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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 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)
[SUIZA FOODS LOGO]
---------------
DELAWARE 75-2559681
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification no.)
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)
---------------
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 November 7, 2001 the number of shares outstanding of each class
of common stock was:
Common Stock, par value $.01 28,104,593
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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.............................................. 27
PART II - OTHER INFORMATION
Item 4 - Submission of Matters to a Vote of Security Holders..................................................... 29
Item 6 - Exhibits and Reports on Form 8-K........................................................................ 30
</Table>
2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SUIZA FOODS CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
<Table>
<Caption>
SEPTEMBER 30, DECEMBER 31,
2001 2000
------------- ------------
(unaudited)
Assets
Current assets:
Cash and cash equivalents ............................................................. $ 25,761 $ 31,110
Accounts receivable, net .............................................................. 540,791 519,318
Inventories ........................................................................... 209,616 186,713
Refundable income taxes ............................................................... 1,268 3,925
Deferred income taxes ................................................................. 60,844 54,634
Prepaid expenses and other current assets ............................................. 56,174 22,231
----------- -----------
Total current assets ............................................................ 894,454 817,931
Property, plant and equipment, net ....................................................... 1,011,645 1,003,769
Intangible and other assets .............................................................. 1,926,679 1,958,778
----------- -----------
Total ........................................................................... $ 3,832,778 $ 3,780,478
=========== ===========
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable and accrued expenses ................................................. $ 543,076 $ 567,342
Income taxes payable .................................................................. 11,012 4,342
Current portion of long-term debt and subsidiary lines of credit ...................... 164,919 128,224
----------- -----------
Total current liabilities ....................................................... 719,007 699,908
Long-term debt ........................................................................... 1,119,087 1,225,045
Other long-term liabilities .............................................................. 60,695 34,202
Deferred income taxes .................................................................... 139,586 123,614
Mandatorily redeemable convertible trust issued preferred securities ..................... 584,459 584,032
Minority interest in subsidiaries ........................................................ 515,472 514,845
Commitments and contingencies
Stockholders' equity:
Common stock, 28,075,650 and 27,285,649 shares issued and outstanding, respectively ... 281 273
Additional paid-in capital ............................................................ 199,593 166,361
Retained earnings ..................................................................... 519,405 433,309
Accumulated other comprehensive loss .................................................. (24,807) (1,111)
----------- -----------
Total stockholders' equity ...................................................... 694,472 598,832
----------- -----------
Total ........................................................................... $ 3,832,778 $ 3,780,478
=========== ===========
</Table>
See notes to condensed consolidated financial statements.
3
SUIZA FOODS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Dollars in thousands, except per share data)
<Table>
<Caption>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------------------- ------------------------------
2001 2000 2001 2000
------------ ------------ ------------ ------------
(unaudited) (unaudited)
Net sales ................................................... $ 1,555,731 $ 1,439,947 $ 4,557,158 $ 4,268,442
Cost of sales ............................................... 1,195,435 1,085,627 3,477,209 3,213,745
------------ ------------ ------------ ------------
Gross profit ................................................ 360,296 354,320 1,079,949 1,054,697
Operating costs and expenses:
Selling and distribution ................................. 207,929 202,371 622,746 602,297
General and administrative ............................... 41,083 43,035 131,498 135,235
Amortization of intangibles .............................. 13,117 13,495 39,914 39,153
Plant closing and other costs ............................ 424 843 3,388
------------ ------------ ------------ ------------
Total operating costs and expenses ................. 262,129 259,325 795,001 780,073
------------ ------------ ------------ ------------
Operating income ............................................ 98,167 94,995 284,948 274,624
Other (income) expense:
Interest expense, net .................................... 23,258 28,987 76,494 83,122
Financing charges on trust issued preferred
securities ........................................... 8,395 8,395 25,186 25,200
Equity in (earnings) loss of unconsolidated affiliates ... 5,424 (5,169) 2,565 (10,572)
Other (income) expense, net .............................. 1,097 (594) 1,600 (1,670)
------------ ------------ ------------ ------------
Total other (income) expense ....................... 38,174 31,619 105,845 96,080
------------ ------------ ------------ ------------
Income from continuing operations before income taxes ....... 59,993 63,376 179,103 178,544
Income taxes ................................................ 20,803 24,021 65,452 67,901
Minority interest in earnings ............................... 9,768 8,166 26,109 25,327
------------ ------------ ------------ ------------
Income before extraordinary items and cumulative
effect of accounting change .............................. 29,422 31,189 87,542 85,316
Extraordinary gain .......................................... 4,968
Cumulative effect of accounting change ...................... (1,446)
------------ ------------ ------------ ------------
Net income .................................................. $ 29,422 $ 31,189 $ 86,096 $ 90,284
============ ============ ============ ============
Average common shares: Basic ............................... 27,860,732 27,623,928 27,594,599 28,530,656
Average common shares: Diluted ............................. 36,603,967 36,197,712 36,180,167 37,062,352
Basic earnings per common share:
Income before extraordinary items and cumulative
effect of accounting change .......................... $ 1.06 $ 1.13 $ 3.17 $ 2.99
Extraordinary gain ....................................... 0.17
Cumulative effect of accounting change ................... (0.05)
------------ ------------ ------------ ------------
Net income ............................................... $ 1.06 $ 1.13 $ 3.12 $ 3.16
============ ============ ============ ============
Diluted earnings per common share:
Income before extraordinary items and cumulative
effect of accounting change .......................... $ 0.95 $ 1.01 $ 2.86 $ 2.73
Extraordinary gain ....................................... 0.14
Cumulative effect of accounting change ................... (0.04)
------------ ------------ ------------ ------------
Net income ............................................... $ 0.95 $ 1.01 $ 2.82 $ 2.87
============ ============ ============ ============
</Table>
See notes to condensed consolidated financial statements.
4
SUIZA FOODS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
<Table>
<Caption>
NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------
2001 2000
----------- -----------
(unaudited)
Cash flows from operating activities:
Net income ........................................................................... $ 86,096 $ 90,284
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization .................................................... 113,467 113,919
Minority interest ................................................................ 42,829 42,682
Equity in (earnings) loss of unconsolidated affiliates ........................... 2,565 (10,572)
Extraordinary gain ............................................................... (4,968)
Cumulative effect of accounting change ........................................... 1,446
Deferred income taxes ............................................................ 21,638 35,334
Other, net ....................................................................... 1,056 5,029
Changes in operating assets and liabilities, net of acquisitions:
Accounts receivable ........................................................... (21,473) (3,383)
Inventories ................................................................... (22,903) (16,375)
Prepaid expenses and other assets ............................................. (5,657) (984)
Accounts payable, accrued expenses and other liabilities ...................... (53,959) (48,682)
Income taxes .................................................................. 14,438 (10,669)
----------- -----------
Net cash provided by operating activities ................................... 179,543 191,615
Cash flows from investing activities:
Net additions to property, plant and equipment ....................................... (89,368) (86,260)
Cash outflows for acquisitions and investments ....................................... (32,442) (286,139)
Net proceeds from divestitures ....................................................... 89,037
Purchase of minority interest ........................................................ (12,620)
Other ................................................................................ 1,915 2,568
----------- -----------
Net cash used in investing activities ....................................... (132,515) (280,794)
Cash flows from financing activities:
Proceeds from issuance of debt ........................................................ 113,789 1,299,909
Repayment of debt ..................................................................... (182,585) (946,558)
Payment of deferred financing costs ................................................... (11,971)
Issuance of common stock, net of expenses ............................................. 30,221 26,178
Redemption of trust issued preferred securities ....................................... (100,050)
Redemption of common stock ............................................................ (6,056) (146,545)
Distribution to minority interest ..................................................... (7,746) (13,942)
----------- -----------
Net cash provided by (used in) financing activities ......................... (52,377) 107,021
----------- -----------
Increase (decrease) in cash and cash equivalents ......................................... (5,349) 17,842
Cash and cash equivalents, beginning of period ........................................... 31,110 25,155
----------- -----------
Cash and cash equivalents, end of period ................................................. $ 25,761 $ 42,997
=========== ===========
</Table>
See notes to condensed consolidated financial statements.
5
SUIZA FOODS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 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 September 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 September 30, 2001, our derivative liability totaled $57.3
million on our consolidated balance sheet. Hedge ineffectiveness, determined in
accordance with SFAS No. 133 and included in our income statement, totaled
approximately $57,000 and $105,000 for the three-months and nine-months ended
September 30, 2001. Approximately $2.1 million and $3.6 million of losses (net
of taxes and minority interest) were reclassified to interest expense from other
comprehensive income during the three- months and nine-months ended September
30, 2001. We estimate that approximately $11.7 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 (FASB) 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
6
distribution expense were approximately $164.0 million and $486.6 million for
the three-month and nine-month periods ending September 30, 2001, compared to
$154.7 million and $453.2 million during the three-month and nine-month periods
ending September 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, FASB 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 September 30, 2001, our
goodwill approximated $1.48 billion. Amortization of goodwill and other
intangible assets with indefinite lives was approximately $12.7 million and
$37.9 million for the three-month and nine-month periods ended September 30,
2001, respectively. We are currently evaluating the impact of adopting these
pronouncements on our consolidated financial statements.
In June 2001, FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations." This statement requires that the fair value of a
liability for an asset retirement obligation be recognized in the period in
which it is incurred if a reasonable estimate of fair value can be made. The
associated asset retirement costs are capitalized as part of the carrying amount
of the long-lived asset. SFAS No. 143 is effective for us in fiscal year 2003.
We are currently evaluating the impact of adopting this pronouncement on our
consolidated financial statements.
FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets" in August 2001 and it will be effective for us beginning
January 1, 2002. SFAS No. 144 provides a single, comprehensive accounting model
for impairment and disposal of long-lived assets and
7
discontinued operations. We do not expect adoption of this standard to have a
material impact on our consolidated financial statements.
2. INVENTORIES
<Table>
<Caption>
AT SEPTEMBER 30, AT DECEMBER 31,
2001 2000
---------------- ---------------
(in thousands)
Raw materials and supplies ........ $ 106,461 $ 99,315
Finished goods .................... 103,155 87,398
---------- ----------
Total ........................ $ 209,616 $ 186,713
========== ==========
</Table>
3. LONG-TERM DEBT
<Table>
<Caption>
AT SEPTEMBER 30, AT DECEMBER 31,
2001 2000
---------------- ---------------
(in thousands)
Parent-level credit facility ................ $ -- $ --
Subsidiary debt obligations:
Suiza Dairy Group credit facility ....... 923,900 1,095,000
Receivable-backed loan .................. 250,000 150,000
Foreign subsidiary term loan ............ 36,631 39,519
Uncommitted line of credit .............. 20,000 20,000
Other lines of credit ................... 8,242 --
Industrial development revenue bonds .... 8,845 8,845
Capital lease obligations and other ..... 36,388 39,905
----------- -----------
1,284,006 1,353,269
Less current portion ........................ (164,919) (128,224)
----------- -----------
Total ................................... $ 1,119,087 $ 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 September 30, 2001, no funds were borrowed under this
facility, but there were $7.5 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.
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 September 30, 2001, there were outstanding borrowings of $923.9
million under this facility, in addition to $19.8 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.
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:
o 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
8
o 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 4.53% at September 30, 2001.
We have interest rate swap agreements in place however, that hedge variable rate
interest on a majority of this facility. The average interest rate on the swaps
during the three months ended September 30, 2001, plus the applicable interest
rate margin on the credit facility, totaled 7.70%. 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:
o $25.0 million quarterly from March 31, 2001 through December 31, 2001;
o $31.25 million quarterly from March 31, 2002 through December 31, 2002;
o $37.5 million quarterly from March 31, 2003 through December 31, 2003;
o 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
o 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.
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.
Upon completion of our pending acquisition of Dean Foods, both the
parent-level credit facility and the Suiza Dairy Group credit facility will be
terminated and replaced with a single $2.7 billion credit facility at the parent
level.
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
9
paper yield as defined in the agreement. The interest rate on the
receivable-backed loan at September 30, 2001 was 3.97%.
Foreign Subsidiary Term Loan -- In connection with our acquisition of
Leche Celta in February 2000, our Spanish subsidiary obtained a 7 billion peseta
(or approximately $38.3 million at September 30, 2001) 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 . The interest rate in effect on
this loan at September 30, 2001 was 6.91%.
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 September 30, 2001, Suiza Dairy Group had an
outstanding balance of $20.0 million under this line of credit at an interest
rate of 4.38%.
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 (or approximately $13.7 million at
September 30, 2001), 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 September
30, 2001, there were outstanding borrowings of $8.2 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 September 30, 2001 ranged from
2.55% to 2.60%.
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 and on anticipated borrowings under
the new credit facility to be funded upon completion of our pending acquisition
of Dean Foods. 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 6.24% 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 by limiting or fixing the
LIBOR interest rates specified in the applicable credit facility at the interest
rates noted above until the indicated expiration dates of these interest rate
derivative agreements.
10
We have also entered into interest rate swap agreements that provide
hedges for loans under Leche Celta's term loan. The following table summarizes
these agreements:
<Table>
<Caption>
FIXED INTEREST RATES NOTIONAL AMOUNTS EXPIRATION DATE
----------------------- ------------------------------------ -------------------
5.54% 1,500,000,000 pesetas November 2003
(approximately $8.2 million at
September 30, 2001)
5.6% 2,000,000,000 pesetas November 2004
(approximately $10.9 million at
September 30, 2001)
</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 $2.1 million of additional
interest expense, net of taxes and minority interest, during the three months
ended September 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.
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 internal 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 SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------- -------------------------------
2001 2000 2001 2000
------------ ------------ ------------ ------------
(in thousands)
Net sales from external customers:
Suiza Dairy Group ................. $ 1,272,119 $ 1,176,168 $ 3,716,980 $ 3,463,702
Morningstar Foods ................. 184,105 175,473 543,807 504,118
Corporate/Other ................... 99,507 88,306 296,371 300,622
------------ ------------ ------------ ------------
Total ......................... $ 1,555,731 $ 1,439,947 $ 4,557,158 $ 4,268,442
============ ============ ============ ============
</Table>
11
<Table>
<Caption>
THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------- -------------------------------
2001 2000 2001 2000
------------ ------------ ------------ ------------
(in thousands)
Intersegment sales:
Suiza Dairy Group ................. $ 3,630 $ 3,954 $ 11,724 $ 10,685
Morningstar Foods ................. 24,185 17,426 66,582 41,331
Corporate/Other ...................
------------ ------------ ------------ ------------
Total ......................... $ 27,815 $ 21,380 $ 78,306 $ 52,016
============ ============ ============ ============
Operating income:
Suiza Dairy Group ................. $ 76,143 $ 71,817 $ 218,455 $ 213,884
Morningstar Foods ................. 21,825 25,415 68,090 69,205
Corporate/Other ................... 199 (2,237) (1,597) (8,465)
------------ ------------ ------------ ------------
Total ......................... $ 98,167 $ 94,995 $ 284,948 $ 274,624
============ ============ ============ ============
</Table>
<Table>
Assets at September 30: 2001 2000
------------ ------------
(in thousands)
Suiza Dairy Group ................. $ 2,903,566 $ 2,816,530
Morningstar Foods ................. 451,073 436,905
Corporate/Other ................... 478,139 430,320
------------ ------------
Total ......................... $ 3,832,778 $ 3,683,755
============ ============
</Table>
Geographic information for the three-month and nine-month periods ended
September 30:
<Table>
<Caption>
REVENUES
--------------------------------------------------------------------- LONG-LIVED ASSETS
THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30, AT SEPTEMBER 30,
-------------------------------- ------------------------------- ----------------------------
2001 2000 2001 2000 2001 2000
---------- ---------- ---------- ---------- ---------- ----------
(in thousands) (in thousands) (in thousands)
United States ...... $1,456,223 $1,351,641 $4,260,787 $3,967,819 $2,699,219 $2,673,144
Puerto Rico ........ 55,527 57,125 168,124 171,302 125,004 123,121
Europe ............. 43,981 31,181 128,247 129,321 105,033 106,734
---------- ---------- ---------- ---------- ---------- ----------
Total .............. $1,555,731 $1,439,947 $4,557,158 $4,268,442 $2,929,256 $2,902,999
========== ========== ========== ========== ========== ==========
</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 $20.8
million and $62.4 million for the three-months and nine-months ended September
30, 2001. The amounts of deferred income tax (expense) benefit and minority
interest charges allocated to each component of other comprehensive income
during the nine months ended September 30, 2001 are included below.
<Table>
<Caption>
TAX BENEFIT
PRE-TAX (EXPENSE)
INCOME AND MINORITY
(LOSS) INTEREST NET AMOUNT
-------- ------------ ----------
(in thousands)
Accumulated other comprehensive loss, 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 loss, 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 loss, June 30, 2001 ....................... $(37,875) $ 21,651 $(16,224)
-------- -------- --------
Cumulative translation adjustment arising during period .............. 3,221 (1,266) 1,955
Net change in fair value of derivative instruments ................... (32,345) 19,686 (12,659)
Amounts reclassified to income statement related to derivatives ...... 5,413 (3,292) 2,121
-------- -------- --------
Accumulated other comprehensive loss, September 30, 2001 .................. $(61,586) $ 36,779 $(24,807)
======== ======== ========
</Table>
12
6. STOCKHOLDERS' EQUITY
We repurchased 123,334 shares under our open market share repurchase
program during the first nine months of 2001, for an aggregate purchase price of
approximately $6.1 million. Approximately $101.3 million remains available for
spending under this program.
Repurchased shares are treated as 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.
Our integration and cost reduction program consists of several
individual cost reduction plans. The principal components of each such plan are:
o 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 120 positions, primarily plant employees
associated with the plant closings and rationalization. All of
those employees had been terminated as of September 30, 2001.
o Shutdown costs, which are costs necessary to prepare plant
facilities for closure.
o Additional costs incurred after shutdown, such as lease
obligations or termination costs, utilities and property taxes.
o 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.
13
Activity with respect to plant closing costs for 2001 to date is
summarized below:
<Table>
<Caption>
NINE MONTHS ENDED
ACCRUED CHARGES SEPTEMBER 30, 2001 ACCRUED CHARGES
AT ------------------------------ AT
DECEMBER 31, 2000 ACCRUALS PAYMENTS SEPTEMBER 30, 2001
----------------- ------------ ------------ ------------------
(in thousands)
Cash Charges:
Workforce reduction costs ......................... $ 1,179 $ 238 $ (1,239) $ 178
Shutdown costs .................................... 363 289 (277) 375
Lease obligations after shutdown .................. 118 182 (207) 93
Other ............................................. 5 (3) 2
------------ ------------ ------------ ------------
Subtotal .............................................. $ 1,660 $ 714 $ (1,726) $ 648
============ ============ ============
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:
o 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 24 employees had been
terminated under these plans as of September 30, 2001.
o 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.
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 SEPTEMBER 30, 2001
----------------- ---------- ------------------
(in thousands)
Cash Charges:
Workforce reduction costs ....... $ 997 $ (269) $ 728
Shutdown costs .................. 7,271 (2,040) 5,231
---------- ---------- ----------
Total .................... $ 8,268 $ (2,309) $ 5,959
========== ========== ==========
</Table>
Consolidated Container - Consolidated Container, in which we own a
43.1% interest, reported restructuring costs related to organizational and
management changes during the third quarter of 2001. Our share of these charges,
which amounted to $1.7 million, was reported as an adjustment to equity in
earnings of unconsolidated affiliates.
8. ACQUISITIONS
Dean Foods Company - 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 $4.0 billion. The merger agreement provides for the
merger of Dean Foods with and into one of our subsidiaries. As a
14
result of the merger, each share of common stock of Dean Foods Company 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 $750.0 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 Company,
expiration or termination of the waiting period under the Hart-Scott-Rodino
Antitrust Improvements Act of 1976 and the absence of any governmental order
permitting the closing of the transaction or making it illegal. Our shareholders
and the shareholders of Dean Foods Company approved the transaction in September
2001. We believe this transaction will be completed in the fourth quarter of
this year.
In connection with the merger, we have also agreed to purchase the
33.8% minority interest in Suiza Dairy Group currently held by Dairy Farmers of
America (DFA) for:
o approximately $165.0 million in cash, subject to adjustment in certain
circumstances as described in our agreement with DFA,
o 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
o 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 $80.0 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
approximately 25% of such payments.
Our purchase 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.
Minority Interest in Leche Celta - In August 2001, we purchased the 25%
minority interest in Leche Celta, our Spanish dairy processor, for approximately
$12.6 million. We funded this purchase with cash flow from operations.
15
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 SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
------------------------------------------- -------------------------------------------
2001 2000 2001 2000
-------------------- -------------------- -------------------- ---------------------
DOLLARS PERCENT DOLLARS PERCENT DOLLARS PERCENT DOLLARS PERCENT
---------- ------- ---------- ------- ---------- ------- ---------- -------
(dollars in thousands) (dollars in thousands)
Net sales $1,555,731 100.0% $1,439,947 100.0% $4,557,158 100.0% $4,268,442 100.0%
Cost of sales 1,195,435 76.8 1,085,627 75.4 3,477,209 76.3 3,213,745 75.3
---------- ----- ---------- ----- ---------- ----- ---------- -----
Gross profit 360,296 23.2 354,320 24.6 1,079,949 23.7 1,054,697 24.7
Operating expenses
Selling and distribution 207,929 13.4 202,371 14.1 622,746 13.6 602,297 14.1
General and administrative 41,083 2.6 43,035 3.0 131,498 2.9 135,235 3.2
Amortization of intangibles 13,117 0.9 13,495 0.9 39,914 0.9 39,153 0.9
Plant closing and other costs 0.0 424 0.0 843 0.0 3,388 0.1
---------- ----- ---------- ----- ---------- ----- ---------- -----
Total operating expenses 262,129 16.9 259,325 18.0 795,001 17.4 780,073 18.3
---------- ----- ---------- ----- ---------- ----- ---------- -----
Total operating income $ 98,167 6.3% $ 94,995 6.6% $ 284,948 6.3% $ 274,624 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").
THIRD QUARTER AND YEAR-TO-DATE 2001 COMPARED TO THIRD QUARTER AND YEAR-TO-DATE
2000
Net Sales -- Net sales increased by $115.8 million or 8.0% to $1.56
billion in the third quarter of 2001 from $1.44 billion in the third quarter of
2000. For the nine month period ending September 30, net sales increased by
$288.7 million, or 6.8%, to $4.56 billion in 2001 from $4.27 billion in 2000.
Net sales for Suiza Dairy Group increased $96.0 million, or 8.2%, in the third
quarter of 2001 compared to the same period in 2000, and increased $253.3
million, or 7.3%, in the first nine months of 2001 compared to the same period
in 2000. Net sales for Morningstar Foods increased $8.6 million, or 4.9%, in the
third quarter of 2001 over the same period in 2000, and increased $39.7 million,
or 7.9%, in the first nine months of 2001 compared to the year-earlier period.
These increases occurred despite a small decline in volume and were due 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 76.8% in the third quarter
of 2001 compared to 75.4% in the third quarter of 2000, and 76.3% for the first
nine months of 2001 compared to 75.3% in the same period of 2000. The cost of
sales ratio for Suiza Dairy Group increased to 77.4% in the third quarter of
2001 from 76.2% in 2000, and increased to 77.0% in the first nine months of 2001
from 76.0% in the same period of 2000. The cost of sales ratio for Morningstar
Foods increased to 70.1% in the third
16
quarter of 2001 from 66.6% in 2000 and increased to 68.4% in the first nine
months of 2001 from 66.9% in 2000. These increases were due to higher raw milk
and butterfat costs in 2001.
Operating Costs and Expenses -- Our operating expense ratio was 16.9%
in the third quarter of 2001 compared to 18.0% in the third quarter of 2000, and
17.4% in the first nine months of 2001 compared to 18.3% in the same period of
2000. The operating expense ratio at Suiza Dairy Group was 16.6% in the third
quarter of 2001 compared to 17.6% in 2000, and 17.1% in the first nine months of
2001 compared to 17.8% 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 18.0%
in the third quarter of 2001 compared to 18.9% in 2000, and 19.1% in the first
nine months of 2001 compared to 19.4% in the same period of 2000. This ratio
improved in the third quarter of 2001 due to lower distribution costs, which
were partly offset in the nine month period by higher selling expenses related
to the introduction of new products.
Operating Income -- Operating income in the third quarter of 2001 was
$98.2 million, an increase of 3.3% from the third quarter of 2000 operating
income of $95.0 million. For the nine month period, operating income in 2001
increased 3.8% to $284.9 million from $274.6 million in 2000. Our operating
margin was 6.3% in the third quarter of 2001 compared to 6.6% in the third
quarter of 2000, and 6.3% in the first nine months of 2001 compared to 6.4% in
the same period of 2000. Operating margin for Suiza Dairy Group declined to 6.0%
in the third quarter of 2001 from 6.1% in 2000 and declined to 5.9% in the first
nine months of 2001 from 6.2% in 2000. This decrease was due to higher raw milk
costs during 2001, partly offset by lower operating costs. Morningstar Foods'
operating margin declined to 11.8% in the third quarter of 2001 from 14.5% in
2000 and declined to 12.5% in the first nine months of 2001 from 13.7% in 2000
due to higher butterfat costs.
Other (Income) Expense --Interest expense decreased to $23.3 million in
the third quarter of 2001 from $29.0 million in 2000, and decreased to $76.5
million in the first nine months of 2001 from $83.1 million in 2000. This
decrease was the result of lower debt balances and lower interest rates in 2001.
Equity from investments in unconsolidated affiliates, which is primarily related
to our minority interest in Consolidated Container, amounted to a $5.4 million
loss in the third quarter of 2001 compared to earnings of $5.2 million in 2000;
and amounted to a $2.6 million loss in the first nine months of 2001 compared to
earnings of $10.6 million in 2000. In the third quarter of 2001 Consolidated
Container incurred restructuring and other one-time costs, including (i) costs
to settle claims by certain customers related to Consolidated Container's
failure to satisfy various contractual obligations, and (ii) costs related to
various organizational and management changes.
Income Taxes -- Income tax expense was recorded at an effective rate of
34.7% in the third quarter of 2001 compared to 37.9% in the third quarter of
2000, and at an effective rate of 36.5% in the first nine months of 2001
compared to 38.0% during the same period of 2000. In the third quarter of 2001 a
contested state tax issue was resolved in our favor. The tax 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,
increased to $9.8 million in the third quarter of 2001 from $8.2 million in
2000, and increased to $26.1 million in the first nine months of 2001 from $25.3
million in 2000, due to higher 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:
17
o 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
o 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 $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 merger agreement with Dean
Foods Company, the nation's second largest dairy processor with annual revenues
of over $4.0 billion. In connection with this transaction, which we believe will
be completed during the fourth quarter of this year, we have also agreed to
purchase the 33.8% minority interest in Suiza Dairy Group currently held by
Dairy Farmers of America. Upon completion of these transactions, we will change
our name to Dean Foods Company and our trading symbol on the New York Stock
Exchange will change from "SZA" to "DF." 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 $179.5 million for the
first nine months of 2001 compared to $191.6 million for the first nine months
of 2000. This reduction was primarily due to an increase in working capital.
We spent $89.4 million during the first nine months of 2001 for capital
expenditures, all of which was funded using cash flow from operations. We intend
to spend between $140 million and $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.
We spent approximately $32.4 million in the first nine months of 2001
on transaction costs related to our proposed acquisition of Dean Foods Company,
$15.9 million of which consisted of fees paid to various commercial lenders to
obtain our new credit facility. In addition, we spent $12.6 million during the
third quarter of 2001 for the purchase of the minority interest in Leche Celta.
All of these acquisition-related costs were funded using cash flow from
operations or borrowings under our existing credit facilities.
Debt Obligations
At September 30, 2001, Suiza Dairy Group had outstanding borrowings of
$923.9 million under its credit facility, compared to $1.095 billion at December
31, 2000, and $19.8 million in outstanding letters of credit. As of September
30, 2001, up to $591.3 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.
18
At September 30, 2001 we had no debt outstanding under our parent-level
senior credit facility, and $7.5 million in outstanding letters of credit,
leaving $292.5 million available for future borrowing, subject to satisfaction
of certain conditions contained in the loan agreement. 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, in addition to the principal and
interest payments due from time to time under our other debt agreements, 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, upon completion of our
pending acquisition of Dean Foods, both of these facilities will be terminated
and replaced with a single $2.7 billion credit facility at the parent level. We
believe that the acquisition of Dean Foods will 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 4, 2001, we signed a definitive merger agreement with Dean
Foods Company. As a result of the merger, each share of common stock of Dean
Foods will automatically convert into the right to receive $21.00 in cash plus
.429 shares of our common stock, subject to adjustment in certain circumstances.
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 its
33.8% interest in Suiza Dairy Group in exchange for:
o approximately $165.0 million in cash, subject to adjustment as
described in our agreement with DFA,
o 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
o 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 approximately 25% of such payments. The
closing of our proposed acquisition of DFA's minority interest in Suiza Dairy
Group
19
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. In addition, we
will also use the proceeds of the new credit facility (i) to retire existing
indebtedness under the Suiza Dairy Group credit facility, our parent-level
credit facility and Dean Foods' existing credit facility, (ii) to pay certain
closing costs, and (iii) for general corporate purposes. We signed a definitive
credit agreement related to our new credit facility in July 2001. During the
fourth quarter of 2001, we expect to pay approximately $30.0 million in fees
related to the new credit facility. 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.
We expect to spend an additional amount of approximately $10.0 million
to $12.0 million during the fourth quarter for other costs related to our
pending acquisition of Dean Foods, 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 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
Consolidated Container Company
We own a 43.1% interest in Consolidated Container Company, one of the
nation's largest manufacturers of rigid plastic containers. During 2001,
Consolidated Container has consistently reported weaker than expected operating
results due to a variety of factors including high raw material costs and
various operational difficulties. Although Consolidated Container has recently
installed new management, we expect Consolidated Container's impact on our
earnings to continue to be unpredictable over the next several quarters.
Impact of Recent Terrorist Attacks
Our customers in the airline, food service and hospitality industries
have suffered decreases in sales volumes in recent weeks due to the events of
September 11 and the resulting economic downturn. Our sales to these customers
have decreased accordingly. We expect to continue to experience lower than
normal sales volumes to these customers until economic stability and consumer
confidence are restored.
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 have been continuing our emphasis on our
rationalization activities. As we continue these activities, we may incur
restructuring costs and 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
20
our former U.S. plastic packaging business and the business of Reid Plastics. We
cannot estimate the effect of these charges on our earnings at this time.
Trends in Tax Rate
Our 2000 tax rate was approximately 38.6%. In 2001, we believe our
annual tax rate will range from 35% to 37%. We expect our annual tax rate to
remain within this range for the foreseeable future due to various tax savings
initiatives we have undertaken.
See "Risk Factors" below for a description of various other risks and
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.
Changes in Raw Material and Supply Costs Can 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. In many cases we are able to adjust our
pricing to reflect changes in raw material costs. However, volatility in the
cost of raw materials can adversely affect our performance, as pricing changes
may lag changes in costs. These lags tend to erode our profit margins. Extremely
high raw material costs can also put downward pressure on our margins and our
volumes. We have been adversely affected in 2001 by raw material costs. Although
we cannot predict changes in raw material costs with precision, we do expect raw
material costs to remain high, and fairly volatile, for the remainder of 2001.
Therefore, we may continue to be adversely affected by changes in raw material
costs for the remainder of 2001 and into 2002.
Consolidated Container Company, in which we own a 43.1% interest, uses
high density, polyethylene resin as its primary raw material. Consolidated
Container incurred sharply increased costs for high density, polyethylene resin
during 2000 and in 2001, 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 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 currently expected, our financial
results including our gross profit and our earnings per share, could be
adversely affected for the remainder of 2001 and into 2002.
21
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 as a
result of increased fuel prices. Further increases in fuel prices beyond our
expectations could adversely affect our results of operations.
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 subject
to certain conditions, including among others the expiration or termination of
the "waiting period" under the Hart-Scott-Rodino Antitrust Improvements Act of
1976 and the absence of any governmental order prohibiting the closing of the
transaction or making it illegal. Although we expect the closing to occur before
the end of this year, 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 those enumerated in the merger agreement, 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. Several
state Attorneys General have also been participating in the investigation of the
competitive effects of the proposed transaction. These 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. Either party to
the merger agreement can terminate the agreement without penalty if the merger
has not closed by December 31, 2001.
22
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.
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(R), Borden(R), Pet(R) and, beginning in the first quarter of next
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.
We May Be Subject to Product Liability Claims
We sell food products for human consumption, which involves risks such
as
o product contamination or spoilage,
o product tampering, and
o 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. An
actual or alleged problem with the quality, safety or integrity of our products
at any of our facilities could also result in
o negative publicity,
o reduced demand for our products, and
o substantial costs of compliance or remediation.
Any of these events could adversely affect us.
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.
23
We Could Be Adversely Affected by Changes in Regulations
The federal government and several state agencies establish minimum
prices paid to producers for raw milk. These prices, which are calculated by
economic formula based on supply and demand, vary by region and by the type of
product manufactured using the raw milk. Until recently, the Northeast Dairy
Compact Commission set a minimum price for raw milk in New England independent
of the price set by the federal milk marketing orders. Under the Northeast Dairy
Compact, the price we paid for raw milk in New England was frequently in excess
of the minimum price established by the federal government. The Northeast Dairy
Compact expired at the end of September 2001. However, new legislation has
recently been proposed that would set a new minimum price for raw milk
throughout the country independent of the price set by the federal milk
marketing orders. Under the proposed legislation, prices charged for raw milk
could exceed the prices we currently pay. We do not know whether this proposed
legislation will be authorized by Congress or, if authorized, the extent to
which it 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
o food quality,
o manufacturing standards,
o labeling,
o packaging,
o waste water, storm water, air emissions, storage tanks and
hazardous materials,
o occupational health and safety, labor, discrimination, and
o 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.
24
We Have Substantial Debt and Other Financial Obligations and We May
Incur Additional Debt
As of September 30, 2001, we had substantial debt and other financial
obligations including, among others,
o $923.9 million of borrowings under the Suiza Dairy Group credit
facility,
o $584.5 million of 5.5% preferred securities, and
o $250.0 million of indebtedness under the receivable-backed loan.
Those amounts compare to our stockholders' equity of $694.5 million as
of September 30, 2001. If our proposed acquisition of Dean Foods is completed,
we will be even more highly leveraged.
As of September 30, 2001, up to $591.3 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 $292.5 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
o limit our ability to obtain additional financing in the future
without obtaining prior consent,
o 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,
o may limit our flexibility in planning for, or reacting to, changes
in our business and market conditions,
o impose on us additional financial and operational restrictions,
and
o 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.
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
25
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.
Our Foreign Operations Bring Added Risk
In February 2000, we purchased 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.
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.
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
than the current market price for our common stock. Among other things, our
certificate of incorporation and bylaws
o 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,
o divide our board of directors into three classes so that only
approximately one-third of the total number of directors is
elected each year,
o permit directors to be removed only for cause, and
o specify advance notice requirements for stockholder proposals and
director nominations.
26
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 and on anticipated borrowings under the new credit
facility to be funded upon completion of our pending acquisition of Dean Foods.
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 6.24% 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 by limiting or fixing the
LIBOR interest rates specified in the applicable 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. The following table summarizes these
agreements:
<Table>
<Caption>
FIXED INTEREST RATES NOTIONAL AMOUNTS EXPIRATION DATE
----------------------- ------------------------------------ -------------------
5.54% 1,500,000,000 pesetas November 2003
(approximately $8.2 million at
September 30, 2001)
5.6% 2,000,000,000 pesetas November 2004
(approximately $10.9 million at
September 30, 2001)
</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 $2.1 million of additional
interest expense, net of taxes and minority interest, during the three months
ended September 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 September 30, 2001, the analysis indicated that such
interest rate movement would not have a material effect on our financial
position,
27
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.
28
PART II - OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On September 21, 2001, we held a special meeting of stockholders to
vote on certain proposals related to our pending acquisition of Dean Foods
Company. At the meeting, we submitted the following matters to a vote of our
stockholders:
Proposal 1:
A proposal to approve:
-- the issuance of Suiza's common stock to Dean's stockholders in the
merger, as contemplated by the Agreement and Plan of Merger dated
April 4, 2001 among Suiza, Blackhawk Acquisition Corp, a
wholly-owned subsidiary of Suiza, and Dean; and
-- the reservation of an additional number of shares of Suiza's common
stock for issuance after the merger pursuant to stock-based awards
outstanding at the time of the merger under Dean's stock awards
plans;
Proposal 2:
A proposal to approve Suiza's adoption of Dean's 1989 Stock Awards Plan
and the reservation of 1,894,864 shares of Suiza's common stock for
issuance after the merger pursuant to that plan, if the merger occurs;
and
Proposal 3:
A proposal to increase the number of shares of Suiza's common stock
reserved for issuance under Suiza's 1997 Stock Option and Restricted
Stock Plan from 7.5 million shares to 12.5 million shares, if the
merger occurs.
All proposals were approved.
The results of voting on each proposal were as follows:
<Table>
<Caption>
Proposal 1 Shares % of Voting
---------- ------ -----------
For 18,884,061 98.82%
Against 162,912 .85%
Abstain 62,606 .33%
</Table>
<Table>
<Caption>
Proposal 2 Shares % of Voting
---------- ------ -----------
For 11,840,074 61.96%
Against 7,229,386 37.83%
Abstain 40,119 .21%
</Table>
<Table>
<Caption>
Proposal 3 Shares % of Voting
---------- ------ -----------
For 9,594,919 50.21%
Against 9,471,178 49.56%
Abstain 43,482 .23%
</Table>
29
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
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 our 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
our Current Report on Form 8-K filed April 5, 2001 (File No.
1-12755))
10.3 Amendment No. 1 to Securities Purchase Agreement among Suiza Foods
Corporation, Suiza Dairy Group, L.P., Suiza Southeast, LLC, Dairy
Farmers of America and Mid-Am Capital, L.L.C.
10.4 Credit Agreement, dated July 31, 2001, among Suiza Foods
Corporation and certain of its subsidiaries, and various lenders
(incorporated by reference from our Quarterly Report on Form 10Q
for the quarter ended June 30, 2001 (File No. 1-12755))
10.5 Credit Agreement (the "Suiza Dairy Group Credit Facility") dated
January 4, 2000 by and among Suiza Dairy Group and various lenders
(incorporated by reference to our Current Report on Form 8-K dated
January 11, 2000, File No. 1-127555)
10.6 Credit Agreement (the "Parent Level Credit Facility") dated
January 4, 2000 among Suiza Foods Corporation and various lenders
(incorporated by reference to our Current Report on Form 8-K dated
January 11, 2000, File No. 1-127555)
10.7 Amendment No. 1 to the Parent Level Credit Facility (incorporated
by reference to our Quarterly Report on Form 10Q for the quarter
ended September 30 2000, File No. 1-12755)
10.8 First Amendment to Suiza Dairy Group Credit Facility (incorporated
by reference to our Quarterly Report on Form 10Q for the quarter
ended September 30, 2000, File No. 1-12755)
11 Statement regarding computation of per share earnings
(b) Reports on Form 8-K and 8-K/A
None
30
SIGNATURES
Pursuant to the requirement of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SUIZA FOODS CORPORATION
/s/ Barry A. Fromberg
----------------------------------------------
Barry A. Fromberg Executive Vice President,
Chief Financial Officer (Principal Accounting
Officer)
Date: November 9, 2001
31
EXHIBIT INDEX
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 our 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 our
Current Report on Form 8-K filed April 5, 2001 (File No. 1-12755))
10.3 Amendment No. 1 to Securities Purchase Agreement among Suiza Foods
Corporation, Suiza Dairy Group, L.P., Suiza Southeast, LLC, Dairy
Farmers of America and Mid-Am Capital, L.L.C.
10.4 Credit Agreement, dated July 31, 2001, among Suiza Foods Corporation
and certain of its subsidiaries, and various lenders (incorporated
by reference from our Quarterly Report on Form 10Q for the quarter
ended June 30, 2001 (File No. 1-12755))
10.5 Credit Agreement (the "Suiza Dairy Group Credit Facility") dated
January 4, 2000 by and among Suiza Dairy Group and various lenders
(incorporated by reference to our Current Report on Form 8-K dated
January 11, 2000, File No. 1-127555)
10.6 Credit Agreement (the "Parent Level Credit Facility") dated January
4, 2000 among Suiza Foods Corporation and various lenders
(incorporated by reference to our Current Report on Form 8-K dated
January 11, 2000, File No. 1-127555)
10.7 Amendment No. 1 to the Parent Level Credit Facility (incorporated by
reference to our Quarterly Report on Form 10Q for the quarter ended
September 30 2000, File No. 1-12755)
10.8 First Amendment to Suiza Dairy Group Credit Facility (incorporated
by reference to our Quarterly Report on Form 10Q for the quarter
ended September 30, 2000, File No. 1-12755)
11 Statement regarding computation of per share earnings
32