UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(Mark One)
[x] Quarterly Report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 For the quarterly period ended June 30, 1997
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 numbers 340-28130
SUIZA FOODS CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 75-2559681
(State or other jurisdiction (I.R.S. Employer
of incorporation) Identification No.)
3811 Turtle Creek Boulevard, Suite 1300
Dallas, Texas 75219
(214) 528-0939
(Address, including zip code, and telephone number, including area code,
of registrant's principal executive offices)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such report(s), and (2) has been subject to
such filing requirements for the past 90 days.
Yes X No
---------- ------------
As of August 8, 1997 the number of shares outstanding of each class of
common stock was:
Common Stock, $.01 par value: 15,952,005
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SUIZA FOODS CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
December 31, June 30,
1996 1997
----------- ------------
(unaudited)
(In thousands)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 8,951 $ 7,130
Accounts receivable 50,608 50,784
Inventories 19,228 21,536
Prepaid expenses and other current assets 2,754 3,369
Refundable income taxes 2,312 ---
Deferred income taxes 3,672 3,796
----------- ----------
Total current assets 87,525 86,615
PROPERTY, PLANT AND EQUIPMENT 123,260 136,281
DEFERRED INCOME TAXES 8,524 8,319
INTANGIBLE AND OTHER ASSETS 164,839 171,091
----------- ----------
TOTAL $ 384,148 $ 402,306
----------- ----------
----------- ----------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued expenses $ 46,664 $ 42,118
Income taxes payable 1,105 1,154
Current portion of long-term debt 12,876 17,323
----------- ----------
Total current liabilities 60,645 60,595
LONG-TERM DEBT 226,693 128,150
DEFERRED INCOME TAXES 3,278 4,928
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Common stock, par value $.01 per share;
100,000,000 shares authorized, 10,741,729 and
15,286,968 shares issued and outstanding 107 153
Additional paid-in capital 89,337 183,263
Retained earnings 4,088 25,217
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Total stockholders' equity 93,532 208,633
----------- ----------
TOTAL $ 384,148 $ 402,306
----------- ----------
----------- ----------
See notes to condensed consolidated financial statements.
SUIZA FOODS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three months ended June 30, Six months ended June 30,
1996 1997 1996 1997
---- ---- ---- ----
(Dollars in thousands, except share data)
NET SALES $ 116,272 $ 171,694 $ 225,307 $ 336,819
COST OF SALES 83,302 125,478 165,917 252,047
----------- ----------- --------- ----------
GROSS PROFIT 32,970 46,216 59,390 84,772
OPERATING COSTS AND EXPENSES:
Selling and distribution 17,180 22,102 32,682 42,244
General and administrative 4,884 7,583 9,805 16,397
Amortization of intangibles 1,023 1,510 1,960 2,982
----------- ----------- --------- ----------
Total operating costs and expenses 23,087 31,195 44,447 61,623
----------- ----------- --------- ----------
INCOME FROM OPERATIONS 9,883 15,021 14,943 23,149
OTHER (INCOME) EXPENSE:
Interest expense, net 3,872 2,910 8,488 6,580
Other income, net (172) (222) (252) (18,575)
----------- ----------- --------- ----------
Total other (income) expense 3,700 2,688 8,236 (11,995)
----------- ----------- --------- ----------
INCOME BEFORE INCOME TAXES AND
EXTRAORDINARY LOSS 6,183 12,333 6,707 35,144
INCOME TAXES 1,630 3,376 1,771 10,745
----------- ----------- --------- ----------
INCOME BEFORE EXTRAORDINARY LOSS 4,553 8,957 4,936 24,399
EXTRAORDINARY LOSS FROM EARLY
EXTINGUISHMENT OF DEBT (2,215) --- (2,215) (3,270)
----------- ----------- --------- ----------
NET INCOME $ 2,338 $ 8,957 $ 2,721 $ 21,129
----------- ----------- --------- ----------
----------- ----------- --------- ----------
NET EARNINGS (LOSS) PER SHARE:
Income before extraordinary loss $ 0.46 $ 0.55 $ 0.58 $ 1.57
Extraordinary loss (0.22) --- (0.26) (0.21)
----------- ----------- --------- ----------
Net income $ 0.24 $ 0.55 $ 0.32 $ 1.36
----------- ----------- --------- ----------
----------- ----------- --------- ----------
WEIGHTED AVERAGE SHARES OUTSTANDING 9,921,715 16,342,250 8,455,332 15,509,388
----------- ----------- --------- ----------
----------- ----------- --------- ----------
See notes to condensed consolidated financial statements.
3
SUIZA FOODS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Six months ended June 30,
(Dollars in thousands)
1996 1997
--------- ----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 2,721 $ 21,129
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 4,479 6,512
Amortization of intangible assets, including deferred
financing costs 2,297 3,401
Loss on the sales of assets 20 38
Extraordinary loss from early extinguishment of debt 2,215 3,270
Noncash and imputed interest 236 ---
Deferred income taxes 767 1,731
Changes in operating assets and liabilities:
Accounts and notes receivable (2,625) 104
Inventories (899) (2,082)
Prepaid expenses and other assets 37 (1,676)
Accounts payable and other accrued expenses (1,959) (4,465)
Income taxes payable (511) 5,535
--------- ----------
Net cash provided by operating activities 6,778 33,497
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property, plant and equipment (7,984) (9,067)
Proceeds from the sale of property, plant and equipment 245 67
Cash outflows for acquisitions (4,176) (16,278)
--------- ----------
Net cash used in investing activities (11,915) (25,278)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from the issuance of debt 8,653 28,000
Repayment of debt (52,322) (122,096)
Payment of deferred financing costs and debt prepayment penalties (1,800) (4,970)
Issuance of common stock, net of expenses 48,608 89,026
--------- ----------
Net cash provided by (used in) financing activities 3,139 (10,040)
--------- ----------
DECREASE IN CASH AND CASH EQUIVALENTS (1,998) (1,821)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 3,177 8,951
--------- ----------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 1,179 $ 7,130
--------- ----------
--------- ----------
See notes to condensed consolidated financial statements.
4
SUIZA FOODS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1997
1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The condensed consolidated financial statements as of June 30, 1997 and for
the three month and six month periods ended June 30, 1997 and 1996 have
been prepared by Suiza Foods Corporation (the "Company" or "Suiza Foods")
without audit. In the opinion of management, all necessary adjustments
(which include only normal recurring adjustments) to present fairly, in all
material respects, the consolidated financial position, results of
operations and cash flows of the Company as of June 30, 1997 and for the
three month and six month periods ended June 30, 1997 and 1996 have been
made. Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted
accounting principles have been omitted. These financial statements should
be read in conjunction with the Company's 1996 financial statements
contained in its Annual Report on Form 10-K as filed with the Securities
and Exchange Commission on March 29, 1997.
2. INVENTORIES
At December 31, At June 30,
1996 1997
----------- -----------
Pasteurized and raw milk and raw materials $ 7,693 $ 9,795
Parts and supplies 5,584 6,067
Finished goods 5,951 5,674
----------- -----------
$ 19,228 $ 21,536
----------- -----------
----------- -----------
3. LONG-TERM DEBT
At December 31, At June 30,
1996 1997
----------- -----------
Senior credit facility:
Revolving loan facility $ 8,600 $ 2,800
Acquisition loan facility 69,100 ---
Term loan facility 125,000 142,000
Subordinated notes 36,000 ---
Capital lease obligations and other debt 869 673
----------- -----------
239,569 145,473
Less: current portion (12,876) (17,323)
----------- -----------
$ 226,693 $ 128,150
----------- -----------
----------- -----------
5
SUIZA FOODS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
JUNE 30, 1997
3. LONG-TERM DEBT (Continued)
On January 28, 1997, the Company sold 4,270,000 shares of common
stock, $.01 par value per share, in a public offering (the "Offering")
at a price to the public of $22.00 per share. The Offering provided
net cash proceeds to the Company of approximately $89.0 million. Of
this amount, $36.0 million was used to repay subordinated notes and
$4.3 million was used to pay prepayment penalties related to the early
extinguishment of the subordinated notes, which, along with the related
balance of unamortized deferred loan costs and net of related income
tax benefits, was reported as an extraordinary loss from the early
extinguishment of debt. The remainder of the net proceeds were used to
repay a portion of the outstanding balance of the acquisition loan
facility of the Company's Senior Credit Facility.
On March 5, 1997, the Company amended its Senior Credit Facility.
Pursuant to this amendment, the Company's term loans were expanded from
a $130.0 million facility into a $150.0 million facility. Quarterly
amortization payments beginning March 31, 1997 on this facility are
$4.0 million, increasing to: 1) $4.5 million on March 31, 1998; 2)
$5.0 million on March 31, 1999; 3) $5.5 million on March 31, 2000; 4)
$6.0 million on March 31, 2001; 5) $6.5 million on March 31, 2002, with
a final installment of $24.0 million due on March 31, 2003. The
Company further amended its Senior Credit Facility to increase the
acquisition loan facility from $90.0 million to $100.0 million. The
Company is required to pay interest only on amounts drawn under the
acquisition loan facility until June 30, 1999, at which time any
outstanding balance will convert into a term loan facility with
scheduled amortization.
On July 31, 1997, the Company amended its Senior Credit Facility to
provide for an aggregate of $700.0 million comprised of: (i) a $150.0
million term loan; (ii) a $50.0 million revolving credit facility;
(iii) a $325.0 million revolving acquisition facility, and (iv) a
$175.0 million acquisition term loan. Under the terms of the Senior
Credit Facility, the $150.0 million term loan will be amortized over
six years beginning September 30, 1997 and the revolving credit
facility expires on September 30, 2003. The availability under the
revolving acquisition facility will decrease at the end of each
calendar quarter beginning December 31, 2000 by $20.3 million until
December 31, 2002, when it begins reducing by $40.6 million each
quarter until maturity on September 30, 2003. The $175.0 million
acquisition term loan will be amortized over five years beginning
December 31, 1999. Amounts outstanding under the Senior Credit Facility
will bear interest at a rate per annum equal to one of the following
rates, at the Company's option: (i) the sum of a base rate equal to the
higher of the Federal Funds rates plus 50 basis points or First Union
National Bank's prime commercial lending rate, plus a margin that
varies from 0 to 50 basis points depending on the Company's ratio of
defined indebtedness to EBITDA (as defined in the Senior Credit
Facility); or (ii) The London Interbank Offered Rate ("LIBOR") plus a
margin that varies from 75 to 150 basis points depending on the
Company's ratio of defined indebtedness to EBITDA. The Company will pay
a commitment fee on unused amounts of the revolving facility and the
revolving acquisition facility that ranges from 20 to 37.5 basis
points, based on the Company's ratio of defined indebtedness to EBITDA.
6
SUIZA FOODS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
JUNE 30, 1997
4. TAXES
In December 1995, the Commonwealth of Puerto Rico adopted the Puerto
Rico Agricultural Tax Incentives Act of 1995, which reduced the
effective income tax rate for qualified agricultural businesses from
39% to 3.9% and provided for a 50% tax credit for certain "eligible
investments" in qualified agricultural businesses in Puerto Rico.
During 1996, the Company made investments in its Suiza-Puerto Rico
dairy, fruit, plastics and coffee operations, all of which were
certified as qualified agricultural businesses in Puerto Rico during
1996.
During 1996, the Company recognized $15.75 million in tax credits
related to qualifying investment made in its Puerto Rico dairy
subsidiary which met the eligible investment criteria of this act.
However, in 1996 the Company did not recognize any of the potential tax
credits related to its investments in its Puerto Rico fruit, plastics
and coffee operations since certain rulings in 1996 by Puerto Rico tax
authorities created uncertainty as to whether these investments met the
eligible investment criteria of the act and whether these additional
tax credits had been earned.
During the first quarter of 1997, the Company obtained a ruling from
the Commonwealth of Puerto Rico confirming that its investments in its
Suiza-Puerto Rico fruit and plastics subsidiaries qualified for the 50%
tax credit. Accordingly, in March 1997, the Company recognized a
nonrecurring gain of $18.1 million, net of discounts and related
expenses ($11.5 million after income taxes) for earned tax credits
which at March 31, 1997, it had agreed to sell to third parties.
During the second quarter of 1997, the Company completed the sale of
substantially all of these tax credits to the third parties.
The Company is currently investigating whether its investment in its
coffee business will qualify for additional tax credits based on recent
rulings by Puerto Rico tax authorities and is awaiting a ruling from
the Treasury Department in Puerto Rico on the availability of such tax
credits. If the Company ultimately qualifies for such credits, the
Company will account for these tax benefits as an adjustment of the
purchase price of the coffee business, which would result in a
reduction of goodwill.
5. ACQUISITIONS
During the quarter, the Company acquired four small ice businesses for
total consideration of approximately $10.7 million. Estimated annual sales
of these ice companies are $8.3 million. Since June 30, 1997, the Company
has acquired three ice companies for approximately $5.9 million, bringing
the total number of acquired ice companies in 1997 to ten, with estimated
aggregate annual sales of $15.8 million.
On July 1, 1997, the Company completed the acquisition of substantially all
the assets of Dairy Fresh L.P., a Delaware limited partnership ("Dairy
Fresh"), for approximately $104.5 million in cash (subject to adjustment
and excluding transaction costs), plus the assumption of certain current
liabilities. Dairy Fresh is a manufacturer of fresh milk and ice cream
products based in Winston-Salem, North Carolina. During its fiscal year
ended December 31, 1996,
7
SUIZA FOODS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
JUNE 30, 1997
5. ACQUISITIONS (continued)
Dairy Fresh reported net sales of approximately $117.0 million throughout
the southeastern United States. The Company will use the acquired assets to
continue operating the business previously operated by Dairy Fresh. The
Company financed the acquisition with borrowings under its Senior Credit
Facility.
On July 31, 1997 the Company completed the purchase of all the outstanding
stock of three affiliated dairy manufacturing and distribution companies,
as well as an affiliated water bottling and distribution company, and 16
affiliated plastic manufacturing companies headquartered in Franklin,
Massachusetts (collectively, the "Garelick Companies"). In connection with
this acquisition the Company paid aggregate cash consideration of
approximately $293.7 million (subject to adjustment and excluding
transaction costs) and issued 446,100 shares of common stock to acquire the
outstanding stock and repay existing indebtedness of the Garelick
Companies. The combined businesses operated by the Garelick Companies
reported net sales of approximately $363 million during the fiscal year
ended September 30, 1996. The dairy operations of the Garelick Companies
are operated through Garelick Farms in Franklin, Massachusetts, Fairdale
Farms in Bennington, Vermont, and Grant's Dairy in Bangor, Maine. The
Garelick Companies also operate the Miscoe Springs water bottling company
in Mendon, Massachusetts and 16 plastic bottle manufacturing operations
located in Connecticut, Florida, Georgia, Illinois, Louisiana, Maine,
Massachusetts, New Jersey, North Carolina, Ohio, Pennsylvania, Texas and
Virginia. The acquisition of the Garelick Companies expands the geographic
presence of the Company's dairy operations into the northeastern United
States and expands the Company's operations into the related business of
plastic container manufacturing.
In connection with the acquisition of the Garelick Companies, the Company
increased the size of its Senior Credit Facility from $300.0 million to
$700.0 million in the aggregate (see footnote 3 - Long-Term Debt).
6. STOCKHOLDERS' EQUITY
On January 28, 1997, the Company sold 4,270,000 shares of common stock,
$.01 par value per share, in a public offering at a price to the public of
$22.00 per share. On March 12, 1997, the Company issued 133,000 shares of
its common stock in partial consideration of the purchase of an ice
company. As of June 30, 1997 the Company had 15,286,968 shares of common
stock issued and outstanding.
8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Overview
Suiza Foods is a leading manufacturer and distributor of fresh milk and related
dairy products, plastic containers and packaged ice in the United States. The
Company has grown primarily through strategic and consolidating acquisitions.
Through these acquisitions, the Company has realized regional economies of scale
and operating efficiencies by consolidating manufacturing and distribution
operations in each of its core businesses. The Company conducts its dairy
operations through several Puerto Rico subsidiaries ("Suiza-Puerto Rico"), Velda
Farms Inc. ("Velda Farms"), Swiss Dairy Corporation ("Swiss Dairy"), Model
Dairy, Inc. ("Model Dairy"), Dairy Fresh, Inc. ("Dairy Fresh"), Garelick Farms,
Inc. and certain related dairy subsidiaries ("Garelick Farms"), its plastics
operations through Franklin Plastics, Inc. and its subsidiaries ("Franklin
Plastics" or "Plastics") and its ice operations through Reddy Ice Corporation
("Reddy Ice"). Each of these subsidiaries is a strong regional competitor with
an established reputation for customer service and product quality. The
Company's dairy and ice subsidiaries market their products through extensive
distribution networks to a diverse group of customers, including convenience
stores, grocery stores, other retail outlets, schools and institutional food
service customers.
On April 22, 1996, the Company sold 3,795,000 shares of common stock, $.01 par
value per share, in a public offering (the "IPO") at a price to the public of
$14.00 per share. Prior to the IPO, there was no public market for the
Company's stock. The IPO provided net cash proceeds to the Company of
approximately $48.6 million. On August 7, 1996, the Company sold 625,000 shares
of its common stock in a private placement to a single investor, which provided
net cash proceeds to the Company of approximately $9.7 million. On January 28,
1997 the Company sold 4,270,000 shares of its common stock in a public offering
at a price to the public of $22.00 per share, providing net cash proceeds to the
Company of approximately $89.0 million. On March 12, 1997 the Company issued
133,000 of its common stock in partial consideration for the purchase of an ice
company. As of June 30, 1997 the Company had 15,286,968 shares of common stock
issued and outstanding. In addition, in connection with the acquisition of the
Garelick Companies, the Company issued 446,100 shares of common stock.
Outlook and Uncertainties
Certain information in this Quarterly Report on Form 10-Q may contain
"forward-looking statements" within the meaning of Section 21E of the
Securities Exchange Act of 1934, as amended. All statements other than
statements of historical fact are "forward-looking statements" for purposes
of these provisions, including any projections of earnings, revenues or other
financial items, any statements of the plans and objectives of management for
future operations, any statements concerning proposed new products or
services, any statements regarding future economic conditions or performance,
and any statement of assumptions underlying any of the foregoing. Although
the Company believes that the expectations reflected in its forward-looking
statements are reasonable, it can give no assurance that such expectations or
any of its forward-looking statements will prove to be correct, and actual
results could differ materially from those projected or assumed in the
Company's forward-looking statements. The Company's future financial
condition and results, as well as any forward-looking statements, are subject
to inherent risks and uncertainties, including, without limitation, potential
limitations on the Company's ability to pursue its acquisition strategy,
significant competition, limitations arising from the Company's substantial
indebtedness, government regulation, seasonality and dependence on key
management. Additional information concerning these and other risk factors is
contained in the Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 1996, a copy of which may be obtained from the Company
upon request.
9
Results of Operations
The Company currently operates in two distinct businesses: Dairy, which
includes the operations of Suiza - Puerto Rico, Velda Farms, Swiss Dairy and
Model Dairy; and Ice, which includes Reddy Ice. Beginning in the Company's
third fiscal quarter, Dairy operations will include Dairy Fresh and Garelick
Farms and the Company will begin operating in the plastics business under its
Franklin Plastics subsidiaries.
Three months ended June 30, Six months ended June 30,
Percent to Percent to Percent to Percent to
1996 Net Sales 1997 Net Sales 1996 Net Sales 1997 Net Sales
----- ---------- ---- ---------- ---- ---------- ----- ----------
Net sales:
Dairy $ 99,876 $ 153,417 $ 202,090 $ 310,293
Ice 16,396 18,277 23,217 26,526
---------- --------- ---------- ----------
Net sales 116,272 100.0% 171,694 100.0% 225,307 100.0% 336,819 100.0%
Cost of sales 83,302 71.6 125,478 73.1 165,917 73.6 252,047 74.8
---------- ----- --------- ----- ---------- ----- ---------- ------
Gross profit 32,970 28.4 46,216 26.9 59,390 26.4 84,772 25.2
Operating expenses:
Selling and distribution 17,180 14.8 22,102 12.9 32,682 14.5 42,244 12.5
General and administrative 4,884 4.2 7,583 4.4 9,805 4.4 16,397 4.9
Amortization of intangibles 1,023 0.9 1,510 0.9 1,960 0.9 2,982 0.9
---------- ----- --------- ----- ---------- ----- ---------- ------
Total operating expenses 23,087 19.9 31,195 18.2 44,447 19.8 61,623 18.3
Operating income (loss):
Dairy 5,660 4.9 12,438 7.2 12,120 5.3 23,492 7.0
Ice 4,901 4.2 3,989 2.3 4,428 2.0 3,151 0.9
Corporate office (678) (0.6) ( 1,406) (0.8) (1,605) (0.7) (3,494) (1.0)
---------- ----- --------- ----- ---------- ----- ---------- ------
Total operating income $ 9,883 8.5% $ 15,021 8.7% $ 14,943 6.6% $ 23,149 6.9%
---------- ----- --------- ----- ---------- ----- ---------- ------
---------- ----- --------- ----- ---------- ----- ---------- ------
SECOND QUARTER AND YEAR-TO-DATE 1997 COMPARED TO SECOND QUARTER AND YEAR-TO-DATE
1996
NET SALES. The Company's net sales increased by 47.7% and 49.5% for the
second quarter and first six months of 1997 when compared to like periods of
1996. Dairy net sales increased by 53.6% and 53.5% for the second quarter and
first six months of 1997 when compared to like periods of 1996, primarily due to
(i) the acquisitions of Garrido y Compania into Suiza-Puerto Rico, Swiss Dairy
and Model Dairy in the last half of 1996, (ii) an increase in prices charged for
milk resulting from increased raw milk costs compared to the second quarter and
first six months of last year and (iii) increased unit volumes in Suiza - Puerto
Rico and Velda Farms. Ice net sales increased by 11.5% and 14.3% for the second
quarter and first six months of 1997 when compared to like periods of 1996 due
to the acquisition of eleven ice businesses during 1996 and seven in the first
six months of 1997.
COST OF SALES. The Company's cost of sales margins were 73.1% and 74.8% for
the second quarter and first six months of 1997 compared to 71.6 % and 73.6%
for the same periods in 1996. Dairy cost of sales margins were essentially
unchanged from the prior year, as higher inherent cost of sales margins at
Swiss Dairy and Model Dairy were offset by increased volumes at the other
dairy operations. Ice cost of sales margins increased reflecting lower unit
volumes due to unseasonably cool weather during the second quarter of 1997
when compared to the second quarter of 1996.
10
OPERATING EXPENSES. The Company's operating expense ratios were 18.2% and
18.3% for the second quarter and first six months of 1997 compared to 19.9%
and 19.8% for the same periods in 1996. Dairy operating expense margins
decreased in the quarter and six month comparisons because of (i) the
addition of Swiss Dairy during the last half of 1996, which had lower
operating expense margins than the other operations and (ii) more efficient
operations at dairies owned for more than one year. Ice operating expense
margins increased due to the increased level of operating expense related to
acquired businesses and due to reduced volumes related to unseasonably cool
weather during the second quarter of 1997.
OPERATING INCOME. The Company's operating income increased 52.0% to $15.0
million in the second quarter of 1997 from $9.9 million in the second quarter of
1996 primarily as a result of the aforementioned acquisitions during the last
half of 1996. For the first six months of 1997, operating income was $23.1
million, an increase of 54.9% from 1996 operating income of $14.9 million. The
Company's operating income margin increased to 8.7% in the second quarter of
1997 from 8.5% in the second quarter of 1996 and increased to 6.9% in the first
six months of 1997 from 6.6% in the first six months of 1996 primarily due to
the acquisitions and to operating expense efficiencies at the Company's Dairy
operations.
OTHER (INCOME) EXPENSE. Interest expense declined to $2.9 million in the second
quarter of 1997 from $3.9 million in the second quarter of 1996 primarily due to
a decrease in interest rates from the repayment of certain subordinated notes in
1996 and 1997 and lower average debt levels during the 1997 period. For the
same reasons, interest expense declined to $6.6 million during the first six
months of 1997 from $8.5 million in the first six months of 1996. Other income
rose to $18.6 million in the first six months of 1997 primarily as a result of
the nonrecurring gain of $18.1 million from the recognition of tax credits as
discussed below and in footnote 4 to the condensed consolidated financial
statements.
EXTRAORDINARY ITEMS. The Company incurred a $3.3 million extraordinary loss
(net of a $2.0 million tax benefit) on January 28, 1997 related to the losses on
the early extinguishment of subordinated debt, which included the write-off of
deferred financing costs and certain prepayment penalties. During the second
quarter of 1996, the Company incurred $2.2 million in extraordinary costs (net
of a $0.9 million tax benefit) as a result of the early extinguishment of debt
from the net cash proceeds of the Company's initial public offering.
NET INCOME. The Company reported net income of $9.0 million in the second
quarter of 1997 compared to net income of $2.3 in the second quarter of 1996
($4.6 million excluding the extraordinary loss). The Company reported net
income of $21.1 million in the first six months of 1997 ($12.9 million excluding
the nonrecurring after-tax gain from the recognition of tax credits and the
extraordinary loss) compared to $2.7 million in the first six months of 1996
($4.9 million excluding the extraordinary loss).
Seasonality
The Company's Ice business is seasonal with peak demand for its products
occurring during the second and third calendar quarters. Over the past two
fiscal years, the Company's Ice business has recorded an average of
approximately 69% of it annual net sales during these two quarters. While this
percentage for the second and third quarters has remained relatively constant
over recent years, the timing of the hottest summer weather can impact the
distribution of sales between these two quarters.
11
Liquidity and Capital Resources
As of June 30, 1997, the Company had total stockholders' equity of $208.6
million and total indebtedness of $145.5 million (including long-term debt and
the current portion of long-term debt). The Company is currently in compliance
with all covenants and financial ratios contained in its debt agreements.
CASH FLOW. Historically, the working capital needs of the Company have been
met with cash flow from operations along with borrowings under revolving credit
facilities. Net cash provided by operating activities was $33.5 million for the
first six months of 1997 as contrasted with net cash provided by operations of
$6.8 million for the first six months of 1996. This increase is partially the
result of the sale of certain tax credits earned pursuant to provisions of the
Puerto Rico Agriculture Tax Incentives Act of 1995, which generated net proceeds
of approximately $11.5 million after taxes. Investing activities in the first
six months of 1997 included approximately $9.1 million in capital expenditures
of which $5.6 million was spent at Dairy and $3.5 million was spent at Ice.
Investing activities also included $16.3 million for acquisitions.
On January 28, 1997, the Company sold 4,270,000 shares of newly issued common
stock, $.01 par value per share, in a public offering (the "Offering") at a
price to the public of $22.00 per share. The Offering provided net cash
proceeds to the Company of approximately $89.0 million. Of this amount, $36.0
million was used to repay subordinated notes and $4.3 million was used to pay
prepayment penalties related to the early extinguishment of the subordinated
notes, which, along with the remaining balance of unamortized deferred loan
costs, was reported as an extraordinary loss from the early extinguishment of
debt. The remainder of the net proceeds were used to repay a portion of the
outstanding balance of the acquisition loan facility of the Company's Senior
Credit Facility.
In July 1997, the Company acquired substantially all the assets of Dairy Fresh,
a regional dairy based in North Carolina, for cash consideration of
approximately $104.5 million (subject to adjustment and excluding transaction
costs), plus the assumption of certain indebtedness. The purchase price for
this acquisition was funded through additional borrowing under the acquisition
facility of the Senior Credit Facility.
In July 1997, the Company also acquired the outstanding equity interests of the
Garelick Companies. At the closing of this acquisition, the Company paid $293.7
million in cash and issued 446,100 shares of common stock having a value of
$15.0 million as of the day prior to the date of execution of the acquisition
agreement. Of the 446,100 shares of common stock issued as part of the purchase
price, 148,700 shares were issued into escrow, subject to the satisfaction of an
earnout provision related to the Garelick Companies' fluids business. The cash
portion of the purchase price was funded through additional borrowing under the
acquisition facility of the Senior Credit Facility.
FUTURE CAPITAL REQUIREMENTS. During 1997, the Company intends to invest a total
of approximately $33.0 million in its manufacturing facilities and distribution
capabilities, including planned post-acquisition expenditures for Dairy Fresh
and the Garelick Companies. Of this amount, Dairy intends to spend
approximately $21.0 million for the year to expand and maintain its
manufacturing facilities and for fleet replacement; Ice intends to spend a total
of approximately $8.0 million in 1997, including $4.8 million for maintenance of
existing facilities and $3.2 million to increase production capacity; and
Plastics intends to spend approximately $4.0 million. The Company also plans to
substantially expand its Plastics operations, including spending approximately
$17.0 million in addition to the amounts noted above during the remainder of
1997 and 1998.
12
CURRENT DEBT OBLIGATIONS. On March 5, 1997 the Company amended its Senior Credit
Facility. Pursuant to this amendment the Company's term loans were expanded from
a $130.0 million facility into a $150.0 million facility, and the acquisition
loan facility was increased from a $90.0 million facility to a $100.0 million
facility. At June 30, 1997, $47.2 million was available under the revolving
loan facility.
The Company expects that cash flow from operations will be sufficient to meet
the Company's requirements for the remainder of 1997 and for the foreseeable
future. During the remainder of 1997 and in the future, the Company intends
to pursue additional acquisitions in its existing regional markets and to
seek strategic acquisition opportunities that are compatible with it core
businesses. Management believes that the Company has the ability to secure
additional financing to pursue its acquisition and consolidation strategy.
There can be no assurance, however, that the Company will have sufficient
available capital resources to realize its acquisition and consolidation
strategy.
On July 31, 1997, in connection with the acquisition of the Garelick Companies,
the Company amended its Senior Credit Facility to provide for an aggregate of
$700.0 million comprised of: (i) a $150.0 million term loan; (ii) a $50.0
million revolving credit facility; (iii) a $325.0 million revolving acquisition
facility, and (iv) a $175.0 million acquisition term loan. Under the terms of
the Senior Credit Facility, the $150.0 million term loan will be amortized over
six years beginning September 30, 1997 and the revolving credit facility expires
on September 30, 2003. The availability under the revolving acquisition facility
will decrease at the end of each calendar quarter beginning December 31, 2000 by
$20.3 million until December 31, 2002, when it begins reducing by $40.6 million
each quarter until maturity on September 30, 2003. The $175.0 million
acquisition term loan will be amortized over five years beginning December 31,
1999. Amounts outstanding under the Senior Credit Facility will bear interest at
a rate per annum equal to one of the following rates, at the Company's option:
(i) the sum of a base rate equal to the higher of the Federal Funds rates plus
50 basis points or First Union National Bank's prime commercial lending rate,
plus a margin that varies from 0 to 50 basis points depending on the Company's
ratio of defined indebtedness to EBITDA (as defined in the Senior Credit
Facility); or (ii) The London Interbank Offered Rate ("LIBOR") plus a margin
that varies from 75 to 150 basis points depending on the Company's ratio of
defined indebtedness to EBITDA. The Company will pay a commitment fee on unused
amounts of the revolving facility and the revolving acquisition facility that
ranges from 20 to 37.5 basis points, based on the Company's ratio of defined
indebtedness to EBITDA. After the acquisition of the Garelick Companies on July
31, 1997 the Company had a total of $149.5 million available under the revolving
credit facility and the revolving acquisition facility.
Additional Factors That May Affect Future Results
The Company's quarterly operating results may fluctuate in the future as a
result of a variety of factors, many of which are outside the Company's
control. Factors that may adversely affect the Company's future operating
results attributable to its dairy operations include changes in the cost of
raw materials, federal, Puerto Rico and state government regulation of the
dairy industry and competition. Factors that may adversely affect the
Company's quarterly operating results attributable to its ice operations
include weather, seasonality and competition. The Company's operating
results in the future are also dependent on the ability of the Company to
identify suitable acquisition candidates and successfully integrate any
acquired businesses into the Company's existing business and retain key
customers of acquired businesses. There can be no assurance that the Company
will have sufficient available capital resources to realize its acquisition
strategy.
13
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is from time to time party to legal proceedings that arise in the
ordinary course of business. Management does not believe that the resolution of
any threatened or pending legal proceedings will have a material adverse affect
on the Company's financial position, results of operations or liquidity.
ITEM 2. CHANGES IN SECURITIES
On June 10, 1997, the Company issued an additional 15,182 shares of common stock
to a former stockholder of PureIce of the South, Inc. ("PureIce"), which was
acquired by the Company in March 1997. These additional shares constitute a
portion of the purchase price of PureIce. On July 1, 1997, the Company issued
an aggregate of 9,000 shares of common stock to the stockholders of Plainview
Ice and Cold Storage, Inc. ("Plainview Ice") as part of the purchase price for
the assets of Plainview Ice, which were acquired by the Company on June 30,
1997. The total purchase price for the assets of Plainview Ice was $375,000.
The issuance of common stock in connection with these acquisitions was exempt
from registration pursuant to Section 4(2) of the Securities Act of 1933, as
amended. No underwriter participated in these transactions.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On May 13, 1997, the Company held its annual meeting of stockholders (the
"Annual Meeting"). At the Annual Meeting, the Company submitted the following
matters to a vote of its stockholders: (i) the election of Messrs. Cletes O.
Beshears, David F. Miller, and Hector M. Nevares as Class II directors to serve
until the expiration of their terms and until their successors are elected and
qualified; (ii) the approval of an amendment to the Company's Certificate of
Incorporation to increase the number of authorized shares of Common Stock, $.01
par value per share, from 20,000,000 shares to 100,000,000 shares (the
"Amendment") ; (iii) the approval of the Suiza Foods Corporation 1997 Stock
Option and Restricted Stock Plan (the "1997 Stock Option Plan") ; (iv) the
approval of the 1997 Employee Stock Purchase Plan of Suiza Foods Corporation
(the "1997 Stock Purchase Plan"); (v) the ratification of the selection of
Deloitte & Touche LLP as the Company's independent auditors for fiscal year
1997. At the Annual Meeting, the stockholders elected the Class II directors
noted above, approved the Amendment, the 1997 Stock Option Plan and the 1997
Stock Purchase Plan, and ratified the selection of Deloitte & Touche as the
Company's independent auditors. The vote of the stockholders with respect to
each such matter was as follows:
(i) Election of Class II directors:
Cletes O. Beshears - 12,657,694 votes for; 1,500 votes withheld.
David F. Miller - 12,657,694 votes for; 1,500 votes withheld.
Hector M. Nevares - 12,657,694 votes for; 1,500 votes withheld.
(ii) Approval of the Amendment
9,588,604 votes for; 3,060,675 against; 9,915 abstentions.
14
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(continued)
(iii) Approval of the 1997 Stock Option Plan
9,441,644 votes for; 2,821,382 votes against; 396,168 abstentions.
(iv) Approval of the 1997 Stock Purchase Plan
12,174,689 votes for; 97,452 votes against; 387,053 abstentions.
(v) Ratification of selection of independent auditors
12,657,769 votes for; 1,225 votes against; 200 abstentions.
ITEM 5. OTHER INFORMATION
On July 31, 1997, the Company acquired the outstanding equity interests of
the privately owned Garelick Companies for aggregate consideration of
approximately $308.7 million (subject to adjustment and excluding transaction
costs). The Garelick Companies consist of three affiliated dairy
manufacturing and distribution companies and an affiliated water bottling and
distribution company (collectively, "Garelick Farms"), and 16 affiliated
plastic manufacturing companies (collectively, "Franklin Plastics"). The
acquisition of the Garelick Companies expands the geographic presence of the
Company's dairy operations into the northeastern United States and expands
the Company's operations into the related business of manufacturing plastic
containers. At the closing of this acquisition, the Company paid $293.7
million in cash and issued 446,100 shares of common stock having a value of
$15.0 million as of the day prior to the date of execution of the acquisition
agreement. Of the 446,100 shares of common stock issued as part of the
purchase price, 148,700 shares were issued into escrow, subject to the
satisfaction of an earnout provision related to the Garelick Companies'
fluids business. The cash portion of the purchase price was funded through
additional borrowing under the acquisition facility of the Senior Credit
Facility. The historical financial statements and the pro forma financial
information required in connection with the acquisition of the Garelick
Companies will be filed within 60 days after the date of this report.
As part of the acquisition of the Garelick Companies, the Company capitalized
Franklin Plastics with a leveraged acquisition structure. This capital
structure includes, in addition to common stock, preferred stock and senior
and subordinated indebtedness issued by Franklin Plastics to the Company and
ten-year warrants to acquire up to 17.5% of the outstanding common stock, on
a fully diluted basis, of Franklin Plastics sold to certain of the sellers of
the Garelick Companies. The Company and certain of the sellers entered into
a shareholders agreement containing certain registration, co-sale and
pre-emptive rights and certain put and call options with respect to common
stock of Franklin Plastics.
Alan J. Bernon, who, along with other members of his family, owned the
Garelick Companies, became a director of the Company following the
consummation of the acquisition.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
3.1 Certificate of Incorporation of the Company
3.2 Certificate of Amendment of Certificate of Incorporation of the Company
3.3 Certificate of Correction of Certificate of Amendment of
Certificate of Incorporation
15
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (continued)
3.4 Certificate of Amendment of Certificate of Incorporation of the
Company
3.5 Certificate of Amendment of Certificate of Incorporation of the
Company
10.1 Suiza Foods Corporation 1997 Stock Option and Restricted Stock Plan
10.2 Form of Stock Option Agreement for Messrs. Gregg L. Engles, William P.
Brick, Hector M. Nevares, and Tracy L. Noll under the Suiza Foods
Corporation 1997 Stock Option Plan and Restricted Stock Plan
10.3 Form of Stock Option Agreement for P. Eugene Pender and Robert
Piccinini under the Suiza Foods Corporation 1997 Stock Option and
Restricted Stock Plan
10.4 1997 Employee Stock Purchase Plan of Suiza Foods Corporation
10.5 First Amendment to the 1997 Employee Stock Purchase Plan of Suiza
Foods Corporation
10.6 Second Amendment to the 1997 Employee Stock Purchase Plan of Suiza
Foods Corporation
10.7 Stock Purchase Agreement dated June 20, 1997 among Suiza Foods
Corporation, Peter M. Bernon, Alan J. Bernon and the other
stockholders named therein and the Garelick Companies
10.8 Amendment No. 1 to Stock Purchase Agreement dated July 30, 1997 among
Suiza Foods Corporation, Peter M. Bernon, Alan J. Bernon and the
other stockholders named therein and the Garelick Companies
10.9 Stockholders Agreement dated July 31, 1997 among Suiza Foods
Corporation, Franklin Plastics, Peter M. Bernon and Alan J.
Bernon
10.10 Third Amended and Restated Credit Agreement dated as of July 31,
1997 with First Union National Bank as administrative agent and
The First National Bank of Chicago as syndication agent for the
lenders named therein
10.11 Second Amended and Restated Supplemental Credit Agreement dated
as of July 31, 1997 with First Union National Bank as administrative
agent and The First National Bank of Chicago as syndication agent for
the lenders named therein
10.12 Consulting Agreement between Cletes O. Beshears and Suiza Foods
Corporation
11. Statement re computation of per share earnings
27. Financial Data Schedule
(b) Reports on Form 8-K
None
16
SIGNATURES
Pursuant to the requirement of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SUIZA FOODS CORPORATION
/s/ Tracy L. Noll
--------------------------------------
Tracy L. Noll
Vice President, Chief Financial Officer
(Principal Accounting Officer)
Date: August 11, 1997
17