-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, KzKGmP3urNVGEDvxZRMEYLQ6UyX+f0Mu0V9VrhGbMKJHtYREN3PoZaaE28EKLIyR o+9vjezRNPGKZIAabAw54A== 0000912057-97-001422.txt : 19970123 0000912057-97-001422.hdr.sgml : 19970123 ACCESSION NUMBER: 0000912057-97-001422 CONFORMED SUBMISSION TYPE: S-1/A PUBLIC DOCUMENT COUNT: 4 FILED AS OF DATE: 19970122 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: SUIZA FOODS CORP CENTRAL INDEX KEY: 0000931336 STANDARD INDUSTRIAL CLASSIFICATION: ICE CREAM & FROZEN DESSERTS [2024] IRS NUMBER: 752559681 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: S-1/A SEC ACT: 1933 Act SEC FILE NUMBER: 333-18263 FILM NUMBER: 97508706 BUSINESS ADDRESS: STREET 1: 3811 TURTLE CREEK BLVD STREET 2: STE 1300 CITY: DALLAS STATE: TX ZIP: 75219 BUSINESS PHONE: 2145283368 MAIL ADDRESS: STREET 1: 3811 TURTLE CREEK BLVD STREET 2: SUITE 1300 CITY: DALLAS STATE: TX ZIP: 75219 S-1/A 1 S-1/A AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JANUARY 22, 1997 REGISTRATION NO. 333-18263 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------------ AMENDMENT NO. 2 TO FORM S-1 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 ------------------------------ SUIZA FOODS CORPORATION (Exact name of registrant as specified in its charter) DELAWARE 2026 75-2559681 (State or other jurisdiction (Primary Standard Industrial (I.R.S. Employer of incorporation or Classification Code Number) Identification organization) No.)
3811 TURTLE CREEK BLVD. SUITE 1300 DALLAS, TEXAS 75219 (214) 528-0939 (Address, including zip code, and telephone number, including area code, of registrant's principal executive offices) GREGG L. ENGLES CHAIRMAN OF THE BOARD AND CHIEF EXECUTIVE OFFICER 3811 TURTLE CREEK BLVD. SUITE 1300 DALLAS, TEXAS 75219 (214) 528-0939 (Name, address, including zip code, and telephone number, including area code, of agent for service) ------------------------------ COPIES TO: WILLIAM A. MCCORMACK KATHERINE M. SEABORN JON L. MOSLE RANDALL G. RAY HUGHES & LUCE, L.L.P. GARDERE & WYNNE, L.L.P. 1717 MAIN STREET 1601 ELM STREET SUITE 2800 SUITE 3000 DALLAS, TEXAS 75201 DALLAS, TEXAS 75201 (214) 939-5500 (214) 999-3000
------------------------------ Approximate date of commencement of proposed sale to the public: As soon as practicable after the effective date of this Registration Statement. ------------------------------ If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box. / / If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. / / If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. / / If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box. / / ------------------------------ CALCULATION OF REGISTRATION FEE
PROPOSED MAXIMUM PROPOSED MAXIMUM TITLE OF EACH CLASS OF AMOUNT TO OFFERING PRICE AGGREGATE AMOUNT OF SECURITIES TO BE REGISTERED BE REGISTERED(1) PER SHARE(2) OFFERING PRICE(2) REGISTRATION FEE Common Stock, $.01 par value 5,405,000 $21.25 $114,856,250 $34,804.92(3)
(1) Includes up to 705,000 shares subject to an over-allotment option granted to the Underwriters. See "Underwriting". (2) Estimated solely for the purpose of calculating the registration fee on the basis of the average of the high and low price paid per share of Common Stock, as reported on the Nasdaq National Market on January 15, 1997, in accordance with Rule 457(c) promulgated under the Securities Act of 1933, as amended. (3) Of this amount, $20,525.41 has already been paid. ------------------------------ THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A), MAY DETERMINE. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SUBJECT TO COMPLETION, DATED JANUARY 21, 1997 INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE. PROSPECTUS 4,700,000 SHARES [LOGO] COMMON STOCK --------------- Of the 4,700,000 shares of Common Stock, $.01 par value per share (the "Common Stock"), offered hereby (the "Offering"), 4,000,000 shares are being sold by Suiza Foods Corporation ("Suiza Foods" or the "Company"), and 700,000 shares are being sold by certain stockholders of the Company (the "Selling Stockholders"). See "Principal and Selling Stockholders". The Company will not receive any proceeds from the sale of Common Stock by the Selling Stockholders. The Common Stock is traded on the Nasdaq National Market under the symbol "SWZA". On January 21, 1997, the closing sale price of the Common Stock on the Nasdaq National Market was $22.25 per share. See "Price Range of Common Stock". ANY INVESTMENT IN THE SECURITIES OFFERED HEREIN INVOLVES A HIGH DEGREE OF RISK. SEE "RISK FACTORS" BEGINNING ON PAGE 7. --------------------- THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
UNDERWRITING PROCEEDS TO DISCOUNTS AND PROCEEDS TO SELLING PRICE TO PUBLIC COMMISSIONS (1) COMPANY (2) STOCKHOLDERS Per Share..................... $ $ $ $ Total (3)..................... $ $ $ $
(1) The Company and the Selling Stockholders have agreed to indemnify the Underwriters against certain liabilities, including liabilities arising under the Securities Act of 1933, as amended ("Securities Act"). See "Underwriting". (2) Before deducting expenses of the Offering payable by the Company, estimated at $500,000. (3) The Company and the Selling Stockholders have granted the Underwriters a 30-day option to purchase up to an additional 270,000 shares of Common Stock and 435,000 shares of Common Stock, respectively, on the same terms as the Common Stock offered hereby solely to cover over-allotments, if any (the "Over-Allotment Option"). If the Over-Allotment Option is exercised in full, the Price to Public, and Underwriting Discounts and Commissions will be $ and $ respectively. The Company will not receive any proceeds from the exercise of the Over-Allotment Option. See "Underwriting". -------------------------- The shares of Common Stock are offered subject to prior sale, when, as and if delivered to and accepted by the Underwriters and subject to certain other conditions. The Underwriters reserve the right to withdraw, cancel or modify such offer and to reject orders in whole or in part. It is expected that delivery of the shares of Common Stock will be made on or about , 1997, at the offices of Bear, Stearns & Co. Inc., 245 Park Avenue, New York, New York 10167. -------------------------- BEAR, STEARNS & CO. INC. A.G. EDWARDS & SONS, INC. , 1997 [A GEOGRAPHIC MAP INDICATING WHERE THE COMPANY HAS MANUFACTURING AND DISTRIBUTION FACILITIES] ------------------------ IN CONNECTION WITH THE OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMPANY'S COMMON STOCK AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH TRANSACTIONS MAY BE EFFECTED IN THE OVER-THE-COUNTER MARKET OR OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME. 2 PROSPECTUS SUMMARY AS USED IN THIS PROSPECTUS, EXCEPT AS OTHERWISE STATED OR UNLESS THE CONTEXT OTHERWISE REQUIRES, THE TERMS "SUIZA FOODS" AND THE "COMPANY" REFER TO SUIZA FOODS CORPORATION AND ITS SUBSIDIARIES ON A CONSOLIDATED BASIS AND THE HISTORICAL OPERATIONS AND ACTIVITIES OF CERTAIN ENTITIES (THE "COMBINED ENTITIES") THAT BECAME SUBSIDIARIES OF THE COMPANY IN MARCH 1995 PURSUANT TO A CORPORATE COMBINATION ACCOUNTED FOR AS A POOLING OF INTERESTS (THE "COMBINATION"). SEE "CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS--HISTORIC RELATIONSHIPS AND RELATED TRANSACTIONS--THE COMBINATION". THE COMPANY'S OPERATING SUBSIDIARIES ARE REFERRED TO INDIVIDUALLY HEREIN AS "SUIZA-PUERTO RICO", "VELDA FARMS", "SWISS DAIRY", "MODEL DAIRY" AND "REDDY ICE". UNLESS OTHERWISE INDICATED, ALL INFORMATION IN THIS PROSPECTUS ASSUMES THAT THE UNDERWRITERS WILL NOT EXERCISE THEIR OVER-ALLOTMENT OPTION. THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY, AND SHOULD BE READ IN CONJUNCTION WITH, THE MORE DETAILED INFORMATION AND FINANCIAL STATEMENTS AND RELATED NOTES INCLUDED ELSEWHERE HEREIN. THE COMPANY Suiza Foods is a leading manufacturer and distributor of fresh milk products, refrigerated ready-to-serve fruit drinks and coffee in Puerto Rico, fresh milk and related dairy products in Florida, California and Nevada and packaged ice in Florida and the southwestern United States. The Company has grown primarily through a successful acquisition strategy, having consummated 37 acquisitions since its inception in May 1988, including 11 acquisitions since its initial public offering in April 1996 (the "IPO"). As a result of its acquisition strategy, the Company's net sales grew from $51.7 million in 1993 to $430.5 million in 1995, during which time its operating income increased from $8.7 million to $30.6 million. Pro forma net sales and operating income for the nine months ended September 30, 1996 were $496.3 million and $34.5 million, respectively. Management believes that the dairy, ice and related distribution oriented food industries provide attractive acquisition opportunities. The Company's strategy is to continue to expand its dairy, ice and related food businesses primarily through acquisitions of strong regional operators in new markets and consolidating or add-on acquisitions in its existing markets. Through acquisitions in the Company's existing markets, management believes that the Company can continue to realize substantial operating efficiencies and economies of scale. The Company also seeks to expand its existing operations by adding new customers, extending its product lines and securing distribution rights for additional branded products. The Company conducts its operations through strong regional operating companies, which have long-standing reputations for customer service and product quality. Currently, the Company's operations are organized under two major business lines, dairy and ice. DAIRY - Suiza-Puerto Rico manufactures and distributes approximately 66% of the fresh milk sold in Puerto Rico and manufactures and markets a line of refrigerated ready-to-serve fruit drinks under its Suiza Fruit-TM- name, a leading brand in Puerto Rico. The Company distributes its dairy products to grocery stores, retail outlets and schools, and also distributes third party brand name ice cream and other refrigerated and frozen foods, principally to grocery stores. The Company also processes and distributes coffee in Puerto Rico and exports specialty super premium coffees to the mainland United States and international markets through Garrido & Compania, Inc. ("Garrido"). Garrido is the second largest coffee processor in Puerto Rico and operates the largest office and hotel coffee service on the island. - Velda Farms manufactures and distributes fresh milk, ice cream and related products throughout peninsular Florida under its own brand names and under brands licensed from third parties. Velda Farms serves approximately 9,500 customers and distributes its products and third party branded products to food service accounts, convenience stores, club stores and schools. - Swiss Dairy manufactures and distributes fresh milk and related products in southern California and southern Nevada. Swiss Dairy offers a limited product line in order to cost effectively service its high volume retail customers. - Model Dairy manufactures and distributes fresh milk, ice cream and related products in northern Nevada and certain areas of northern California. Model Dairy is the largest dairy processor in northern Nevada and distributes its full line of products to grocery stores, retail outlets, schools and food service accounts. 3 ICE - Reddy Ice manufactures and distributes ice products for retail, commercial and industrial uses. The Company currently manufactures ice at 21 facilities and serves approximately 21,000 retail locations in Texas, Florida, Arizona, New Mexico, Nevada, Oklahoma and Utah. Management believes that the Company is one of the largest manufacturers and distributors of packaged ice in the United States and that it has significant market share in each of its markets. RECENT DEVELOPMENTS In April 1996, the Company completed its IPO with net proceeds to the Company of approximately $48.6 million. These proceeds were applied to repay a portion of the Company's senior and subordinated indebtedness. Since its IPO, the Company has completed a number of acquisitions within its two major business lines, including the following: - In July 1996, the Company acquired Garrido, a leading Puerto Rico processor and distributor of coffee, for approximately $35.0 million plus future performance based payments of up to $5.5 million. Garrido's sales for its fiscal year ended June 30, 1996 were approximately $26.2 million. - In September 1996, the Company acquired Swiss Dairy, a manufacturer and distributor of fresh milk and related products in southern California and southern Nevada, for approximately $54.0 million. Swiss Dairy had sales of approximately $108.2 million for the twelve months ended September 7, 1996. - In December 1996, the Company acquired Model Dairy, a manufacturer and distributor of fresh milk and related products in northern Nevada and northern California, for approximately $26.0 million. Model Dairy's sales for its fiscal year ended October 31, 1996 were approximately $56.9 million. - The Company has also completed seven acquisitions of small ice businesses since its IPO for total consideration of $4.6 million. These businesses have been consolidated into the Company's existing ice operations. Since its IPO, the Company has also completed the following financing transactions: - In August 1996, the Company completed a private placement of 625,000 shares of Common Stock to T. Rowe Price Small Cap Value Fund with net proceeds to the Company of approximately $9.7 million (the "Private Placement"). The proceeds were applied to repay a portion of the Company's senior indebtedness. - In connection with its acquisition of Swiss Dairy in September 1996, the Company amended its Senior Credit Facility (as defined herein) to provide for a new $90.0 million acquisition facility. The Company financed its acquisitions of Swiss Dairy and Model Dairy with borrowings under this acquisition facility. THE OFFERING Common Stock offered by the Company........................... 4,000,000 shares Common Stock offered by the Selling Stockholders.............. 700,000 shares Common Stock to be outstanding after the Offering (1)......... 14,741,729 shares Use of Proceeds............................................... To repay certain outstanding indebtedness. See "Use of Proceeds". Nasdaq National Market symbol................................. SWZA
- -------------------------- (1) Total shares outstanding is as of December 31, 1996 and excludes 1,466,738 shares of Common Stock subject to options outstanding as of that date, which are exercisable at a weighted average exercise price of $8.11 per share. See "Management--Executive Compensation--Option and Restricted Stock Plan" and "Certain Relationships and Related Transactions--Historic Relationships and Related Transactions--The Combination-- Stock Options". * * * The Company was formed to become a holding company for Suiza-Puerto Rico, Velda Farms and Reddy Ice pursuant to the Combination. See "Certain Relationships and Related Transactions--Historic Relationships and Related Transactions--The Combination". The Company is a Delaware corporation with its principal offices located at 3811 Turtle Creek Boulevard, Suite 1300, Dallas, Texas 75219 (telephone number 214-528-0939). 4 SUMMARY CONSOLIDATED AND PRO FORMA FINANCIAL DATA (IN THOUSANDS, EXCEPT SHARE DATA) The following summary consolidated financial data for the three years ended December 31, 1995 have been derived from the audited consolidated financial statements of the Company. The summary consolidated financial data for the nine-month periods ended September 30, 1995 and 1996 were derived from the unaudited financial statements of the Company and include, in management's opinion, all adjustments (consisting of only normal recurring adjustments) necessary to present fairly the results for such periods. The summary financial data do not purport to indicate results of operations as of any future date or for any future period. Effective with the Combination, the Company became the holding company for the operations of Suiza-Puerto Rico, Velda Farms and Reddy Ice. The Combination was accounted for using the pooling of interests method of accounting. Results of operations of Suiza-Puerto Rico and Velda Farms are included from the dates such operations were acquired in purchase business combinations (December 16, 1993 and April 10, 1994, respectively). The pro forma operating data give effect to the Garrido, Swiss Dairy and Model Dairy acquisitions as if such transactions had been consummated on January 1, 1995. The pro forma balance sheet data give effect to the Model Dairy acquisition as if such transaction had occurred on September 30, 1996. There is no pro forma balance sheet impact from the Garrido and Swiss Dairy acquisitions since they were consummated prior to September 30, 1996 and are reflected in the historical balance sheet. See "Unaudited Pro Forma Financial Data".
NINE MONTHS ENDED SEPTEMBER 30, YEAR ENDED DECEMBER 31, --------------------------------- -------------------------------------------- PRO FORMA 1993 1994 1995 1995 1996 1996 --------- --------- --------- --------- --------- ----------- PRO FORMA 1995 ----------- (UNAUDITED) (UNAUDITED) OPERATING DATA: Net sales................................. $ 51,675 $ 341,108 $ 430,466 $ 634,186 $ 325,454 $ 364,611 $ 496,333 Gross profit.............................. 31,263 100,640 117,833 152,281 90,692 97,480 120,459 Operating income.......................... 8,702 25,760 30,564 42,882 24,234 26,404 34,463 Interest expense, net..................... 7,697 19,279 19,921 27,864 15,285 12,844 17,600 Income (loss) before extraordinary loss... 1,420 4,245 (1,576) 2,008 (2,846) 23,873 26,424 Net income (loss) (1)..................... 1,420 4,048 (10,038) 2,008 (11,308) 21,658 26,424 Weighted average shares outstanding............................. 2,487,174 6,156,387 6,109,398 6,782,907 6,041,000 9,360,539 9,360,539 Earnings (loss) per share: Income (loss) before extraordinary loss... $ .57 $ .69 $ (.26) $ .30 $ (.47) $ 2.55 $ 2.82 Extraordinary loss........................ -- (.03) (1.38) -- (1.40) (.24) -- --------- --------- --------- ----------- --------- --------- ----------- Net income (loss) (1)..................... $ .57 $ .66 $ (1.64) $ .30 $ (1.87) $ 2.31 $ 2.82 --------- --------- --------- ----------- --------- --------- ----------- --------- --------- --------- ----------- --------- --------- -----------
AS OF SEPTEMBER 30, 1996 --------------------------------------- PRO FORMA ACTUAL PRO FORMA AS ADJUSTED (2) --------- ----------- --------------- (UNAUDITED) BALANCE SHEET DATA: Working capital.......................................................... $ 22,281 $ 26,654 $ 28,673 Total assets............................................................. 349,670 381,114 380,121 Total debt............................................................... 215,953 242,801 163,365 Total stockholders' equity............................................... 89,476 89,476 169,938
- ------------------------------ (1) Net income (loss) and related per share amounts include the following nonrecurring and extraordinary charges and benefits:
YEARS ENDED DECEMBER 31, NINE MONTHS ENDED ------------------------------- SEPTEMBER 30, 1993 1994 1995(D) -------------------------- --------- --------- --------- 1995 1996(D) ----------- ------------- (UNAUDITED) (UNAUDITED) Merger, financing and other costs (a)..................... $ -- $ (1,602) $ (9,554) $ (9,544) $ (354) --------- --------- --------- ----------- ------------- Tax benefits (b).......................................... -- -- -- -- 13,950 Extraordinary loss from early extinguishment of debt (c)..................................................... -- (197) (8,462) (8,462) (2,215) --------- --------- --------- ----------- ------------- $ -- $ (1,799) $ (18,016) $ (18,016) $ 11,381 --------- --------- --------- ----------- ------------- --------- --------- --------- ----------- -------------
5 (a) Consists of costs incurred in connection with the Combination, an uncompleted public offering of Common Stock, an uncompleted debt offering, uncompleted acquisitions and debt refinancing costs, net of associated income taxes of $58 in 1994, $684 in 1995 and $217 in the nine months ended September 30, 1996. (b) Includes sale of Puerto Rico tax credits of $3,400 (net of related expenses), reflected in other income, and the recognition of $11,750 in deferred income tax benefits, recorded as a credit to tax expense, both effects related to tax credits generated by Suiza-Puerto Rico, partially offset by additional income tax expense of $1,200 related to the sale of the tax credits. See "Management's Discussion and Analysis of Financial Condition and Results of Operations--Tax Benefits". (c) Net of associated income taxes of $700 in 1995 and $900 in the nine months ended September 30, 1996. (d) The nonrecurring and extraordinary charges and benefits are reflected in pro forma net income and per share amounts for the corresponding periods, except for extraordinary losses of $8,462 in 1995 and $2,215 in the nine months ended September 30, 1996 that are excluded from income from continuing operations on a pro forma basis. (2) As adjusted to reflect the sale of the 4,000,000 shares of Common Stock offered hereby by the Company at an assumed public offering price of $22.25 and the application of the net proceeds therefrom, including the recognition of an extraordinary loss of $3,294 related to the write-off of unamortized deferred loan costs of $993 and the expensing of prepayment penalties of $4,320, net of the tax benefit of $2,019. See "Use of Proceeds". 6 RISK FACTORS ANY INVESTMENT IN THE COMMON STOCK OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK. PROSPECTIVE INVESTORS SHOULD READ THIS ENTIRE PROSPECTUS CAREFULLY AND SHOULD CONSIDER, AMONG OTHER THINGS, THE RISKS AND THE SPECULATIVE FACTORS INHERENT IN AND AFFECTING THE COMPANY'S BUSINESS DESCRIBED BELOW AND THROUGHOUT THIS PROSPECTUS. POTENTIAL LIMITATIONS ON EXPANSION The Company's strategy is to continue to expand its dairy, ice, food distribution and related food businesses primarily through acquisitions of strong regional operators in new markets and consolidating or add-on acquisitions in its existing markets. The Company will evaluate specific acquisition opportunities based on market conditions and economic factors existing at the time and intends to pursue favorable opportunities as they arise. The Company may encounter increased competition for acquisitions in the future, which could result in acquisition prices the Company does not consider acceptable. There can be no assurance that the Company will find suitable acquisition candidates at acceptable prices or succeed in integrating any acquired business into the Company's existing business or in retaining key customers of acquired businesses. There can also be no assurance that the Company will have sufficient available capital resources to realize its acquisition strategy. See "--Substantial Indebtedness", "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Business--Business Strategy". COMPETITION The Company's regional dairy businesses are subject to significant competition from regional dairy operations and large national food service distributors that operate in the Company's markets. Competition in the dairy processing, fruit drink and food distribution businesses is based primarily on service, price, brand recognition, quality and breadth of product line. Many of the Company's competitors are larger, better capitalized and have greater financial, operational and marketing resources than the Company. See "Business--Competition--Dairy". The dairy industry has excess capacity and has been in the process of consolidation for many years. Excess capacity has resulted from the development of more efficient manufacturing techniques, the establishment of captive dairy manufacturing operations by large grocery retailers and relatively little growth in the demand for fresh milk products. The increased use of captive dairy manufacturing operations by the Company's customers could have an adverse effect on the Company's operations. See "Business-- Industry Overview--Dairy". The packaged ice business is also highly competitive. The Company faces a number of competitors in the packaged ice business, including smaller independent ice manufacturers, convenience and grocery retailers that operate captive commercial ice plants and retailers that manufacture and package ice at store locations. Competition exists primarily on a regional basis, with service, price and quality as the principal competitive factors. A significant increase in the utilization of captive commercial ice plants or on-site manufacturing by operators of large retail chains served by the Company could have an adverse effect on the Company's operations. See "Business--Competition--Ice". SUBSTANTIAL INDEBTEDNESS On September 30, 1996, the Company's total indebtedness and long-term debt (excluding current portion) were $216.0 million and $204.3 million, respectively. On a pro forma as adjusted basis, after giving effect to (i) the incurrence of borrowings to fund the acquisition of Model Dairy and (ii) the application of the net proceeds from the Offering as if each such transaction had occurred on September 30, 1996, the Company would have had total indebtedness and long-term indebtedness (excluding current portion) of $163.4 million and $151.7 million, respectively, with long-term indebtedness (excluding current portion) representing 47.2% of pro forma as adjusted total capitalization. The Company's Senior Credit Facility, 7 Subordinated Notes (as defined herein) and related debt service obligations (i) limit the Company's ability to obtain additional financing in the future; (ii) require the Company to dedicate a significant portion of the Company's cash flow to the payment of principal and interest on its indebtedness, thereby reducing the funds available to the Company for other purposes; (iii) limit the Company's flexibility in planning for, or reacting to, changes in its business and market conditions; and (iv) impose additional financial and operational restrictions on the Company, including restrictions on dividends. The Company's ability to make scheduled payments on its indebtedness depends on its financial and operating performance, which is subject to prevailing economic conditions and to financial, business and other factors, some of which are beyond the Company's control. The Company has pledged substantially all its assets to secure the Company's indebtedness under the Senior Credit Facility. The failure of the Company to comply with the financial and other restrictive covenants under the Senior Credit Facility or Subordinated Notes may result in an event of default which, if not cured or waived, could have a material adverse effect on the Company. The Company has entered into various interest rate agreements to reduce its exposure to interest rate fluctuations under the Senior Credit Facility. These agreements have the effect of fixing the Company's interest rate with respect to a portion of its indebtedness under the Senior Credit Facility. The Company remains subject to interest rate risk, however, with respect to a substantial portion of its indebtedness. See "Management's Discussion and Analysis of Financial Condition and Results of Operations--Liquidity and Capital Resources". GOVERNMENT REGULATION; RAW MATERIAL COSTS The supply and price of milk in Puerto Rico are regulated under Puerto Rico law. The government of Puerto Rico establishes an industry-wide production ceiling and sets the prices that may be charged for milk at the dairy farm level and the maximum prices that may be charged at the processor and retail levels. These prices are reviewed (typically on an annual basis) and remain fixed unless changed by the government. The price controls in Puerto Rico make the Company vulnerable to increases in the costs of manufacturing, packaging and distributing its products. There can be no assurance that the Company's operating results will not be adversely affected by price levels set by Puerto Rico. See "Business--Raw Materials and Supply--Dairy" and "Business--Government Regulation--Puerto Rico Milk Industry Regulation". The price of raw milk in the mainland United States fluctuates based on supply and demand, with minimum support prices established monthly on a regional basis by federal or state government agencies. Congress has recently passed legislation to phase out support prices over a specified period. There can be no assurance that a material increase in milk prices in the mainland United States will not occur or that any such increase would not reduce the profitability of the Company's operations. See "Business--Raw Materials and Supply--Dairy" and "Business--Government Regulation--U.S. Dairy Support Program". The Company's operations are also subject to other federal, Puerto Rico, state and local governmental regulation. See "Business--Government Regulation". SEASONALITY OF ICE BUSINESS The Company's ice business is seasonal, with its highest sales occurring during the second and third calendar quarters. In 1994 and 1995, the Company recorded an average of approximately 69% of its annual net sales of ice during these two quarters. Because the Company's results of operations for its ice business depend significantly on sales during its peak season, adverse weather during this season (such as an unusually mild or rainy period) could have a disproportionate impact on the Company's results of operations for the full year. See "Management's Discussion and Analysis of Financial Condition and Results of Operations--Seasonality". 8 DEPENDENCE ON KEY PERSONNEL The future success of the Company's business operations is dependent in part on the efforts and skills of certain key members of management, including Gregg L. Engles, Chairman and Chief Executive Officer of the Company. The loss of any of its key members of management could have an adverse effect on the Company. The Company has not obtained key man life insurance with respect to any of its key members of management. See "Management--Executive Compensation--Employment Agreements and Other Arrangements". LIMITATIONS ON FAVORABLE TAX TREATMENT Under Section 936 of the Internal Revenue Code of 1986, as amended, a portion of the Company's income derived from its dairy, fruit drink and plastic bottle operations in Puerto Rico qualifies for a tax credit that has the effect of reducing or eliminating United States income taxes on income derived from these operations. In the Revenue Reconciliation Act of 1993, the United States Congress imposed certain limitations on the availability of the Section 936 credit. In August 1996, Congress passed the Small Business Job Protection Act of 1996 which contains further restrictions on the availability of Section 936 credits and eliminates Section 936 altogether by December 31, 2005. These limitations, combined with certain other provisions in the Internal Revenue Code that govern the allocation among affiliated corporations of credits derived under Section 936, may limit the amount of the tax credit available to the Company prior to the expiration of Section 936. See "Management's Discussion and Analysis of Financial Condition and Results of Operations--Tax Benefits". BENEFITS TO BE RECEIVED BY CERTAIN EXISTING STOCKHOLDERS The Company intends to use a portion of the net proceeds from the Offering to repay certain of its outstanding Subordinated Notes and to pay related prepayment penalties. John Hancock Mutual Life Insurance Company and an affiliate ("John Hancock") and Pacific Mutual Life Insurance Company and an affiliate ("Pacific Mutual"), principal stockholders of the Company, held, as of September 30, 1996, $31.0 million and $5.0 million, respectively, of Subordinated Notes. Upon completion of the Offering (assuming that the net proceeds of the Offering are as set forth under "Use of Proceeds"), John Hancock and Pacific Mutual will be paid approximately $34.7 million (including approximately $3.7 million in prepayment penalties) and $5.6 million (including approximately $0.6 million in prepayment penalties), respectively, in repayment of the entire amount of their outstanding Subordinated Notes, together with accrued interest. See "Use of Proceeds" and "Certain Relationships and Related Transactions--Other Historic Relationships and Related Transactions". CONTROL OF THE COMPANY After completion of the Offering, the Company's executive officers and directors and their affiliates will beneficially own 21.2% of the outstanding shares of Common Stock. The Company's executive officers and directors acting in concert can influence the business, policies and affairs of the Company and may, together with their affiliates and related parties, be able to block approval of any proposed merger, combination or sale of substantially all the Company's assets. Such ownership may also make a tender offer or proxy contest involving the Company less likely. See "Principal and Selling Stockholders" and "Description of Capital Stock--Certain Provisions Relating to Changes in Control". ANTITAKEOVER PROVISIONS The Company's charter and bylaws contain provisions that may delay, defer or prevent a change in control of the Company. Among other things, these provisions: (i) authorize the Board of Directors to issue preferred stock in series with the terms of each series to be fixed by the Board of Directors; (ii) divide the Board of Directors into three classes so that only approximately one-third of the total number of directors will be elected each year; (iii) permit directors to be removed only for cause; and (iv) specify 9 advance notice requirements for stockholder proposals and director nominations. See "Description of Capital Stock--Certain Provisions Relating to Changes in Control". SHARES ELIGIBLE FOR FUTURE SALE Upon completion of the Offering, the Company will have 14,741,729 shares of Common Stock outstanding. Of these shares, an aggregate of 3,795,000 shares sold in the IPO are, and the 4,700,000 shares sold in this Offering will be, freely tradable without restriction or further registration under the Securities Act, except for any such shares purchased by affiliates of the Company. In addition, the Company has filed a registration statement under the Securities Act which will allow the resale, without restriction, of the 625,000 shares of Common Stock sold in the Private Placement for so long as such registration statement remains effective. The Company has also filed a registration statement under the Securities Act which will allow the sale, without restriction, of Common Stock acquired upon exercise of stock options or pursuant to awards of restricted stock under the Company's Option and Restricted Stock Plan (as defined herein), except for any such shares acquired by affiliates of the Company. Of the remaining shares, 5,613,479 shares, which were issued in the Combination, will be eligible for sale in the public market upon expiration of the applicable holding periods, or sooner if registered under the Securities Act. The stockholders who received Common Stock in the Combination have three demand registration rights and unlimited incidental (or piggyback) registration rights, subject to certain limitations and conditions relating to the timing and size of the registrations and similar matters. The first two demand registration rights are exercisable until July 22, 1999, but no demand registration right may be exercised before April 22, 1997 unless the market price of the Common Stock at the time of exercise is at least $16.80 per share (120% of the IPO price). The third demand registration right may be exercised beginning July 22, 1999. The Company's officers and directors and the stockholders who received Common Stock in the Combination have agreed for a period of 90 days after the date of this Prospectus, not to offer, sell, agree to sell, grant any option to purchase or make any other disposition (excluding certain pledges) of any shares owned by them without the prior written consent of Bear, Stearns & Co. Inc. ("Bear Stearns"). This agreement may be released by Bear Stearns without notice to persons purchasing shares in this Offering and without notice to any market on which the Common Stock is traded. Sales of substantial amounts of shares in the public market following the Offering could adversely affect the market price of the Common Stock. See "Certain Relationships and Related Transactions--Historic Relationships and Related Transactions--The Combination--Registration Rights", "Shares Eligible for Future Sale" and "Underwriting". DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS This Prospectus includes "forward-looking statements" within the meaning of Section 27A of the Securities Act and Section 21E of the Securities Exchange Act of 1934, as amended ("Exchange Act"). All statements other than statements of historical facts included in this Prospectus, including without limitation, statements under "Risk Factors", "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Business" regarding the Company's financial position, business strategy and plans and objectives of management of the Company for future operations, are forward-looking statements. Although the Company believes that the expectations reflected in such forward-looking statements are reasonable, it can give no assurance that such expectations will prove to be correct. Important factors that could cause actual results to differ materially from the Company's expectations ("Cautionary Statements") are disclosed under "Risk Factors" and elsewhere in this Prospectus, including without limitation in conjunction with the forward-looking statements included in this Prospectus. All subsequent written and oral forward-looking statements attributable to the Company or persons acting on its behalf are expressly qualified in their entirety by the Cautionary Statements. 10 USE OF PROCEEDS Assuming an offering price of $22.25 per share, the net proceeds to the Company from the sale of shares of Common Stock offered hereby by the Company are estimated to be approximately $83.8 million ($89.4 million if the Underwriters exercise their Over-Allotment Option in full), after deducting estimated underwriting discounts and commissions and estimated offering expenses. The Company intends to use the net proceeds from the Offering to repay certain outstanding indebtedness and to pay related prepayment penalties. At September 30, 1996, the Company had outstanding $25.0 million in principal amount of indebtedness outstanding under its 12% Subordinated Notes and $11.0 million in principal amount outstanding under its 13.5% Subordinated Notes. These Subordinated Notes require semiannual principal payments in varying amounts commencing in 2001, with the remaining unpaid principal balances due at maturity on March 31, 2004, and require semiannual interest payments in March and September of each year. These Subordinated Notes, which constitute all of the Company's subordinated indebtedness, are held by John Hancock and Pacific Mututal. The Company intends to apply an aggregate of $36.0 million to repay the entire outstanding principal amount of the 12% and 13.5% Subordinated Notes and an additional $4.3 million to pay related prepayment penalties. See "Risk Factors--Benefits to be Received by Certain Existing Stockholders"; "Management's Discussion and Analysis of Financial Condition and Results of Operations--Liquidity and Captial Resources--Current Debt Obligations" and "Certain Relationships and Related Transactions--Current Relationships and Related Transactions". At September 30, 1996, the Company had approximately $179.0 million in principal amount of senior indebtedness (including the current portion) outstanding under its Senior Credit Facility. Of this amount, approximately $127.5 million was outstanding under a term loan facility, which is being amortized over seven years ending on March 31, 2002, approximately $8.6 million was outstanding under a revolving loan facility, which matures on March 31, 2000, and approximately $42.9 million was outstanding under the acquisition facility, which will be amortized over four years commencing September 30, 1998. Indebtedness under the Senior Credit Facility bears interest at floating rates. As of September 30, 1996, the blended interest rate on the Senior Credit Facility was 6.9%. The Company entered into the Senior Credit Facility in connection with the Combination in order to replace the previously outstanding senior indebtedness of the Combined Entities. The Senior Credit Facility was amended in July 1996 in connection with the acquisition of Garrido. In September 1996, the Company entered into a supplemental credit facility as part of an amendment to the Senior Credit Facility providing for a $90.0 million acquisition facility. The Company originally borrowed an aggregate of $71.2 million under the acquisition facility to fund its acquisitions of Swiss Dairy and Model Dairy. See "Management's Discussion and Analysis of Financial Condition and Results of Operations--Liquidity and Capital Resources--Current Debt Obligations". The Company intends to apply $43.4 million of the net proceeds of the Offering to repay a portion of the amount outstanding under the acquisition facility of the Senior Credit Facility. The Company will not receive any of the proceeds from the sale of the 700,000 shares of Common Stock by the Selling Stockholders. 11 PRICE RANGE OF COMMON STOCK The Common Stock began trading in the Nasdaq National Market on April 17, 1996. The following table sets forth, for the periods from April 17, 1996 to January 21, 1997, the high and low sales prices of the Common Stock as quoted on the Nasdaq National Market. On January 21, 1997, the last reported sale price of the Common Stock on the Nasdaq National Market was $22.25 per share. At January 6, 1997, there were approximately 43 record holders of Common Stock.
PRICE RANGE OF COMMON STOCK -------------------- HIGH LOW --------- --------- Year Ended December 31, 1996: Second Quarter (from April 17, 1996)........................................ $ 18.75 $ 14.00 Third Quarter............................................................... $ 17.75 $ 15.75 Fourth Quarter.............................................................. $ 20.75 $ 16.75 Year Ended December 31, 1997: First Quarter (through January 21, 1997).................................... $ 22.25 $ 19.50
DIVIDEND POLICY The Company has never declared or paid a cash dividend on the Common Stock. Management intends to retain all earnings to cover working capital fluctuations and to fund capital expenditures, scheduled debt repayments and acquisitions and does not anticipate paying cash dividends on the Common Stock in the foreseeable future. The Company's Senior Credit Facility and Subordinated Notes prohibit the payment of dividends by the Company on any shares of Common Stock, other than dividends payable solely in Common Stock. See "Management's Discussion and Analysis of Financial Condition and Results of Operations--Liquidity and Capital Resources". 12 CAPITALIZATION The following table sets forth the capitalization of the Company as of September 30, 1996: (i) on an actual basis; (ii) on a pro forma basis, after giving effect to the borrowing to fund the acquisition of Model Dairy; and (iii) on a pro forma basis, as adjusted to give effect to the sale of shares of Common Stock offered by the Company hereunder and the application of the estimated net proceeds therefrom as described under "Use of Proceeds". This table should be read in conjunction with the other financial information appearing elsewhere in this Prospectus.
AS OF SEPTEMBER 30, 1996 ------------------------------------ PRO FORMA ACTUAL PRO FORMA AS ADJUSTED ---------- ----------- ----------- (IN THOUSANDS, EXCEPT SHARE DATA) Current portion of long-term debt........................................... $ 11,637 $ 11,637 $ 11,637 ---------- ----------- ----------- ---------- ----------- ----------- Long-term debt, net of current portion: Senior Credit Facility Revolving loan facility................................................. $ 8,600 $ 8,600 $ 8,600 Term loan facility...................................................... 116,250 116,250 116,250 Acquisition loan facility............................................... 42,900 69,748 26,312 Subordinated indebtedness................................................. 36,000 36,000 -- Other long-term debt...................................................... 566 566 566 ---------- ----------- ----------- Total long-term debt.................................................... 204,316 231,164 151,728 ---------- ----------- ----------- Stockholders' equity: Preferred Stock, $.01 par value, 1,000,000 shares authorized; none outstanding............................................................. -- -- -- Common Stock, $.01 par value, 20,000,000 shares authorized; 10,739,729 actual and pro forma shares outstanding (1); and 14,739,729 pro forma shares outstanding...................................................... 107 107 147 Additional paid-in capital................................................ 89,337 89,337 173,053 Retained earnings (deficit)............................................... 32 32 (3,262) ---------- ----------- ----------- Total stockholders' equity.............................................. 89,476 89,476 169,938 ---------- ----------- ----------- Total capitalization.................................................. $ 293,792 $ 320,640 $ 321,666 ---------- ----------- ----------- ---------- ----------- -----------
- ------------------------ (1) Excludes 1,446,238 shares of Common Stock subject to options outstanding as of September 30, 1996, which are exercisable at a weighted average exercise price of $7.93 per share. See "Management-- Executive Compensation--Option and Restricted Stock Plan" and "Certain Relationships and Related Transactions--Historic Relationships and Related Transactions--The Combination--Stock Options". 13 UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL DATA The following unaudited pro forma financial data have been derived by the application of pro forma adjustments to the financial statements of the Company. The pro forma statement of operations data represent income from continuing operations for the year ended December 31, 1995 and for the nine months ended September 30, 1996 and give effect to: (i) the acquisition of Garrido; (ii) the acquisition of Swiss Dairy; (iii) the acquisition of Model Dairy; and (iv) the related borrowings to fund such acquisitions (collectively, the "Transactions"), as if the Transactions had been consummated on January 1, 1995. The pro forma balance sheet data give effect to the acquisition of Model Dairy as if the acquisition had been consummated on September 30, 1996. There is no pro forma balance sheet impact from the Garrido and Swiss Dairy acquisitions because these acquisitions were consummated prior to September 30, 1996 and are reflected in the historical balance sheet as of that date. The pro forma adjustments, which are described in the accompanying notes, are based on available information and certain assumptions that management of the Company believes are reasonable. The pro forma financial data should not be considered indicative of actual results that would have been achieved if the Transactions had been consummated on the dates or for the periods indicated and do not purport to indicate results of operations as of any future date or for any future period. The historical amounts in the pro forma statements of operations for Garrido, Swiss Dairy and Model Dairy include the operating results of these entities only for the applicable periods prior to the effective dates of their acquisition by the Company (July 1996 for Garrido, September 1996 for Swiss Dairy and December 1996 for Model Dairy). Because the fiscal year for Garrido ends on June 30 of each year, the financial data for the year ended December 31, 1995 were derived from the aggregation of the unaudited financial information of Garrido for the six month period ended June 30, 1995 in Garrido's 1995 fiscal year and the six month period ended December 31, 1995 in Garrido's 1996 fiscal year; and the financial data for the nine months ended September 30, 1996 were derived from unaudited financial information of Garrido for the six month period ended June 30, 1996 in Garrido's 1996 fiscal year. Because the fiscal year for Model Dairy ends on October 31 of each year, the financial data for the year ended December 31, 1995 represent the financial information of Model Dairy for the fiscal year ended October 31, 1995; and the financial data for the nine months ended September 30, 1996 represent the unaudited financial data of Model Dairy for the same nine month period. The following pro forma financial data does not give effect to the sales of Common Stock and the application of the net proceeds therefrom in the IPO, the Private Placement or this Offering (including the recognition of the extraordinary loss from the early extinguishment of debt). The unaudited pro forma financial data should be read in conjunction with the financial statements of the Company, Garrido, Swiss Dairy and Model Dairy and the related notes appearing elsewhere herein. 14 UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS YEAR ENDED DECEMBER 31, 1995 (IN THOUSANDS, EXCEPT SHARE DATA)
HISTORICAL ------------------------------------------ THE SWISS MODEL PRO FORMA COMPANY GARRIDO DAIRY DAIRY ADJUSTMENTS PRO FORMA --------- --------- --------- --------- ---------------- ----------- Net sales................................. $ 430,466 $ 26,226 $ 126,647 $ 50,847 $ -- $ 634,186 Cost of sales............................. 312,633 17,242 111,798 41,309 (1,077)(a)(b) 481,905 --------- --------- --------- --------- ----------- Gross profit............................ 117,833 8,984 14,849 9,538 152,281 Operating expenses: Selling and distribution................ 64,289 2,506 7,852 3,920 (1,241)(a)(b) 77,326 General and administrative.............. 19,277 2,041 2,483 3,724 (1,354)(a)(b) 26,171 Amortization of intangibles and other... 3,703 -- -- 20 2,179(c) 5,902 --------- --------- --------- --------- ----------- Total operating costs and expenses.... 87,269 4,547 10,335 7,664 109,399 --------- --------- --------- --------- ----------- Income from operations.................... 30,564 4,437 4,514 1,874 42,882 Other (income) expense: Interest expense, net................... 19,921 349 -- 66 7,528(d) 27,864 Merger and other costs.................. 10,238 -- -- -- 10,238 Other income, net....................... (469) (110) (270) (116) (965) --------- --------- --------- --------- ----------- Total other (income) expense.......... 29,690 239 (270) (50) 37,137 --------- --------- --------- --------- ----------- Income before income taxes................ 874 4,198 4,784 1,924 5,745 Income taxes.............................. 2,450 589 65 5 628(e) 3,737 --------- --------- --------- --------- ----------- Income (loss) from continuing operations.. $ (1,576) $ 3,609 $ 4,719 $ 1,919 $ 2,008 --------- --------- --------- --------- ----------- --------- --------- --------- --------- ----------- Income (loss) per share from continuing operations.............................. $ (0.26) $ 0.30 --------- ----------- --------- ----------- Weighted average shares outstanding....... 6,109,398 6,782,907 --------- ----------- --------- -----------
- -------------------------- (a) Excess of historical depreciation expense over the depreciation of the fair value of property and equipment acquired, as follows:
GARRIDO SWISS DAIRY MODEL DAIRY TOTAL ----------- ------------- --------------- --------- Cost of sales.......................................... $ (84) $ (170) $ (68) $ (322) Selling and distribution............................... (15) (149) (68) (232) General and administration............................. (13) (16) (15) (44) ----- ----- ----- --------- $ (112) $ (335) $ (151) $ (598) ----- ----- ----- --------- ----- ----- ----- ---------
(b) Elimination of (i) salaries and benefits paid primarily to former shareholders of Swiss Dairy and Model Dairy, whose employment was either terminated or salaries reduced, and (ii) certain related party rentals at Model Dairy, as part of the respective acquisition agreements, resulting in a reduction of historical costs of sales, selling and distribution and general and administrative costs, as follows:
SWISS DAIRY MODEL DAIRY TOTAL ------------- ------------- --------- Cost of sales................................................... $ (620) $ (135) $ (755) Selling and distribution........................................ (245) (764) (1,009) General and administration...................................... (702) (608) (1,310) ------------- ------------- --------- $ (1,567) $ (1,507) $ (3,074) ------------- ------------- --------- ------------- ------------- ---------
15 (c) Amortization of goodwill and other intangibles in excess of historical amounts, as follows:
LIFE GARRIDO SWISS DAIRY MODEL DAIRY TOTAL --- ----------- ------------- --------------- --------- Organization costs.............................. 5 $ 5 $ 5 $ 5 $ 15 Tradename....................................... 25 -- -- 120 120 Customer list................................... 10 -- -- 400 400 Goodwill........................................ 40 494 1,000 150 1,644 ----- ------ ----- --------- $ 499 $ 1,005 $ 675 2,179 ----- ------ ----- --------- ----- ------ ----- ---------
(d) Pro forma interest expense on the average outstanding balance of new borrowings used to fund the acquisitions at an assumed interest rate of 7.25%, net of the reduction of historical interest expense related to the historical debt repaid.
TOTAL --------- Garrido..................................................................................... $ 2,083 Swiss Dairy................................................................................. 3,737 Model Dairy................................................................................. 1,708 --------- $ 7,528 --------- ---------
(e) Estimated pro forma adjustment to reflect income taxes at the Company's estimated effective tax rate of 4% for Garrido, 40% for Swiss Dairy and 35% for Model Dairy.
TOTAL --------- Garrido...................................................................................... $ (502) Swiss Dairy.................................................................................. 715 Model Dairy.................................................................................. 415 --------- $ 628 --------- ---------
16 UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS NINE MONTHS ENDED SEPTEMBER 30, 1996 (IN THOUSANDS, EXCEPT SHARE DATA)
HISTORICAL ------------------------------------------ THE SWISS MODEL PRO FORMA COMPANY GARRIDO DAIRY DAIRY ADJUSTMENTS PRO FORMA --------- --------- --------- --------- ---------------- ----------- Net sales............................... $ 364,611 $ 13,228 $ 75,615 $ 42,879 $ -- $ 496,333 Cost of sales........................... 267,131 8,982 65,462 35,171 (872)(a)(b) 375,874 --------- --------- --------- --------- ----------- Gross profit........................ 97,480 4,246 10,153 7,708 120,459 Operating expenses: Selling and distribution.............. 52,215 1,428 5,153 3,350 (1,131)(a)(b) 61,015 General and administrative............ 15,661 1,163 1,458 3,019 (983)(a)(b) 20,318 Amortization of intangibles and other............................... 3,200 -- -- 8 1,455(c) 4,663 --------- --------- --------- --------- ----------- Total operating costs and expenses.. 71,076 2,591 6,611 6,377 85,996 --------- --------- --------- --------- ----------- Income from operations.................. 26,404 1,655 3,542 1,331 34,463 Other (income) expense: Interest expense, net................. 12,844 131 (51) 51 4,625(d) 17,600 Merger and other costs................ 571 -- -- -- 571 Other income, net..................... (3,389) (237) (318) 23 (3,921) --------- --------- --------- --------- ----------- Total other (income) expense........ 10,026 (106) (369) 74 14,250 --------- --------- --------- --------- ----------- Income before income taxes.............. 16,378 1,761 3,911 1,257 20,213 Income taxes (benefit).................. (7,495) (478) 57 -- 1,705(e) (6,211) --------- --------- --------- --------- ----------- Income from continuing operations....... $ 23,873 $ 2,239 $ 3,854 $ 1,257 $ 26,424 --------- --------- --------- --------- ----------- --------- --------- --------- --------- ----------- Income per share from continuing operations............................. $ 2.55 $ 2.82 --------- ----------- --------- ----------- Weighted average shares outstanding..... 9,360,539 9,360,539 --------- ----------- --------- -----------
- -------------------------- (a) Excess of historical depreciation expense over the depreciation of the fair value of property and equipment acquired, as follows:
GARRIDO SWISS DAIRY MODEL DAIRY TOTAL ----------- ------------- --------------- --------- Cost of sales................................................ $ (42) $ (225) $ (88) $ (355) Selling and distribution..................................... (8) (199) (88) (295) General and administration................................... (6) (22) (20) (48) --- ----- ----- --------- $ (56) $ (446) $ (196) $ (698) --- ----- ----- --------- --- ----- ----- ---------
(b) Elimination of (i) salaries and benefits paid primarily to former shareholders of Swiss Dairy and Model Dairy, whose employment was either terminated or salaries reduced, and (ii) certain related party rentals at Model Dairy, as part of the respective acquisition agreements, resulting in a reduction of historical costs of sales, selling and distribution and general and administrative costs, as follows:
SWISS DAIRY MODEL DAIRY TOTAL ------------- ------------- --------- Cost of sales......................................................... $ (517) $ -- $ (517) Selling and distribution.............................................. (240) (596) (836) General and administration............................................ (352) (583) (935) ------------- ------------- --------- $ (1,109) $ (1,179) $ (2,288) ------------- ------------- --------- ------------- ------------- ---------
(c) Amortization of goodwill and other intangibles in excess of historical amounts, as follows:
LIFE GARRIDO SWISS DAIRY MODEL DAIRY TOTAL --- ----------- --------------- --------------- --------- Organization costs.................................... 5 $ 3 $ 4 $ 4 $ 11 Tradename............................................. 25 -- -- 90 90 Customer list......................................... 10 -- -- 300 300 Goodwill.............................................. 40 250 684 120 1,054 ----- ----- ----- --------- $ 253 $ 688 $ 514 $ 1,455 ----- ----- ----- --------- ----- ----- ----- ---------
17 (d) Pro forma interest expense on the average outstanding balance of new borrowings used to fund the acquisitions at an assumed interest rate of 7.25%, net of the reduction of historical interest expense related to the historical debt repaid.
TOTAL --------- Garrido........................................................................................... $ 979 Swiss Dairy....................................................................................... 2,502 Model Dairy....................................................................................... 1,144 --------- $ 4,625 --------- ---------
(e) Estimated pro forma adjustment to reflect income taxes at the Company's estimated effective tax rate of 4% for Garrido, 40% for Swiss Dairy and 35% for Model Dairy.
TOTAL --------- Garrido........................................................................................... $ 511 Swiss Dairy....................................................................................... 853 Model Dairy....................................................................................... 341 --------- $ 1,705 --------- ---------
18 UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET AS OF SEPTEMBER 30, 1996 (IN THOUSANDS)
HISTORICAL --------------------- THE MODEL PRO FORMA COMPANY DAIRY ADJUSTMENTS PRO FORMA ---------- --------- -------------- ----------- Current assets: Cash and cash equivalents................................... $ 9,288 $ 1,110 $ -- $ 10,398 Accounts receivable, net.................................... 47,729 5,662 (19)(b) 53,372 Inventories................................................. 15,853 2,052 17,905 Prepaid expenses and other current assets................... 3,162 164 3,326 Deferred income taxes....................................... 2,127 -- 2,127 ---------- --------- ----------- Total current assets...................................... 78,159 8,988 87,128 Property and equipment........................................ 112,280 4,873 3,578(b) 120,731 Deferred income taxes......................................... 7,792 -- 7,792 Intangible and other assets................................... 151,439 627 13,397(b) 165,463 ---------- --------- ----------- Total assets.................................................. $ 349,670 $ 14,488 $ 381,114 ---------- --------- ----------- ---------- --------- ----------- Current liabilities: Accounts payable and accrued expenses....................... $ 43,702 $ 4,358 $ 238(a) $ 48,298 Income taxes payable........................................ 539 -- 539 Current portion of long-term debt........................... 11,637 663 (663)(a) 11,637 ---------- --------- ----------- Total current liabilities................................. 55,878 5,021 60,474 Long-term debt................................................ 204,316 2,394 24,454(a) 231,164 Stockholders' equity: Common stock................................................ 107 67 (67)(b) 107 Additional paid-in capital.................................. 89,337 -- 89,337 Retained earnings........................................... 32 7,006 (7,006)(b) 32 ---------- --------- ----------- Total stockholders equity................................. 89,476 7,073 89,476 ---------- --------- ----------- Total liabilities and equity.................................. $ 349,670 $ 14,488 $ 381,114 ---------- --------- ----------- ---------- --------- -----------
- ------------------------ (a) In December 1996, the Company completed the acquisition of substantially all the net assets of Model Dairy for a purchase price of $26.2 million, including acquired cash and excluding $.9 million in related expenses. The total purchase price was funded primarily with borrowings under the Company's Senior Credit Facility, a portion of which was used to repay indebtedness at Model Dairy, as follows (in thousands): Credit agreement borrowings.............................................................................. $ 26,848 Accrued expenses......................................................................................... 250 ----------- Total purchase price..................................................................................... 27,098 Repayment of existing indebtedness Accrued interest....................................................................................... (12) Current portion........................................................................................ (663) Long-term portion...................................................................................... (2,394) ----------- Net purchase price................................................................................... $ 24,029 ----------- -----------
19 (b) The above acquisition resulted in an excess of the purchase price over the historical net assets acquired, which was allocated to the net assets acquired as follows: Net purchase price....................................................................................... $ 24,029 Historical carrying value of net assets: Total net assets....................................................................................... 7,073 Less net assets not assumed: Accounts receivable.................................................................................. (19) Intangible and other assets.......................................................................... (439) --------- Historical carrying value of net assets acquired................................................... 6,615 --------- Excess of net purchase price over historical carrying value.............................................. $ 17,414 --------- --------- Allocation of excess purchase price: Excess fair value of property and equipment............................................................ $ 3,578 Intangible assets...................................................................................... 13,836 --------- $ 17,414 --------- ---------
20 SELECTED CONSOLIDATED FINANCIAL DATA (IN THOUSANDS, EXCEPT SHARE DATA) The following table presents selected consolidated financial data of the Company for the five years ended December 31, 1995 derived from the Company's audited consolidated financial statements. The selected consolidated financial data for the nine-month periods ended September 30, 1995 and 1996 are unaudited, and in the opinion of management, reflect all adjustments (consisting of normal recurring accruals) that are necessary to present fairly the financial results for such periods. The selected financial data do not purport to indicate results of operations as of any future date or for any future period. Effective with the Combination, the Company became the holding company for the operations of Suiza-Puerto Rico, Velda Farms and Reddy Ice. The Combination has been accounted for using the pooling of interests method of accounting. Results of operations of Suiza-Puerto Rico and Velda Farms are included from the dates such operations were acquired in purchase business combinations (December 16, 1993 and April 10, 1994, respectively). The Selected Consolidated Financial Data should be read in conjunction with the Consolidated Financial Statements and related notes of the Company included elsewhere in this Prospectus and "Management's Discussion and Analysis of Financial Condition and Results of Operations".
NINE MONTHS ENDED YEAR ENDED DECEMBER 31, SEPTEMBER 30, ----------------------------------------------------- -------------------- 1991 1992 1993 1994 1995 1995 1996 --------- --------- --------- --------- --------- --------- --------- (UNAUDITED) OPERATING DATA: Net sales................................. $ 45,513 $ 44,452 $ 51,675 $ 341,108 $ 430,466 $ 325,454 $ 364,611 Costs of sales............................ 15,016 14,586 20,412 240,468 312,633 234,762 267,131 --------- --------- --------- --------- --------- --------- --------- Gross profit.............................. 30,497 29,866 31,263 100,640 117,833 90,692 97,480 Operating costs and expenses: Selling and distribution.................. 14,806 14,483 15,434 54,248 64,289 48,295 52,215 General and administrative................ 6,699 6,110 6,305 16,935 19,277 15,298 15,661 Amortization of intangibles and other..... 720 1,911 822 3,697 3,703 2,865 3,200 --------- --------- --------- --------- --------- --------- --------- Total operating costs and expenses...... 22,225 22,504 22,561 74,880 87,269 66,458 71,076 --------- --------- --------- --------- --------- --------- --------- Income from operations...................... 8,272 7,362 8,702 25,760 30,564 24,234 26,404 Other (income) expense: Interest expense, net..................... 9,212 8,495 7,697 19,279 19,921 15,285 12,844 Merger and other costs.................... 467 1,199 -- 1,660 10,238 10,238 571 Other income, net......................... (245) (408) (419) (268) (469) (406) (3,389) --------- --------- --------- --------- --------- --------- --------- Total other (income) expense............ 9,434 9,286 7,278 20,671 29,690 25,117 10,026 --------- --------- --------- --------- --------- --------- --------- Income (loss) before income taxes and extraordinary loss...................... (1,162) (1,924) 1,424 5,089 874 (883) 16,378 Income taxes (benefit).................... -- -- 4 844 2,450 1,963 (7,495) --------- --------- --------- --------- --------- --------- --------- Income (loss) before extraordinary loss... (1,162) (1,924) 1,420 4,245 (1,576) (2,846) 23,873 Extraordinary loss from early extinguishment of debt.................. 1,272 2,491 -- 197 8,462 8,462 2,215 --------- --------- --------- --------- --------- --------- --------- Net income (loss) (1)..................... $ (2,434) $ (4,415) $ 1,420 $ 4,048 $ (10,038) $ (11,308) $ 21,658 --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- Weighted average shares outstanding....... 1,763,502 1,763,502 2,487,174 6,156,387 6,109,398 6,041,000 9,360,539 Income (loss) before extraordinary loss per share............................... $ (.66) $ (1.09) $ .57 $ .69 $ (.26) $ (0.47) $ 2.55 Extraordinary loss per share.............. (.72) (1.41) -- (.03) (1.38) (1.40) (0.24) --------- --------- --------- --------- --------- --------- --------- Net income (loss) per share (1)........... $ (1.38) $ (2.50) $ .57 $ .66 $ (1.64) $ (1.87) $ 2.31 --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- BALANCE SHEET DATA (AT END OF PERIOD): Working capital (deficit)................. $ (3,851) $ 616 $ (3,609) $ (2,099) $ (1,554) $ (1,331) $ 22,281 Total assets.............................. 52,103 46,991 167,948 238,952 232,522 234,474 349,670 Long-term debt, net of current portion.... 51,588 54,739 132,123 173,327 171,745 173,729 204,316 Total stockholders' equity (deficit)...... (9,469) (15,408) 162 9,887 9,460 8,190 89,476
- ------------------------------ 21 (1) Net income (loss) and related per share amounts include the following nonrecurring and extraordinary charges and benefits:
YEARS ENDED DECEMBER 31, NINE MONTHS ENDED ----------------------------------------------------- SEPTEMBER 30, 1991 1992 1993 1994 1995 -------------------------- --------- --------- --------- --------- --------- 1995 1996 ----------- ------------- (UNAUDITED) (UNAUDITED) Merger, financing and other costs (a)....... $ (467) $ (1,199) $ -- $ (1,602) $ (9,554) $ (9,544) $ (354) --------- --------- --------- --------- --------- ----------- ------------- Tax benefits (b)............................ -- -- -- -- -- -- 13,950 Extraordinary loss from early extinguishment of debt (c)............................... -- -- -- (197) (8,462) (8,462) (2,215) --------- --------- --------- --------- --------- ----------- ------------- $ (467) $ (1,199) $ -- $ (1,799) $ (18,016) $ (18,016) $ 11,381 --------- --------- --------- --------- --------- ----------- ------------- --------- --------- --------- --------- --------- ----------- -------------
(a) Consists of costs incurred in connection with the Combination and a prior merger, an uncompleted public offering of Common Stock, an uncompleted debt offering, uncompleted acquisitions and debt refinancing costs, net of associated income taxes of $58 in 1994, $684 in 1995 and $217 in the nine months ended September 30, 1996. (b) Includes sale of Puerto Rico tax credits of $3,400 (net of related expenses), reflected in other income, and the recognition of $11,750 in deferred income tax benefits recorded as a credit to tax expense, both effects related to tax credits generated by Suiza-Puerto Rico, partially offset by additional income tax expense of $1,200 related to the sale of the tax credits. See "Management's Discussion and Analysis of Financial Condition and Results of Operations--Tax Benefits". (c) Net of associated income taxes of $700 in 1995 and $900 in the nine months ended September 30, 1996. 22 SELECTED PRE-ACQUISITION HISTORICAL FINANCIAL DATA (IN THOUSANDS) The following tables set forth selected historical financial data for Pre-Acquisition Suiza-Puerto Rico and Pre-Acquisition Velda Farms as of and for the periods indicated. The historical financial data for Pre-Acquisition Suiza-Puerto Rico and Pre-Acquisition Velda Farms are presented for periods prior to December 16, 1993 and April 10, 1994, respectively, the respective dates of acquisition of Suiza-Puerto Rico and Velda Farms. This information should be read in conjunction with the financial statements and related notes for Pre-Acquisition Suiza-Puerto Rico and Pre-Acquisition Velda Farms included elsewhere herein. PRE-ACQUISITION SUIZA-PUERTO RICO
PERIOD YEAR ENDED ENDED DECEMBER 31, DECEMBER 15, ---------------------- 1993 1991 1992 (50 WEEKS) ---------- ---------- ------------ OPERATING DATA: Net sales................................................................ $ 172,347 $ 184,022 $ 174,771 Operating income......................................................... 12,438 14,178 11,720 Income from continuing operations (1).................................... 8,538 10,288 12,893 BALANCE SHEET DATA (AT END OF PERIOD): Total assets............................................................. 68,139 65,110 68,357 Long-term debt........................................................... 16,431 12,514 -- OTHER DATA: Cash dividends paid...................................................... 3,247 14,251 14,994
PRE-ACQUISITION VELDA FARMS
PERIOD FROM JANUARY 1, YEAR ENDED DECEMBER 31, 1994 ------------------------------- TO 1991 1992 1993 APRIL 9, 1994 --------- --------- --------- ------------- OPERATING DATA: Net sales..................................... $ 115,688 $ 123,774 $ 125,908 $ 38,269 Operating income (2).......................... 4,443 2,977 3,422 1,460 Income from continuing operations (2)......... 1,274 379 910 730 BALANCE SHEET DATA (AT END OF PERIOD): Total assets.................................. 43,599 39,337 38,215 39,867 Long-term debt................................ 30,556 30,506 30,497 30,517 OTHER DATA: Cash dividends paid........................... -- -- -- --
- ------------------------ (1) Includes a deferred tax benefit in 1993 of $2,734 from the settlement of deferred tax liabilities with the Department of Treasury of the Commonwealth of Puerto Rico. (2) Includes non-recurring expenses for restructuring costs allocated by Velda Farms' former parent of $1,048 in 1992 and $1,023 in 1993. 23 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW Suiza Foods is a leading manufacturer and distributor of fresh milk products, refrigerated ready-to-serve fruit drinks and coffee in Puerto Rico, fresh milk and related dairy products in Florida, California and Nevada, and packaged ice in Florida and the southwestern United States. The markets in which the Company operates tend to be relatively mature and do not offer opportunities for rapid internal growth. However, these markets are relatively stable in nature and thus provide some level of predictability for the Company's operations. As a result of these dynamics, the Company's strategy has been to grow primarily through acquisitions and to realize economies of scale and operating efficiencies by eliminating duplicative manufacturing, distribution, purchasing and administrative operations. RESULTS OF OPERATIONS Effective with the Combination, the Company became the holding company for the operations of Suiza-Puerto Rico, Velda Farms and Reddy Ice. The Combination has been accounted for using the pooling of interests method of accounting. Results of operations of Suiza-Puerto Rico and Velda Farms are included from the dates such operations were acquired in purchase business combinations (December 16, 1993 and April 10, 1994, respectively). These transactions and other consolidating acquisitions made throughout the periods presented increased the Company's combined sales from $51.7 million for the year ended December 31, 1993 to $430.5 million for the year ended December 31, 1995. The following table presents certain information concerning the Company's results of operations, including information presented as a percentage of net sales (dollars in thousands):
YEAR ENDED DECEMBER 31, -------------------------------------------------------- 1993 1994 1995 ---------------- ----------------- ----------------- DOLLARS PERCENT DOLLARS PERCENT DOLLARS PERCENT ------- ------- -------- ------- -------- ------- Net sales: Dairy........................................... $ 6,587 $293,407 $379,959 Ice............................................. 45,088 47,701 50,507 ------- -------- -------- Net sales..................................... 51,675 100.0% 341,108 100.0% 430,466 100.0% Cost of sales..................................... 20,412 39.5 240,468 70.5 312,633 72.6 ------- ------- -------- ------- -------- ------- Gross profit.................................... 31,263 60.5 100,640 29.5 117,833 27.4 Operating expenses: Selling and distribution........................ 15,434 29.9 54,248 15.9 64,289 14.9 General and administrative...................... 6,305 12.2 16,935 5.0 19,277 4.5 Amortization of intangibles..................... 822 1.6 3,697 1.1 3,703 0.9 ------- ------- -------- ------- -------- ------- Total operating expenses...................... 22,561 43.7 74,880 22.0 87,269 20.3 Operating income: Dairy........................................... 92 17,122 23,435 Ice............................................. 8,610 8,638 9,966 Corporate office................................ -- -- (2,837) ------- ------- -------- ------- -------- ------- Operating income.............................. $ 8,702 16.8% $ 25,760 7.6% $ 30,564 7.1% ------- ------- -------- ------- -------- ------- ------- ------- -------- ------- -------- ------- NINE MONTHS ENDED SEPTEMBER 30, ------------------------------------- 1995 1996 ----------------- ----------------- DOLLARS PERCENT DOLLARS PERCENT -------- ------- -------- ------- Net sales: Dairy........................................... $284,536 $321,522 Ice............................................. 40,918 43,089 -------- -------- Net sales..................................... 325,454 100% 364,611 100.0% Cost of sales..................................... 234,762 72.1 267,131 73.3 -------- ------- -------- ------- Gross profit.................................... 90,692 27.9 97,480 26.7 Operating expenses: Selling and distribution........................ 48,295 14.8 52,215 14.3 General and administrative...................... 15,298 4.7 15,661 4.3 Amortization of intangibles..................... 2,865 0.9 3,200 0.9 -------- ------- -------- ------- Total operating expenses...................... 66,458 20.4 71,076 19.5 Operating income: Dairy........................................... 17,201 18,560 Ice............................................. 9,040 10,399 Corporate office................................ (2,007) (2,555) -------- ------- -------- ------- Operating income.............................. $ 24,234 7.5% $ 26,404 7.2% -------- ------- -------- ------- -------- ------- -------- -------
NINE MONTHS ENDED SEPTEMBER 30, 1996 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30, 1995 NET SALES. The Company's net sales increased by 12.0% for the first nine months of 1996 when compared to the like period of 1995. Net sales for the Company's dairy operations increased by 13.0% for the first nine months of 1996 when compared to the first nine months of 1995, primarily due to (i) the acquisition of Skinners' Dairy in January 1996, Garrido in July 1996 and Swiss Dairy in September 1996 which collectively reported net sales of $24.3 million for the first nine months of 1996 for periods subsequent to their acquisition and (ii) an increase in prices charged for milk to recoup increases in raw 24 milk costs in the U.S. Net sales for the Company's ice operations increased by 5.3% for the first nine months of 1996 when compared to the first nine months of 1995 due to the addition of new customers and the acquisition of ten small ice businesses during the first nine months of 1996. COST OF SALES. The Company's cost of sales margin was 73.3% for the first nine months of 1996 compared to 72.1% for the same period in 1995. Cost of sales margins for the Company's dairy operations increased primarily due to higher raw milk costs. Cost of sales margins for the Company's ice operations decreased, reflecting additional efficiencies realized from acquired business and increased volumes when compared to the same periods over last year. OPERATING EXPENSES. The Company's operating expense ratio was 19.5% for the first nine months of 1996 compared to 20.4% for the same period in 1995. Operating expense increases were experienced in both dairy and ice as the result of acquisitions. The operating expense margin decreased in the nine-month comparison because of (i) increased dairy net sales due to higher milk costs (which had little impact on operating expense levels) and (ii) the addition of Garrido and Swiss Dairy during the third quarter, which had lower operating expense margins than the other operations. OPERATING INCOME. The Company's operating income for the first nine months of 1996 was $26.4 million, an increase of 9.0% from operating income for the first nine months of 1995 of $24.2 million. The Company's operating income margin decreased to 7.2% in the first nine months of 1996 from 7.5% in the first nine months of 1995 due primarily to the effect of higher milk costs and increased dairy influence in the Company's mix of business. The Company's ice business has higher operating income margins than the Company's dairy business. OTHER (INCOME) EXPENSE. Interest expense declined to $12.8 million during the first nine months of 1996 from $15.3 million during the first nine months of 1995. The reduction in interest expense resulted from a decrease in interest rates from the repayment of certain subordinated notes in 1996 and lower average debt levels during the 1996 nine month period. The Company also incurred $8.8 million in non-recurring merger expenses on March 31, 1995 related to the Combination and $1.4 million in non-recurring merger costs during the second quarter of 1995 related to several uncompleted acquisitions and to an uncompleted debt offering. Other income rose to $3.1 million in the third quarter of 1996 primarily as a result of $3.4 million realized from the sale of tax credits associated with the Company's Puerto Rico operations. See "--Tax Benefits". EXTRAORDINARY ITEMS. 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 Companys' initial public offering. These costs included $1.3 million for the write-off of deferred financing costs and $1.8 million in prepayment penalties. During the first nine months of 1995, the Company incurred $8.5 million in extraordinary costs (net of $0.7 million tax benefit) to refinance the Company's debt in conjunction with the Combination, which included the write-off of deferred financing costs and certain prepayment penalties. NET INCOME (LOSS). The Company reported net income of $21.7 million for the first nine months of 1996 compared to a loss of $11.3 million for the first nine months of 1995. The 1996 net income improved due to a one-time gain from tax credits associated with the Company's Puerto Rico operations, resulting in a tax benefit of $7.5 million, in addition to improved operating income. See "--Tax Benefits". The 1995 loss resulted primarily from the $10.2 million in one-time non-operating charges related to the Combination and uncompleted acquisitions and to the $8.5 million extraordinary loss on early extinguishment of debt mentioned above. 25 YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED DECEMBER 31, 1994 NET SALES. The Company's net sales increased 26.2% to $430.5 million in 1995 from $341.1 million in 1994. Net sales for the Company's dairy operations increased 29.5%, or $86.6 million, primarily due to (i) the acquisition of Velda Farms in April 1994, (ii) the acquisition of Mayaguez Dairy in June 1994, and (iii) the acquisition of Flav-O-Rich in November 1994. Net sales for the Company's ice operations increased 5.9%, or $2.8 million. Unit volumes of ice increased 5.2% from the addition of new customers and from four small acquisitions made during 1995. During the pre-acquisition periods during 1994, Velda Farms, Mayaguez Dairy and Flav-O-Rich reported sales of $38.3 million, $8.5 million and $32.7 million, respectively. COST OF SALES. The cost of sales margin for the dairy business substantially exceeds that of its ice business because of higher raw material cost for dairy products compared to ice. The Company's cost of sales increased $72.2 million, resulting in an increase in the cost of sales margin to 72.6% in 1995 from 70.5% in 1994. The increase in cost of sales was due to (i) the inclusion of the operating results of Velda Farms, Flav-O-Rich and Mayaguez Dairy for the full year of 1995, (ii) an increase in dairy cost of sales of $1.3 million due to higher plastic resin costs and $4.7 million in higher milk costs, and (iii) an increase of $0.9 million in plastic bag costs in the ice business. Velda Farms, Flav-O-Rich and Mayaguez Dairy reported an aggregate of $62.7 million in cost of sales for their respective pre-acquisition periods in 1994. OPERATING EXPENSES. The Company's operating expenses increased $12.4 million in 1995, while the operating expense margin decreased to 20.3% in 1995 from 22.0% in 1994. The operating expense increase was due to the inclusion of a full year of operating expenses of Velda Farms, Flav-O-Rich and Mayaguez Dairy, which reported aggregate operating expenses of $16.3 million for their respective pre-acquisition periods in 1994. The operating expense margin declined primarily because the ice business, which has higher operating expense margins than the dairy business, became a smaller component of the Company. OPERATING INCOME. The Company's operating income increased 18.6% to $30.6 million in 1995 from $25.8 million in 1994 primarily as a result of the dairy acquisitions discussed above. The Company's operating income margin decreased from 7.6% in 1994 to 7.1% in 1995 primarily due to an increased proportion of net sales attributable to its dairy business. OTHER (INCOME) EXPENSE. Interest expense rose to $19.9 million in 1995 from $19.3 million in 1994 primarily due to the additional indebtedness incurred to finance the dairy acquisitions. The Company incurred $8.8 million in nonrecurring expenses in 1995 related to the Combination and $1.4 million related to negotiation and due diligence in connection with uncompleted acquisitions and an uncompleted debt offering. The Company incurred $1.7 million in nonrecurring costs in 1994 related to the Combination and to an uncompleted initial public offering. EXTRAORDINARY ITEMS. The Company incurred $8.5 million in extraordinary costs (net of a $0.7 million tax benefit) in 1995 to refinance the Company's debt in conjunction with the Combination, which costs included the write-off of deferred financing costs and certain prepayment penalties. The Company incurred $0.2 million in extraordinary costs in 1994 for the early retirement of debt related to its ice business. NET INCOME (LOSS). The Company reported a net loss of $10.0 million in 1995 compared to net income of $4.0 million in 1994. The primary causes of the 1995 net loss were $10.2 million in non-recurring merger and other costs and $8.5 million in extraordinary losses from the early retirement of debt. The Company incurred a $2.5 million income tax expense in 1995 on pre-tax income of $0.9 million due to the non-deductibility of certain nonrecurring merger costs. 26 YEAR ENDED DECEMBER 31, 1994 COMPARED TO YEAR ENDED DECEMBER 31, 1993 NET SALES. The Company's net sales increased to $341.1 million in 1994 from $51.7 million in 1993 due to the acquisitions of Suiza-Puerto Rico in December 1993 and Velda Farms in April 1994. The Company reported $293.4 million of dairy net sales during 1994, as compared to $6.6 million in 1993. Net sales of ice increased 5.8%, or $2.6 million. Unit volumes in the Company's ice business increased 6.6% as a result of generally warmer weather conditions and four small acquisitions completed during 1993 and 1994. COST OF SALES. The cost of sales margin for the Company's dairy business substantially exceeds that of its ice business because of the higher raw material cost for dairy products compared to ice. The Company's cost of sales increased $220.1 million, primarily due to the acquisitions of Suiza-Puerto Rico in December 1993 and Velda Farms in April 1994. The Company reported $224.3 million in dairy cost of sales in 1994, as compared to $5.3 million of dairy cost of sales in 1993. The cost of sales margin rose to 70.5% in 1994 from 39.5% in 1993, primarily due to the Company's increased dairy activity. OPERATING EXPENSES. The Company's operating expenses increased $52.3 million, while the operating expense margin decreased to 22.0% in 1994 from 43.7% in 1993. The operating expense increase was due to the inclusion of $52.0 million of operating expenses for the Suiza-Puerto Rico and Velda Farms dairy operations acquired in December 1993 and April 1994, respectively, as compared to $1.2 million of operating expenses in 1993. The operating expense margin declined primarily because the Company's ice business, which has a higher operating expense margin than the dairy business, became a smaller component of the Company. OPERATING INCOME. The Company's operating income increased to $25.8 million in 1994 from $8.7 million in 1993 primarily due to the acquisitions discussed above. The Company's operating income margin decreased from 16.8% in 1993 to 7.6% in 1994 primarily due to an increased proportion of net sales attributable to its dairy business. OTHER (INCOME) EXPENSE. Interest expense rose to $19.3 million in 1994 from $7.7 million in 1993 primarily due to the additional indebtedness incurred to finance the acquisitions discussed above. The Company also expensed $1.7 million in nonrecurring costs in 1994 related to the Combination and to an uncompleted initial public offering. NET INCOME. Net income increased to $4.0 million in 1994 from $1.4 million in 1993 primarily due to increased operating income from the dairy business. Increased interest expense resulting from the acquisitions discussed above, income taxes and an extraordinary loss on the early retirement of refinanced debt partially offset this increased operating income. SEASONALITY The Company's ice business is seasonal with peak demand for its products occurring during the second and third calendar quarters. In 1994 and 1995, the Company recorded an average of approximately 69% of its annual net sales of ice during these two quarters. While this percentage for the second and third quarters has remained relatively constant over recent years, the timing of the hottest summer weather can impact the distribution of sales between these two quarters. Because the Company's results of operations for its ice business depend significantly on sales generated during its peak season, adverse weather during this season (such as an unusually mild or rainy period) could have a disproportionate impact on the Company's results of operations for the full year. Management believes, however, that the geographic diversity of its ice business helps mitigate the potential for a significant impact from such adverse weather conditions. The Company's dairy operations are not subject to large seasonal sales fluctuations. The Company sells milk to schools, most of which are closed during the summer months. Approximately 8% of the 27 Company's dairy sales were made to schools during 1995. The Company experiences a decrease in sales to schools during months when schools close for vacation. In addition, the Company has traditionally experienced slight shortages in its milk supply in Puerto Rico during the months of September and October each year. Management estimates that these shortages reduce dairy sales by less than 2% during these months. LIQUIDITY AND CAPITAL RESOURCES As of September 30, 1996, the Company had total stockholders' equity of $89.5 million and total indebtedness of $216.0 million (including long-term debt and the current portion of long-term debt). On a pro forma as adjusted basis, after giving effect to the borrowing to fund the acquisition of Model Dairy and the application of the net proceeds from the Offering as if each such transaction had occurred on September 30, 1996, the Company would have had total stockholders' equity and total indebtedness (including long-term debt and current portion of long-term debt) of $169.9 million and $163.4 million, respectively. The Company is currently in compliance with all covenants and financial ratios contained in its debt agreements. CASH FLOW. The working capital needs of the Company historically have been met with cash flow from operations along with borrowings under revolving credit facilities. Net cash provided by operating activities was $23.0 million for 1995 and $24.9 million for 1994. Investing activities in 1995 included $10.4 million in capital expenditures, of which $6.7 million was spent on the Company's dairy operations and $3.6 million was spent on its ice operations. Investing activities also included four ice acquisitions completed during 1995 totaling $2.4 million. Financing activities for 1995 included financing incurred to effect the Combination on March 31, 1995. See "Certain Relationships and Related Transactions--Historic Relationships and Related Transactions--The Combination". Net cash provided by operating activities was $15.2 million for the first nine months of 1996 as contrasted with net cash provided by operations of $17.0 million for the first nine months of 1995. Investing activities in the first nine months of 1996 included $10.2 million in capital expenditures, of which $7.9 million was spent on the Company's dairy manufacturing and distribution facilities and $2.3 million was spent on the Company's ice facilities. In April 1996, the Company completed the IPO, which provided net proceeds to the Company of $48.6 million. Of this amount, $4.6 million was used to repay amounts outstanding under the revolving credit portion of the Senior Credit Facility, an aggregate of $26.5 million was used to repay current and long-term maturities under the term portion of the Senior Credit Facility, $15.7 million was used to repay the Company's 15% Subordinated Notes and $1.8 million was used to pay prepayment penalties related to the early extinguishment of the 15% Subordinated Notes. In July 1996, the Company purchased the stock of Garrido, a Puerto Rico processor and distributor of coffee and coffee-related products, for approximately $35.0 million, plus future performance-based payments of up to an additional $5.5 million. Funding for this purchase was provided through an amendment to its existing Senior Credit Facility. In August 1996, the Company completed the Private Placement of 625,000 shares of Common Stock for net proceeds of $9.7 million. The net proceeds from this sale were used to retire outstanding indebtedness under the revolving credit portion of the Senior Credit Facility. In September 1996, the Company purchased the assets of Swiss Dairy, a regional dairy based in Riverside, California, for approximately $54.0 million. Funding for this purchase was provided primarily by a new $90.0 million acquisition facility under the Senior Credit Facility. In December 1996, the Company acquired the assets of Model Dairy based in Reno, Nevada, for approximately $26.0 million. The purchase price for this acquisition was funded through additional borrowing under the acquisition facility of the Senior Credit Facility. In September 1996, the Company sold certain tax credits generated pursuant to provisions of the Puerto Rico Agricultural Tax Incentives Act of 1995 for net proceeds of $3.4 million, before provision for 28 income taxes. See "--Tax Benefits." Management used the net proceeds from this sale to repay amounts outstanding under the acquisition facility of the Senior Credit Facility. In September 1996, Hurricane Hortense struck Puerto Rico and caused a power outage that affected a portion of the island. As a result of the power outage, the Company's San Juan dairy manufacturing facility was shut down for approximately one week, resulting in the spoilage of inventory and a loss of sales that affected the Company's results of operations for the third quarter of 1996. The Company is pursuing a claim under its business interruption insurance policy. FUTURE CAPITAL REQUIREMENTS. The Company planned to invest approximately $14.9 million in its manufacturing facilities and distribution capabilities during 1996, of which $10.2 million was spent during the first nine months of 1996. Of this amount, the Company designated approximately $11.2 million to expand and maintain its dairy manufacturing and distribution facilities and for fleet replacement and approximately $3.7 million to maintain and increase the production capacity of its ice facilities. Management expects that cash flow from operations along with additional borrowings under existing and future credit facilities will be sufficient to meet the Company's requirements for the remainder of 1996 and for the foreseeable future. In the future, the Company intends to pursue additional acquisitions in its existing regional markets and to seek acquisition opportunities that are compatible with its core businesses. Management believes that upon completion of the Offering and the application of the net proceeds therefrom, the Company will have 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. CURRENT DEBT OBLIGATIONS. In September 1996, the Company amended its existing credit facility and entered into a supplemental credit facility with a group of lenders, including First Union National Bank of North Carolina, as agent, and The First National Bank of Chicago, as syndication agent, which provide for an aggregate senior credit facility (the "Senior Credit Facility") of $250.0 million comprised of: (i) a $130.0 million term loan; (ii) a $30.0 million revolving credit facility; and (iii) a $90.0 million acquisition facility. Under the terms of the Senior Credit Facility, the term loan is amortized over five and one-half years and the revolving credit facility expires on March 31, 2000. Any amounts drawn under the acquisition facility that are outstanding on September 30, 1998 will be amortized in fifteen quarterly installments. Amounts outstanding under the Senior Credit Facility bear interest at a rate per annum equal to one of the following rates, at the Company's option: (i) the sum of a base rate equal to the higher of the Federal Funds rate plus 50 basis points or First Union National Bank of North Carolina's prime commercial lending rate, plus a margin that varies from 0 to 75 basis points depending on the Company's ratio of defined indebtedness to EBITDA (as defined in the Senior Credit Facility); or (ii) The London Interbank Offering Rate ("LIBOR") plus a margin that varies from 75 to 200 basis points depending on the Company's ratio of defined indebtedness to EBITDA. The Company pays a commitment fee on unused amounts of the revolving facility and the acquisition facility that ranges from 20 basis points to 37.5 basis points, based on the Company's ratio of defined indebtedness to EBITDA. As of September 30, 1996, the Company had approximately $179.0 million of indebtedness outstanding under the Senior Credit Facility at a blended interest rate of 6.9% and approximately $67.0 million in unused borrowing capacity. The Company may prepay loans outstanding under the Senior Credit Facility at any time in increments of $100,000 or, in the case of a LIBOR loan, $1.0 million (subject to a $500,000 minimum or, in the case of a LIBOR loan, a $2.0 million minimum), in whole or in part, without penalty. In addition, the Senior Credit Facility requires mandatory prepayments, subject to certain limitations, from the defined net proceeds of certain casualty events, certain sales of assets, equity issuances and from excess cash flow. The Company's Senior Credit Facility requires the Company to comply with the following financial covenants at all times: (i) the leverage ratio (defined as the ratio of aggregate debt to EBITDA) will not exceed 4.25 to 1 through June 29, 1997, declining thereafter to 2.75 to 1 by June 30, 1999; (ii) the leverage 29 ratio for senior debt will not exceed 3.75 to 1 through June 29, 1997, declining thereafter to 2.25 to 1 by June 30, 1999; (iii) net worth will not be less than $63.0 million after September 10, 1996, plus 50% of net income for each quarter commencing on or after January 1, 1997, plus certain additional amounts as a result of public or private offerings of Common Stock by the Company; (iv) the fixed charges ratio will not be less than 1.05 to 1; (v) the interest coverage ratio will not be less than 2.20 to 1 through June 29, 1997, increasing thereafter to 3.75 to 1 by June 30, 2000; and (vi) the interest coverage ratio for senior debt will not be less than 3.50 to 1 through June 29, 1997, increasing thereafter to 5.00 to 1 by June 30, 2000. Without lender consent, the Senior Credit Facility also: (i) prohibits the payment of cash dividends; (ii) prohibits capital expenditures in excess of specified amounts; (iii) prohibits acquisitions exceeding $30.0 million in a single transaction and limits the use of the revolving credit facility to fund acquisitions not exceeding $1.0 million in a single transaction or $5.0 million in the aggregate for any year; (iv) limits the incurrence of additional debt; and (v) limits transactions with affiliates. The Company has pledged all the capital stock of its subsidiaries (except for 35% of the capital stock of Garrido) to secure the Senior Credit Facility. Each of the Company's subsidiaries (other than Garrido) has guaranteed, and pledged substantially all its assets and the proceeds therefrom, to secure the indebtedness under the term loans, revolving facility and/or the acquisition facility of the Senior Credit Facility. A default with respect to any loan under the Senior Credit Facility is a default with respect to all other loans under the Senior Credit Facility. The Senior Credit Facility includes various events of default customary for similar senior credit facilities, including defaults resulting from nonpayment of principal when due, nonpayment of interest and fees, material misrepresentations, default in the performance of any covenant and the expiration of any applicable grace period, bankruptcy or insolvency, certain judgments and a change in control of the Company (including certain changes in the board of directors, certain acquisitions of Common Stock by third parties or any reduction in Mr. Engles' beneficial ownership of Common Stock below 75% of the Common Stock he owned on June 1, 1996). The Company has five interest rate derivative agreements currently in place, which have been designated as hedges against the Company's variable interest rate exposure on its loans under the Senior Credit Facility. The first agreement, which has a notional amount of $14.0 million, matures in May 1997 and caps interest on LIBOR loans at 7.5%, plus the applicable LIBOR margin. The second and third agreements, each of which has a notional amount of $27.5 million and matures in June 1998, fixes the interest rate on LIBOR loans at 6.0%, plus the applicable LIBOR margin. The fourth and fifth agreements, which each have a notional amount of $25.0 million and mature in December 1997, fix the interest rate on LIBOR loans at 6.01%, plus the applicable LIBOR margin. These derivative agreements provide hedges for the term loans and the acquisition facility under the Senior Credit Facility by limiting or fixing the LIBOR loan rates on the amounts stated in the agreements until the indicated expiration dates. The original costs and premiums of these derivative agreements are being amortized on a straight-line basis as a component of interest expense. There was no material income or expense attributable to the amortization or periodic settlements of the derivative agreements in 1995 or 1996. On March 31, 1995, the Company issued certain subordinated notes (collectively, the "Subordinated Notes") to replace certain of the existing subordinated notes of each of Suiza-Puerto Rico, Velda Farms and Reddy Ice. The Subordinated Notes that remain outstanding bear interest at rates of 12% and 13.5% (12.5% on a weighted average basis), payable semiannually in March and September of each year. The Subordinated Notes require semiannual principal payments in varying amounts commencing in 2001, with the remaining unpaid principal balances due at maturity on March 31, 2004. The Subordinated Notes are junior in right of payment to the loans under the Senior Credit Facility. The Subordinated Notes place restrictions on the Company similar to, but generally less stringent than, those imposed under the Senior Credit Facility. The Company used $15.7 million of the net proceeds from the IPO to repay the Company's 15% Subordinated Notes and $1.8 million to pay prepayment penalties related to the early extinguishment of the 15% Subordinated Notes. 30 Concurrently with the consummation of the IPO and the application of the net proceeds therefrom, the Company expensed approximately $1.3 million to write off previously incurred deferred financing costs related to the indebtedness repaid with the proceeds from the IPO. This expense combined with the $1.8 million in prepayment penalties related to the 15% Subordinated Notes have been accounted for as an extraordinary loss on the early extinguishment of debt, which, net of income tax benefit, is approximately $2.2 million. In September 1996, the Company expensed approximately $571,000 for amendment fees in connection with the amendment of the Senior Credit Facility. TAX BENEFITS Management believes that the Company's effective tax rate will range from 25% to 35% for the next several years. The Company's effective tax rate is significantly affected by various tax advantages applicable to the Company's Puerto Rico based operations. Any additional acquisitions could affect this effective tax rate. The Company's Puerto Rico fruit drink and plastic bottle operations are 90% exempt from Puerto Rico income and property taxes. These operations are also 60% exempt from Puerto Rico municipal taxes. These exemptions were granted through ten-year exemption decrees issued pursuant to the Puerto Rico Tax Incentives Act. The decrees have eight and six years remaining for the fruit drink and plastic bottle entities, respectively. These types of grants are typically renewable beyond their initial ten-year terms at reduced rates of exemption. The Company's Puerto Rico dairy and coffee processing, sales and distribution operations are 90% exempt from Puerto Rico income taxes and 100% exempt from property, municipal, certain excise and other taxes and fees pursuant to the Puerto Rico Agricultural Tax Incentives Act of 1995. Dividends to the Company from Suiza-Puerto Rico will generally be subject to a ten percent "tollgate" tax in Puerto Rico. The Company currently is able to maintain the tax benefits from its dairy, fruit drink and plastic bottle operations described above through U.S. tax credits specified under Section 936 of the U.S. Internal Revenue Code of 1986, as amended. The Section 936 credit eliminates or reduces United States income taxes for U.S. corporations on certain income derived from Puerto Rico and is available to certain domestic corporations that earn 80% or more of their gross income from sources within Puerto Rico and earn 75% or more of their gross income from the active conduct of a trade or business in Puerto Rico over a three-year period (or such shorter period as may be applicable). Management believes that each of the operating subsidiaries based in Puerto Rico (except Garrido) satisfy these conditions. In the Revenue Reconciliation Act of 1993, Congress imposed certain limitations on the availability of the Section 936 credit. Pursuant to these limitations, the Section 936 credit for each eligible corporation generally cannot exceed the sum of 60% of certain wage and fringe benefit expenses and a portion of depreciation allowances for a taxable year or, if elected, a reduced credit computed without regard to these economic activity limitations. The Puerto Rico Agricultural Tax Incentives Act of 1995 provides a 50% tax credit for certain "eligible investments" in qualified agricultural businesses in Puerto Rico. These credits may be transferred to other taxpaying entities. During 1996, the Company made investments in its Puerto Rico dairy, fruit, plastics and coffee operations, all of which have been certified as qualified agricultural businesses in Puerto Rico. The Company believes that it has met the eligible investment criteria of this act related to its investment in its Puerto Rico dairy operations. During the quarter ended September 30, 1996, the Company recognized $15.75 million in tax credits related to this qualifying investment. In September 1996, the Company sold $4.0 million of these tax credits to third parties, resulting in net proceeds of $3.4 million before provision for income taxes, and recognized a deferred tax asset for the remainder of the tax credit in the amount of $11.75 million. The Company is currently investigating whether its investment in its Puerto Rico fruit, plastics and coffee operations will qualify for additional credits. If the Company qualifies for such credits, there can be no assurances as to the amounts or timing of any benefits that the Company may realize or whether there will be opportunities for further sales of these credits to third parties. 31 The Small Business Job Protection Act of 1996 (the "Job Protection Act") eliminated the Section 936 credit for corporations other than "existing credit claimants". As an existing credit claimant, the Company's Puerto Rico based dairy, fruit drink and plastic bottle operations will continue to realize the benefits of Section 936 through December 31, 2005, the year in which Section 936 will be eliminated. However, for tax years beginning after December 31, 2001 and before January 1, 2006, the total amount of the Company's Puerto Rico income that is eligible to be offset by the 936 credit cannot exceed the "base period income" of the Company as determined under the Job Protection Act. This limitation may reduce the amount of credits otherwise available to the Company. ACCOUNTING PRONOUNCEMENTS Statement of Financial Accounting Standards No. 14, "Financial Reporting for Segments of a Business Enterprise" requires disclosure related to an entity's operations in different industries, its foreign operations and export sales and its major customers. See Note 19 of Notes to Consolidated Financial Statements for information about the Company's operations in the dairy and ice businesses and in different geographic areas. During 1996, the Company adopted Statement of Financial Accounting Standards No. 121, "Accounting for Long-Lived Assets and for Long-Lived Assets to be Disposed of", which requires that long-lived assets and certain identifiable intangibles to be held and used by an entity be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Impairment is evaluated by comparing future cash flows (undiscounted and without interest charges) expected to result from use of the asset and its eventual disposition to the carrying amount of the asset. The adoption of this pronouncement had no material impact on the Company's results of operations or financial condition. Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation", encourages, but does not require, companies to recognize compensation expense for grants of stock, stock options and other equity instruments to employees based on new fair value accounting rules. Although expense recognition for employee stock based compensation is not mandatory, SFAS 123 requires companies that choose not to adopt the new fair value accounting to disclose pro forma net income and earnings per share under the new method. During 1996, the Company implemented the disclosure requirements of this pronouncement. See Note 13 of Notes to Consolidated Financial Statements for disclosures required by SFAS 123. 32 BUSINESS GENERAL Suiza Foods is a leading manufacturer and distributor of fresh milk products, refrigerated ready-to-serve fruit drinks and coffee in Puerto Rico, fresh milk and related dairy products in Florida, California and Nevada, and packaged ice in Florida and the southwestern United States. The Company conducts its dairy operations primarily through Suiza-Puerto Rico, Velda Farms, Swiss Dairy and Model Dairy and its ice operations through Reddy Ice. Each of these operating subsidiaries is a strong regional competitor with an established reputation for customer service and product quality. These subsidiaries market their products through extensive distribution networks to a diverse group of customers, including convenience stores, grocery stores, schools and institutional food service customers. The Company has grown primarily through acquisitions, having consummated 37 acquisitions since it was formed in 1988. Through these acquisitions, the Company has realized economies of scale and operating efficiencies by eliminating duplicative manufacturing, distribution, purchasing and administrative operations. BUSINESS STRATEGY The Company's strategy is to continue to expand its dairy, ice and related food businesses primarily through acquisitions of dairy, ice and related food businesses in new markets and subsequent consolidating or add-on acquisitions in its existing markets. After entering new markets through acquisitions of strong regional operators, the Company will pursue consolidating or add-on acquisitions where such opportunities exist. In addition, the Company will seek to expand its existing operations by adding new customers, extending its product lines and securing distribution rights for additional branded product lines. The Company's acquisition strategy has historically focused on established regional dairy and ice operations that have significant market share and long-standing customer relationships. Suiza-Puerto Rico, which was founded in 1939, has served the Puerto Rico market for over 50 years, and Velda Farms has served the Florida dairy market for over 40 years. Reddy Ice entered the retail ice business in the 1920s. Garrido and Swiss Dairy, which were acquired in July 1996 and September 1996, respectively, have each served their respective markets for approximately 50 years. The predecessor of Model Dairy was founded in 1906. The Company has recently implemented its consolidation strategy by acquiring and integrating dairy operations into Suiza-Puerto Rico and Velda Farms, and a number of ice companies into Reddy Ice. Management has enhanced the profitability of the acquired operations through enhanced purchasing power and by consolidating delivery routes, production, acquired brand names and human resources into the Company's larger scale operations. In June 1994, the Company acquired Mayaguez Dairy, Inc. ("Mayaguez Dairy"), formerly the third largest dairy manufacturer and distributor in Puerto Rico. Since the acquisition, the Company has consolidated Mayaguez Dairy's production into its existing Puerto Rico facilities and has eliminated the fixed costs of Mayaguez Dairy's former manufacturing facility and duplicative administrative expenses. In November 1994, the Company acquired the Florida Division of Flav-O-Rich, Inc., a subsidiary of Mid-America Dairymen, Inc. ("Flav-O-Rich"). Located in St. Petersburg, Florida, Flav-O-Rich manufactured and distributed fresh dairy products in peninsular Florida. Since the acquisition, the Company has re-allocated production among its Florida facilities, consolidated Flav-O-Rich's distribution operations with its own and reduced Flav-O-Rich's personnel expenses. In January 1996, the Company acquired Skinners' Dairy, Inc. ("Skinners") in Jacksonville, Florida. Skinners' manufactured and distributed fresh dairy products in peninsular Florida, primarily in the Jacksonville area. Since the acquisition, the Company has closed the Skinners' manufacturing plant, transferred Skinners' volume to the Company's Winter Haven facility, consolidated Skinners' distribution with its own and reduced Skinners' personnel expenses. In most cases, the Company has closed the manufacturing facilities of 33 acquired ice businesses and tranfers the acquired business's volume to one of the Company's existing ice manufacturing facilities. INDUSTRY OVERVIEW DAIRY According to published industry statistics, approximately $22.8 billion of fresh milk products were sold in 1995 at the wholesale level in the United States compared to $21.5 billion sold in 1988. Management believes that the dairy industry is mature in both the mainland United States and Puerto Rico. The dairy industry has excess capacity and has been in the process of consolidation for many years. Excess capacity has resulted from the development of more efficient manufacturing techniques, the establishment of captive dairy manufacturing operations by large grocery retailers and relatively little growth in the demand for fresh milk products. As the industry has consolidated, many smaller dairy processors have been eliminated and several large regional dairy processors have emerged. According to published industry statistics, in 1995 there were approximately 651 fresh milk processing plants in the United States, a decline of 540 from the 1,191 plants operating in 1982. The number of plants with 20 or more manufacturing employees declined from 792 to 447 over the same period. As a result of this consolidation trend, which management believes will continue, the Company has had favorable opportunities to pursue its business strategy. ICE The ice industry is highly fragmented and is regional because of the relatively high cost of transporting ice. Demand for ice is seasonal, with peak demand occurring in the second and third calendar quarters. The availability of ice during periods of high demand is important to grocery retailers and convenience stores. The ice industry has therefore emerged as a service oriented business requiring efficient manufacturing facilities and distribution systems capable of accommodating peak demand levels. Management believes that the Company is one of the largest manufacturers and distributors of ice in the United States and that it has significant market share in each of the markets in which it operates. PRODUCTS AND SERVICES The following table sets forth the total net sales of the Company's largest product lines, fresh milk products and ice, in dollars and as a percentage of consolidated total net sales in 1993, 1994 and 1995 (dollars in millions):
1993 1994 1995 ------------------------ ---------------------- ---------------------- DOLLARS PERCENT DOLLARS PERCENT DOLLARS PERCENT ----------- ----------- --------- ----------- --------- ----------- Fresh milk products................. $ 5.3 10.3% $ 227.9 66.8% $ 291.8 67.8% Ice................................. 45.1 87.3 47.7 14.0 50.5 11.7
The change in the percentage of consolidated total net sales represented by sales of fresh milk and by sales of ice from 1993 to 1995 is primarily the result of the significant dairy acquisitions in December 1993 and in April 1994. Management anticipates that ice will constitute less than 10% of consolidated total net sales on a pro forma basis for the year ended December 31, 1996. DAIRY The Company's regional dairy operations manufacture and distribute fluid milk, fruit drinks, coffee, juices, water and related products under proprietary brand names and on a private-label basis for large customers. The Company also purchases and distributes certain other products such as yogurt, packaged ice cream and ice cream novelties. 34 ICE The Company manufactures and distributes ice products for retail, commercial and institutional markets. The Company's primary product is cocktail ice in eight pound bags, which it sells principally to convenience and grocery stores. The Company also sells cocktail ice in various bag sizes ranging from three pounds to 40 pounds to restaurants, bars, stadiums, vendors and caterers. In addition, the Company sells block ice in ten and 300 pound sizes to commercial and industrial customers. SALES AND DISTRIBUTION DAIRY The Company markets and sells its dairy product line to a variety of retail and food service outlets including grocery stores, club stores, convenience stores, gas stores, schools, restaurants, hotels and cruise ships. The Company's regional dairy operations serve over 19,000 customers in its markets utilizing a fleet of approximately 1,000 delivery vehicles. Suiza-Puerto Rico is the larger of two fresh milk processors in Puerto Rico and distributes its products to approximately 8,800 grocery stores, retail outlets and schools, and also distributes third party brand name ice cream and other refrigerated and frozen foods principally to medium-sized and large grocery stores. Velda Farms serves approximately 9,500 customers throughout peninsular Florida and focuses its distribution efforts on food service accounts, convenience stores, club stores and schools. Swiss Dairy distributes fresh milk and a limited number of other products to high volume retailers in Southern California and Nevada, including grocery and club stores. Approximately 85% of Swiss Dairy's net sales during the first nine months of 1996 were made to three large retailers. Model Dairy distributes fresh milk, ice cream and related products to grocery stores, retail outlets, schools and food service accounts in northern Nevada and in certain adjoining areas of northern California. ICE The Company markets its ice products to convenience and grocery stores for retail sales and, to a lesser extent, to business and institutional customers that utilize the Company's products in their operations. The Company serves approximately 21,000 sites from 21 ice manufacturing facilities and 5 distribution centers. The Company provides ice merchandisers to a substantial majority of these sites. During 1995, the Company's largest two ice customers accounted for approximately 23% of net ice sales (2.7% of total net sales). The Company's ice distribution fleet consists of approximately 120 delivery vehicles, the majority of which are owned. In order to meet peak demand, the Company expands its fleet during the summer season with short-term leased vehicles. RAW MATERIALS AND SUPPLY DAIRY The Company purchases milk, its primary raw material, from farmers and farm co-operatives under contractual arrangements. Certain aspects of the Company's milk supply arrangements are regulated by governmental authorities. See "--Government Regulation--Milk". Fluid milk is generally readily available. The Company has traditionally experienced slight shortages in its milk supply in Puerto Rico during the months of September and October each year. Management estimates that these shortages, when they occur, reduce its Puerto Rico dairy sales by less than 2% during these months. Other raw materials, such as coffee, juice concentrates, sweeteners, and packaging supplies are generally available from numerous suppliers and the Company is not dependent on any single supplier for these materials. Certain of these raw materials are purchased under long term contracts in order to obtain lower costs. 35 ICE Except with respect to its water supply and electricity, the Company is not dependent upon any single supplier for materials used in the manufacturing and packaging of its ice products. The Company has not experienced any material supply problems in the past with respect to its ice business. COMPETITION The Company's businesses are highly competitive. The Company has a number of competitors in each of its major product, service and geographic markets, and many of these competitors are larger, more established and better capitalized than the Company. DAIRY PUERTO RICO The Company owns and operates two of the three fresh milk manufacturing facilities in Puerto Rico. The Company's competitor, Vaqueria Tres Monjitas ("Tres Monjitas"), operates a single manufacturing plant. The Company manufactures and distributes approximately 66% of the fresh milk sold in Puerto Rico while Tres Monjitas, which is well capitalized and operates an efficient manufacturing plant, manufactures and distributes approximately 34%. The Company competes primarily on the basis of service, price, brand name recognition and quality. Because of the Company's size, the quality of its manufacturing facilities, the efficiency of its largely non-union work force, the strength of its distribution network and the strength of its brand name, management believes the Company can continue to compete effectively in the Puerto Rico dairy business. The Company does not presently face competition in the Puerto Rico fresh dairy business from outside Puerto Rico, nor does it expect to in the foreseeable future. The Company's fresh dairy business does, however, compete with shelf stable milk products, which are manufactured by one manufacturer in Puerto Rico and also imported from the mainland United States and Canada. Management believes that shelf stable milk competes with fresh milk primarily where the consumer lacks adequate refrigeration or in small quantity uses, such as coffee creamers. Management further believes that sales of shelf stable milk are approximately one-tenth as large as sales of fresh milk and that sales of shelf stable products have shown moderate volume increases in recent years. In the refrigerated ready-to-serve fruit drink segment, Tres Monjitas is the Company's largest direct competitor located in Puerto Rico. In addition to competition from other local manufacturers and distributors of refrigerated ready-to-serve fruit drinks, the Company competes against numerous other beverage companies, including large United States-based manufacturers and marketers of carbonated and non-carbonated beverages. These competitors are generally larger and better capitalized than the Company. Although management believes that competition will continue to grow from fruit drink and other beverage companies, management anticipates that the Company will be able to continue to compete effectively in the fruit drink segment because of the strength and efficiency of its distribution network, its recognizable brands and the established presence of its products in the dairy case. UNITED STATES The Company's competitors in its U.S. dairy processing and distribution business include other large, independent dairy processing companies and dairy processors owned by grocery chains, many of which are larger and better capitalized than the Company. Due to the cost of transporting fresh milk, competition in the fluid dairy business tends to be regional rather than national, with flexibility of service, price, breadth of product line and quality as the primary competitive factors. In addition to competition from other dairy manufacturers, the Company's Florida and Nevada dairy operations compete with food service companies and other distributors of dairy products, many of which 36 are large, well-capitalized, national companies. Although competition in the dairy and food distribution business is intense, management believes that the Company's focus on customer service and tailored product lines and the strength and efficiency of its distribution system allow it to compete effectively. In its Florida and Nevada ice cream distribution businesses, the Company competes with large integrated dairy and ice cream manufacturing companies and independent distributors of national ice cream brands. Because the Company offers brands manufactured by third parties as well as its own brand of ice cream products, the Company competes effectively in these markets by offering convenience stores and other small retailers a broad line of ice cream products and frozen novelties. By carrying a broad line of popular national and other brands, the Company generates profitable sales volumes from retail sites that single line or other more limited distributors may find uneconomical to service. ICE The Company competes primarily with smaller independent regional ice manufacturers and machines that manufacture and package ice at store locations. In addition to this direct competition, certain convenience and grocery retailers operate commercial ice plants for internal use. During peak season, however, the Company frequently services retailers that manufacture their own ice. To further compete in this segment, the Company also offers ice machines that manufacture and package ice at customer locations. Competition in the ice business is based primarily on service, price and quality. In order to successfully compete, an ice manufacturer must be able to substantially increase production and distribution on a seasonal basis while maintaining cost efficiency. Management believes that the size and quality of the Company's ice facilities, its high regional market share and its route density allow it to compete effectively. Because only one ice manufacturer typically serves an individual retail site, the Company's ice products generally do not face competition at the retail level. Several major grocery chains within the Company's ice markets manufacture ice at their own ice plants. While the Company does not supply these and other vertically integrated grocery retailers/ manufacturers, such companies generally manufacture ice products for internal use only and do not compete for third party accounts. However, a significant increase in the utilization of captive commercial ice plants or on-site manufacturing by retailers currently serviced by the Company could have an adverse effect on the Company's operations. 37 FACILITIES The Company conducts its manufacturing and distribution operations from the following facilities:
MANUFACTURING & REGION DISTRIBUTION DISTRIBUTION ONLY -------------- ---------------------- -------------------- DAIRY: California Riverside Florida Miami Daytona Beach St. Petersburg Fort Myers Winterhaven Jacksonville Naples Orlando Ocala Riviera Beach Sarasota Tampa Vero Beach Nevada Reno Puerto Rico Aguadilla Adjuntas (coffee) Caguas (coffee) Arecibo Lares (coffee) Ponce San Juan San Juan (coffee) ICE: Arizona Phoenix Tucson Yuma Florida Auburndale Crescent St. Petersburg City Davie New Smyrna Beach Opa Locka Tampa Nevada Las Vegas New Mexico Albuquerque Texas Austin Bryan Dallas Galveston Fort Worth Livingston Houston (2) Port Neches Killeen Pilot Point Rockwall Splendora Waco Utah Salt Lake City
The Company maintains two administrative offices located in leased premises in Dallas, including its executive offices located at 3811 Turtle Creek Boulevard, Suite 1300, Dallas, Texas 75219. TRADEMARKS The Company has developed or acquired a number of trademarks and brand names, of which eight are registered, for use in its dairy and ice businesses, and holds licenses for the use of several additional registered trademarks from third parties. Although the Company's use of its trademarks has created goodwill and results in product differentiation, management does not believe that the loss of any of the 38 Company's trademarks would have a material adverse effect on its operations. The Company also holds a patent on an ice machine that manufactures and packages ice at store locations. GOVERNMENT REGULATION PUBLIC HEALTH As a manufacturer and distributor of food products, the Company is subject to the Federal Food, Drug and Cosmetic Act and regulations promulgated thereunder by the Food and Drug Administration ("FDA"). This comprehensive regulatory scheme governs the manufacture (including composition and ingredients), labeling, packaging and safety of food. The FDA regulates manufacturing practices for foods through its current good manufacturing practices regulations, specifies the standards of identity for certain foods, including many of the products sold by the Company, and prescribes the format and content of certain information required to appear on food product labels. In addition, the FDA enforces the Public Health Service Act and regulations issued thereunder, which authorize regulatory activity necessary to prevent the introduction, transmission or spread of communicable diseases. These regulations require, for example, pasteurization of milk and milk products. The Company and its products are also subject to state and local regulation through such measures as the licensing of dairy manufacturing facilities, enforcement by state and local health agencies of state standards for the Company's products, inspection of the Company's facilities and regulation of the Company's trade practices in connection with the sale of dairy products. The Company utilizes quality control laboratories to test milk and other ingredients and finished products. Product quality and freshness are essential to the successful retail distribution of dairy and refrigerated ready-to-serve fruit drinks. To monitor product quality at its facilities, the Company maintains quality control programs to test products during various processing stages. Management believes that the Company's dairy and ice facilities and manufacturing practices comply with applicable government regulations. EMPLOYEE SAFETY REGULATIONS The Company is subject to certain health and safety regulations including regulations issued pursuant to the Occupational Safety and Health Act. These regulations require the Company to comply with certain manufacturing, health and safety standards to protect its employees from accidents. ENVIRONMENTAL REGULATIONS The Company is subject to certain federal, state and local environmental regulations. Certain of the Company's dairy facilities discharge biodegradable wastewater into municipal waste treatment facilities in excess of levels permitted under local regulations. Because of this, Velda Farms pays wastewater surcharges of approximately $150,000 annually to municipal water treatment authorities. These authorities may, however, require Velda Farms to comply with such regulations and construct pre-treatment facilities or take other action to reduce effluent discharge in the future. The Company maintains above-ground or underground petroleum storage tanks at many of its facilities. These tanks are periodically inspected to determine compliance with applicable regulations. The Company may be required to make expenditures from time to time in order to maintain compliance of these tanks. The federal government has banned the production of a refrigerant used by the Company in its ice merchandisers. The continued use of this refrigerant, however, is permitted and there are sufficient quantities of the refrigerant available to meet the Company's needs for the next several years. The Company is taking steps to facilitate its conversion to new, reformulated refrigerants. Management does not anticipate that conversion costs will be material. 39 Management does not expect environmental compliance to have a material impact on the Company's capital expenditures, earnings or competitive position in the foreseeable future. U.S. MILK INDUSTRY REGULATION The average price paid to producers for Grade A milk in most of the mainland United States is monitored by Federal Milk Marketing Orders. In California and Nevada, milk prices are monitored by state agencies. In the federal milk markets and the California and Nevada milk markets, raw milk prices are currently supported by the federal government through standing offers to buy storable forms of dairy products such as cheese, nonfat dry milk powder and butter. Congress has recently passed legislation to phase out federal support prices by December 31, 1999. PUERTO RICO MILK INDUSTRY REGULATION The milk industry in Puerto Rico is regulated under Puerto Rico law Number 34 of June 11, 1957. This statute establishes a production ceiling for milk production by dairy farmers in order to manage the supply and demand of milk products and to stabilize prices. In addition, the Puerto Rico statute provides that the government will establish maximum prices for the dairy farm, processor and retail levels and that such prices be reviewed at least once a year. The Office for the Regulation of the Milk Industry, an agency of the Puerto Rico Department of Agriculture, is charged with: (i) ensuring the quality of milk products; (ii) setting the price of milk at the dairy farm level and maximum prices at the processor and retail levels; and (iii) administering and managing licenses and other matters within the industry. As part of its review and price setting process, this agency examines the financial condition of each of the participants in the industry as well as overall economic trends within the industry. As a general rule, pricing at each of the industry levels reflects an attempt to provide a fair return to processors and farmers and maintain prices acceptable to consumers. The latest price increase for dairy manufacturers in Puerto Rico was in 1994 and, prior to that, in 1990. EMPLOYEES As of November 30, 1996, the Company (including Model Dairy) employed 2,474 employees in the following categories:
NON-UNION UNION TOTAL ----------- ----------- --------- Dairy Puerto Rico.................................................... 958 69 1,027 Florida........................................................ 729 -- 729 California..................................................... 12 121 133 Nevada......................................................... 46 116 162 Ice.............................................................. 413 -- 413 Corporate........................................................ 10 -- 10 ----- --- --------- Total........................................................ 2,168 306 2,474 ----- --- --------- ----- --- ---------
The Puerto Rico union employees are subject to two collective bargaining agreements that expire in July and October 1997. The California and Nevada union employees are subject to collective bargaining agreements that expire in August 1999 and June 2000, respectively. LEGAL PROCEEDINGS The Company is from time to time a 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 operations. 40 MANAGEMENT EXECUTIVE OFFICERS AND DIRECTORS The following table sets forth the names, ages and positions of the executive officers and directors of the Company. Their respective backgrounds are described following the table.
NAME AGE POSITION - --------------------------------- --- -------------------------------------------------------------- Gregg L. Engles (1).............. 39 Chairman of the Board and Chief Executive Officer Cletes O. Beshears (1)(2)........ 70 President and Director Hector M. Nevares (1)............ 46 Vice Chairman of the Board William P. Brick................. 45 Executive Vice President and Chief Operating Officer Gayle O. Beshears (2)............ 68 Executive Vice President and Director Tracy L. Noll.................... 48 Vice President, Chief Financial Officer and Secretary John W. Madden................... 31 Vice President Robert Bartholomew (3)........... 50 Director Stephen L. Green................. 45 Director Robert L. Kaminski............... 46 Director P. Eugene Pender (3)(4)(5)....... 65 Director Robert Piccinini (3)(4)(5)....... 54 Director
- ------------------------ (1) Member of the Executive Committee of the Board of Directors. (2) Cletes O. Beshears and Gayle O. Beshears are brothers. (3) Member of the Audit Committee of the Board of Directors. (4) Member of the Compensation Committee of the Board of Directors. (5) Member of the Stock Option Committee of the Board of Directors. GREGG L. ENGLES. Mr. Engles joined the Company in October 1994 as Chairman of the Board and Chief Executive Officer. Mr. Engles has served as Chairman of the Board and Chief Executive Officer of Reddy Ice since May 1988, Chairman of the Board of Suiza-Puerto Rico since December 1993, and Chairman of the Board of Velda Farms since April 1994. In addition, Mr. Engles has served as President of Kaminski Engles Capital Corporation ("KECC") since May 1988 and as President of Engles Management Corporation ("EMC") since February 1993. KECC and EMC are investment banking and consulting firms. Mr. Engles was also President of Engles Capital Corporation, an investment banking and consulting firm, from May 1989 to October 1992. Mr. Engles is a director and member of the compensation committee of Columbus Realty Trust, a public real estate investment trust. CLETES O. BESHEARS. Mr. C.O. Beshears joined the Company in October 1994 as director, President and Chief Operating Officer. Mr. C.O. Beshears served as President and Chief Executive Officer of Velda Farms from April 1994 to April 1995. From March 1988 to April 1994, Mr. C.O. Beshears provided consulting services to companies pursuing acquisitions of dairy companies. From 1980 to 1988, Mr. C.O. Beshears served as Vice President of The Southland Corporation and Chief Operating Officer of its Dairy Group. From 1965 to 1980, Mr. C.O. Beshears served as Division Manager of several of The Southland Corporation's regional dairies, including Velda Farms. Mr. Beshears relinquished the title of Chief Operating Officer in October 1996. HECTOR M. NEVARES. Mr. Nevares joined the Company as a director in October 1994. Mr. Nevares served as President of Suiza-Puerto Rico from June 1983 until September 1996, having served in additional executive capacities at Suiza-Puerto Rico since June 1974. In September 1996, Mr. Nevares became Vice 41 Chairman of the Board. Mr. Nevares is a director of First Federal Savings Bank, a public company, in San Juan, Puerto Rico. WILLIAM P. BRICK. Mr. Brick joined the Company in July 1996 as Executive Vice President and became Chief Operating Officer of the Company in October 1996. Prior to joining the Company, Mr. Brick served as Vice President--Sales and Marketing for the Metropoulos Management Group from February 1996 until June 1996. From August 1995 until January 1996, Mr. Brick served as Vice President--Sales and Marketing for Ultra Products. From April 1995 until August 1995, Mr. Brick owned and operated a private golf course in Ontario, Canada. Mr. Brick served in various marketing capacities, including Vice President of Sales, for The Morningstar Group, Inc. from October 1991 until December 1994. From 1988 until August 1991, Mr. Brick served in various marketing capacities for Palm Dairies Inc. in Calgary, Alberta. GAYLE O. BESHEARS. Mr. G.O. Beshears joined the Company as a director in October 1994. In September 1996, Mr. G.O. Beshears became an Executive Vice President of the Company. Mr. G.O. Beshears served as President of Reddy Ice from May 1988 until September 1996. From January 1985 to May 1988, Mr. G.O. Beshears served as Division Manager of the Reddy Ice division of The Southland Corporation. Prior to January 1985, Mr. G.O. Beshears served in a number of capacities for The Southland Corporation's Dairy Group, including Division Manager of Midwest Farms Dairy. TRACY L. NOLL. Mr. Noll joined the Company in October 1994 as Vice President, Chief Financial Officer and Secretary. Prior to joining the Company, Mr. Noll served as Controller of Foxmeyer Corporation from June 1994 until September 1994. From March 1988 until June 1994, Mr. Noll served as Vice President and Chief Financial Officer of The Morningstar Group Inc., the parent company of Velda Farms until its acquisition by the Company in April 1994. JOHN W. MADDEN. Mr. Madden joined the Company in October 1994 as Vice President and Treasurer. From November 1990 to October 1994, Mr. Madden was employed by and associated during various periods with KECC, EMC and Engles Capital Corporation. From July 1988 to July 1990, Mr. Madden was employed as an analyst with Bankers Trust Company. ROBERT BARTHOLOMEW. Mr. Bartholomew was elected to the Company's Board of Directors in October 1994. Since June 1990, Mr. Bartholomew has been a principal of Pacific Mezzanine Investors, L.P. ("PMI") and an officer of Pacific Mezzanine Associates, Inc., the general partner of PMI and an indirect, wholly owned subsidiary of Pacific Mutual Life Insurance Company, a principal stockholder of the Company. STEPHEN L. GREEN. Mr. Green was elected to the Company's Board of Directors in October 1994. Mr. Green has served as a General Partner of Canaan Capital Partners, L.P., the general partner of Canaan Capital Limited Partnership and Canaan Capital Offshore Limited Partnership, C.V., principal stockholders of the Company, since November 1991. From October 1985 until November 1991, Mr. Green served as Managing Director of GE Capital Corporation's Corporate Finance Group. Mr. Green is a director of Chartwell Re Corporation and CapMAC Holdings Inc., each of which is a public company. ROBERT L. KAMINSKI. Mr. Kaminski was elected to the Company's Board of Directors in November 1994. Mr. Kaminski has served as President of Robert Kaminski Interests, Inc. since 1984 and has been a principal in KECC since 1988. Robert Kaminski Interests, Inc. and KECC are both investment banking and consulting firms. P. EUGENE PENDER. Mr. Pender was elected to the Company's Board of Directors in October 1994. Prior to his retirement in December 1987, Mr. Pender served as Vice President and Controller of The Southland Corporation. Thereafter, Mr. Pender served as a consultant to The Southland Corporation until March 1991. ROBERT PICCININI. Mr. Piccinini was elected to the Company's Board of Directors in November 1995. Mr. Piccinini has served as Chairman of the Board and Chief Executive Officer of Save Mart Supermarkets 42 since 1985. Prior to 1985, Mr. Piccinini served in a number of capacities at Save Mart, including President from 1981 to 1985 and Vice President from 1971 to 1981. The Company's Certificate of Incorporation divides the Board of Directors into three classes, with regular three-year staggered terms. C.O. Beshears, Hector M. Nevares, and Robert Bartholomew will serve until the annual meeting of stockholders in 1997, Gregg L. Engles, P. Eugene Pender and Robert Piccinini will serve until the annual meeting of stockholders in 1998, and G.O. Beshears, Robert L. Kaminski and Stephen Green will serve until the annual meeting of stockholders in 1999. Upon completion of the Combination, the Company entered into employment agreements with Messrs. Engles and C.O. Beshears and agreed to nominate and support their election as members of the Board of Directors during the term of their employment with the Company. Additionally, the Company agreed to nominate and support Mr. Engles' election as Chairman of the Board. The executive officers of the Company are appointed by and serve at the discretion of the Board of Directors. DIRECTOR COMPENSATION The Company pays its unaffiliated outside directors an annual fee of $15,000, payable quarterly, plus a fee of $1,000 for each board meeting attended. (As referred to herein, an unaffiliated outside director is a director who is not an employee or officer of the Company or any of its subsidiaries, nor a beneficial owner of 345,000 or more shares of Common Stock, nor an employee or affiliate of a beneficial owner of 345,000 or more shares of Common Stock; the Company's current unaffiliated outside directors are Messrs. Pender and Piccinini). The Company also pays its unaffiliated outside directors $1,000 annually for serving on a board committee and an additional $2,000 annually for chairing any such committee. The Company reimburses its directors for expenses incurred in attending board and committee meetings. Directors are eligible to receive stock options and restricted stock awards pursuant to the Suiza Foods Corporation 1995 Stock Option and Restricted Stock Plan (the "Option and Restricted Stock Plan"). On March 31, 1995, Mr. Pender received nonqualified stock options to purchase 3,450 shares of Common Stock at $10.51 per share; on January 1, 1996 Mr. Piccinini received nonqualified stock options to purchase 3,450 shares of Common Stock at $12.32 per share; and on June 30, 1996, Messrs. Pender and Piccinini each received non-qualified stock options to purchase 3,450 shares of Common Stock at $17.25 per share. The Option and Restricted Stock Plan provides that each unaffiliated outside director will automatically receive nonqualified stock options to purchase 3,450 shares of Common Stock on the date such person becomes a director of the Company and on each June 30 thereafter that such person continues to serve as a director. These options vest immediately and are exercisable at fair market value on the date of grant, as determined by the Board of Directors. Directors receive stock options and restricted stock awards as described in "--Executive Compensation--Option and Restricted Stock Plan". COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION Compensation decisions concerning the executive officers of the Company for 1995 were made by the Board of Directors. Messrs. Engles, C.O. Beshears and Nevares participated in deliberations but abstained from voting with respect to their own employment agreements. Pursuant to the Combination: (i) certain directors and stockholders affiliated with certain directors received shares of Common Stock or options to acquire Common Stock in amounts based on their percentage ownership interest (or right to acquire such ownership interest) in Suiza-Puerto Rico, Velda Farms and Reddy Ice; (ii) stockholders of the Company, including certain directors, received certain registration rights with respect to their shares of Common Stock; (iii) Messrs. Engles and C.O. Beshears received Common Stock in exchange for certain profit interests granted as compensation for services related to the acquisition of Suiza-Puerto Rico and Velda Farms; (iv) Mr. Nevares was paid the redemption value of certain preferred stock of Suiza-Puerto Rico; and (v) Mr. Kaminski entered into a new noncompetition and consulting agreement with the Company and received a one-time fee in connection with the termination of a preexisting consulting agreement. During 43 the first three months of 1995, Messrs. Engles and Kaminski were paid an aggregate of $150,000 by the Company and EMC (an affiliate of Mr. Engles) was paid an aggregate of $87,500 by the Company under management consulting agreements that were terminated at the time of the Combination. In addition, at the time of the Combination, Reddy Ice sold its minority equity interest in a plastic bag manufacturer to an entity formed by the stockholders of Reddy Ice, including Messrs. Engles and Kaminski. Pacific Mutual Life Insurance Company and an affiliate (which are affiliated with one current director of the Company and with a director who served through November 1995) held $5.0 million of the Company's Subordinated Notes at September 30, 1996. For a more detailed description of each of these transactions and relationships, see "Certain Relationships and Related Transactions--Historic Relationships and Related Transactions". Velda Farms purchases a portion of its requirements for frozen concentrated orange juice from an entity in which Messrs. Engles, Kaminski and Madden collectively own a minority limited partner interest. Purchases by Velda Farms from this supplier totaled approximately $1.3 million in 1995 and $1.6 million through November 1996. An affiliate of Robert Piccinini purchases fresh milk from Model Dairy. In addition, Model Dairy purchases certain supplies and products used in its business, primarily plastic bottles and cottage cheese, from this entity. Sales of fresh milk by Model Dairy to this entity totaled $15.3 million and $16.0 million, respectively, for Model Dairy's 1995 and 1996 fiscal years. Purchases of supplies and products by Model Dairy from this entity totaled $1.3 million and $1.4 million, respectively, for Model Dairy's 1995 and 1996 fiscal years. For a more detailed description of these transactions and this relationship, see "Certain Relationships and Related Transactions--Current Relationships and Related Transactions". 44 EXECUTIVE COMPENSATION SUMMARY COMPENSATION TABLE Prior to the completion of the Combination in March 1995, the executive officers of the Company did not receive any compensation from the Company, although certain of these officers received compensation from Suiza-Puerto Rico, Velda Farms or Reddy Ice. Messrs. Engles, C.O. Beshears, G.O. Beshears and Noll now receive compensation from Suiza Management Corporation, a wholly owned subsidiary of the Company, in accordance with their respective employment agreements. Mr. Nevares, who was formerly the President of Suiza-Puerto Rico, receives compensation from Suiza-Puerto Rico. The following table sets forth the annual cash compensation paid or accrued by the Company to its Chief Executive Officer and its other four most highly compensated executive officers for the years ended December 31, 1996 and 1995.
ANNUAL COMPENSATION ---------------------------------------- LONG-TERM OTHER ANNUAL COMPENSATION ALL OTHER NAME AND PRINCIPAL COMPENSATION SHARES UNDERLYING COMPENSATION POSITION YEAR SALARY ($) BONUS ($) ($)(1) OPTIONS (#) ($)(2) - ------------------------- ------------ ---------- ------------- ------------- ----------------- ------------- Gregg L. Engles.......... 1996 $ 420,000 $ -- (4) -- 13,800 -- Chairman of the Board 1995(3) 299,467 180,000 -- 138,000 -- and Chief Executive Officer Cletes O. Beshears....... 1996 367,500 -- (4) -- 20,700 -- President 1995 291,509 175,300 -- 138,000 -- Hector M. Nevares........ 1996 294,000 -- (4) -- 5,175 -- Vice Chairman of the 1995 280,000 92,400 -- 34,500 -- Board Gayle O. Beshears........ 1996 241,817 -- (4) -- 5,175 $ 400 Executive Vice 1995 216,711 95,172 -- 34,500 9,019 President Tracy L. Noll............ 1996 170,000 -- (4) -- 6,900 -- Vice President and 1995 160,000 43,200 -- 77,625 -- Chief Financial Officer
- ------------------------ (1) In each case, the aggregate value of perquisites and other personal benefits does not exceed the lesser of $50,000 or 10% of the total annual salary and bonus reported for the named executive officer. (2) The amounts shown in the "All Other Compensation" column consist of contributions by the Company to a 401(k) plan on behalf of the named executive. (3) Reflects only payments for the nine months following completion of the Combination prior to which no compensation was paid by any of the Combined Entities. (4) Bonuses for 1996, which will be based on financial performance for the year ended December 31, 1996, have not yet been determined. Management anticipates that bonuses will be at least 50% of base salary for the named executive officers. OPTION AND RESTRICTED STOCK PLAN In March 1995, the Board of Directors of the Company adopted the Option and Restricted Stock Plan, which provides for grants of incentive and nonqualified stock options and awards of restricted stock to directors and key employees of the Company and its subsidiaries. The Option and Restricted Stock Plan 45 permits grants and awards covering up to 1,069,500 shares of Common Stock, provided that no more than 379,500 shares may be awarded as restricted stock. Any shares subject to unexercised portions of stock options that terminate or subject to restricted stock awards that fail to vest and are forfeited may be reissued under new stock option grants or restricted stock awards. At December 31, 1996, options to purchase an aggregate of 888,978 shares of Common Stock and 6,250 shares of restricted stock were outstanding under the Option and Restricted Stock Plan and an additional 174,272 shares were available for future grants. In January 1997, the Stock Option Committee approved the grant of additional options to purchase an aggregate of 92,000 shares, reducing the number of shares available under the Option and Restricted Stock Plan to 82,272 shares. The Company also has options to purchase an aggregate of 577,760 shares outstanding under the Exchange Stock Option and Restricted Stock Plan (the "Exchange Plan"). See "Certain Relationships and Related Transactions--Historic Relationships and Related Transactions-- The Combination--Stock Options". The Option and Restricted Stock Plan is administered by a committee of disinterested directors (the "Stock Option Committee"), which has the authority to determine who will receive stock options or restricted stock, the number of shares of Common Stock subject to such stock options or restricted stock awards, and the terms of such stock options or restricted stock awards, including the exercise price of the stock options and any vesting periods. In accordance with the Option and Restricted Stock Plan, the exercise price of stock options will not be less than the fair market value of the Common Stock on the date of grant, as determined by the Stock Option Committee, and in the case of an incentive stock option granted to an employee owning 10% of the Common Stock of the Company on the date of grant, not less than 110% of the fair market value. The Option and Restricted Stock Plan permits the exercise of stock options by delivery of shares of Common Stock owned by the optionee in lieu of or in addition to cash or by financing made available by the Company. The Option and Restricted Stock Plan also permits the Stock Option Committee to grant stock options with terms that provide for acceleration of vesting upon a change in control. During 1996, options to purchase an aggregate of 314,153 shares of Common Stock at fair market value as of the date of grant were granted under the Option and Restricted Stock Plan. The following table provides information regarding stock options granted during 1996 to the executive officers of the Company named in the Summary Compensation Table. OPTION GRANTS DURING 1996
INDIVIDUAL GRANTS POTENTIAL REALIZABLE ----------------------------------------------------------- VALUE AT ASSUMED % OF TOTAL ANNUAL RATES OF STOCK NUMBER OF OPTIONS PRICE APPRECIATION FOR SECURITIES GRANTED TO EXERCISE OPTION TERM (1) UNDERLYING OPTIONS EMPLOYEES PRICE EXPIRATION ---------------------- NAME GRANTED (#) DURING 1996 ($/SHARE) DATE 5% ($) 10% ($) - ------------------------------------------ ------------------ ------------- ----------- ----------- ---------- ---------- Gregg L. Engles........................... 13,800 4.4% $ 12.32 1/01/2006 $ 106,922 $ 270,962 Cletes O. Beshears........................ 20,700 6.6 12.32 1/01/2006 160,384 406,442 Hector M. Nevares......................... 5,175 1.6 12.32 1/01/2006 40,096 101,611 Gayle O. Beshears......................... 5,175 1.6 12.32 1/01/2006 40,096 101,611 Tracy L. Noll............................. 6,900 2.2 12.32 1/01/2006 53,461 135,481
- ------------------------ (1) The 5% and 10% assumed annual rates of compounded stock price appreciation are mandated by the rules of the Securities and Exchange Commission. The actual value, if any, an executive officer may realize will depend on the excess of the stock price over the exercise price on the date the option is exercised. There is no assurance the value realized by an executive officer will be at or near the assumed 5% or 10% levels. 46 The following table provides information regarding the exercise of stock options during 1996 and the year-end option values. AGGREGATED OPTION EXERCISES AND YEAR-END OPTION VALUES
NUMBER OF SECURITIES VALUE OF UNEXERCISED UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS OPTIONS AT YEAR END (#) AT YEAR END ($)(1) SHARES ACQUIRED VALUE -------------------------- --------------------------- NAME ON EXERCISE (#) REALIZED ($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE - --------------------------------------- --------------- ------------- ----------- ------------- ------------ ------------- Gregg L. Engles........................ -- -- 46,000 105,800 $ 448,040 $ 1,005,514 Cletes O. Beshears..................... -- -- 49,532 117,999 495,581 1,131,556 Hector M. Nevares...................... -- -- 11,500 28,175 112,010 265,058 Gayle O. Beshears...................... -- -- 293,145 28,175 5,807,632 265,058 Tracy L. Noll.......................... -- -- 25,875 58,650 252,023 558,762
- ------------------------ (1) The value of in-the-money options at year-end is based on the fair market value of $20.25 per share of Common Stock, which was the closing price for the Company's Common Stock on December 31, 1996, as reported on the Nasdaq National Market. EMPLOYMENT AGREEMENTS AND OTHER ARRANGEMENTS The Company entered into employment agreements with Messrs. Engles and C.O. Beshears in March 1995, pursuant to which Mr. Engles serves as Chairman of the Board and Chief Executive Officer of the Company and Mr. C.O. Beshears serves as President of the Company. The employment agreements provide that Messrs. Engles and C.O. Beshears will receive annual base salaries of $400,000 and $350,000, respectively, as well as incentive cash bonuses. If certain minimum levels of net income are met, Mr. Engles and Mr. C.O. Beshears may earn an incentive cash bonus of up to 100% and 90%, respectively, of their respective annual base salaries. Based on the Company's net income during 1995, Mr. Engles received an incentive cash bonus of $180,000 and Mr. C.O. Beshears received an incentive cash bonus of $141,750. The Board of Directors is required to review cash compensation arrangements for Messrs. Engles and C.O. Beshears annually and provide for such increases as may be warranted in accordance with the Company's policies. The employment agreements of Messrs. Engles and C.O. Beshears had initial terms of three years, but have been extended until March 31, 1999. These agreements may be terminated by the Company prior to completion of the term upon the death or disability of the employee, "with cause", or in the event the employee materially breaches the agreement. As defined in the employment agreements, the term "with cause" means any termination of the employee for: (i) commission of an act of fraud or embezzlement against the Company; (ii) conviction of a felony or a crime involving moral turpitude; (iii) gross negligence or willful misconduct in performing the employee's duties; or (iv) breach of fiduciary duty in connection with the employee's employment. Messrs. Engles' and C.O. Beshears' employment agreements also contain two-year non-compete provisions, which apply if the respective employee is terminated with cause or in the event the employee materially breaches the agreement. Hector M. Nevares serves as Vice Chairman of the Board and receives an annual base salary of $280,000 and an annual bonus equal to 33% of his base salary, pursuant to an employment agreement entered into in December 1993 and amended in March 1995. Mr. Nevares may earn up to an additional 27% (or a combined maximum of up to 60%) of his annual base salary if certain minimum levels of operating income are met at Suiza-Puerto Rico. Based on operating income at Suiza-Puerto Rico during 1995, Mr. Nevares received an incentive cash bonus of $92,400 for 1995. The Company is required to review Mr. Nevares' cash compensation arrangements annually and provide for such increases as may be warranted in accordance with the Company's policies. The agreement had an initial term expiring on December 15, 1996, but has been extended until March 31, 1999. This Agreement is terminable by the 47 Company prior to the completion of its term only upon the death or disability of Mr. Nevares or "for cause". As defined in Mr. Nevares' employment agreement, the term "for cause" means any termination of the employee for: (i) misconduct or action damaging or detrimental to the Company; (ii) engaging in conduct that would constitute a crime; (iii) the use, possession, sale, transportation, distribution or being under the influence of a controlled substance other than as prescribed by a licensed physician; or (iv) misappropriation of the Company's funds or conviction of a crime involving a felony. Mr. Nevares' employment agreement contains a five-year non-compete provision, which applies upon termination of his employment agreement for any reason. Mr. G.O. Beshears has agreed to a three-year noncompetition covenant, which applies if he is terminated for any reason. LIMITATION OF LIABILITY AND INDEMNIFICATION The Company's Certificate of Incorporation provides, consistent with the provisions of the Delaware General Corporation Law, that no director of the Company will be personally liable to the Company or any of its stockholders for monetary damages arising from the director's breach of fiduciary duty as a director. This does not apply, however, with respect to any action for unlawful payments of dividends, stock purchases or redemptions, nor does it apply if the director: (i) has breached his duty of loyalty to the Company and its stockholders; (ii) does not act in good faith or, in failing to act, does not act in good faith; (iii) has acted in a manner involving intentional misconduct or a knowing violation of law or, in failing to act, has acted in a manner involving intentional misconduct or a knowing violation of law; or (iv) has derived an improper personal benefit. The provisions of the Certificate of Incorporation eliminating liability of directors for monetary damages do not affect the standard of conduct to which directors must adhere, nor do such provisions affect the availability of equitable relief. In addition, such limitations on personal liability do not affect the availability of monetary damages under causes of action based on federal law. The Company's Certificate of Incorporation provides for indemnification of its officers and directors to the fullest extent permitted by the Delaware General Corporation Law. In addition, the Company intends to purchase and maintain insurance on behalf of its directors and executive officers insuring them against any liability asserted against them in their capacities as directors or executive officers or arising out of such status. 48 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS CURRENT RELATIONSHIPS AND RELATED TRANSACTIONS As of September 30, 1996, John Hancock and Pacific Mutual held $31.0 million and $5.0 million, respectively, of the Company's outstanding Subordinated Notes. Upon completion of the Offering (assuming that the net proceeds of the Offering are as set forth under "Use of Proceeds"), John Hancock will be paid approximately $34.7 million (including approximately $3.7 million in prepayment penalties) and Pacific Mutual will be paid approximately $5.6 million (including approximately $0.6 million in prepayment penalties) in repayment of the entire amount of their outstanding Subordinated Notes, together with accrued interest on the principal amounts repaid. In April 1996, John Hancock and Pacific Mutual were paid approximately $14.0 million (including approximately $1.4 million in prepayment penalties) and approximately $3.5 million (including approximately $0.4 million in prepayment penalties), respectively, from the net proceeds from the IPO in repayment of the 15% Subordinated Notes, together with accrued interest on the principal amounts repaid. The Company purchases plastic bags for use in its ice business from a plastic bag manufacturer in which certain affiliates of the Company own a minority equity interest. The seller principally manufactures bread bags. The Company's purchases from this supplier totaled approximately $346,000 through November 30, 1996. Management believes that the terms of the purchase orders are at least as favorable to the Company as could have been obtained in an arms'-length transaction with an unaffiliated third party. See "--Historic Relationships and Related Transactions--Other Historic Relationships and Related Transactions". Velda Farms purchases a portion of its requirements for frozen concentrated orange juice from an entity in which Messrs. Engles, Kaminski and Madden collectively own a minority limited partner interest. Velda Farms has no written agreement with this supplier, and all purchases are based on purchase orders. Management of Velda Farms monitors the market price for frozen concentrated orange juice by maintaining contact with a number of potential suppliers and purchases the product from the supplier offering the lowest price, inclusive of delivery and other service charges. Management believes that the terms of the purchase orders are at least as favorable to the Company as could be obtained in an arms'-length transaction with an unaffiliated third party. Purchases by Velda Farms from this supplier totaled approximately $457,000 in 1994, $1.3 million in 1995 and $1.6 million through November 1996. An affiliate of Robert Piccinini purchases fresh milk from Model Dairy. Sales of fresh milk by Model Dairy to this entity totaled approximately $15.0 million, $15.3 million and $16.0 million, respectively, for Model Dairy's 1994, 1995 and 1996 fiscal years. This entity is Model Dairy's largest customer. In addition, Model Dairy purchases certain supplies and products used in its business, primarily plastic bottles and cottage cheese, from this entity. Purchases of these items by Model Dairy from this entity totaled approximately $1.3 million, $1.3 million and $1.4 million, respectively, for Model Dairy's 1994, 1995 and 1996 fiscal years. In connection with the Combination, the Company granted certain registration rights to the Predecessor Owners (defined below) and issued new options in exchange for options previously granted by the Combined Entities. The Company will have ongoing obligations with respect to these registration rights and stock options. See "--Historic Relationships and Related Transactions--The Combination--Registration Rights" and "--Historic Relationships and Related Transactions--The Combination--Stock Options". HISTORIC RELATIONSHIPS AND RELATED TRANSACTIONS ACQUISITIONS In December 1993, Suiza Holdings, L.P. (the "Suiza Partnership") (one of the Combined Entities) purchased Suiza-Puerto Rico from the Nevares family. The total purchase price was $99.4 million, which included: (i) a cash payment of $85.9 million to the Nevares family; (ii) the payment of certain liabilities to third parties at closing; (iii) preferred stock of Suiza-Puerto Rico with an aggregate liquidation preference 49 of $5.0 million, which was issued to Mr. Nevares and his sister; and (iv) preferred stock of Suiza-Puerto Rico with an aggregate annual dividend of $50,000, which was issued to Mr. Nevares. The cash portion of the purchase price and payments made to third parties at closing were financed with the proceeds from the following: (i) the issuance by the Suiza Partnership and its general partner of $15.0 million of equity to certain investors (collectively, the "Predecessor Owners"), including John Hancock, Pacific Mutual, Canaan Capital Limited Partnership and an affiliate ("Canaan") and Messrs. Engles, C.O. Beshears, Nevares and Madden, each of whom is a director and/or executive officer of the Company; (ii) the issuance by the Suiza Partnership of $25.0 million in principal amount of subordinated indebtedness (including lender warrants), to John Hancock and Pacific Mutual; and (iii) a portion of the proceeds from an aggregate $72.0 million senior term loan and revolving line of credit provided by The Chase Manhattan Bank, N.A. to Suiza-Puerto Rico. The $15.0 million of equity issued by the Suiza Partnership and its general partner to the Predecessor Owners included limited partnership interests of the Suiza Partnership and shares of common stock of its general partner. The $15.0 million purchase price paid by the Predecessor Owners for this equity was determined through arms'-length negotiations among the Predecessor Owners. In April 1994, Velda Holdings, L.P. (the "Velda Partnership") (one of the Combined Entities) and its general partner purchased Velda Farms from The Morningstar Group Inc. The total purchase price was $54.8 million, which included: (i) a cash payment of $48.4 million; and (ii) preferred stock of Velda Farms with a liquidation preference of $3.0 million. The cash portion of the purchase price was financed with the proceeds from the following: (i) the issuance by the Velda Partnership, its general partner and one of its subsidiaries of $6.2 million of equity to the Predecessor Owners, including John Hancock, Pacific Mutual, Canaan, and Messrs. Engles, C.O. Beshears, Nevares and Madden; (ii) the issuance by the Velda Partnership of $14.0 million in principal amount of subordinated indebtedness (including lender warrants) to John Hancock and Pacific Mutual; and (iii) a portion of the proceeds from an aggregate $34.5 million senior term loan and revolving line of credit provided by a group of banks to Velda Farms. The $6.2 million of equity issued by the Velda Partnership, its general partner and one of its subsidiaries included limited partnership interests of the Velda Partnership, shares of common stock of its general partner and shares of common stock of a subsidiary of the Velda Partnership. The $6.2 million purchase price for this equity was determined through arms'-length negotiations among the Predecessor Owners. THE COMBINATION As a result of the Combination, the Company became a holding company for Suiza-Puerto Rico, Velda Farms and Reddy Ice. The Combined Entities were corporations and partnerships originally formed to acquire Suiza-Puerto Rico, Velda Farms and Reddy Ice. The Combined Entities and Predecessor Owners entered into an agreement (the "Combination Agreement") pursuant to which certain mergers, exchanges and related transactions were consummated simultaneously. Pursuant to the Combination Agreement, all of the Predecessor Owner's equity interests in the Combined Entities were converted into shares of Common Stock, or options to acquire shares of Common Stock, of the Company. The exchange ratios for conversion or exchange in the Combination of the pre-existing equity interests in the Combined Entities were determined through negotiations among the Combined Entities and the Predecessor Owners as to the relative values of Suiza-Puerto Rico, Velda Farms and Reddy Ice. These relative values, expressed as a percentage of the value of the Company, are as follows: Suiza-Puerto Rico............................................ 51.02% Velda Farms.................................................. 13.74% Reddy Ice.................................................... 35.24%
Based on these relative values, the Predecessor Owners of Suiza-Puerto Rico received shares of Common Stock and options to acquire shares of Common Stock in the Combination in an aggregate amount equal to 51.02% of the 6,900,002 shares of Common Stock outstanding or subject to options immediately after 50 the Combination (excluding options granted under the Option and Restricted Stock Plan). The Predecessor Owners of Velda Farms and Reddy Ice likewise received shares of Common Stock and options to acquire shares of Common Stock in an aggregate amount equal to 13.74% and 35.24%, respectively, of such 6,900,002 shares. Each of the Predecessor Owners received shares or options to acquire shares of Common Stock in an amount equal to such Predecessor Owner's percentage ownership interest or right to acquire such ownership interest on a fully diluted basis in Suiza-Puerto Rico, Velda Farms or Reddy Ice, multiplied by the aggregate number of shares of Common Stock and shares of Common Stock subject to options to be received by the Predecessor Owners in Suiza-Puerto Rico, Velda Farms and Reddy Ice, as applicable. The options held in Suiza-Puerto Rico, Velda Farms or Reddy Ice were exchanged for options to acquire the same number of shares of Common Stock as the holders of the predecessor options would have acquired if they had exercised such options prior to the Combination and then exchanged the equity acquired upon such exercise for shares of Common Stock in the Combination. Each of the new options has substantially the same terms as the predecessor option for which it was exchanged, with the same aggregate exercise price and vesting schedule. See "--Stock Options". As discussed in more detail in the following table, certain executive officers, directors and 5% stockholders of the Company received certain benefits in connection with the Combination. COMMON STOCK RECEIVED IN THE COMBINATION The following table reflects, for each of the executive officers, directors and 5% stockholders of the Company, for all such officers, directors and 5% stockholders as a group and for all the Predecessor Owners as a group: (i) the number of shares of Common Stock received (of record and beneficially) in the Combination for his or its equity interests in the Combined Entities; (ii) the aggregate cost to such person or group of the shares of Common Stock received in the Combination (which is the aggregate amount of the investment by such person or group in the Combined Entities); and (iii) the resulting average cost per share of the shares of Common Stock received in the Combination by each such person or group for his or its equity interests in the Combined Entities:
SHARES OF COMMON STOCK AGGREGATE COST RECEIVED IN OF SHARES OF THE COMMON STOCK AVERAGE COST NAME COMBINATION RECEIVED PER SHARE - -------------------------------------------------------------------- -------------- -------------- ------------- Gregg L. Engles..................................................... 1,352,169(1) $ 932,500 $ 0.69 Cletes O. Beshears.................................................. 50,489 220,000 4.36 Hector M. Nevares................................................... 317,767 2,100,000 6.61 Gayle O. Beshears................................................... 16,370 45,000 2.75 William P. Brick.................................................... -- -- -- Tracy L. Noll....................................................... -- -- -- John W. Madden...................................................... 51,495(2) 71,000 1.38 Robert L. Kaminski.................................................. 865,367(1) 52,000 0.06 P. Eugene Pender.................................................... -- -- -- Robert Bartholomew.................................................. -- (3) -- -- Robert Piccinini.................................................... -- -- -- Stephen L. Green.................................................... 847,379(4) 5,600,000 6.61 John Hancock........................................................ 1,542,418(5) 9,008,543 5.84 Pacific Mutual...................................................... 968,745(6) 6,281,363 6.48 Canaan.............................................................. 847,379(7) 5,600,000 6.61 All executive officers, directors and 5% stockholders as a group.... 6,012,199 24,310,406 4.05 All Predecessor Owners as a group................................... 6,313,479 25,592,520 4.05
- ------------------------ (1) Includes 11,757 shares that are held subject to an option in favor of Mr. Madden. 51 (2) Excludes 11,757 shares held by each of Messrs. Engles and Kaminski subject to options in favor of Mr. Madden. (3) Excludes 879,941 shares held by Pacific Mutual Life Insurance Company and 88,804 shares held by PM Group Life Insurance Co., each of which exercises independent voting and investment power with respect to such shares. Mr. Bartholomew, who is an officer of Pacific Mezzanine Associates, Inc., an indirect, wholly owned subsidiary of Pacific Mutual Life Insurance Company, disclaims beneficial ownership of such shares. (4) Consists solely of shares owned by Canaan Capital Limited Partnership and Canaan Capital Offshore Limited Partnership, C.V. Mr. Green may be deemed to share beneficial ownership of such shares since he serves as a general partner of Canaan Capital Partners, L.P., the general partner of such entities (the "Canaan General Partner"), and shares voting and investment power with the other general partners of the Canaan General Partner. (5) Includes 1,515,977 shares held by John Hancock Mutual Life Insurance Company and 26,441 shares held by John Hancock Life Insurance Company of America, an indirect, wholly owned subsidiary of John Hancock Mutual Life Insurance Company. (6) Includes 879,941 shares held by Pacific Mutual Life Insurance Company and 88,804 shares held by PM Group Life Insurance Co., an indirect, wholly owned subsidiary of Pacific Mutual Life Insurance Company, each of which exercises independent voting and investment power with respect to such shares. (7) Includes 90,520 shares held by Canaan Capital Limited Partnership and 756,859 shares held by Canaan Capital Offshore Limited Partnership, C.V. The Canaan General Partner exercises sole voting and investment power with respect to such shares. REGISTRATION RIGHTS Pursuant to the Combination Agreement, the Predecessor Owners received three demand registration rights and incidental (or piggyback) registration rights with respect to their shares of Common Stock, subject to certain limitations. See "Shares Eligible for Future Sale". STOCK OPTIONS In connection with the Combination, the Company's Board of Directors adopted the Exchange Plan. Pursuant to the Exchange Plan, outstanding stock options granted by certain of the Combined Entities (the "Predecessor Options"), including Predecessor Options granted to certain executive officers and directors of the Company, were converted into options to acquire an aggregate of 586,523 shares of Common Stock of the Company, representing the number of shares of Common Stock that the holders of such Predecessor Options would have acquired if they had exercised such Predecessor Options prior to the Combination and then exchanged the equity acquired upon such exercise for shares of Common Stock in the Combination. Each option granted under the Exchange Plan has substantially the same terms as the Predecessor Option for which it was exchanged, with the same aggregate exercise price and vesting schedule. See "--Stock Options". Pursuant to the Exchange Plan, the Company granted Messrs. C.O. Beshears and G.O. Beshears options to purchase 8,831 shares and 281,645 shares of Common Stock at a per share exercise price of $6.79 per share and $0.03 per share, respectively. The options granted to Mr. C.O. Beshears are subject to certain vesting requirements. In addition, under the Exchange Plan, restricted stock in OC Holdings, Inc. (one of the Combined Entities) previously granted to certain executive officers, directors and employees of the Company was converted into a total of 35,321 shares of Common Stock of the Company, which shares are subject to certain restrictions on transfer. Messrs. Engles and C.O. Beshears received 9,566 shares and 11,774 shares, respectively, of restricted stock in the Company in exchange for the restricted stock in OC Holdings, Inc. owned by each of them. All shares of restricted stock awarded under the Exchange Plan vested immediately on grant. No additional options will be granted and no additional shares of restricted stock will be awarded under the Exchange Plan. 52 PROFITS INTERESTS At the time of the Combination, Engles Dairy Holdings, Inc. ("EDH"), which was partially owned by Messrs. Engles and C.O. Beshears, received shares of Common Stock in exchange for EDH's profits interests in the Suiza Partnership and its general partner and the Velda Partnership and its general partner. These profits interests were granted to EDH as compensation for the services of EMC (Engles Management Corporation, an affiliate of Mr. Engles), in identifying, structuring and negotiating the Suiza-Puerto Rico and Velda Farms acquisitions. EDH's profits interests in such entities were fixed by mutual agreement of the partners of the Suiza Partnership and the Velda Partnership. Following the Combination, EDH was dissolved and the shares of Common Stock it received in the Combination were distributed to its stockholders. As a result, Messrs. Engles, C.O. Beshears and Madden received 359,364 shares, 17,530 shares and 40,902 shares of Common Stock, respectively. REPAYMENT OF DEBT At the time of the Combination, along with $1.0 million in prepayment penalties, the Company repaid $16.5 million in principal amount of senior indebtedness and $500,000 in principal amount of junior subordinated indebtedness owed to John Hancock by Reddy Ice, including interest accrued thereon through the date of the Combination. In addition, Suiza Foods assumed the obligations of the Combined Entities to John Hancock and Pacific Mutual with respect to an aggregate of approximately $50.7 million in principal amount of subordinated notes pursuant to a restated note purchase agreement. REDEMPTION OF PREFERRED STOCK Pursuant to the Combination, the Company paid an aggregate of approximately $5.0 million to redeem the shares of preferred stock issued to Hector M. Nevares and his sister and additional shares of preferred stock issued to Mr. Nevares by certain operating subsidiaries of Suiza-Puerto Rico in December 1993. The Company also paid accrued dividends on these shares of preferred stock. INVESTMENT BANKING AND CONSULTING FEES EMC and Cletes O. Beshears received transaction fees in 1994 of $1.0 million and $150,000, respectively, in connection with the acquisition of Velda Farms. EMC is an investment banking and consulting firm owned by Gregg L. Engles. EMC paid an aggregate of $225,000 from the transaction fees it received in the Suiza-Puerto Rico and Velda Farms acquisitions to John W. Madden for his services in connection with such acquisitions. EMC received an additional fee of $50,000 in November 1994 in connection with the acquisition of Flav-O-Rich by Velda Farms. Since the Combination, the Company has not paid any investment banking or consulting fees to EMC, and the Company does not intend to pay any such fees in the future. STRATEGIC SERVICES AND MANAGEMENT CONSULTING AGREEMENTS At the time of the acquisition of Suiza-Puerto Rico in 1993, EMC entered into a Strategic Services Agreement with Suiza-Puerto Rico pursuant to which Suiza-Puerto Rico agreed to pay EMC an annual consulting fee of $200,000 for an initial term of three years ending in December 1996. During the year ended December 31, 1994 and during the three months ended March 31, 1995, Suiza-Puerto Rico paid approximately $200,000 and $50,000, respectively, under this agreement. Pursuant to this agreement, EMC provided management consulting services relating to strategic and financial matters, including consultation regarding strategic acquisitions, business strategies and financial planning. EMC entered into a similar agreement with Velda Farms pursuant to which Velda Farms agreed to pay EMC an annual consulting fee of $150,000 for an initial term of three years ending in April 1997. During the period from April 10, 1994 to December 31, 1994 and during the three months ended March 31, 1995, Velda Farms paid approximately $107,500 and $37,500 under this agreement. As part of the Combination, EMC terminated these agreements. 53 In connection with the merger of Reddy Ice with an affiliate and the related debt financing in September 1992, Reddy Ice entered into management consulting agreements with Gregg L. Engles and Robert L. Kaminski pursuant to which Reddy Ice paid each of them a consulting fee of $25,000 per month for an initial term of ten years, ending in September 2002. Under the agreements, Messrs. Engles and Kaminski provided management consulting services similar to those provided by EMC to Suiza-Puerto Rico and Velda Farms. Reddy Ice paid Messrs. Engles and Kaminski an aggregate of $600,000 during the year ended December 31, 1994 and paid an aggregate of $150,000 during the three-month period ended March 31, 1995 under the agreements, which were terminated at the time of the Combination. In connection with the Combination, Mr. Kaminski entered into a new noncompetition and consulting agreement with the Company pursuant to which he received $12,500 per month in exchange for consulting services, including assisting the Company in identifying acquisition or merger candidates engaged in the business of manufacturing, distributing or selling fragmentary or block ice and in negotiating and completing such acquisitions or mergers. This agreement terminated upon completion of the IPO. The Company paid Mr. Kaminski a one-time fee of $500,000 in connection with the termination of his preexisting management consulting agreement and the execution of his new noncompetition and consulting agreement. OTHER HISTORIC RELATIONSHIPS AND RELATED TRANSACTIONS In connection with the formation in June 1994 of a bread bag manufacturer in which Reddy Ice was a minority investor, KECC received a transaction fee of $200,000 and a profits interest in the manufacturer. In addition, Reddy Ice issued $1.5 million in aggregate principal amount of junior subordinated pay-in- kind notes and lender warrants to purchase shares of common stock of Reddy Ice to John Hancock. The proceeds from these notes were used primarily to finance Reddy Ice's investment in the bread bag manufacturer. The warrants entitled John Hancock to purchase an aggregate of 34,127 shares of Reddy Ice common stock for an exercise price of $20.00 per share, subject to adjustment. John Hancock exercised these Reddy Ice lender warrants immediately prior to the Combination and exchanged the shares of Reddy Ice common stock acquired upon such exercise for 80,243 shares of the Company's Common Stock. Contemporaneously with the completion of the Combination, Reddy Ice sold its interest in the bread bag manufacturer to an entity formed by the equity owners of Reddy Ice at the same price Reddy Ice paid for such interest, including expenses related to the investment. In connection with this sale, this entity assumed the $1.7 million in junior subordinated pay-in-kind notes previously issued to John Hancock. John Hancock and Messrs. Engles, Kaminski, G.O. Beshears and Madden (as former equity owners of Reddy Ice) now beneficially own minority interests in the bag manufacturer. See "--Current Relationships and Related Transactions". Reddy Ice paid approximately $54,000 and $64,000 in life insurance premiums for Gregg L. Engles and Robert L. Kaminski, respectively, during 1994. Pursuant to a buy-sell provision contained in a shareholders' agreement, Reddy Ice, as beneficiary under the policies, was required to utilize the proceeds of such policies to purchase Mr. Engles' and Mr. Kaminski's equity interests in Reddy Ice from their estates. As part of the Combination, this agreement was terminated. FUTURE TRANSACTIONS Although the Company has no present intention to do so, it may in the future enter into other transactions and agreements incident to its business with its directors, officers, principal stockholders and other affiliates. The Company has no current procedure to resolve conflicts of interest arising from affiliated transactions; however, the Company intends for all such transactions and agreements to be on terms no less favorable to the Company than those obtainable from unaffiliated third parties on an arms'-length basis. In addition, all such transactions will be approved by a majority of the Company's disinterested directors. 54 PRINCIPAL AND SELLING STOCKHOLDERS The following table sets forth the beneficial ownership of the Company's Common Stock by: (i) each stockholder known by the Company to beneficially own more than 5% of the Company's outstanding Common Stock; (ii) each director of the Company; (iii) each executive officer named in the Summary Compensation Table; (iv) all executive officers and directors as a group; and (v) each Selling Stockholder as of December 31, 1996 and as adjusted to reflect the sale of shares in the Offering.
SHARES BENEFICIALLY OWNED SHARES BENEFICIALLY OWNED AFTER THE OFFERING BEFORE THE OFFERING NUMBER OF --------------------------- ---------------------------- SHARES TO NUMBER OF NUMBER OF BE SOLD IN SHARES SHARES PERCENT OF THE OF COMMON PERCENT OF NAME OF BENEFICIAL OWNER OF COMMON STOCK CLASS (1) OFFERING STOCK CLASS - ------------------------------------------------ --------------- ----------- ---------- -------------- ----------- Gregg L. Engles................................. 1,406,544(2) 13.0% 37,610 1,368,934 9.2% Cletes O. Beshears.............................. 170,171(3) 1.6 14,982 155,189 1.0 Hector M. Nevares............................... 342,492(4) 3.2 -- 342,492 2.3 Tracy L. Noll................................... 60,963(5) * -- 60,963 * Gayle O. Beshears............................... 322,740(6) 2.9 -- 322,740 2.1 Robert L. Kaminski.............................. 684,518(7) 6.4 37,610 646,908 4.4 P. Eugene Pender................................ 7,400(8) * -- 7,400 * Robert Bartholomew.............................. -- (9) * -- -- * Robert Piccinini................................ 6,900(10) * -- 6,900 * Stephen L. Green................................ 847,379(11) 7.9 507,801 339,578 2.3 John Hancock.................................... 1,723,267(12) 16.0 -- 1,723,267 11.7 Pacific Mutual.................................. 968,745(13) 9.0 -- 968,745 6.6 Canaan.......................................... 847,379(14) 7.9 507,801 339,578 2.3 T. Rowe Price Small-Cap Value Fund.............. 625,000(15) 5.8 -- 625,000 4.2 All executive officers and directors as a group (12 persons).................................. 3,855,386 33.9 598,003 3,257,383 21.2 OTHER SELLING STOCKHOLDERS: - ------------------------------------------------ BP Puerto Rico, Inc. (16)....................... 137,699 1.3 82,518 55,181 * John W. Madden (17)............................. 123,884 1.1 14,982 108,902 * William L. Farrell.............................. 5,296 * 3,174 2,122 * Niels Larsen.................................... 5,318 * 882 4,436 * William Aaronson................................ 1,619 * 441 1,178 *
- ------------------------ * Less than 1% (1) Percentages are based on the total number of shares outstanding, plus the total number of outstanding options that are exercisable as of March 31, 1997. (2) Includes 96,600 shares subject to options granted under the Option and Restricted Stock Plan that are exercisable within 60 days and 11,757 shares subject to an option granted by Mr. Engles in favor of John W. Madden. Mr. Engles' address is 3811 Turtle Creek Blvd., Suite 1300, Dallas, Texas 75219. (3) Includes 102,432 shares subject to options granted under the Option and Restricted Stock Plan and the Exchange Plan that are exercisable within 60 days. (4) Includes 69,264 shares held by Neva Holdings, Inc., a company wholly owned by Mr. Nevares and his family, and 24,725 shares subject to options granted under the Option and Restricted Stock Plan that are exercisable within 60 days. (5) Includes 54,050 shares subject to options granted under the Option and Restricted Stock Plan that are exercisable within 60 days. 55 (6) Includes 306,370 shares subject to options granted under the Option and Restricted Stock Plan and the Exchange Plan that are exercisable within 60 days. (7) Includes 11,757 shares subject to an option granted by Mr. Kaminski in favor of John W. Madden. Mr. Kaminski's address is 3811 Turtle Creek Blvd., Suite 1300, Dallas, Texas 75219. (8) Includes 6,900 shares subject to options granted under the Option and Restricted Stock Plan that are exercisable within 60 days. (9) Excludes 879,941 shares held by Pacific Mutual Life Insurance Company and 88,804 shares held by PM Group Life Insurance Company, each of which exercises independent voting and investment power with respect to such shares. Mr. Bartholomew, who is an officer of Pacific Mezzanine Associates, Inc., an indirect, wholly owned subsidiary of Pacific Mutual Life Insurance Company, disclaims beneficial ownership of such shares. (10) Consists of shares subject to options granted under the Option and Restricted Stock Plan that are exercisable within 60 days. (11) Consists solely of shares owned by Canaan Capital Limited Partnership and Canaan Capital Offshore Limited Partnership, C.V. Mr. Green may be deemed to share beneficial ownership of such shares since he serves as a general partner of the Canaan General Partner and shares voting and investment power with the other general partners of the Canaan General Partner. Mr. Green's address is c/o Canaan Capital, 105 Rowayton Avenue, Rowayton, Connecticut 06853. (12) Includes 1,694,447 shares held by John Hancock Mutual Life Insurance Company and 28,820 shares held by John Hancock Life Insurance Company of America, an indirect, wholly owned subsidiary of John Hancock Mutual Life Insurance Company. John Hancock's address is T-50th Floor, 200 Clarendon Street, Boston, Massachusetts 02117. (13) Includes 879,941 shares held by Pacific Mutual Life Insurance Company and 88,804 shares held by PM Group Life Insurance Co., an indirect, wholly owned subsidiary of Pacific Mutual Life Insurance Company, each of which exercises independent voting and investment power with respect to such shares. Pacific Mutual's address is 700 Newport Center Drive, Newport Beach, California 92660. (14) Includes 90,520 shares held by Canaan Capital Limited Partnership and 756,859 shares held by Canaan Capital Offshore Limited Partnership, C.V. The Canaan General Partner exercises sole voting and investment power with respect to such shares. Canaan's address is 105 Rowayton Avenue, Rowayton, Connecticut 06853. (15) T. Rowe Price Small-Cap Value Fund's address is 100 East Pratt Street, Baltimore, Maryland 21202. (16) BP Puerto Rico, Inc. is an affiliate of Richard L. Bloch, who served as a director of the Company from March 1995 until July 1995. (17) Includes 36,800 shares subject to options granted under the Option and Restricted Stock Plan and an aggregate of 23,514 shares subject to options granted to Mr. Madden by Messrs. Engles and Kaminski. Mr. Madden has served as a Vice President of the Company since October 1994. See "Management-- Executive Officers and Directors". DESCRIPTION OF CAPITAL STOCK The authorized capital stock of the Company consists of 21,000,000 shares, of which 20,000,000 shares are Common Stock, par value $.01 per share, and 1,000,000 shares are Preferred Stock, par value $.01 per share. As of the date of this Prospectus, there were 10,741,729 shares of Common Stock issued and outstanding (including 6,250 shares of restricted stock awarded under the Option and Restricted Stock Plan) and 577,760 shares reserved for issuance upon exercise of options granted pursuant to the Exchange Plan. In addition, 1,061,250 shares of Common Stock are reserved and remain available for issuance upon 56 exercise of options or as grants of restricted stock under the Option and Restricted Stock Plan, of which options to purchase a total of 888,978 shares of Common Stock were outstanding as of December 31, 1996. No shares of Preferred Stock are currently outstanding. COMMON STOCK All outstanding shares of Common Stock are, and the shares of Common Stock offered by the Company hereunder will be when issued, duly authorized, validly issued, fully paid and nonassessable. Subject to the rights of the holders of any outstanding shares of preferred stock and any restrictions that may be imposed by any lender to the Company, holders of Common Stock are entitled to receive such dividends, if any, as may be declared by the Board of Directors out of legally available funds. In the event of the liquidation, dissolution or winding up of the Company, holders of Common Stock are entitled to share equally and ratably, based on the number of shares held, in the assets, if any, remaining after payment of all of the Company's debts and liabilities and the liquidation preference of any outstanding preferred stock. Holders of Common Stock are entitled to one vote per share for each share held of record on any matter submitted to the holders of Common Stock for a vote. Because holders of Common Stock do not have cumulative voting rights, the holders of a majority of the shares of Common Stock represented at a meeting can elect all the directors. The shares of Common Stock are neither redeemable nor convertible, and the holders thereof have no preemptive rights to subscribe for or purchase any additional shares of capital stock issued by the Company. PREFERRED STOCK The Company is authorized to issue shares of Preferred Stock in one or more series, and to designate the rights, preferences, limitations and restrictions of and upon shares of each series, including voting, redemption and conversion rights. The Board of Directors also may designate dividend rights and preferences in liquidation. It is not possible to state the actual effect of the authorization and issuance of additional series of Preferred Stock upon the rights of holders of Common Stock until the Board of Directors determines the specific terms, rights and preferences of a series of Preferred Stock. Such effects, however, might include, among other things, granting the holders of Preferred Stock priority over the holders of Common Stock with respect to the payment of dividends; diluting the voting power of the Common Stock; or granting the holders of Preferred Stock preference with respect to liquidation rights. In addition, under certain circumstances, the issuance of Preferred Stock may render more difficult or tend to discourage a merger, tender offer or proxy contest, the assumption of control by a holder of a large block of the Company's securities or the removal of incumbent management. SECTION 203 OF THE DELAWARE GENERAL CORPORATION LAW The Company is subject to Section 203 of the Delaware General Corporation Law ("Section 203"), which prohibits certain persons ("Interested Stockholders") from engaging in a "business combination" with a Delaware corporation for three years following the date such persons become Interested Stockholders. Interested Stockholders generally include: (i) persons who are the beneficial owners of 15% or more of the outstanding voting stock of the corporation; and (ii) persons who are affiliates or associates of the corporation and who hold 15% or more of the corporation's outstanding voting stock at any time within three years before the date on which such person's status as an Interested Stockholder is determined. Subject to certain exceptions, a "business combination" includes, among other things: (i) mergers or consolidations; (ii) the sale, lease, exchange, mortgage, pledge, transfer or other disposition of assets having an aggregate market value equal to 10% or more of either the aggregate market value of all assets of the corporation determined on a consolidated basis or the aggregate market value of all the outstanding stock of the corporation; (iii) transactions that result in the issuance or transfer by the corporation of any stock of the corporation to the Interested Stockholder, except pursuant to a transaction that effects a pro 57 rata distribution to all stockholders of the corporation; (iv) any transaction involving the corporation that has the effect of increasing the proportionate share of the stock of any class or series, or securities convertible into the stock of any class or series, of the corporation that is owned directly or indirectly by the Interested Stockholder; or (v) any receipt by the Interested Stockholder of the benefit (except proportionately as a stockholder) of any loans, advances, guarantees, pledges or other financial benefits provided by or through the corporation. Section 203 does not apply to a business combination if: (i) before a person becomes an Interested Stockholder, the board of directors of the corporation approves the transaction in which the Interested Stockholder became an Interested Stockholder or approved the business combination; (ii) upon consummation of the transaction that resulted in the Interested Stockholder becoming an Interested Stockholder, the Interested Stockholder owned at least 85% of the voting stock of the corporation outstanding at the time the transaction commences (other than certain excluded shares); or (iii) following a transaction in which the person became an Interested Stockholder, the business combination is (a) approved by the board of directors of the corporation, and (b) authorized at a regular or special meeting of stockholders (and not by written consent) by the affirmative vote of the holders of at least two-thirds of the outstanding voting stock of the corporation not owned by the Interested Stockholder. CERTAIN PROVISIONS RELATING TO CHANGES IN CONTROL The Company's Certificate of Incorporation and Bylaws contain several provisions that could have the effect of delaying, deterring or preventing the acquisition of control of the Company by means of tender offer, open market purchases, a proxy contest or otherwise. Set forth below is a description of those provisions. CLASSIFIED BOARD OF DIRECTORS The Certificate of Incorporation divides the Board of Directors into three classes, with one class having an initial term of one year, one class having an initial term of two years and one class having an initial term of three years. Each class is as nearly equal in number as possible. At each annual meeting of stockholders, commencing with the annual meeting of stockholders held in 1995, directors will be elected to succeed those directors whose terms have expired, and each newly elected director will serve for a three-year term. The Company believes that a classified Board of Directors will help assure the continuity and stability of the Company's Board of Directors and the Company's business strategies and policies. The classified board provision could increase the likelihood that, in the event of a takeover of the Company, incumbent directors will retain their positions. In addition, the classified board provision will help ensure that the Company's board of directors, if confronted with an unsolicited proposal from a third party that has acquired a block of the voting stock of the Company, will have sufficient time to review the proposal and appropriate alternatives and to seek the best available result for all stockholders. NUMBER OF DIRECTORS; REMOVAL; FILLING VACANCIES The Bylaws provide that the exact number of directors shall be fixed from time to time by the Board of Directors. With a classified board, directors may only be removed "for cause" and only by the affirmative vote of a majority of the stockholders entitled to vote. As defined in the Company's Bylaws, "for cause" means: (i) commission of an act of fraud or embezzlement against the Company; (ii) conviction of a felony or a crime involving moral turpitude; (iii) gross negligence or willful misconduct in performing the director's duties to the Company or its stockholders; or (iv) breach of fiduciary duty owed to the Company. The Bylaws also provide that vacant directorships may be filled by the Board of Directors. 58 SPECIAL MEETINGS OF STOCKHOLDERS The Company's Bylaws provide that special meetings of stockholders may be called only by the Chief Executive Officer, and shall be called by the Chief Executive Officer or the Secretary at the written request of a majority of the Board of Directors. Special meetings may not be called by the stockholders. ADVANCE NOTICE REQUIREMENTS FOR STOCKHOLDER PROPOSALS AND DIRECTOR NOMINATIONS The Company's Bylaws establish advance notice procedures with regard to stockholder proposals and the nomination, other than by or at the direction of the Board of Directors or a committee thereof, of candidates for election as directors. These procedures provide that the notice of stockholder proposals and stockholder nominations for the election of directors at an annual meeting must be in writing and received by the Secretary of the Company no later than March 1 of any calendar year (or if less than 35 days' notice of a meeting of stockholders is given, stockholder nominations must be delivered to the Secretary of the Company no later than the close of business on the seventh day following the day notice was mailed). Stockholder proposals and nominations for the election of directors at a special meeting must be in writing and received by the Secretary of the Company no later than the close of business on the tenth day following the day on which notice of the meeting was mailed or public disclosure of the date of the meeting was made, whichever occurs first. The notice of stockholder nominations must set forth certain information with respect to each nominee who is not an incumbent director. CERTAIN EFFECTS OF AUTHORIZED BUT UNISSUED STOCK Unissued and unreserved shares may be utilized for a variety of corporate purposes, including future public offerings to raise additional capital and for facilitating corporate acquisitions. Except pursuant to certain employee benefit plans described in this Prospectus, the Company does not currently have any plans to issue additional shares of Common Stock or Preferred Stock. One of the effects of unissued and unreserved shares of capital stock may be to enable the Board of Directors to render more difficult or discourage an attempt to obtain control of the Company by means of a merger, tender offer, proxy contest or otherwise, and thereby to protect the continuity of the Company's management. If, in the due exercise of its fiduciary obligations, for example, the Board of Directors determines that a takeover proposal was not in the Company's best interests, such shares could be issued by the Board of Directors without stockholder approval in one or more private transactions or other transactions that might prevent or render more difficult or costly the completion of the takeover transaction by diluting the voting or other rights of the proposed acquiror or insurgent stockholder group, by creating a substantial voting block in institutional or other hands that might undertake to support the position of the incumbent board of directors, by effecting an acquisition that might complicate or preclude the takeover, or otherwise. TRANSFER AGENT AND REGISTRAR Harris Trust and Savings Bank is the transfer agent and registrar for the Common Stock. NASDAQ NATIONAL MARKET QUOTATION The Common Stock is quoted on the Nasdaq National Market under the symbol "SWZA". SHARES ELIGIBLE FOR FUTURE SALE Upon completion of the Offering, the Company will have 14,741,729 shares of Common Stock outstanding. Of these shares, an aggregate of 3,795,000 shares sold in the IPO are, and the 4,700,000 shares sold in this Offering will be, freely tradable without restriction or further registration under the Securities Act, except for shares purchased by affiliates of the Company. Under the terms of the Private Placement, the Company is required to maintain an effective registration statement for three years with respect to the 625,000 shares sold in the Private Placement. The Company filed a registration statement on Form S-1 with 59 respect to the resale of these shares on October 1, 1996, which was declared effective on October 11, 1996. Such shares may be sold without restriction for so long as the registration statement remains effective. The Company has also filed a registration statement under the Securities Act which will allow the sale, without restriction, of Common Stock acquired upon exercise of stock options or pursuant to awards of restricted stock under the Option and Restricted Stock Plan, except for any such shares acquired by affiliates of the Company. The 5,613,479 shares issued in the Combination and not offered for sale hereunder are "restricted securities" subject to holding period, volume and other resale restrictions under Rule 144 of the Securities Act ("Rule 144"). These shares will be eligible for sale in the public market upon expiration of the applicable holding periods under Rule 144 or sooner if registered under the Securities Act. Under Rule 144 as currently in effect, any person (or persons whose shares are aggregated) who has beneficially owned restricted securities for at least two years is entitled to sell, within any three-month period, a number of shares that does not exceed the greater of: (i) 1% of the then outstanding shares of the Company's Common Stock (147,417 shares immediately after the Offering); or (ii) the average weekly trading volume during the four calendar weeks immediately preceding the date on which notice of the sale is filed with the Securities and Exchange Commission. Sales pursuant to Rule 144 are also subject to certain requirements relating to the manner of sale, notice and availability of current public information about the Company. The Predecessor Owners, all of whom received shares of Common Stock or options to purchase shares of Common Stock (collectively, the "Subject Shares") in the Combination, have an aggregate of three demand registration rights requiring the Company to use its best efforts to effect the registration of their shares under the Securities Act and applicable state securities laws. The Predecessor Owners have the right to exercise two demand registration rights until July 22, 1999, and the right to exercise one additional demand registration right commencing on July 22, 1999 and expiring on April 22, 2001. The Company is also obligated to offer the Predecessor Owners the right to include the Subject Shares owned by them in certain registration statements filed by the Company for a period expiring on April 22, 2001. The first demand registration right may be exercised by Predecessor Owners that collectively own at least 1,380,000 of the Subject Shares so long as at least 1,380,000 of the Subject Shares are offered for sale in an underwritten public offering. In order to exercise the first demand registration right prior to April 22, 1997, the price of the Company's Common Stock in the public market at the time of exercise must be at least $16.80, which is 120% of the initial public offering price. The second demand registration right may be exercised by Predecessor Owners that collectively own at least 1,035,000 of the Subject Shares so long as at least 1,035,000 of the Subject Shares are offered for sale in an underwritten public offering. No offering may be conducted upon exercise of the second demand registration right sooner than nine months after completion of the offering conducted upon exercise of the first demand registration right. The third demand registration right may be exercised by Predecessor Owners that collectively own at least 1,035,000 of the Subject Shares so long as at least 1,035,000 of the Subject Shares are offered for sale in an underwritten public offering. No offering may be conducted upon exercise of the third demand registration right sooner than nine months after completion of the offering conducted upon exercise of the second demand registration right. The third demand registration right will expire when none of the Predecessor Owners, other than Gregg L. Engles, owns more than 5% of the then-current fully diluted shares of Common Stock. The Company will have a prior right to conduct public offerings for corporate purposes and may pre-empt any registration undertaken upon exercise by the Predecessor Owners of their demand registration rights. If the Company pre-empts any demand registration, the registration will not be counted as a demand registration. If the Company pre-empts the third demand registration right so that Predecessor Owners are unable to exercise such right within the five-year period described above, then such five-year period will be extended until nine months after completion of the Company's public offering. 60 The Company will choose the underwriter or underwriters to conduct the public offering of any Subject Shares upon exercise of the demand registration rights. The Company will indemnify the Predecessor Owners and their respective officers, directors and controlling persons for securities law liabilities in connection with any such offering, other than liabilities resulting from information furnished in writing by the Predecessor Owners. Except in certain limited instances, the Company is obligated to pay all expenses incidental to a demand registration, excluding underwriters' discounts and commissions. The Company has agreed with the Underwriters of this Offering not to offer, issue, sell, agree to sell, grant any option for the sale of or otherwise dispose of, directly or indirectly, any shares of Common Stock or any securities convertible into or exercisable or exchangeable for Common Stock (except for options granted pursuant to the Option and Restricted Stock Plan) for a period of 90 days after the date of this Prospectus, without the prior written consent of Bear Stearns. The officers and directors of the Company and the Predecessor Owners have also agreed that for a period of 90 days after the date of this Prospectus, they will not offer, sell, agree to sell, grant any option to purchase or make any other disposition (excluding certain pledges) of any shares owned by them without the prior written consent of Bear Stearns. No prediction can be made as to the effect, if any, that sales of shares of Common Stock in this Offering or otherwise, or the availability of such shares for future sale will have on the market price of the Common Stock prevailing from time to time. Sales of substantial amounts of Common Stock in the public market, or the perception that such sales could occur, could adversely affect the prevailing market price for the Common Stock. Such sales may also make it more difficult for the Company to sell equity securities or equity-related securities in the future at a time and price that it deems appropriate. 61 UNDERWRITING The Underwriters of the Offering of Common Stock (the "Underwriters), for whom Bear, Stearns & Co. Inc. and A.G. Edwards & Sons, Inc. are acting as Representatives, have severally agreed, subject to the terms and conditions of the Underwriting Agreement (the form of which is filed as an exhibit to the Company's Registration Statement of which this Prospectus is a part), to purchase from the Company and the Selling Stockholders an aggregate of 4,700,000 shares of Common Stock. The aggregate number of shares of Common Stock that each Underwriter has agreed to purchase is set forth opposite its name below. The Underwriters are committed to purchase and pay for all of such shares of Common Stock if any are purchased.
NUMBER OF UNDERWRITERS SHARES - ------------------------------------------------------------------------------------------- ---------- Bear, Stearns & Co. Inc. .................................................................. A.G. Edwards & Sons, Inc................................................................... ---------- Total.................................................................................... 4,700,000 ---------- ----------
The Underwriters have advised the Company that they propose to offer 4,700,000 shares of Common Stock to the public initially at the public offering price set forth on the cover page of this Prospectus and to certain selected dealers (who may include the Underwriters) at such public offering price less a concession not to exceed $ per share. The selected dealers may reallow a concession to certain other dealers not to exceed $ per share. After the initial offering to the public, the public offering price, the concession to selected dealers and the reallowance to other dealers may be changed by the Representatives. The Common Stock is offered subject to receipt and acceptance by the Underwriters and to certain other conditions, including the right to reject orders in whole or in part. The Underwriters have informed the Company that the Underwriters do not intend to confirm sales to any accounts over which they exercise discretionary authority. The Underwriting Agreement provides that the Company and the Selling Stockholders will indemnify the Underwriters against certain liabilities, including liabilities under the Securities Act, or will contribute to payments the Underwriters may be required to make in respect thereof. The Company and the Selling Stockholders have granted to the Underwriters an option to purchase up to an additional 270,000 shares of Common Stock and an additional 435,000 shares of Common Stock, respectively, at the public offering price less the underwriting discount set forth on the cover page of this Prospectus, solely to cover over-allotments, if any. This option may be exercised at any time until 30 days after the date of this Prospectus. If the Underwriters exercise this option, each of the Underwriters will be committed, subject to certain conditions, to purchase a number of additional shares proportionate to such Underwriter's initial commitment as indicated in the preceding table. The Company has agreed not to offer, issue, sell, agree to sell, grant any option for the sale of or otherwise dispose of, directly or indirectly, any shares of Common Stock or any securities convertible into or exercisable or exchangeable for Common Stock (except for options granted pursuant to the Option and Restricted Stock Plan) for a period of 90 days after the date of this Prospectus without the prior written consent of Bear Stearns. The Company's officers and directors and the Predecessor Owners have also agreed with the Underwriters not to offer, sell, agree to sell, grant any option to purchase or otherwise dispose (excluding certain pledges) of any shares owned by them for a period of 90 days after the date of this Prospectus without the prior written consent of Bear Stearns. This agreement may be released without notice to 62 persons purchasing shares in the Offering and without notice to any market on which the Common Stock is traded. Certain stockholders of the Company have registration rights with respect to shares of Common Stock owned by them. See "Shares Eligible For Future Sale". In connection with this Offering and in accordance with Rule 10b-6A under the Exchange Act, the Underwriters and selling group members (if any) may, upon the satisfaction of certain conditions, engage in passive market making transactions in the Common Stock on the Nasdaq National Market during the period when Rule 10b-6 under the Exchange Act would otherwise prohibit such activity. Rule 10b-6A prohibits underwriters and selling group members engaged in passive market making generally from entering a bid or effecting a purchase at a price that exceeds the highest bid for those securities displayed on Nasdaq by a market maker that is not participating in the distribution. Under Rule 10b-6A, each underwriter or selling group member engaged in passive market making is subject to a daily net purchase limitation equal to 30% of such entity's average daily trading volume during the two full consecutive calendar months immediately preceding the date of filing of the registration statement under the Securities Act pertaining to the security to be distributed. Bear Stearns provides the Company with investment banking services from time to time for which it receives customary compensation. LEGAL MATTERS The validity of the Common Stock will be passed upon for the Company by Hughes & Luce, L.L.P., Dallas, Texas. Certain legal matters relating to the Offering will be passed upon for the Underwriters by Gardere & Wynne, L.L.P. A partner with Hughes & Luce, L.L.P., beneficially owns 41,795 shares of Common Stock. EXPERTS The consolidated financial statements of Suiza Foods Corporation as of December 31, 1995 and 1994 and for each of the three years in the period ended December 31, 1995; the combined financial statements of Pre-Acquisition Suiza-Puerto Rico as of December 15, 1993 and for the period from December 31, 1992 to December 15, 1993; the financial statements of Pre-Acquisition Velda Farms as of April 9, 1994 and December 31, 1993 and for the period from January 1, 1994 to April 9, 1994 and for the year ended December 31, 1993; and the financial statements of Swiss Dairy, a Corporation, as of December 31, 1995 and 1994 and for each of the three years in the period ended December 31, 1995 appearing in this Prospectus have been audited by Deloitte & Touche LLP, independent auditors, as stated in their reports appearing herein. The consolidated financial statements of Garrido & Compania, Inc. as of June 30, 1996 and 1995 and for each of the years in the three year period ended June 30, 1996 have been audited by KPMG Peat Marwick LLP, independent auditors, as stated in their report appearing herein. The financial statements of Model Dairy, Inc. as of October 31, 1995 and 1994 and for the years then ended have been audited by Barnard, Vogler & Co., independent auditors, as stated in their report appearing herein. Such financial statements are included herein in reliance upon the respective reports of such firms given upon their authority as experts in accounting and auditing. AVAILABLE INFORMATION The Company is subject to the informational requirements of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance therewith files reports and other information with the Securities and Exchange Commission (the "Commission"). Reports, registration statements, proxy statements, and other information filed by the Company with the Commission can be inspected and copied at the public reference facilities maintained by the Commission at Judiciary Plaza, 450 Fifth Street, N.W., Room 1024, Washington, D.C. 20549, and at the Commission's Regional Offices: 500 West Madison Street, 63 Suite 1400, Chicago, Illinois 60661 and 7 World Trade Center, New York, New York 10048. Copies of such materials can be obtained at prescribed rates from the Public Reference Section of the Commission, 450 Fifth Street, N.W., Room 1024, Washington, D.C. 20549. Copies of reports, registration statements, proxy and information statements filed electronically by the Company and other information regarding the Company can be obtained from the Commission's address on the world wide web: "http://www.sec.gov". The Company has filed with the Commission a Registration Statement on Form S-1 (the "Registration Statement") under the Securities Act with respect to the Common Stock offered hereby. As used herein, the term "Registration Statement" means the initial Registration Statement and any and all amendments thereto. This Prospectus omits certain information contained in said Registration Statement as permitted by the rules and regulations of the Commission. For further information with respect to the Company and the Common Stock offered hereby, reference is made to the Registration Statement, including the exhibits thereto. Statements herein concerning the contents of any contract or other document are not necessarily complete and in each instance reference is made to such contract or other document filed with the Commission as an exhibit to the Registration Statement, or otherwise, each such statement being qualified by and subject to such reference in all respects. 64 INDEX TO FINANCIAL STATEMENTS
PAGE --------- SUIZA FOODS CORPORATION Report of Independent Auditors--Deloitte & Touche LLP.................................................... F-2 Consolidated Balance Sheets.............................................................................. F-3 Consolidated Statements of Operations.................................................................... F-4 Consolidated Statements of Stockholders' Equity.......................................................... F-5 Consolidated Statements of Cash Flows.................................................................... F-6 Notes to Consolidated Financial Statements............................................................... F-7 PRE-ACQUISITION SUIZA-PUERTO RICO Report of Independent Auditors--Deloitte & Touche LLP.................................................... F-28 Combined Balance Sheet................................................................................... F-29 Combined Statement of Operations......................................................................... F-30 Combined Statement of Stockholders' Equity............................................................... F-31 Combined Statement of Cash Flows......................................................................... F-32 Notes to Combined Financial Statements................................................................... F-33 PRE-ACQUISITION VELDA FARMS Report of Independent Auditors--Deloitte & Touche LLP.................................................... F-38 Balance Sheets........................................................................................... F-39 Statements of Operations................................................................................. F-40 Statements of Stockholders' Equity....................................................................... F-41 Statements of Cash Flows................................................................................. F-42 Notes to Financial Statements............................................................................ F-43 GARRIDO & COMPANIA, INC. Report of Independent Auditors--KPMG Peat Marwick LLP.................................................... F-51 Consolidated Balance Sheets.............................................................................. F-52 Consolidated Statements of Earnings...................................................................... F-53 Consolidated Statements of Changes in Stockholders' Equity............................................... F-54 Consolidated Statements of Cash Flows.................................................................... F-55 Notes to Consolidated Financial Statements............................................................... F-56 SWISS DAIRY Report of Independent Auditors--Deloitte & Touche LLP.................................................... F-63 Balance Sheets........................................................................................... F-64 Statements of Earnings and Retained Earnings............................................................. F-65 Statements of Cash Flows................................................................................. F-66 Notes to Financial Statements............................................................................ F-67 MODEL DAIRY Report of Independent Auditors--Barnard, Vogler & Co..................................................... F-71 Balance Sheets........................................................................................... F-72 Statements of Earnings and Retained Earnings............................................................. F-73 Statements of Cash Flows................................................................................. F-74 Notes to Financial Statements............................................................................ F-75
F-1 INDEPENDENT AUDITORS' REPORT To the Board of Directors Suiza Foods Corporation Dallas, Texas We have audited the accompanying consolidated balance sheets of Suiza Foods Corporation and subsidiaries (the "Company") as of December 31, 1995 and 1994, and the related consolidated statements of operations, stockholders' equity and cash flows for each of the three years in the period ended December 31, 1995. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. The consolidated financial statements give retroactive effect to the Combination of Suiza-Puerto Rico, Velda Farms and Reddy Ice, which has been accounted for as a pooling-of-interests, as described in Note 1 of the Notes to Consolidated Financial Statements. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all material respects, the consolidated financial position of Suiza Foods Corporation and subsidiaries at December 31, 1995 and 1994, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1995, in conformity with generally accepted accounting principles. DELOITTE & TOUCHE LLP Dallas, Texas February 18, 1996 (February 29, 1996, as to Note 13) F-2 SUIZA FOODS CORPORATION CONSOLIDATED BALANCE SHEETS (DOLLARS IN THOUSANDS) ASSETS
DECEMBER 31, -------------------- 1994 1995 --------- --------- SEPTEMBER 30, 1996 ----------- (UNAUDITED) CURRENT ASSETS: Cash and cash equivalents................................. $ 5,395 $ 3,177 $ 9,288 Accounts receivable....................................... 29,164 31,045 47,729 Inventories............................................... 10,747 11,346 15,853 Prepaid expenses and other current assets................. 1,821 1,380 3,162 Deferred income taxes..................................... 866 1,448 2,127 --------- --------- ----------- Total current assets.................................... 47,993 48,396 78,159 PROPERTY, PLANT AND EQUIPMENT............................... 90,874 92,715 112,280 DEFERRED INCOME TAXES....................................... 7,792 INTANGIBLE AND OTHER ASSETS................................. 100,085 91,411 151,439 --------- --------- ----------- TOTAL....................................................... $ 238,952 $ 232,522 $ 349,670 --------- --------- ----------- --------- --------- ----------- LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable and accrued expenses..................... $ 30,945 $ 31,957 $ 43,702 Income taxes payable...................................... 266 2,415 539 Current portion of long-term debt......................... 14,683 15,578 11,637 --------- --------- ----------- Total current liabilities............................... 45,894 49,950 55,878 LONG-TERM DEBT.............................................. 173,327 171,745 204,316 DEFERRED INCOME TAXES....................................... 1,199 1,367 COMMITMENTS AND CONTINGENCIES MINORITY INTEREST IN SUBSIDIARIES........................... 8,645 STOCKHOLDERS' EQUITY (Note 13): Preferred stock, par value $.01; 1,000,000 shares authorized, no shares issued and outstanding............ Common stock, par value $.01; 20,000,000 shares authorized, 6,313,479 shares issued and outstanding at December 31, 1995; 10,739,729 shares issued and outstanding at September 30, 1996....................... 1 63 107 Additional paid-in capital................................ 20,894 31,023 89,337 Warrants.................................................. 580 Retained earnings (deficit)............................... (11,588) (21,626) 32 --------- --------- ----------- Total stockholders' equity................................ 9,887 9,460 89,476 --------- --------- ----------- TOTAL....................................................... $ 238,952 $ 232,522 $ 349,670 --------- --------- ----------- --------- --------- -----------
See notes to consolidated financial statements. F-3 SUIZA FOODS CORPORATION CONSOLIDATED STATEMENTS OF OPERATIONS (DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
NINE MONTHS ENDED YEAR ENDED DECEMBER 31, SEPTEMBER 30, ---------------------------------- -------------------------- 1993 1994 1995 1995 1996 ---------- ---------- ---------- ------------ ------------ (UNAUDITED) NET SALES...................................... $ 51,675 $ 341,108 $ 430,466 $ 325,454 $ 364,611 COST OF SALES.................................. 20,412 240,468 312,633 234,762 267,131 ---------- ---------- ---------- ------------ ------------ Gross profit............................... 31,263 100,640 117,833 90,692 97,480 OPERATING COSTS AND EXPENSES: Selling and distribution..................... 15,434 54,248 64,289 48,295 52,215 General and administrative................... 6,305 16,935 19,277 15,298 15,661 Amortization of intangibles.................. 822 3,697 3,703 2,865 3,200 ---------- ---------- ---------- ------------ ------------ Total operating costs and expenses......... 22,561 74,880 87,269 66,458 71,076 ---------- ---------- ---------- ------------ ------------ INCOME FROM OPERATIONS......................... 8,702 25,760 30,564 24,234 26,404 OTHER (INCOME) EXPENSE: Interest expense, net........................ 7,697 19,279 19,921 15,285 12,844 Merger and other costs....................... 1,660 10,238 10,238 571 Other income, net............................ (419) (268) (469) (406) (3,389) ---------- ---------- ---------- ------------ ------------ Total other expense........................ 7,278 20,671 29,690 25,117 10,026 ---------- ---------- ---------- ------------ ------------ INCOME BEFORE INCOME TAXES AND EXTRAORDINARY LOSS......................................... 1,424 5,089 874 (883) 16,378 INCOME TAXES (BENEFIT)......................... 4 844 2,450 1,963 (7,495) ---------- ---------- ---------- ------------ ------------ INCOME (LOSS) BEFORE EXTRAORDINARY LOSS........ 1,420 4,245 (1,576) (2,846) 23,873 EXTRAORDINARY LOSS FROM EARLY EXTINGUISHMENT OF DEBT......................................... 197 8,462 8,462 2,215 ---------- ---------- ---------- ------------ ------------ NET INCOME (LOSS).............................. $ 1,420 $ 4,048 $ (10,038) $ (11,308) $ 21,658 ---------- ---------- ---------- ------------ ------------ ---------- ---------- ---------- ------------ ------------ NET EARNINGS (LOSS) PER SHARE: Income (loss) before extraordinary loss...... $ 0.57 $ 0.69 $ (0.26) $ (0.47) $ 2.55 Extraordinary loss........................... (0.03) (1.38) (1.40) (0.24) ---------- ---------- ---------- ------------ ------------ Net income (loss)............................ $ 0.57 $ 0.66 $ (1.64) $ (1.87) $ 2.31 ---------- ---------- ---------- ------------ ------------ ---------- ---------- ---------- ------------ ------------ WEIGHTED AVERAGE SHARES OUTSTANDING............ 2,487,174 6,156,387 6,109,398 6,041,000 9,360,539 ---------- ---------- ---------- ------------ ------------ ---------- ---------- ---------- ------------ ------------
See notes to consolidated financial statements. F-4 SUIZA FOODS CORPORATION CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
COMMON STOCK ADDITIONAL RETAINED ---------------------- PAID-IN EARNINGS SHARES AMOUNT CAPITAL WARRANTS (DEFICIT) TOTAL --------- ----------- ----------- ----------- --------- --------- (DOLLARS IN THOUSANDS) BALANCE, JANUARY 1, 1993.......... 25,558 $ -- $ 1,068 $ 276 $ (16,752) $ (15,408) Issuance of common stock........ 42,150 1 14,149 14,150 Issuance of warrants............ 247 (247) -- Net income...................... 1,420 1,420 --------- ----- ----------- ----- --------- --------- BALANCE, DECEMBER 31, 1993........ 67,708 1 15,217 523 (15,579) 162 Issuance of common stock........ 11,960 5,677 5,677 Increase in market value of warrants...................... 57 (57) -- Net income...................... 4,048 4,048 --------- ----- ----------- ----- --------- --------- BALANCE, DECEMBER 31, 1994........ 79,668 1 20,894 580 (11,588) 9,887 Issuance of common stock........ 11,832 5,080 (580) 4,500 Capital contribution (Note 13)........................... 5,111 5,111 Net loss........................ (10,038) (10,038) 69 for 1 stock split (Note 13)........................... 6,221,979 62 (62) -- --------- ----- ----------- ----- --------- --------- BALANCE, DECEMBER 31, 1995........ 6,313,479 63 31,023 -- (21,626) 9,460 Issuance of common stock (Unaudited)................... 4,426,250 44 58,314 58,358 Net income (Unaudited).......... 21,658 21,658 --------- ----- ----------- ----- --------- --------- BALANCE, SEPTEMBER 30, 1996 (UNAUDITED)..................... 10,739,729 $ 107 $ 89,337 $ -- $ 32 $ 89,476 --------- ----- ----------- ----- --------- --------- --------- ----- ----------- ----- --------- ---------
See notes to consolidated financial statements. F-5 SUIZA FOODS CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (DOLLARS IN THOUSANDS)
NINE MONTHS ENDED YEARS ENDED DECEMBER 31, SEPTEMBER 30, -------------------------------- ---------------------- 1993 1994 1995 1995 1996 --------- --------- ---------- ---------- ---------- (UNAUDITED) CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss)......................................... $ 1,420 $ 4,048 $ (10,038) $ (11,308) $ 21,658 Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation and amortization........................... 3,476 8,244 9,258 6,834 7,032 Amortization of intangible assets, including deferred financing costs....................................... 995 4,876 4,686 3,749 3,776 Gain on the sale of assets.............................. (16) (177) (265) (98) 17 Extraordinary loss from early extinguishment of debt.... 197 8,462 8,462 2,215 Merger and other nonrecurring costs..................... 1,660 10,238 10,238 571 Noncash and imputed interest............................ 54 483 1,087 670 236 Minority interests...................................... 8 556 101 101 Deferred income taxes................................... 333 (414) 287 (9,896) Changes in operating assets and liabilities: Accounts and notes receivable......................... (259) (108) (1,881) (1,491) (7,639) Inventories........................................... (344) (73) (599) (916) (1,657) Prepaid expenses and other assets..................... 199 (222) 1,007 (1,157) (1,534) Accounts payable and other accrued expenses........... 262 4,862 716 (2,217) 1,649 Income tax payable.................................... (16) 254 649 3,889 (1,260) --------- --------- ---------- ---------- ---------- Net cash provided by operating activities........... 5,779 24,933 23,007 17,043 15,168 --------- --------- ---------- ---------- ---------- CASH FLOWS FROM INVESTING ACTIVITIES: Additions to property, plant and equipment................ (1,207) (4,784) (10,392) (7,638) (10,186) Proceeds from sale of property, plant and equipment....... 129 245 691 650 267 Sales (purchases) of cash investments and marketable securities.............................................. 10,880 (277) Increase in investments and other assets.................. (10) (1,331) Cash outflows for acquisitions............................ (82,783) (61,357) (2,425) (1,808) (83,129) --------- --------- ---------- ---------- ---------- Net cash used in investing activities............... (72,991) (67,504) (12,126) (8,796) (93,048) --------- --------- ---------- ---------- ---------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from the issuance of debt........................ 90,500 67,585 154,505 146,700 89,473 Repayment of debt......................................... (33,520) (30,906) (154,387) (145,546) (60,620) Payments of deferred financing, debt restructuring and merger costs............................................ (1,660) (8,972) (8,972) (3,220) Issuance of common stock, net of expenses................. 14,150 5,677 4,087 4,087 58,358 Investments by (distributions to) minority interests...... 151 (61) (63) (63) Purchase of subsidiary preferred stock.................... (8,269) (8,269) --------- --------- ---------- ---------- ---------- Net cash provided by (used in) financing activities........................................ 71,281 40,635 (13,099) (12,063) 83,991 --------- --------- ---------- ---------- ---------- INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS............ 4,069 (1,936) (2,218) (3,816) 6,111 CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD.............. 3,262 7,331 5,395 5,395 3,177 --------- --------- ---------- ---------- ---------- CASH AND CASH EQUIVALENTS, END OF PERIOD.................... $ 7,331 $ 5,395 $ 3,177 $ 1,579 $ 9,288 --------- --------- ---------- ---------- ---------- --------- --------- ---------- ---------- ----------
See notes to consolidated financial statements. F-6 SUIZA FOODS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995 AND FOR THE UNAUDITED NINE MONTHS ENDED SEPTEMBER 30, 1995 AND 1996 1. THE COMBINATION Suiza Foods Corporation (the "Company" or "Suiza Foods") is a Delaware corporation, incorporated on September 19, 1994, for the sole purpose of entering into certain mergers, exchanges and related transactions (the "Combination"). On March 31, 1995, the Company completed the Combination pursuant to which the Company acquired Suiza Holdings, L.P. and subsidiaries ("Suiza-Puerto Rico"), Velda Holdings, L.P., Velda Holdings, Inc. and subsidiaries ("Velda Farms"), and Reddy Ice Corporation ("Reddy Ice") (collectively, the "Combined Entities") by engaging in certain mergers, exchanges and related transactions. Pursuant to the Combination, the Company issued 6,313,479 shares, as adjusted, of its common stock in exchange for all of the outstanding equity interests of Suiza-Puerto Rico, Velda Farms and Reddy Ice. The Company has accounted for the Combination using the pooling of interests method of accounting, whereby the assets acquired and liabilities assumed are reflected in the consolidated financial statements of the Company at the historical amounts of the Combined Entities. The operations of Suiza-Puerto Rico and Velda Farms are only included in the results of operations from the dates they were acquired in purchase business combinations (December 16, 1993, for Suiza-Puerto Rico and April 10, 1994, for Velda Farms). In connection with the Combination, the equity accounts of Suiza-Puerto Rico, Velda Farms and Reddy Ice were adjusted to allocate partners' capital and additional paid-in capital between common stock, additional paid-in capital and retained earnings based on each of the companies' historical results and the number of shares of the Company's common stock issued in the Combination. The Company had no operations until its acquisition of Suiza-Puerto Rico, Velda Farms and Reddy Ice in the Combination. Separate results of the Combined Entities preceding the Combination were as follows:
UNAUDITED THREE MONTHS ENDED MARCH 31, 1993 1994 1995 --------- ---------- ------------- (IN THOUSANDS) Revenues: Suiza-Puerto Rico..................................... $ 6,587 $ 191,334 $ 52,229 Velda Farms........................................... 102,073 46,235 Reddy Ice............................................. 45,088 47,701 6,412 --------- ---------- ------------- Total............................................... $ 51,675 $ 341,108 $ 104,876 --------- ---------- ------------- --------- ---------- ------------- Net income (loss): Suiza Foods........................................... $ -- $ -- $ (7,024) Suiza-Puerto Rico..................................... (130) 2,211 (4,806) Velda Farms........................................... 544 (219) Reddy Ice............................................. 1,550 1,293 (5,941) --------- ---------- ------------- Total............................................... $ 1,420 $ 4,048 $ (17,990) --------- ---------- ------------- --------- ---------- -------------
Included in net income of Reddy Ice for the year ended December 31, 1994, is an extraordinary loss from early extinguishment of debt of $.2 million. In addition, included in net losses of Suiza-Puerto Rico, Velda Farms and Reddy Ice for the three-month period ended March 31, 1995 are extraordinary losses F-7 SUIZA FOODS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995 AND FOR THE UNAUDITED NINE MONTHS ENDED SEPTEMBER 30, 1995 AND 1996 1. THE COMBINATION (CONTINUED) from the early extinguishment of debt of $5.0 million (net of income tax benefit of $.1 million), $.9 million (net of income tax benefit of $.5 million) and $2.6 million, respectively. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES BUSINESS. Effective with the Combination, the Company became the parent company for the operations of Suiza-Puerto Rico, Velda Farms and Reddy Ice. Suiza-Puerto Rico, which includes Suiza Dairy Corporation ("Suiza Dairy"), Suiza Fruit Corporation ("Suiza Fruit") and Neva Plastics Manufacturing Corp. ("Neva Plastics"), manufactures and distributes fluid milk products and refrigerated ready-to-serve fruit drinks, and distributes refrigerated and frozen foods to various customers, including grocery stores, retail outlets and schools throughout Puerto Rico. Velda Farms manufactures and distributes fresh milk, ice cream and related products throughout peninsular Florida under its own brand names and under brands licensed from third parties. Velda Farms customers include food service accounts, convenience stores, club stores and schools. Reddy Ice manufactures and distributes ice products for retail, commercial and industrial use in Texas, Florida, Arizona, New Mexico and Nevada. The Company and its subsidiaries provide credit terms to customers generally ranging up to 30 days, perform ongoing credit evaluations of their customers and maintain allowances for potential credit losses based on historical experience. The preparation of financial statements requires the use of significant estimates and assumptions by management; actual results could differ from these estimates. PRINCIPLES OF CONSOLIDATION. The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries, Suiza Dairy, Suiza Fruit, Neva Plastics, Velda Farms and Reddy Ice. All significant intercompany balances and transactions are eliminated in consolidation. INVENTORIES. Pasteurized and raw milk inventories are stated at the lower of average cost or market. Raw materials, spare parts and supplies and merchandise for resale inventories are stated at the lower of cost, using the first-in, first-out ("FIFO") method, or market. Manufactured finished goods inventories are stated at the lower of average production cost or market. Production costs include raw materials, direct labor and indirect production and overhead costs. PROPERTY, PLANT AND EQUIPMENT. Property, plant and equipment are stated at cost. Depreciation and amortization are provided using the straight-line method over the estimated useful lives of the assets, as follows:
ASSET USEFUL LIFE - --------------------------------------------------------------- ------------------------------ Buildings and improvements..................................... Ten to 40 years Machinery and equipment........................................ Five to 20 years Motor vehicles................................................. Five to 15 years Furniture and fixtures......................................... Three to ten years
Capitalized lease assets are amortized over the shorter of their lease term or their estimated useful lives. Expenditures for repairs and maintenance which do not improve or extend the life of the assets are expensed as incurred. F-8 SUIZA FOODS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995 AND FOR THE UNAUDITED NINE MONTHS ENDED SEPTEMBER 30, 1995 AND 1996 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) INTANGIBLE ASSETS. Intangible assets include the following intangibles which are amortized over their related useful lives:
INTANGIBLE ASSET USEFUL LIFE - -------------------------------------- ------------------------------------------------------ Goodwill.............................. Straight-line method over 20 to 40 years Identifiable intangible assets: Customer list....................... Straight-line method over seven to ten years Trademarks/trade names.............. Straight-line method over 30 years Noncompetition agreements........... Straight-line method over five to ten years Deferred financing costs.............. Interest method over the terms of the related debt (ranging from seven to 11 years) Organization costs.................... Straight-line method over five years
The Company periodically assesses the net realizable value of its intangible assets, as well as all other assets, by comparing the expected future net operating cash flows, undiscounted and without interest charges, to the carrying amount of the underlying assets. The Company would evaluate a potential impairment if the recorded value of these assets exceeded the associated future net operating cash flows. Any potential impairment loss would be measured as the amount by which the carrying value exceeds the fair value of the asset. Fair value of assets would be measured by market value, if an active market exists, or by a forecast of expected future net operating cash flows, discounted at a rate commensurate with the risk involved. INTEREST RATE AGREEMENTS. Interest rate swaps, caps and floors are entered into as a hedge against interest exposure of variable rate debt. Differences between amounts to be paid or received on these interest rate agreements designated as hedges are included in interest expense as payments are made or received. Amounts paid to acquire interest rate caps and amounts received for interest rate floors are amortized as an adjustment to interest expense over the life of the related agreement. REVENUE. Revenue is recognized when the product is shipped to the customer. INCOME TAXES. At the Combination date, the Company became the parent company of Suiza Dairy, Suiza Fruit, Neva Plastics, Velda Farms and Reddy Ice. Velda Farms and Reddy Ice are now included in the consolidated tax return of the Company. The Company's Puerto Rico subsidiaries, Suiza Dairy, Suiza Fruit and Neva Plastics, which are organized as Delaware companies, will be required to file separate U.S. and Puerto Rico income tax returns. Since their operations are in Puerto Rico, they are eligible for Section 936 tax credits which may reduce or eliminate U.S. income taxes due. Prior to the Combination, Suiza-Puerto Rico, Velda Farms and Reddy Ice were separate taxpayers and income taxes were provided for in the financial statements, where applicable, based on each company's separate income tax return. Suiza-Puerto Rico was organized as a U.S. limited partnership, which was not subject to income taxes, with its operating subsidiaries, Suiza Dairy, Suiza Fruit and Neva Plastics, organized under the laws of the Commonwealth of Puerto Rico. As a result, each of its operating subsidiaries was required to file a separate income tax return in Puerto Rico. Both before and after the Combination, Suiza Fruit and Neva Plastics were eligible through grants, with certain qualifications, for partial exemptions from Puerto Rico income, property and municipal taxes. The grants were originally made for ten-year terms and provide for a 90% exemption from income and property taxes and 60% exemption from municipal taxes. Reddy Ice historically qualified as a small business corporation under F-9 SUIZA FOODS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995 AND FOR THE UNAUDITED NINE MONTHS ENDED SEPTEMBER 30, 1995 AND 1996 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Section 1372 of Subchapter S of the Internal Revenue Code. Accordingly, no provision for income taxes or income tax liabilities were recorded in its financial statements since such amounts, if any, were the responsibility of the individual stockholders. Since prior to the Combination, certain of Suiza-Puerto Rico's operations were organized as a partnership and Reddy Ice's operations were organized as a small business corporation under Subchapter S, no income taxes were provided in the financial statements. However, had these operations been subject to corporate income taxes, available net operating losses would have been sufficient to eliminate any corporate income taxes due. Deferred income taxes are provided for temporary differences in the financial statement and tax bases of assets and liabilities using current tax rates. Deferred tax assets, including the benefit of net operating loss carryforwards, are evaluated based on the guidelines for realization and may be reduced by a valuation allowance. CASH EQUIVALENTS. The Company considers all highly liquid investments purchased with a remaining maturity of three months or less to be cash equivalents. EARNINGS (LOSS) PER SHARE--The Company computes earnings per share based on the weighted average number of common shares outstanding during the year, as adjusted for the stock split (Note 13), including common equivalent shares, when dilutive. Fully diluted earnings per share are not presented since the assumed exercise of stock options and warrants would not result in a material dilutive effect. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS--Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of," requires that long-lived assets and certain identifiable intangibles to be held and used by an entity be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Impairment is evaluated by comparing future cash flows (undiscounted and without interest charges) expected to result from the use of the asset and its eventual disposition to the carrying amount of the asset. This new accounting principle is effective for the Company's fiscal year ending December 31, 1996. The Company believes that this new accounting principle will not have a material impact on its financial position. Statement of Financial Accounting Standards No. 123 ("SFAS 123"), "Accounting for Stock-Based Compensation," encourages, but does not require, companies to recognize compensation expense for grants of stock, stock options and other equity instruments to employees based on new fair value accounting rules. Although expense recognition for employee stock based compensation is not mandatory, SFAS 123 requires companies that choose not to adopt the new fair value accounting to disclose pro forma net income and earnings per share under the new method. This new accounting principle is effective for the Company's fiscal year ending December 31, 1996. The Company intends to comply with the disclosure requirements of this new accounting principle and will not adopt fair value accounting expense recognition provisions. UNAUDITED INTERIM FINANCIAL STATEMENTS. The Company's balance sheet as of September 30, 1996 and the statements of operations and cash flows for the nine-month periods ended September 30, 1995 and 1996, have been prepared by the Company without audit. In the opinion of management, all adjustments (which include only normal, recurring adjustments) necessary to present fairly the balance sheet of the Company at September 30, 1996, and the results of operations and cash flows of the Company for the nine F-10 SUIZA FOODS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995 AND FOR THE UNAUDITED NINE MONTHS ENDED SEPTEMBER 30, 1995 AND 1996 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) months ended September 30, 1996 and 1995 have been made. The results of operations for the interim periods are not necessarily indicative of the results to be expected for the full year. 3. ACQUISITIONS Effective December 16, 1993, the Company, through its Suiza-Puerto Rico subsidiaries, acquired all of the outstanding common and preferred stock of Suiza Dairy, Suiza Fruit and Neva Plastics. The total purchase price, including related acquisition and financing costs, was approximately $99.4 million, which was funded with the proceeds from partners' capital contributions, the proceeds from the issuance of subordinated notes payable of $25.0 million, term loan and revolving credit facility advances directly to the subsidiaries of $67.0 million and preferred stock issued to the seller of $5.0 million. In connection with the refinancing of debt on March 31, 1995, the term loan, revolving credit facility advances and preferred stock were repaid as part of the Combination. Effective April 10, 1994, the Company, through its Velda Farms subsidiary, acquired all of the outstanding common stock of Velda Farms, Inc., a wholly owned subsidiary of The Morningstar Group, Inc. The total purchase price, including related acquisition and financing costs, was approximately $54.8 million, which was funded with the net proceeds from the issuance of common stock, the proceeds from the issuance of subordinated notes, term loan and revolving credit facility advances, and preferred stock issued to the seller. In connection with the refinancing of debt at the date of the Combination, the term loan, revolving credit facility advances and preferred stock were repaid. Effective June 29, 1994, Suiza Dairy acquired Mayaguez Dairy, Inc. for a total purchase price, including costs and expenses, of approximately $7.6 million, which was funded primarily by additional term loan borrowings of $7.0 million. Effective November 1, 1994, Velda Farms acquired all of the net assets of the Florida Division of Flav-O-Rich, Inc. The total purchase price, including related acquisition and financing costs, was approximately $5.9 million, which was funded with revolving credit agreement borrowings, along with a subordinated note payable to the seller and an amount payable to the seller upon the final purchase price settlement, which was paid subsequent to year-end. During 1993, 1994 and 1995, the Company's Reddy Ice subsidiary entered into noncompetition arrangements and acquired certain property, plant and equipment of eight separate ice companies for cash, including costs and expenses, of approximately $.4 million in 1993, $.3 million in 1994 and $2.4 million in 1995, along with the issuance of notes payable to the sellers of approximately $.4 million in 1993, $.4 million in 1994 and $.1 million in 1995. The above acquisitions were accounted for using the purchase method of accounting as of their respective acquisition dates, and accordingly, only the results of operations of the acquired companies subsequent to their respective acquisition dates are included in the consolidated financial statements of the Company. At the acquisition date, the purchase price was allocated to assets acquired, including identifiable intangibles, and liabilities assumed based on their fair market values. The excess of the total purchase F-11 SUIZA FOODS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995 AND FOR THE UNAUDITED NINE MONTHS ENDED SEPTEMBER 30, 1995 AND 1996 3. ACQUISITIONS (CONTINUED) prices over the fair values of the net assets acquired represented goodwill. In connection with the acquisitions, assets were acquired and liabilities were assumed as follows:
1993 1994 1995 --------- --------- --------- (IN THOUSANDS) Purchase prices: Cash paid for capital stock................................... $ 82,783 $ 61,357 $ 2,425 Subsidiary preferred stock issued............................. 5,000 3,000 Notes and amounts payable to seller........................... 365 4,495 91 Cash acquired in acquisitions................................. 12,035 142 --------- --------- --------- Total purchase prices........................................... 100,183 68,994 2,516 Fair values of net assets acquired: Fair values of assets acquired................................ 92,680 53,590 2,317 Liabilities assumed........................................... (43,400) (10,924) --------- --------- --------- Total net assets acquired....................................... 49,280 42,666 2,317 --------- --------- --------- Goodwill........................................................ $ 50,903 $ 26,328 $ 199 --------- --------- --------- --------- --------- ---------
The following table presents unaudited pro forma results of operations of the Company for the year ended December 31, 1994, as if the above 1994 acquisitions had occurred at the beginning of 1994. There was no material pro forma impact of the acquisitions in 1995.
(IN THOUSANDS, EXCEPT PER SHARE DATA) ------------- Net sales...................................................................... $ 426,626 ------------- ------------- Income before extraordinary loss............................................... $ 7,447 ------------- ------------- Net income..................................................................... $ 7,250 ------------- ------------- Earnings per share............................................................. $ 1.14 ------------- -------------
The unaudited pro forma results of operations are not necessarily indicative of what the actual results of operations of the Company would have been had the acquisitions occurred at the beginning of 1994, nor do they purport to be indicative of the future results of operations of the Company. Subsequent to year-end, the Company, through its Velda Farms subsidiary, acquired certain assets of Skinners' Dairy, Inc. for a purchase price of $2.7 million. The acquisition was funded with additional term loan borrowings under the Senior Credit Facility. There was no material pro forma impact of the acquisition. F-12 SUIZA FOODS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995 AND FOR THE UNAUDITED NINE MONTHS ENDED SEPTEMBER 30, 1995 AND 1996 4. ACCOUNTS RECEIVABLE
DECEMBER 31, -------------------- 1994 1995 --------- --------- SEPTEMBER 30, 1996 ------------- (UNAUDITED) (IN THOUSANDS) Trade customers, including route receivables............. $ 24,731 $ 28,435 $ 40,916 Milk industry and milk price stabilization fund.......... 3,539 1,839 2,489 Suppliers................................................ 497 604 2,612 Customer financing receivables........................... 516 353 261 Officers and employees................................... 388 425 557 Other.................................................... 709 737 2,354 --------- --------- ------------- 30,380 32,393 49,189 Less allowance for doubtful accounts..................... (1,216) (1,348) (1,460) --------- --------- ------------- $ 29,164 $ 31,045 $ 47,729 --------- --------- ------------- --------- --------- -------------
5. INVENTORIES
DECEMBER 31, -------------------- 1994 1995 --------- --------- SEPTEMBER 30, 1996 ------------- (UNAUDITED) (IN THOUSANDS) Pasteurized and raw milk and raw materials............... $ 3,725 $ 4,278 $ 6,062 Parts and supplies....................................... 3,075 3,105 4,482 Finished goods........................................... 3,947 3,963 5,309 --------- --------- ------------- $ 10,747 $ 11,346 $ 15,853 --------- --------- ------------- --------- --------- -------------
6. PROPERTY, PLANT AND EQUIPMENT
DECEMBER 31, ---------------------- 1994 1995 ---------- ---------- SEPTEMBER 30, 1996 ------------- (IN THOUSANDS)(UNAUDITED) Land.................................................. $ 15,587 $ 15,582 $ 18,117 Buildings and improvements............................ 30,392 33,264 41,884 Machinery and equipment............................... 42,338 47,119 60,465 Motor vehicles........................................ 9,140 9,994 11,538 Furniture and fixtures................................ 16,421 18,219 18,684 ---------- ---------- ------------- 113,878 124,178 150,688 Less accumulated depreciation and amortization........ (23,004) (31,463) (38,408) ---------- ---------- ------------- $ 90,874 $ 92,715 $ 112,280 ---------- ---------- ------------- ---------- ---------- -------------
F-13 SUIZA FOODS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995 AND FOR THE UNAUDITED NINE MONTHS ENDED SEPTEMBER 30, 1995 AND 1996 7. INTANGIBLE AND OTHER ASSETS
DECEMBER 31, --------------------- 1994 1995 ---------- --------- SEPTEMBER 30, 1996 ------------- (UNAUDITED) (IN THOUSANDS) Goodwill................................................ $ 78,304 $ 78,503 $ 140,846 Identifiable intangibles................................ 16,552 13,374 15,193 Deferred financing costs................................ 9,964 6,018 4,061 Organization costs...................................... 745 Investments............................................. 1,936 89 59 Deposits and other...................................... 1,488 905 918 ---------- --------- ------------- 108,989 98,889 161,077 Less accumulated amortization........................... (8,904) (7,478) (9,638) ---------- --------- ------------- $ 100,085 $ 91,411 $ 151,439 ---------- --------- ------------- ---------- --------- -------------
In 1994, the Company's Reddy Ice subsidiary invested $1.2 million, including expenses, to acquire a less than 20% partnership interest in a plastic bread bag manufacturer which was accounted for using the cost method whereby no earnings or losses are recognized until distributions are made. This investment was funded through $1.5 million of junior subordinated notes, a portion of which was required to be maintained in an investment collateral account. Immediately prior to the Combination, Reddy Ice distributed this investment to an entity formed by the stockholders of Reddy Ice at its carrying value in consideration for cash and the assumption by this entity of the existing junior subordinated note and the related investment collateral account used to fund the investment. 8. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
DECEMBER 31, -------------------- 1994 1995 --------- --------- SEPTEMBER 30, 1996 ------------- (UNAUDITED) (IN THOUSANDS) Accounts payable......................................... $ 19,949 $ 21,689 $ 30,882 Accrued payroll and benefits............................. 3,468 6,965 8,767 Accrued interest......................................... 3,274 1,845 42 Amount payable for acquisition........................... 1,672 1,004 Other.................................................... 2,582 1,458 3,007 --------- --------- ------------- $ 30,945 $ 31,957 $ 43,702 --------- --------- ------------- --------- --------- -------------
F-14 SUIZA FOODS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995 AND FOR THE UNAUDITED NINE MONTHS ENDED SEPTEMBER 30, 1995 AND 1996 9. LONG-TERM DEBT
DECEMBER 31, ---------------------- 1994 1995 ---------- ---------- SEPTEMBER 30, 1996 ------------- (IN THOUSANDS)(UNAUDITED) Senior credit facility: Revolving loan facility............................. $ -- $ 10,900 $ 8,600 Acquisition facility................................ 42,900 Term loans.......................................... 123,750 127,500 Senior and subordinated debt subsequently repaid...... 135,142 Subordinated notes.................................... 50,430 51,101 36,000 Capital lease obligations and other................... 2,438 1,572 953 ---------- ---------- ------------- 188,010 187,323 215,953 Less current portion.................................. (14,683) (15,578) (11,637) ---------- ---------- ------------- $ 173,327 $ 171,745 $ 204,316 ---------- ---------- ------------- ---------- ---------- -------------
SENIOR CREDIT FACILITY. Simultaneously with the Combination, the Company entered into a senior credit facility (the "Senior Credit Facility") with a syndicate of banks with the Chase Manhattan Bank, N.A., as agent, providing for an aggregate senior credit facility of $160.0 million, which included: (i) a $57.0 million term loan for its mainland United States operations; (ii) a $78.0 million term loan for its Puerto Rico operations; (iii) a $20.0 million revolving credit facility for its mainland United States operations; and (iv) a $5.0 million revolving credit facility for its Puerto Rico operations. Under the terms of the Senior Credit Facility, each term loan is amortized over seven years. The revolving credit facilities expire at the end of five years. Amounts outstanding under the Senior Credit Facility bear interest at a rate per annum equal to one of the following rates, at the Company's option: (i) a base rate (Base Rate) equal to the higher of the Federal Funds rate plus 50 basis points or the Chase Manhattan Bank's prime commercial lending rate plus a margin that varies from 0 to 75 basis points depending on the Company's ratio of defined indebtedness to EBITDA (as defined in the Senior Credit Facility); or (ii) a LIBOR rate plus a margin that varies from 75 to 200 basis points depending on the Company's ratio of defined indebtedness to EBITDA. The Company pays a commitment fee on unused amounts of the revolving facility that ranges from 20 basis points to 37.5 basis points, based on the Company's ratio of debt to EBITDA. The blended interest rate in effect at December 31, 1995, on the Senior Credit Facility was 7.8%. Interest is payable quarterly, and scheduled principal installments on the term loan facilities are due in quarterly installments of approximately $3.8 million through March 1997, $4.4 million for each quarter thereafter through March 1998, $5.0 million for each quarter thereafter through March 2000, $5.6 million for each quarter thereafter through March 2001 and $6.3 million for each quarter thereafter through March 2002. Loans under the Senior Credit Facility are collateralized by substantially all assets. Borrowings under the revolving credit facility are limited to 85% of eligible accounts receivable and 50% of eligible inventories. The proceeds from this Senior Credit Facility were used to repay outstanding senior and certain subordinated debt of the Company's subsidiaries, including Suiza-Puerto Rico's and Velda Farms' term loan and revolving credit facility advances, and Reddy Ice's senior secured notes, subordinated notes, F-15 SUIZA FOODS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995 AND FOR THE UNAUDITED NINE MONTHS ENDED SEPTEMBER 30, 1995 AND 1996 9. LONG-TERM DEBT (CONTINUED) certain junior subordinated notes, senior bridge loan and certain other debt, and to redeem the outstanding preferred stock of Suiza-Puerto Rico and Velda Farms. On July 19, 1996 and September 9, 1996, the Company amended its senior credit facilities. See Note 21 "Subsequent Events" for an additional discussion of these amendments. SUBORDINATED NOTES. On March 31, 1995, the Company issued subordinated notes in the Combination to replace certain of the existing subordinated notes of each of Suiza-Puerto Rico, Velda Farms and Reddy Ice. The subordinated notes bear interest at rates ranging from 12% to 15% (13.2% on a weighted average basis), payable on a semiannual basis in March and September of each year, with semi-annual principal installments due in varying amounts commencing in 2001, with the remaining unpaid principal balances due at maturity on March 31, 2004. Certain of the subordinated notes contain provisions which allow the Company to pay a portion of the interest through the issuance of additional notes. The notes are subordinated to the loans under the Senior Credit Facility. On April 22, 1996 the Company repaid $15.7 million of subordinated notes. See Note 21, "Subsequent Events" for additional discussion of this repayment. OTHER DEBT. Other debt includes a mortgage note payable which was collateralized by one of the Reddy Ice properties, various promissory notes for the purchase of property, plant and equipment and capital lease obligations. The mortgage note payable provided for interest at the prime interest rate, plus 1%, payable monthly with principal payments through January 1996. The various promissory notes payable provided for interest at rates ranging from 10% to prime plus 1% and were payable in monthly installments of principal and interest until maturity, when the remaining principal balance was due. Capital lease obligations represent machinery and equipment financing obligations which are payable in monthly installments of principle and interest and are collateralized by the related assets financed. INTEREST RATE AGREEMENTS. During 1994, the Company entered into interest rate cap agreements to hedge against future impacts of increases in interest rates. The cap agreements have three-year terms and notional values of $40.0 million and $14.0 million, and cap the interest rate on LIBOR loans at 6% plus the LIBOR margin and 7.5% plus the LIBOR margin, respectively. In July 1995, the Company entered into an interest rate floor agreement and received an up-front payment of $250,000. The floor agreement expires in December 1996, has a notional value of $40.0 million and sets an interest floor of 6% plus the LIBOR margin. The up-front payment is being amortized over the life of the floor agreement. During 1995, the Company also entered into two interest rate swap agreements, which mature on June 30, 1998, to fix the interest on a notional amount of $55.0 million at a fixed cost of 6% plus the LIBOR margin. The Company has designated these interest rate agreements as hedges against its interest rate exposure on its variable rate loans under the Senior Credit Facility. The Company is exposed to market risk under these swap arrangements due to the possibility of exchanging a lower interest rate for a higher interest rate. The counterparties are major financial institutions and the risk of incurring losses related to credit risk is considered by the Company to be remote. DEBT COVENANTS. The Company's Senior Credit Facility contains various financial and other restrictive covenants and requirements that the Company maintain certain financial ratios, including leverage (computed as the ratio of the aggregate outstanding principal amount of defined indebtedness to EBITDA, as defined), fixed charges (computed as the ratio of EBITDA to defined fixed charges), interest F-16 SUIZA FOODS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995 AND FOR THE UNAUDITED NINE MONTHS ENDED SEPTEMBER 30, 1995 AND 1996 9. LONG-TERM DEBT (CONTINUED) coverage (computed as the ratio of EBITDA to defined interest expense) and minimum net worth. The Senior Credit Facility also contains limitations on capital expenditures, investments, the payment of dividends and the incurrence of additional indebtedness and requires certain mandatory prepayments from the proceeds of certain dispositions of property. SCHEDULED MATURITIES. The scheduled maturities of long-term debt, which include capitalized lease obligations, at December 31, 1995, were as follows (in thousands): 1996...................................................... $ 15,578 1997...................................................... 17,401 1998...................................................... 19,648 1999...................................................... 20,129 2000...................................................... 21,895 Thereafter................................................ 92,672 --------- $ 187,323 --------- ---------
10. LEASES The Company leases certain property, plant and equipment used in its operations under both capital and operating lease agreements. Such leases, which are primarily for machinery and equipment and vehicles, have lease terms ranging from two to nine years. Certain of the operating lease agreements require the payment of additional rentals for maintenance, based on miles driven or units produced. Rent expense was $.6 million, $4.5 million and $6.3 million for the years ended December 31, 1993, 1994 and 1995, respectively and $4.3 million and $4.6 million for the nine month periods ended September 30, 1995 and 1996, respectively. The composition of capital leases which are reflected as property, plant and equipment in the balance sheets at December 31, 1994 and 1995 is as follows:
DECEMBER 31, -------------------- 1994 1995 --------- --------- (IN THOUSANDS) Machinery and equipment................................................. $ 2,854 $ 2,518 Less accumulated amortization........................................... (573) (814) --------- --------- $ 2,281 $ 1,704 --------- --------- --------- ---------
F-17 SUIZA FOODS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995 AND FOR THE UNAUDITED NINE MONTHS ENDED SEPTEMBER 30, 1995 AND 1996 10. LEASES (CONTINUED) Future minimum payments at December 31, 1995, under noncancelable capital and operating leases with terms in excess of one year are summarized below (in thousands):
CAPITAL OPERATING LEASES LEASES ----------- ----------- 1996............................................................................... $ 470 $ 4,310 1997............................................................................... 185 4,146 1998............................................................................... 151 3,270 1999............................................................................... 112 2,293 2000............................................................................... 2,057 Thereafter......................................................................... 3,071 ----- ----------- Total minimum lease payments................................................... 918 $ 19,147 ----------- ----------- Less amount representing imputed interest.......................................... (69) ----- Present value of capitalized lease obligations..................................... $ 849 ----- -----
11. INCOME TAXES There is no material provision for income taxes during 1993 primarily as a result of Reddy Ice's S corporation election and net operating losses. The provision for income taxes for the years ended December 31, 1994 and 1995, excluding the tax benefit of $669,000 applicable to the extraordinary loss during 1995, are as follows:
YEAR ENDED DECEMBER 31, -------------------- 1994 1995 --------- --------- (IN THOUSANDS) Current taxes payable (refundable): Federal.............................................................................. $ 491 $ 2,763 State................................................................................ 20 101 Deferred income taxes.................................................................. 333 (414) --------- --------- $ 844 $ 2,450 --------- --------- --------- ---------
F-18 SUIZA FOODS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995 AND FOR THE UNAUDITED NINE MONTHS ENDED SEPTEMBER 30, 1995 AND 1996 11. INCOME TAXES (CONTINUED) The following is a reconciliation of income taxes reported in the statements of operations:
YEAR ENDED DECEMBER 31, -------------------- 1994 1995 --------- --------- (IN THOUSANDS) Tax expense at statutory rates..................................................... $ 1,959 $ 306 Tax benefit from tax-exempt earnings............................................... (2,745) (1,532) Tax expense from losses not subject to taxes at the corporate level................ 1,612 Minority interest.................................................................. 84 35 Net operating loss carryforwards................................................... 1,344 188 Nondeductible expenses............................................................. 202 1,841 --------- --------- $ 844 $ 2,450 --------- --------- --------- ---------
The tax effects of temporary differences giving rise to deferred income tax assets and liabilities at December 31, 1994 and 1995 were:
DECEMBER 31, -------------------- 1994 1995 --------- --------- (IN THOUSANDS) Deferred income tax assets: Asset valuation reserves......................................................... $ 157 $ 326 Nondeductible accruals........................................................... 1,024 1,122 Net operating loss carryforwards................................................. 914 1,989 Valuation allowance.............................................................. (1,229) (1,989) --------- --------- 866 1,448 --------- --------- Deferred income tax liabilities: Depreciation..................................................................... (203) 312 Amortization of intangibles...................................................... (996) (1,185) Foreign distributions and other.................................................. (494) --------- --------- 1,199 1,367 --------- --------- Net deferred income tax asset (liability)........................................ $ (333) $ 81 --------- --------- --------- ---------
The Company has established a valuation allowance for deferred tax assets of the Company's Suiza Dairy subsidiary in Puerto Rico. The deferred tax assets of this subsidiary represent primarily net operating loss carryforwards, which, under Puerto Rico law, are only available for utilization against future taxable income of this subsidiary. Because of the continuing operating losses of this subsidiary, the Company has been unable to determine that it is more likely than not that the net deferred tax assets of this subsidiary will be realized. Should the Company's Suiza Dairy subsidiary become profitable in future periods, this valuation allowance may be reduced or eliminated. The Company will continue to review this valuation allowance on a quarterly basis and make adjustments as appropriate. During 1995, the Company increased the valuation allowance as a result of operating losses incurred and reversals of deferred tax assets by its Suiza Dairy subsidiary in 1995 which increased this subsidiary's net operating loss carryforwards. F-19 SUIZA FOODS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995 AND FOR THE UNAUDITED NINE MONTHS ENDED SEPTEMBER 30, 1995 AND 1996 11. INCOME TAXES (CONTINUED) During the nine months ended September 30, 1996 the deferred tax asset related to these net operating loss carryforwards and the related valuation allowance was substantially eliminated as a result of the reduction in tax rates in Puerto Rico from the Puerto Rico Agricultural Tax Incentives Act of 1995. The Company has provided for income taxes during the nine months ended September 30, 1996 using estimated 1996 effective tax rates for each of its taxing jurisdictions which have been allocated between current income taxes payable and deferred income taxes based on anticipated temporary differences at December 31, 1996. Income taxes during this nine month period determined using these effective tax rates have been adjusted to reflect the recognition of Puerto Rico tax credits from eligible investments during 1996 pursuant to the Puerto Rico Agricultural Tax Incentives Act of 1995 as discussed below. In December 1995, the Commonwealth of Puerto Rico adopted the Puerto Rico Agricultural Tax Incentives Act of 1995 which reduced the effective 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 business in Puerto Rico. During 1996, the Company made investments in its Puerto Rico dairy, fruit, plastics and Garrido operations, all of which were certified as qualified agricultural businesses in Puerto Rico during 1996. In connection with these investments, the Company believes that it has met the eligible investment criteria of this act related to its investment in its Puerto Rico dairy subsidiary. Accordingly, during the quarter ended September 30, 1996, the Company recognized $15.75 million in tax credits related to this qualifying investment. Of this amount, the Company (i) sold $4.0 million of tax credits to third parties, resulting in a cash gain of $3.4 million (net of a discount and related expenses) and (ii) recognized a deferred tax asset for the remainder of the tax credit in the amount of $11.75 million. Accordingly, the Company recorded other income in the amount of $3.4 million from the sale ($2.2 million net of U.S. income taxes) and recorded a credit to tax expense of approximately $11.75 million during the third quarter. The Company is currently investigating whether its investment in Garrido or other recent transactions relating to its Puerto Rico based operations will qualify for tax credits based on recent rulings by Puerto Rico tax authorities. If the Company ultimately qualifies for such credits, there can be no assurance as to the amounts or timing of any benefits that the Company may realize. 12. MINORITY INTEREST Prior to the Combination, minority interest included common equity interests of approximately $.4 million representing an interest in the common stock of certain subsidiaries, along with shares of preferred stock of certain subsidiaries with cumulative liquidation values aggregating $8.0 million plus cumulative unpaid dividends of between 5% and 9% annually. The charges for minority interest in the statements of operations, which are reflected in other income, were $.6 million and $.1 million for the years ended December 31, 1994 and 1995, respectively, and represented accrued dividends and the minority shareholders interest in net income of the respective subsidiary. In connection with the Combination, the Company acquired the remaining outstanding shares of certain of its subsidiaries, redeemed outstanding preferred stock and paid cumulative dividends. F-20 SUIZA FOODS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995 AND FOR THE UNAUDITED NINE MONTHS ENDED SEPTEMBER 30, 1995 AND 1996 13. STOCKHOLDERS' EQUITY CAPITAL SHARES. Authorized capital shares of the Company include 10,000 shares (1,000,000 shares as of February 29, 1996) of preferred stock with a par value of $.01 per share and 200,000 shares (20,000,000 shares as of February 29, 1996) of common stock with a par value of $.01 per share. There have been no shares of preferred stock issued by the Company. The rights and preferences of preferred stock are established by the Company's board of directors upon issuance. In connection with the Combination, the Company issued 1,973,049 shares of common stock in exchange for outstanding equity interests held by Reddy Ice investors; 3,415,558 shares of common stock in exchange for outstanding equity interests held by Suiza-Puerto Rico investors; and 924,872 shares of common stock in exchange for outstanding equity interests held by Velda Farms investors. The Company also granted the previous owners two demand registration rights as well as incidental registration rights and additional registration rights, effective upon the Company becoming eligible for registration on Form S-3, with respect to their shares of common stock, subject to certain limitations. Effective upon the closing of the Company's first underwritten public offering, these registration rights will terminate and the previous owners will receive three new demand registration rights and incidental registration rights subject to certain limitations. In connection with the acquisitions of Suiza-Puerto Rico and Velda Farms, profits interests were granted to certain individuals, through an affiliate, as compensation for services in identifying, structuring and negotiating these acquisitions. Immediately prior to the Combination, the existing owners of Suiza-Puerto Rico and Velda Farms fixed this profits interest by mutual agreement and exchanged equity interests among investors and these individuals. In connection with this exchange, the Company recorded a compensation expense charge to merger expense of $5.1 million, which approximated the fair value of these interests, and resulted in a capital contribution in the same amount. COMMON STOCK SPLIT. On February 28, 1996, the Company's Board of Directors authorized a 69 for 1 stock split in the form of a common stock dividend payable to stockholders of record on February 29, 1996. In addition, on the same date, the Board of Directors authorized the increase in the number of authorized shares of preferred and common stock to 1,000,000 shares and 20,000,000 shares, respectively. All references in the consolidated financial statements to number of common shares outstanding and per share amounts, and all references to common stock issued, stock options and related prices in the notes to the consolidated financial statements have been restated to reflect the split. STOCK OFFERINGS. On April 22, 1996 and August 7, 1996, the Company sold shares of common stock. See Note 21 "Subsequent Events" for additional disclosure. STOCK OPTION AND RESTRICTED STOCK PLANS. In connection with the Combination, the Company adopted an exchange option and restricted stock plan, whereby the outstanding stock options granted by the Combined Entities were converted into options to acquire 586,523 shares of common stock on substantially the same terms as the prior options. These options are exercisable at prices ranging from $.03 to $6.79 per share, which approximated the fair market value of such shares at the date of original grant. At December 31, 1995, 579,760 of such options were outstanding, of which 480,450 were exercisable at prices ranging from $.03 to $6.79 per share. The options vest ratably in five annual increments and may be exercised, to the extent vested, over the ten-year period following the award date. Concurrently with the Combination, the Company adopted the Option and Restricted Stock Plan (the "Plan"), which provides for grants of incentive and nonqualified stock options and awards of restricted F-21 SUIZA FOODS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995 AND FOR THE UNAUDITED NINE MONTHS ENDED SEPTEMBER 30, 1995 AND 1996 13. STOCKHOLDERS' EQUITY (CONTINUED) stock to directors and key employees of the Company or its subsidiaries of up to 1,069,500 shares, provided that no more than 379,500 shares may be awarded as restricted stock. Under the terms of the Plan, the options vest ratably over a three year period, except for options granted to outside directors, which vest immediately. The Plan also provides that the exercise price of stock options will not be less than the fair market value on the date of grant, and in the case of an incentive stock option granted to an employee owning more than 10% of the common stock of the Company on the date of grant, not less than 110% of the fair market value. In connection with the Combination, on March 31, 1995, the Company's Board of Directors granted 474,375 options pursuant to the Plan at an exercise price per share of $10.51. In addition, during the remainder of 1995, the Company granted options for an additional 3,450 shares at the same exercise price per share. At December 31, 1995, 477,825 options were outstanding at an exercise price of $10.51 per share, of which 3,450 shares were exercisable. Effective January 1, 1996 the Board of Directors authorized the grant of options for 159,253 shares at an exercise price of $12.32 per share. Effective July 1, 1996, the Board of Directors authorized the grant of options for 50,000 shares at an exercise price of $16.00 per share. Effective September 1, 1996, the Board of Directors authorized the grant of options for 123,000 shares at an exercise price of $16.25 per share. The Company applies APB Opinion No. 25 and related interpretations in accounting for its stock option plans and accordingly no compensation cost has been recognized since stock options granted under these plans were at exercise prices which approximated market value at the grant date. Had compensation expense been determined for current period stock option grants using fair value methods provided for in SFAS 123, the Company's net income (loss) and net earnings (loss) per common share would have been reduced to the pro forma amounts indicated below:
YEAR ENDED NINE MONTHS ENDED DECEMBER 31, 1995 SEPTEMBER 30, 1996 ----------------- ------------------ (UNAUDITED) (DOLLARS IN THOUSANDS, EXCEPT SHARE DATA) Compensation Cost................................................ $ 765 $ 1,119 Net income (loss): As reported.................................................... $ (10,038) $ 21,658 Pro forma...................................................... (10,543) 20,920 Net earnings (loss) per share: As reported.................................................... $ (1.64) $ 2.31 Pro forma...................................................... (1.73) 2.23 Stock option share data: Stock options granted during period............................ 477,825 332,253 Weighted average exercise price................................ $ 10.51 $ 14.33 Average option compensation value (1).......................... 6.41 8.44
- ------------------------ (1) Calculated in accordance with the Black-Scholes option pricing model, using the following assumptions: expected volatility of 30-35%; expected dividend yield of 0%; expected option term of ten years and risk-free rate of return as of the date of grant which ranged from 5.64% to 7.15% based on the yield of ten year U.S. treasury securities. F-22 SUIZA FOODS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995 AND FOR THE UNAUDITED NINE MONTHS ENDED SEPTEMBER 30, 1995 AND 1996 13. STOCKHOLDERS' EQUITY (CONTINUED) WARRANTS. Prior to the Combination, Suiza-Puerto Rico, Velda Farms and Reddy Ice had entered into various warrant agreements with their subordinated and junior subordinated noteholders which granted such holders the right to purchase equity interests in each of the companies. These warrants were exercisable, in whole or in part, at various dates through December 31, 2005. Immediately prior to the Combination, all warrant holders exercised their warrants to acquire equity interests in Suiza-Puerto Rico, Velda Farms and Reddy Ice in consideration for aggregate proceeds of $4.1 million. As a result, such warrant holders became equity holders of each of Suiza-Puerto Rico, Velda Farms and Reddy Ice, and received shares of the Company's common stock in the Combination. 14. EMPLOYEES SAVINGS AND PROFIT SHARING PLANS The Company's subsidiaries each sponsor employees savings and profit sharing plans. Employees who have completed one or more years of service and have met other requirements pursuant to the plans are eligible to participate in the plans. The employees participating in the plans can generally make contributions to the plan of between 6% and 8% of their annual compensation, and each of the subsidiaries can elect to match such contributions. During the years ended December 31, 1994 and 1995, the Company expensed contributions to the plans of approximately $.8 million and $.8 million, respectively. There were no material contributions during 1993. During the unaudited nine months ended September 30, 1995 and 1996, the Company expensed contributions to the plans of approximately $.5 million and $.6 million, respectively. 15. MERGER AND OTHER COSTS MERGER AND OTHER COSTS. During 1994 and 1995, in connection with the Combination, the Company incurred merger and other costs of $1.7 million and $10.2 million, respectively, which consisted of the costs associated with the negotiation of the merger and preparation of related merger documents and agreements, financial consulting costs and other costs related to the Combination of $1.4 million and $8.8 million in 1994 and 1995, respectively; and other non-operating costs of $.3 million and $1.4 million, respectively. During 1995, these other merger costs related to the Combination included a one-time $.5 million payment to cancel an existing management consulting agreement; a one-time tax cost of $1.5 million to convert the Company's Puerto Rico operating subsidiaries to United States corporations; the write-off of $.4 million in unamortized organization costs; and $5.1 million to recognize compensation expense related to the issuance of common stock in exchange for the profits interest in Suiza-Puerto Rico and Velda Farms (Note 13), which resulted in a capital contribution in the same amount. Other non-operating costs included $.3 million of bank fees in 1994 related to the funding of bridge loans to repay certain indebtedness prior to the Combination, and during 1995, $.7 million of costs associated with several uncompleted acquisitions and $.7 million of costs associated with an uncompleted debt offering. See discussion of 1996 costs in Note 21 "Subsequent Events." EXTRAORDINARY LOSS. During 1994 and 1995, as a result of the repayment of outstanding indebtedness, the Company expensed approximately $.2 million and $8.5 million (net of income tax benefit of $.7 million), respectively, of debt issuance, legal and other costs associated with extinguishment of prior credit facilities. These amounts have been classified as an extraordinary loss in accordance with the provisions of F-23 SUIZA FOODS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995 AND FOR THE UNAUDITED NINE MONTHS ENDED SEPTEMBER 30, 1995 AND 1996 15. MERGER AND OTHER COSTS (CONTINUED) Statement of Financial Accounting Standards No. 4, "Reporting Gains and Losses From the Extinguishment of Debt." 16. SUPPLEMENTAL CASH FLOW INFORMATION
DECEMBER 31, SEPTEMBER 30, ------------------------------- -------------------- 1993 1994 1995 1995 1996 --------- --------- --------- --------- --------- (UNAUDITED) (IN THOUSANDS) Cash paid for interest.......................... $ 6,136 $ 16,929 $ 17,226 $ 16,939 $ 14,646 Cash paid for taxes............................. 362 1,432 432 3,698 Noncash transactions: Issuance of subsidiary preferred stock in connection with acquisitions................ 5,000 3,000 Issuance of subordinated notes and amounts payable to the seller in connection with acquisitions................................ 365 4,495 91 Dividends payable or paid in additional preferred stock on subsidiary stock......... 10 197 Distribution of investment and related debt in a bread bag manufacturer to stockholders of Reddy Ice................................... 1,534 1,534 Acquisition of minority interest common stock and exercise of warrants.................... 993 993 Compensation expense recorded as a capital contribution................................ 5,111 5,111 Subordinated notes issued in lieu of interest.................................... 430 671 671 433
17. COMMITMENTS AND CONTINGENCIES The Company and its subsidiaries are parties, in the ordinary course of business, to certain claims and litigation. In management's opinion, the settlement of such matters is not expected to have a material impact on the consolidated financial statements. In connection with the Combination, the Company entered into employment agreements with certain officers which provided for minimum compensation levels and incentive bonuses along with provisions for termination of benefits in certain circumstances. The Company also entered into a consulting and noncompetition arrangement with a former officer for a period of three years providing for monthly payments of $12,500 for services to be rendered in the future. 18. RELATED PARTY TRANSACTIONS Prior to the Combination, the Company had consulting agreements with certain stockholders and affiliates requiring the payment of monthly consulting fees, plus expenses, in consideration for financial advisory and oversight services provided to it by such stockholders. These consulting agreements, which were cancelable only at the option of such stockholders over their term, were canceled in the Combination. During the years ended December 31, 1993, 1994 and 1995, the Company expensed $.6 million, $.9 million and $.2 million, respectively, plus expenses under the provisions of these agreements, which are included in F-24 SUIZA FOODS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995 AND FOR THE UNAUDITED NINE MONTHS ENDED SEPTEMBER 30, 1995 AND 1996 18. RELATED PARTY TRANSACTIONS (CONTINUED) general and administrative expenses. In addition, the Company paid an affiliate of one of its stockholders investment banking fees of $2.0 million and $1.1 million, along with related expenses, during the years ended December 31, 1993 and 1994, respectively, for acquisition and financing services, which were included as part of the costs and expenses of the acquisition. 19. BUSINESS AND GEOGRAPHIC INFORMATION AND MAJOR CUSTOMERS Information about the Company's operations in the Dairy and Ice businesses and in different geographic areas is as follows:
NINE MONTHS ENDED YEAR ENDED DECEMBER 31, SEPTEMBER 30, ------------------------------- -------------------- 1993 1994 1995 1995 1996 --------- --------- --------- --------- --------- (UNAUDITED) (IN THOUSANDS) Net sales to unaffiliated customers: Dairy: United States.......................... $ -- $ 102,073 $ 175,553 $ 129,692 $ 163,845 Puerto Rico............................ 6,587 191,334 204,406 154,844 157,677 --------- --------- --------- --------- --------- 6,587 293,407 379,959 284,536 321,522 Ice--United States....................... 45,088 47,701 50,507 40,918 43,089 --------- --------- --------- --------- --------- Total................................ $ 51,675 $ 341,108 $ 430,466 $ 325,454 $ 364,611 --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- Operating income: Dairy: United States.......................... $ -- $ 4,848 $ 8,772 $ 5,733 $ 6,799 Puerto Rico............................ 92 12,274 13,614 10,808 10,770 --------- --------- --------- --------- --------- 92 17,122 22,386 16,541 17,569 Ice--United States....................... 8,610 8,638 9,218 8,800 10,040 Corporate................................ (1,040) (1,107) (1,205) --------- --------- --------- --------- --------- Total................................ $ 8,702 $ 25,760 $ 30,564 $ 24,234 $ 26,404 --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- Identifiable assets (at end of period): Dairy: United States.......................... $ 68,781 $ 68,852 $ 136,516 Puerto Rico............................ 125,207 119,977 154,942 --------- --------- --------- 193,988 188,829 291,458 Ice--United States....................... 44,964 40,519 53,873 Corporate................................ 3,174 4,339 --------- --------- --------- Total................................ $ 238,952 $ 232,522 $ 349,670 --------- --------- --------- Capital expenditures: Dairy.................................... $ 312 $ 3,364 $ 6,676 $ 4,553 $ 7,821 Ice...................................... 895 1,420 3,573 3,067 2,319 Corporate................................ 143 18 46 --------- --------- --------- --------- --------- Total................................ $ 1,207 $ 4,784 $ 10,392 $ 7,638 $ 10,186 --------- --------- --------- --------- --------- --------- --------- --------- --------- ---------
F-25 SUIZA FOODS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995 AND FOR THE UNAUDITED NINE MONTHS ENDED SEPTEMBER 30, 1995 AND 1996 19. BUSINESS AND GEOGRAPHIC INFORMATION AND MAJOR CUSTOMERS (CONTINUED)
NINE MONTHS ENDED YEAR ENDED DECEMBER 31, SEPTEMBER 30, ------------------------------- -------------------- 1993 1994 1995 1995 1996 --------- --------- --------- --------- --------- (UNAUDITED) (IN THOUSANDS) Depreciation expense: Dairy.................................... $ 217 $ 4,943 $ 5,995 $ 4,325 $ 4,762 Ice...................................... 3,259 3,301 3,263 2,509 2,270 --------- --------- --------- --------- --------- Total................................ $ 3,476 $ 8,244 $ 9,258 $ 6,834 $ 7,032 --------- --------- --------- --------- --------- --------- --------- --------- --------- ---------
20. FAIR VALUE OF FINANCIAL INSTRUMENTS Pursuant to SFAS No. 107, "Disclosure About Fair Value of Financial Instruments", the Company is required to disclose an estimate of the fair value of the Company's financial instruments as of December 31, 1994 and 1995. Differences between the historical presentation and estimated fair values can occur for many reasons, including taxes, commissions, prepayment penalties, make-whole provisions and other restrictions as well as the inherent limitations in any estimation technique. Due to their near-term maturities, the carrying amounts of accounts receivable and accounts payable are considered equivalent to fair value. In addition, because the interest rates on the Company's revolving credit and term loan facilities and certain other debt are variable, their fair values approximate their carrying values. Certain of the Company's long-term debt bears fixed interest rates and is privately placed with unique terms and no active market. The fair value of such long-term debt was determined by discounting future cash flows at current market yields. In addition, the Company has entered into various interest rate agreements to reduce the Company's sensitivity to changes in interest rates on its variable rate debt. The fair values of these instruments were determined based on current values for similar instruments with similar terms. The following is a summary of the asset (liability) values for both the carrying values and fair values of such instruments:
DECEMBER 31, ------------------------------------------ 1994 1995 -------------------- -------------------- HISTORICAL HISTORICAL CARRYING FAIR CARRYING FAIR AMOUNT VALUE AMOUNT VALUE --------- --------- --------- --------- (IN THOUSANDS) (IN THOUSANDS) Fixed rate debt...................................... $ (91,929) $ (85,121) $ (52,472) $ (53,621) Interest rate agreements............................. 333 630 -- (1,220)
21. SUBSEQUENT EVENTS (UNAUDITED) On April 22, 1996, the Company sold 3,795,000 shares of common stock, $.01 par value per share, in a public offering at a price to the public of $14.00 per share. Following this offering, the Company had 10,108,479 shares of common stock issued and outstanding. The public offering provided net cash proceeds to the Company of approximately $48.6 million. Of this amount, $31.1 million was used to repay senior debt, $15.7 million was used to repay the Company's 15% subordinated notes and $1.8 million was used to pay prepayment penalties related to the early extinguishment of the 15% subordinated notes. As a result of these transactions, the Company recorded a $2.2 million extraordinary loss from extinguishment of debt F-26 SUIZA FOODS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995 AND FOR THE UNAUDITED NINE MONTHS ENDED SEPTEMBER 30, 1995 AND 1996 21. SUBSEQUENT EVENTS (UNAUDITED) (CONTINUED) which included $1.8 million in prepayment penalties and $1.3 million for the write-off of deferred financing costs related to the repaid debt, net of a tax benefit of $0.9 million. In addition, on August 7, 1996, the Company sold 625,000 shares of its common stock at a price of $16.00 per share in a private placement to a single investor. Following the private sale, the Company had 10,739,729 shares of common stock issued and outstanding. On July 19, 1996, the Company amended its senior credit facilities to borrow $35.0 million to complete the Garrido acquisition (see discussion of the Garrido acquisition below). Pursuant to this amendment, the Company's term loans were combined into a single $130.0 million U.S. based facility. In addition, on September 9, 1996, the Company further amended its senior credit facilities to add a new $90.0 million acquisition facility. The Company is required to pay interest only on amounts drawn under this facility until September 30, 1998, at which time any outstanding balance will convert into a term facility with scheduled amortization. In connection with this amendment, the Company expensed $571,000 of financing costs. Under the amended senior credit facilities, quarterly amortization payments beginning September 30, 1996 are $2.5 million, increasing to: $3.75 million on September 30, 1997; and $5.0 million on September 30, 1998; $5.375 million on September 30, 1999; and $6.0 million on September 30, 2000, with the remaining unpaid balance due on March 31, 2002. In July 1996, the Company acquired the common stock of Garrido y Compania ("Garrido") for approximately $35.0 million. In September 1996, the Company purchased the assets of Swiss Dairy Corporation ("Swiss Dairy") for approximately $54.0 million. In December 1996, the Company purchased the assets of Model Dairy, Inc. ("Model Dairy") for approximately $26.0 million. Approximately $71.0 million of the funds required for the Swiss Dairy and Model Dairy acquisitions were funded from the Company's new $90.0 million acquisition facility. Sales for Garrido and Swiss Dairy were approximately $26.2 million and $108.2 million, respectively, for the twelve month period preceding their acquisition. Sales for Model Dairy were approximately $56.9 million for its fiscal year ended October 31, 1996. F-27 INDEPENDENT AUDITORS' REPORT To the Board of Directors Suiza Dairy Corporation Suiza Fruit Corporation Neva Plastics Manufacturing Corp. We have audited the accompanying combined balance sheet of Suiza Dairy Corporation and subsidiary, Borinquen Dairy, Inc., Suiza Fruit Corporation and Neva Plastics Manufacturing Corp. (collectively referred to as "Pre-acquisition Suiza-Puerto Rico") as of December 15, 1993, and the related combined statements of operations, stockholders' equity and cash flows for the period from December 31, 1992 to December 15, 1993. These financial statements are the responsibility of Pre-acquisition Suiza-Puerto Rico's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, such financial statements present fairly, in all material respects, the combined financial position of Pre-acquisition Suiza-Puerto Rico as of December 15, 1993, and the results of their combined operations and cash flows for the period from December 31, 1992 to December 15, 1993, in conformity with generally accepted accounting principles. On December 16, 1993, as discussed in Note 1, the Pre-acquisition Suiza-Puerto Rico companies were acquired by Suiza Holdings, L.P. DELOITTE & TOUCHE LLP Dallas, Texas April 15, 1994 F-28 PRE-ACQUISITION SUIZA-PUERTO RICO COMBINED BALANCE SHEET DECEMBER 15, 1993 ASSETS CURRENT ASSETS: Cash......................................................................... $11,303,709 Marketable securities........................................................ 9,788,501 Accounts receivable (Note 2)................................................. 10,017,470 Inventories (Note 3)......................................................... 3,987,522 Prepaid expenses and other current assets.................................... 1,561,185 ---------- Total current assets....................................................... 36,658,387 PROPERTY, PLANT AND EQUIPMENT (Note 4)......................................... 31,134,998 INTANGIBLE AND OTHER ASSETS (Note 5)........................................... 564,082 ---------- TOTAL.......................................................................... $68,357,467 ---------- ---------- LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Revolving credit facility advances (Note 7).................................. $17,565,233 Accounts payable and accrued expenses (Note 6)............................... 10,940,482 Income tax payable (Note 9).................................................. 28,029 Current portion of long-term debt (Note 7)................................... 13,074,206 ---------- Total current liabilities.................................................. 41,607,950 COMMITMENTS AND CONTINGENCIES (Notes 8 and 12) COMBINED STOCKHOLDERS' EQUITY: Preferred stock.............................................................. 6,922,700 Common stock................................................................. 8,998,741 Additional paid-in capital................................................... Retained earnings............................................................ 10,828,076 ---------- Total equity............................................................... 26,749,517 ---------- TOTAL.......................................................................... $68,357,467 ---------- ----------
See notes to combined financial statements. F-29 PRE-ACQUISITION SUIZA-PUERTO RICO COMBINED STATEMENT OF OPERATIONS PERIOD FROM DECEMBER 31, 1992 TO DECEMBER 15, 1993
PERIOD ENDED DECEMBER 15, 1993 (50 WEEKS) -------------- NET SALES......................................................................................... $ 174,770,747 COST OF SALES..................................................................................... 135,020,164 -------------- GROSS PROFIT...................................................................................... 39,750,583 OPERATING EXPENSES: Selling and distribution........................................................................ 21,664,253 General and administrative...................................................................... 6,263,115 Amortization of intangibles..................................................................... 103,529 -------------- Total operating expenses...................................................................... 28,030,897 -------------- OPERATING INCOME.................................................................................. 11,719,686 OTHER (INCOME) EXPENSE: Interest expense, including amortization of deferred financing costs............................ 2,407,316 Interest income................................................................................. (1,228,133) Other........................................................................................... (106,640) -------------- Total other expense........................................................................... 1,072,543 -------------- INCOME BEFORE INCOME TAXES........................................................................ 10,647,143 INCOME TAX BENEFIT (Note 9)....................................................................... (2,246,209) -------------- NET INCOME........................................................................................ $ 12,893,352 -------------- --------------
See notes to combined financial statements. F-30 PRE-ACQUISITION SUIZA-PUERTO RICO COMBINED STATEMENT OF STOCKHOLDERS' EQUITY PERIOD FROM DECEMBER 31, 1992 TO DECEMBER 15, 1993
ADDITIONAL PREFERRED PAID-IN RETAINED STOCK COMMON STOCK CAPITAL EARNINGS TOTAL ------------ ------------ ----------- ------------- ------------- BALANCE, DECEMBER 31, 1992................ $ 6,922,700 $ 8,529,306 $ 439,694 $ 7,279,515 $ 23,171,215 Distribution of net assets of the fruit business of Suiza Dairy Corporation to form Suiza Fruit Corporation.......... 469,435 (439,694) (29,741) -- Net income for the period ended December 15, 1993.............................. 12,893,352 12,893,352 Dividends............................... (9,315,050) (9,315,050) ------------ ------------ ----------- ------------- ------------- BALANCE, DECEMBER 15, 1993................ $ 6,922,700 $ 8,998,741 $ -- $ 10,828,076 $ 26,749,517 ------------ ------------ ----------- ------------- ------------- ------------ ------------ ----------- ------------- -------------
See notes to combined financial statements. F-31 PRE-ACQUISITION SUIZA-PUERTO RICO COMBINED STATEMENT OF CASH FLOWS PERIOD FROM DECEMBER 31, 1992 TO DECEMBER 15, 1993
PERIOD ENDED DECEMBER 15, 1993 (50 WEEKS) -------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income...................................................................................... $ 12,893,352 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization................................................................. 4,874,100 Amortization of intangibles and other assets, including deferred financing costs.............. 103,529 Change in deferred income taxes............................................................... (2,734,497) Gain on sale of marketable securities......................................................... (679,112) Changes in operating assets and liabilities: Accounts receivable......................................................................... 2,590,937 Inventories................................................................................. 99,600 Prepaid expenses and other assets........................................................... (467,560) Accounts payable and other accrued expenses................................................. (600,638) Income tax payable.......................................................................... (3,703,506) -------------- Net cash provided by operating activities................................................. 12,376,205 CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of marketable securities.............................................................. (9,819,875) Proceeds from sale of marketable securities..................................................... 11,290,693 Capital expenditures............................................................................ (3,758,983) Collection of note receivable................................................................... 540,000 -------------- Net cash used in investing activities..................................................... (1,748,165) CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from the issuance of debt.............................................................. 16,702,291 Repayments of debt.............................................................................. (4,315,389) Cash dividends.................................................................................. (14,994,428) -------------- Net cash used in financing activities..................................................... (2,607,526) -------------- INCREASE IN CASH.................................................................................. 8,020,514 CASH AT BEGINNING OF PERIOD....................................................................... 3,283,195 -------------- CASH AT END OF PERIOD............................................................................. $ 11,303,709 -------------- --------------
See notes to combined financial statements. F-32 PRE-ACQUISITION SUIZA-PUERTO RICO NOTES TO COMBINED FINANCIAL STATEMENTS PERIOD FROM DECEMBER 31, 1992 TO DECEMBER 15, 1993 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES ORGANIZATION AND BUSINESS. Suiza Dairy Corporation and its wholly owned subsidiary, Borinquen Dairy, Inc., Suiza Fruit Corporation (formed effective January 1, 1993, through the distribution of the net assets of the fruit business of Suiza Dairy Corporation) and Neva Plastics Manufacturing Corp. (collectively, "Pre-Acquisition Suiza-Puerto Rico" or "Suiza-Puerto Rico") were affiliated companies in Puerto Rico under common control and management. Accordingly, combined financial statements are presented for the operations of these affiliated companies. All significant intercompany balances and transactions were eliminated in combination. Effective December 16, 1993, Pre-Acquisition Suiza-Puerto Rico was acquired by Suiza Holdings, L.P. (a limited partnership) which was organized under the laws of the State of Delaware in December 1993 as a holding company for its Puerto Rico subsidiaries, Suiza Dairy Corporation (formerly Engles Acquisition D, Inc.), Suiza Fruit Corporation (formerly Engles Acquisition F, Inc.) and Neva Plastics Manufacturing Corp. (formerly Engles Acquisition P, Inc.) to effect the acquisition of the combined companies. Suiza-Puerto Rico manufactures and distributes fluid milk products and refrigerated ready-to-serve fruit drinks, and distributes refrigerated and frozen foods to various customers, including grocery stores, retail outlets and schools throughout Puerto Rico. Suiza-Puerto Rico provides credit terms to certain customers generally ranging from 15 to 30 days, performs ongoing credit evaluations of its customers and maintains allowances for potential credit losses based on historical experience. MARKETABLE SECURITIES. Marketable securities consist principally of U.S. government securities and are stated at the lower of cost or market at the balance sheet date. Dividends and interest income are accrued as earned. The cost of marketable securities sold is determined on the specific identification method for recognizing realized gains or losses on sales of marketable securities. INVENTORIES. Pasteurized and raw milk inventories are stated at the lower of average cost or market. Raw materials, spare parts and supplies, and merchandise for resale inventories are stated at the lower of cost, using the first-in, first-out ("FIFO") method, or market. Manufactured finished goods inventories are stated at the lower of average production cost or market. Production costs include raw materials, direct labor and indirect production and overhead costs. PROPERTY, PLANT AND EQUIPMENT. Property, plant and equipment are stated at cost. Depreciation and amortization are provided using the straight-line method over the estimated useful lives of the assets, as follows:
ASSET USEFUL LIFE - --------------------------------------------------------------- --------------------- Buildings and improvements..................................... Ten to 40 years Machinery and equipment........................................ Five to 20 years Motor vehicles................................................. Five to 15 years Furniture and fixtures......................................... Three to ten years
Capitalized lease assets are amortized over the shorter of their lease term or their estimated useful lives. Expenditures for repairs and maintenance which do not improve or extend the life of the assets are expensed as incurred. INTANGIBLES AND OTHER ASSETS. Intangibles and other assets include primarily goodwill which is amortized over 40 years using the straight-line method. F-33 PRE-ACQUISITION SUIZA-PUERTO RICO NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED) PERIOD FROM DECEMBER 31, 1992 TO DECEMBER 15, 1993 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Suiza-Puerto Rico periodically assesses the net realizable value of its intangible assets, as well as all other assets, by comparing the expected future net operating cash flows, undiscounted and without interest charges, to the carrying amount of the underlying assets. Suiza-Puerto Rico would evaluate a potential impairment if the recorded value of these assets exceeded the associated future net operating cash flows. Any potential impairment loss would be measured as the amount by which the carrying value exceeds the fair value of the asset. Fair value of assets would be measured by market value, if an active market exists, or by a forecast of expected future net operating cash flows, discounted at a rate commensurate with the risk involved. REVENUE. Revenue is recognized when the product is shipped to the customer. INCOME TAXES. Suiza Dairy Corporation, Suiza Fruit Corporation and Neva Plastics Manufacturing Corp. were all organized under the laws of the Commonwealth of Puerto Rico, and as a result, each is required to file a separate income tax return in Puerto Rico. Accordingly, Puerto Rico income taxes are provided for in the combined financial statements based on each company's separate Puerto Rico tax returns. Suiza Fruit Corporation and Neva Plastics Manufacturing Corp. have been granted, with certain qualifications, partial exemptions from Puerto Rico income, property and municipal taxes. The grants were originally made to extend for a period of ten years and provide for a 90% exemption from income and property taxes and a 60% exemption from municipal taxes. Deferred income taxes are provided for in the combined financial statements for temporary differences in the financial statement and tax bases of assets and liabilities using current tax rates in effect in accordance with Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes." There are no material temporary differences which give rise to deferred income taxes. CASH EQUIVALENTS. Suiza-Puerto Rico considers all highly liquid investments purchased with a remaining maturity of three months or less to be cash equivalents. 2. ACCOUNTS RECEIVABLE
DECEMBER 15, 1993 ----------------- Trade customers, including route receivables............................... $ 7,811,936 Milk industry and milk price stabilization fund............................ 750,406 Suppliers.................................................................. 292,058 Customer financing receivables............................................. 683,207 Officers and employees..................................................... 330,578 Other...................................................................... 499,285 ----------------- 10,367,470 Less allowance for doubtful accounts....................................... (350,000) ----------------- $ 10,017,470 ----------------- -----------------
Trade customers accounts receivable include $1,656,000 of route receivables. F-34 PRE-ACQUISITION SUIZA-PUERTO RICO NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED) PERIOD FROM DECEMBER 31, 1992 TO DECEMBER 15, 1993 3. INVENTORIES
DECEMBER 15, 1993 ----------------- Pasteurized and raw milk................................................... $ 771,571 Raw materials.............................................................. 821,606 Spare parts and supplies................................................... 1,573,743 Manufactured finished goods................................................ 306,860 Merchandise purchased for resale........................................... 513,742 ----------------- $ 3,987,522 ----------------- -----------------
4. PROPERTY, PLANT AND EQUIPMENT
DECEMBER 15, 1993 ----------------- Land....................................................................... $ 997,112 Buildings and improvements................................................. 12,888,499 Machinery and equipment.................................................... 24,355,356 Motor vehicles............................................................. 9,770,939 Furniture and fixtures..................................................... 3,059,807 ----------------- 51,071,713 Less accumulated depreciation and amortization............................. (19,936,715) ----------------- $ 31,134,998 ----------------- -----------------
5. INTANGIBLE AND OTHER ASSETS
DECEMBER 15, 1993 ----------------- Goodwill................................................................... $ 722,187 Deposits and other......................................................... 2,100 ----------------- 724,287 Less accumulated amortization.............................................. (160,205) ----------------- $ 564,082 ----------------- -----------------
6. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
DECEMBER 15, 1993 ----------------- Accounts payable........................................................... $ 8,318,021 Accrued payroll and benefits............................................... 1,638,505 Accrued interest........................................................... 41,672 Other...................................................................... 942,284 ----------------- $ 10,940,482 ----------------- -----------------
F-35 PRE-ACQUISITION SUIZA-PUERTO RICO NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED) PERIOD FROM DECEMBER 31, 1992 TO DECEMBER 15, 1993 7. DEBT
DECEMBER 15, 1993 ----------------- Revolving credit facility advances......................................... $ 17,565,233 ----------------- ----------------- Long-term debt: Debt repaid upon acquisition............................................. $ 12,279,991 Capitalized lease obligations (Note 8)................................... 794,215 ----------------- 13,074,206 Less current portion....................................................... (13,074,206) ----------------- $ -- ----------------- -----------------
In connection with the acquisition by Suiza Holdings, L.P. described in Note 1, the Pre-acquisition Suiza-Puerto Rico debt, including revolving credit facility advances, were assumed and repaid on December 16, 1993. CAPITAL LEASE OBLIGATIONS AND OTHER. Capital lease obligations represent primarily machinery and equipment financing obligations which are payable in monthly installments of principal and interest and are collateralized by the related assets financed. 8. LEASES Suiza-Puerto Rico leases certain property, plant and equipment used in its operations under both capital and operating lease agreements. Such leases, which are primarily for equipment and vehicles, have lease terms ranging from five to seven years. Certain of the operating lease agreements require the payment of additional rentals based on units produced. Rent expense, including additional rent, was $351,000 for the period from December 31, 1992 to December 15, 1993. 9. INCOME TAXES The following is a reconciliation of income taxes reported in the combined statements of operations:
PERIOD ENDED DECEMBER 15, 1993 (50 WEEKS) ------------- Tax expense at statutory rates................................................. $ 4,473,031 Tax benefit from tax-exempt earnings........................................... (4,348,317) Deferred tax benefit........................................................... (2,734,497) Other.......................................................................... 363,574 ------------- $ (2,246,209) ------------- -------------
During 1993, the Department of Treasury of the Commonwealth of Puerto Rico completed an examination of Suiza Dairy Corporation's income tax returns through fiscal year 1992. As the result of this examination, the Department of Treasury assessed Suiza Dairy Corporation additional taxes to recapture tax deductions taken for flexible depreciation in prior years. During the period ended December 15, 1993, an agreement was reached with the Department of Treasury of the Commonwealth of Puerto Rico F-36 PRE-ACQUISITION SUIZA-PUERTO RICO NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED) PERIOD FROM DECEMBER 31, 1992 TO DECEMBER 15, 1993 9. INCOME TAXES (CONTINUED) whereby Suiza Dairy Corporation agreed to pay $3,000,000 (including interest assessed of $604,000) to settle all claims related to flexible depreciation and to eliminate any temporary differences related to depreciation in the future. As a result of this settlement of all flexible depreciation claims, excess deferred tax liabilities of $2,734,497 were recognized as a tax benefit. 10. EMPLOYEES SAVINGS AND PROFIT SHARING PLAN The companies sponsor an employees savings and profit sharing plan. Employees who are both 21 years of age and have completed one or more years of service are eligible to participate in the plan. The employees participating in the plan can make contributions to the plan of up to 8% of their annual compensation, and the companies can elect to match such contributions, at the discretion of the boards of directors. The matching amount during 1993 was set at a rate of $.75 for each dollar contributed by the employees. In addition, the companies can make an additional profit sharing contribution at the discretion of the companies' boards of directors. During the period from December 31, 1992 to December 15, 1993, Suiza-Puerto Rico accrued profit sharing expense of $828,000. 11. SUPPLEMENTAL CASH FLOW INFORMATION Cash used to pay interest during the period from December 31, 1992 to December 15, 1993, amounted to approximately $2,313,000. Cash used to pay taxes during the period from December 31, 1992 to December 15, 1993, amounted to approximately $1,084,000. Noncash transactions during the period ended December 15, 1993, included the distribution of the net assets of the fruit business of Suiza Dairy Corporation to stockholders and the contribution of such net assets to Suiza Fruit Corporation in exchange for the issuance of common stock in the amount of $548,358. 12. COMMITMENTS AND CONTINGENCIES The companies are a party, in the ordinary course of business, to certain claims and litigation. In management's opinion, the settlement of such matters is not expected to have a material impact on the combined financial statements. F-37 INDEPENDENT AUDITORS' REPORT To the Board of Directors Velda Farms, Inc. Dallas, Texas We have audited the accompanying balance sheets of Velda Farms, Inc. (a wholly owned subsidiary of The Morningstar Group, Inc. ("Pre-acquisition Velda Farms")) as of April 9, 1994 and December 31, 1993, and the related statements of operations, equity (deficit) and cash flows for the period from January 1, 1994 to April 9, 1994, and for the year ended December 31, 1993. These financial statements are the responsibility of Pre-acquisition Velda Farms' management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such financial statements present fairly, in all material respects, the financial position of Pre-acquisition Velda Farms at April 9, 1994 and December 31, 1993 and the results of its operations and its cash flows for the period from January 1, 1994 to April 9, 1994 and the year ended December 31, 1993 in conformity with generally accepted accounting principles. Effective April 10, 1994, as discussed in Note 1, Pre-acquisition Velda Farms was acquired by Velda Holdings, Inc. and Velda Holdings, L.P. DELOITTE & TOUCHE LLP Dallas, Texas November 4, 1994 F-38 PRE-ACQUISITION VELDA FARMS BALANCE SHEETS DECEMBER 31, 1993 AND APRIL 9, 1994 ASSETS
DECEMBER 31, APRIL 9, 1993 1994 ------------- ------------- CURRENT ASSETS: Cash............................................................................. $ 2,219 $ 1,425 Accounts receivable (Note 2)..................................................... 10,066,504 12,072,851 Inventories (Note 3)............................................................. 4,063,307 3,925,354 Prepaid expenses and other current assets........................................ 31,882 228,627 ------------- ------------- Total current assets........................................................... 14,163,912 16,228,257 PROPERTY, PLANT AND EQUIPMENT (Note 4)............................................. 13,627,432 13,425,470 INTANGIBLE AND OTHER ASSETS (Note 5)............................................... 10,423,366 10,213,730 ------------- ------------- TOTAL.............................................................................. $ 38,214,710 $ 39,867,457 ------------- ------------- ------------- ------------- LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) CURRENT LIABILITIES: Accounts payable and accrued expenses (Note 6)................................... $ 8,597,223 $ 9,398,931 Intercompany payables to parent.................................................. 899,021 1,010,578 Current portion of long-term debt (Note 7)....................................... 87,021 76,061 ------------- ------------- Total current liabilities...................................................... 9,583,265 10,485,570 LONG-TERM DEBT (Note 7)............................................................ 30,497,325 30,517,346 COMMITMENTS AND CONTINGENCIES (Notes 8 and 12) STOCKHOLDERS' EQUITY (DEFICIT): Common stock, par value $1.00 per share; 1,000 shares authorized, issued and outstanding.................................................................... 1,000 1,000 Retained earnings (deficit)...................................................... (1,866,880) (1,136,459) ------------- ------------- Total equity (deficit)......................................................... (1,865,880) (1,135,459) ------------- ------------- TOTAL.............................................................................. $ 38,214,710 $ 39,867,457 ------------- ------------- ------------- -------------
See notes to financial statements. F-39 PRE-ACQUISITION VELDA FARMS STATEMENTS OF OPERATIONS YEAR ENDED DECEMBER 31, 1993 PERIOD FROM JANUARY 1, 1994 TO APRIL 9, 1994
PERIOD FROM JANUARY 1, 1994 TO APRIL 9, 1993 1994 ----------- ---------- NET SALES......................................................... $125,907,847 $38,268,830 COST OF SALES..................................................... 95,145,659 29,462,819 ----------- ---------- Gross profit.................................................... 30,762,188 8,806,011 OPERATING EXPENSES: Selling and distribution........................................ 20,459,855 5,901,185 General and administrative...................................... 3,789,260 1,009,012 Amortization of intangibles..................................... 797,174 178,449 Parent administrative allocation................................ 1,270,937 257,720 Parent restructuring allocation................................. 1,022,761 ----------- ---------- Total operating expenses...................................... 27,339,987 7,346,366 ----------- ---------- INCOME FROM OPERATIONS............................................ 3,422,201 1,459,645 OTHER (INCOME) EXPENSE: Interest expense, including amortization of deferred financing costs......................................................... 2,546,343 639,058 Other........................................................... (34,260) 90,166 ----------- ---------- Total other expense........................................... 2,512,083 729,224 ----------- ---------- INCOME BEFORE INCOME TAXES........................................ 910,118 730,421 INCOME TAXES (Note 9)............................................. ----------- ---------- NET INCOME........................................................ $ 910,118 $ 730,421 ----------- ---------- ----------- ----------
See notes to financial statements. F-40 PRE-ACQUISITION VELDA FARMS STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT) YEAR ENDED DECEMBER 31, 1993 AND PERIOD FROM JANUARY 1, 1994 TO APRIL 9, 1994
ADDITIONAL RETAINED COMMON PAID-IN EARNINGS STOCK CAPITAL (DEFICIT) TOTAL ----------- ------------- ------------- ------------- BALANCE, JANUARY 1, 1993..................................... $ 1,000 $ -- $ (2,776,998) $ (2,775,998) Net income................................................. 910,118 910,118 ----------- ----- ------------- ------------- BALANCE, DECEMBER 31, 1993................................... 1,000 -- (1,866,880) (1,865,880) Net income for the period from January 1, 1994 to April 9, 1994..................................................... 730,421 730,421 ----------- ----- ------------- ------------- BALANCE, APRIL 9, 1994....................................... $ 1,000 $ -- $ (1,136,459) $ (1,135,459) ----------- ----- ------------- ------------- ----------- ----- ------------- -------------
See notes to financial statements. F-41 PRE-ACQUISITION VELDA FARMS STATEMENTS OF CASH FLOWS YEAR ENDED DECEMBER 31, 1993 AND PERIOD FROM JANUARY 1, 1994 TO APRIL 9, 1994
PERIOD FROM JANUARY 1, 1994 TO 1993 APRIL 9, 1994 ------------- -------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income...................................................................... $ 910,118 $ 730,421 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization................................................. 1,308,366 344,728 Amortization of intangible assets, including deferred financing costs......... 913,626 210,034 Changes in operating assets and liabilities: Accounts receivable......................................................... (848,604) (2,006,347) Inventories................................................................. 148,046 137,953 Prepaid expenses and other assets........................................... (3,048) (197,143) Accounts payable and other accrued expenses................................. 975,773 801,708 ------------- -------------- Net cash provided by operating activities................................. 3,404,277 21,354 CASH FLOWS FROM INVESTING ACTIVITIES: Capital expenditures............................................................ (336,023) (122,745) ------------- -------------- Net cash used in investing activities..................................... (336,023) (122,745) CASH FLOWS FROM FINANCING ACTIVITIES: Repayments of debt.............................................................. (57,157) (10,960) Net repayments of intercompany payables......................................... (3,010,703) 111,557 ------------- -------------- Net cash provided by (used in) financing activities....................... (3,067,860) 100,597 ------------- -------------- INCREASE (DECREASE) IN CASH....................................................... 394 (794) CASH AT BEGINNING OF PERIOD....................................................... 1,825 2,219 ------------- -------------- CASH AT END OF PERIOD............................................................. $ 2,219 $ 1,425 ------------- -------------- ------------- --------------
See notes to financial statements. F-42 PRE-ACQUISITION VELDA FARMS NOTES TO FINANCIAL STATEMENTS YEAR ENDED DECEMBER 31, 1993 AND PERIOD FROM JANUARY 1, 1994 TO APRIL 9, 1994 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES ORGANIZATION AND BUSINESS. Velda Farms, Inc. ("Pre-acquisition Velda Farms" or "Velda Farms") was a wholly owned subsidiary of The Morningstar Group Inc. (the "Parent"). Effective April 10, 1994, Velda Holdings, Inc. and Velda Holdings, L.P. (a limited partnership) acquired Velda Farms, Inc. from the Parent. Velda Farms manufactures and distributes fresh milk, ice cream and related products throughout peninsular Florida under its own brand names and under brands licensed from third parties to various customers, including food service accounts, convenience stores, club stores and schools. Velda Farms provides credit terms to customers generally ranging to up to 30 days, performs ongoing credit evaluations of its customers and maintains allowances for potential credit losses based on historical experience. INVENTORIES. Pasteurized and raw milk inventories are stated at the lower of average cost or market. Raw material, packaging material and case and container inventories are stated at the lower of cost, using the first-in, first-out ("FIFO") method, or market. Manufactured finished goods inventories are stated at the lower of average production cost or market. Production costs include raw materials, direct labor and indirect production and overhead costs. PROPERTY, PLANT AND EQUIPMENT. Property, plant and equipment are stated at cost. Depreciation and amortization is provided using the straight-line method over the estimated useful lives of the assets, as follows:
ASSET USEFUL LIFE - ----------------------------------------------------------------------- --------------------- Buildings and improvements............................................. Ten to 40 years Machinery and equipment................................................ Five to 20 years Furniture and fixtures................................................. Three to ten years
Capitalized lease assets are amortized over the shorter of their lease term or their estimated useful lives. Expenditures for repairs and maintenance which do not improve or extend the life of the assets are expensed as incurred. INTANGIBLE ASSETS. Intangible assets include the following intangibles which are amortized over their related useful lives:
INTANGIBLE ASSET USEFUL LIFE - ----------------------------------------------- --------------------------------------------- Goodwill....................................... Straight-line method over 40 years Customer list.................................. Straight-line method over eight years Other identifiable intangibles................. Straight-line method over five to 15 years Deferred financing costs....................... Interest method over the terms of the related debt
Velda Farms periodically assesses the net realizable value of its intangible assets as well as all other assets by comparing the expected future net operating cash flows, undiscounted and without interest charges, to the carrying amount of the underlying assets. Velda Farms would evaluate a potential impairment if the recorded value of these assets exceeded the associated future net operating cash flows. Any potential impairment loss would be measured as the amount by which the carrying value exceeds the F-43 PRE-ACQUISITION VELDA FARMS NOTES TO FINANCIAL STATEMENTS (CONTINUED) YEAR ENDED DECEMBER 31, 1993 AND PERIOD FROM JANUARY 1, 1994 TO APRIL 9, 1994 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) fair value of the asset. Fair value of assets would be measured by market value, if an active market exists, or by a forecast of expected future net operating cash flows, discounted at a rate commensurate with the risk involved. REVENUE. Revenue is recognized when the product is shipped to the customer. INCOME TAXES. Pre-acquisition Velda Farms was included in the consolidated tax return of the Parent. Current and deferred income tax expense was allocated to Pre-acquisition Velda Farms by the Parent in accordance with the provisions of Statement of Financial Accounting Standards No. 109 ("SFAS 109"), "Accounting for Income Taxes." Under SFAS 109, deferred income taxes are provided for temporary differences in the financial statement and tax bases of assets and liabilities using the current tax rates in effect. Deferred tax assets, including the benefit for net operating loss carryforwards, are evaluated based on the guidelines in SFAS 109 for realization and may be reduced by a valuation allowance. As of December 31, 1993 and April 9, 1994, there were no material amounts of current or deferred income tax liabilities included in the Pre-acquisition Velda Farms intercompany payable account. CORPORATE ALLOCATIONS. The Parent has allocated certain assets and liabilities, such as goodwill, deferred financing costs, other intangibles and debt, to Pre-acquisition Velda Farms in accordance with the F-44 PRE-ACQUISITION VELDA FARMS NOTES TO FINANCIAL STATEMENTS (CONTINUED) YEAR ENDED DECEMBER 31, 1993 AND PERIOD FROM JANUARY 1, 1994 TO APRIL 9, 1994 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Pre-acquisition Velda Farms' pro rata share of such assets and liabilities. In addition, the Parent has allocated significant expenses to Pre-acquisition Velda Farms using the following allocation bases:
EXPENSE ALLOCATION BASE - ------------------------------------------------ --------------------------------------------------------------- Interest expense................................ 8% on the balance of the note payable to Parent Amortization of intangibles..................... As described in "Intangible Assets" above Corporate, general and administrative expense... Corporate overhead costs for accounting and finance, executive, human resources, legal, management information systems and certain other corporate departments, which consist primarily of salary costs, were allocated based on the percentage of sales, property, employees, specific product sales and number of data processing users of Pre-acquisition Velda Farms to the Parent's consolidated amounts Profit sharing expense.......................... Determined by the Parent based on its overall performance and allocated to Pre-acquisition Velda Farms based on its employees' participation Restructuring expense........................... Estimated charges of the Parent for severance pay, a chairman's contract and the Parent's data processing conversion were allocated to Pre-acquisition Velda Farms as determined by the Parent Income taxes.................................... As described in "Income Taxes" above Relocation costs................................ At a rate of $7,500 per month for normal personnel relocations within the operations group Data processing charges......................... The Parent's outside data processing service bureau charges were allocated based on Pre-acquisition Velda Farms' usage as a proportion of the total consolidated usage Employee benefits expense....................... Costs as estimated by the Parent for employee benefits such as medical and dental care, term life insurance and long-term disability coverages under the Parent's plans Workers' compensation expense................... As estimated by the Parent based on the Parent's overall cost and the experience of Pre-acquisition Velda Farms Insurance expense: General and other liability..................... Based on the percentage of Pre-acquisition Velda Farms' sales to consolidated sales Automobile liability............................ Based on historical claims and losses Property liability.............................. Based on actual property values of Pre-acquisition Velda Farms
CASH EQUIVALENTS. Velda Farms considers all highly liquid investments purchased with a remaining maturity of three months or less to be cash equivalents. F-45 PRE-ACQUISITION VELDA FARMS NOTES TO FINANCIAL STATEMENTS (CONTINUED) YEAR ENDED DECEMBER 31, 1993 AND PERIOD FROM JANUARY 1, 1994 TO APRIL 9, 1994 2. ACCOUNTS RECEIVABLE
DECEMBER 31, APRIL 9, 1993 1994 ------------- ------------- Trade customers................................................ $ 10,187,723 $ 12,308,914 Other.......................................................... 51,833 74,199 ------------- ------------- 10,239,556 12,383,113 Less allowance for doubtful accounts........................... (173,052) (310,262) ------------- ------------- $ 10,066,504 $ 12,072,851 ------------- ------------- ------------- -------------
3. INVENTORIES
DECEMBER 31, APRIL 9, 1993 1994 ------------ ------------ Raw materials.................................................... $ 503,238 $ 450,845 Packaging materials.............................................. 325,882 310,422 Finished goods................................................... 2,500,914 2,440,614 Cases and containers............................................. 733,273 723,473 ------------ ------------ $4,063,307 $ 3,925,354 ------------ ------------ ------------ ------------
4. PROPERTY, PLANT AND EQUIPMENT
DECEMBER 31, APRIL 9, 1993 1994 ------------- ------------- Land........................................................... $ 3,918,876 $ 3,918,876 Buildings and improvements..................................... 6,610,137 6,621,091 Machinery and equipment........................................ 8,082,235 8,269,883 Furniture and fixtures......................................... 2,107,911 2,081,448 ------------- ------------- 20,719,159 20,891,298 Less accumulated depreciation and amortization................. (7,091,727) (7,465,828) ------------- ------------- $ 13,627,432 $ 13,425,470 ------------- ------------- ------------- -------------
F-46 PRE-ACQUISITION VELDA FARMS NOTES TO FINANCIAL STATEMENTS (CONTINUED) YEAR ENDED DECEMBER 31, 1993 AND PERIOD FROM JANUARY 1, 1994 TO APRIL 9, 1994 5. INTANGIBLE AND OTHER ASSETS
DECEMBER 31, APRIL 9, 1993 1994 ------------- ------------- Goodwill....................................................... $ 6,405,880 $ 6,405,880 Customer list.................................................. 2,332,067 2,332,067 Other identifiable intangibles................................. 3,093,920 3,093,920 Deferred financing costs....................................... 588,414 588,414 Deposits and other............................................. 197,930 198,328 ------------- ------------- 12,618,211 12,618,609 Less accumulated amortization.................................. (2,194,845) (2,404,879) ------------- ------------- $ 10,423,366 $ 10,213,730 ------------- ------------- ------------- -------------
6. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
DECEMBER 31, APRIL 9, 1993 1994 ------------ ------------ Accounts payable................................................. $6,740,086 $ 7,675,488 Accrued payroll and benefits..................................... 1,459,441 1,221,303 Other............................................................ 397,696 502,140 ------------ ------------ $8,597,223 $ 9,398,931 ------------ ------------ ------------ ------------
Trade accounts payable at December 31, 1993, and April 9, 1994, includes $707,929 and $441,505, respectively, due to Bancroft Dairy, which is a wholly owned subsidiary of the Parent. 7. DEBT
DECEMBER 31, APRIL 9, 1993 1994 ------------- ------------- Long-term debt: Note payable to the Parent................................... $ 30,373,652 $ 30,373,652 Capitalized lease obligations (Note 8)....................... 210,694 219,755 ------------- ------------- 30,584,346 30,593,407 Less current portion........................................... (87,021) (76,061) ------------- ------------- $ 30,497,325 $ 30,517,346 ------------- ------------- ------------- -------------
The note payable to the Parent was not assumed in the acquisition described in Note 1. 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. F-47 PRE-ACQUISITION VELDA FARMS NOTES TO FINANCIAL STATEMENTS (CONTINUED) YEAR ENDED DECEMBER 31, 1993 AND PERIOD FROM JANUARY 1, 1994 TO APRIL 9, 1994 8. LEASES Velda Farms leases certain property, plant and equipment used in its operations under both capital and operating lease agreements. Such leases, which are primarily for machinery and equipment and vehicles, have lease terms ranging from two to nine years. Certain of the operating lease agreements require the payment of additional rentals for maintenance based on miles driven or units produced. Rent expense, including additional rent, was $4,440,454 and $1,238,823 for the year ended December 31, 1993, and the period from January 1, 1994 to April 9, 1994, respectively. The composition of capital leases which are reflected as property, plant and equipment in the balance sheets is as follows:
DECEMBER 31, APRIL 9, 1993 1994 ------------- ------------- Machinery and equipment........................................ $ 382,125 $ 382,125 Less accumulated amortization.................................. (103,622) (113,176) ------------- ------------- $ 278,503 $ 268,949 ------------- ------------- ------------- -------------
9. INCOME TAXES There is no current or deferred income tax expense for the year ended December 31, 1993, or for the period ended April 9, 1994, as a result of available net operating loss carryforwards in sufficient amounts to eliminate any deferred income tax liabilities. The following is a reconciliation of income taxes reported in the statements of operations:
PERIOD FROM JANUARY 1, DECEMBER 31, 1994 TO 1993 APRIL 9, 1994 ------------- ------------- Tax expense at statutory rates................................. $ 350,000 $ 281,000 Net operating loss carryforwards............................... (415,000) (299,000) Other.......................................................... 65,000 18,000 ------------- ------------- $ -- $ -- ------------- ------------- ------------- -------------
10. EMPLOYEES SAVINGS AND PROFIT SHARING PLAN Velda Farms sponsors an employees savings and profit sharing plan. Employees of Velda Farms who have completed one or more years of service are eligible to participate in the plan. The employees participating in the plan can make contributions to the plan of up to 6% of their annual compensation and Velda Farms can elect, on a discretionary basis, to match such contributions. During the year ended December 31, 1993, and the period from January 1, 1994 to April 9, 1994, the accrued profit sharing expense was $218,000 and $60,000, respectively. 11. SUPPLEMENTAL CASH FLOW INFORMATION Cash used to pay interest, primarily to the Parent, which was cleared through the intercompany payable account, was approximately $2.4 million for the year ended December 31, 1993, and for the period F-48 PRE-ACQUISITION VELDA FARMS NOTES TO FINANCIAL STATEMENTS (CONTINUED) YEAR ENDED DECEMBER 31, 1993 AND PERIOD FROM JANUARY 1, 1994 TO APRIL 9, 1994 11. SUPPLEMENTAL CASH FLOW INFORMATION (CONTINUED) from January 1, 1994 to April 9, 1994, was approximately $607,000. Noncash transactions of Pre-acquisition Velda Farms during the year ended December 31, 1993, included the acquisition of equipment through capital lease obligations of $60,305. 12. COMMITMENTS AND CONTINGENCIES Velda Farms is a party in the ordinary course of business to certain claims and litigation. In management's opinion, the settlement of such matters is not expected to have a material impact on the financial statements. 13. MAJOR CUSTOMER Velda Farms is a party to a supply contract with The Southland Corporation ("Southland") which requires certain of Southland's retail sites to purchase their product requirements from the Company at formula prices. Sales under this supply contract, which expires in December 1996, approximated $22.9 million, or 18% of net sales, for the year ended December 31, 1993; and $6.1 million, or 16% of net sales, for the period from January 1, 1994 to April 9, 1994. F-49 PRE-ACQUISITION VELDA FARMS NOTES TO FINANCIAL STATEMENTS (CONTINUED) YEAR ENDED DECEMBER 31, 1993 AND PERIOD FROM JANUARY 1, 1994 TO APRIL 9, 1994 14. RELATED PARTY TRANSACTIONS As discussed in Note 1, significant costs and expenses were allocated to Pre-acquisition Velda Farms by the Parent. The following is a summary of such corporate allocations and their classification in the statements of operations:
PERIOD FROM YEAR ENDED JANUARY 1, DECEMBER 31, 1994 TO 1993 APRIL 9, 1994 ------------- ------------- Cost of sales: Workers' compensation........................................ $ 279,488 $ 62,360 Employee benefits............................................ 576,304 130,956 Insurance.................................................... 303,585 83,489 ------------- ------------- 1,159,377 276,805 ------------- ------------- Selling and distribution: Workers' compensation........................................ 579,303 134,215 Employee benefits............................................ 1,122,780 281,852 Insurance.................................................... 531,600 146,190 ------------- ------------- 2,233,683 562,257 ------------- ------------- General and administrative: Workers' compensation........................................ 127,921 26,113 Employee benefits............................................ 245,751 54,838 Relocation................................................... 87,888 22,500 EDP services................................................. 703,403 227,678 ------------- ------------- 1,164,963 331,129 ------------- ------------- Parent administrative costs.................................... 1,270,937 257,720 Restructuring costs............................................ 1,022,761 Amortization of intangibles.................................... 797,174 178,449 Interest expense............................................... 2,546,343 639,058 ------------- ------------- Total allocated costs and expenses......................... $ 10,195,238 $ 2,245,418 ------------- ------------- ------------- -------------
Management believes that the above allocated costs and expenses were reasonable costs of the Parent which were allocated to all of the Parent's subsidiaries. However, management believes that the Parent administrative costs and the restructuring costs allocated to Velda Farms by the Parent are costs which Velda Farms would not have incurred on a stand-alone basis. Management believes the remaining allocated costs are competitive with costs to acquire similar services. F-50 INDEPENDENT AUDITORS' REPORT Board of Directors Garrido & Compania, Inc. and Subsidiaries: We have audited the accompanying consolidated balance sheets of Garrido & Compania, Inc. and Subsidiaries as of June 30, 1996 and 1995, and the related consolidated statements of earnings, changes in stockholders' equity, and cash flows for each of the years in the three-year period ended June 30, 1996. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall consolidated financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. As discussed in note 1 to the consolidated financial statements, effective July 19, 1996, Garrido & Compania, Inc.'s wholly-owned subsidiaries, Garrido Alto Grande Corp., Alto Grande Export Corp. and Guest Choice, Inc. merged with and into Garrido & Compania, Inc. Simultaneously on the same date, Garrido & Compania, Inc. was acquired by G Acquisition Corp., who changed its name to Garrido & Compania, Inc. These mergers and acquisition result in a new accounting entity whose financial statements are not included herewith. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Garrido & Compania, Inc. and Subsidiaries as of June 30, 1996 and 1995, and the results of their operations and their cash flows for each of the years in the three-year period ended June 30, 1996 in conformity with generally accepted accounting principles. As discussed in notes 1 and 7 to the consolidated financial statements, effective July 1, 1993, Garrido & Compania, Inc. and Subsidiaries changed their method of accounting for income taxes to adopt the provisions of Financial Accounting Standards Board's Statement of Financial Accounting Standards No. 109, ACCOUNTING FOR INCOME TAXES. KPMG PEAT MARWICK, LLP San Juan, Puerto Rico August 23, 1996 Stamp No. 1353935 of the Puerto Rico Society of Certified Public Accountants was affixed to the record copy of this report. F-51 GARRIDO & COMPANIA, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS JUNE 30, 1996 AND 1995 ASSETS
1996 1995 ------------ ------------ Current assets: Cash and cash equivalents of $8,694,471 in 1996 and $4,830,762 in 1995 (note 1)..... $ 10,736,810 $ 4,969,014 ------------ ------------ Accounts receivable: Trade (note 5)...................................................................... 2,420,152 2,756,225 Other............................................................................... 31,010 106,788 ------------ ------------ 2,451,162 2,863,013 Less allowance for doubtful accounts................................................ 100,000 -- ------------ ------------ Accounts receivable, net.......................................................... 2,351,162 2,863,013 Inventories (notes 3 and 5)......................................................... 1,893,681 2,141,911 Other prepaid expenses.............................................................. 29,149 187,554 ------------ ------------ Total current assets.............................................................. 15,010,802 10,161,492 ------------ ------------ Investments in government securities.................................................. 11,229 14,062 ------------ ------------ Property and equipment, at cost (notes 2, 4 and 5).................................... 4,099,079 5,193,094 Less accumulated depreciation and amortization...................................... 2,570,627 3,341,099 ------------ ------------ Property and equipment, net....................................................... 1,528,452 1,851,995 Other assets, including unamortized cost of intangibles of $97,335 in 1996 and $129,896 in 1995 (note 2)........................................................... 121,245 177,913 ------------ ------------ $ 16,671,728 $ 12,205,462 ------------ ------------ ------------ ------------ LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Notes payable to banks (notes 1 and 5).............................................. $ 2,115,000 $ 217,616 Current installments of long-term debt (notes 1 and 5).............................. 711,429 711,428 Current portion of notes payable to former stockholders (notes 1 and 5)............. 188,314 143,759 Accounts payable and accrued expenses (note 2)...................................... 1,083,607 736,368 Income taxes payable (note 7)....................................................... 265,088 90,849 ------------ ------------ Total current liabilities......................................................... 4,363,438 1,900,020 Long-term debt, excluding current installments (notes 1 and 5)........................ 1,499,523 2,210,952 Notes payable to former stockholders, excluding current portion (notes 1 and 5)....... 469,269 664,853 Deferred income taxes (note 7)........................................................ 34,277 788,598 Other liabilities (note 2)............................................................ -- 85,000 ------------ ------------ Total liabilities................................................................. 6,366,507 5,649,423 ------------ ------------ Stockholders' equity: Common stock, $100 par value. Authorized 10,000 shares; 586 shares issued and outstanding (note 5).............................................................. 58,600 58,600 Retained earnings................................................................... 10,246,621 6,497,439 ------------ ------------ Total stockholders' equity........................................................ 10,305,221 6,556,039 Commitments and contingencies (notes 6, 7 and 8)...................................... ------------ ------------ $ 16,671,728 $ 12,205,462 ------------ ------------ ------------ ------------
See accompanying notes to consolidated financial statements. F-52 GARRIDO & COMPANIA, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF EARNINGS YEARS ENDED JUNE 30, 1996, 1995 AND 1994
1996 1995 1994 ------------- ------------- ------------- Net sales........................................................... $ 26,219,899 $ 25,803,634 $ 24,747,415 Cost of sales....................................................... 17,793,564 18,200,625 17,571,451 ------------- ------------- ------------- Gross profit.................................................... 8,426,335 7,603,009 7,175,964 Selling, general and administrative expenses (notes 6 and 8)........ 5,034,182 4,493,311 4,968,225 ------------- ------------- ------------- Operating income................................................ 3,392,153 3,109,698 2,207,739 Other income/(expenses): Interest expense (notes 2 and 5).................................. (299,885) (353,439) (422,965) Other, net........................................................ 327,450 56,028 12,610 ------------- ------------- ------------- Total other income/(expense), net............................... 27,565 (297,411) (410,355) ------------- ------------- ------------- Earnings before income taxes and cumulative effect of change in accounting principle.......................................... 3,419,718 2,812,287 1,797,384 ------------- ------------- ------------- Income taxes (note 7) Current........................................................... (424,857) (336,077) (254,358) Deferred.......................................................... 754,321 (134,260) (34,910) ------------- ------------- ------------- 329,464 (470,337) (289,268) ------------- ------------- ------------- Earnings before cumulative effect of change in accounting principle..................................................... 3,749,182 2,341,950 1,508,116 ------------- ------------- ------------- Cumulative effect at July 1, 1993 of change in accounting principle (notes 1 and 7)................................................... -- -- (103,074) ------------- ------------- ------------- Net earnings.................................................... $ 3,749,182 $ 2,341,950 $ 1,405,042 ------------- ------------- ------------- ------------- ------------- ------------- Earnings per share of common stock (note 1): Before cumulative effect of change in accounting principle............................................ $ 6,398 $ 3,997 $ 2,356 Cumulative effect of change in accounting principle (notes 1 and 7)....................................... -- -- (161) ------------- ------------- ------------- Net earnings per share (note 1)................................. $ 6,398 $ 3,997 $ 2,195 ------------- ------------- ------------- ------------- ------------- -------------
See accompanying notes to consolidated financial statements. F-53 GARRIDO & COMPANIA, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY JUNE 30, 1996, 1995 AND 1994
TOTAL COMMON RETAINED STOCKHOLDERS' STOCK EARNINGS EQUITY --------- ------------- ------------- Balance at June 30, 1993................................................ $ 65,100 $ 3,493,947 $ 3,559,047 Net earnings............................................................ -- 1,405,042 1,405,042 Acquisition and cancellation of 65 shares of common stock (note 5)........................................................ (6,500) (743,500) (750,000) --------- ------------- ------------- Balance at June 30, 1994................................................ 58,600 4,155,489 4,214,089 Net earnings............................................................ -- 2,341,950 2,341,950 --------- ------------- ------------- Balance at June 30, 1995................................................ 58,600 6,497,439 6,556,039 Net earnings -- 3,749,182 3,749,182 --------- ------------- ------------- Balance at June 30, 1996................................................ $ 58,600 $ 10,246,621 $ 10,305,221 --------- ------------- ------------- --------- ------------- -------------
See accompanying notes to consolidated financial statements. F-54 GARRIDO & COMPANIA, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS YEARS ENDED JUNE 30, 1996, 1995 AND 1994 INCREASE/(DECREASE) IN CASH AND CASH EQUIVALENTS
1996 1995 1994 ------------- ------------- ------------- Cash flows from operating activities: Net earnings....................................................... $ 3,749,182 $ 2,341,950 $ 1,405,042 Adjustments to reconcile net earnings to net cash provided by operating activities: Depreciation and amortization.................................... 543,277 633,298 656,814 Deferred income taxes............................................ (754,321) 134,260 137,984 Net gain/(loss) in disposition of property and equipment......... 8,144 -- (1,800) Amortization on discount on notes payable to former stockholders................................................... 10,092 10,396 10,613 Change in assets and liabilities: Decrease/(increase) in accounts receivable, net................ 511,851 (427,983) (252,874) Decrease/(increase) in inventories............................. 248,230 4,371,240 (1,954,132) Decrease in prepaid income tax................................. -- 23,357 Decrease/(increase) in other prepaid expenses.................. 158,405 111,003 (70,319) Decrease/(increase) in other assets............................ 48,144 (37,071) 4,668 Increase/(decrease) in accounts payable and accrued expenses... 347,239 (49,710) 205,368 Decrease in obligation under capital lease..................... -- (19,266) (19,202) Increase/(decrease) in other liabilities....................... (85,000) (85,000) (149,876) Increase in income tax payable................................. 174,239 1,373 89,476 ------------- ------------- ------------- Total adjustments............................................ 1,210,300 4,642,540 (1,319,923) ------------- ------------- ------------- Net cash provided by operating activities.................... 4,959,482 6,984,490 85,119 ------------- ------------- ------------- Cash flows from investing activities: Principal returns on investment in government securities........... 2,833 3,343 2,765 Proceeds on sale of property and equipment......................... 1,000 8,600 3,100 Capital expenditures for additions to property and equipment....... (220,354) (312,544) (261,299) ------------- ------------- ------------- Net cash used in investing activities........................ (216,521) (300,601) (255,434) ------------- ------------- ------------- Cash flows from financing activities: Net borrowings under various lines of credit agreements and demand notes payable.................................................... 8,048,242 1,700,000 962,269 Payments of long-term debt and note payable to bank................ (6,862,287) (3,215,049) (565,476) Payments on principal of notes payable to former stockholders...... (161,120) (351,370) (46,886) Acquisition and cancellation of common stock....................... -- -- (269,123) ------------- ------------- ------------- Net cash provided by/(used in) financing activities.......... 1,024,835 (1,866,419) 80,784 ------------- ------------- ------------- Net increase/(decrease) in cash (note 9)............................. 5,767,796 4,817,470 (89,531) Cash and cash equivalents at beginning of year....................... 4,969,014 151,544 241,075 ------------- ------------- ------------- Cash and cash equivalents at end of year............................. $ 10,736,810 $ 4,969,014 $ 151,544 ------------- ------------- ------------- ------------- ------------- -------------
See accompanying notes to consolidated financial statements. F-55 GARRIDO & COMPANIA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 1996 AND 1995 (1) NATURE OF BUSINESS, AFFILIATION, SUBSEQUENT EVENTS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES NATURE OF BUSINESS Garrido & Compania, Inc. and its subsidiaries (the Company) are mainly engaged in the processing and roasting of raw coffee for sale and distribution under the tradenames of Cafe Crema, Cafe Adjuntas, Cafe Pilon, Cafe Expreso, Cafe Alto Grande and under Executive and Aroma Coffee Break Services. In addition, the Company exports certain products to be sold outside the United States' territories, such as Japan, Sweden, and other European countries, which currently represents less than 10% of sales. AFFILIATION The Company is 100% owner of the outstanding common stock of Garrido Alto Grande Corp. (GAGC), Alto Grande Export Corp. (AGEC) and Guest Choice, Inc. (GC). Guest Choice, Inc. was incorporated under the laws of Puerto Rico on February 8, 1996, and will be engaged in providing and servicing coffee to hotels and other businesses in Puerto Rico, the United States and the Caribbean. Guest Choice, Inc. main offices are located in the state of Arizona. Guest Choice, Inc. did not have any sales during 1996, and total assets related to these operations amounted to approximately $1,122,000 as of June 30, 1996. SUBSEQUENT EVENTS Effective July 19, 1996, Garrido & Compania, Inc. and subsidiaries were acquired by G Acquisition Corp., a wholly-owned subsidiary of Suiza Foods Corporation through the purchase of all of its outstanding common stock. Simultaneously, Garrido & Compania, Inc. merged with and into its wholly-owned subsidiaries. Subsequent to the mergers and acquisition, G Acquisition Corp. changed its name to Garrido & Compania, Inc. The abovementioned mergers and acquisition result in a new accounting entity after June 30, 1996 whose financial statements are not included herewith. The accompanying consolidated financial statements relate to the Company and its subsidiaries as of June 30, 1996, which is prior to the effectiveness of the mergers and acquisition of July 19, 1996. As a part of the aforementioned transactions, on or about July 19, 1996 all the outstanding long-term debt, including certain term loans, revolving and temporary lines of credit, notes payable to former stockholders and other notes payable included as part of other liabilities in the consolidated balance sheets at June 30, 1996, were assumed and paid in full by the stockholders of the Company. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (a) BASIS OF CONSOLIDATION. The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All significant intercompany balances and transactions have been eliminated in the preparation of the consolidated financial statements. (b) INVENTORIES. Inventories are stated at the lower of cost (average cost) or market (net realizable value). For finished goods inventories, the cost is comprised of the cost of coffee, the cost of packaging material and the cost of labor and overhead. F-56 GARRIDO & COMPANIA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) JUNE 30, 1996 AND 1995 (1) NATURE OF BUSINESS, AFFILIATION, SUBSEQUENT EVENTS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) (c) PROPERTY AND EQUIPMENT. Property and equipment are stated at cost. Major renewals and betterments are charged to property accounts. Replacements, maintenance and repairs which do not improve or extend the life of the respective assets are charged to expense. (d) DEPRECIATION AND AMORTIZATION. Depreciation and amortization are provided over the estimated useful life of the respective assets under the straight-line method. Useful lives of the depreciable assets fluctuate from 3 to 20 years. Leasehold improvements are amortized over the shorter of the lease term or estimated useful life of the asset. (e) INTANGIBLES. Intangibles consist primarily of customer lists, benefits from covenants not to compete, trademarks, confidential formulas, right of use of water wells and others. The cost of these intangible assets are being amortized over their estimated useful lives under the straight-line method. (f) INCOME TAXES. Effective July 1, 1993, the Company adopted Statement of Financial Accounting Standards No. 109, ACCOUNTING FOR INCOME TAXES, and reported the cumulative effect of that change in the method of accounting for income taxes in the 1994 consolidated statement of earnings. Statement No. 109 requires a change from the deferred method of accounting for income taxes of APB Opinion 11 to the asset and liability method of accounting for income taxes. Under the asset and liability method of Statement No. 109, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Under Statement No. 109, the effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. (g) CASH EQUIVALENTS. For purposes of the statements of cash flows, the Company considers all highly liquid debt instruments with original maturities of three months or less to be cash equivalents. Cash equivalents for 1996 and 1995 consist of U.S. Treasury bills amounting to $8,694,471 and $4,830,762, respectively, with market value of $8,752,487 and $4,860,338, respectively. Management has the ability and intent to hold these cash equivalents until maturity. (h) NET EARNINGS PER COMMON SHARE. Net Earnings per common share is based upon the weighted average number shares of common stock outstanding during the year, which equals 586 shares for 1996 and 1995 and 640 shares for 1994. (i) FAIR VALUE OF FINANCIAL INSTRUMENTS. The Company's financial instruments include cash and cash equivalents, trade and other receivables, investments, trade accounts payable, other accrued liabilities, notes payable to banks and others and long-term debt. At June 30, 1996 the carrying value of all financial instruments approximated their fair value, due to their nature. Fair value estimates are made at a specific point in time, based on relevant market information and information about the financial instrument. These estimates are subjective in nature and involve uncertainty and matters of significant judgment and, therefore, cannot be determined with precision. Changes in assumptions could significantly affect the estimates. F-57 GARRIDO & COMPANIA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) JUNE 30, 1996 AND 1995 (1) NATURE OF BUSINESS, AFFILIATION, SUBSEQUENT EVENTS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) (j) USE OF ESTIMATES. Management of the Company has made a number of estimates and assumptions relating to the reporting of assets and liabilities and the disclosure of contingent assets and liabilities to prepare these consolidated financial statements in conformity with generally accepted accounting principles. Actual results could differ from those estimates. (k) RECLASSIFICATION. Certain reclassifications have been made to the 1995 figures in order to conform them with the 1996 consolidated financial statements. (2) ASSET ACQUISITIONS During 1991, the Company acquired certain assets from an unrelated party. Of the total purchase price, $510,000 is payable in annual installments of $85,000, plus interest, through 1996. Interest rate fluctuates between 9% or prime rate, whichever is lower. As of June 30, 1996 and 1995, the unpaid principal balance amounted to $85,000 and $170,000 respectively, of which $85,000 is included in accounts payable and accrued expenses and the remaining balance in 1995 is included in other liabilities. The liability is secured by the assets acquired. As stated in note 1, amounts outstanding at June 30, 1996 were subsequently paid on or about July 19, 1996. During 1990, the Company also acquired certain assets from an unrelated party. Of the total purchase price, $154,463 remained unpaid at June 30, 1995 and is included in accounts payable. Such amount was paid in full during 1996. (3) INVENTORIES Inventories at June 30, 1996 and 1995 consist of the following:
1996 1995 ------------ ------------ Raw coffee........................................................ $ 925,176 $ 1,381,553 Finished goods.................................................... 623,063 514,133 Bags, labels and supplies......................................... 345,442 246,225 ------------ ------------ $ 1,893,681 $ 2,141,911 ------------ ------------ ------------ ------------
F-58 GARRIDO & COMPANIA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) JUNE 30, 1996 AND 1995 (4) PROPERTY AND EQUIPMENT Property and equipment at June 30, 1996 and 1995 consist of the following:
1996 1995 ------------ ------------ Land.............................................................. $ 157,464 $ 157,464 Building.......................................................... 723,488 727,109 Machinery and equipment........................................... 2,379,515 2,914,072 Motor vehicles.................................................... 294,544 575,244 Data processing equipment......................................... 115,181 114,677 Furniture and fixtures............................................ 110,584 318,968 Leasehold improvements............................................ 318,303 385,560 ------------ ------------ Total......................................................... $ 4,099,079 $ 5,193,094 ------------ ------------ ------------ ------------
(5) INDEBTEDNESS Long-term debt at June 30, 1996 and 1995 consists of the following:
1996 1995 ------------ ------------ Term loan payable to bank in monthly installments of $5,952, plus interest, through 1998. Interest rate fluctuates based on the prime interest rate, which at June 30, 1996 was 8.25%. Term loan payable is partially secured by land and property of the Company......................................................... $ 130,952 $ 202,380 Term loan payable to bank in quarterly installments of $160,000 through 2000 secured by trade receivables and inventories. Interest rate fluctuates based on prime rate plus 1/2%, floating........................................................ 2,080,000 2,720,000 ------------ ------------ 2,210,952 2,922,380 Less current installments......................................... 711,429 711,428 ------------ ------------ Long-term debt, excluding current installments.................... $ 1,499,523 $ 2,210,952 ------------ ------------ ------------ ------------
Notes payable to banks represent advances under revolving and temporary lines of credit with a commercial bank amounting to $5,500,000. Withdrawals, under these credit facilities can be made under a Master Promissory Note and will be available for letters of credit and guarantee letters. These facilities will be available to cover working capital needs and for buying coffee directly from suppliers. Advances from such lines of credit amounting to $2,115,000 in 1996 and $217,616 in 1995 are secured by the personal guarantee of the Company's stockholders. These obligations bear interest at 6.66%. Notes payable to former stockholders consist of a 6% subordinated note payable in monthly installments of $7,750, including interest, through June 1, 2007. Aggregate unpaid principal balance of these notes was $640,316 and $693,164 as of June 30, 1996 and 1995, respectively. The notes are presented net of unamortized discounts amounting to $53,743 in 1996 and $63,836 in 1995 which were originally computed based on the prime interest rates at the time of their issuance. During 1994, the Company acquired and canceled 65 shares of common stock from a former stockholder for $750,000. At the date of F-59 GARRIDO & COMPANIA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) JUNE 30, 1996 AND 1995 (5) INDEBTEDNESS (CONTINUED) the purchase $269,123 were paid and the rest was financed through a $480,877 noninterest bearing note payable in monthly installments of $8,333 through April 1997. Unpaid balances as of June 30, 1996 and 1995 are $71,010 and $179,284, respectively. As stated in note 1, on or about July 19, 1996 all the aforementioned outstanding long-term debt, notes payable to banks and notes payable to former stockholders amounting to $4,983,535 at June 30, 1996 were assumed and paid in full by the Company's stockholders. (6) RELATED PARTY TRANSACTIONS The Company leases certain of its production and office facilities in premises owned by a related party under a ten (10) year operating lease agreement expiring in April 2005. The annual minimum lease expense is approximately $62,000. (7) INCOME TAX AND TAX EXEMPTIONS Pursuant to the 1987 Puerto Rico Tax Incentives Act, Garrido Alto Grande Corp. (GAGC) has been granted partial tax exemption from the Commonwealth of Puerto Rico income, property and municipal taxes with respect to a portion of its operations up to year 2011. During 1996, the Company and Garrido Alto Grande Corp. have been granted partial tax exemption under Law No. 225, AGRICULTURAL TAX INCENTIVES ACT OF 1995, of the Commonwealth of Puerto Rico. Under subject law, the companies are 100% exempt from property and municipal taxes, effective for part of the year ended June 30, 1996. Furthermore, effective for taxable year ending June 30, 1997, the companies will be entitled to a 90% exemption on income taxes related to their agricultural business income. The dollar effect of the income tax saving related to the partial tax exemption for the years ended June 30, 1996, 1995 and 1994 are $1,067,580, $552,781 and $341,453, respectively. Per share amounts of such income tax savings are $1,822 in 1996, $943 in 1995 and $534 in 1994. As discussed in note 1, the Company adopted Statement No. 109 as of July 1, 1993. The cumulative effect of this change in accounting for income taxes amounting to $103,074 was determined as of July 1, 1993 and is reported separately in the consolidated statement of earnings for the year ended June 30, 1994. Income tax benefit/(expense) for the years ended June 30, 1996, 1995 and 1994 consists of:
1996 1995 1994 ----------- ----------- ----------- Current................................................ $ (424,857) $ (336,077) $ (254,358) Deferred............................................... 754,321 (134,260) (34,910) ----------- ----------- ----------- $ 329,464 $ (470,337) $ (289,268) ----------- ----------- ----------- ----------- ----------- -----------
Deferred income tax expense for 1995 and 1994 is mainly related to the use of flexible depreciation for income tax purposes and straight-line depreciation for consolidated financial statement purposes, and the tax effect for consolidated financial statements of current undistributed earnings of subsidiaries as required by Statement No. 109. The 1996 deferred tax benefit arises from a reduction in the Company's effective tax rate after considering the future tax effect of the 90% income tax exemption under Law No. 225 referred F-60 GARRIDO & COMPANIA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) JUNE 30, 1996 AND 1995 (7) INCOME TAX AND TAX EXEMPTIONS (CONTINUED) to above and the reversal of prior years deferred tax liability related to undistributed earnings, which will not be paid due to the transactions described in note 1. Income tax expense for the years ended June 30, 1996, 1995 and 1994 differs from the amounts computed by applying the Company's Puerto Rico effective income tax rate to pretax accounting income from operations as a result of the following:
1996 1995 1994 ----------- ---------- ----------- Provision computed on pretax accounting income, net of the GAGC tax exemption............................... $ 236,686 $ 236,942 $ 116,469 Add/(deduct) tax effect on the following items: Nondeductible expenses............................... 44,064 17,140 14,475 Excess of depreciation per financial statements over depreciation for tax purposes...................... 179,406 77,696 121,472 Tax-exempt interest income and others................ (35,299) 4,299 1,942 ----------- ---------- ----------- Puerto Rico income tax current..................... $ 424,857 $ 336,077 $ 254,358 ----------- ---------- ----------- ----------- ---------- ----------- Deferred income tax expense/(benefit) is composed as follows: Reversal of temporary difference related to flexible depreciation and the effect of income tax exemption under Law No. 225.................................. $ (336,170) $ (77,696) $ (121,472) Unamortized discounts and others..................... (21,855) (23,406) (4,552) Undistributed earnings of wholly-owned subsidiary.... (396,296) 235,362 160,934 ----------- ---------- ----------- Puerto Rico deferred income tax expense/ (benefit)........................................ $ (754,321) $ 134,260 $ 34,910 ----------- ---------- ----------- ----------- ---------- -----------
The tax effect of temporary differences that give rise to significant portions of deferred income tax liabilities at June 30, 1996 and 1995 are presented below:
1996 1995 --------- ---------- Flexible depreciation for tax purposes................................. $ 32,181 $ 368,351 Unamortized discount on notes payable to stockholders.................. 2,096 23,951 Undistributed earnings of wholly-owned subsidiary...................... -- 396,296 --------- ---------- $ 34,277 $ 788,598 --------- ---------- --------- ----------
As of June 30, 1996, the Company is being audited by the Treasury Department of the Commonwealth of Puerto Rico for the year 1993. Management believes that no significant deficiencies will result from this audit. However, as per the terms of the purchase agreement related to the acquisition as stated in note 1, any deficiencies will be assumed and paid by the Company's stockholders. As of June 30, 1996, the Company has a net operating loss (NOL) of $94,019 related to the 1996 operations of Guest Choice, Inc., available to offset future taxable income, if any, related to the Guest F-61 GARRIDO & COMPANIA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) JUNE 30, 1996 AND 1995 (7) INCOME TAX AND TAX EXEMPTIONS (CONTINUED) Choice operations. No deferred tax asset is recognized due to the fact that the realization of the NOL is uncertain. (8) COMMITMENTS AND CONTINGENCIES The Company leases certain building facilities for the operations of coffee break services under a noncancellable operating lease, expiring in April 1998. Rent expense under such lease agreement for the year ended June 30, 1996 was approximately $43,000 and for 1995 and 1994 was approximately $41,000. The future minimum lease payments under this noncancellable operating lease amounted to approximately $78,833. The Company is involved in various other claims and legal actions arising in the ordinary course of business. In the opinion of management, the ultimate disposition of these matters will not have a material adverse effect on the Company's consolidated financial position, results of operations or liquidity. (9) SUPPLEMENTAL INFORMATION ON CASH FLOWS During the years ended June 30, 1996, 1995 and 1994, the Company made the following cash payments and noncash transactions:
1996 1995 1994 ---------- ---------- ---------- Interest payments........................................ $ 316,712 $ 329,919 $ 417,190 ---------- ---------- ---------- ---------- ---------- ---------- Income tax payments...................................... $ 264,881 $ 334,704 $ 125,194 ---------- ---------- ---------- ---------- ---------- ---------- Acquisition and cancellation of 65 shares of common stock financed through the issuance of a notes payable (note 5)..................................................... $ -- $ -- $ 480,877 ---------- ---------- ---------- ---------- ---------- ----------
F-62 INDEPENDENT AUDITORS' REPORT The Board of Directors Swiss Dairy, a Corporation Riverside, California We have audited the accompanying balance sheets of Swiss Dairy, a Corporation (the Company) as of December 30, 1995 and December 31, 1994, and the related statements of earnings and retained earnings and cash flows for each of the three years in the period ended December 30, 1995. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such financial statements present fairly, in all material respects, the financial position of Swiss Dairy, a Corporation at December 30, 1995 and December 31, 1994, and the results of its operations and cash flows for each of the three years in the period ended December 30, 1995 in conformity with generally accepted accounting principles. DELOITTE & TOUCHE LLP Costa Mesa, California August 28, 1996 F-63 SWISS DAIRY, A CORPORATION BALANCE SHEETS
SEPTEMBER DECEMBER DECEMBER 7, 31, 1994 30, 1995 1996 ----------- ----------- ----------- (UNAUDITED) (IN THOUSANDS) ASSETS CURRENT ASSETS: Cash and cash equivalents............................... $ 2,414 $ 449 $ 3,394 Accounts receivable..................................... 8,296 7,146 6,749 Note receivable from related party...................... 600 Inventories............................................. 591 785 508 Prepaid expenses and other.............................. 305 309 292 ----------- ----------- ----------- Total current assets.................................. 12,206 8,689 10,943 PROPERTY, PLANT AND EQUIPMENT, net...................... 6,331 8,426 8,179 ----------- ----------- ----------- $ 18,537 $ 17,115 $ 19,122 ----------- ----------- ----------- ----------- ----------- ----------- LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable........................................ $ 7,541 $ 6,352 $ 6,822 Accrued expenses........................................ 435 488 606 ----------- ----------- ----------- Total current liabilities............................. 7,976 6,840 7,428 COMMITMENTS AND CONTINGENCIES STOCKHOLDERS' EQUITY: Common stock, par value $10; 20,000 shares authorized; 6,500 shares issued and outstanding................... 65 65 65 Additional paid-in capital.............................. 6 6 6 Retained earnings....................................... 10,490 10,204 11,623 ----------- ----------- ----------- Total stockholders' equity............................ 10,561 10,275 11,694 ----------- ----------- ----------- $ 18,537 $ 17,115 $ 19,122 ----------- ----------- ----------- ----------- ----------- -----------
See notes to financial statements. F-64 SWISS DAIRY, A CORPORATION STATEMENTS OF EARNINGS AND RETAINED EARNINGS
FOR THE YEARS ENDED THIRTY-SIX WEEKS ENDED ------------------------------------- ------------------------ SEPTEMBER SEPTEMBER DECEMBER DECEMBER DECEMBER 9, 7, 23, 1993 31, 1994 30, 1995 1995 1996 ----------- ----------- ----------- ----------- ----------- (UNAUDITED) (UNAUDITED) (IN THOUSANDS, EXCEPT SHARE DATA) NET SALES.............................. $ 142,107 $ 149,153 $ 126,647 $ 94,085 $ 75,615 COST OF SALES.......................... 125,961 132,443 111,798 83,193 65,462 ----------- ----------- ----------- ----------- ----------- GROSS PROFIT........................... 16,146 16,710 14,849 10,892 10,153 OPERATING COSTS AND EXPENSES: Selling and distribution............... 8,266 8,168 7,852 5,643 5,153 General and administrative............. 2,423 2,892 2,483 1,760 1,458 ----------- ----------- ----------- ----------- ----------- Total operating costs and expenses... 10,689 11,060 10,335 7,403 6,611 ----------- ----------- ----------- ----------- ----------- INCOME FROM OPERATIONS................. 5,457 5,650 4,514 3,489 3,542 OTHER INCOME (EXPENSE): Interest, net.......................... (25) (10) 128 51 Other income, net...................... 612 511 270 357 318 ----------- ----------- ----------- ----------- ----------- Total other income................... 587 501 270 485 369 ----------- ----------- ----------- ----------- ----------- INCOME BEFORE FRANCHISE TAXES.......... 6,044 6,151 4,784 3,974 3,911 FRANCHISE TAXES........................ 127 99 65 59 57 ----------- ----------- ----------- ----------- ----------- NET EARNINGS........................... 5,917 6,052 4,719 3,915 3,854 RETAINED EARNINGS, beginning of period............................... 8,431 10,443 10,490 10,490 10,204 DIVIDENDS.............................. (3,905) (6,005) (5,005) (4,603) (2,435) ----------- ----------- ----------- ----------- ----------- RETAINED EARNINGS, end of period....... $ 10,443 $ 10,490 $ 10,204 $ 9,802 $ 11,623 ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- NET EARNINGS PER SHARE................. $ 910.31 $ 931.07 $ 726.00 $ 602.31 $ 592.92 ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
See notes to financial statements. F-65 SWISS DAIRY, A CORPORATION STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED THIRTY-SIX WEEKS ENDED ------------------------------------- ------------------------ DECEMBER DECEMBER DECEMBER 23, 31, 30, 1993 1994 1995 ----------- ----------- ----------- SEPTEMBER SEPTEMBER 9, 1995 7, 1996 ----------- ----------- (UNAUDITED) (UNAUDITED) (IN THOUSANDS) CASH FLOWS FROM OPERATING ACTIVITIES: Net earnings........................... $ 5,917 $ 6,052 $ 4,719 $ 3,915 $ 3,854 Adjustments to reconcile net earnings to net cash provided by operating activities: Depreciation and amortization........ 1,954 1,816 1,752 1,787 1,319 (Gain) loss on the sale of assets.... 7 (12) 186 (119) 20 Changes in operating assets and liabilities: Accounts receivable................ 720 (1,757) 1,150 2,029 397 Inventories........................ 140 66 (194) 111 277 Prepaid expenses and other......... 18 35 (4) (25) 17 Accounts payable................... (760) (3,675) (1,189) (351) 470 Accrued expenses................... (252) 324 53 430 118 ----------- ----------- ----------- ----------- ----------- Net cash provided by operating activities..................... 7,744 2,849 6,473 7,777 6,472 CASH FLOWS FROM INVESTING ACTIVITIES: Collections (advances) from note receivable........................... 151 (316) 600 400 Additions to property, plant and equipment............................ (2,237) (1,023) (4,215) (2,592) (1,225) Proceeds from sale of property, plant and equipment........................ 256 156 182 156 133 ----------- ----------- ----------- ----------- ----------- Net cash used in investing activities........................... (1,830) (1,183) (3,433) (2,036) (1,092) CASH FLOWS FROM FINANCING ACTIVITIES: Cash dividends......................... (3,905) (6,005) (5,005) (4,603) (2,435) ----------- ----------- ----------- ----------- ----------- INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS.......................... 2,009 (4,339) (1,965) 1,138 2,945 CASH AND CASH EQUIVALENTS, beginning of period.................. 4,744 6,753 2,414 2,414 449 ----------- ----------- ----------- ----------- ----------- CASH AND CASH EQUIVALENTS, end of period........................ $ 6,753 $ 2,414 $ 449 $ 3,552 $ 3,394 ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- Cash paid for interest................. $ 25 $ 10 $ -- $ -- $ 16 ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
See notes to financial statements. F-66 SWISS DAIRY, A CORPORATION NOTES TO FINANCIAL STATEMENTS 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES BUSINESS. Swiss Dairy, a Corporation (the Company), is a California corporation which processes and distributes fluid milk products, refrigerated ready-to-serve fruit drinks and bottled water throughout Southern California under its own brand names and private labels. The Company provides credit terms to customers, the majority of which are major grocery chains, generally ranging to up to 30 days, performs ongoing credit evaluations of their customers and maintains allowances for potential credit losses based on historical experience. The preparation of financial statements requires the use of significant estimates and assumptions by management; actual results could differ from these estimates. INVENTORIES. Pasteurized and raw milk inventories are stated at the lower of average cost or market. Raw materials and merchandise for resale inventories are stated at the lower of cost, using the first-in, first-out (FIFO) method, or market. Manufactured finished goods inventories are stated at the lower of average production cost or market. Production costs include raw materials, direct labor, and indirect production and overhead costs. PROPERTY, PLANT AND EQUIPMENT. Property, plant and equipment are stated at cost. Depreciation and amortization are provided using the straight-line method over the estimated useful lives of the assets, as follows:
ASSET USEFUL LIFE - --------------------------------------------------------------- --------------- Buildings and improvements..................................... 7 to 40 years Machinery and equipment........................................ 3 to 20 years Milk cases and carts........................................... 3 to 7 years Sales and delivery equipment................................... 3 to 7 years Furniture and fixtures......................................... 3 to 7 years
Expenditures for repairs and maintenance which do not improve or extend the life of the assets are expensed as incurred. IMPAIRMENT OF LONG-LIVED ASSETS. Effective January 1, 1996, the Company adopted Statement of Financial Accounting Standards (SFAS) No. 121, ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS AND FOR LONG-LIVED ASSETS TO BE DISPOSED OF, which requires that long-lived assets and certain identifiable intangibles to be held and used by an entity be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Impairment is evaluated by comparing future cash flows (undiscounted and without interest charges) expected to result from the use of the asset and its eventual disposition to the carrying amount of the asset. The Company does not anticipate a material impact on the financial statements of the Company as a result of its adoption of this new accounting principle. REVENUE. Revenue is recognized when the product is shipped to the customer. INCOME TAXES. The Company is qualified as a small business corporation under Section 1372 of Subchapter S of the Internal Revenue Code, which results in the income of the Company being taxable to the individual stockholders instead of at the corporate level. The Company pays a franchise tax to the State of California at a rate of 1.5% of taxable income. As a result, the financial statements of the Company do not contain either a provision for federal income taxes or the related current and deferred income tax liabilities, since such amounts are the responsibility of the individual stockholders. Had the Company been subject to state and federal income taxes at the corporate level, the estimated income tax expense would F-67 SWISS DAIRY, A CORPORATION NOTES TO FINANCIAL STATEMENTS (CONTINUED) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) have been approximately $2.4 million, $2.4 million and $1.9 million for 1993, 1994 and 1995, respectively, and $1.6 million for each of the unaudited thirty-six weeks ended September 9, 1995 and September 7, 1996 based on a combined federal and state income tax rate of 40%. CASH EQUIVALENTS. The Company considers all highly-liquid investments purchased with a remaining maturity of three months or less to be cash equivalents. EARNINGS PER SHARE. The Company computes earnings per share based on the weighted average number of common shares outstanding during the period. FINANCIAL INSTRUMENTS. Pursuant to SFAS No. 107, DISCLOSURE ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS, the Company is required to disclose an estimate of the fair value of the Company's financial instruments; however, due to their near-term maturities, the carrying amounts of the Company's financial instruments, which consist of accounts receivable and accounts payable, are considered equivalent to fair value. UNAUDITED INTERIM FINANCIAL STATEMENTS. The Company's balance sheet as of September 7, 1996 and the statements of earnings and retained earnings and cash flows for the thirty-six weeks ended September 9, 1995 and September 7, 1996, have been prepared by the Company without audit. In the opinion of management, all adjustments (which include only normal, recurring adjustments) necessary to present fairly the balance sheet of the Company at September 7, 1996, and the results of operations and cash flows of the Company for the thirty-six weeks ended September 9, 1995 and September 7, 1996, have been made. The results of operations for the interim periods are not necessarily indicative of the results to be expected for the full year. 2. ACCOUNTS RECEIVABLE Accounts receivable consist of the following as of:
DECEMBER DECEMBER 31, 30, 1994 1995 ----------- ----------- SEPTEMBER 7, 1996 ----------- (UNAUDITED) (IN THOUSANDS) Trade customers......................... $ 7,852 $ 6,844 $ 6,205 Rebates and other....................... 444 302 544 ----------- ----------- ----------- Accounts receivable..................... $ 8,296 $ 7,146 $ 6,749 ----------- ----------- ----------- ----------- ----------- -----------
F-68 SWISS DAIRY, A CORPORATION NOTES TO FINANCIAL STATEMENTS (CONTINUED) 3. INVENTORIES Inventories consist of the following as of:
DECEMBER DECEMBER 31, 30, 1994 1995 ----------- ----------- SEPTEMBER 7, 1996 ----------- (UNAUDITED) (IN THOUSANDS) Pasteurized and raw milk and raw materials............................. $ 208 $ 228 $ 322 Finished goods.......................... 238 305 151 Merchandise purchased for resale........ 145 252 35 ----------- ----------- ----------- $ 591 $ 785 $ 508 ----------- ----------- ----------- ----------- ----------- -----------
4. PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment consist of the following as of:
DECEMBER DECEMBER 31, 30, 1994 1995 ----------- ----------- SEPTEMBER 7, 1996 ----------- (UNAUDITED) (IN THOUSANDS) Land.................................... $ 47 $ 120 $ 120 Buildings and improvements.............. 2,768 4,005 3,885 Machinery and equipment................. 3,885 4,163 5,048 Milk cases and carts.................... 1,202 1,210 1,210 Sales and delivery equipment............ 4,893 6,076 5,821 Furniture and fixtures.................. 189 169 166 Construction in progress................ 581 289 ----------- ----------- ----------- 12,984 16,324 16,539 Less accumulated depreciation and amortization.......................... (6,653) (7,898) (8,360) ----------- ----------- ----------- $ 6,331 $ 8,426 $ 8,179 ----------- ----------- ----------- ----------- ----------- -----------
5. ACCRUED EXPENSES Accrued expenses consist of the following as of:
DECEMBER DECEMBER 31, 30, 1994 1995 ----------- ----------- SEPTEMBER 7, 1996 ----------- (UNAUDITED) (IN THOUSANDS) Accrued payroll and benefits............ $ 390 $ 455 $ 526 Other................................... 45 33 80 ----------- ----------- ----------- $ 435 $ 488 $ 606 ----------- ----------- ----------- ----------- ----------- -----------
6. LINE OF CREDIT The Company has a credit facility with a bank of $1,500,000 with interest due monthly at the bank's reference rate. This facility may be utilized as a revolving line of credit or for the purchase of equipment. F-69 SWISS DAIRY, A CORPORATION NOTES TO FINANCIAL STATEMENTS (CONTINUED) 6. LINE OF CREDIT (CONTINUED) The interest rate is the bank's reference rate. At December 30, 1995, there was no outstanding balance on this loan. The credit facility is secured by the assets of the Company. 7. EMPLOYEES 401(K) PLAN The Company sponsors a 401(k) plan for eligible employees who have completed one or more years of service and have met other requirements pursuant to the plan. The employees participating in the plan can generally make contributions to the plan of up to 15% of their annual compensation, and the Company can elect to match such contributions. During the unaudited period ended September 7, 1996, the Company expensed contributions to the plan of approximately $74,000. No contributions were made by the Company during 1993, 1994 and 1995 or during the unaudited period ended September 9, 1995. 8. COMMITMENTS AND CONTINGENCIES The Company is a party in the ordinary course of business to certain claims and litigation. In management's opinion, the outcome of such matters is not expected to have a material impact on the financial statements. The Company has a practice which provides for bonuses and benefits upon termination in certain circumstances, subject to the sole discretion of management. No such expenses were incurred by the Company during 1993, 1994 and 1995 or during the unaudited period ended September 9, 1995, for these discretionary benefits. However, during the unaudited period ended September 7, 1996, the Company expensed $160,000 for severance benefits for certain employees who were terminated prior to the transfer of ownership interests. 9. RELATED PARTY TRANSACTIONS In 1993, the Company had a note receivable from a stockholder. This note has been fully reimbursed in 1995. 10. MAJOR CUSTOMERS During 1993, 1994 and 1995, sales to four customers in the aggregate represented approximately 95%, 96% and 96% of sales, respectively. A decision by a significant customer to decrease the amount purchased from the Company or to cease carrying the Company's products could have a material adverse effect on the Company's financial condition and results of operations. 11. TRANSFER OF OWNERSHIP INTERESTS Subsequent to December 30, 1995, the Company transferred all of its assets and liabilities pursuant to an agreement for the transfer of ownership interests. F-70 INDEPENDENT AUDITORS' REPORT To the Board of Directors and Stockholders of Model Dairy, Inc. Reno, Nevada We have audited the accompanying balance sheets of Model Dairy, Inc. (an S corporation) as of October 31, 1995 and 1994, and the related statements of earnings and retained earnings, and cash flows for the years then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Model Dairy, Inc. as of October 31, 1995 and 1994, and the results of its operations and its cash flows for the years then ended in conformity with generally accepted accounting principles. BARNARD, VOGLER & CO. Reno, Nevada December 14, 1995 F-71 MODEL DAIRY, INC. BALANCE SHEETS ASSETS
OCTOBER 31, ---------------------------- SEPTEMBER 30, 1994 1995 1996 ------------- ------------- ------------- (UNAUDITED) CURRENT ASSETS: Cash and cash equivalents......................................... $ 1,242,695 $ 1,456,140 $ 1,109,631 Receivables....................................................... 4,793,522 5,012,989 5,661,557 Inventories....................................................... 1,723,956 1,855,773 2,052,344 Prepaid expenses and other current assets......................... 97,737 127,625 164,147 ------------- ------------- ------------- Total current assets............................................ 7,857,910 8,452,527 8,987,679 PROPERTY, PLANT AND EQUIPMENT....................................... 3,191,896 4,268,844 4,873,348 INTANGIBLE AND OTHER ASSETS......................................... 473,958 549,839 626,693 ------------- ------------- ------------- TOTAL............................................................... $ 11,523,764 $ 13,271,210 $ 14,487,720 ------------- ------------- ------------- ------------- ------------- ------------- LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Acccounts payable and accrued expenses............................ $ 3,586,135 $ 4,389,494 $ 4,357,859 Current portion of long term debt................................. 250,698 423,916 663,000 ------------- ------------- ------------- Total current liabilities....................................... 3,836,833 4,813,410 5,020,859 LONG-TERM DEBT...................................................... 942,202 1,386,304 2,393,769 COMMITMENTS AND CONTINGENCIES STOCKHOLDERS' EQUITY: Common stock, no par value; 2,400 shares authorized, 700 shares issued and outstanding.......................................... 67,000 67,000 67,000 Retained earnings................................................. 6,677,729 7,004,496 7,006,092 ------------- ------------- ------------- Total stockholders' equity........................................ 6,744,729 7,071,496 7,073,092 ------------- ------------- ------------- TOTAL............................................................... $ 11,523,764 $ 13,271,210 $ 14,487,720 ------------- ------------- ------------- ------------- ------------- -------------
See accompanying notes F-72 MODEL DAIRY, INC. STATEMENTS OF EARNINGS AND RETAINED EARNINGS
ELEVEN MONTHS YEARS ENDED OCTOBER 31, ENDED ---------------------------- SEPTEMBER 30, 1994 1995 1996 ------------- ------------- ------------- (UNAUDITED) NET SALES........................................................... $ 49,434,727 $ 50,846,894 $ 51,608,455 COST OF SALES....................................................... 39,770,987 41,309,141 42,374,695 ------------- ------------- ------------- Gross profit...................................................... 9,663,740 9,537,753 9,233,760 OPERATING COSTS AND EXPENSES: Distribution...................................................... 4,166,032 3,920,048 4,051,604 General and administrative........................................ 3,662,429 3,723,719 3,620,238 Amortization of intangibles....................................... 58,178 20,273 9,895 ------------- ------------- ------------- Total operating costs and expenses.............................. 7,886,639 7,664,040 7,681,737 ------------- ------------- ------------- INCOME FROM OPERATIONS.............................................. 1,777,101 1,873,713 1,552,023 OTHER (INCOME) EXPENSE: Interest, net..................................................... (1,311) 65,975 61,755 Other income, net................................................. (51,619) (115,627) 23,602 ------------- ------------- ------------- Total other (income) expense...................................... (52,930) (49,652) 85,357 ------------- ------------- ------------- EARNINGS BEFORE INCOME TAX.......................................... 1,830,031 1,923,365 1,466,666 INCOME TAXES........................................................ 1,948 4,789 -- ------------- ------------- ------------- NET EARNINGS........................................................ 1,828,083 1,918,576 1,466,666 RETAINED EARNINGS, beginning of year................................ 6,129,136 6,677,729 7,004,496 CASH DIVIDENDS...................................................... (1,279,490) (1,591,809) (1,465,070) ------------- ------------- ------------- RETAINED EARNINGS, end of year...................................... $ 6,677,729 $ 7,004,496 $ 7,006,902 ------------- ------------- ------------- ------------- ------------- -------------
See accompanying notes F-73 MODEL DAIRY, INC. STATEMENTS OF CASH FLOWS
ELEVEN MONTHS YEARS ENDED OCTOBER 31, ENDED ---------------------------- SEPTEMBER 30, 1994 1995 1996 ------------- ------------- ------------- (UNAUDITED) CASH FLOWS FROM OPERATING ACTIVITIES Net earnings....................................................... $ 1,828,083 $ 1,918,576 $ 1,466,666 Adjustments to reconcile net earnings to net cash provided by operating activities Depreciation..................................................... 693,056 794,862 783,465 Amortization of intangibles...................................... 58,178 20,273 9,895 Gain on sale of assets........................................... (9,396) (28,750) (9,200) Changes in operating assets and liabilities: Receivables.................................................... (181,457) (174,282) (739,207) Inventories.................................................... (113,595) (131,817) (196,571) Prepaid expenses and other current assets...................... 28,869 (29,888) (36,522) Other assets................................................... 11,747 (14,312) 11,112 Accounts payable and accrued expenses.......................... (488,409) 803,359 (31,635) ------------- ------------- ------------- Net cash provided by operating activities........................ 1,827,076 3,158,021 1,258,003 CASH FLOWS FROM INVESTING ACTIVITIES Proceeds from sale of property, plant and equipment................ 27,911 28,750 9,200 Additions to property, plant and equipment......................... (1,379,200) (1,871,810) (1,387,969) Payments for other assets.......................................... (31,374) (127,027) (7,222) ------------- ------------- ------------- Net cash used in investing activities............................ (1,382,663) (1,970,087) (1,385,991) CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from line of credit....................................... $ 650,000 $ 850,000 $ 1,477,862 Payments on long-term debt......................................... (260,020) (232,680) (231,313) Dividends paid..................................................... (1,279,490) (1,591,809) (1,465,070) ------------- ------------- ------------- Net cash used in financing activities............................ (889,510) (974,489) (218,521) ------------- ------------- ------------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS................. (445,097) 213,445 (346,509) CASH AND CASH EQUIVALENTS, beginning of year......................... 1,687,792 1,242,695 1,456,140 ------------- ------------- ------------- CASH AND CASH EQUIVALENTS, end of year............................... $ 1,242,695 $ 1,456,140 $ 1,109,631 ------------- ------------- ------------- ------------- ------------- ------------- SUPPLEMENTAL CASH FLOW DATA Cash paid during the year for Interest......................................................... $ 54,290 $ 131,878 $ 121,384 Income taxes..................................................... 32,974 31,396 6,888 SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES Conversion of accounts receivable into notes receivable............ $ 160,202 $ -- $ 142,784
See accompanying notes F-74 MODEL DAIRY, INC. NOTES TO FINANCIAL STATEMENTS YEARS ENDED OCTOBER 31, 1994 AND 1995 AND THE UNAUDITED ELEVEN MONTHS ENDED SEPTEMBER 30, 1996 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES NATURE OF OPERATIONS--Model Dairy, Inc. (the "Company") is a Nevada corporation incorporated on November 17, 1965. The Company operates as a creamery, processing raw milk into various milk, ice cream and frozen yogurt products. The Company distributes its manufactured dairy products, as well as other purchased dairy products, to retail and wholesale distributors, grocery stores, restaurants and various institutions, located in northern Nevada and California. The Company provides credit terms to customers generally ranging up to 30 days and performs ongoing credit evaluations of their customers. The preparation of financial statements requires the use of significant estimates and assumptions by management; actual results could differ from these estimates. INVENTORIES--Cost of purchased inventories is determined on the first-in, first-out method. Cost of manufactured inventories is based upon standard costs which approximate average costs. All inventories are stated at the lower of cost or market. PROPERTY, PLANT AND EQUIPMENT--Property, plant and equipment are stated at cost. Depreciation is computed using the straight-line method for financial reporting purposes. The estimated useful lives of the assets are:
YEARS --------- Leasehold improvements...................................................... 10-39 Automobiles and trucks...................................................... 3-7 Machinery and equipment..................................................... 7-10 Office equipment............................................................ 3-10
Capital lease assets are amortized over the shorter of their lease term or their estimated useful lives. Maintenance, repairs and renewals that neither materially add to the value of the property nor appreciably prolong its life are charged to expense as incurred. Gains and losses on dispositions of property and equipment are included in income. INTANGIBLE ASSETS--Intangible assets are stated at cost. Amortization is computed using the straight-line method. The estimated useful lives of assets are:
YEARS --------- Covenant not to compete..................................................... 2-5 Trademarks.................................................................. 20-40 Customer lists and routes................................................... 5-10 Goodwill.................................................................... 40
The Company periodically assesses the net realizable value of its intangible assets, as well as all other assets, by comparing the expected future net operating cash flows, undiscounted and without interest charges, to the carrying amount of the underlying assets. The Company would evaluate a potential impairment if the recorded value of these assets exceeded the associated future net operating cash flows. Any potential impairment loss would be measured as the amount by which the carrying value exceeds the fair value of the asset. Fair value of assets would be measured by market value, if an active market exists, or F-75 MODEL DAIRY, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) YEARS ENDED OCTOBER 31, 1994 AND 1995 AND THE UNAUDITED ELEVEN MONTHS ENDED SEPTEMBER 30, 1996 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) by a forecast of expected future net operating cash flows, discounted at a rate commensurate with the risk involved. REVENUE--Revenue is recognized when the product is shipped to the customer. ADVERTISING--The Company expenses advertising costs as incurred. During the years ended October 31, 1994 and 1995, advertising expense approximated $236,000 and $262,000, respectively. INCOME TAXES--The Company, with the consent of its shareholders, elected to be taxed under the provisions of Subchapter S of the Internal Revenue Code for the fiscal year beginning November 1, 1988. Under those provisions, the Company does not pay federal corporate income taxes on its taxable income. Instead, the stockholders are liable for individual federal income taxes on their respective shares of the Company's taxable income. Had the Company been subject to state and federal income taxes at the corporate level, the estimated income tax expense would have been approximately $623,000, and $657,000 for the years ended October 31, 1994 and 1995, respectively and $501,000 for the unaudited eleven months in 1996. The Company is liable for federal corporate built-in gain taxes attributable to built-in gain realized on the disposition of ordinary income property and short-term capital gain property owned at the time the Subchapter S election was made. CASH AND CASH EQUIVALENTS--For purposes of the statement of cash flows, the Company considers all highly liquid debt instruments purchased with a maturity of three months or less to be cash equivalents. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS--Statement of Financial Accounting Standards (SFAS) No. 107 requires the disclosure of an estimate of the fair value of the Company's financial instruments, which consist primarily of accounts and notes receivable, accounts payable and debt. Due to the near-term maturities of accounts receivable and accounts payable, the Company believes that the carrying amounts of these instruments are equivalent to fair value. In the case of notes receivable and debt, the Company believes that the fixed interest rates on notes receivable and the variable interest rate on primarily all debt represent market rates which results in the carrying value of such instruments approximating fair value. Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of," requires that long-lived assets and certain identifiable intangibles to be held and used by an entity be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Impairment is evaluated by comparing future cash flows (undiscounted and without interest charges) expected to result from the use of the asset and its eventual disposition to the carrying amount of the asset. These new accounting principles are effective for the Company's fiscal year ending October 31, 1996. The Company believes that these new accounting principles will not have a material impact on its financial position. RECLASSIFICATIONS--Certain amounts in 1994 have been reclassified to conform with the 1995 presentation. F-76 MODEL DAIRY, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) YEARS ENDED OCTOBER 31, 1994 AND 1995 AND THE UNAUDITED ELEVEN MONTHS ENDED SEPTEMBER 30, 1996 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) UNAUDITED INTERIM FINANCIAL STATEMENTS--The Company's balance sheet as of September 30, 1996 and the statements of earnings and retained earnings and cash flows for the eleven months ended September 30, 1996, have been prepared by the Company without audit. In the opinion of management, all adjustments (which include only normal, recurring adjustments) necessary to present fairly the balance sheet of the Company at September 30, 1996, and the results of operations and cash flows of the Company for the eleven months ended September 30, 1996 have been made. The results of operations for the interim period are not necessarily indicative of the results to be expected for the full year. 2. RECEIVABLES Receivables consist of the following:
OCTOBER 31, -------------------------- 1994 1995 ------------ ------------ SEPTEMBER 30, 1996 ------------- (UNAUDITED) Trade accounts receivable.................................... $ 4,598,462 $ 4,869,483 $ 5,413,030 Current portion of notes receivable.......................... 108,570 68,592 106,571 Other........................................................ 86,490 74,914 141,956 ------------ ------------ ------------- $ 4,793,522 $ 5,012,989 $ 5,661,557 ------------ ------------ ------------- ------------ ------------ -------------
Included in trade accounts receivable and the current portion of notes receivable are amounts due from certain distributors who are affiliates of the Company's shareholders. These affiliates had the following outstanding balances:
OCTOBER 31, ---------------------- 1994 1995 ---------- ---------- SEPTEMBER 30, 1996 ------------- (UNAUDITED) Trade accounts receivable....................................... $ 388,862 $ 539,496 $ 827,561 Current portion of notes receivable............................. 59,113 34,846 38,262 ---------- ---------- ------------- $ 447,975 $ 574,342 $ 865,823 ---------- ---------- ------------- ---------- ---------- -------------
Accounts and notes receivable are considered fully collectible by management. Therefore, no allowance for doubtful accounts is included in the financial statements. F-77 MODEL DAIRY, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) YEARS ENDED OCTOBER 31, 1994 AND 1995 AND THE UNAUDITED ELEVEN MONTHS ENDED SEPTEMBER 30, 1996 3. INVENTORIES Inventories consist of the following:
OCTOBER 31, -------------------------- 1994 1995 ------------ ------------ SEPTEMBER 30, 1996 ------------- (UNAUDITED) Raw materials............................................... $ 681,773 $ 838,075 $ 861,239 Finished goods.............................................. 1,042,183 1,017,698 1,191,105 ------------ ------------ ------------- $ 1,723,956 $ 1,855,773 $ 2,052,344 ------------ ------------ ------------- ------------ ------------ -------------
4. PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment, together with accumulated depreciation, consist of the following:
OCTOBER 31, -------------------------- 1994 1995 ------------ ------------ SEPTEMBER 30, 1996 ------------- (UNAUDITED) Automobiles and trucks....................................... $ 3,013,498 $ 3,141,602 $ 3,470,695 Machinery and equipment...................................... 4,474,022 5,092,967 5,585,461 Leasehold improvements....................................... 693,451 1,782,953 1,785,333 Office equipment............................................. 611,801 655,742 692,148 Construction in progress..................................... 573,716 393,702 894,753 ------------ ------------ ------------- 9,366,488 11,066,966 12,428,390 Less accumulated depreciation................................ (6,174,592) (6,798,122) (7,555,042) ------------ ------------ ------------- $ 3,191,896 $ 4,268,844 $ 4,873,348 ------------ ------------ ------------- ------------ ------------ -------------
Depreciation expense was $693,056 and $794,862 in 1994 and 1995, respectively, and $783,465 for the unaudited eleven months in 1996. The Company follows the policy of capitalizing interest as a component of the cost of property, plant, and equipment constructed for its own use. For the year ended October 31, 1994, total interest incurred was $70,526, of which $13,593 was capitalized and $56,933 was charged to operations. For the year ended October 31, 1995, total interest incurred was $163,778 of which $23,297 was capitalized and $140,481 was charged to operations. For the unaudited eleven months ended September 30, 1996, total interest incurred was $158,384, of which $37,000 was capitalized and $121,384 was charged to operations. F-78 MODEL DAIRY, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) YEARS ENDED OCTOBER 31, 1994 AND 1995 AND THE UNAUDITED ELEVEN MONTHS ENDED SEPTEMBER 30, 1996 5. INTANGIBLE AND OTHER ASSETS Intangible and other assets consist of the following:
OCTOBER 31, ---------------------- 1994 1995 ---------- ---------- SEPTEMBER 30, 1996 ------------- (UNAUDITED) Intangible assets............................................... $ 123,399 $ 103,126 $ 93,231 Long term portion of notes receivable........................... 132,546 87,361 178,000 Investments, deposits and other................................. 218,013 359,352 355,462 ---------- ---------- ------------- $ 473,958 $ 549,839 $ 626,693 ---------- ---------- ------------- ---------- ---------- -------------
The above intangible assets, together with accumulated amortization, consist of the following:
OCTOBER 31, ------------------------ 1994 1995 ----------- ----------- SEPTEMBER 30, 1996 ------------- (UNAUDITED) Covenants not to compete...................................... $ 601,950 $ 601,950 $ -- Trademarks.................................................... 48,488 48,488 48,488 Customer lists and routes..................................... 163,821 163,821 113,821 Goodwill...................................................... 29,346 29,346 29,346 Loan fees..................................................... 9,000 9,000 9,000 ----------- ----------- ------------- 852,605 852,605 200,655 Less accumulated amortization................................. (729,206) (749,479) (107,424) ----------- ----------- ------------- $ 123,399 $ 103,126 $ 93,231 ----------- ----------- ------------- ----------- ----------- -------------
Amortization expense consisted of $58,178 and $20,273 in 1994 and 1995, respectively, and $9,895 for the unaudited eleven months in 1996. 6. ACCOUNTS PAYABLE AND ACCRUED EXPENSES Accounts payable and accrued expenses consist of the following:
OCTOBER 31, -------------------------- 1994 1995 ------------ ------------ SEPTEMBER 30, 1996 ------------- (UNAUDITED) Trade accounts payable....................................... $ 2,746,057 $ 3,593,510 $ 3,736,328 Accrued payroll and benefits................................. 649,322 679,847 500,671 Other........................................................ 190,756 116,137 120,860 ------------ ------------ ------------- $ 3,586,135 $ 4,389,494 $ 4,357,859 ------------ ------------ ------------- ------------ ------------ -------------
F-79 MODEL DAIRY, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) YEARS ENDED OCTOBER 31, 1994 AND 1995 AND THE UNAUDITED ELEVEN MONTHS ENDED SEPTEMBER 30, 1996 7. LONG TERM DEBT Long-term debt consists of the following:
OCTOBER 31, -------------------------- 1994 1995 ------------ ------------ SEPTEMBER 30, 1996 ------------- (UNAUDITED) Credit agreement: Line of credit........................................ $ 650,000 $ 1,418,865 $ 1,169,642 Term loans............................................ 1,625,540 Note payable to Creamland Dairy......................... 383,586 309,823 236,840 Capital lease obligations............................... 136,635 81,532 24,747 Other................................................... 22,679 ------------ ------------ ------------- 1,192,900 1,810,220 3,056,769 Less current portion.................................... (250,698) (423,916) (663,000) ------------ ------------ ------------- $ 942,202 $ 1,386,304 $ 2,393,769 ------------ ------------ ------------- ------------ ------------ -------------
LINE OF CREDIT--On March 30, 1994, the Company entered into a business loan agreement with Bank of America for a line of credit and a letter of credit. The line of credit totals $1,500,000. This is a non-revolving line of credit available to be drawn against for the period between the date of the agreement and June 5, 1995. After June 5, 1995, the Company is required to begin repayment under a term repayment option. The proceeds from this line were used for adding a new cooler facility to the existing creamery plant. The interest rate is the bank's reference rate plus one-half of one percentage point. Monthly interest payments begin on May 1, 1994, and continue until the principal is paid in full. Principal payments are to be paid in sixty successive equal monthly installments of $31,900 starting July 5, 1995. On June 5, 2000, the remaining principal balance plus any interest is due in full. At October 31, 1994 and 1995 and the unaudited September 30, 1996, $650,000, $1,418,865 and $1,169,642 was outstanding on the line of credit with an interest rate of 8.25%, 9.25% and 7.5%, respectively. Under this same agreement, the Bank has provided a letter of credit to the State of Nevada Department of Commerce for workmen's compensation for the Company. Under the terms of the business loan agreement, the Company is required to maintain minimum working capital of $1,500,000, maintain tangible net worth equal to at least $4,000,000, maintain a ratio of total liabilities to tangible net worth not greater than 1.50 to 1.00, and maintain a debt service coverage ratio of at least 1.25 to 1.00. At October 31, 1994 and 1995, the Company was in compliance with all terms of the business loan agreement. The line of credit and the letter of credit are collateralized by the personal guarantees of the shareholders of the Company. TERM LOANS--During the unaudited eleven months in 1996, the Company entered into a $1.5 million term loan agreement with Bank of America to fund the expansion of the Company's ice cream freezer and an equipment loan with Bank of America to acquire related equipment. The freezer expansion term loan was fully funded by the bank, requires monthly installment payments of $30,200 and bears the same interest rate as the line of credit. F-80 MODEL DAIRY, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) YEARS ENDED OCTOBER 31, 1994 AND 1995 AND THE UNAUDITED ELEVEN MONTHS ENDED SEPTEMBER 30, 1996 7. LONG TERM DEBT (CONTINUED) In connection with these new loans with Bank of America, the existing loan covenants were revised to require the Company to maintain minimum working capital of $2,000,000, maintain tangible net worth equal to at least $5,000,000, maintain a ratio of total liabilities to tangible net worth not greater than 1.50 to 1.00 and maintain a debt service coverage ratio of at least 1.50 to 1.00. At September 30, 1996, the Company was in compliance with all terms of revised bank covenants. OTHER NOTES--The note payable to Creamland Dairy was issued in the original face amount of $600,000, is secured by an irrevocable, unsecured letter of credit with Pioneer Citizens Bank and is payable in monthly installments of $8,482 including interest at 8% through May 1, 1999. CAPITAL LEASE OBLIGATIONS--In 1991, the Company entered into a lease obligation for machinery which has been classified as a capital lease. The machinery is included in machinery and equipment at a cost of $269,307, with accumulated depreciation in the amount of $87,525, $114,456 and $139,143 at October 31, 1994 and 1995 and unaudited September 30, 1996, respectively. Minimum future lease payments under the capital lease as of October 31, 1995, for the remaining term of the lease and in the aggregate are: Total minimum lease payments for 1996.................................. $ 88,122 Less amount representing interest...................................... (6,590) --------- Present value of net minimum lease payments............................ 81,532 Less current portion................................................... (81,532) --------- $ -- --------- ---------
The interest rate on the capitalized lease of 12.3% is imputed based on the Company's incremental borrowing rate at the inception of the lease. DEBT MATURITIES--Maturities of current and long-term debt, excluding the capital lease obligations, are as follows:
YEAR ENDING OCTOBER 31, AMOUNT - ------------------------------------------------------------------------------------- ------------ 1996............................................................................... $ 342,384 1997............................................................................... 374,352 1998............................................................................... 409,316 1999............................................................................... 395,809 2000............................................................................... 206,827 ------------ $ 1,728,688 ------------ ------------
8. EMPLOYEE BENEFIT PLANS PROFIT SHARING PLAN--The Company maintains a profit sharing plan for all qualified officers and employees except those covered by a collective bargaining agreement. The amount of the contribution is determined annually by the board of directors. Allocation of the contribution among officers and employees is based on the amount of salary or wages earned. The contribution expense was $202,164 and F-81 MODEL DAIRY, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) YEARS ENDED OCTOBER 31, 1994 AND 1995 AND THE UNAUDITED ELEVEN MONTHS ENDED SEPTEMBER 30, 1996 8. EMPLOYEE BENEFIT PLANS (CONTINUED) $200,000 in 1994 and 1995, respectively. No profit sharing contribution expense has been recognized or is anticipated during the unaudited eleven months in 1996. PENSION PLANS--Under the terms of a collective bargaining agreement ("Agreement"), the Company is required to contribute for each employee covered by the Agreement a stipulated amount into the Teamsters Pension Trust Fund. Contributions to the fund are based on the total straight-time hours worked during each month, including amounts paid for vacation, holiday, and sick leave. For the years ended October 31, 1994 and 1995, the Agreement stipulated a contribution rate of $.77 per hour. For 1994, 1995 and the unaudited eleven months in 1996, the amount of pension expense was $163,336, $172,376 and $180,485, respectively. In addition, the Company sponsors a supplementary defined contribution pension plan for all employees covered by the Agreement. Contributions to the plan are based on the total straight-time hours worked during each month, but are limited to 173 hours per employee per month. For the years ended October 31, 1994 and 1995, the Agreement stipulated a contribution rate of $.85 per hour. For 1994, 1995 and the unaudited eleven months in 1996, the amount of supplementary pension expense was $163,553, $177,980 and $162,925, respectively. 9. OPERATING LEASES The Company leases its main plant under two fifteen year operating leases expiring April 30, 2003 and December 31, 2004. Additional warehouse space is occupied under five operating leases. One lease, expiring August 31, 2000, provided for a rental increase on September 1, 1995, to give effect to changes in the cost of living index. In addition, the lease contains an option to renew for three successive five-year periods. The remaining four leases are on a month-to-month basis. Under all leases the Company is responsible for insurance, taxes and normal maintenance of the facilities. The following is a schedule of future minimum rental payments (net of sublease income) required under operating leases that have initial or remaining noncancelable lease terms in excess of one year:
YEAR ENDING OCTOBER 31, AMOUNT - -------------------------------------------------- -------------- 1996.............................................. $ 509,181 1997.............................................. 509,181 1998.............................................. 509,181 1999.............................................. 509,181 2000.............................................. 502,813 Thereafter........................................ 1,463,440 -------------- $ 4,002,977 -------------- --------------
Minimum lease payments in this schedule exclude rentals under renewal options. Total rental expense for all operating leases, net of sublease rentals, was $708,070, $733,585 and $697,129 for 1994 and 1995 and for the interim period in 1996, respectively. F-82 MODEL DAIRY, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) YEARS ENDED OCTOBER 31, 1994 AND 1995 AND THE UNAUDITED ELEVEN MONTHS ENDED SEPTEMBER 30, 1996 10. MAJOR CUSTOMERS, SUPPLIERS AND CONCENTRATION OF CREDIT RISK The Company had sales to a major customer comprising approximately 24%, 23% and 25% of net sales in 1994 and 1995 and the unaudited eleven months in 1996, respectively. At October 31, 1994 and 1995 and the unaudited September 30, 1996, amounts due from that customer included in trade accounts receivable were $1,028,894, $716,150 and $894,090, respectively. Credit is granted to customers, substantially all of whom are located in northern Nevada and northern California. During 1994 and 1995, the Company purchased all of its fluid raw milk from one supplier. At October 31, 1994 and 1995 and the unaudited eleven months in 1996, amounts due to that supplier included in accounts payable were $1,080,937, $1,609,818 and $1,978,733, respectively. The Company maintains the majority of its cash accounts in two banking institutions located in Reno, Nevada. Accounts at each institution are insured up to $100,000. A summary of the total insured and uninsured amounts held at the institutions at October 31, 1995, follows: Total cash held................................................. $1,664,463 Portion insured................................................. 109,954 --------- Uninsured cash balance.......................................... $1,554,509 --------- ---------
11. RELATED PARTY TRANSACTIONS The principal owners of the Company are also principal owners of several affiliated companies. The Company made sales of approximately $3,260,325, $3,531,888 and $3,680,784 in 1994 and 1995 and the unaudited eleven months in 1996, respectively, to the affiliated companies. Accounts receivable from affiliated companies were $388,351, $539,496 and $827,561 at October 31, 1994 and 1995 and unaudited September 30, 1996, respectively. The Company also rented real property from related parties who are principal stockholders. Total rental payments to these individuals were $582,576, $592,176 and $544,000 in 1994 and 1995 and unaudited September 30, 1996, respectively. Notes receivable from related parties consist of the following:
OCTOBER 31, ------------------------------ 1994 1995 -------------- -------------- SEPTEMBER 30, 1996 ------------- (UNAUDITED) 6% note from affiliated company................... $ 76,089 $ 23,702 $ 23,702 8% note from affiliated company................... -- 15,741 14,560 -------------- -------------- ------------- 76,089 39,443 38,262 Less current portion.............................. (59,113) (34,846) (38,262) -------------- -------------- ------------- $ 16,976 $ 4,597 $ -- -------------- -------------- ------------- -------------- -------------- -------------
F-83 MODEL DAIRY, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) YEARS ENDED OCTOBER 31, 1994 AND 1995 AND THE UNAUDITED ELEVEN MONTHS ENDED SEPTEMBER 30, 1996 12. COMMITMENTS AND CONTINGENCIES WORKERS' COMPENSATION--Effective May 1, 1990, the Company adopted a partially self-insured workers' compensation plan. Under the plan, the Company pays up to $350,000 per occurrence; claims above $350,000 are covered up to statutory limits by an insurance policy. In addition, the Company maintains a cash flow protection endorsement limiting the annual liability to $90,000 per occurrence. The Company estimates its liabilities for unpaid claims based on the data supplied to them by their insurance administrators. The amount of estimated unpaid claims in the accompanying financial statements is $127,024, $24,846 and $42,500 at October 31, 1994 and 1995 and unaudited September 30, 1996, respectively. A self-insured employer is required to deposit with the commissioner of the State of Nevada Department of Commerce an amount reasonably sufficient to ensure payment of compensation, but in no event may it be less than 105 percent of the employer's expected annual incurred cost of claims, or less than $100,000. At October 31, 1994 and 1995 and unaudited September 30, 1996, the Company has provided as security an unsecured letter of credit from Bank of America for $116,000, $132,000 and $110,000, respectively. PURCHASE AGREEMENTS--In conjunction with an equipment acquisition, the Company has agreed to purchase at least 90% of its sweetener requirement from Liquid Sugars, Inc. for the period of time covered by their contract payable ending October 1, 1995. In November of 1993, the Company entered into a commitment agreement with Purity to purchase packaging inventory for a certain product. Purity has provided the Company with equipment for use in packaging this finished product. Under the terms of the agreement, once the Company has fulfilled the purchase commitment, the equipment becomes the property of the Company. The inventory purchased includes an additional charge for this equipment. Based on current market prices at October 31, 1994 and 1995, the total remaining committed purchases approximate $1,180,000 and $634,000, respectively. The costs incurred to purchase this packaging inventory approximated $522,000 and $570,000 during the years ended October 31, 1994 and 1995, respectively. The commitment agreement is anticipated to be fulfilled by February of 1997. CONSTRUCTION CONTRACT--In May of 1994, the Company entered into a contract with Zero Temp, Inc. to construct a new cold storage facility to their existing creamery plant. The terms of the payments were based on percentage of completion determined by the contractor. Total costs incurred of $382,710 were included in construction in progress at October 31, 1994. At October 31, 1994, the Company was committed to an additional $255,140 of construction costs under this contract. Construction was completed during the year ended October 31, 1995 and no further commitment existed. In May of 1996, the Company entered into a similar contract with Tri-Com Refrigeration, Inc., to construct a new freezer facility. Total costs incurred of $164,675 were included in construction in progress at September 30, 1996. At September 30, 1996, the Company was commited to an additional $512,054 of construction costs under this contract. F-84 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- NO DEALER, SALESMAN OR ANY OTHER PERSON HAS BEEN AUTHORIZED BY THE COMPANY TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, AND IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MAY NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY, THE SELLING STOCKHOLDERS OR ANY OF THE UNDERWRITERS. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, ANY SECURITIES OTHER THAN THE SECURITIES TO WHICH IT RELATES OR AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, TO ANY PERSON IN ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION IS NOT AUTHORIZED, OR IN WHICH THE PERSON MAKING THE OFFER OR SOLICITATION IS NOT QUALIFIED TO DO SO, OR TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. UNDER NO CIRCUMSTANCES SHALL THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER CREATE ANY IMPLICATION THAT INFORMATION CONTAINED IN THIS PROSPECTUS IS CORRECT AS OF ANY TIME SUBSEQUENT THE DATE OF THIS PROSPECTUS. ------------------------ TABLE OF CONTENTS
PAGE ----- Prospectus Summary............................. 3 Risk Factors................................... 7 Use of Proceeds................................ 11 Price Range of Common Stock.................... 12 Dividend Policy................................ 12 Capitalization................................. 13 Unaudited Pro Forma Consolidated Financial Data......................................... 14 Selected Consolidated Financial Data........... 21 Selected Pre-Acquisition Historical Financial Data......................................... 23 Management's Discussion and Analysis of Financial Condition and Results of Operations................................... 24 Business....................................... 33 Management..................................... 41 Certain Relationships and Related Transactions................................. 49 Principal and Selling Stockholders............. 55 Description of Capital Stock................... 56 Shares Eligible for Future Sale................ 59 Underwriting................................... 62 Legal Matters.................................. 63 Experts........................................ 63 Available Information.......................... 63 Index to Financial Statements.................. F-1
4,700,000 SHARES [LOGO] COMMON STOCK --------------------- PROSPECTUS --------------------- BEAR, STEARNS & CO. INC. A.G. EDWARDS & SONS, INC. , 1997 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- PART II ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION. The following table indicates the estimated expenses to be incurred in connection with the Offering described in this Registration Statement, all of which will be paid by the Company. Registration fee.................................................. $ 20,500 NASD fee.......................................................... 7,000 Nasdaq National Market listing fee................................ 17,500 Accounting fees and expenses...................................... 100,000 Legal fees and expenses........................................... 100,000 Printing and engraving............................................ 125,000 Blue Sky fees and expenses (including counsel fees)............... 5,000 Miscellaneous other expenses...................................... 125,000 --------- Total........................................................... $ 500,000 --------- ---------
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS. The Company's Certificate of Incorporation provides that no director of the Company will be personally liable to the Company or any of its stockholders for monetary damages arising from the director's breach of fiduciary duty as a director, with certain limited exceptions. See "Management-- Limitation of Liability and Indemnification" in the Prospectus. Pursuant to the provisions of Section 145 of the Delaware General Corporation Law, every Delaware corporation has the power to indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding (other than an action by or in the right of the corporation) by reason of the fact that such person is or was a director, officer, employee or agent of any corporation, partnership, joint venture, trust or other enterprise, against any and all expenses, judgments, fines and amounts paid in settlement and reasonably incurred in connection with such action, suit or proceeding. The power to indemnify applies only if such person acted in good faith and in a manner such person reasonably believed to be in the best interests, or not opposed to the best interests, of the corporation and, with respect to any criminal action or proceeding, had no reasonable cause to believe his or her conduct was unlawful. The power to indemnify applies to actions brought by or in the right of the corporation as well, but only to the extent of defense and settlement expenses and not to any satisfaction of a judgment or settlement of the claim itself, and with the further limitation that in such actions no indemnification shall be made in the event of any adjudication of negligence or misconduct unless the court, in its discretion, believes that in light of all the circumstances indemnification should apply. The Company's Certificate of Incorporation contains provisions requiring it to indemnify its officers and directors to the fullest extent permitted by the Delaware General Corporation Law. See "Management--Limitation of Liability and Indemnification" in the Prospectus. ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES. On August 7, 1996, the Company completed a private placement of 625,000 shares of Common Stock to T. Rowe Price Small-Cap Value Fund, Inc., a Maryland corporation. The sale of Common Stock in this private placement was exempt from registration pursuant to Section 4(2) of the Securities Act. No underwriter participated in this transaction. In March 1995, the Company completed a private placement of shares of its Common Stock and options to acquire shares of its Common Stock in connection with the Combination described in the II-1 Prospectus under the caption "Certain Relationships and Related Transactions". The offerees in such private placement were the Predecessor Owners of the Combined Entities in the Combination. These Predecessor Owners received Common Stock and options to acquire Common Stock in exchange for their equity interests in the Combined Entities, as shown in the table below (which reflects record ownership). The Company's sale of its securities in this private placement was exempt from registration pursuant to Rule 506 of Regulation D under Section 4(2) of the Securities Act. The Company's sale of its securities in this private placement to certain of its employees and employees of its subsidiaries also qualified for an exemption from registration pursuant to Rule 701 under the Securities Act. No underwriters participated in these transactions.
NUMBER OF SHARES OF AVERAGE NUMBER OF COMMON STOCK EXERCISE TOTAL SHARES OF SUBJECT TO PRICE PER SHARES COMMON STOCK OPTIONS OPTION SHARE AND OPTIONS -------------- -------------- ------------ ----------- Gregg L. Engles...................................... 1,352,169 -- -- 1,352,169 Cletes O. Beshears................................... 50,489 8,831 6.79 59,320 Gayle O. Beshears.................................... 16,370 281,645 0.03 298,015 Hector M. Nevares.................................... 248,503 -- -- 248,503 Neva Holdings, Inc. ................................. 69,264 -- -- 69,264 Robert L. Kaminski................................... 865,367 -- -- 865,367 John Hancock Mutual Life Insurance Company........... 1,515,977 -- -- 1,515,977 John Hancock Life Insurance Company of America....... 26,441 -- -- 26,441 Pacific Mutual Life Insurance Company................ 879,941 -- -- 879,941 PM Group Life Insurance Company...................... 88,804 -- -- 88,804 Canaan Capital Limited Partnership................... 90,520 -- -- 90,520 Canaan Capital Offshore Limited Partnership C.V. .................................. 756,859 -- -- 756,859 John W. Madden....................................... 51,495 -- -- 51,495 Graham D. Davis...................................... 16,370 88,438 0.06 104,808 Rick C. Smith........................................ -- 88,438 0.06 88,438 BP Puerto Rico, Inc. ................................ 137,699 -- -- 137,699 William A. McCormack................................. 41,795 -- -- 41,795 James Silcock Jr. 1994 Trust......................... 2,648 -- -- 2,648 Hunt E. Silcock 1994 Trust........................... 2,648 -- -- 2,648 William L. Farrell................................... 5,296 -- -- 5,296 Todd Follmer......................................... 46,687 -- -- 46,687 Suiza Profit Sharing Plan............................ 34,156 -- -- 34,156 Other Suiza-Puerto Rico Employees.................... -- 104,823 4.44 104,823 James Green.......................................... 5,887 3,679 6.79 9,566 Other Velda Farms Employees.......................... 8,094 10,669 6.79 18,763 -------------- -------------- ------------ ----------- Totals:.............................................. 6,313,479 586,523 6,900,002 -------------- -------------- ----------- -------------- -------------- -----------
ITEM 16. EXHIBITS. (a) EXHIBITS:
EXHIBIT NUMBER DESCRIPTION - --------- ------------------------------------------------------------------------------------ 1.1* -- Form of Underwriting Agreement 2.1 -- Amended and Restated Reorganization Agreement (filed as Exhibit 2.1 to the Registrant's Registration Statement on Form S-1 (Registration No. 333-1858) and incorporated herein by this reference)
II-2
EXHIBIT NUMBER DESCRIPTION - --------- ------------------------------------------------------------------------------------ 3.1 -- Certificate of Incorporation of the Company (filed as Exhibit 3.1 to the Registrant's Registration Statement on Form S-1 (Registration No. 333-1858) and incorporated herein by this reference) 3.2 -- Certificate of Amendment of Certificate of Incorporation of the Company (filed as Exhibit 3.2 to the Registrant's Registration Statement on Form S-1 (Registration No. 333-1858) and incorporated herein by this reference) 3.3 -- Certificate of Correction of Certificate of Amendment of Certificate of Incorporation (filed as Exhibit 3.3 to the Registrant's Registration Statement on Form S-1 (Registration No. 333-1858) and incorporated herein by this reference) 3.4 -- Certificate of Amendment of Certificate of Incorporation of the Company (filed as Exhibit 3.4 to the Registrant's Registration Statement on Form S-1 (Registration No. 333-1858) and incorporated herein by this reference) 3.5 -- Bylaws of the Company (filed as Exhibit 3.5 to the Registrant's Registration Statement on Form S-1 (Registration No. 333-1858) and incorporated herein by this reference) 4.1 -- Specimen of Common Stock Certificate (filed as Exhibit 4.1 to the Registrant's Registration Statement on Form S-1 (Registration No. 333-1858) and incorporated herein by this reference) 4.2 -- Registration Rights (Exhibit G-2 to Amended and Restated Reorganization Agreement) (filed as Exhibit 4.2 to the Registrant's Registration Statement on Form S-1 (Registration No. 333-1858) and incorporated herein by this reference) 5.1* -- Opinion of Hughes & Luce, L.L.P. regarding legality of securities being registered 10.1 -- Suiza Foods Corporation Exchange Stock Option and Restricted Stock Option Plan (filed as Exhibit 10.1 to the Registrant's Registration Statement on Form S-1 (Registration No. 333-1858) and incorporated herein by this reference) 10.2 -- Exchange Stock Option and Restricted Stock Agreement between the Company and Cletes O. Beshears (filed as Exhibit 10.2 to the Registrant's Registration Statement on Form S-1 (Registration No. 333-1858) and incorporated herein by this reference) 10.3 -- Exchange Stock Option Agreement between the Company and Gayle O. Beshears (filed as Exhibit 10.3 to the Registrant's Registration Statement on Form S-1 (Registration No. 333-1858) and incorporated herein by this reference) 10.4 -- Exchange Stock Option Agreement between the Company and Gayle O. Beshears (filed as Exhibit 10.4 to the Registrant's Registration Statement on Form S-1 (Registration No. 333-1858) and incorporated herein by this reference) 10.5* -- Suiza Foods Corporation 1995 Stock Option and Restricted Stock Plan 10.6 -- Employment Agreement between Suiza Management Corporation and Gregg L. Engles (filed as Exhibit 10.8 to the Registrant's Registration Statement on Form S-1 (Registration No. 333-1858) and incorporated herein by this reference)
II-3
EXHIBIT NUMBER DESCRIPTION - --------- ------------------------------------------------------------------------------------ 10.7 -- Amendment No. 1 to Employment Agreement between Suiza Management Corporation and Gregg L. Engles (filed as Exhibit 10.9 to the Registrant's Registration Statement on Form S-1 (Registration No. 333-1858) and incorporated herein by this reference) 10.8 -- Employment Agreement between Suiza Management Corporation and Cletes O. Beshears (filed as Exhibit 10.10 to the Registrant's Registration Statement on Form S-1 (Registration No. 333-1858) and incorporated herein by this reference) 10.9 -- Amendment No. 1 to Employment Agreement between Suiza Management Corporation and Cletes O. Beshears (filed as Exhibit 10.11 to the Registrant's Registration Statement on Form S-1 (Registration No. 333-1858) and incorporated herein by this reference) 10.10 -- Employment Agreement between Suiza Dairy Corporation, Suiza Fruit Corporation, Neva Plastics Manufacturing Corp. and Hector M. Nevares (filed as Exhibit 10.12 to the Registrant's Registration Statement on Form S-1 (Registration No. 333-1858) and incorporated herein by this reference) 10.11 -- Amendment No. 1 to Hector M. Nevares' Employment Agreement (filed as Exhibit 10.13 to the Registrant's Registration Statement on Form S-1 (Registration No. 333-1858) and incorporated herein by this reference) 10.12 -- Amendment No. 2 to Hector M. Nevares' Employment Agreement (filed as Exhibit 10.14 to the Registrant's Registration Statement on Form S-1 (Registration No. 333-1858) and incorporated herein by this reference) 10.13 -- Amended and Restated Credit Agreement with Chase Manhattan Bank, N.A. (filed as Exhibit 10.13 to the Registrant's Registration Statement on Form S-1 (Registration No. 333-13119) and incorporated herein by this reference) 10.14 -- Amendment and Waiver to Amended and Restated Credit Agreement with Chase Manhattan Bank, N.A. (filed as Exhibit 10.14 to the Registrant's Registration Statement on Form S-1 (Registration No. 333-13119) and incorporated herein by this reference) 10.15 -- Amendment No. 2 to Amended and Restated Credit Agreement with First Union National Bank of North Carolina (filed as Exhibit 10.15 to the Registrant's Registration Statement on Form S-1 (Registration No. 333-13119) and incorporated herein by this reference) 10.16 -- Supplemental Credit Agreement with First Union National Bank of North Carolina (filed as Exhibit 10.16 to the Registrant's Registration Statement on Form S-1 (Registration No. 333-13119) and incorporated herein by this reference) 10.17 -- Note Purchase Agreement with John Hancock and Pacific Mutual (filed as Exhibit 10.18 to the Registrant's Registration Statement on Form S-1 (Registration No. 333-1858) and incorporated herein by this reference) 10.18 -- Agreement among Suiza Holdings, L.P., Engles Acquisition D, Inc., Engles Acquisition F, Inc. and Engles Acquisition P, Inc. and Hector M. Nevares La Costa, Carmen M. La Costa Bolivar, and certain other shareholders and Suiza Dairy Corporation, Borinquen Dairy, Inc., Suiza Fruit Corporation and Neva Plastics Manufacturing Corp. (filed as Exhibit 10.19 to the Registrant's Registration Statement on Form S-1 (Registration No. 333-1858) and incorporated herein by this reference)
II-4
EXHIBIT NUMBER DESCRIPTION - --------- ------------------------------------------------------------------------------------ 10.19 -- Amended and Restated Agreement and Plan of Merger among Engles Dairy Acquisition, L.P., Velda Farms, Inc. and the Morningstar Group Inc. (filed as Exhibit 10.20 to the Registrant's Registration Statement on Form S-1 (Registration No. 333-1858) and incorporated herein by this reference) 10.20 -- Noncompetition Agreement by and between Velda Farms, L.P. and The Morningstar Group Inc. (filed as Exhibit 10.21 to the Registrant's Registration Statement on Form S-1 (Registration No. 333-1858) and incorporated herein by this reference) 10.21 -- Form of Underwriting Agreement (filed as Exhibit 1.1 to the Registrant's Registration Statement on Form S-1 (Registration No. 333-1858) and incorporated herein by this reference) 10.22 -- Stock Purchase Agreement among G Acquisition Corp. and Jose M. Rodriguez Garrido and Jorge Rodriguez Garrido (filed as Exhibit 2.1 to the Registrant's Current Report on Form 8-K/A filed with the Commission on September 25, 1996 and incorporated herein by this reference) 10.23 -- Asset Purchase Agreement by and among Suiza Foods Corporation, Swiss Dairy Corporation a Delaware corporation, Swiss Dairy, a Corporation, a California corporation and the principal stockholders of Swiss Dairy, a Corporation identified therein (filed as Exhibit 2.1 to the Registrant's Current Report on Form 8-K filed with the Commission on September 24, 1996 and incorporated herein by this reference) 10.24 -- Stock Purchase Agreement by and between T. Rowe Price Small-Corp. Value Fund, Inc. and Suiza Foods Corporation (filed as Exhibit 10.24 to the Registrant's Registration Statement on Form S-1 (Registration No. 333-13119) and incorporated herein by this reference) 10.25 -- Asset Purchase Agreement by and among Suiza Foods Corporation, Model Dairy, Inc., J & T Enterprises, Bahan & Bahan, the Estate of Thomas E. Bahan, the Thomas E. Bahan Trust and James N. Bahan (filed as Exhibit 2.1 to the Registrant's Current Report on Form 8-K filed with the Commission on December 31, 1996 and incorporated herein by this reference) 11.1* -- Statement re computation of per share earnings 21.1* -- List of Subsidiary Corporations 23.1 -- Consent of Hughes & Luce, L.L.P. (included in Exhibit 5.1) 23.2 -- Consent of Deloitte & Touche LLP 23.3 -- Consent of KPMG Peat Marwick LLP 23.4 -- Consent of Barnard, Vogler & Co. 24.1* -- Powers of Attorney
- ------------------------ * Previously filed (b) FINANCIAL STATEMENT SCHEDULES: No financial statement schedules are required as all material required information is disclosed in the notes to the consolidated financial statements. II-5 ITEM 17. UNDERTAKINGS. The undersigned Registrant hereby undertakes to provide to the Underwriters at the closing certificates in such denominations and registered in such names as required by the Underwriters to permit prompt delivery to each purchaser. Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers and controlling persons of the Registrant pursuant to the underwriting agreement, the Company's Certificate of Incorporation or Bylaws, Delaware law or otherwise, the Registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Registrant of expenses incurred or paid by a director, officer or controlling person of the Registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the Registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue. The undersigned Registrant hereby undertakes that: (1) For the purposes of determining any liability under the Securities Act, the information omitted from the form of prospectus filed as part of this Registration Statement in reliance upon Rule 430A and contained in a form of prospectus filed by the Registrant pursuant to Rule 424(b)(l) or (4) or 497(h) under the Securities Act shall be deemed to be part of this Registration Statement as of the time it was declared effective. (2) For the purpose of determining any liability under the Securities Act, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. II-6 SIGNATURES Pursuant to the requirements of the Securities Act, the Registrant has duly caused this Amendment No. 2 to Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Dallas, State of Texas, on January 21, 1997. SUIZA FOODS CORPORATION By: /s/ GREGG L. ENGLES ----------------------------------------- Gregg L. Engles CHAIRMAN OF THE BOARD AND CHIEF EXECUTIVE OFFICER Pursuant to the requirements of the Securities Act, this Amendment No. 2 to Registration Statement has been signed below by the following persons in the capacities and on the dates indicated. NAME TITLE DATE - ------------------------------ -------------------------- ------------------- /s/ GREGG L. ENGLES - ------------------------------ Chairman of the Board and January 21, 1997 Gregg L. Engles Chief Executive Officer * - ------------------------------ President and Director January 21, 1997 Cletes O. Beshears * - ------------------------------ Vice Chairman of the Board January 21, 1997 Hector M. Nevares * - ------------------------------ Executive Vice President January 21, 1997 Gayle O. Beshears and Director * Vice President, Chief - ------------------------------ Financial Officer and January 21, 1997 Tracy L. Noll Secretary * - ------------------------------ Director January 21, 1997 Robert Bartholomew * - ------------------------------ Director January 21, 1997 Stephen Green * - ------------------------------ Director January 21, 1997 Robert L. Kaminski II-7 NAME TITLE DATE - ------------------------------ -------------------------- ------------------- * - ------------------------------ Director January 21, 1997 P. Eugene Pender * - ------------------------------ Director January 21, 1997 Robert Piccinini *By: /s/ GREGG L. ENGLES ------------------------- Gregg L. Engles ATTORNEY-IN-FACT - ------------------------ * Powers of Attorney authorizing Gregg L. Engles and Tracy L. Noll to sign this Form S-1 Registration Statement on behalf of the directors and certain officers of the Company have been filed with the Securities and Exchange Commission. II-8
INDEX TO EXHIBITS EXHIBIT NUMBER DESCRIPTION - ---------- -------------------------------------------------------------------- 1.1* -- Form of Underwriting Agreement 2.1 -- Amended and Restated Reorganization Agreement (filed as Exhibit 2.1 to the Registrant's Registration Statement on Form S-1 (Registration No. 333-1858) and incorporated herein by this reference) 3.1 -- Certificate of Incorporation of the Company (filed as Exhibit 3.1 to the Registrant's Registration Statement on Form S-1 (Registration No. 333-1858) and incorporated herein by this reference) 3.2 -- Certificate of Amendment of Certificate of Incorporation of the Company (filed as Exhibit 3.2 to the Registrant's Registration Statement on Form S-1 (Registration No. 333-1858) and incorporated herein by this reference) 3.3 -- Certificate of Correction of Certificate of Amendment of Certificate of Incorporation (filed as Exhibit 3.3 to the Registrant's Registration Statement on Form S-1 (Registration No. 333-1858) and incorporated herein by this reference) 3.4 -- Certificate of Amendment of Certificate of Incorporation of the Company (filed as Exhibit 3.4 to the Registrant's Registration Statement on Form S-1 (Registration No. 333-1858) and incorporated herein by this reference) 3.5 -- Bylaws of the Company (filed as Exhibit 3.5 to the Registrant's Registration Statement on Form S-1 (Registration No. 333-1858) and incorporated herein by this reference) 4.1 -- Specimen of Common Stock Certificate (filed as Exhibit 4.1 to the Registrant's Registration Statement on Form S-1 (Registration No. 333-1858) and incorporated herein by this reference) 4.2 -- Registration Rights (Exhibit G-2 to Amended and Restated Reorganization Agreement) (filed as Exhibit 4.2 to the Registrant's Registration Statement on Form S-1 (Registration No. 333-1858) and incorporated herein by this reference) 5.1* -- Opinion of Hughes & Luce, L.L.P. regarding legality of securities being registered 10.1 -- Suiza Foods Corporation Exchange Stock Option and Restricted Stock Option Plan (filed as Exhibit 10.1 to the Registrant's Registration Statement on Form S-1 (Registration No. 333-1858) and incorporated herein by this reference) 10.2 -- Exchange Stock Option and Restricted Stock Agreement between the Company and Cletes O. Beshears (filed as Exhibit 10.2 to the Registrant's Registration Statement on Form S-1 (Registration No. 333-1858) and incorporated herein by this reference) 10.3 -- Exchange Stock Option Agreement between the Company and Gayle O. Beshears (filed as Exhibit 10.3 to the Registrant's Registration Statement on Form S-1 (Registration No. 333-1858) and incorporated herein by this reference) 10.4 -- Exchange Stock Option Agreement between the Company and Gayle O. Beshears (filed as Exhibit 10.4 to the Registrant's Registration Statement on Form S-1 (Registration No. 333-1858) and incorporated herein by this reference) 10.5* -- Suiza Foods Corporation 1995 Stock Option and Restricted Stock Plan 10.6 -- Employment Agreement between Suiza Management Corporation and Gregg L. Engles (filed as Exhibit 10.8 to the Registrant's Registration
INDEX TO EXHIBITS EXHIBIT NUMBER DESCRIPTION - ---------- -------------------------------------------------------------------- Statement on Form S-1 (Registration No. 333-1858) and incorporated herein by this reference) 10.7 -- Amendment No. 1 to Employment Agreement between Suiza Management Corporation and Gregg L. Engles (filed as Exhibit 10.9 to the Registrant's Registration Statement on Form S-1 (Registration No. 333-1858) and incorporated herein by this reference) 10.8 -- Employment Agreement between Suiza Management Corporation and Cletes O. Beshears (filed as Exhibit 10.10 to the Registrant's Registration Statement on Form S-1 (Registration No. 333-1858) and incorporated herein by this reference) 10.9 -- Amendment No. 1 to Employment Agreement between Suiza Management Corporation and Cletes O. Beshears (filed as Exhibit 10.11 to the Registrant's Registration Statement on Form S-1 (Registration No. 333-1858) and incorporated herein by this reference) 10.10 -- Employment Agreement between Suiza Dairy Corporation, Suiza Fruit Corporation, Neva Plastics Manufacturing Corp. and Hector M. Nevares (filed as Exhibit 10.12 to the Registrant's Registration Statement on Form S-1 (Registration No. 333-1858) and incorporated herein by this reference) 10.11 -- Amendment No. 1 to Hector M. Nevares' Employment Agreement (filed as Exhibit 10.13 to the Registrant's Registration Statement on Form S-1 (Registration No. 333-1858) and incorporated herein by this reference) 10.12 -- Amendment No. 2 to Hector M. Nevares' Employment Agreement (filed as Exhibit 10.14 to the Registrant's Registration Statement on Form S-1 (Registration No. 333-1858) and incorporated herein by this reference) 10.13 -- Amended and Restated Credit Agreement with Chase Manhattan Bank, N.A. (filed as Exhibit 10.13 to the Registrant's Registration Statement on Form S-1 (Registration No. 333-13119) and incorporated herein by this reference) 10.14 -- Amendment and Waiver to Amended and Restated Credit Agreement with Chase Manhattan Bank, N.A. (filed as Exhibit 10.14 to the Registrant's Registration Statement on Form S-1 (Registration No. 333-13119) and incorporated herein by this reference) 10.15 -- Amendment No. 2 to Amended and Restated Credit Agreement with First Union National Bank of North Carolina (filed as Exhibit 10.15 to the Registrant's Registration Statement on Form S-1 (Registration No. 333-13119) and incorporated herein by this reference) 10.16 -- Supplemental Credit Agreement with First Union National Bank of North Carolina (filed as Exhibit 10.16 to the Registrant's Registration Statement on Form S-1 (Registration No. 333-13119) and incorporated herein by this reference) 10.17 -- Note Purchase Agreement with John Hancock and Pacific Mutual (filed as Exhibit 10.18 to the Registrant's Registration Statement on Form S-1 (Registration No. 333-1858) and incorporated herein by this reference) 10.18 -- Agreement among Suiza Holdings, L.P., Engles Acquisition D, Inc., Engles Acquisition F, Inc. and Engles Acquisition P, Inc. and Hector M. Nevares La Costa, Carmen M. La Costa Bolivar, and certain other shareholders and Suiza Dairy Corporation, Borinquen Dairy, Inc., Suiza Fruit Corporation and Neva Plastics Manufacturing Corp. (filed as Exhibit 10.19 to the Registrant's
INDEX TO EXHIBITS EXHIBIT NUMBER DESCRIPTION - ---------- -------------------------------------------------------------------- Registration Statement on Form S-1 (Registration No. 333-1858) and incorporated herein by this reference) 10.19 -- Amended and Restated Agreement and Plan of Merger among Engles Dairy Acquisition, L.P., Velda Farms, Inc. and the Morningstar Group Inc. (filed as Exhibit 10.20 to the Registrant's Registration Statement on Form S-1 (Registration No. 333-1858) and incorporated herein by this reference) 10.20 -- Noncompetition Agreement by and between Velda Farms, L.P. and The Morningstar Group Inc. (filed as Exhibit 10.21 to the Registrant's Registration Statement on Form S-1 (Registration No. 333-1858) and incorporated herein by this reference) 10.21 -- Form of Underwriting Agreement (filed as Exhibit 1.1 to the Registrant's Registration Statement on Form S-1 (Registration No. 333-1858) and incorporated herein by this reference) 10.22 -- Stock Purchase Agreement among G Acquisition Corp. and Jose M. Rodriguez Garrido and Jorge Rodriguez Garrido (filed as Exhibit 2.1 to the Registrant's Current Report on Form 8-K/A filed with the Commission on September 25, 1996 and incorporated herein by this reference) 10.23 -- Asset Purchase Agreement by and among Suiza Foods Corporation, Swiss Dairy Corporation a Delaware corporation, Swiss Dairy, a Corporation, a California corporation and the principal stockholders of Swiss Dairy, a Corporation identified therein (filed as Exhibit 2.1 to the Registrant's Current Report on Form 8-K filed with the Commission on September 24, 1996 and incorporated herein by this reference) 10.24 -- Stock Purchase Agreement by and between T. Rowe Price Small-Corp. Value Fund, Inc. and Suiza Foods Corporation (filed as Exhibit 10.24 to the Registrant's Registration Statement on Form S-1 (Registration No. 333-13119) and incorporated herein by this reference) 10.25 -- Asset Purchase Agreement by and among Suiza Foods Corporation, Model Dairy, Inc., J & T Enterprises, Bahan & Bahan, the Estate of Thomas E. Bahan, the Thomas E. Bahan Trust and James N. Bahan (filed as Exhibit 2.1 to the Registrant's Current Report on Form 8-K filed with the Commission on December 31, 1996 and incorporated herein by this reference) 11.1* -- Statement re computation of per share earnings 21.1* -- List of Subsidiary Corporations 23.1 -- Consent of Hughes & Luce, L.L.P. (included in Exhibit 5.1) 23.2 -- Consent of Deloitte & Touche LLP 23.3 -- Consent of KPMG Peat Marwick LLP 23.4 -- Consent of Barnard, Vogler & Co. 24.1* -- Powers of Attorney
- ------------------------ * Previously filed EX-23.2 2 EXHIBIT 23.2 EXHIBIT 23.2 INDEPENDENT AUDITORS' CONSENT We consent to the use in this Amendment No. 2 to Registration Statement No. 333-18263 of Suiza Foods Corporation on Form S-1 of our reports on the consolidated financial statements of Suiza Foods Corporation dated February 18, 1996 (February 29, 1996 as to Note 13); the combined financial statements of Pre-Acquisition Suiza-Puerto Rico dated April 15, 1994; the financial statements of Pre-Acquisition Velda Farms dated November 4, 1994; and the financial statements of Swiss Dairy, a Corporation, dated August 28, 1996, appearing in the Prospectus, which is part of this Registration Statement, and to the reference to us under the heading "Experts" in such Prospectus. DELOITTE & TOUCHE LLP Dallas, Texas January 21, 1997 EX-23.3 3 EXHIBIT 23.3 EXHIBIT 23.3 INDEPENDENT AUDITORS' CONSENT We consent to the use in this Amendment No. 2 to Registration Statement No. 333-18263 on Form S-1 of Suiza Foods Corporation and the related prospectus of our report dated August 23, 1996, with respect to the consolidated balance sheets of Garrido & Compania, Inc. and Subsidiaries as of June 30, 1996 and 1995, and the related consolidated statements of earnings, changes in stockholders' equity, and cash flows for each of the years in the three-year period ended June 30, 1996, and to the reference to us under the heading "Experts" in such prospectus. KPMG PEAT MARWICK LLP San Juan, Puerto Rico January 21, 1997 EX-23.4 4 EXHIBIT 23.4 EXHIBIT 23.4 INDEPENDENT AUDITORS' CONSENT We consent to the use in this Amendment No. 2 to Registration Statement No. 333-18263 of Suiza Foods Corporation on Form S-1 of our report dated December 14, 1995, with respect to the balance sheets of Model Dairy, Inc. as of October 31, 1995 and 1994, and the related statements of earnings and retained earnings, and cash flows for the years then ended, appearing in the Prospectus, which is part of this Registration Statement, and to the reference to us under the heading "Experts" in such Prospectus. BARNARD, VOGLER & CO. Reno, Nevada January 21, 1997 -----END PRIVACY-ENHANCED MESSAGE-----