<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
DATE OF REPORT (DATE OF EARLIEST EVENT REPORTED):
FEBRUARY 18, 1998 (NOVEMBER 25, 1997)
SUIZA FOODS CORPORATION
-----------------------
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 1-12755 75-2559681
-------- ------- ----------
(STATE OR OTHER (COMMISSION FILE NUMBER) (IRS EMPLOYER
JURISDICTION OF INCORPORATION) IDENTIFICATION NO.)
3811 TURTLE CREEK BLVD., SUITE 1300
DALLAS, TEXAS 75219
--------------------
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE:
(214) 528-0939
1
<PAGE> 2
ITEM 5. OTHER EVENTS.
During the fourth quarter of 1997 Suiza Foods Corporation (the
"Registrant") completed the acquisitions of Country Fresh, Inc., which was
completed on November 25, 1997, and The Morningstar Group Inc., which was
completed on November 26, 1997, which have been accounted for as poolings of
interests. The Registrant timely reported the consummation of these
acquisitions in Current Report on Form 8-K dated December 10, 1997. In
accordance with General Instruction B.3 of Form 8-K, however, no financial
statements were required to be filed in the Form 8-K dated December 10 because
substantially the same information required by Form 8-K was previously reported
by the Registrant in Registration Statements on Form S-4 relating to these
acquisitions. The supplemental consolidated financial statements included in
this Current Report on Form 8-K supplementally disclose the effect of these
poolings of interest on the historical financial statements of the Registrant as
of September 30, 1997, December 31, 1996 and 1995, for each of the three years
in the period ended December 31, 1996 and for the nine month ended September 30,
1997 and 1996. Generally accepted accounting principles proscribes giving effect
to a consummated business combination accounted for by the pooling of interests
method in financial statements that do not include the date of combination.
These supplemental financial statements do not extend through the date of
consummation, however, they will become the historical consolidated financial
statements of the Registrant after consolidated financial statements covering
the date of consummation of the business combinations are issued.
The following financial statements are filed herein:
<TABLE>
<CAPTION>
SUIZA FOODS CORPORATION
<S> <C>
Independent Auditors' Report............................................... F-1
Supplemental Consolidated Balance Sheets................................... F-3
Supplemental Consolidated Statements of Income............................. F-4
Supplemental Consolidated Statements of Stockholders' Equity............... F-5
Supplemental Consolidated Statements of Cash Flows......................... F-6
Notes to Supplemental Consolidated Financial Statements.................... F-7
</TABLE>
ITEM 7. FINANCIAL STATEMENTS, PRO FORMA FINANCIAL INFORMATION AND EXHIBITS.
(c) Exhibits.
<TABLE>
<CAPTION>
Exhibit
Number Description
- ------ -----------
<S> <C>
23.1 Consent of Deloitte & Touche LLP
</TABLE>
2
<PAGE> 3
INDEPENDENT AUDITORS' REPORT
To the Board of Directors
Suiza Foods Corporation
Dallas, Texas
We have audited the accompanying supplemental consolidated balance sheets of
Suiza Foods Corporation and subsidiaries (the "Company") as of December 31,
1996 and 1995, and the related supplemental consolidated statements of income,
stockholders' equity and cash flows for each of the three years in the period
ended December 31, 1996. The supplemental consolidated financial statements
give retroactive effect to the Company's mergers with Country Fresh, Inc. and
The Morningstar Group Inc. on November 25, 1997, and November 26, 1997,
respectively, which have been accounted for as poolings of interests as
described in the Notes 1 and 2 to the supplemental consolidated financial
statements. Generally accepted accounting principles proscribes giving effect
to a consummated business combination accounted for by the pooling of interests
method in financial statements that do not include the date of consummation.
These financial statements do not extend through the date of consummation;
however, they will become the historical consolidated financial statements of
the Company and subsidiaries after consolidated financial statements covering
the date of consummation of the business combinations are issued. These
supplemental consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
supplemental consolidated financial statements based on our audits. We did not
audit the consolidated financial statements of The Morningstar Group Inc. for
the years ended December 31, 1996, 1995 and 1994, which consolidated statements
reflect total assets of $356.0 million, $162.7 million and $165.3 million as of
December 31, 1996, 1995 and 1994, respectively, and total revenues of $394.3
million, $304.7 million and $292.3 million for the respective years then ended.
Those financial statements were audited by other auditors whose report has been
furnished to us, and our opinion, insofar as it relates to the amounts included
for The Morningstar Group Inc. for such periods, is based solely on the report
of such other auditors.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
F-1
<PAGE> 4
In our opinion, based on our audits and the report of the other auditors, such
supplemental consolidated financial statements present fairly, in all material
respects, the consolidated financial position of Suiza Foods Corporation and
subsidiaries as of December 31, 1996 and 1995, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1996, in conformity with generally accepted accounting principles
applicable after consolidated financial statements are issued for a period which
includes the date of consummation of the business combinations.
DELOITTE & TOUCHE LLP
Dallas, Texas
February 18, 1997
(November 26, 1997 as to Note 2)
F-2
<PAGE> 5
SUIZA FOODS CORPORATION
SUPPLEMENTAL CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------
DECEMBER 31,
SEPTEMBER 30, ------------------------
1997 1996 1995
------------- ------- ---------
ASSETS (UNAUDITED)
<S> <C> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 22,902 $ 24,261 $ 20,639
Receivables, net of allowance for doubtful
accounts of $10,067 (unaudited), $8,554
and $4,170, respectively 163,986 132,721 82,951
Inventories 76,358 58,926 35,034
Prepaid expenses and other current assets 12,547 9,756 5,025
Deferred income taxes 12,962 12,179 5,659
---------- ---------- ----------
Total current assets 288,755 237,843 149,308
PROPERTY, PLANT AND EQUIPMENT 406,567 250,724 181,543
DEFERRED INCOME TAXES 10,862 11,494 2,543
INTANGIBLE AND OTHER ASSETS 670,853 339,284 156,602
---------- ---------- ----------
TOTAL $1,377,037 $ 839,345 $ 489,996
========== ========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued expenses $ 202,096 $ 145,141 $ 97,150
Income taxes payable 8,856 8,115 3,906
Current portion of long-term debt 33,989 23,712 26,388
---------- ---------- ----------
Total current liabilities 244,941 176,968 127,444
LONG-TERM DEBT 732,503 432,613 239,897
OTHER LONG-TERM LIABILITIES 6,508 6,938 7,309
DEFERRED INCOME TAXES 13,414 8,972 3,437
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred stock 3,741 3,741 3,800
Common stock 303 250 210
Additional paid-in capital 276,068 164,390 104,791
Retained earnings 99,559 45,473 3,108
---------- ---------- ----------
Total stockholders' equity 379,671 213,854 111,909
---------- ---------- ----------
TOTAL $1,377,037 $ 839,345 $ 489,996
========== ========== ==========
</TABLE>
See notes to supplemental consolidated financial statements.
F-3
<PAGE> 6
SUIZA FOODS CORPORATION
SUPPLEMENTAL CONSOLIDATED STATEMENTS OF INCOME
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------------
NINE MONTHS ENDED
SEPTEMBER 30, YEARS ENDED DECEMBER 31,
-------------------------- ---------------------------------------------
1997 1996 1996 1995 1994
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
NET SALES $ 1,299,094 $ 887,103 $ 1,260,349 $ 1,065,433 $ 938,866
COST OF SALES 986,672 693,741 989,053 831,485 726,393
----------- ----------- ----------- ----------- -----------
GROSS PROFIT 312,422 193,362 271,296 233,948 212,473
OPERATING COSTS AND EXPENSES:
Selling and distribution 154,487 100,566 140,520 124,275 115,457
General and administrative 49,629 35,303 50,461 45,659 41,468
Amortization of intangibles 11,075 5,430 8,192 6,104 6,078
Merger and other costs 571 571 10,238 1,660
----------- ----------- ----------- ----------- -----------
Total operating costs and expenses 215,191 141,870 199,744 186,276 164,663
----------- ----------- ----------- ----------- -----------
INCOME FROM OPERATIONS 97,231 51,492 71,552 47,672 47,810
OTHER (INCOME) EXPENSE:
Interest expense, net 28,366 16,066 22,715 25,615 23,817
Other income, net (19,625) (4,038) (4,734) (2,378) (2,063)
----------- ----------- ----------- ----------- -----------
Total other (income) expense 8,741 12,028 17,981 23,237 21,754
----------- ----------- ----------- ----------- -----------
INCOME FROM CONTINUING OPERATIONS BEFORE
INCOME TAXES 88,490 39,464 53,571 24,435 26,056
INCOME TAXES 30,463 349 4,393 10,602 8,522
----------- ----------- ----------- ----------- -----------
INCOME FROM CONTINUING OPERATIONS
BEFORE CUMULATIVE EFFECT OF CHANGE
IN ACCOUNTING AND EXTRAORDINARY LOSS 58,027 39,115 49,178 13,833 17,534
INCOME FROM DISCONTINUED OPERATIONS 184 1,326
----------- ----------- ----------- ----------- -----------
INCOME BEFORE CUMULATIVE EFFECT OF CHANGE
IN ACCOUNTING AND EXTRAORDINARY LOSS 58,027 39,115 49,178 14,017 18,860
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING 2,272
EXTRAORDINARY LOSS FROM EARLY
EXTINGUISHMENT OF DEBT 3,270 2,215 2,215 8,462 197
----------- ----------- ----------- ----------- -----------
NET INCOME $ 54,757 $ 36,900 $ 46,963 $ 5,555 $ 16,391
=========== =========== =========== =========== ===========
NET INCOME APPLICABLE TO COMMON STOCK $ 54,533 $ 36,672 $ 46,661 $ 5,251 $ 16,391
=========== =========== =========== =========== ===========
NET INCOME PER COMMON SHARE:
Income from continuing operations before
cumulative effect of change in
accounting and extraordinary loss $ 1.83 $ 1.63 $ 1.97 $ 0.64 $ 0.76
Discontinued operations 0.01 0.06
Cumulative effect of change in accounting (0.10)
Extraordinary loss (0.10) (0.10) (0.09) (0.40) (0.01)
----------- ----------- ----------- ----------- -----------
Net income $ 1.73 $ 1.53 $ 1.88 $ 0.25 $ 0.71
=========== =========== =========== =========== ===========
WEIGHTED AVERAGE SHARES OUTSTANDING 31,526,771 23,926,430 24,768,983 21,036,608 23,106,841
=========== =========== =========== =========== ===========
</TABLE>
See notes to supplemental consolidated financial statements.
F-4
<PAGE> 7
SUIZA FOODS CORPORATION
SUPPLEMENTAL CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994, AND NINE MONTHS ENDED
SEPTEMBER 30, 1997 (UNAUDITED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------------
PREFERRED STOCK
SERIES A ADDITIONAL
8% CUMULATIVE COMMON STOCK PAID-IN RETAINED
------------------------ ----------------------
SHARES AMOUNT SHARES AMOUNT CAPITAL EARNINGS TOTAL
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, JANUARY 1, 1994 $ -- $ -- 12,316,180 $ 123 $ 95,549 $ 8,630 $ 104,302
Issuance of common stock 551,964 6 7,813 7,819
Redemption of common stock (1,250) (184) (374) (558)
Net income 16,391 16,391
---------- ---------- ---------- ---------- ---------- ---------- ----------
BALANCE, DECEMBER 31, 1994 -- -- 12,866,894 129 103,178 24,647 127,954
Issuance of common stock 289,208 3 5,370 5,373
Capital contribution 5,111 5,111
Stock splits 10,286,455 103 (103) --
Redemption of common stock and
the exchange of preferred stock 11,875 3,800 (2,463,544) (25) (8,765) (26,790) (31,780)
Preferred stock dividends (304) (304)
Net income 5,555 5,555
---------- ---------- ---------- ---------- ---------- ---------- ----------
BALANCE, DECEMBER 31, 1995 11,875 3,800 20,979,013 210 104,791 3,108 111,909
Issuance of common stock 4,480,369 45 59,599 59,644
Redemption of common and preferred
stock (184) (59) (456,559) (5) (4,296) (4,360)
Preferred stock dividends (302) (302)
Net income 46,963 46,963
---------- ---------- ---------- ---------- ---------- ---------- ----------
BALANCE, DECEMBER 31, 1996 11,691 3,741 25,002,823 250 164,390 45,473 213,854
Issuance of common stock
(unaudited) 5,251,968 53 111,678 111,731
Preferred stock dividends
(unaudited) (224) (224)
Adjustment for conforming the year-
end of Country Fresh (unaudited) (447) (447)
Net income (unaudited) 54,757 54,757
---------- ---------- ---------- ---------- ---------- ---------- ----------
BALANCE, SEPTEMBER 30, 1997 (Unaudited) 11,691 $ 3,741 30,254,791 $ 303 $ 276,068 $ 99,559 $ 379,671
========== ========== ========== ========== ========== ========== ==========
</TABLE>
See notes to supplemental consolidated financial statements.
F-5
<PAGE> 8
SUIZA FOODS CORPORATION
SUPPLEMENTAL CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------------
NINE MONTHS ENDED
SEPTEMBER 30, YEARS ENDED DECEMBER 31,
---------------------- ----------------------------------
1997 1996 1996 1995 1994
(UNAUDITED) (IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 54,757 $ 36,900 $ 46,963 $ 5,555 $ 16,391
Adjustments to reconcile net income to net cash provided
by operating activities:
Adjustment for conforming the year end of Country Fresh (447)
Income from discontinued operations (184) (1,326)
Depreciation and amortization 34,900 22,869 31,635 30,168 28,029
Extraordinary loss from early extinguishment of debt 3,270 2,215 2,215 8,462 197
Merger and other nonrecurring costs 571 571 10,238 1,660
Other 45 253 (197) 1,383 2,160
Deferred income taxes 4,291 (10,088) (13,618) 3,095 2,967
Changes in operating assets and liabilities, net of
acquisitions:
Receivables 6,519 (18,552) (10,840) (1,515) (4,744)
Inventories (7,072) (6,125) (6,322) (1,546) (150)
Prepaid expenses and other assets (1,712) (1,462) (863) 1,206 3,483
Accounts payable and accrued expenses 2,164 16,687 15,402 4,680 4,154
Income taxes payable (12,885) 104 (325) 336 (1,233)
--------- --------- --------- --------- --------
Net cash provided by continuing operations 83,830 43,372 64,621 61,878 51,588
Net cash used by discontinued operations (3,403)
--------- --------- --------- --------- --------
Net cash provided by operating activities 83,830 43,372 64,621 61,878 48,185
--------- --------- --------- --------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net additions to property, plant and equipment (41,413) (23,276) (33,794) (27,618) (17,946)
Cash outflows for acquisitions (451,815) (96,041) (256,694) (2,425) (65,220)
Other (865) 123 (359) 414 410
--------- --------- --------- --------- --------
Net cash used in continuing operations (494,093) (119,194) (290,847) (29,629) (82,756)
Net cash provided by discontinued operations 3,000 49,755
--------- --------- --------- --------- --------
Net cash used in investing activities (494,093) (119,194) (290,847) (26,629) (33,001)
--------- --------- --------- --------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from the issuance of debt 446,150 89,473 270,550 181,505 67,585
Repayment of debt (135,983) (58,968) (92,164) (177,511) (92,624)
Payments of deferred financing, debt restructuring and
merger costs (12,770) (3,220) (3,520) (9,376) (1,660)
Issuance of common stock, net of expenses 111,731 59,644 59,644 4,960 7,819
Redemption of preferred and common stock (4,304) (4,360) (38,491) (558)
Other (224) (228) (302) (304) (596)
--------- --------- --------- --------- --------
Net cash provided by (used in) financing activities 408,904 82,397 229,848 (39,217) (20,034)
--------- --------- --------- --------- --------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (1,359) 6,575 3,622 (3,968) (4,850)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 24,261 20,639 20,639 24,607 29,457
--------- --------- --------- --------- --------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 22,902 $ 27,214 $ 24,261 $ 20,639 $ 24,607
========= ========= ========= ========= ========
</TABLE>
See notes to supplemental consolidated financial statements.
F-6
<PAGE> 9
SUIZA FOODS CORPORATION
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
- --------------------------------------------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BUSINESS - Suiza Foods Corporation (the "Company" or "Suiza Foods") is a
manufacturer and distributor of fresh milk and related dairy products,
refrigerated ready-to-serve fruit drinks and coffee, refrigerated, shelf
stable and frozen food products, plastic containers and packaged ice in
the United States and Puerto Rico.
On March 31, 1995, the Company became the holding company for the
operations of Suiza Holdings, L.P. and subsidiaries ("Suiza-Puerto
Rico"); Velda Holdings, L.P.; Velda Holdings, Inc. and subsidiaries
("Velda"); and Reddy Ice Corporation ("Reddy Ice") through the issuance
of 6,313,479 shares of its common stock in exchange for all of the
outstanding equity interests of these entities. The Company accounted for
this combination using the pooling of interests method of accounting,
whereby the assets acquired and liabilities assumed are reflected in the
consolidated financial statements of the Company at the historical
amounts of these entities.
The Company and its subsidiaries provide credit terms to customers
generally ranging up to 30 days, perform ongoing credit evaluations of
their customers and maintain allowances for potential credit losses based
on historical experience. The preparation of financial statements
requires the use of significant estimates and assumptions by management;
actual results could differ from these estimates. Certain prior year
amounts have been reclassified to conform to current year presentation.
BASIS OF PRESENTATION - The supplemental consolidated financial
statements of Suiza Foods have been prepared to give retroactive effect
for all periods presented to the mergers with Country Fresh, Inc.
("Country Fresh") and The Morningstar Group Inc. ("Morningstar") on
November 25, 1997 and November 26, 1997, respectively which have been
accounted for as poolings of interest (see Note 2). Generally accepted
accounting principles proscribe giving effect to a consummated business
combination accounted for by the pooling of interests method in financial
statements that do not include the date of consummation. These financial
statements do not extend through the date of consummation; however, they
will become the historical consolidated financial statements of Suiza
Foods after consolidated financial statements covering the date of
consummation of the business combination are issued.
FISCAL YEAR - The fiscal year of the Company ends on December 31 for all
of the Company's subsidiaries except for Country Fresh, whose fiscal year
for 1996, 1995 and 1994 ended on the Saturday closest to the end of
February. During 1997, Country Fresh is changing its year end to conform
to the Company's December 31 year-end date. Accordingly, in 1997, the
interim financial data related to Country Fresh for the unaudited nine
months ended September 30, 1997, reflects the conversion of Country
Fresh's financial information to the same period as the rest of the
Company, which has resulted in nine weeks of operations of Country Fresh
included in the Company's operating results for both the unaudited nine
months ended September 30, 1997, and the year ended December 31, 1996.
PRINCIPLES OF CONSOLIDATION - The supplemental consolidated financial
statements include the accounts of the Company and its wholly owned
subsidiaries. All significant intercompany balances and transactions are
eliminated in consolidation.
F-7
<PAGE> 10
INVENTORIES - Inventories are stated at the lower of cost, the majority
of which is determined using the first-in, first-out ("FIFO") method, or
market. At December 31, 1996 and 1995, the cost of approximately 24% and
36%, respectively, of inventories were determined using the last-in,
first-out ("LIFO") method, however, there were no material differences
between the LIFO and FIFO costs of these inventories. The costs of
finished goods inventories include raw materials, direct labor and
indirect production and overhead costs.
PROPERTY, PLANT AND EQUIPMENT - Property, plant and equipment are stated
at cost. Depreciation and amortization are provided using the
straight-line method over the estimated useful lives of the assets, as
follows:
<TABLE>
<CAPTION>
ASSET USEFUL LIFE
<S> <C>
Buildings and improvements Ten to 40 years
Machinery and equipment Three to 20 years
</TABLE>
Capitalized lease assets are amortized over the shorter of their lease
term or their estimated useful lives. Expenditures for repairs and
maintenance which do not improve or extend the life of the assets are
expensed as incurred.
Intangible Assets - Intangible assets include the following intangibles
which are amortized over their related useful lives:
<TABLE>
<CAPTION>
INTANGIBLE ASSET USEFUL LIFE
<S> <C>
Goodwill Straight-line method over 20 to 40 years
Identifiable intangible assets:
Customer list Straight-line method over seven to ten years
Trademarks/trade names Straight-line method over 10 to 40 years
Noncompetition agreements Straight-line method over the terms of the agreements
Deferred financing costs Interest method over the terms of the related debt
Organization costs Straight-line method over five years
</TABLE>
The Company periodically assesses the net realizable value of its
intangible assets, as well as all other assets, by comparing the expected
future net operating cash flows, undiscounted and without interest
charges, to the carrying amount of the underlying assets. The Company
would evaluate a potential impairment if the recorded value of these
assets exceeded the associated future net operating cash flows. Any
potential impairment loss would be measured as the amount by which the
carrying value exceeds the fair value of the asset. Fair value of assets
would be measured by market value, if an active market exists, or by a
forecast of expected future net operating cash flows, discounted at a
rate commensurate with the risk involved.
INTEREST RATE AGREEMENTS - Interest rate swaps, caps and floors are
entered into as a hedge against interest exposure of variable rate debt.
Differences between amounts to be paid or received on these interest rate
agreements designated as hedges are included in interest expense as
payments are made or received. Gains or losses on other agreements not
designated as hedges are included in income as incurred. Amounts paid to
acquire interest rate caps and amounts received for interest rate floors
are amortized as an adjustment to interest expense over the life of the
related agreement.
REVENUE - Revenue is recognized when the product is shipped to the
customer.
F-8
<PAGE> 11
INCOME TAXES - All of Suiza Foods' U.S. operating subsidiaries and
Country Fresh's and Morningstar's subsidiaries have been included in
their respective consolidated tax returns. The Company's Suiza Dairy,
Suiza Fruit and Neva Plastics subsidiaries are organized as Delaware
companies and are required to file separate U.S. and Puerto Rico income
tax returns; however, since their operations are in Puerto Rico, they are
eligible for Section 936 tax credits which may reduce or eliminate U.S.
income taxes due. The Company's Garrido and Company, Inc. ("Garrido")
subsidiary is organized under the laws of the Commonwealth of Puerto Rico
and is only required to file a separate tax return in Puerto Rico.
Effective January 1, 1996, substantially all of the Company's Puerto Rico
operations are 90% exempt from Puerto Rico income taxes and 100% exempt
from property, municipal, certain excise and other taxes, and fees
pursuant to the Puerto Rico Agricultural Tax Incentives Act of 1995.
Prior to this date, only the Company's Suiza Fruit and Neva Plastics
subsidiaries had similar exemptions through separate tax grants in Puerto
Rico. These operations are, however, subject to a 10% withholding tax on
distributions from Puerto Rico to the United States.
Prior to March 31, 1995, Suiza-Puerto Rico, Velda and Reddy Ice were
separate taxpayers and income taxes were provided for in the financial
statements, where applicable, based on each company's separate income tax
return and tax status. As a result, since certain of Suiza-Puerto Rico's
operations were organized as a partnership and Reddy Ice's operations
were organized as a small business corporation under Subchapter S, no
income taxes were provided in the financial statements. However, had
these operations been subject to corporate income taxes, available net
operating losses would have been sufficient to eliminate any corporate
income taxes due.
Deferred income taxes are provided for temporary differences in the
financial statement and tax bases of assets and liabilities using current
tax rates. Deferred tax assets, including the benefit of net operating
loss carryforwards, are evaluated based on the guidelines for realization
and may be reduced by a valuation allowance.
CASH EQUIVALENTS - The Company considers all highly liquid investments
purchased with a remaining maturity of three months or less to be cash
equivalents.
INCOME PER SHARE - The Company computes income per share based on the
weighted average number of common shares outstanding during the year, as
adjusted for the stock splits (Note 11) and the exchange ratios for the
mergers, including common equivalent shares.
In March 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings
per Share." This new standard requires dual presentation of basic and
diluted earnings per share ("EPS") on the face of the consolidated income
statement and requires a reconciliation of the numerators and denominators
of the basic and diluted EPS calculations. Adoption of SFAS No. 128 is
required for the Company's year ended December 31, 1997. The following
table summarizes the Company's supplementary basic and diluted net income
per share under the provisions of SFAS No. 128:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------------------
1996 1995 1994
<S> <C> <C> <C>
Basic $ 1.99 $ .25 $ .75
============ ============ ============
Diluted $ 1.91 $ .25 $ .71
============ ============ ============
</TABLE>
F-9
<PAGE> 12
UNAUDITED INTERIM SUPPLEMENTAL FINANCIAL STATEMENTS - The Company's
supplemental consolidated balance sheet as of September 30, 1997, and the
supplemental consolidated statements of income, shareholders' equity and
cash flows for the nine months ended September 30, 1997 and 1996, have
been prepared by the Company without audit. In the opinion of management,
all adjustments (which include only normal, recurring adjustments)
necessary to present fairly the supplemental consolidated financial
position of the Company at September 30, 1997, and the supplemental
consolidated results of operations and cash flows of the Company for
the nine months ended September 30, 1997 and 1996, have been made. The
results of operations for the interim periods are not necessarily
indicative of the results to be expected for the full year.
2. MERGERS
During October 1997, the Company entered into definitive agreements to
merge with Country Fresh and Morningstar. On November 25, 1997, Country
Fresh was merged with and into the Company, and on November 26, 1997,
Morningstar was merged with and into the Company. Under the terms of the
merger agreements, Suiza Foods issued 1.9 million and 13.2 million shares
of common stock to the shareholders of Country Fresh and Morningstar,
respectively, for all of the outstanding common stock of these companies,
and .2 million and 2.9 million, respectively, of Suiza Foods replacement
stock options were issued for all of the outstanding stock options of
these companies.
The table below presents a reconciliation of revenues and net income, as
reported in the supplemental consolidated statement of income with those
previously reported by the Company. The references to Suiza Foods in this
table are to the Company's historical consolidated operating results prior
to the mergers with Country Fresh and Morningstar.
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
SEPTEMBER 30,
1997 YEARS ENDED DECEMBER 31,
-----------------------------------------
(UNAUDITED) 1996 1995 1994
Revenues:
<S> <C> <C> <C> <C>
Suiza Foods $ 644,099 $ 520,916 $ 430,466 $ 341,108
Country Fresh 255,468 353,037 336,055 310,164
Morningstar 404,813 394,306 304,730 292,314
Eliminations (5,286) (7,910) (5,818) (4,720)
----------- ----------- ----------- -----------
Total $ 1,299,094 $ 1,260,349 $ 1,065,433 $ 938,866
=========== =========== =========== ===========
Net income (loss):
Suiza Foods 32,077 25,714 (10,038) 4,048
Country Fresh 6,095 6,673 4,069 1,696
Morningstar 16,585 14,576 11,524 10,647
----------- ----------- ----------- -----------
Total $ 54,757 $ 46,963 $ 5,555 $ 16,391
=========== =========== =========== ===========
</TABLE>
Included in net income of Suiza Foods for the nine months ended September
30, 1997 and for fiscal years 1996, 1995 and 1994, are extraordinary
losses from the early extinguishment of debt of $3.3 million (net of
income tax benefit of $2.0 million), $2.2 million (net of income tax
benefit of $.9 million), $8.5 million (net of income tax benefit of $.7
million), and $.2 million, respectively. In addition, included in net
income of
F-10
<PAGE> 13
Country Fresh for fiscal year 1994 is a charge of $2.3 million (net of
income tax benefit of $1.2 million) for the cumulative effect of a change
in accounting for postretirement benefits other than pensions, and
included in net income of Morningstar in fiscal year 1995 and 1994 is
income from discontinued operations of $.2 million (net of income taxes
of $.2 million) and $1.3 million (net of income taxes of $3.4 million),
respectively,
3. ACQUISITIONS
In April 1994, Suiza Foods acquired all of the outstanding common stock
of Velda Farms, Inc. The total purchase price, including related
acquisition and financing costs, was approximately $54.8 million, which
was funded with the net proceeds from the issuance of common stock, the
proceeds from the issuance of subordinated notes, term loan and revolving
credit facility advances, and preferred stock issued to the seller. In
connection with the refinancing of debt at the date of the combination,
the term loan, revolving credit facility advances and preferred stock
were repaid.
In July 1996, Suiza Foods acquired all of the outstanding common stock of
Garrido for approximately $35.8 million, including related acquisition
and financing costs, which was funded primarily by additional term loan
borrowings under the Senior Credit Facility. As a result of the adoption
of the Puerto Rico Agricultural Tax Incentives Act of 1995, as discussed
in more detail in Note 10, the Company may be eligible for tax credits on
a portion of its investment in Garrido of between $6.2 million and $8.8
million, which are dependent on the receipt of a favorable ruling on the
availability of such tax credits from the Treasury Department in Puerto
Rico. Should a favorable ruling on these tax credits be received, the
Company will account for these tax benefits as an adjustment of the
purchase price, which would result in a reduction of goodwill.
In September 1996, Suiza Foods acquired all of the net assets of Swiss
Dairy for approximately $55.1 million, including related acquisition
costs, which was funded primarily by borrowings under the revolving
credit and acquisition facilities of the Senior Credit Facility.
On December 3, 1996, Morningstar acquired all of the outstanding stock of
Presto Food Products, Inc. ("Presto"). The Company paid approximately
$123.5 million in cash for the stock acquired and assumed approximately
$37.4 million in related liabilities. Included in the assumed liabilities
were approximately $3.2 million related to costs associated with the
involuntary termination and/or relocation of certain employees of the
acquired company. The terminated employees represent redundant and excess
personnel in the operations, marketing, selling, and general and
administrative areas.
In December 1996, Suiza Foods acquired all of the net assets of Model
Dairy, along with certain assets held by affiliates of the seller, for
approximately $27.0 million, including related acquisition costs, which
was funded primarily by borrowings under the acquisition facility of the
Senior Credit Facility.
On July 1, 1997, Suiza Foods completed the acquisition of substantially
all the assets of Dairy Fresh L.P., a Delaware limited partnership ("Dairy
Fresh"), for approximately $106.3 million (unaudited), including related
acquisition costs. Suiza Foods financed the acquisition with borrowings
under its Senior Credit Facility.
On July 31, 1997, Suiza Foods completed the purchase of all the
outstanding stock of three affiliated dairy manufacturing and
distribution companies, as well as an affiliated water bottling and
distribution company, and 16 affiliated plastic manufacturing companies
headquartered in Franklin, Massachusetts (collectively, the "Garelick
Companies"). In connection with this acquisition, the Company paid
aggregate cash consideration of approximately $299.6 million (unaudited),
including related acquisition
F-11
<PAGE> 14
costs, and issued 297,400 shares of common stock with a market value of
$10.0 million (unaudited) to acquire the outstanding stock and repay
existing indebtedness of the Garelick Companies. In connection with the
acquisition, the purchase agreement requires the payment of a contingent
purchase price based on the future performance of this operation over the
next five years. At the acquisition date, Suiza Foods issued 148,700
shares of common stock into escrow for this contingent purchase price
obligation, which will be subject to release to the sellers upon
satisfaction of these future performance requirements and will be
accounted for as an adjustment to the purchase price when this
contingency is resolved. Suiza Foods financed the acquisition with
borrowings under its Senior Credit Facility.
In addition to the above acquisitions, during 1997, 1996, 1995 and 1994,
Suiza Foods, Morningstar and Country Fresh acquired certain net assets of
and entered into noncompetition arrangements with 29 separate ice
companies, seven dairies and six food products companies for
approximately $55.8 million in 1997 (unaudited), $30.4 million in 1996,
$2.5 million in 1995 and $18.1 million in 1994, including costs and
expenses, all of which were funded by Senior Credit Facility borrowings.
The above acquisitions were accounted for using the purchase method of
accounting as of their respective acquisition dates, and accordingly,
only the results of operations of the acquired companies subsequent to
their respective acquisition dates are included in the consolidated
financial statements of the Company. At the acquisition date, the
purchase price was allocated to assets acquired, including identifiable
intangibles, and liabilities assumed based on their fair market values.
The excess of the total purchase prices over the fair values of the net
assets acquired represented goodwill. In connection with the
acquisitions, assets were acquired and liabilities were assumed as
follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------
1996 1995 1994
<S> <C> <C> <C>
Purchase prices:
Net cash paid $ 256,694 $ 2,425 $ 65,257
Notes payable and preferred stock issued 173 91 7,495
Cash acquired in acquisitions 14,937 142
--------- --------- ---------
Total purchase prices 271,804 2,516 72,894
Fair values of net assets acquired:
Fair values of assets acquired 212,112 2,317 57,090
Liabilities assumed (56,676) (10,924)
--------- --------- ---------
Total net assets acquired 155,436 2,317 46,166
--------- --------- ---------
Goodwill $ 116,368 $ 199 $ 26,728
========= ========= =========
</TABLE>
F-12
<PAGE> 15
The following table presents unaudited pro forma results of operations of
the Company as if the above 1996 acquisitions had occurred at the
beginning of 1995 and the above 1997 acquisitions had occurred at the
beginning of 1996 (in thousands, except per share data):
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
SEPTEMBER 30, YEAR ENDED DECEMBER 31,
---------------------------
1997 1996 1995
<S> <C> <C> <C>
Net sales $ 1,583,379 $ 2,014,626 $ 1,414,443
=========== =========== ===========
Income from continuing operations $ 66,989 $ 62,781 $ 19,876
=========== =========== ===========
Net income $ 63,719 $ 60,566 $ 11,598
=========== =========== ===========
Income per share $ 2.00 $ 2.42 $ .55
=========== =========== ===========
</TABLE>
The unaudited pro forma results of operations are not necessarily
indicative of what the actual results of operations of the Company would
have been had the acquisitions occurred at the beginning of 1995 or, in
the case of 1997 acquisitions, 1996, nor do they purport to be indicative
of the future results of operations of the Company.
4. INVENTORIES
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
---------------------------
1997 1996 1995
(UNAUDITED) (IN THOUSANDS)
<S> <C> <C> <C>
Raw materials and supplies $ 39,899 $ 31,878 $ 19,472
Finished goods 36,459 27,048 15,562
----------- ----------- -----------
$ 76,358 $ 58,926 $ 35,034
=========== =========== ===========
</TABLE>
5. PROPERTY, PLANT AND EQUIPMENT
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------
1996 1995
(IN THOUSANDS)
<S> <C> <C>
Land $ 31,071 $ 24,147
Buildings and improvements 104,337 78,865
Machinery and equipment 254,465 196,730
----------- -----------
389,873 299,742
Less accumulated depreciation (139,149) (118,199)
----------- -----------
$ 250,724 $ 181,543
=========== ===========
</TABLE>
F-13
<PAGE> 16
6. INTANGIBLE AND OTHER ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
1996 1995
(IN THOUSANDS)
<S> <C> <C>
Goodwill $ 256,471 $ 141,000
Identifiable intangibles 89,963 17,617
Deferred financing costs 8,933 8,738
Deposits and other 2,569 1,881
----------- -----------
357,936 169,236
Less accumulated amortization (18,652) (12,634)
----------- -----------
$ 339,284 $ 156,602
=========== ===========
</TABLE>
7. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------
1996 1995
(IN THOUSANDS)
<S> <C> <C>
Accounts payable $ 82,947 $ 61,207
Accrued payroll and benefits 19,836 13,117
Accrued insurance 10,654 9,333
Other 31,704 13,493
----------- -----------
$ 145,141 $ 97,150
=========== ===========
</TABLE>
8. LONG-TERM DEBT
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
----------------------------
1997 1996 1995
(IN THOUSANDS)
(UNAUDITED)
<S> <C> <C> <C>
Senior Credit Facilities:
Revolving loan facilities $ 29,800 $ 38,949 $ 20,900
Acquisition facilities 235,000 69,100
Term loans 485,000 295,000 175,750
Industrial development revenue bonds 13,145 13,355 14,050
Subordinated notes 36,000 51,101
Capital lease obligations and other 3,547 3,921 4,484
----------- ----------- -----------
766,492 456,325 266,285
Less current portion (33,989) (23,712) (26,388)
----------- ----------- -----------
$ 732,503 $ 432,613 $ 239,897
=========== =========== ===========
</TABLE>
F-14
<PAGE> 17
SENIOR CREDIT FACILITIES - Prior to the mergers discussed in Note 2,
Suiza Foods, Morningstar and Country Fresh each maintained separate
senior credit facilities with separate bank groups. These senior credit
facilities provided for aggregate borrowings of $500.0 million,
comprising (i) $300.0 million in term loan facilities, (ii) $110.0
million in revolving credit facilities and (iii) a $90.0 million
acquisition facility. These facilities provided for variable interest
rates based on either LIBOR or prime rates, plus an interest rate margin.
At December 31, 1996, the interest rates on these facilities ranged from
6.95% to 7.2%.
On November 26, 1997, the Company entered into a new credit facility with
a group of lenders, including First Union National Bank of North
Carolina, as administrative agent, and The First National Bank of
Chicago, as syndication agent, which provide for an aggregate senior
credit facility (the "Senior Credit Facility") of $1.25 billion comprised
of a $550.0 million term loan facility and a $700.0 million revolving
credit facility. The proceeds from this new facility were used to repay
all amounts due under the separate Suiza Foods, Morningstar and Country
Fresh senior credit facilities. Under the terms of the Senior Credit
Facility, the term loan is amortized, on a quarterly basis, over six
years in increasing amounts beginning March 31, 1998, and the revolving
credit facility expires on December 31, 2003. Amounts outstanding under
the Senior Credit Facility bear interest at a rate per annum equal to one
of the following rates, at the Company's option: (i) a base rate equal to
the higher of the Federal Funds rate plus 50 basis points or the prime
rate or (ii) The London Interbank Offering Rate ("LIBOR") plus a margin
that varies from 40 to 100 basis points depending on the Company's ratio
of defined indebtedness to EBITDA (as defined in the Senior Credit
Facility). The Company pays a commitment fee on unused amounts of the
revolving credit facility that ranges from 15 to 25 basis points, based
on the Company's ratio of defined indebtedness to EBITDA. Loans under the
Senior Credit Facility are collateralized by substantially all the
Company's assets.
INDUSTRIAL DEVELOPMENT REVENUE BONDS - Country Fresh and Morningstar each
have revenue bonds outstanding, certain of which require aggregate annual
sinking fund redemptions aggregating $.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
the revenue bonds is due semiannually at interest rates that vary based
on market conditions. At December 31, 1996, the interest rates on the
revenue bonds ranged from 3.4% to 4.3%.
SUBORDINATED NOTES - On March 31, 1995, the Company issued subordinated
notes, which carried interest rates ranging from 12% to 15%, to replace
certain existing subordinated notes. On April 22, 1996, the Company used
$15.7 million of the net proceeds from its initial public offering to
repay all the outstanding principal balances of the 15% subordinated
notes, and on January 28, 1997, the Company repaid the remaining
outstanding principal balances of these subordinated notes with a portion
of the proceeds from the sale of common stock.
OTHER DEBT - Other debt includes various promissory notes for the
purchase of property, plant and equipment and capital lease obligations.
The various promissory notes payable provided for interest at rates
ranging from 7.25% to prime plus 1% and were payable in monthly
installments of principal and interest until maturity, when the remaining
principal balance was due. Capital lease obligations represent machinery
and equipment financing obligations which are payable in monthly
installments of principle and interest and are collateralized by the
related assets financed.
INTEREST RATE AGREEMENTS - The Company has interest rate derivative
agreements in place that have been designated as hedges against the
Company's variable interest rate exposure on its loans under the Senior
Credit Facility. At December 31, 1996, the Company had interest rate
derivative agreements in place, including interest rate caps and interest
rate swaps, which have been designated as hedges against the
F-15
<PAGE> 18
Company's variable interest rate exposure on its loans under its various
senior credit facilities. The interest rate caps have aggregate notional
amounts of $74.0 million, $14.0 million of which matures in May 1997 and
$60.0 million of which matures in March 2000, and caps interest on LIBOR
loans at 7.5% and 8.0%, respectively, plus the applicable LIBOR margin.
The interest rate swaps have aggregate notional amounts of $105.0 million
and mature in December 1997 and June 1998 and fix the interest rates on
LIBOR loans at approximately 6.0%, plus the applicable LIBOR margin.
These derivative agreements provide hedges for senior credit facility
loans by limiting or fixing the LIBOR interest rates specified in the
senior credit facilities (5.6% at December 31, 1997) at the above rates
until the indicated expiration dates of these interest-rate-derivative
agreements. The original costs and premiums of these derivative
agreements are being amortized on a straight-line basis as a component of
interest expense. The Company has designated these interest rate
agreements as hedges against its interest rate exposure on its variable
rate loans under the senior credit facilities.
The Company is exposed to market risk under these arrangements due to the
possibility of exchanging a lower interest rate for a higher interest
rate. The counterparties are major financial institutions and the risk of
incurring losses related to credit risk is considered by the Company to
be remote.
DEBT COVENANTS - The Company's Senior Credit Facility and its prior
facilities contain various financial and other restrictive covenants and
requirements that the Company maintain certain financial ratios,
including leverage (computed as the ratio of the aggregate outstanding
principal amount of defined indebtedness to EBITDA, as defined), fixed
charges (computed as the ratio of EBITDA to defined fixed charges),
interest coverage (computed as the ratio of EBITDA to defined interest
expense) and minimum net worth. The Senior Credit Facility also contains
limitations on capital expenditures, investments, the payment of
dividends and the incurrence of additional indebtedness and requires
certain mandatory prepayments from the proceeds of certain dispositions
of property.
SCHEDULED MATURITIES - The scheduled maturities of long-term debt, which
include capitalized lease obligations, at December 31, 1996, were as
follows (in thousands):
<TABLE>
<S> <C>
1997 $ 23,712
1998 37,232
1999 47,047
2000 67,537
2001 75,664
Thereafter 205,133
--------
$456,325
========
</TABLE>
9. LEASES
The Company leases certain property, plant and equipment used in its
operations under both capital and operating lease agreements. Such
leases, which are primarily for machinery and equipment and vehicles,
have lease terms ranging from one to nine years. Certain of the operating
lease agreements require the payment of additional rentals for
maintenance, along with additional rentals, based on miles driven or
units produced. Rent expense, including additional rent, was $15.0
million, $12.5 million and $10.5 million for the years ended December 31,
1996, 1995, and 1994, respectively.
F-16
<PAGE> 19
The composition of capital leases which are reflected as property, plant
and equipment in the balance sheets is as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------
1996 1995
----------- -----------
(IN THOUSANDS)
<S> <C> <C>
Machinery and equipment $ 812 $ 1,370
Less accumulated amortization (366) (415)
----------- -----------
$ 446 $ 955
=========== ===========
</TABLE>
Future minimum payments at December 31, 1996, under noncancelable capital
and operating leases with terms in excess of one year are summarized
below (in thousands):
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES
---------- ----------
<C> <C> <C>
1997 $ 185 $ 9,524
1998 152 8,216
1999 112 6,314
2000 5,182
2001 2,998
Thereafter 4,153
---------- ----------
Total minimum lease payments 449 $ 36,387
==========
Less amount representing imputed interest (27)
----------
Present value of capitalized lease obligations $ 422
==========
</TABLE>
10. INCOME TAXES
The provisions for income taxes, excluding the tax benefits of $.9
million in 1996 and $.5 million in 1995 and tax expense of $2.2 million
in 1994 applicable to the discontinued operations, the cumulative effect
of the change in accounting and extraordinary losses, are as follows (in
thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
Current taxes payable:
Federal $ 12,054 $ 6,858 $ 4,496
State 2,047 836 1,118
Deferred income taxes (9,708) 2,908 2,908
----------- ----------- -----------
$ 4,393 $ 10,602 $ 8,522
=========== =========== ===========
</TABLE>
F-17
<PAGE> 20
The following is a reconciliation of income taxes reported in the
statements of operations:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------
1996 1995 1994
------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Tax expense at statutory rates $18,648 $ 8,317 $ 9,087
State income taxes 1,330 1,091 918
Tax expense (benefit) from tax-exempt earnings (losses) (2,711) 268 (1,401)
Puerto Rico tax credits (11,750)
Utilization of previously unrecognized deferred
tax assets (2,265) (1,405) (1,107)
Nondeductible expenses 486 2,314 718
Other 655 17 307
------- ------- -------
$ 4,393 $10,602 $ 8,522
======= ======= =======
</TABLE>
The tax effects of temporary differences giving rise to deferred income
tax assets and liabilities were:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1996 1995
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Deferred income tax assets:
Asset valuation reserves $ 2,992 $ 1,479
Nondeductible accruals 10,300 9,734
Puerto Rico tax credits 10,076
Net operating loss carryforwards 91 2,374
Valuation allowance (5,062)
-------- -------
23,459 8,525
Deferred income tax liabilities:
Depreciation and amortization (8,621) (2,827)
Foreign distributions and other (137) (933)
-------- -------
(8,758) (3,760)
-------- -------
Net deferred income tax asset $ 14,701 $ 4,765
======== =======
</TABLE>
These net deferred income tax assets are classified in the consolidated
balance sheet as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1996 1995
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Current assets $ 12,179 $ 5,659
Noncurrent assets 11,494 2,543
Noncurrent liabilities (8,972) (3,437)
-------- -------
$ 14,701 $ 4,765
======== =======
</TABLE>
In prior years, the Company had established valuation allowances for
certain deferred tax assets related to net operating loss carryforwards
of Morningstar created prior to its financial restructuring and net
F-18
<PAGE> 21
operating loss carryforwards of the Company's Suiza Dairy subsidiary in
Puerto Rico, which under Puerto Rico law were only available for
utilization against future taxable income of this subsidiary. Because of
the continuing operating losses, the Company was unable to determine in
those years that it was more likely than not that these net deferred tax
assets would be realized. During 1995 and 1994, Morningstar realized $5.6
million and $4.2 million, respectively, of these deferred tax assets,
which was treated as an adjustment to its purchase price related to the
restructuring, and thus reduced goodwill. During 1996, the deferred tax
asset related to the Puerto Rico net operating loss carryforwards and the
related valuation allowance was substantially eliminated as a result of
the reduction in tax rates in Puerto Rico from the Puerto Rico
Agricultural Tax Incentives Act of 1995.
In December 1995, the Commonwealth of Puerto Rico adopted the Puerto Rico
Agricultural Tax Incentives Act of 1995 (the "Act"), which reduced the
effective income tax rate for qualified agricultural business from 39% to
3.9% and provided for a 50% tax credit for certain "eligible investments"
in qualified agricultural businesses in Puerto Rico. During 1996, the
Company made investments in its Puerto Rico dairy, fruit, plastics and
Garrido operations, all of which were certified as qualified agricultural
businesses in Puerto Rico during 1996.
During 1996, the Company recognized $15.75 million in tax credits related
to qualifying investments in its Puerto Rico dairy subsidiary. Of this
amount, the Company (i) sold $4.0 million of tax credits to third
parties, resulting in a cash gain of $3.4 million (net of a discount and
related expenses), which is recorded in other income, and (ii) recognized
a deferred tax asset for the remainder of the tax credit in the amount of
$11.75 million, resulting in a corresponding credit to tax expense. These
tax credits can be used by the Company to eliminate both Puerto Rico
income taxes and the 10% Puerto Rico withholding tax on distributions
from the Company's Puerto Rico operations.
In 1996, the Company did not recognize any of the potential tax credits
related to its investments in its Puerto Rico fruit, plastics and coffee
operations since certain rulings in 1996 by Puerto Rico tax authorities
created uncertainty as to whether these investments met the eligible
investment criteria of the Act and whether these additional tax credits
had been earned. During the first quarter of 1997, however, the Company
obtained a ruling from the Commonwealth of Puerto Rico confirming that
its investments in its Suiza-Puerto Rico fruit and plastics subsidiaries
qualified for the 50% tax credit. Accordingly, in March 1997, the Company
recognized a nonrecurring gain of $18.1 million, net of discounts and
related expenses ($11.5 million after income taxes) for earned tax
credits that at March 31, 1997, it had agreed to sell to third parties;
during the second quarter of 1997, the Company completed the sale of
substantially all of these tax credits to the third parties.
The Company is currently investigating whether its investment in its
coffee business will qualify for additional tax credits based on recent
rulings by Puerto Rico tax authorities and is awaiting a ruling from the
Treasury Department in Puerto Rico on the availability of such tax
credits. If the Company ultimately qualifies for such credits, it will
account for these tax benefits as an adjustment of the purchase price of
the coffee business, which would result in a reduction of goodwill.
11. STOCKHOLDERS' EQUITY
CAPITAL SHARES - Authorized capital shares of the Company include
1,000,000 shares of preferred stock with a par value of $.01 per share
and 100,000,000 shares of common stock with a par value of $.01 per
share.
The rights and preferences of preferred stock are established by the
Company's Board of Directors upon issuance. In connection with the Country
Fresh merger, the Company issued 11,691 shares of Series A preferred stock
in exchange for all the outstanding shares of Country Fresh preferred
stock. The Series A preferred
F-19
<PAGE> 22
stock has a par value of $320 per share, bears a cumulative dividend rate
of 8% and is redeemable only at the Company's option.
On March 31, 1995, the Company issued 6,313,479 shares of common stock in
exchange for all of the outstanding equity interests of Suiza-Puerto
Rico, Velda and Reddy Ice, including profits interests that were granted
to certain individuals as compensation for services in identifying,
structuring and negotiating certain acquisitions. Immediately prior to
the combination date, the existing investors fixed this profits interest
by mutual agreement and exchanged equity interests among investors and
these individuals. In connection with this exchange, the Company recorded
a compensation expense charge to merger expense of $5.1 million, which
approximated the fair value of these interests, and resulted in a capital
contribution in the same amount.
STOCK SPLITS - On February 21, 1995, the Country Fresh shareholders
approved a recapitalization plan in which it converted its existing
common shares into 40 shares of no par value voting common stock,
redeemed 3,682,520 of these shares of common stock and converted 475,000
shares of common stock into 11,875 shares of Series A preferred stock. On
February 28, 1996, Suiza Foods' Board of Directors authorized a 69 for 1
stock split in the form of a common stock dividend payable to
stockholders of record on February 29, 1996. All references in the
supplemental consolidated financial statements to number of common shares
outstanding and per share amounts, and all references to common stock
issued, stock options and related prices in the notes to the supplemental
consolidated financial statements have been restated to reflect the
Country Fresh recapitalization plan and Suiza Foods' stock split.
STOCK OFFERINGS - On April 22, 1996, Suiza Foods sold 3,795,000 shares of
common stock, $.01 par value per share, in an initial public offering at
a price to the public of $14.00 per share. Following this offering, the
Company had 10,108,479 shares of common stock issued and outstanding. The
public offering provided net cash proceeds to the Company of
approximately $48.6 million. Of this amount, $31.1 million was used to
repay senior debt, $15.7 million was used to repay the Company's 15%
subordinated notes, and $1.8 million was used to pay prepayment penalties
related to the early extinguishment of the 15% subordinated notes. As a
result of these transactions, the Company recorded a $2.2 million
extraordinary loss from extinguishment of debt which included $1.8
million in prepayment penalties and $1.3 million for the write-off of
deferred financing costs related to the repaid debt, net of a tax benefit
of $0.9 million. In addition, on August 7, 1996, the Company sold 625,000
shares of its common stock at a price of $16.00 per share in a private
placement to a single investor. Following the private sale, the Company
had 10,739,729 shares of common stock issued and outstanding. On January
28, 1997, the Company sold 4,270,000 shares of common stock, $.01 par
value per share, in a public offering at a price to the public of $22.00
per share. Following this offering, the Company had 15,011,729 shares of
common stock issued and outstanding. The public offering provided net
cash proceeds to the Company of approximately $89.0 million. Of this
amount, $36 million was used to repay subordinated notes, and $4.3
million was used to pay prepayment penalties related to the early
extinguishment of the subordinated notes, which, along with the remaining
balance of unamortized deferred loan costs, have been reported as an
extraordinary loss from the early extinguishment of debt during the
unaudited nine-month period ended September 30, 1997. The remainder of
the net proceeds were used to repay a portion of the outstanding balance
of the acquisition facility of the Company's Senior Credit Facility. Had
these sales of common stock occurred on January 1, 1996, the supplemental
pro forma net earnings per share before extraordinary losses from the
early extinguishment of debt for the year ended December 31, 1996, would
have decreased by $.16 to $1.81.
STOCK OPTION AND RESTRICTED STOCK PLANS - On March 31, 1995, Suiza Foods
adopted an exchange option and restricted stock plan, whereby the
outstanding stock options previously granted were converted into options
to acquire 586,523 shares of common stock on substantially the same terms
as the prior
F-20
<PAGE> 23
options. These options are exercisable at prices ranging from $.03 to
$6.79 per share, which approximated the fair market value of such shares
at the date of original grant. At December 31, 1996, 577,760 of such
options were outstanding, of which 480,450 were exercisable at prices
ranging from $.03 to $6.79 per share. The options vest ratably in five
annual increments and may be exercised, to the extent vested, over the
ten-year period following the award date.
Effective March 31, 1995, Suiza Foods also adopted the Option and
Restricted Stock Plan (the "Plan"), which provides for grants of
incentive and nonqualified stock options and awards of restricted stock
to directors and key employees of the Company or its subsidiaries of up
to 1,069,500 shares, provided that no more than 379,500 shares may be
awarded as restricted stock. Under the terms of the Plan, the options
vest ratably over a three year period, except for options granted to
outside directors, which vest immediately. The Plan also provides that
the exercise price of stock options will not be less than the fair market
value on the date of grant, and in the case of an incentive stock option
granted to an employee owning more than 10% of the common stock on the
date of grant, not less than 110% of the fair market value. On March 31,
1995, Suiza Foods' Board of Directors granted 474,375 options pursuant to
the Plan at an exercise price per share of $10.51. In addition, during
the remainder of 1995, Suiza Foods granted options for an additional
3,450 shares at the same exercise price per share. At December 31, 1995,
477,825 options were outstanding at an exercise price of $10.51 per
share, of which 3,450 shares were exercisable. In 1996, Suiza Foods
granted additional options to purchase 398,153 shares at exercise prices
ranging from $12.32 to $17.50 per share. At December 31, 1996, 873,978
options were outstanding at exercise prices ranging from $10.51 to $17.50
per share, of which 739,035 shares were exercisable.
Morningstar also had several stock-based compensation plans for its key
employees and directors which provided for grants of incentive and
nonqualified stock options. In connection with the merger discussed in
Note 2, all the outstanding Morningstar options became exercisable
pursuant to the change in control provisions of such options and were
exchanged for Suiza Foods stock options at an exchange ratio of .85 Suiza
Foods stock options for each Morningstar stock option, with the exercise
prices adjusted for such exchange ratios. These replacement options, as
adjusted for the exchange ratio, were exercisable at prices ranging from
$3.01 to $12.06 per share, which approximated the fair market value of
such shares at the date of grant and expired ten years from the date of
grant. Replacement options for 1,719,719 shares were exercisable at the
date of grant and replacement options for 1,081,253 shares were
exercisable over a three-year period. Replacement options for 1,074,400,
94,350 and 790,500 shares were granted during 1996, 1995 and 1994,
respectively. During 1996, 1995 and 1994, replacement options for 37,273,
266,444 and 538,718 shares, respectively, were exercised, and during
1995, replacement options for 96,942 were canceled. There were 1,924,495
and 887,368 of such replacement options outstanding at December 31, 1996
and 1995, respectively, of which 1,469,745 and 685,918 replacement
options were exercisable at prices ranging from $3.01 to $12.06 per
share.
Country Fresh also had a stock option plan that provided for the grant of
stock options to acquire common stock to officers and key employees, at
an exercise price equal to the fair market value of such shares at the
date of grant. The options vest ratably over seven years from the date of
grant and expire 12 years from the date of grant. In connection with the
merger discussed in Note 2, all the outstanding Country Fresh options
became exercisable pursuant to the change in control provisions of such
options and were exchanged for Suiza Foods stock options at an exchange
ratio of .5454 Suiza Foods stock options for each Country Fresh stock
option, with the exercise price adjusted for such exchange ratio.
Replacement options, as adjusted for the exchange ratio, for 229,068
shares were granted during 1994 to a key employee at $10.08 per share. At
December 31, 1996 and 1995, all these replacement options were
outstanding, and replacement options for 65,448 shares were exercisable
at December 31, 1996.
F-21
<PAGE> 24
The Company applies APB Opinion No. 25 and related interpretations in
accounting for its stock option plans, and accordingly, no compensation
has been recognized since stock options granted under these plans were at
exercise prices which approximated market value at the grant date. Had
compensation expense been determined for current period stock option
grants using fair value methods provided for in SFAS No. 123, the
Company's pro forma net income and net earnings per common share would
have been the amounts indicated below:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1996 1995
---------- --------
(IN THOUSANDS,
EXCEPT SHARE DATA)
<S> <C> <C>
Compensation cost $ 7,886 $ 869
Net income:
As reported 46,963 5,555
Pro forma 42,113 5,021
Net income per share:
As reported 1.88 0.25
Pro forma 1.69 0.22
Stock option share data:
Stock options granted during period 1,472,553 572,175
Weighted average option fair value (a) $ 10.64 $ 6.70
</TABLE>
(a) Calculated in accordance with the Black-Scholes option pricing
model, using the following assumptions: expected volatility of 30%
to 40%; expected dividend yield of 0%; expected option term of four
to ten years and risk-free rate of returns as of the date of grant
which ranged from 5.64% to 7.15% based on the yield of ten-year U.S.
treasury securities.
STOCK REDEMPTIONS - During 1996, 1995 and 1994, Country Fresh made
incidental repurchases of 109, 532 and 1,250 shares, as adjusted for the
exchange ratio, respectively, of its common stock in addition to the
2,267,512 shares of common stock repurchased or exchanged in 1995
pursuant to the February 21, 1995, recapitalization plan discussed above.
In addition, during 1996 and 1995, Morningstar repurchased, through open
market or negotiated transactions, 456,450 shares and 195,500 shares, as
adjusted for the exchange ratio, respectively, of its common stock at a
cost of $4.3 million and $1.8 million, respectively. These repurchased
shares have been treated as effectively retired in the supplemental
consolidated financial statements.
F-22
<PAGE> 25
12. EMPLOYEE RETIREMENT AND PROFIT SHARING PLANS
The Company sponsors various defined benefit and defined contribution
retirement plans, as well as various employee savings and profit sharing
plans and contributes to various multi-employer pension plans on behalf
of its employees. Substantially all full-time union and non-union
employees who have completed one or more years of service and have met
other requirements pursuant to the plans are eligible to participate in
these plans. During 1996, 1995 and 1994, the Company's retirement and
profit sharing plan expenses were as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------
1996 1995 1994
------- ------- ------
(IN THOUSANDS)
<S> <C> <C> <C>
Defined benefit plans $1,136 $ 887 $ 847
Defined contribution plans 1,725 1,531 1,385
Multi-employer pension plans 2,493 1,991 1,980
------ ------ ------
$5,354 $4,409 $4,212
====== ====== ======
</TABLE>
DEFINED BENEFIT PLANS - The benefits under the Company's defined benefit
plans are based on years of service and employee compensation. The
Company's funding policy is to contribute annually the minimum amount
required under ERISA regulations. Plan assets consist principally of
investments made with insurance companies under a group annuity contract.
The following table sets forth the funded status of the Company's defined
benefit plans and the amounts recognized in its supplemental consolidated
balance sheets:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1996 1995
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Actuarial present value of benefit obligations:
Accumulated benefit obligation including vested benefit
obligations of $11,973,482 in 1996 and $10,462,548 in 1995 $ 12,508 $ 10,943
======== ========
Projected benefit obligation for service rendered to date $ 14,980 $ 12,668
Plan assets, at estimated fair value 14,056 11,624
-------- --------
Projected benefit obligation in excess of the plan assets 924 1,044
Unrecognized net gain from past experience and the effect of
changes in assumptions 1,361 1,742
Unrecognized prior service cost (874) (938)
Unrecognized initial net obligation at December 1, 1986, and
March 1, 1987, amortized over 19 and 16 years, respectively (735) (823)
Adjustment required to reflect the minimum liability 1,232
-------- --------
Accrued pension costs 676 2,257
Less current portion (200) (250)
-------- --------
Long-term $ 476 $ 2,007
======== ========
</TABLE>
F-23
<PAGE> 26
Net periodic pension costs 1996, 1995 and 1994 included the following
components (in thousands):
<TABLE>
<CAPTION>
1996 1995 1994
------- ------- -------
<S> <C> <C> <C>
Service cost-benefits earned during the year $ 1,023 $ 748 $ 724
Interest cost on projected benefit obligation 979 890 824
Actual return on plan assets (1,673) (1,824) (316)
Net amortization and deferral 807 1,073 (385)
------- ------- -----
$ 1,136 $ 887 $ 847
======= ======= =====
</TABLE>
Assumptions used in the actuarial valuations were:
<TABLE>
<CAPTION>
1996 1995 1994
------ ------ ------
<S> <C> <C> <C>
Discount rates 7.50 % 7.25 % 8.25 %
Rates of increase in compensation levels 4.00 3.75 4.75
Expected long-term rate of return on assets 9.00 9.00 9.00
</TABLE>
DEFINED CONTRIBUTION PLANS - Certain of the Company's non-union personnel
may elect to participate in savings and profit sharing plans sponsored by
the Company. These plans generally provide for salary reduction
contributions to the plans on behalf of the participants of between 6%
and 8% of a participant's annual compensation and provide for employer
matching and profit sharing contributions as determined by the Board of
Directors. In addition, certain union hourly employees are participants
in Company-sponsored defined contribution plans which provide for
employer contributions in various amounts ranging from $19 to $35 per pay
period per participant.
MULTI-EMPLOYER PENSION PLANS - Certain of the Company's subsidiaries
contribute to various multi-employer union pension plans, which are
administered jointly by management and union representatives and cover
substantially all full-time and certain part-time union employees who are
not covered by the Company's other plans. The pension expense for these
plans approximated $.2 million during 1996. The Multi-Employer Pension
Plan Amendments Act of 1980 amended ERISA to establish funding
requirements and obligations for employers participating in
multi-employer plans, principally related to employer withdrawal from or
termination of such plans. The Company could, under certain
circumstances, be liable for unfunded vested benefits or other expenses
of jointly administered union/management plans. At this time, the Company
has not established any liabilities because withdrawal from these plans
is not probable or reasonably possible.
13. POSTRETIREMENT BENEFITS OTHER THAN PENSIONS
One of the Company's subsidiaries provides health care benefits to
certain retirees who are covered under specific group contracts.
Postretirement health care coverage on subsequent employment contracts
has been eliminated; therefore, no additional employees will be eligible
under current agreements for such benefits. As defined by the specific
group contract, qualified covered associates may be eligible to receive
major medical insurance with deductible and coinsurance provisions
subject to certain lifetime maximums.
Effective at the beginning of 1994, the Company adopted SFAS No. 106,
"Employers' Accounting for Postretirement Benefits Other Than Pensions."
Under SFAS No. 106, the Company is required to accrue the estimated cost
of retiree benefit payments, other than pensions, during the employee's
active service period. As permitted by SFAS No. 106, the Company elected
to recognize immediately the cumulative effect of the change in
accounting during 1994, which resulted in a charge for the cumulative
F-24
<PAGE> 27
effect of the change in accounting for postretirement benefits other than
pensions of $2.3 million, net of the income tax benefit of $1.2 million.
The accumulated postretirement benefit obligation amounted to $3.5
million at both December 31, 1996 and 1995, respectively, of which $3.2
million and $3.3 million, respectively, were considered long-term
liabilities. Postretirement health care expense for 1996 and 1995
consisted of interest cost on the accumulated postretirement benefit
obligation of $.2 million and $.3 million, respectively. The Company
continues to fund the cost of these benefits as incurred, which required
payments of $.3 million, $.2 million and $.1 million in 1996, 1995 and
1994, respectively.
The assumed health care cost trend rate used in measuring the accumulated
postretirement benefit obligation was 8.58% for the year ended December
31, 1996, gradually declining at a rate of approximately 1% per year to
5.25% in 2005 and remaining at that level thereafter, and the assumed
discount rate in determining the accumulated postretirement benefit
obligation was 7.50%. A one-percentage-point increase in the assumed
health care cost trend rate for each year would increase the accumulated
postretirement benefit cost and the service cost plus interest cost by
between approximately 8% and 9%.
14. MERGER AND OTHER COSTS
MERGER AND OTHER COSTS - During 1995 and 1994, the Company incurred
merger and other costs of $10.2 million and $1.7 million, respectively,
which consisted of the costs associated with the negotiation of the
merger and preparation of related merger documents and agreements,
financial consulting costs and other related costs of $8.8 million and
$1.4 million in 1995 and 1994, respectively; and other non-operating
costs of $1.4 million and $.3 million, respectively. During 1995, these
other merger costs included a one-time $.5 million payment to cancel an
existing management consulting agreement; a one-time tax cost of $1.5
million to convert the Company's Puerto Rico operating subsidiaries to
United States corporations; the write-off of $.4 million in unamortized
organization costs; and $5.1 million to recognize compensation expense
related to the issuance of common stock in exchange for a negotiated
profits interest, which resulted in a capital contribution in the same
amount. Other non-operating costs included $.3 million of bank fees in
1994 related to the funding of bridge loans to repay certain
indebtedness, and during 1995, $.7 million of costs associated with
several uncompleted acquisitions and $.7 million of costs associated with
an uncompleted debt offering. During 1996, the Company expensed
non-operating costs of $.6 million in connection with fees and expenses
paid to amend its Senior Credit Facility.
DISCONTINUED OPERATIONS - In April 1994, Morningstar completed the
divestiture of Velda for $48.0 million in cash and $3.0 million of
preferred stock. The majority of the cash proceeds were used to pay down
bank debt and to fund federal and state taxes generated by the gain on
the sale. The sale of Velda concluded the divestiture of Morningstar's
regional dairies, which were considered a separate segment of its
business. As such, these operations have been restated and presented in
the supplemental consolidated financial statements as discontinued
operations. In connection with the sale, Morningstar recognized income
from discontinued operations and a gain on the sale of $1.3 million, net
of income taxes of $3.4 million. During 1995, the preferred stock was
redeemed, resulting in an additional gain of $.2 million, net of income
taxes of $.2 million, which was reflected in discontinued operations. Net
sales of this discontinued operation was $38.6 million in 1994.
EXTRAORDINARY LOSS - During 1996, 1995 and 1994, as a result of the
repayment of the outstanding indebtedness, the Company expensed
approximately $2.2 million (net of income tax benefit of $.9 million),
$8.5 million (net of income tax benefit of $.7 million) and $.2 million,
respectively, of debt
F-25
<PAGE> 28
issuance, legal and other costs associated with extinguishment of prior
credit facilities. These amounts have been classified as an extraordinary
loss in accordance with the provisions of SFAS No. 4, "Reporting Gains and
Losses From the Extinguishment of Debt."
15. SUPPLEMENTAL CASH FLOW INFORMATION
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------
1996 1995 1994
------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Cash paid for interest $21,896 $23,719 $21,939
Cash paid for taxes 10,477 3,199 7,075
Noncash transactions:
Issuance of notes payable and preferred stock in
connection with business and property acquisitions 1,993 2,301 9,147
Distribution of investment and related debt in a bread
bag manufacturer to shareholders of Reddy Ice 1,534
Compensation expense recorded as a capital contribution 5,111
Subordinated notes and preferred stock issued in lieu of
interest and dividends 236 671 627
Collection of receivable through redemption of common
stock in recapitalization 1,217
</TABLE>
16. COMMITMENTS AND CONTINGENCIES
LITIGATION - The Company and its subsidiaries are parties, in the
ordinary course of business, to certain claims and litigation. In
management's opinion, the settlement of such matters is not expected to
have a material impact on the consolidated financial statements.
EMPLOYMENT AGREEMENTS - As of December 31, 1996, the Company had entered
into employment agreements with certain key management personnel which
provided for minimum compensation levels and incentive bonuses along with
provisions for termination of benefits in certain circumstances and for
certain severance payments in the event of a change in control (as
defined). The Company also entered into a consulting and noncompetition
arrangement with a former officer providing for monthly payments of
$12,500 for services to be rendered in the future, which expires in March
1998.
17. RELATED PARTY TRANSACTIONS
Prior to March 31, 1995, the Company had consulting agreements with
certain stockholders and affiliates requiring the payment of monthly
consulting fees, plus expenses, in consideration for financial advisory
and oversight services provided to it by such stockholders. These
consulting agreements, which were cancelable only at the option of such
stockholders over their term, were canceled in 1995. During the years
ended December 31, 1995 and 1994, the Company expensed $.4 million and
$.1 million, respectively, plus expenses under the provisions of these
agreements, which are included in general and administrative expenses. In
addition, the Company paid a stockholder and an affiliate of one of its
stockholders investment banking fees totaling $1.4 million, along with
related expenses, during the year ended December 31, 1994, for
acquisition and financing services, which were included as part of the
costs and expenses of the acquisition.
F-26
<PAGE> 29
18. FAIR VALUE OF FINANCIAL INSTRUMENTS
Pursuant to SFAS No. 107, "Disclosure About Fair Value of Financial
Instruments," the Company is required to disclose an estimate of the fair
value of the Company's financial instruments as of December 31, 1996 and
1995. Differences between the historical presentation and estimated fair
values can occur for many reasons, including taxes, commissions,
prepayment penalties, make-whole provisions and other restrictions as
well as the inherent limitations in any estimation technique. Due to
their near-term maturities, the carrying amounts of accounts receivable
and accounts payable are considered equivalent to fair value. In
addition, because the interest rates on the Company's revolving credit
and term loan facilities and certain other debt are variable, their fair
values approximate their carrying values. Certain of the Company's
long-term debt bears fixed interest rates and is privately placed with
unique terms and no active market. The fair value of such long-term debt
was determined by discounting future cash flows at current market yields.
In addition, the Company has entered into various interest rate
agreements to reduce the Company's sensitivity to changes in interest
rates on its variable rate debt. The fair values of these instruments
were determined based on current values for similar instruments with
similar terms. The following is a summary of the asset (liability) values
for both the carrying values and fair values of such instruments:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------------------------------
1996 1995
HISTORICAL HISTORICAL
CARRYING CARRYING
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
---------- ---------- ---------- ----------
(IN THOUSANDS) (IN THOUSANDS)
<S> <C> <C> <C> <C>
Fixed rate debt $(39,921) $(37,261) $(55,585) $(56,734)
Interest rate agreements (143) (1,220)
</TABLE>
F-27
<PAGE> 30
19. BUSINESS AND GEOGRAPHIC INFORMATION AND MAJOR CUSTOMERS
Information about the Company's operations in the Dairy and Ice
businesses and in different geographic areas for the three years ended
December 31, 1996, is as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------
1996 1995 1994
---------- ---------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Net sales to unaffiliated customers:
Dairy:
United States $ 992,259 $ 810,520 $ 699,831
Puerto Rico 215,306 204,406 191,334
----------- ----------- ---------
1,207,565 1,014,926 891,165
Ice - United States 52,784 50,507 47,701
----------- ----------- ---------
Total $ 1,260,349 $ 1,065,433 $ 938,866
=========== =========== =========
Operating income:
Dairy:
United States $ 48,340 $ 36,471 $ 28,558
Puerto Rico 16,430 14,160 12,274
----------- ----------- ---------
64,770 50,631 40,832
Ice - United States 11,022 10,116 8,638
Corporate (4,240) (13,075) (1,660)
----------- ----------- ---------
Total $ 71,552 $ 47,672 $ 47,810
=========== =========== =========
Identifiable assets (at end of period):
Dairy:
United States $ 622,376 $ 326,326 $ 332,916
Puerto Rico 152,198 119,977 125,207
----------- ----------- ---------
774,574 446,303 458,123
Ice - United States 47,096 40,519 44,964
Corporate 17,675 3,174
----------- ----------- ---------
Total $ 839,345 $ 489,996 $ 503,087
=========== =========== =========
Capital expenditures:
Dairy $ 30,501 $ 24,595 $ 16,803
Ice 3,715 3,573 1,420
Corporate 78 143
----------- ----------- ---------
Total $ 34,294 $ 28,311 $ 18,223
=========== =========== =========
Depreciation expense:
Dairy $ 19,742 $ 19,519 $ 17,220
Ice 3,115 3,263 3,301
Corporate 29
----------- ----------- ---------
Total $ 22,886 $ 22,782 $ 20,521
=========== =========== =========
</TABLE>
F-28
<PAGE> 31
20. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The following is a summary of the unaudited quarterly results of
operations for the first three quarters of 1997 and for the years 1996 and
1995 (dollars in thousands, except per share data):
<TABLE>
<CAPTION>
QUARTER
---------------------------------------------------------
FIRST SECOND THIRD FOURTH
<S> <C> <C> <C> <C>
1997
Net Sales $ 373,833 $ 399,660 $ 525,601 --
Gross profit 84,282 99,034 129,106 --
Income before extraordinary loss 20,739 17,577 19,711 --
Net income 17,469 17,577 19,711 --
Earnings per common share:
Income before extraordinary loss .69 .55 .60 --
Net income .58 .55 .60 --
1996
Net sales $ 275,097 $ 289,794 $ 322,129 $ 373,329
Gross profit 57,634 66,212 69,518 77,932
Income before extraordinary loss 5,144 10,756 23,215 10,063
Net income 5,144 8,541 23,215 10,063
Earnings per common share:
Income before extraordinary loss .24 .44 .90 .37
Net income .24 .35 .90 .37
1995
Net sales $ 255,967 $ 268,233 $ 260,435 $ 280,798
Gross profit 54,308 61,245 60,376 58,019
Income before extraordinary loss (6,568) 7,142 7,905 5,354
Net Income (14,336) 6,632 7,905 5,354
Earnings per common share:
Income before extraordinary loss (.33) .33 .36 .24
Net income (.72) .31 .36 .24
</TABLE>
Earnings per common share calculations for each of the quarters were
based on the weighted average number of shares outstanding for each
period, and the sum of the quarters may not necessarily be equal to the
full year earnings per common share amount.
The results for the first quarter of 1995 included $8.8 million of merger
costs related to the combination along with $8.5 million of extraordinary
losses from the early extinguishment of debt repaid at the combination
date.
The results for the second quarter of 1996 include $2.2 million of
extraordinary losses from the early extinguishment of debt repaid with
the proceeds of the Company's initial public offering.
The results for the third quarter of 1996 include a gain on the sale of
Puerto Rico tax credits of $3.4 million and a tax benefit related to the
recognition of the remaining amount of such credits of $11.8 million,
partially offset by $.6 million in financing costs related to the
amendment of the Company's Senior Credit Facility.
The results for the first quarter of 1997 include a gain on the sale of
Puerto Rico tax credits of $18.1 million, partially offset by $3.2
million of extraordinary losses from the early extinguishment of debt
repaid with the proceeds of the Company's January 1997 equity offering.
******
F-29
<PAGE> 32
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
Dated: February 18, 1998 SUIZA FOODS CORPORATION
By: /s/ Tracy L. Noll
-------------------------------
Tracy L. Noll
Vice President and Chief
Financial Officer
<PAGE> 33
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit
Number Description
- ------ -----------
<S> <C>
23.1 Consent of Deloitte & Touche, LLP
</TABLE>
<PAGE> 1
EXHIBIT 23.1
CONSENT OF DELOITTE & TOUCHE LLP
We hereby consent to the incorporation by reference in the Registration
Statement on Form S-4, as amended by Post- Effective Amendment No. 1
(Registration No. 333-29741), the Registration Statement on Form S-3, as amended
by Post- Effective Amendment No. 2 (Registration No. 333-13119), the
Registration Statement on Form S-3, as amended by Post- Effective Amendment No.
1 (Registration No. 333-29207), the Registration Statement on Form S-3
(Registration No. 333-34133), the Registration Statement on Form S-3
(Registration No. 333-45749), the Registration Statement on Form S-8
(Registration No. 333-11185), the Registration Statement on Form S-8
(Registration Statement No. 333-28019), the Registration Statement on Form S-8
(Registration No. 333-28021), and the Registration Statement on Form S-8
(Registration No. 333-41353), of our report dated February 18, 1997 (November
26, 1997 as to Note 2), with respect to the supplemental consolidated financial
statements of Suiza Foods Corporation, included in this Current Report on Form
8-K.
DELOITTE & TOUCHE LLP
Dallas, Texas
February 17, 1998