UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(Mark One)
[x] Quarterly Report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the quarterly period ended September 30, 1997
or
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from to
Commission file numbers 001-12755
SUIZA FOODS CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 75-2559681
(State or other jurisdiction (I.R.S. Employer
of incorporation) Identification No.)
3811 Turtle Creek Boulevard, Suite 1300
Dallas, Texas 75219
(214) 528-0939
(Address, including zip code, and telephone number, including area code,
of registrant's principal executive offices)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
----- ------
As of October 31, 1997 the number of shares outstanding of each class of
common stock was:
Common Stock, $.01 par value: 15,810,800
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SUIZA FOODS CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
December 31, September 30,
1996 1997
------------ -------------
(unaudited)
(Dollars in thousands, except share data)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 8,951 $ 9,646
Accounts receivable 50,608 94,104
Inventories 19,228 30,587
Prepaid expenses and other current assets 2,754 9,403
Refundable income taxes 2,312 ---
Deferred income taxes 3,672 4,427
-------- --------
Total current assets 87,525 148,167
PROPERTY, PLANT AND EQUIPMENT 123,260 256,462
DEFERRED INCOME TAXES 8,524 7,750
INTANGIBLE AND OTHER ASSETS 164,839 504,721
-------- --------
TOTAL $384,148 $917,100
-------- --------
-------- --------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued expenses $ 46,664 $114,912
Income taxes payable 1,105 1,193
Current portion of long-term debt 12,876 16,825
Total current liabilities 60,645 132,930
-------- --------
LONG-TERM DEBT 226,693 540,905
DEFERRED INCOME TAXES 3,278 7,720
COMMITMENTS AND CONTINGENCIES --- ---
STOCKHOLDERS' EQUITY:
Common stock, par value $.01 per share; 100,000,000 shares authorized,
10,741,729 and 15,809,415 shares issued and outstanding 107 158
Additional paid-in capital 89,337 199,222
Retained earnings 4,088 36,165
-------- --------
Total stockholders' equity 93,532 235,545
-------- --------
TOTAL $384,148 $917,100
-------- --------
-------- --------
See notes to condensed consolidated financial statements.
2
SUIZA FOODS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Three months ended September 30, Nine months ended September 30,
1996 1997 1996 1997
---- ---- ---- ----
(Dollars in thousands, except share data)
NET SALES $ 139,304 $ 307,280 $ 364,611 $ 644,099
COST OF SALES 101,214 228,235 267,131 480,282
----------- ----------- ---------- -----------
GROSS PROFIT 38,090 79,045 97,480 163,817
OPERATING COSTS AND EXPENSES:
Selling and distribution 19,533 37,265 52,215 79,509
General and administrative 5,856 11,695 15,661 28,092
Amortization of intangibles 1,240 3,514 3,200 6,496
----------- ----------- ---------- -----------
Total operating costs and expenses 26,629 52,474 71,076 114,097
----------- ----------- ---------- -----------
INCOME FROM OPERATIONS 11,461 26,571 26,404 49,720
OTHER (INCOME) EXPENSE:
Interest expense, net 4,356 10,789 12,844 17,369
Merger and other costs 571 --- 571 ---
Other income, net (3,137) (228) (3,389) (18,803)
----------- ----------- ---------- -----------
Total other (income) expense 1,790 10,561 10,026 (1,434)
----------- ----------- ---------- -----------
INCOME BEFORE INCOME TAXES AND EXTRAORDINARY LOSS 9,671 16,010 16,378 51,154
INCOME TAXES (BENEFIT) (9,266) 5,062 (7,495) 15,807
----------- ----------- ---------- -----------
INCOME BEFORE EXTRAORDINARY LOSS 18,937 10,948 23,873 35,347
EXTRAORDINARY LOSS FROM EARLY EXTINGUISHMENT OF DEBT --- --- (2,215) (3,270)
----------- ----------- ---------- -----------
NET INCOME $ 18,937 $ 10,948 $ 21,658 $ 32,077
----------- ----------- ---------- -----------
----------- ----------- ---------- -----------
NET EARNINGS (LOSS) PER SHARE:
Income before extraordinary loss $ 1.68 $ 0.64 $ 2.55 $ 2.22
Extraordinary loss --- --- (0.24) (0.21)
----------- ----------- ---------- -----------
Net income $ 1.68 $ 0.64 $ 2.31 $ 2.01
----------- ----------- ---------- -----------
----------- ----------- ---------- -----------
WEIGHTED AVERAGE SHARES OUTSTANDING 11,249,682 17,079,727 9,360,539 15,929,708
----------- ----------- ---------- -----------
----------- ----------- ---------- -----------
See notes to condensed consolidated financial statements.
3
SUIZA FOODS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Nine months ended September 30,
(Dollars in thousands)
1996 1997
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 21,658 $ 32,077
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation 7,032 11,505
Amortization of intangible assets, including deferred financing costs 3,776 7,086
Loss on sales of assets 17 71
Extraordinary loss from early extinguishment of debt 2,215 3,270
Merger and other costs 571 ---
Noncash and imputed interest 236 ---
Deferred income taxes (9,896) 4,461
Changes in operating assets and liabilities, net of acquisitions:
Accounts and notes receivable (7,639) (6,425)
Inventories (1,657) (1,686)
Prepaid expenses and other assets (1,534) (3,184)
Accounts payable and other accrued expenses 1,649 13,482
Income taxes payable (1,260) 7,313
-------- ---------
Net cash provided by operating activities 15,168 67,970
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property, plant and equipment (10,186) (19,303)
Proceeds from the sale of property, plant and equipment 267 223
Cash outflows for acquisitions (83,129) (443,187)
-------- ---------
Net cash used in investing activities (93,048) (462,267)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from the issuance of debt 89,473 446,150
Repayment of debt (60,620) (127,989)
Payment of deferred financing costs and debt prepayment penalties (3,220) (12,770)
Issuance of common stock, net of expenses 58,358 89,601
-------- ---------
Net cash provided by financing activities 83,991 394,992
-------- ---------
INCREASE IN CASH AND CASH EQUIVALENTS 6,111 695
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 3,177 8,951
-------- ---------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 9,288 $ 9,646
-------- ---------
-------- ---------
See notes to condensed consolidated financial statements.
4
SUIZA FOODS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1997
1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The condensed consolidated financial statements as of September 30, 1997
and for the three month and nine month periods ended September 30, 1997 and
1996 have been prepared by Suiza Foods Corporation (the "Company" or "Suiza
Foods") without audit. In the opinion of management, all necessary
adjustments (which include only normal recurring adjustments) to present
fairly, in all material respects, the consolidated financial position,
results of operations and cash flows of the Company as of September 30,
1997 and for the three month and nine month periods ended September 30,
1997 and 1996 have been made. Certain information and footnote disclosures
normally included in financial statements prepared in accordance with
generally accepted accounting principles have been omitted. These
financial statements should be read in conjunction with the Company's 1996
financial statements contained in its Annual Report on Form 10-K as filed
with the Securities and Exchange Commission on March 29, 1997.
2. INVENTORIES
At December 31, At September 30,
1996 1997
---- ----
(Unaudited)
Pasteurized and raw milk and raw
materials $ 7,693 $12,597
Parts and supplies 5,584 9,048
Finished goods 5,951 8,942
------- -------
$19,228 $30,587
------- -------
------- -------
3. LONG-TERM DEBT
At December 31, At September 30,
1996 1997
---- ----
(Unaudited)
Senior credit facility:
Revolving loan facility $ 8,600 $ 1,000
Acquisition loan facility 69,100 235,000
Term loan facilities 125,000 321,000
Subordinated notes 36,000 ---
Capital lease obligations and
other debt 869 730
-------- --------
239,569 557,730
Less: current portion (12,876) (16,825)
-------- --------
$226,693 $540,905
-------- --------
-------- --------
5
SUIZA FOODS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
SEPTEMBER 30, 1997
3. LONG-TERM DEBT (Continued)
On January 28, 1997, the Company sold 4,270,000 shares of common stock,
$.01 par value per share, in a public offering (the "Offering") at a price
to the public of $22.00 per share (see Note 6). The Offering provided
net cash proceeds to the Company of approximately $89.0 million. Of this
amount, $36.0 million was used to repay subordinated notes and $4.3 million
was used to pay prepayment penalties related to the early extinguishment of
the subordinated notes, which, along with the related balance of
unamortized deferred loan costs and net of related income tax benefits, was
reported as an extraordinary loss from the early extinguishment of debt.
The remainder of the net proceeds were used to repay a portion of the
outstanding balance of the acquisition loan facility of the Company's
Senior Credit Facility.
On March 5, 1997, the Company amended its Senior Credit Facility. Pursuant
to this amendment, the Company's term loans were expanded from a $130.0
million facility into a $150.0 million facility. On July 31, 1997, the
Company amended its Senior Credit Facility to provide for an aggregate of
$700.0 million comprised of: (i) a $150.0 million term loan; (ii) a $50.0
million revolving credit facility; (iii) a $325.0 million revolving
acquisition facility, and (iv) a $175.0 million acquisition term loan.
Under the terms of the Senior Credit Facility, the $150.0 million term loan
will be amortized over six years beginning September 30, 1997 and the
revolving credit facility expires on September 30, 2003. The availability
under the revolving acquisition facility will decrease at the end of each
calendar quarter beginning December 31, 2000 by $20.3 million until
December 31, 2002, when it begins reducing by $40.6 million each quarter
until maturity on September 30, 2003. The $175.0 million acquisition term
loan will be amortized over four years beginning December 31, 1999. Amounts
outstanding under the Senior Credit Facility will bear interest at a rate
per annum equal to one of the following rates, at the Company's option: (i)
the sum of a base rate equal to the higher of the Federal Funds rates plus
50 basis points or First Union National Bank's prime commercial lending
rate, plus a margin that varies from 0 to 50 basis points depending on the
Company's ratio of defined indebtedness to EBITDA (as defined in the Senior
Credit Facility); or (ii) The London Interbank Offered Rate ("LIBOR") plus
a margin that varies from 75 to 150 basis points depending on the Company's
ratio of defined indebtedness to EBITDA. The Company will pay a commitment
fee on unused amounts of the revolving facility and the revolving
acquisition facility that ranges from 20 to 37.5 basis points, based on the
Company's ratio of defined indebtedness to EBITDA.
On September 28, 1997, Suiza Foods entered into an agreement pursuant to
which a subsidiary of Suiza Foods would merge with The Morningstar Group
Inc. ("Morningstar") and Morningstar would become a wholly-owned subsidiary
of Suiza Foods (see Note 5). On October 17, 1997, the Company accepted a
commitment letter from First Union National Bank and The First National
Bank of Chicago as co-underwriters for a new senior lending facility. The
new facility is comprised of a $700.0 million revolving credit line and a
$550.0 million term loan. The Company expects to close on this facility
contemporaneously with the closing of the Morningstar transaction.
6
SUIZA FOODS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
SEPTEMBER 30, 1997
4. TAXES
In December 1995, the Commonwealth of Puerto Rico adopted the Puerto Rico
Agricultural Tax Incentives Act of 1995, which reduced the effective income
tax rate for qualified agricultural businesses from 39% to 3.9% and
provided for a 50% tax credit for certain "eligible investments" in
qualified agricultural businesses in Puerto Rico. During 1996, the Company
made investments in its Suiza-Puerto Rico dairy, fruit, plastics and coffee
operations, all of which were certified as qualified agricultural
businesses in Puerto Rico during 1996.
During 1996, the Company recognized $15.75 million in tax credits related
to qualifying investment made in its Puerto Rico dairy subsidiary which met
the eligible investment criteria of this act. However, in 1996 the Company
did not recognize any of the potential tax credits related to its
investments in its Puerto Rico fruit, plastics and coffee operations since
certain rulings in 1996 by Puerto Rico tax authorities created uncertainty
as to whether these investments met the eligible investment criteria of the
act and whether these additional tax credits had been earned.
During the first quarter of 1997, the Company obtained a ruling from the
Commonwealth of Puerto Rico confirming that its investments in its Suiza-
Puerto Rico fruit and plastics subsidiaries qualified for the 50% tax
credit. Accordingly, in March 1997, the Company recognized a nonrecurring
gain of $18.1 million, net of discounts and related expenses ($11.5 million
after income taxes) for earned tax credits which at March 31, 1997, it had
agreed to sell to third parties. During the second quarter of 1997, the
Company completed the sale of substantially all of these tax credits to the
third parties.
The Company is currently investigating whether its investment in its coffee
business will qualify for additional tax credits based on recent rulings by
Puerto Rico tax authorities and is awaiting a ruling from the Treasury
Department in Puerto Rico on the availability of such tax credits. If the
Company ultimately qualifies for such credits, the Company will account for
these tax benefits as an adjustment of the purchase price of the coffee
business, which would result in a reduction of goodwill.
5. MERGERS AND ACQUISITIONS
During the quarter ended September 30, 1997, the Company acquired four ice
businesses for total consideration of approximately $12.4 million.
Estimated annual sales of these ice companies are $7.0 million. Since
January 1, 1997, the Company has acquired eleven ice companies for
approximately $31.1 million with estimated aggregate annual sales of $19.4
million.
On July 1, 1997, the Company completed the acquisition of substantially all
the assets of Dairy Fresh L.P., a Delaware limited partnership ("Dairy
Fresh"), for approximately $104.5 million in cash (subject to adjustment
and excluding transaction costs), plus the assumption of certain current
liabilities. Dairy Fresh is a manufacturer of fresh milk and ice cream
products
7
SUIZA FOODS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
SEPTEMBER 30, 1997
5. MERGERS AND ACQUISITIONS (Continued)
based in Winston-Salem, North Carolina. During its fiscal year ended
December 31, 1996, Dairy Fresh reported net sales of approximately $117.0
million throughout the southeastern United States. The Company will use the
acquired assets to continue operating the business previously operated by
Dairy Fresh. The Company financed the acquisition with borrowings under its
Senior Credit Facility.
On July 31, 1997 the Company completed the purchase of all the outstanding
stock of three affiliated dairy manufacturing and distribution companies,
as well as an affiliated water bottling and distribution company, and 16
affiliated plastic manufacturing companies headquartered in Franklin,
Massachusetts (collectively, the "Garelick Companies"). In connection with
this acquisition the Company paid aggregate cash consideration of
approximately $293.7 million (subject to adjustment and excluding
transaction costs) and issued 446,100 shares of common stock to acquire the
outstanding stock and repay existing indebtedness of the Garelick
Companies. The combined businesses operated by the Garelick Companies
reported net sales of approximately $363.0 million during the fiscal year
ended September 30, 1996.
On September 18, 1997, Suiza Foods entered into a merger agreement with
Country Fresh, Inc. ("Country Fresh") pursuant to which a subsidiary of
Suiza Foods would merge into Country Fresh, and Country Fresh would become
a wholly-owned subsidiary of Suiza Foods in a business combination proposed
to be accounted for as a pooling. Country Fresh is a leading manufacturer,
supplier and distributor of milk, ice cream and related products in the
Midwest. Country Fresh's products are principally marketed in Michigan,
northern Indiana, northern Illinois and northern Ohio. Country Fresh
processes raw milk into such products as fortified and homogenized milk and
cream, ice cream, low fat ice cream, cream cheese, cottage cheese, fresh
and frozen yogurt, specialty dips, sherbet, eggnog, sour cream, buttermilk
and extended shelf life products such as half & half, coffee cream and
whipped cream. In addition, Country Fresh processes and markets purified
water and various fruit drinks. Country Fresh also manufactures and
markets frozen dessert products and other ice cream novelty items. Country
Fresh recorded net sales of approximately $353.0 million during its fiscal
year ended March 1, 1997.
On September 28, 1997, Suiza Foods entered into an agreement pursuant to
which a subsidiary of Suiza Foods would merge with Morningstar and
Morningstar would become a wholly-owned subsidiary of Suiza Foods in a
business combination proposed to be accounted for as a pooling. Morningstar
is a national manufacturer, distributor and marketer of refrigerated,
shelf-stable and frozen food products. Its established branded products
include: International Delightu gourmet-flavored and non-flavored coffee
creamers, Second Natureu refrigerated no-cholesterol egg substitute, Mocha
Mixu non-dairy coffee creamers, Naturally Yoursu fat-free and regular real
dairy sour cream, Jon Donaireu cheesecakes and desserts, Wacky WillieJ
flavored shakes and, in the western two-thirds of the United States,
Lactaidu lactose-free and lactose-reduced milks produced under license from
McNeil Consumer Products Company (a subsidiary of Johnson & Johnson).
Morningstar also specializes in providing private label refrigerated,
shelf-stable and frozen products to grocery warehouses,
8
SUIZA FOODS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
SEPTEMBER 30, 1997
5. MERGERS AND ACQUISITIONS (Continued)
bakery/industrial companies, club stores and dairy companies. Morningstar
reported net sales of approximately $394.0 million for 1996.
Following is a summary of unaudited pro forma results of operations of
Suiza Foods which gives effect to the acquisitions of Garrido y Compania,
Swiss Dairy Corporation, Model Dairy, Inc., Dairy Fresh and the Garelick
Companies for 1996 and the acquisitions of Dairy Fresh and the Garelick
Companies for 1997:
Nine Months Ended
September 30
1996 1997
---- ----
(Dollars in thousands, except share data)
Revenues $850,037 $928,384
Net Income before Extraordinary
Items 31,025 43,825
Net Income 28,810 40,555
Net Income Per Share:
Income before Extraordinary
Items $3.21 $2.71
Net Income $2.98 $2.51
6. STOCKHOLDERS' EQUITY
On January 28, 1997, the Company sold 4,270,000 shares of common stock,
$.01 par value per share, in a public offering at a price to the public of
$22.00 per share. On March 12, 1997, the Company issued 133,000 shares of
its common stock in partial consideration of the purchase of an ice
company. On July 31, 1997 in connection with the acquisition of the
Garelick Companies, the Company issued 446,100 shares of common stock. As
of September 30, 1997 the Company had 15,809,415 shares of common stock
issued and outstanding.
Pursuant to the Country Fresh merger agreement, upon satisfaction of
certain closing conditions, Suiza Foods will issue approximately 1.9
million shares of Suiza common stock to Country Fresh's stockholders and
will assume outstanding stock options of Country Fresh, which will be
converted into substitute options to purchase approximately 230,000
additional shares of Suiza common stock.
Pursuant to the Morningstar merger agreement, upon satisfaction of certain
closing conditions, Suiza Foods will issue approximately 12.5 million
shares of Suiza common stock to Morningstar's stockholders and will assume
outstanding stock options of Morningstar, which will be converted into
substitute options to purchase approximately 3.0 million additional shares
of Suiza common stock.
9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Overview
Suiza Foods is a leading manufacturer and distributor of fresh milk and related
dairy products, plastic containers and packaged ice in the United States. The
Company has grown primarily through strategic and consolidating acquisitions.
Through these acquisitions, the Company has realized regional economies of scale
and operating efficiencies by consolidating manufacturing and distribution
operations in each of its core businesses. The Company conducts its dairy
operations through several Puerto Rico subsidiaries ("Suiza-Puerto Rico"), Velda
Farms Inc. ("Velda Farms"), Swiss Dairy Corporation ("Swiss Dairy"), Model
Dairy, Inc. ("Model Dairy"), Dairy Fresh, Inc. ("Dairy Fresh"), Garelick Farms,
Inc. and certain related dairy subsidiaries ("Garelick Farms") and Country
Delite Farms Inc. ("Country Delite"), its plastics operations through Franklin
Plastics, Inc. and its subsidiaries ("Franklin Plastics" or "Plastics") and its
ice operations through Reddy Ice Corporation ("Reddy Ice"). Each of these
subsidiaries is a strong regional competitor with an established reputation for
customer service and product quality. The Company's dairy and ice subsidiaries
market their products through extensive distribution networks to a diverse group
of customers, including convenience stores, grocery stores, other retail
outlets, schools and institutional food service customers.
On April 22, 1996, the Company sold 3,795,000 shares of common stock, $.01 par
value per share, in a public offering (the "IPO") at a price to the public of
$14.00 per share. Prior to the IPO, there was no public market for the
Company's stock. The IPO provided net cash proceeds to the Company of
approximately $48.6 million. On August 7, 1996, the Company sold 625,000 shares
of its common stock in a private placement to a single investor, which provided
net cash proceeds to the Company of approximately $9.7 million. On January 28,
1997 the Company sold 4,270,000 shares of its common stock in a public offering
at a price to the public of $22.00 per share, providing net cash proceeds to the
Company of approximately $89.0 million. On March 12, 1997 the Company issued
133,000 shares of its common stock in partial consideration for the purchase of
an ice company. On July 31, 1997, in connection with the acquisition of the
Garelick Companies, the Company issued 446,100 shares of common stock. As of
September 30, 1997 the Company had 15,809,415 shares of common stock issued and
outstanding.
Outlook and Uncertainties
Certain information in this Quarterly Report on Form 10-Q may contain "forward-
looking statements" within the meaning of Section 21E of the Securities Exchange
Act of 1934, as amended. All statements other than statements of historical fact
are "forward-looking statements" for purposes of these provisions, including any
projections of earnings, revenues or other financial items, any statements of
the plans and objectives of management for future operations, any statements
concerning proposed new products or services, any statements regarding future
economic conditions or performance, and any statement of assumptions underlying
any of the foregoing. Although the Company believes that the expectations
reflected in its forward-looking statements are reasonable, it can give no
assurance that such expectations or any of its forward-looking statements will
prove to be correct, and actual results could differ materially from those
projected or assumed in the Company's forward-looking statements. The Company's
future financial condition and results, as well as any forward-looking
statements, are subject to inherent risks and uncertainties, including, without
limitation, potential limitations on the Company's ability to pursue its
acquisition strategy, significant competition, fluctuating raw material costs,
limitations arising from the Company's substantial indebtedness, government
regulation, and various risks related to the pending Morningstar and Country
Fresh acquisitions, including the risk that expected cost savings cannot be
fully realized, that revenues following the mergers are lower than expected and
that costs or difficulties related to
10
integrating the merged businesses are greater than expected. Additional
information concerning these and other risk factors is contained in the
Company's Annual Report on Form 10-K for the fiscal year ended December 31,
1996, a copy of which may be obtained from the Company upon request.
Results of Operations
The Company currently operates in three distinct businesses: Dairy, which
includes the operations of Suiza - Puerto Rico, Velda Farms, Swiss Dairy, Model
Dairy, Dairy Fresh, Garelick Farms and Country Delite; Ice, which includes Reddy
Ice; and Plastics, which includes Franklin Plastics.
Three months ended September 30, Nine months ended September 30,
------------------------------------------- -------------------------------------------
1996 1997 1996 1997
-------------------- --------------------- -------------------- --------------------
Percent to Percent to Percent to Percent to
Dollars Net Sales Dollars Net Sales Dollars Net Sales Dollars Net Sales
------- --------- ------- --------- ------- --------- ------- ---------
Net sales:
Dairy $119,432 $256,522 $321,522 $566,815
Ice 19,872 26,083 43,089 52,609
Plastics --- 24,675 --- 24,675
-------- ----- -------- ----- -------- ----- -------- -----
Net sales 139,304 100.0% 307,280 100.0% 364,611 100.0% 644,099 100.0%
Cost of sales 101,214 72.7 228,235 74.3 267,131 73.3 480,282 74.6
-------- ----- -------- ----- -------- ----- -------- -----
Gross profit 38,090 27.3 79,045 25.7 97,480 26.7 163,817 25.4
Operating expenses:
Selling and distribution 19,533 14.0 37,265 12.1 52,215 14.3 79,509 12.3
General and administrative 5,856 4.2 11,695 3.8 15,661 4.3 28,092 4.4
Amortization of intangibles 1,240 0.9 3,514 1.2 3,200 0.9 6,496 1.0
-------- ----- -------- ----- -------- ----- -------- -----
Total operating expenses 26,629 19.1 52,474 17.1 71,076 19.5 114,097 17.7
Operating income (loss):
Dairy 6,545 4.7 20,064 6.5 18,919 5.2 43,346 6.7
Ice 5,851 4.2 6,245 2.0 10,040 2.7 9,156 1.4
Plastics --- --- 2,356 0.8 --- --- 2,356 0.4
Corporate office (935) (0.7) (2,094) (0.7) (2,555) (0.7) (5,138) (0.8)
-------- ----- -------- ----- -------- ----- -------- -----
Total operating income $ 11,461 8.2% $ 26,571 8.6% $ 26,404 7.2% $ 49,720 7.7%
-------- ----- -------- ----- -------- ----- -------- -----
-------- ----- -------- ----- -------- ----- -------- -----
THIRD QUARTER AND YEAR-TO-DATE 1997 COMPARED TO THIRD QUARTER AND YEAR-TO-DATE
1996
NET SALES. The Company's net sales increased by 120.6% and 76.7% for the
third quarter and first nine months of 1997 when compared to like periods of
1996. Dairy net sales increased by 114.8% and 76.3% for the third quarter and
first nine months of 1997 when compared to like periods of 1996, primarily due
to (i) the acquisition of Garrido y Compania into Suiza-Puerto Rico and the
acquisitions of Swiss Dairy and Model Dairy in the last half of 1996, (ii) the
acquisitions of Dairy Fresh, Garelick Farms, and Country Delite in the third
quarter of 1997 and (iii) increased unit volumes in Suiza - Puerto Rico. Ice
net sales increased by 31.3% and 22.1% for the third quarter and first nine
months of 1997 when compared to like periods of 1996 due to the acquisition of
11 ice businesses during 1996 and 11 in the first nine months of 1997. The
Company began operating in the plastics business with the acquisition of
Franklin Plastics on July 31, 1997.
COST OF SALES. The Company's cost of sales margins were 74.3% and 74.6% for the
third quarter and first nine months of 1997 compared to 72.7 % and 73.3% for the
same periods in 1996. Dairy cost of sales margins improved slightly from the
prior year due to lower raw milk costs at Velda Farms and
11
Swiss Dairy partly offset by higher inherent cost of sales margins at Model
Dairy, Dairy Fresh and Country Delite. Ice cost of sales margins increased
reflecting additional costs from acquisitions.
OPERATING EXPENSES. The Company's operating expense ratios were 17.1% and 17.7%
for the third quarter and first nine months of 1997 compared to 19.1% and 19.5%
for the same periods in 1996. Dairy operating expense margins decreased in the
quarter and nine month comparisons because of the addition of Swiss Dairy and
Dairy Fresh which had lower operating expense margins than the other operations.
Ice operating expense margins increased due to the increased level of operating
expense related to acquired businesses.
OPERATING INCOME. The Company's operating income increased 131.8% to $26.6
million in the third quarter of 1997 from $11.5 million in the third quarter of
1996 primarily as a result of the aforementioned acquisitions. For the first
nine months of 1997, operating income was $49.7 million, an increase of 88.3%
from 1996 operating income of $26.4 million. The Company's operating income
margin increased to 8.6% in the third quarter of 1997 from 8.2% in the third
quarter of 1996 and increased to 7.7% in the first nine months of 1997 from 7.2%
in the first nine months of 1996 primarily due to the acquisitions.
OTHER (INCOME) EXPENSE. Interest expense increased to $10.8 million in the
third quarter of 1997 from $4.4 million in the second quarter of 1996 primarily
due to the increased level of debt used to finance the Dairy Fresh and Garelick
acquisitions. Interest expense increased to $17.4 million during the first nine
months of 1997 from $12.8 million in the first nine months of 1996 for the same
reasons, partly offset by a decrease in interest rates from the repayment of
certain subordinated notes in 1996 and 1997. Other income decreased to $0.2
million in the third quarter of 1997 from $3.1 million in the third quarter of
1996 due to the recognition of a $3.4 million gain from the sale of tax credits
in the 1996 period. Other income rose to $18.8 million in the first nine months
of 1997 primarily as a result of the nonrecurring gain of $18.1 million from the
recognition of tax credits as discussed below and in Note 4 to the condensed
consolidated financial statements.
EXTRAORDINARY ITEMS. The Company incurred a $3.3 million extraordinary loss
(net of a $2.0 million tax benefit) on January 28, 1997 related to the losses on
the early extinguishment of subordinated debt, which included the write-off of
deferred financing costs and certain prepayment penalties. During the second
quarter of 1996, the Company incurred $2.2 million in extraordinary costs (net
of a $0.9 million tax benefit) as a result of the early extinguishment of debt
from the net cash proceeds of the Company's initial public offering.
NET INCOME. The Company reported net income of $10.9 million in the third
quarter of 1997 compared to net income of $18.9 million in the third quarter of
1996 ($5.0 million excluding the after-tax gain on the sale of tax credits and a
one-time credit to tax expense of $11.75 million relating to retained tax
credits). The Company reported net income of $32.1 million in the first nine
months of 1997 ($23.8 million excluding the nonrecurring after-tax gain from the
recognition of tax credits and the extraordinary loss) compared to $21.7 million
in the first nine months of 1996 ($9.9 million excluding the nonrecurring gains
from the recognition of the tax credits and the extraordinary loss).
Liquidity and Capital Resources
As of September 30, 1997, the Company had total stockholders' equity of $235.5
million and total indebtedness of $557.7 million (including long-term debt and
the current portion of long-term debt). The Company is currently in compliance
with all covenants and financial ratios contained in its debt agreements.
CASH FLOW. Historically, the working capital needs of the Company have been
met with cash flow from operations along with borrowings under revolving credit
facilities. Net cash provided by operating activities was $68.0 million for the
first nine months of 1997 as contrasted with net cash
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provided by operations of $15.2 million for the first nine months of 1996.
This increase is partially the result of the sale of certain tax credits
earned pursuant to provisions of the Puerto Rico Agriculture Tax Incentives
Act of 1995, which generated net proceeds of approximately $11.5 million
after taxes. Investing activities in the first nine months of 1997 included
approximately $19.3 million in capital expenditures of which $9.2 million was
spent at Dairy, $6.1 million was spent at Ice, and $4.0 million was spent at
Plastics. Investing activities also included $443.2 million for
acquisitions.
On January 28, 1997, the Company sold 4,270,000 shares of newly issued common
stock, $.01 par value per share, in a public offering (the "Offering") at a
price to the public of $22.00 per share. The Offering provided net cash
proceeds to the Company of approximately $89.0 million. Of this amount, $36.0
million was used to repay subordinated notes and $4.3 million was used to pay
prepayment penalties related to the early extinguishment of the subordinated
notes, which, along with the remaining balance of unamortized deferred loan
costs, was reported as an extraordinary loss from the early extinguishment of
debt. The remainder of the net proceeds were used to repay a portion of the
outstanding balance of the acquisition loan facility of the Company's Senior
Credit Facility.
In July 1997, the Company acquired substantially all the assets of Dairy Fresh,
a regional dairy based in North Carolina, for cash consideration of
approximately $104.5 million (subject to adjustment and excluding transaction
costs), plus the assumption of certain indebtedness. The purchase price for
this acquisition was funded through additional borrowing under the acquisition
facility of the Senior Credit Facility.
In July 1997, the Company also acquired the outstanding equity interests of the
Garelick Companies. At the closing of this acquisition, the Company paid $293.7
million in cash (subject to adjustment and excluding transaction costs) and
issued 446,100 shares of common stock having a value of $15.0 million as of the
day prior to the date of execution of the acquisition agreement. Of the 446,100
shares of common stock issued as part of the purchase price, 148,700 shares were
issued into escrow, subject to the satisfaction of an earnout provision related
to the Garelick Companies' fluids business. The cash portion of the purchase
price was funded through additional borrowing under the acquisition facility of
the Senior Credit Facility.
FUTURE CAPITAL REQUIREMENTS. During 1997, the Company intends to invest a total
of approximately $38.5 million in its manufacturing facilities and distribution
capabilities, including planned post-acquisition expenditures for Dairy Fresh
and the Garelick Companies. Of this amount, Dairy intends to spend
approximately $23.7 million for the year to expand and maintain its
manufacturing facilities and for fleet replacement; Ice intends to spend a total
of approximately $7.8 million in 1997, and Plastics intends to spend
approximately $7.0 million. The Company also plans to substantially expand its
Plastics operations by opening new locations, and expects to spend approximately
$15.6 million in addition to the amounts noted above during 1997 and 1998.
CURRENT DEBT OBLIGATIONS. On July 31, 1997 the Company amended its Senior Credit
Facility to provide for an aggregate of $700.0 million comprised of: (i) a
$150.0 million term loan; (ii) a $50.0 million revolving credit facility; (iii)
a $325.0 million revolving acquisition facility; and (iv) a $175.0 million
acquisition term loan. At September 30, 1997, $125.1 million was available
under the revolving loan facilities.
The Company expects that cash flow from operations will be sufficient to meet
the Company's requirements for its existing businesses for the remainder of 1997
and for the foreseeable future. During the remainder of 1997 and in the future,
the Company intends to pursue additional acquisitions in its existing regional
markets and to seek strategic acquisition opportunities that are compatible with
it core businesses. Management believes that the Company has the ability to
secure additional financing to pursue its acquisition and consolidation
strategy. There can be no assurance, however, that the Company will have
sufficient available capital resources to realize its acquisition and
consolidation strategy.
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On July 31, 1997, in connection with the acquisition of the Garelick Companies,
the Company amended its Senior Credit Facility to provide for an aggregate of
$700.0 million of borrowing capacity. On September 28, 1997, Suiza Foods entered
into an agreement pursuant to which a subsidiary of Suiza Foods would merge with
Morningstar and Morningstar would become a wholly-owned subsidiary of Suiza
Foods (the "Morningstar Merger"). In connection with the Morningstar Merger,
Suiza Foods has received a commitment letter from its senior lenders to replace
its existing $700.0 million senior credit facilities with replacement facilities
in the aggregate amount of $1.25 billion, consisting of a $550.0 million term
loan and a $700.0 million revolving credit facility (collectively, the "New
Credit Facility"). The term loan would be amortized over six years beginning in
1998, and the revolving credit facility would expire on December 31, 2003.
Amounts outstanding under the New Credit Facility would bear interest at a rate
per annum equal to one of the following rates, at Suiza Foods' option: (i) a
specified base rate or (ii) The London Interbank Offered Rate ("LIBOR") plus a
margin that would vary from 40 to 100 basis points depending on Suiza Foods'
leverage ratio (defined as the ratio of aggregate funded debt to EBITDA). Suiza
Foods would pay a commitment fee on the unused amounts of the revolving facility
that ranges from 15 to 25 basis points depending on the leverage ratio.
The New Credit Facility would require Suiza Foods to comply with certain
financial covenants, including the following: (i) the leverage ratio will not
exceed 3.90 to 1 during 1998, 3.75 to 1 during 1999 and 3.50 to 1 thereafter;
(ii) net worth will not be less than $300.0 million, plus 50% of positive net
income, plus 75% of the proceeds of new equity offerings; (iii) the interest
coverage ratio (defined as the ratio of EBITDA to interest expense) will not be
less than 3.00 to 1 and (iv) the fixed charge coverage ratio (defined as the
ratio of EBITDA to the sum of scheduled principal repayments, interest, taxes,
capital expenditures and dividends) will not be less than 1.00 to 1 during 1998
and 1.10 to 1 thereafter.
The New Credit Facility would also include usual and customary covenants,
including limitations on material acquisitions or dispositions of assets, lines
of business, the incurrence of additional indebtedness and transactions with
affiliates, subject to specified exceptions. Suiza Foods would pledge all of the
capital stock of its direct and indirect subsidiaries (except for 35% of the
capital stock of Garrido) to secure the New Credit Facility, and Suiza Foods
would agree not to grant a security interest in its remaining assets to any
other person (subject to certain exceptions). In addition, each of Suiza Foods'
direct and indirect subsidiaries (other than Garrido) would guarantee the debt
incurred under the New Credit Facility. The New Credit Facility would include
various events of default customary for similar senior credit facilities,
including defaults resulting from a change in control of Suiza Foods (including
certain changes in the Suiza Board and certain acquisitions of Suiza common
stock by third parties).
Additional Factors That May Affect Future Results
The Company's quarterly operating results may fluctuate in the future as a
result of a variety of factors, many of which are outside the Company's control.
Factors that may adversely affect the Company's future operating results
attributable to its dairy operations include changes in the cost of raw
materials, federal, Puerto Rico and state government regulation of the dairy
industry and competition. Factors that may adversely affect the Company's
quarterly operating results attributable to its ice operations include weather,
seasonality and competition. The Company's operating results in the future are
also dependent on the ability of the Company to identify suitable acquisition
candidates and successfully integrate any acquired businesses into the Company's
existing business and retain key customers of acquired businesses. There can be
no assurance that the Company will have sufficient available capital resources
to realize its acquisition strategy.
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PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is from time to time party to legal proceedings that arise in the
ordinary course of business. Management does not believe that the resolution of
any threatened or pending legal proceedings will have a material adverse affect
on the Company's financial position, results of operations or liquidity.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On November 26, 1997 the Company will hold a special meeting of the stockholders
of Suiza Foods to vote upon a proposal to approve the issuance of Suiza Foods
common stock in connection with the combination of Suiza Foods and The
Morningstar Group Inc. Stockholders will also be asked to vote upon a proposal
to increase the number of authorized shares of common stock reserved for
issuance under the Suiza Foods Corporation 1997 Stock Option and Restricted
Stock Plan from 1,150,000 shares to 3,000,000 shares.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10.1 Agreement and Plan of Merger dated as of September 18, 1997 by and
among Suiza Foods Corporation, CF Acquisition Corp. and Country Fresh,
Inc.; filed as Exhibit 2.2 to the registrant's Registration Statement
on Form S-4 (Registration No. 333-37861) and incorporated herein by
reference.
10.2 Agreement and Plan of Merger dated as of September 28, 1997 by and
among Suiza Foods Corporation, SF Acquisition Corporation and The
Morningstar Group Inc.; filed as Exhibit 2.2 to the registrant's
Registration Statement on Form S-4 (Registration No. 333-37869) and
incorporated herein by reference.
11. Statement re computation of per share earnings.
27. Financial Data Schedule.
(b) Reports on Form 8-K
(1) Form 8-K filed on July 14, 1997 to report the acquisitions of Dairy
Fresh and the Garelick Companies.
(2) Form 8-K/A filed on August 22, 1997, amending the 8-K filed on July
14, 1997, containing Item 7, historical and pro forma financial
statements for Dairy Fresh and the Garelick Companies.
(3) Form 8-K filed on September 29, 1997 to report the definitive merger
agreement between Suiza Foods and Morningstar.
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SIGNATURES
Pursuant to the requirement of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SUIZA FOODS CORPORATION
/s/ Tracy L. Noll
----------------------------------------
Tracy L. Noll
Vice President, Chief Financial Officer
(Principal Accounting Officer)
Date: November 11, 1997
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