-----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, IK8Rwyjt/MKWzswQkzxQM2CGHpdBoHHWYCm3myXmOUp54nRBPqGAqjmPc36+8WYW QvURNNDIK0jH7IswFQ9YHw== 0000950134-01-508141.txt : 20020410 0000950134-01-508141.hdr.sgml : 20020410 ACCESSION NUMBER: 0000950134-01-508141 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 20010930 FILED AS OF DATE: 20011109 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: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-12755 FILM NUMBER: 1780547 BUSINESS ADDRESS: STREET 1: 2515 MCKINNEY AVENUE LB 30 STREET 2: SUITE 1200 CITY: DALLAS STATE: TX ZIP: 75201 BUSINESS PHONE: 2143033400 MAIL ADDRESS: STREET 1: 3811 TURTLE CREEK BLVD STREET 2: SUITE 1300 CITY: DALLAS STATE: TX ZIP: 75219 10-Q 1 d92024e10-q.txt FORM 10-Q FOR QUARTER ENDED SEPTEMBER 30, 2001 ================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q (MARK ONE) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2001 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM TO COMMISSION FILE NUMBER 001-12755 SUIZA FOODS CORPORATION (Exact name of the registrant as specified in its charter) [SUIZA FOODS LOGO] --------------- DELAWARE 75-2559681 (State or other jurisdiction of (I.R.S. employer incorporation or organization) identification no.) 2515 MCKINNEY AVENUE, SUITE 1200 DALLAS, TEXAS 75201 (214) 303-3400 (Address, including zip code, and telephone number, including area code, of the registrant's principal executive offices) --------------- Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] As of November 7, 2001 the number of shares outstanding of each class of common stock was: Common Stock, par value $.01 28,104,593 ================================================================================ TABLE OF CONTENTS
Page ---- PART I - FINANCIAL INFORMATION Item 1 - Financial Statements.................................................................................... 3 Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations................... 16 Item 3 - Quantitative and Qualitative Disclosures About Market Risk.............................................. 27 PART II - OTHER INFORMATION Item 4 - Submission of Matters to a Vote of Security Holders..................................................... 29 Item 6 - Exhibits and Reports on Form 8-K........................................................................ 30
2 PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS SUIZA FOODS CORPORATION CONDENSED CONSOLIDATED BALANCE SHEETS (Dollars in thousands)
SEPTEMBER 30, DECEMBER 31, 2001 2000 ------------- ------------ (unaudited) Assets Current assets: Cash and cash equivalents ............................................................. $ 25,761 $ 31,110 Accounts receivable, net .............................................................. 540,791 519,318 Inventories ........................................................................... 209,616 186,713 Refundable income taxes ............................................................... 1,268 3,925 Deferred income taxes ................................................................. 60,844 54,634 Prepaid expenses and other current assets ............................................. 56,174 22,231 ----------- ----------- Total current assets ............................................................ 894,454 817,931 Property, plant and equipment, net ....................................................... 1,011,645 1,003,769 Intangible and other assets .............................................................. 1,926,679 1,958,778 ----------- ----------- Total ........................................................................... $ 3,832,778 $ 3,780,478 =========== =========== Liabilities and Stockholders' Equity Current liabilities: Accounts payable and accrued expenses ................................................. $ 543,076 $ 567,342 Income taxes payable .................................................................. 11,012 4,342 Current portion of long-term debt and subsidiary lines of credit ...................... 164,919 128,224 ----------- ----------- Total current liabilities ....................................................... 719,007 699,908 Long-term debt ........................................................................... 1,119,087 1,225,045 Other long-term liabilities .............................................................. 60,695 34,202 Deferred income taxes .................................................................... 139,586 123,614 Mandatorily redeemable convertible trust issued preferred securities ..................... 584,459 584,032 Minority interest in subsidiaries ........................................................ 515,472 514,845 Commitments and contingencies Stockholders' equity: Common stock, 28,075,650 and 27,285,649 shares issued and outstanding, respectively ... 281 273 Additional paid-in capital ............................................................ 199,593 166,361 Retained earnings ..................................................................... 519,405 433,309 Accumulated other comprehensive loss .................................................. (24,807) (1,111) ----------- ----------- Total stockholders' equity ...................................................... 694,472 598,832 ----------- ----------- Total ........................................................................... $ 3,832,778 $ 3,780,478 =========== ===========
See notes to condensed consolidated financial statements. 3 SUIZA FOODS CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Dollars in thousands, except per share data)
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, ----------------------------- ------------------------------ 2001 2000 2001 2000 ------------ ------------ ------------ ------------ (unaudited) (unaudited) Net sales ................................................... $ 1,555,731 $ 1,439,947 $ 4,557,158 $ 4,268,442 Cost of sales ............................................... 1,195,435 1,085,627 3,477,209 3,213,745 ------------ ------------ ------------ ------------ Gross profit ................................................ 360,296 354,320 1,079,949 1,054,697 Operating costs and expenses: Selling and distribution ................................. 207,929 202,371 622,746 602,297 General and administrative ............................... 41,083 43,035 131,498 135,235 Amortization of intangibles .............................. 13,117 13,495 39,914 39,153 Plant closing and other costs ............................ 424 843 3,388 ------------ ------------ ------------ ------------ Total operating costs and expenses ................. 262,129 259,325 795,001 780,073 ------------ ------------ ------------ ------------ Operating income ............................................ 98,167 94,995 284,948 274,624 Other (income) expense: Interest expense, net .................................... 23,258 28,987 76,494 83,122 Financing charges on trust issued preferred securities ........................................... 8,395 8,395 25,186 25,200 Equity in (earnings) loss of unconsolidated affiliates ... 5,424 (5,169) 2,565 (10,572) Other (income) expense, net .............................. 1,097 (594) 1,600 (1,670) ------------ ------------ ------------ ------------ Total other (income) expense ....................... 38,174 31,619 105,845 96,080 ------------ ------------ ------------ ------------ Income from continuing operations before income taxes ....... 59,993 63,376 179,103 178,544 Income taxes ................................................ 20,803 24,021 65,452 67,901 Minority interest in earnings ............................... 9,768 8,166 26,109 25,327 ------------ ------------ ------------ ------------ Income before extraordinary items and cumulative effect of accounting change .............................. 29,422 31,189 87,542 85,316 Extraordinary gain .......................................... 4,968 Cumulative effect of accounting change ...................... (1,446) ------------ ------------ ------------ ------------ Net income .................................................. $ 29,422 $ 31,189 $ 86,096 $ 90,284 ============ ============ ============ ============ Average common shares: Basic ............................... 27,860,732 27,623,928 27,594,599 28,530,656 Average common shares: Diluted ............................. 36,603,967 36,197,712 36,180,167 37,062,352 Basic earnings per common share: Income before extraordinary items and cumulative effect of accounting change .......................... $ 1.06 $ 1.13 $ 3.17 $ 2.99 Extraordinary gain ....................................... 0.17 Cumulative effect of accounting change ................... (0.05) ------------ ------------ ------------ ------------ Net income ............................................... $ 1.06 $ 1.13 $ 3.12 $ 3.16 ============ ============ ============ ============ Diluted earnings per common share: Income before extraordinary items and cumulative effect of accounting change .......................... $ 0.95 $ 1.01 $ 2.86 $ 2.73 Extraordinary gain ....................................... 0.14 Cumulative effect of accounting change ................... (0.04) ------------ ------------ ------------ ------------ Net income ............................................... $ 0.95 $ 1.01 $ 2.82 $ 2.87 ============ ============ ============ ============
See notes to condensed consolidated financial statements. 4 SUIZA FOODS CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Dollars in thousands)
NINE MONTHS ENDED SEPTEMBER 30, ------------------------------- 2001 2000 ----------- ----------- (unaudited) Cash flows from operating activities: Net income ........................................................................... $ 86,096 $ 90,284 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization .................................................... 113,467 113,919 Minority interest ................................................................ 42,829 42,682 Equity in (earnings) loss of unconsolidated affiliates ........................... 2,565 (10,572) Extraordinary gain ............................................................... (4,968) Cumulative effect of accounting change ........................................... 1,446 Deferred income taxes ............................................................ 21,638 35,334 Other, net ....................................................................... 1,056 5,029 Changes in operating assets and liabilities, net of acquisitions: Accounts receivable ........................................................... (21,473) (3,383) Inventories ................................................................... (22,903) (16,375) Prepaid expenses and other assets ............................................. (5,657) (984) Accounts payable, accrued expenses and other liabilities ...................... (53,959) (48,682) Income taxes .................................................................. 14,438 (10,669) ----------- ----------- Net cash provided by operating activities ................................... 179,543 191,615 Cash flows from investing activities: Net additions to property, plant and equipment ....................................... (89,368) (86,260) Cash outflows for acquisitions and investments ....................................... (32,442) (286,139) Net proceeds from divestitures ....................................................... 89,037 Purchase of minority interest ........................................................ (12,620) Other ................................................................................ 1,915 2,568 ----------- ----------- Net cash used in investing activities ....................................... (132,515) (280,794) Cash flows from financing activities: Proceeds from issuance of debt ........................................................ 113,789 1,299,909 Repayment of debt ..................................................................... (182,585) (946,558) Payment of deferred financing costs ................................................... (11,971) Issuance of common stock, net of expenses ............................................. 30,221 26,178 Redemption of trust issued preferred securities ....................................... (100,050) Redemption of common stock ............................................................ (6,056) (146,545) Distribution to minority interest ..................................................... (7,746) (13,942) ----------- ----------- Net cash provided by (used in) financing activities ......................... (52,377) 107,021 ----------- ----------- Increase (decrease) in cash and cash equivalents ......................................... (5,349) 17,842 Cash and cash equivalents, beginning of period ........................................... 31,110 25,155 ----------- ----------- Cash and cash equivalents, end of period ................................................. $ 25,761 $ 42,997 =========== ===========
See notes to condensed consolidated financial statements. 5 SUIZA FOODS CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 2001 1. GENERAL Basis of Presentation -- The unaudited condensed consolidated financial statements contained in this report have been prepared on the same basis as the consolidated financial statements in our Annual Report on Form 10-K for the year ended December 31, 2000. In our opinion, we have made all necessary adjustments (which include only normal recurring adjustments) in order to present fairly, in all material respects, our consolidated financial position, results of operations and cash flows as of the dates and for the periods presented. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been omitted. Our results of operations for the period ended September 30, 2001 may not be indicative of our operating results for the full year. The consolidated financial statements contained in this report should be read in conjunction with our 2000 consolidated financial statements contained in our Annual Report on Form 10-K as filed with the Securities and Exchange Commission on April 2, 2001. This Quarterly Report, including these notes, have been written in accordance with the Securities and Exchange Commission's "Plain English" guidelines. Unless otherwise indicated, references in this report to "we," "us" or "our" refer to Suiza Foods Corporation and its subsidiaries, including Suiza Dairy Group (our joint venture with Dairy Farmers of America), as a whole. Recently Issued Accounting Standards -- Statement of Financial Accounting Standards (SFAS) No. 133, Accounting for Derivative Instruments and Hedging Activities, as amended, became effective for us as of January 1, 2001. We hedge a portion of our exposure to variable interest rates using interest rate swaps. These swaps, designated as cash flow hedging instruments, are used to hedge a portion of our debt, with the objective of minimizing our interest rate risk and stabilizing cash flows. These swaps are required to be recorded as an asset or liability on our consolidated balance sheet at fair value, with an offset to other comprehensive income to the extent the hedge is effective. Derivative gains and losses included in other comprehensive income are reclassified into earnings as the underlying transaction occurs. Any ineffectiveness in our hedges is recorded as an adjustment to interest expense. As of September 30, 2001, our derivative liability totaled $57.3 million on our consolidated balance sheet. Hedge ineffectiveness, determined in accordance with SFAS No. 133 and included in our income statement, totaled approximately $57,000 and $105,000 for the three-months and nine-months ended September 30, 2001. Approximately $2.1 million and $3.6 million of losses (net of taxes and minority interest) were reclassified to interest expense from other comprehensive income during the three- months and nine-months ended September 30, 2001. We estimate that approximately $11.7 million of net derivative losses (net of income taxes and minority interest) included in other comprehensive income will be reclassified into earnings within the next twelve months. These losses will partially offset the lower interest payments recorded on our variable rate debt. The Emerging Issues Task Force (Task Force) of the Financial Accounting Standards Board (FASB) Issue No. 00-10, "Accounting for Shipping and Handling Fees and Costs," became effective for us in the fourth quarter of 2000. Our shipping and handling costs are included in either cost of sales or selling and distribution expense, depending on the nature of such costs. Shipping and handling costs included in cost of sales reflect the cost of shipping products to customers through third party carriers, inventory warehouse costs and product loading and handling costs. Shipping and handling costs included in selling and distribution expense consist primarily of route delivery costs for both company-owned delivery routes and independent distributor routes, to the extent that such independent distributors are paid a delivery fee. Shipping and handling costs that were recorded as a component of selling and 6 distribution expense were approximately $164.0 million and $486.6 million for the three-month and nine-month periods ending September 30, 2001, compared to $154.7 million and $453.2 million during the three-month and nine-month periods ending September 30, 2000. The Task Force recently reached a consensus on Issue No. 00-14, "Accounting for Certain Sales Incentives," which will become effective for us in the first quarter of 2002. This Issue addresses the recognition, measurement and income statement classification of sales incentives that have the effect of reducing the price of a product or service to a customer at the point of sale. Our current accounting policy for recording sales incentives within the scope of this Issue is to record estimated coupon expense as a reduction of revenue based on historical coupon redemption experience which is consistent with the requirements of this Issue. Therefore, our adoption of this Issue will have no impact on our consolidated financial statements. In April 2001, the Task Force reached a consensus on Issue No. 00-25, "Vendor Income Statement Characterization of Consideration Paid to a Reseller of the Vendor's Products." We plan to adopt this Issue in the first quarter of 2002, as required. Under this Issue, certain consideration paid to our customers will be required to be classified as a reduction of revenue. Adoption of this Issue will result in the reclassification of certain costs as a reduction of revenue. However, there will be no change in reported net income. In June 2001, FASB issued SFAS No. 141, "Business Combinations", and SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS No. 141 addresses financial accounting and reporting for business combinations. Under the new standard, all business combinations entered into after June 30, 2001 are to be accounted for by the purchase method. SFAS No. 142 addresses financial accounting and reporting for acquired goodwill and other intangible assets. SFAS No. 142 requires that goodwill no longer be amortized, but instead requires a transitional goodwill impairment assessment and annual impairment tests thereafter. Any transitional impairment loss resulting from the adoption will be recognized as the effect of a change in accounting principle in our income statement. SFAS No. 142 will also require that recognized intangible assets be amortized over their respective estimated useful lives. As part of the adoption, we will reassess the useful lives and residual values of all intangible assets. Any recognized intangible asset determined to have an indefinite useful life will not be amortized, but instead tested for impairment in accordance with the standard until its life is determined to no longer be indefinite. We are required to adopt the provisions of SFAS 142 on January 1, 2002. However, for any business combination completed after June 30, 2001, the purchase method of accounting will be required and goodwill and any intangible asset determined to have an indefinite useful life will not be amortized. Goodwill and intangible assets acquired in business combinations completed before July 1, 2001 will continue to be amortized until December 31, 2001. At September 30, 2001, our goodwill approximated $1.48 billion. Amortization of goodwill and other intangible assets with indefinite lives was approximately $12.7 million and $37.9 million for the three-month and nine-month periods ended September 30, 2001, respectively. We are currently evaluating the impact of adopting these pronouncements on our consolidated financial statements. In June 2001, FASB issued SFAS No. 143, "Accounting for Asset Retirement Obligations." This statement requires that the fair value of a liability for an asset retirement obligation be recognized in the period in which it is incurred if a reasonable estimate of fair value can be made. The associated asset retirement costs are capitalized as part of the carrying amount of the long-lived asset. SFAS No. 143 is effective for us in fiscal year 2003. We are currently evaluating the impact of adopting this pronouncement on our consolidated financial statements. FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" in August 2001 and it will be effective for us beginning January 1, 2002. SFAS No. 144 provides a single, comprehensive accounting model for impairment and disposal of long-lived assets and 7 discontinued operations. We do not expect adoption of this standard to have a material impact on our consolidated financial statements. 2. INVENTORIES
AT SEPTEMBER 30, AT DECEMBER 31, 2001 2000 ---------------- --------------- (in thousands) Raw materials and supplies ........ $ 106,461 $ 99,315 Finished goods .................... 103,155 87,398 ---------- ---------- Total ........................ $ 209,616 $ 186,713 ========== ==========
3. LONG-TERM DEBT
AT SEPTEMBER 30, AT DECEMBER 31, 2001 2000 ---------------- --------------- (in thousands) Parent-level credit facility ................ $ -- $ -- Subsidiary debt obligations: Suiza Dairy Group credit facility ....... 923,900 1,095,000 Receivable-backed loan .................. 250,000 150,000 Foreign subsidiary term loan ............ 36,631 39,519 Uncommitted line of credit .............. 20,000 20,000 Other lines of credit ................... 8,242 -- Industrial development revenue bonds .... 8,845 8,845 Capital lease obligations and other ..... 36,388 39,905 ----------- ----------- 1,284,006 1,353,269 Less current portion ........................ (164,919) (128,224) ----------- ----------- Total ................................... $ 1,119,087 $ 1,225,045 =========== ===========
Parent-Level Credit Facility -- This facility, which expires in January 2005, provides us with a revolving line of credit of up to $300 million to be used for general corporate and working capital purposes, including the financing of acquisitions. As of September 30, 2001, no funds were borrowed under this facility, but there were $7.5 million of issued but undrawn letters of credit outstanding. See "Credit Facility Terms" below for a description of the terms of our parent-level credit facility. Suiza Dairy Group Credit Facility -- Suiza Dairy Group, our joint venture with Dairy Farmers of America, has a $1.61 billion credit facility with a group of lenders which expires in January 2005. This facility provides an $805 million revolving line of credit, a $625 million term loan and a $180 million term loan. At September 30, 2001, there were outstanding borrowings of $923.9 million under this facility, in addition to $19.8 million of issued but undrawn letters of credit. See "Credit Facility Terms" below for a description of the terms of the Suiza Dairy Group credit facility. Credit Facility Terms -- Amounts outstanding under the Suiza Dairy Group credit facility and our parent-level credit facility bear interest at a rate per annum equal to one of the following rates, at our option: o a base rate equal to the higher of the Federal Funds rate plus 50 basis points or the prime rate, plus a margin that varies from 25 to 125 basis points for the Suiza Dairy Group credit facility and 0 to 75 basis points on the parent-level credit facility, depending on our ratio of defined indebtedness to EBITDA; or 8 o the London Interbank Offering Rate ("LIBOR") computed as LIBOR divided by the product of one minus the Eurodollar Reserve Percentage, plus a margin that varies from 125 to 225 basis points for the Suiza Dairy Group credit facility and 75 to 175 basis points on the parent-level credit facility, depending on our ratio of indebtedness to EBITDA. The interest rate in effect on the Suiza Dairy Group credit facility, including the applicable interest rate margin, was 4.53% at September 30, 2001. We have interest rate swap agreements in place however, that hedge variable rate interest on a majority of this facility. The average interest rate on the swaps during the three months ended September 30, 2001, plus the applicable interest rate margin on the credit facility, totaled 7.70%. Interest is payable quarterly or at the end of the applicable interest period. Scheduled principal payments on the $625 million term loan are due in the following installments: o $25.0 million quarterly from March 31, 2001 through December 31, 2001; o $31.25 million quarterly from March 31, 2002 through December 31, 2002; o $37.5 million quarterly from March 31, 2003 through December 31, 2003; o 25% of the outstanding balance (up to $50 million) quarterly on each of March 31, 2004, June 30, 2004 and September 30, 2004; and the o Remaining balance on January 4, 2005. No principal payments are due on the $805 million line of credit and the $180 million term loan until maturity on January 4, 2005. In consideration for the revolving commitments, we pay a commitment fee on unused amounts of the Suiza Dairy Group credit facility and the parent-level credit facility that ranges from 25 to 50 basis points, based on our ratio of indebtedness to EBITDA (as defined in the agreements). The Suiza Dairy Group credit facility and our parent-level credit facility both contain various financial and other restrictive covenants and requirements that we maintain certain financial ratios, including a leverage ratio (computed as the ratio of the aggregate outstanding principal amount of defined indebtedness to EBITDA, as defined separately by each agreement) and an interest coverage ratio (computed as the ratio of EBITDA to interest expense as defined separately by each agreement). In addition, both facilities require that we maintain a minimum level of net worth as defined separately by each agreement. The facilities also contain limitations on liens, investments, the incurrence of additional indebtedness and acquisitions, and prohibit certain dispositions of property and restrict certain payments, including dividends. The credit facilities are secured by the capital stock of certain of our subsidiaries. Upon completion of our pending acquisition of Dean Foods, both the parent-level credit facility and the Suiza Dairy Group credit facility will be terminated and replaced with a single $2.7 billion credit facility at the parent level. Receivable-Backed Loan -- On June 30, 2000 we entered into a $150 million credit facility secured by certain subsidiary accounts receivable. Pursuant to this transaction, we pledged receivables to a multi-seller asset-backed conduit sponsored by a major financial institution. In February 2001, we increased the amount of this facility to $175 million and in June 2001, we further increased it to $250 million. We have used the proceeds of this facility to pay down higher-cost borrowings under the Suiza Dairy Group credit facility. The loan bears interest at a variable rate based on the commercial 9 paper yield as defined in the agreement. The interest rate on the receivable-backed loan at September 30, 2001 was 3.97%. Foreign Subsidiary Term Loan -- In connection with our acquisition of Leche Celta in February 2000, our Spanish subsidiary obtained a 7 billion peseta (or approximately $38.3 million at September 30, 2001) non-recourse loan from a Spanish lender, all of which was borrowed at closing and used to finance a portion of the purchase price. The loan, which is secured by the stock of Leche Celta, will expire on February 21, 2007, bears interest at a variable rate based on the ratio of Leche Celta's debt to EBITDA (as defined in the loan agreement) and requires semi-annual principal payments . The interest rate in effect on this loan at September 30, 2001 was 6.91%. Uncommitted Line of Credit -- Suiza Dairy Group also has an agreement with First Union National Bank pursuant to which it may borrow up to $20.0 million from time to time on an uncommitted basis. There is no commitment fee associated with this facility. On September 30, 2001, Suiza Dairy Group had an outstanding balance of $20.0 million under this line of credit at an interest rate of 4.38%. Other Lines of Credit -- Leche Celta, our Spanish subsidiary, is our only subsidiary with a line of credit separate from the credit facilities described above. Leche Celta's existing line of credit, which is in the principal amount of 2.5 billion pesetas (or approximately $13.7 million at September 30, 2001), was obtained on July 12, 2000 in replacement of a pre-existing line of credit, bears interest at a variable interest rate based on the ratio of Leche Celta's debt to EBITDA (as defined in the loan agreement), is secured by our stock in Leche Celta and will expire in June 2007. At September 30, 2001, there were outstanding borrowings of $8.2 million under this line of credit at an interest rate of 5.00%. Industrial Development Revenue Bonds -- Certain of our subsidiaries have revenue bonds outstanding which require annual sinking fund redemptions aggregating $0.7 million and are secured by irrevocable letters of credit issued by financial institutions, along with first mortgages on certain real property and equipment. Interest on these bonds is due semiannually at interest rates that vary based on market conditions which, at September 30, 2001 ranged from 2.55% to 2.60%. Other Subsidiary Debt -- Other subsidiary debt includes various promissory notes for the purchase of property, plant and equipment and capital lease obligations. The various promissory notes payable provide for interest at varying rates and are payable in monthly installments of principal and interest until maturity, when the remaining principal balances are due. Capital lease obligations represent machinery and equipment financing obligations which are payable in monthly installments of principal and interest and are collateralized by the related assets financed. Interest Rate Agreements -- We have interest rate swaps in place that have been designated as hedges against variable interest rate exposure on loans under the Suiza Dairy Group credit facility and on anticipated borrowings under the new credit facility to be funded upon completion of our pending acquisition of Dean Foods. The following table summarizes our various interest rate agreements:
FIXED INTEREST RATES NOTIONAL AMOUNTS EXPIRATION DATE -------------------- ---------------- --------------- 4.90% to 4.93% $275.0 million December 2002 6.07% to 6.24% 325.0 million December 2002 6.23% 50.0 million June 2003 6.69% 100.0 million December 2004 6.69% to 6.74% 100.0 million December 2005 6.78% 75.0 million December 2006
These derivative agreements provide hedges by limiting or fixing the LIBOR interest rates specified in the applicable credit facility at the interest rates noted above until the indicated expiration dates of these interest rate derivative agreements. 10 We have also entered into interest rate swap agreements that provide hedges for loans under Leche Celta's term loan. The following table summarizes these agreements:
FIXED INTEREST RATES NOTIONAL AMOUNTS EXPIRATION DATE ----------------------- ------------------------------------ ------------------- 5.54% 1,500,000,000 pesetas November 2003 (approximately $8.2 million at September 30, 2001) 5.6% 2,000,000,000 pesetas November 2004 (approximately $10.9 million at September 30, 2001)
We are exposed to market risk under these arrangements due to the possibility of interest rates on our outstanding debt falling below the rates on our interest rate derivative agreements. We incurred $2.1 million of additional interest expense, net of taxes and minority interest, during the three months ended September 30, 2001 as a result of interest rates on our variable rate debt falling below the agreed-upon interest rate on our existing swap agreements. See Note 1 - General - Recently Issued Accounting Standards. Credit risk under these arrangements is remote since the counterparties to our interest rate derivative agreements are major financial institutions. 4. BUSINESS AND GEOGRAPHIC INFORMATION AND MAJOR CUSTOMERS We currently have two reportable segments: Suiza Dairy Group and Morningstar Foods. Suiza Dairy Group manufactures and distributes fluid milk, ice cream and novelties, half-and-half and whipping cream, sour cream, cottage cheese and yogurt, as well as fruit juices, flavored drinks and bottled water. Morningstar Foods manufactures dairy and non-dairy coffee creamers, whipping cream and pre-whipped toppings, specialty products such as lactose-reduced milk and soy milk, as well as certain refrigerated and extended shelf-life products. Our Puerto Rico and Spanish operations are not required under applicable accounting rules to be separately reported and, therefore, they are included in the charts below on the "Corporate/Other" line. This line also includes the two European packaging businesses that we sold in March and May 2000. The accounting policies of our segments are the same as those described in the summary of significant accounting policies set forth in Note 1 to our 2000 consolidated financial statements contained in our 2000 Annual Report on Form 10-K. We do not allocate income taxes or internal management fees to segments. In addition, there are no significant non-cash items other than depreciation and amortization in reported operating income. The amounts in the following tables are derived from reports used by our executive management team:
THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30, -------------------------------- ------------------------------- 2001 2000 2001 2000 ------------ ------------ ------------ ------------ (in thousands) Net sales from external customers: Suiza Dairy Group ................. $ 1,272,119 $ 1,176,168 $ 3,716,980 $ 3,463,702 Morningstar Foods ................. 184,105 175,473 543,807 504,118 Corporate/Other ................... 99,507 88,306 296,371 300,622 ------------ ------------ ------------ ------------ Total ......................... $ 1,555,731 $ 1,439,947 $ 4,557,158 $ 4,268,442 ============ ============ ============ ============
11
THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30, -------------------------------- ------------------------------- 2001 2000 2001 2000 ------------ ------------ ------------ ------------ (in thousands) Intersegment sales: Suiza Dairy Group ................. $ 3,630 $ 3,954 $ 11,724 $ 10,685 Morningstar Foods ................. 24,185 17,426 66,582 41,331 Corporate/Other ................... ------------ ------------ ------------ ------------ Total ......................... $ 27,815 $ 21,380 $ 78,306 $ 52,016 ============ ============ ============ ============ Operating income: Suiza Dairy Group ................. $ 76,143 $ 71,817 $ 218,455 $ 213,884 Morningstar Foods ................. 21,825 25,415 68,090 69,205 Corporate/Other ................... 199 (2,237) (1,597) (8,465) ------------ ------------ ------------ ------------ Total ......................... $ 98,167 $ 94,995 $ 284,948 $ 274,624 ============ ============ ============ ============
Assets at September 30: 2001 2000 ------------ ------------ (in thousands) Suiza Dairy Group ................. $ 2,903,566 $ 2,816,530 Morningstar Foods ................. 451,073 436,905 Corporate/Other ................... 478,139 430,320 ------------ ------------ Total ......................... $ 3,832,778 $ 3,683,755 ============ ============
Geographic information for the three-month and nine-month periods ended September 30:
REVENUES --------------------------------------------------------------------- LONG-LIVED ASSETS THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30, AT SEPTEMBER 30, -------------------------------- ------------------------------- ---------------------------- 2001 2000 2001 2000 2001 2000 ---------- ---------- ---------- ---------- ---------- ---------- (in thousands) (in thousands) (in thousands) United States ...... $1,456,223 $1,351,641 $4,260,787 $3,967,819 $2,699,219 $2,673,144 Puerto Rico ........ 55,527 57,125 168,124 171,302 125,004 123,121 Europe ............. 43,981 31,181 128,247 129,321 105,033 106,734 ---------- ---------- ---------- ---------- ---------- ---------- Total .............. $1,555,731 $1,439,947 $4,557,158 $4,268,442 $2,929,256 $2,902,999 ========== ========== ========== ========== ========== ==========
We have no single customer within any segment which represents greater than ten percent of our consolidated revenues. 5. COMPREHENSIVE INCOME Comprehensive income consists of net income plus all other changes in equity from non-owner sources. Consolidated comprehensive income was $20.8 million and $62.4 million for the three-months and nine-months ended September 30, 2001. The amounts of deferred income tax (expense) benefit and minority interest charges allocated to each component of other comprehensive income during the nine months ended September 30, 2001 are included below.
TAX BENEFIT PRE-TAX (EXPENSE) INCOME AND MINORITY (LOSS) INTEREST NET AMOUNT -------- ------------ ---------- (in thousands) Accumulated other comprehensive loss, December 31, 2000 ................... $ (2,394) $ 1,283 $ (1,111) Cumulative translation adjustment arising during period .............. (3,534) 1,389 (2,145) Cumulative effect of accounting change ............................... (16,278) 9,875 (6,403) Net change in fair value of derivative instruments ................... (15,564) 9,466 (6,098) Amounts reclassified to income statement related to derivatives ...... 124 (74) 50 -------- -------- -------- Accumulated other comprehensive loss, March 31, 2001 ...................... $(37,646) $ 21,939 $(15,707) -------- -------- -------- Cumulative translation adjustment arising during period .............. (2,013) 791 (1,222) Net change in fair value of derivative instruments ................... (1,823) 1,115 (708) Amounts reclassified to income statement related to derivatives ...... 3,607 (2,194) 1,413 -------- -------- -------- Accumulated other comprehensive loss, June 30, 2001 ....................... $(37,875) $ 21,651 $(16,224) -------- -------- -------- Cumulative translation adjustment arising during period .............. 3,221 (1,266) 1,955 Net change in fair value of derivative instruments ................... (32,345) 19,686 (12,659) Amounts reclassified to income statement related to derivatives ...... 5,413 (3,292) 2,121 -------- -------- -------- Accumulated other comprehensive loss, September 30, 2001 .................. $(61,586) $ 36,779 $(24,807) ======== ======== ========
12 6. STOCKHOLDERS' EQUITY We repurchased 123,334 shares under our open market share repurchase program during the first nine months of 2001, for an aggregate purchase price of approximately $6.1 million. Approximately $101.3 million remains available for spending under this program. Repurchased shares are treated as retired in our consolidated financial statements. 7. PLANT CLOSING COSTS Plant closing costs -- As part of our overall integration and cost reduction program initiated during 1999, we recorded plant closing costs during the first quarter of 2001 in the amount of $843,000 related to the closing of our Canton, Mississippi plant. Our integration and cost reduction program consists of several individual cost reduction plans. The principal components of each such plan are: o Workforce reduction as a result of plant closings, plant rationalizations and consolidation of administrative functions. Workforce reduction costs are charged to earnings in the period that the plan is established in detail and employee severance and benefits are appropriately communicated. Our current plans include an overall reduction of 120 positions, primarily plant employees associated with the plant closings and rationalization. All of those employees had been terminated as of September 30, 2001. o Shutdown costs, which are costs necessary to prepare plant facilities for closure. o Additional costs incurred after shutdown, such as lease obligations or termination costs, utilities and property taxes. o Write-downs of property, plant and equipment and other assets, primarily for asset impairments as a result of facilities that are no longer used in operations. The impairments relate primarily to owned building, land and equipment at the facilities which are being sold and are written down to their estimated fair value. 13 Activity with respect to plant closing costs for 2001 to date is summarized below:
NINE MONTHS ENDED ACCRUED CHARGES SEPTEMBER 30, 2001 ACCRUED CHARGES AT ------------------------------ AT DECEMBER 31, 2000 ACCRUALS PAYMENTS SEPTEMBER 30, 2001 ----------------- ------------ ------------ ------------------ (in thousands) Cash Charges: Workforce reduction costs ......................... $ 1,179 $ 238 $ (1,239) $ 178 Shutdown costs .................................... 363 289 (277) 375 Lease obligations after shutdown .................. 118 182 (207) 93 Other ............................................. 5 (3) 2 ------------ ------------ ------------ ------------ Subtotal .............................................. $ 1,660 $ 714 $ (1,726) $ 648 ============ ============ ============ Noncash charges: Write-down of property, plant and equipment ....... 129 ------------ Total charges ......................................... $ 843 ============
There have not been significant adjustments to any plan included within our integration and cost reduction program, and the majority of future cash requirements to reduce the liabilities under the plans are expected to be completed within one year. Acquired facility closing costs -- As part of our purchase price allocations related to the acquisitions of Broughton Foods during 1999 and Southern Foods during 2000, we accrued certain costs pursuant to plans to exit certain activities and operations of those acquired businesses in order to rationalize production and reduce costs and inefficiencies. The principal components of the plans included the following: o Workforce reduction as a result of plant closings including an overall reduction of 212 plant personnel. The costs incurred were charged against acquisition liabilities. All except 24 employees had been terminated under these plans as of September 30, 2001. o Shutdown costs including costs necessary to clean and prepare plant facilities for closure, and certain additional costs to be incurred after shutdown including lease obligations or termination costs, utilities and property taxes. Set forth in the following chart are the types and amounts of cash payments made against these accruals during 2001 to date:
ACCRUED CHARGES ACCRUED CHARGES AT AT DECEMBER 31, 2000 PAYMENTS SEPTEMBER 30, 2001 ----------------- ---------- ------------------ (in thousands) Cash Charges: Workforce reduction costs ....... $ 997 $ (269) $ 728 Shutdown costs .................. 7,271 (2,040) 5,231 ---------- ---------- ---------- Total .................... $ 8,268 $ (2,309) $ 5,959 ========== ========== ==========
Consolidated Container - Consolidated Container, in which we own a 43.1% interest, reported restructuring costs related to organizational and management changes during the third quarter of 2001. Our share of these charges, which amounted to $1.7 million, was reported as an adjustment to equity in earnings of unconsolidated affiliates. 8. ACQUISITIONS Dean Foods Company - On April 4, 2001, we signed a definitive merger agreement with Dean Foods Company, the nation's second largest dairy processor with annual revenues of over $4.0 billion. The merger agreement provides for the merger of Dean Foods with and into one of our subsidiaries. As a 14 result of the merger, each share of common stock of Dean Foods Company will automatically convert into the right to receive .429 shares of our common stock and $21.00 in cash, subject to adjustment in certain circumstances. We expect to issue approximately 15.3 million shares of common stock, and to pay approximately $750.0 million in cash, to Dean's stockholders in the merger. The merger agreement contains customary closing conditions including, among others, approval of our stockholders and the stockholders of Dean Foods Company, expiration or termination of the waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976 and the absence of any governmental order permitting the closing of the transaction or making it illegal. Our shareholders and the shareholders of Dean Foods Company approved the transaction in September 2001. We believe this transaction will be completed in the fourth quarter of this year. In connection with the merger, we have also agreed to purchase the 33.8% minority interest in Suiza Dairy Group currently held by Dairy Farmers of America (DFA) for: o approximately $165.0 million in cash, subject to adjustment in certain circumstances as described in our agreement with DFA, o a subordinated contingent promissory note in the original principal amount of $50.0 million (which increases annually based on the change in the consumer price index, up to a maximum of $120.0 million) payable only in the event that we terminate or breach one of our existing milk supply agreements with DFA prior to the twentieth anniversary of the closing date, and o six plants (and the operations associated with those plants) located in areas where our operations overlap with those of Dean Foods. DFA has assigned its right to acquire these plants to National Dairy Holdings, an entity in which DFA owns a minority interest. Therefore, when the merger occurs, we expect to transfer the six plants to National Dairy Holdings rather than to DFA. Also as part of the consideration to be paid to DFA, we will amend one of our existing milk supply agreements with DFA to provide that if we do not, within a specified period after closing, offer DFA the right to supply raw milk, or manage the supply of raw milk, to certain of Dean's dairy plants after the merger, we could be required to pay liquidated damages to DFA in an amount of up to $80.0 million. Any such liquidated damages would be paid without interest over a five-year period and would reduce the principal amount of the $50.0 million contingent promissory note described above by an amount equal to approximately 25% of such payments. Our purchase of DFA's interest in Suiza Dairy Group is conditioned on, and is expected to occur simultaneously with, the closing of our acquisition of Dean Foods. We will pay the cash portion of the purchase price for the transactions with Dean Foods and DFA with borrowings under a new $2.7 billion credit facility that will be funded upon closing of the transactions. Minority Interest in Leche Celta - In August 2001, we purchased the 25% minority interest in Leche Celta, our Spanish dairy processor, for approximately $12.6 million. We funded this purchase with cash flow from operations. 15 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS We are the nation's leading dairy processor and distributor, producing a full line of company-branded and customer-branded dairy products such as fluid milk, ice cream and novelties, coffee creamers, half-and-half, whipping cream, sour cream, cottage cheese, yogurt, extended shelf-life flavored milks, soy milk and pre-whipped topping. We also manufacture and distribute fruit juices, flavored drinks, bottled water and coffee, and own a 43.1% interest in Consolidated Container Company, one of the largest rigid plastic container manufacturers in the United States. We currently have two reportable segments, including Suiza Dairy Group and Morningstar Foods. RESULTS OF OPERATIONS The following table presents certain information concerning our results of operations, including information presented as a percentage of net sales:
THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30, ------------------------------------------- ------------------------------------------- 2001 2000 2001 2000 -------------------- -------------------- -------------------- --------------------- DOLLARS PERCENT DOLLARS PERCENT DOLLARS PERCENT DOLLARS PERCENT ---------- ------- ---------- ------- ---------- ------- ---------- ------- (dollars in thousands) (dollars in thousands) Net sales $1,555,731 100.0% $1,439,947 100.0% $4,557,158 100.0% $4,268,442 100.0% Cost of sales 1,195,435 76.8 1,085,627 75.4 3,477,209 76.3 3,213,745 75.3 ---------- ----- ---------- ----- ---------- ----- ---------- ----- Gross profit 360,296 23.2 354,320 24.6 1,079,949 23.7 1,054,697 24.7 Operating expenses Selling and distribution 207,929 13.4 202,371 14.1 622,746 13.6 602,297 14.1 General and administrative 41,083 2.6 43,035 3.0 131,498 2.9 135,235 3.2 Amortization of intangibles 13,117 0.9 13,495 0.9 39,914 0.9 39,153 0.9 Plant closing and other costs 0.0 424 0.0 843 0.0 3,388 0.1 ---------- ----- ---------- ----- ---------- ----- ---------- ----- Total operating expenses 262,129 16.9 259,325 18.0 795,001 17.4 780,073 18.3 ---------- ----- ---------- ----- ---------- ----- ---------- ----- Total operating income $ 98,167 6.3% $ 94,995 6.6% $ 284,948 6.3% $ 274,624 6.4% ========== ===== ========== ===== ========== ===== ========== =====
The sales and operating expenses of minority-owned businesses, including Consolidated Container, are not included in the table presented above, but are instead condensed onto a single line below operating income (see discussion below under "Other (Income) Expense"). THIRD QUARTER AND YEAR-TO-DATE 2001 COMPARED TO THIRD QUARTER AND YEAR-TO-DATE 2000 Net Sales -- Net sales increased by $115.8 million or 8.0% to $1.56 billion in the third quarter of 2001 from $1.44 billion in the third quarter of 2000. For the nine month period ending September 30, net sales increased by $288.7 million, or 6.8%, to $4.56 billion in 2001 from $4.27 billion in 2000. Net sales for Suiza Dairy Group increased $96.0 million, or 8.2%, in the third quarter of 2001 compared to the same period in 2000, and increased $253.3 million, or 7.3%, in the first nine months of 2001 compared to the same period in 2000. Net sales for Morningstar Foods increased $8.6 million, or 4.9%, in the third quarter of 2001 over the same period in 2000, and increased $39.7 million, or 7.9%, in the first nine months of 2001 compared to the year-earlier period. These increases occurred despite a small decline in volume and were due to an increase in prices charged for our products in response to higher raw milk and butterfat costs. Cost of Sales -- Our cost of sales ratio was 76.8% in the third quarter of 2001 compared to 75.4% in the third quarter of 2000, and 76.3% for the first nine months of 2001 compared to 75.3% in the same period of 2000. The cost of sales ratio for Suiza Dairy Group increased to 77.4% in the third quarter of 2001 from 76.2% in 2000, and increased to 77.0% in the first nine months of 2001 from 76.0% in the same period of 2000. The cost of sales ratio for Morningstar Foods increased to 70.1% in the third 16 quarter of 2001 from 66.6% in 2000 and increased to 68.4% in the first nine months of 2001 from 66.9% in 2000. These increases were due to higher raw milk and butterfat costs in 2001. Operating Costs and Expenses -- Our operating expense ratio was 16.9% in the third quarter of 2001 compared to 18.0% in the third quarter of 2000, and 17.4% in the first nine months of 2001 compared to 18.3% in the same period of 2000. The operating expense ratio at Suiza Dairy Group was 16.6% in the third quarter of 2001 compared to 17.6% in 2000, and 17.1% in the first nine months of 2001 compared to 17.8% in the same period of 2000. This ratio improved due to lower plant closing costs in 2001 and lower selling and general and administrative costs. The operating expense ratio at Morningstar Foods was 18.0% in the third quarter of 2001 compared to 18.9% in 2000, and 19.1% in the first nine months of 2001 compared to 19.4% in the same period of 2000. This ratio improved in the third quarter of 2001 due to lower distribution costs, which were partly offset in the nine month period by higher selling expenses related to the introduction of new products. Operating Income -- Operating income in the third quarter of 2001 was $98.2 million, an increase of 3.3% from the third quarter of 2000 operating income of $95.0 million. For the nine month period, operating income in 2001 increased 3.8% to $284.9 million from $274.6 million in 2000. Our operating margin was 6.3% in the third quarter of 2001 compared to 6.6% in the third quarter of 2000, and 6.3% in the first nine months of 2001 compared to 6.4% in the same period of 2000. Operating margin for Suiza Dairy Group declined to 6.0% in the third quarter of 2001 from 6.1% in 2000 and declined to 5.9% in the first nine months of 2001 from 6.2% in 2000. This decrease was due to higher raw milk costs during 2001, partly offset by lower operating costs. Morningstar Foods' operating margin declined to 11.8% in the third quarter of 2001 from 14.5% in 2000 and declined to 12.5% in the first nine months of 2001 from 13.7% in 2000 due to higher butterfat costs. Other (Income) Expense --Interest expense decreased to $23.3 million in the third quarter of 2001 from $29.0 million in 2000, and decreased to $76.5 million in the first nine months of 2001 from $83.1 million in 2000. This decrease was the result of lower debt balances and lower interest rates in 2001. Equity from investments in unconsolidated affiliates, which is primarily related to our minority interest in Consolidated Container, amounted to a $5.4 million loss in the third quarter of 2001 compared to earnings of $5.2 million in 2000; and amounted to a $2.6 million loss in the first nine months of 2001 compared to earnings of $10.6 million in 2000. In the third quarter of 2001 Consolidated Container incurred restructuring and other one-time costs, including (i) costs to settle claims by certain customers related to Consolidated Container's failure to satisfy various contractual obligations, and (ii) costs related to various organizational and management changes. Income Taxes -- Income tax expense was recorded at an effective rate of 34.7% in the third quarter of 2001 compared to 37.9% in the third quarter of 2000, and at an effective rate of 36.5% in the first nine months of 2001 compared to 38.0% during the same period of 2000. In the third quarter of 2001 a contested state tax issue was resolved in our favor. The tax rate varies as the mix of earnings contributed by our various business units changes, and as tax savings initiatives are adopted. Minority Interest -- Minority interest in earnings, which is primarily the 33.8% ownership interest of Dairy Farmers of America in Suiza Dairy Group, increased to $9.8 million in the third quarter of 2001 from $8.2 million in 2000, and increased to $26.1 million in the first nine months of 2001 from $25.3 million in 2000, due to higher earnings at Suiza Dairy Group. Extraordinary Gain -- During the first quarter of 2000 we recognized a $5.0 million extraordinary gain, net of income tax expense of $2.8 million, which included the following items related to the early extinguishment of our previous senior credit facility: 17 o A $6.5 million gain, net of income tax expense of $3.6 million, for interest rate derivatives which became unhedged and were marked to fair market value, and o A $1.5 million loss, net of an income tax benefit of $0.8 million, for the write-off of deferred finance costs. Cumulative Effect of Accounting Change - Effective January 1, 2001 we adopted Statement of Financial Accounting Standards (SFAS) No. 133, Accounting for Derivative Instruments and Hedging Activities (as amended). Our adoption of this accounting standard resulted in the recognition of $1.4 million, net of an income tax benefit of $1.5 million and minority interest benefit of $0.7 million, as a charge to earnings. PENDING ACQUISITION OF DEAN FOODS COMPANY On April 4, 2001, we signed a definitive merger agreement with Dean Foods Company, the nation's second largest dairy processor with annual revenues of over $4.0 billion. In connection with this transaction, which we believe will be completed during the fourth quarter of this year, we have also agreed to purchase the 33.8% minority interest in Suiza Dairy Group currently held by Dairy Farmers of America. Upon completion of these transactions, we will change our name to Dean Foods Company and our trading symbol on the New York Stock Exchange will change from "SZA" to "DF." For more information about these transactions, please see Note 8 to our Condensed Consolidated Financial Statements contained in this report. LIQUIDITY AND CAPITAL RESOURCES Cash Flow Net cash provided by operating activities was $179.5 million for the first nine months of 2001 compared to $191.6 million for the first nine months of 2000. This reduction was primarily due to an increase in working capital. We spent $89.4 million during the first nine months of 2001 for capital expenditures, all of which was funded using cash flow from operations. We intend to spend between $140 million and $150 million in 2001 on capital expenditures for our existing manufacturing facilities and distribution capabilities. We will fund all of these capital expenditures using cash flow from operations. We spent approximately $32.4 million in the first nine months of 2001 on transaction costs related to our proposed acquisition of Dean Foods Company, $15.9 million of which consisted of fees paid to various commercial lenders to obtain our new credit facility. In addition, we spent $12.6 million during the third quarter of 2001 for the purchase of the minority interest in Leche Celta. All of these acquisition-related costs were funded using cash flow from operations or borrowings under our existing credit facilities. Debt Obligations At September 30, 2001, Suiza Dairy Group had outstanding borrowings of $923.9 million under its credit facility, compared to $1.095 billion at December 31, 2000, and $19.8 million in outstanding letters of credit. As of September 30, 2001, up to $591.3 million was available for future borrowings under Suiza Dairy Group's senior credit facility, subject to satisfaction of certain conditions contained in the loan agreement. Suiza Dairy Group is currently in compliance with all covenants and financial ratios contained in its credit agreement. 18 At September 30, 2001 we had no debt outstanding under our parent-level senior credit facility, and $7.5 million in outstanding letters of credit, leaving $292.5 million available for future borrowing, subject to satisfaction of certain conditions contained in the loan agreement. We are currently in compliance with all covenants and financial ratios contained in our parent-level credit facility. Scheduled principal payments in the amount of $25.0 million each are due and payable on Suiza Dairy Group's $625.0 million term loan during each quarter of 2001. We fund these payments, in addition to the principal and interest payments due from time to time under our other debt agreements, using cash flow from operations or borrowings under our existing credit facilities. Both the Suiza Dairy Group credit facility and the parent-level credit facility are scheduled to expire in 2005. However, upon completion of our pending acquisition of Dean Foods, both of these facilities will be terminated and replaced with a single $2.7 billion credit facility at the parent level. We believe that the acquisition of Dean Foods will be completed during the fourth quarter of this year. See "--Future Capital Requirements." In February 2001, we increased the amount of our receivable-backed loan from $150 million to $175 million, and in June 2001, we further increased the amount of this facility to $250 million. In both instances we used the proceeds to pay down higher-cost debt. Future Capital Requirements On April 4, 2001, we signed a definitive merger agreement with Dean Foods Company. As a result of the merger, each share of common stock of Dean Foods will automatically convert into the right to receive $21.00 in cash plus .429 shares of our common stock, subject to adjustment in certain circumstances. We expect to issue approximately 15.3 million new shares of common stock, and pay approximately $750.0 million in cash, to the shareholders of Dean Foods in connection with the proposed transaction. In connection with our proposed acquisition of Dean Foods, we have entered into an agreement with Dairy Farmers of America (DFA) to purchase its 33.8% interest in Suiza Dairy Group in exchange for: o approximately $165.0 million in cash, subject to adjustment as described in our agreement with DFA, o a subordinated contingent promissory note in the original principal amount of $50.0 million (which increases annually based on the change in the consumer price index, up to a maximum of $120.0 million) payable only in the event that we terminate or breach one of our existing milk supply agreements with DFA prior to the twentieth anniversary of the closing date, and o six plants (and the operations associated with those plants) located in areas where our operations overlap with those of Dean Foods. We have also agreed to amend our current milk supply agreement with DFA to provide that if we do not, within a specified period after closing, offer DFA the right to supply raw milk, or manage the supply of raw milk, to certain of Dean Foods' dairy plants after the acquisition, we could be required to pay them liquidated damages in an amount of up to $80.0 million. Any such liquidated damages would be paid, without interest, over a five-year period and would reduce the principal amount of the $50.0 million contingent promissory note described above by an amount equal to approximately 25% of such payments. The closing of our proposed acquisition of DFA's minority interest in Suiza Dairy Group 19 is contingent on, and is expected to occur simultaneously with, the completion of our acquisition of Dean Foods. We intend to pay the cash portion of the purchase price for the transactions with Dean Foods and DFA with borrowings under a new $2.7 billion credit facility that will be funded upon closing of the acquisition of Dean Foods and the purchase of DFA's interest in Suiza Dairy Group. In addition, we will also use the proceeds of the new credit facility (i) to retire existing indebtedness under the Suiza Dairy Group credit facility, our parent-level credit facility and Dean Foods' existing credit facility, (ii) to pay certain closing costs, and (iii) for general corporate purposes. We signed a definitive credit agreement related to our new credit facility in July 2001. During the fourth quarter of 2001, we expect to pay approximately $30.0 million in fees related to the new credit facility. We expect to pay all future fees out of cash flow from operations or using borrowings under our existing credit facilities or our new credit facility. We expect to spend an additional amount of approximately $10.0 million to $12.0 million during the fourth quarter for other costs related to our pending acquisition of Dean Foods, all of which will be paid using cash flow from operations or borrowings under our existing credit facilities or our new credit facility. Pending the closing of the transactions with Dean Foods and DFA, we may pursue additional acquisitions that are compatible with our core business strategy. Any such acquisitions of fluid dairy businesses in the United States (excluding territories) will be purchased through Suiza Dairy Group, pursuant to our partnership agreement with DFA, except in certain unusual circumstances. Therefore, any such acquisitions will likely be funded under the Suiza Dairy Group credit facility. Any international acquisitions, or domestic acquisitions of non-fluid dairy businesses, as well as all stock repurchases, will be funded through the parent-level credit facility. We believe that we have the financial resources necessary to meet our capital requirements for the foreseeable future. KNOWN TRENDS AND UNCERTAINTIES Consolidated Container Company We own a 43.1% interest in Consolidated Container Company, one of the nation's largest manufacturers of rigid plastic containers. During 2001, Consolidated Container has consistently reported weaker than expected operating results due to a variety of factors including high raw material costs and various operational difficulties. Although Consolidated Container has recently installed new management, we expect Consolidated Container's impact on our earnings to continue to be unpredictable over the next several quarters. Impact of Recent Terrorist Attacks Our customers in the airline, food service and hospitality industries have suffered decreases in sales volumes in recent weeks due to the events of September 11 and the resulting economic downturn. Our sales to these customers have decreased accordingly. We expect to continue to experience lower than normal sales volumes to these customers until economic stability and consumer confidence are restored. Rationalization Activities As a result of our rapid growth in recent years, we have had, and will continue to have, many opportunities to lower costs and become more efficient in our operations. In 2001 we have been continuing our emphasis on our rationalization activities. As we continue these activities, we may incur restructuring costs and other charges. Although we cannot estimate the amount of these costs or other charges at this time, we do not expect that these costs will have a material adverse impact on our earnings or results of operations. We also expect that our earnings from our 43.1% equity investment in Consolidated Container Company will continue to be reduced by our share of restructuring and other non-recurring charges recognized by Consolidated Container as they continue to integrate the operations of 20 our former U.S. plastic packaging business and the business of Reid Plastics. We cannot estimate the effect of these charges on our earnings at this time. Trends in Tax Rate Our 2000 tax rate was approximately 38.6%. In 2001, we believe our annual tax rate will range from 35% to 37%. We expect our annual tax rate to remain within this range for the foreseeable future due to various tax savings initiatives we have undertaken. See "Risk Factors" below for a description of various other risks and uncertainties concerning our business. RISK FACTORS This report contains certain statements about our future that are not statements of historical fact. These statements are found in the portions of this report entitled "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources," "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Known Trends and Uncertainties" and "Quantitative and Qualitative Disclosures About Market Risk." In some cases, you can identify these statements by terminology such as "may," "will," "should," "expects," "seek to," "anticipates," "plans," "believes," "estimates," "intends," "predicts," "potential" or "continue" or the negative of such terms and other comparable terminology. These statements are only predictions, and in evaluating those statements, you should carefully consider the risks outlined below. Actual performance or results may differ materially and adversely. Changes in Raw Material and Supply Costs Can Adversely Affect Us The most important raw materials that we use in our operations are raw milk and cream (including butterfat). The prices of these materials increase and decrease depending on supply and demand and, in some cases, governmental regulation. Prices of raw milk and cream (including butterfat) can fluctuate widely over short periods of time. In many cases we are able to adjust our pricing to reflect changes in raw material costs. However, volatility in the cost of raw materials can adversely affect our performance, as pricing changes may lag changes in costs. These lags tend to erode our profit margins. Extremely high raw material costs can also put downward pressure on our margins and our volumes. We have been adversely affected in 2001 by raw material costs. Although we cannot predict changes in raw material costs with precision, we do expect raw material costs to remain high, and fairly volatile, for the remainder of 2001. Therefore, we may continue to be adversely affected by changes in raw material costs for the remainder of 2001 and into 2002. Consolidated Container Company, in which we own a 43.1% interest, uses high density, polyethylene resin as its primary raw material. Consolidated Container incurred sharply increased costs for high density, polyethylene resin during 2000 and in 2001, which adversely affected its results of operations for those periods and, accordingly, our earnings per share for those periods. Consolidated Container is also our primary supplier of plastic bottles. Pursuant to our supply agreements with Consolidated Container, the price we pay for plastic bottles increases as the cost of high density, polyethylene resin increases. We are adversely affected by these cost increases to the extent they are not passed on to our customers. Should the cost of high density, polyethylene resin rise even higher than currently expected, our financial results including our gross profit and our earnings per share, could be adversely affected for the remainder of 2001 and into 2002. 21 Also, because we deliver a majority of our products directly to our customers through our "direct store delivery" system, we are a large consumer of diesel fuel. We experienced increased fuel costs during 2000 and in 2001 as a result of increased fuel prices. Further increases in fuel prices beyond our expectations could adversely affect our results of operations. Obtaining Required Regulatory Approvals and Satisfying Other Closing Conditions Could Delay, Prevent or Alter the Projected Benefits of our Proposed Acquisition of Dean Foods Company Completion of our proposed acquisition of Dean Foods Company is subject to certain conditions, including among others the expiration or termination of the "waiting period" under the Hart-Scott-Rodino Antitrust Improvements Act of 1976 and the absence of any governmental order prohibiting the closing of the transaction or making it illegal. Although we expect the closing to occur before the end of this year, we can give no assurance as to when or if the conditions to closing will be satisfied. Generally, in order for the waiting period under the Hart-Scott Rodino Antitrust Improvements Act to expire without resulting in the federal government obtaining an injunction prohibiting us from closing the transaction, we must first satisfy any concerns that the U.S. Department of Justice (DOJ) might have regarding the competitive effects of the proposed transaction. We can give no assurance as to the terms and conditions, if any, that we will be obliged to comply with in order to satisfy the concerns that the DOJ, or any court reviewing the transaction, may have. We may not be able to satisfy their concerns at all. If we are required to divest operations or lines of business beyond those enumerated in the merger agreement, the projected benefits of the proposed acquisition may be diminished, which could adversely affect the financial performance and prospects of our company after the acquisition. Moreover, we can give no assurance that the DOJ will not attempt to block the merger altogether, or that any such attempt would not be successful. Several state Attorneys General have also been participating in the investigation of the competitive effects of the proposed transaction. These state antitrust enforcement officials or private parties also have the ability to attempt to block the proposed transaction if they have concerns about the competitive effects of the proposed transaction. While state approval is not formally required, we can give no assurance that any such challenge would not be successful. In connection with the Dean Foods acquisition, we intend to purchase Dairy Farmers of America's interest in Suiza Dairy Group and to transfer certain plants to National Dairy Holdings. In addition to the Dean Foods acquisition, both of these transactions are subject to DOJ review. Although completion of these transactions is not a condition to completion of the Dean Foods acquisition, if regulatory approval for these transactions is not timely obtained, we could be prohibited from purchasing DFA's interest in Suiza Dairy Group on the terms currently contemplated, and/or be required to find another buyer for the plants to be divested, which could (i) delay the acquisition of Dean Foods, (ii) have a material adverse impact on the projected benefits of the acquisition and our financial performance after the acquisition, and/or (iii) jeopardize our ability to obtain financing for the transaction on acceptable terms. We have incurred and will continue to incur, significant costs and expenses related to the proposed acquisition prior to closing. See "Management's Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources." A significant delay in the closing of the proposed transaction beyond our current expectations could substantially burden our financial and management resources, which could have an adverse effect on our operations and/or financial results. If any of the conditions to closing contained in the merger agreement are not timely satisfied in accordance with the terms of the merger agreement, the merger agreement could be terminated and the transaction would not be completed at all. In that case, we would have incurred significant costs without achieving the expected benefits of the proposed merger. All costs incurred in attempting to complete the merger would be reflected as expenses on our consolidated income statement, which would have a significant adverse affect on our earnings per share in the period such costs are recorded. Either party to the merger agreement can terminate the agreement without penalty if the merger has not closed by December 31, 2001. 22 Our Innovation Efforts May Not Succeed We have invested, or intend to invest, significant resources in product innovation in an effort to increase our sales and profit margins as well as the overall consumption of dairy products. We believe that sales and profit growth through innovation is a significant source of potential growth for our business. Innovation may improve demand, which has been relatively flat in the dairy industry for a number of years. Further, innovation is important because we expect margins on non value-added dairy products to be compressed as our customer base consolidates. The success of our innovation initiatives will depend on customer and consumer acceptance of our products, of which there can be no assurance. If our innovation efforts do not succeed, or if we do not have adequate resources to invest in innovation, we may not be able to continue to significantly increase demand for our products, or our sales or profit margins. Loss of Rights to any of our Licensed Brands Could Adversely Affect Us We sell certain of our products under licensed brand names such as Hershey's(R), Borden(R), Pet(R) and, beginning in the first quarter of next year, Folgers Jakada(TM). Should our rights to manufacture and sell products under any of these names be terminated, our financial performance and results of operations could be materially and adversely affected. We May Be Subject to Product Liability Claims We sell food products for human consumption, which involves risks such as o product contamination or spoilage, o product tampering, and o other adulteration of food products. Consumption of an adulterated, contaminated or spoiled product may result in personal illness or injury. We could be subject to claims or lawsuits relating to an actual or alleged illness or injury, and we could incur liabilities that are not insured or that exceed our insurance coverages. An actual or alleged problem with the quality, safety or integrity of our products at any of our facilities could also result in o negative publicity, o reduced demand for our products, and o substantial costs of compliance or remediation. Any of these events could adversely affect us. Our Failure to Successfully Compete Could Adversely Affect Our Prospects and Financial Results Our business is subject to significant competition. If we fail to successfully compete against our competitors, our business will be adversely affected. Significant consolidation is currently underway in the retail grocery and food service industries. As our customer base continues to consolidate, we expect competition among us and our competitors to intensify as we compete for the business of fewer customers. As this consolidation continues, there can be no assurance that we will be able to keep our existing customers, or to gain new customers. Winning new customers is particularly important to our future growth, as demand tends to be relatively flat in our industry. Moreover, as our customers become larger, they will have significantly greater purchasing leverage, and may force prices and margins significantly lower than current competitive levels. We could also be adversely affected by any expansion of capacity by our existing competitors or by new entrants in our markets. We face pressure from other beverage companies seeking to expand their influence over consumer beverage choices. These larger competitors may adversely affect us in our fight for shelf space and consumption of products. 23 We Could Be Adversely Affected by Changes in Regulations The federal government and several state agencies establish minimum prices paid to producers for raw milk. These prices, which are calculated by economic formula based on supply and demand, vary by region and by the type of product manufactured using the raw milk. Until recently, the Northeast Dairy Compact Commission set a minimum price for raw milk in New England independent of the price set by the federal milk marketing orders. Under the Northeast Dairy Compact, the price we paid for raw milk in New England was frequently in excess of the minimum price established by the federal government. The Northeast Dairy Compact expired at the end of September 2001. However, new legislation has recently been proposed that would set a new minimum price for raw milk throughout the country independent of the price set by the federal milk marketing orders. Under the proposed legislation, prices charged for raw milk could exceed the prices we currently pay. We do not know whether this proposed legislation will be authorized by Congress or, if authorized, the extent to which it would increase the prices we pay for raw milk. A substantial increase in the price we are required to pay for raw milk beyond our expectations could have an adverse effect on our results of operations, to the extent those increases are not passed on to customers. Moreover, even if those costs are passed on to customers, we could suffer a loss of sales if the price of processed milk and other dairy products rises beyond the price that consumers are willing to pay. We are also subject to federal, state and local laws and regulations relating to o food quality, o manufacturing standards, o labeling, o packaging, o waste water, storm water, air emissions, storage tanks and hazardous materials, o occupational health and safety, labor, discrimination, and o other matters. While we believe that we are in compliance with all material governmental regulations, we cannot be certain what effect any future material noncompliance, or any material changes in these laws and regulations, including changes in the laws regulating minimum prices for raw milk, could have on our business. Material changes in these laws and regulations could have positive or adverse effects on our business. 24 We Have Substantial Debt and Other Financial Obligations and We May Incur Additional Debt As of September 30, 2001, we had substantial debt and other financial obligations including, among others, o $923.9 million of borrowings under the Suiza Dairy Group credit facility, o $584.5 million of 5.5% preferred securities, and o $250.0 million of indebtedness under the receivable-backed loan. Those amounts compare to our stockholders' equity of $694.5 million as of September 30, 2001. If our proposed acquisition of Dean Foods is completed, we will be even more highly leveraged. As of September 30, 2001, up to $591.3 million was available for future borrowings under Suiza Dairy Group's senior credit facility, subject to satisfaction of certain conditions contained in the loan agreement, and a total of $292.5 million was available for borrowing under the parent-level credit facility. We have pledged the stock of some of our subsidiaries to secure these facilities and the assets of other subsidiaries to secure other indebtedness. Our credit facilities and debt service obligations o limit our ability to obtain additional financing in the future without obtaining prior consent, o require us to dedicate a significant portion of our cash flow to the payment of principal and interest on our debt, which reduces the funds we have available for other purposes, o may limit our flexibility in planning for, or reacting to, changes in our business and market conditions, o impose on us additional financial and operational restrictions, and o expose us to interest rate risk since a portion of our debt obligations are at variable rates. Our ability to make scheduled payments on our debt and other financial obligations depends on our financial and operating performance. Our financial and operating performance is subject to prevailing economic conditions and to financial, business and other factors, some of which are beyond our control. If we do not comply with the financial and other restrictive covenants under our credit facilities, we may default under these facilities. Upon default, our lenders could accelerate the indebtedness under the facilities, foreclose against their collateral or seek other remedies. Negative Publicity and/or Shortages of Milk Supply Related to Mad Cow Disease and/or Foot and Mouth Disease Could Adversely Affect Us Recent incidences of bovine spongiform encephalopathy ("BSE" or "mad cow disease") in some European countries have raised public concern about the safety of eating beef and using or ingesting certain other animal-derived products. The World Health Organization, the U.S. Food and Drug Administration and the United States Department of Agriculture have all affirmed that BSE is not transmitted to milk. Moreover, recent incidences of mad cow disease have occurred primarily in Europe. No cases of disease in humans or livestock caused by BSE have ever been detected in the United States. Notwithstanding these facts, we are still subject to risk as a result of public misperception that milk products may be affected by mad cow disease. To date, we have not seen any measurable impact on our milk sales in Spain or the United States resulting from concerns about mad cow disease. However, should public concerns about the safety of milk or milk products escalate as a result of further 25 occurrences of mad cow disease, we could suffer a loss of sales, which could have a material and adverse affect on our financial results. Foot and Mouth Disease ("FMD") is a highly contagious disease of cattle, swine, sheep, goats, deer, and other cloven-hooved animals. FMD causes severe losses in the production of meat and milk; however, FMD does not pose a health risk to humans. While there have been several recent occurrences of FMD in Europe, the United States has been free of FMD since 1929. To date, we have not seen a measurable impact on our supply of raw milk in Spain as a result of FMD. However, should FMD become widespread in Spain, a milk supply shortage could develop, which would affect our ability to obtain raw milk for our Spanish operations and the price that we are required to pay for raw milk in Spain. If we are unable to obtain a sufficient amount of raw milk to satisfy our Spanish customers' needs, and/or if we are forced to pay a significantly higher price for raw milk in Spain, our financial results in Spain could be materially and adversely affected. Likewise, if there is an outbreak of FMD in the United States, a shortage of raw milk could develop in the United States, which would affect our ability to obtain raw milk and the price that we are required to pay for raw milk in the United States. If we are unable to obtain a sufficient amount of raw milk to satisfy our U.S. customers' needs and/or if we are forced to pay a significantly higher price for raw milk in the United States, our consolidated financial results could be materially and adversely affected. Our Foreign Operations Bring Added Risk In February 2000, we purchased a Spanish dairy processor. We have limited experience in managing a European dairy operation. There can be no assurance that we will be able to effectively manage a dairy operation in Europe. Also, we are exposed to foreign currency risk due to certain operating cash flows and various financial instruments being denominated in Spanish pesetas. Any substantial devaluation of Spanish pesetas would have an adverse effect on our financial condition and results of operations. Loss of or Inability to Attract Key Personnel Could Adversely Affect Our Business Our success depends to a large extent on the skills, experience and performance of our key personnel. The loss of one or more of these persons could hurt our business. We do not maintain key man life insurance on any of our executive officers, directors or other employees. Also, we have experienced, and could continue to experience, some difficulty in attracting management personnel due to the currently low unemployment rates in the United States. If we are unable to attract and retain key personnel, our business will be adversely affected. Certain Provisions of Our Certificate of Incorporation, Bylaws and Delaware Law Could Deter Takeover Attempts Some provisions in our certificate of incorporation and bylaws could delay, prevent or make more difficult a merger, tender offer, proxy contest or change of control. Our stockholders might view any such transaction as being in their best interests since the transaction could result in a higher stock price than the current market price for our common stock. Among other things, our certificate of incorporation and bylaws o authorize our board of directors to issue preferred stock in series with the terms of each series to be fixed by our board of directors, o divide our board of directors into three classes so that only approximately one-third of the total number of directors is elected each year, o permit directors to be removed only for cause, and o specify advance notice requirements for stockholder proposals and director nominations. 26 In addition, with some exceptions, the Delaware General Corporation Law restricts mergers and other business combinations between us and any stockholder that acquires 15% or more of our voting stock. We also have a stockholder rights plan. Under this plan, after the occurrence of specified events, our stockholders will be able to buy stock from us or our successor at reduced prices. These rights do not extend, however, to persons participating in takeover attempts without the consent of our board of directors. Accordingly, this plan could delay, defer, make more difficult or prevent a change of control. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK INTEREST RATE AGREEMENTS We have interest rate swaps in place that have been designated as hedges against our variable interest rate exposure on our loans under the Suiza Dairy Group credit facility and on anticipated borrowings under the new credit facility to be funded upon completion of our pending acquisition of Dean Foods. The following table summarizes our various interest rate agreements:
FIXED INTEREST RATES NOTIONAL AMOUNTS EXPIRATION DATE -------------------- ---------------- --------------- 4.90% to 4.93% $275.0 million December 2002 6.07% to 6.24% 325.0 million December 2002 6.23% 50.0 million June 2003 6.69% 100.0 million December 2004 6.69% to 6.74% 100.0 million December 2005 6.78% 75.0 million December 2006
These derivative agreements provide hedges by limiting or fixing the LIBOR interest rates specified in the applicable credit facility at the interest rates noted above until the indicated expiration dates of these interest rate derivative agreements. We have entered into interest rate swap agreements that provide hedges for loans under Leche Celta's term loan. The following table summarizes these agreements:
FIXED INTEREST RATES NOTIONAL AMOUNTS EXPIRATION DATE ----------------------- ------------------------------------ ------------------- 5.54% 1,500,000,000 pesetas November 2003 (approximately $8.2 million at September 30, 2001) 5.6% 2,000,000,000 pesetas November 2004 (approximately $10.9 million at September 30, 2001)
We are exposed to market risk under these arrangements due to the possibility of interest rates on our outstanding debt falling below the rates on our interest rate derivative agreements. We incurred $2.1 million of additional interest expense, net of taxes and minority interest, during the three months ended September 30, 2001 as a result of interest rates on our variable rate debt falling below the agreed-upon interest rate on our existing swap agreements. See Note 1 - General - Recently Issued Accounting Standards. Credit risk under these arrangements is remote since the counterparties to our interest rate derivative agreements are major financial institutions. A majority of our debt obligations are at variable rates. We have performed a sensitivity analysis assuming a hypothetical 10% adverse movement in interest rates. As of September 30, 2001, the analysis indicated that such interest rate movement would not have a material effect on our financial position, 27 results of operations or cash flows. However, actual gains and losses in the future may differ materially from that analysis based on changes in the timing and amount of interest rate movement and our actual exposure and hedges. FOREIGN CURRENCY We are exposed to foreign currency risk due to operating cash flows and various financial instruments that are denominated in foreign currencies. Our most significant foreign currency exposures relate to the Spanish peseta and the euro. Although a substantial devaluation of Spanish pesetas would have an adverse effect on our financial condition and results of operations, we do not believe that any such adverse effects would be material to our financial condition or results of operations on a consolidated basis. 28 PART II - OTHER INFORMATION ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS On September 21, 2001, we held a special meeting of stockholders to vote on certain proposals related to our pending acquisition of Dean Foods Company. At the meeting, we submitted the following matters to a vote of our stockholders: Proposal 1: A proposal to approve: -- the issuance of Suiza's common stock to Dean's stockholders in the merger, as contemplated by the Agreement and Plan of Merger dated April 4, 2001 among Suiza, Blackhawk Acquisition Corp, a wholly-owned subsidiary of Suiza, and Dean; and -- the reservation of an additional number of shares of Suiza's common stock for issuance after the merger pursuant to stock-based awards outstanding at the time of the merger under Dean's stock awards plans; Proposal 2: A proposal to approve Suiza's adoption of Dean's 1989 Stock Awards Plan and the reservation of 1,894,864 shares of Suiza's common stock for issuance after the merger pursuant to that plan, if the merger occurs; and Proposal 3: A proposal to increase the number of shares of Suiza's common stock reserved for issuance under Suiza's 1997 Stock Option and Restricted Stock Plan from 7.5 million shares to 12.5 million shares, if the merger occurs. All proposals were approved. The results of voting on each proposal were as follows:
Proposal 1 Shares % of Voting ---------- ------ ----------- For 18,884,061 98.82% Against 162,912 .85% Abstain 62,606 .33%
Proposal 2 Shares % of Voting ---------- ------ ----------- For 11,840,074 61.96% Against 7,229,386 37.83% Abstain 40,119 .21%
Proposal 3 Shares % of Voting ---------- ------ ----------- For 9,594,919 50.21% Against 9,471,178 49.56% Abstain 43,482 .23%
29 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits 10.1 Agreement and Plan of Merger, dated as of April 4, 2001, among Suiza Foods Corporation, Dean Foods Company and Blackhawk Acquisition Corp. (incorporated by reference from our Current Report on Form 8-K filed April 5, 2001 (File No. 1-12755)) 10.2 Securities Purchase Agreement, dated as of April 4, 2001, among Suiza Foods Corporation, Suiza Dairy Group Holdings, Inc., Suiza Dairy Group, L.P., Suiza Southeast, LLC, Dairy Farmers of America, Inc. and Mid-Am Capital, L.L.C. (incorporated by reference from our Current Report on Form 8-K filed April 5, 2001 (File No. 1-12755)) 10.3 Amendment No. 1 to Securities Purchase Agreement among Suiza Foods Corporation, Suiza Dairy Group, L.P., Suiza Southeast, LLC, Dairy Farmers of America and Mid-Am Capital, L.L.C. 10.4 Credit Agreement, dated July 31, 2001, among Suiza Foods Corporation and certain of its subsidiaries, and various lenders (incorporated by reference from our Quarterly Report on Form 10Q for the quarter ended June 30, 2001 (File No. 1-12755)) 10.5 Credit Agreement (the "Suiza Dairy Group Credit Facility") dated January 4, 2000 by and among Suiza Dairy Group and various lenders (incorporated by reference to our Current Report on Form 8-K dated January 11, 2000, File No. 1-127555) 10.6 Credit Agreement (the "Parent Level Credit Facility") dated January 4, 2000 among Suiza Foods Corporation and various lenders (incorporated by reference to our Current Report on Form 8-K dated January 11, 2000, File No. 1-127555) 10.7 Amendment No. 1 to the Parent Level Credit Facility (incorporated by reference to our Quarterly Report on Form 10Q for the quarter ended September 30 2000, File No. 1-12755) 10.8 First Amendment to Suiza Dairy Group Credit Facility (incorporated by reference to our Quarterly Report on Form 10Q for the quarter ended September 30, 2000, File No. 1-12755) 11 Statement regarding computation of per share earnings (b) Reports on Form 8-K and 8-K/A None 30 SIGNATURES Pursuant to the requirement of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. SUIZA FOODS CORPORATION /s/ Barry A. Fromberg ---------------------------------------------- Barry A. Fromberg Executive Vice President, Chief Financial Officer (Principal Accounting Officer) Date: November 9, 2001 31 EXHIBIT INDEX EXHIBIT NUMBER DESCRIPTION - ------- ----------- 10.1 Agreement and Plan of Merger, dated as of April 4, 2001, among Suiza Foods Corporation, Dean Foods Company and Blackhawk Acquisition Corp. (incorporated by reference from our Current Report on Form 8-K filed April 5, 2001 (File No. 1-12755)) 10.2 Securities Purchase Agreement, dated as of April 4, 2001, among Suiza Foods Corporation, Suiza Dairy Group Holdings, Inc., Suiza Dairy Group, L.P., Suiza Southeast, LLC, Dairy Farmers of America, Inc. and Mid-Am Capital, L.L.C. (incorporated by reference from our Current Report on Form 8-K filed April 5, 2001 (File No. 1-12755)) 10.3 Amendment No. 1 to Securities Purchase Agreement among Suiza Foods Corporation, Suiza Dairy Group, L.P., Suiza Southeast, LLC, Dairy Farmers of America and Mid-Am Capital, L.L.C. 10.4 Credit Agreement, dated July 31, 2001, among Suiza Foods Corporation and certain of its subsidiaries, and various lenders (incorporated by reference from our Quarterly Report on Form 10Q for the quarter ended June 30, 2001 (File No. 1-12755)) 10.5 Credit Agreement (the "Suiza Dairy Group Credit Facility") dated January 4, 2000 by and among Suiza Dairy Group and various lenders (incorporated by reference to our Current Report on Form 8-K dated January 11, 2000, File No. 1-127555) 10.6 Credit Agreement (the "Parent Level Credit Facility") dated January 4, 2000 among Suiza Foods Corporation and various lenders (incorporated by reference to our Current Report on Form 8-K dated January 11, 2000, File No. 1-127555) 10.7 Amendment No. 1 to the Parent Level Credit Facility (incorporated by reference to our Quarterly Report on Form 10Q for the quarter ended September 30 2000, File No. 1-12755) 10.8 First Amendment to Suiza Dairy Group Credit Facility (incorporated by reference to our Quarterly Report on Form 10Q for the quarter ended September 30, 2000, File No. 1-12755) 11 Statement regarding computation of per share earnings 32 EX-10.3 3 d92024ex10-3.txt AMENDMENT NO. 1 TO SECURITIES PURCHASE AGREEMENT EXHIBIT 10.3 AMENDMENT NO. 1 TO SECURITIES PURCHASE AGREEMENT AMONG SUIZA FOODS CORPORATION, SUIZA DAIRY GROUP HOLDINGS, INC., SUIZA DAIRY GROUP, L.P., SUIZA SOUTHEAST, LLC, DAIRY FARMERS OF AMERICA, INC., AND MID-AM CAPITAL, L.L.C. DATED AS OF SEPTEMBER 19, 2001 AMENDMENT NO. 1 TO SECURITIES PURCHASE AGREEMENT This Amendment No. 1 to Securities Purchase Agreement ("AMENDMENT") is made as of September 19, 2001, by and among Suiza Foods Corporation, a Delaware corporation ("SUIZA"), Suiza Dairy Group Holdings, Inc., a Nevada corporation ("HOLDINGS"), Suiza Dairy Group, L.P., a Delaware limited partnership ("SDG"), Suiza Southeast, LLC, a Delaware limited liability company ("SUIZA SOUTHEAST"), Dairy Farmers of America, Inc., a Kansas cooperative marketing association ("DFA"), and Mid-Am Capital, L.L.C., Delaware limited liability company ("MID-AM"). WHEREAS, Suiza, Holdings, SDG, Suiza Southeast, DFA and Mid-Am are parties to that certain Securities Purchase Agreement dated April 4, 2001 ("AGREEMENT"), pursuant to which Holdings agreed to purchase from DFA and Mid-Am, and DFA and Mid-Am agreed to sell to Holdings, all the limited partner interests in SDG held by each of them; WHEREAS, Suiza, Holdings, SDG, Suiza Southeast, DFA and Mid-Am desire to amend the Agreement on the terms set forth herein; and NOW, THEREFORE, in consideration of the premises and the mutual covenants, and in reliance on the representations and warranties, herein contained, the parties hereby agree as follows: 1. Amendment to Section 2.2(a). Section 2.2(a) is hereby amended by deleting Section 2.2(a) as it appears in the Agreement in its entirety and inserting in its place the following revised Section 2.2(a): "(a) In exchange for the SDG Common Interests and the SDG Preferred Interests, Holdings will (i) cause SDG or Dean Foods, as applicable, to transfer, sell and convey the Dairy Assets and the Dairy Liabilities to DFA, (ii) pay, or cause SDG to pay, an amount equal to $166 million in cash to DFA and Mid-Am, subject to adjustment as set forth below (the "CASH CONSIDERATION"), in the relative amounts designated by the DFA Companies at least 3 days prior to Closing, (iii) deliver a subordinated promissory note executed by Suiza in the principal amount of $50,000,000 to DFA, in substantially the form of Exhibit C attached hereto (the "Note"), and (iv) deliver a First Amendment to Milk Supply Agreement executed by Suiza, in substantially the form of Exhibit E attached hereto (the "SUPPLY AMENDMENT"). Items (i), (ii), (iii) and (iv) are collectively referred to as the "PURCHASE PRICE". SDG will not transfer, sell or convey the Excluded Assets to DFA and DFA will not assume and shall not be liable or responsible for any Excluded Liabilities. The Cash Consideration payable to DFA at Closing shall be (A) increased for DFA's and Mid-Am's pro rata share of the reported earnings of SDG from and including January 1, 2001 through the day immediately preceding the Closing Date, (B) decreased by (I) $2,535,000, plus (II) the amount of any distributions (including any distributions to be paid after Closing related to the period prior to the Closing Date) paid to DFA and Mid-Am 36 of cash or other property and the amount of any deemed distributions (for stock option exercises) deemed paid to DFA and Mid-Am under the Limited Partnership Agreement, in the case of such distributions, from and including January 1, 2001 and through the day immediately preceding the Closing Date, and (C) increased or decreased, as applicable, to the extent the Closing Date Working Capital is less than or greater than Stated Working Capital (collectively, the "CASH ADJUSTMENT")." 2. Amendment to Section 2.4(d). Section 2.4(d) is hereby amended by replacing section 2.4(d) as it appears in the Agreement with the following new section 2.4(d), and renumbering the existing 2.4(d) in the Agreement as new section 2.4(e), as follows: "(d) Suiza and DFA will execute and deliver the Supply Amendment, substantially in the form attached hereto as Exhibit E. (e) Suiza, Holdings, SDG, Suiza Southeast, Dean Foods and/or one or more of its subsidiaries, DFA and Mid-Am will execute and deliver such other documents and agreements required under Sections 7 and 8, as applicable." 3. Amendment to Section 4. Section 4 is hereby amended by adding the following new section 4.3: "4.3 MILK SUPPLY AGREEMENTS. Except as set forth on Schedule 4.3 and except for milk supply agreements with DFA, neither Velda, Coburg Dairy, Inc., H. Meyer Dairy Company, Cream-O-Weber Dairy, Inc., nor the fluid milk facility of Barber Dairies, Inc., located in Birmingham, Alabama is a party to a supply agreement which has (a) term in excess of one (1) year and which does not expire on or before December 31, 2001 or (b) a right of first offer or right of first refusal with respect to the supply of raw milk." 4. Amendment to Section 6. Section 6 is hereby amended by adding the following new Section 6.13: "6.13 DAIRY LIABILITIES. In no event shall any milk supply agreement, other than those listed on Schedule 4.3, which has (a) a term in excess of one (1) year and which does not expire on or before December 31, 2001 or (b) a right of first offer or right of first refusal with respect to the supply of raw milk, constitute a Dairy Liability." 5. Amendment to Section 8.1. Section 8.1 is hereby amended by adding the following sentence to the end of such section "Notwithstanding the foregoing, the failure of the representation and warranty contained in Section 4.3 to be accurate as of the date hereof or on the Closing Date shall not be the basis for or cause the condition set forth in this Section 8.1 to fail to be satisfied. If the representation and warranty contained in Section 4.3 fails to be accurate on the date hereof or on the Closing Date, DFA (assuming the other conditions precedent to DFA's obligation to Close have either been satisfied 37 or waived as of the Closing Date) will not be permitted to terminate this Agreement and will not be released from its obligations to Close the transactions contemplated hereby. Nothing in this Section 8.1 shall limit DFA's right to be indemnified in respect of a breach of the representation and warranty contained in Section 4.3, as provided in Section 9 of the Agreement." 6. Amendment to Section 9.1. Section 9.1 is hereby amended by deleting third sentence of Section 9.1 as it appears in the Agreement in its entirety and inserting in its place the following revised third sentence of Section 9.1: "Except as otherwise provided in this Section 9.1, all representations and warranties in this Agreement and the Bill of Sale and any other certificate or document delivered pursuant to this Agreement or the Bill of Sale will terminate eighteen months after the Closing; provided, however, that (a) the representations and warranties set forth in Section 4.3 of this Agreement will survive for a period of five years after the Closing, (b) the representations and warranties set forth in Sections 4.1(c)(i), 4.1(c)(iii) and 4.1(c)(iv) of the Bill of Sale will survive until the expiration of the applicable statute of limitations for any such violation, breach or other matter that is the subject of such representations and warranties, (c) if any breach of the representations and warranties set forth herein, or in Sections 3.1, 4.1, 4.7, 4.9, 4.10, 4.11 or 4.15 of the Bill of Sale is based on a violation of any Legal Requirement, then such representations and warranties and any claim for indemnification applicable to such a violation shall survive for the longer of eighteen months from the Closing Date and the applicable statute of limitation with respect thereto; and (d) with respect to the representations and warranties set forth in Sections 3.2, 4.4 and 4.5(b) of the Bill of Sale, such representations and warranties and any claim for indemnification with respect thereto shall survive indefinitely." 7. Amendment to Section 9.4(e). Section 9.4(e) is hereby amended by deleting Section 9.4(e) as it appears in the Agreement in its entirety and inserting in its place the following revised Section 9.4(e): "(e) Notwithstanding the foregoing, the limitations set forth in Section 9.4(b), (c) and (d) will not apply to Damages arising from or in connection with a breach or alleged breach of (i) the representations and warranties of DFA set forth in Section 3.2 of the Bill of Sale, (ii) the representations and warranties of Suiza, Holdings and SDG set forth in Section 4.3 of this Agreement, (iii) the representations and warranties of Suiza and SDG set forth in Section 4.4 and 4.5(b) of the Bill of Sale, (iv) the covenants and agreements concerning the Dairy Liabilities or the Excluded Liabilities, or (v) the covenants and agreements set forth in Section 6.11(d)." 8. Amendment to Exhibit C. Exhibit C to the Agreement as hereby amended by deleting Exhibit C as it appears as an attachment to the Agreement in its entirety and inserting in its place the revised Exhibit C attached hereto. 38 9. Miscellaneous. (a) All capitalized terms not otherwise defined herein shall have the meanings ascribed to such terms in the Agreement. (b) This Amendment may be executed in two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. (c) This Amendment is intended to amend the Agreement. Except as specifically set forth herein, all other terms and conditions of the Agreement shall remain in full force and effect without modification. [SIGNATURE PAGES FOLLOW] IN WITNESS WHEREOF, the parties have executed and delivered this Amendment as of the date first written above. SUIZA FOODS CORPORATION By: /s/ MICHELLE P. GOOLSBY --------------------------------------------- Name: Michelle P. Goolsby -------------------------------------- Title: Executive Vice President ----------------------------------- & General Counsel ----------------------------------- SUIZA DAIRY GROUP HOLDINGS, INC. By: /s/ MICHELLE P. GOOLSBY --------------------------------------------- Name: Michelle P. Goolsby -------------------------------------- Title: Vice President ------------------------------------- SUIZA DAIRY GROUP, L.P. By: SUIZA MANAGEMENT CORPORATION, the sole general partner By: /s/ MICHELLE P. GOOLSBY --------------------------------------------- Name: Michelle P. Goolsby -------------------------------------- Title: Executive Vice President ----------------------------------- & General Counsel ----------------------------------- SUIZA SOUTHEAST, LLC By: /s/ MICHELLE P. GOOLSBY --------------------------------------------- Name: Michelle P. Goolsby -------------------------------------- Title: Vice President ------------------------------------- DAIRY FARMERS OF AMERICA, INC. By: /s/ GARY E. HANMAN --------------------------------------------- Name: Gary E. Hanman -------------------------------------- Title: President & Chief Executive Officer ------------------------------------- MID-AM CAPITAL, L.L.C. By: /s/ GERALD L. BOS --------------------------------------------- Name: Gerald L. Bos -------------------------------------- Title: CEO & Treasurer ------------------------------------- EX-11 4 d92024ex11.txt STATEMENT RE: COMPUTATION OF PER SHARE EARNINGS EXHIBIT 11 - STATEMENT RE COMPUTATION OF PER SHARE EARNINGS SUIZA FOODS CORPORATION (In thousands, except share and per-share amounts)
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, ----------------------------- ----------------------------- 2001 2000 2001 2000 ----------- ----------- ----------- ----------- Basic EPS computation: Numerator: Income before extraordinary items $ 29,422 $ 31,189 $ 87,542 $ 85,316 ----------- ----------- ----------- ----------- Income applicable to common stock $ 29,422 $ 31,189 $ 87,542 $ 85,316 =========== =========== =========== =========== Denominator: Average common shares 27,860,732 27,623,928 27,594,599 28,530,656 =========== =========== =========== =========== Basic EPS before extraordinary items $ 1.06 $ 1.13 $ 3.17 $ 2.99 =========== =========== =========== =========== Diluted EPS calculation: Numerator: Income before extraordinary items $ 29,422 $ 31,189 $ 87,542 $ 85,316 Net effect on earnings from conversion of mandatorily redeemable convertible preferred securities 5,331 5,331 15,993 16,001 ----------- ----------- ----------- ----------- Income applicable to common stock $ 34,753 $ 36,520 $ 103,535 $ 101,317 =========== =========== =========== =========== Denominator: Average common shares - basic 27,860,732 27,623,928 27,594,599 28,530,656 Stock option conversion 1,076,481 906,601 918,762 832,882 Dilutive effect of conversion of manditorily redeemable convertible preferred securities 7,666,754 7,667,183 7,666,806 7,698,814 ----------- ----------- ----------- ----------- Average common shares - diluted 36,603,967 36,197,712 36,180,167 37,062,352 =========== =========== =========== =========== Diluted EPS before extraordinary items $ 0.95 $ 1.01 $ 2.86 $ 2.73 =========== =========== =========== ===========
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