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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTIONS 13 OF 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998
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)
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<TABLE>
<S> <C>
DELAWARE 75-2559681
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification no.)
</TABLE>
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)
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Securities Registered Pursuant to Section 12(b) of the Act:
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Name of Each Exchange
Title of Each Class on Which Registered
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<S> <C>
Common Stock, $.01 par value New York Stock Exchange
</TABLE>
Securities Registered Pursuant to Section 12(g) of the Act: NONE
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 [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K: [X]
The aggregate market value of the registrant's voting stock held by
non-affiliates of the registrant at March 22, 1999, based on the $36.375 per
share closing price for the registrant's common stock on the New York Stock
Exchange, was approximately $1.12 billion.
The number of shares of the registrant's common stock outstanding as of
March 22, 1999 was 33,711,318.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's definitive Proxy Statement for its Annual
Meeting of Stockholders to be held on or about May 19, 1999 (to be filed) are
incorporated by reference into Part III of this Form 10-K.
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TABLE OF CONTENTS
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PAGE
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PART I
1 Business.................................................... 1
2 Properties.................................................. 12
3 Legal Proceedings........................................... 13
PART II
5 Market for Our Common Stock and Related Matters............. 13
6 Selected Financial Data..................................... 14
7 Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 15
7a Quantitative and Qualitative Disclosures About Market
Risk........................................................ 21
8 Financial Statements and Supplementary Data................. 22
PART III
10 Directors and Executive Officers............................ 22
11 Executive Compensation...................................... 22
Security Ownership of Certain Beneficial Owners and
12 Management.................................................. 22
13 Certain Relationships and Related Transactions.............. 22
PART IV
14 Exhibits, Financial Statement Schedules and Reports on Form
8-K......................................................... 23
</TABLE>
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PART I
ITEM 1. BUSINESS
GENERAL
We are a leading manufacturer and distributor of dairy products and a
leading manufacturer of rigid plastic packaging in the United States. Our net
sales during the year ended December 31, 1998 were approximately $3.3 billion,
of which approximately $2.8 billion (or approximately 85%) was contributed by
our dairy operations and approximately $500 million (or approximately 15%) was
contributed by our packaging operations.
Our principal executive offices are located at 2515 McKinney Avenue, Suite
1200, Dallas, Texas 75201. Our telephone number is (214) 303-3400. We maintain a
worldwide web site at http://www.suizafoods.com. We were incorporated in
Delaware in 1994.
BRIEF HISTORY
We commenced operations in 1988 through a predecessor entity. Our original
operations consisted solely of a packaged ice business. As a result of an
aggressive acquisition strategy in the packaged ice industry, we became one of
the largest manufacturers and distributors of packaged ice in the United States.
We entered the dairy business in December 1993 when we acquired Suiza Dairy
Corporation, a regional dairy processor located in Puerto Rico. Since our
acquisition of Suiza Dairy, we have grown our dairy business primarily through
an aggressive acquisition strategy. Since our acquisition of Suiza Dairy in
1993, we have completed 31 dairy acquisitions, including 13 during 1998 and 3
during 1999 to date.
We completed our initial public offering in April 1996. Initially our
common stock was traded in the Nasdaq National Market. In January 1997, we
completed a second public offering and our common stock began trading on the New
York Stock Exchange in March 1997.
We entered the packaging business in August 1997 when we acquired Franklin
Plastics, Inc. as part of our acquisition of a related dairy business. We have
grown our packaging business through our acquisition of Continental Can Company,
Inc. in May 1998 and seven other smaller acquisitions during 1998.
In April 1998, we sold our packaged ice operations in order to focus our
resources on our dairy and packaging operations.
Primarily as a result of our acquisitions, we have increased our net sales
and operating income from $891.2 million and $40.0 million, respectively, for
the year ended December 31, 1994, to $3.3 billion and $242.5 million,
respectively, for the year ended December 31, 1998.
CURRENT BUSINESS STRATEGY
We remain focused on achieving continued sales and profit growth through
the following strategies:
Acquiring Businesses
According to statistics published by the Milk Industry Foundation, the
United States fluid milk industry totaled approximately $24.3 billion in
wholesale value in 1998. The industry remains fragmented and is undergoing
consolidation. To capitalize on this trend, we intend to continue to acquire
strong dairy businesses in new markets and to strengthen our presence in
existing markets through acquisitions. By pursuing this strategy in our dairy
segment, we seek to
- expand the geographic coverage of our dairy business to better serve an
increasingly national customer base
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- reduce manufacturing costs and increase product quality through the
continued integration of manufacturing operations into specialized,
scale-efficient facilities
- achieve economies of scale in purchasing, product development and
consumer research as we increase our sales base
- develop a more efficient system for distributing a greater volume and
variety of branded and higher margin products directly to our customers
- combine the increased geographic scope of our direct store delivery
system with our national warehouse system to increase the productivity of
our manufacturing, distribution and marketing assets
In pursuing our acquisition and integration strategy for our packaging
business, we seek to
- expand the geographic coverage of our manufacturing facilities to better
serve our national customers and to minimize transportation costs
- broaden our product line and technological capabilities to better meet
our customers' needs
We currently have two pending dairy acquisitions and engage in discussions
with other potential acquisition candidates on an ongoing basis. The completion
of one or more of any future acquisitions could be material to us.
We are currently considering strategic alternatives for our packaging
business, which could include a partial or complete spin-off, a sale of all or a
portion of the business or a continuation of our acquisition and integration
strategy. Pending any final decision, we intend to pursue our current
acquisition and integration strategy.
Increasing Sales in Our Existing Businesses
In both our dairy and packaging businesses we intend to continue to build
our existing distribution networks and product offerings. We intend to develop
or acquire new product lines that are compatible with our existing
manufacturing, distribution and marketing infrastructure and that can serve as
additional platforms for future growth. In our dairy segment we are currently
test marketing and introducing new products and packaging innovations and
investing in product research and marketing to develop additional product and
packaging innovations.
Enhancement of Operating Profit Margins
We continue to seek profit margin improvements through increased production
and purchasing efficiencies, operating synergies from acquired businesses and
increased sales of higher-margin products. By pursuing this strategy, we have
improved our operating margin from 4.5% for the year ended December 31, 1994 to
7.3% for the year ended December 31, 1998.
In order to implement our business strategies, we have expanded our
management team and invested in product development, marketing and other
centralized functions.
RECENT DEVELOPMENTS
Acquisitions
During 1998 and 1999 to date, we have completed 16 dairy and eight
packaging acquisitions. Our most significant acquisitions during that period
were
- Land-O-Sun (February 1998). Land-O-Sun Dairies, L.L.C., a manufacturer
and distributor of dairy products in the southeastern and central United
States, had net sales of approximately $464 million for its 1997 fiscal
year.
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- Continental Can (May 1998). Continental Can, a manufacturer of packaging
products with operations in the United States and Europe, had net sales
of approximately $546 million for its 1997 fiscal year.
- Tuscan Farms/Lehigh Valley Dairies (December 1998). Tuscan/Lehigh, L.P.,
a manufacturer and distributor of dairy products in the northeastern
United States, had net sales of approximately $523 million for the year
ended December 31, 1998. We merged Tuscan/Lehigh into our northeastern
dairy operations to form a new subsidiary in which Dairy Farmers of
America, Inc. owns a 25% interest. The combined net sales of our
northeastern dairy operations and Tuscan/ Lehigh were approximately $1.2
billion for the twelve month period ended September 30, 1998.
Primarily as a result of acquisitions, we increased our net sales from $1.8
billion for the year ended December 31, 1997 to $3.3 billion for the year ended
December 31, 1998. For more information about our acquisition history, see Note
2 to our Consolidated Financial Statements (page F-9).
Other Events
During 1998, we also
- issued $100 million of 5% mandatorily redeemable convertible preferred
securities in connection with our acquisition of Land-O-Sun
- issued $600 million of 5.5% mandatorily redeemable convertible preferred
securities in a private placement
- discontinued our packaged ice operations as a result of the sale in April
1998 of our packaged ice business to Packaged Ice, Inc. for approximately
$172.7 million
For more information about the sale of our packaged ice business, see Note
3 to our Consolidated Financial Statements (page F-11). For more information
about our mandatorily redeemable convertible preferred securities, see Note 10
to our Consolidated Financial Statements (page F-17).
INDUSTRY OVERVIEW
Dairy
According to published industry statistics, approximately $24.3 billion in
wholesale value of fresh milk products were sold in the United States in 1998
compared to $21.6 billion sold in 1989.
The dairy industry is a mature industry and has excess capacity. Excess
capacity has resulted from the development of more efficient manufacturing
techniques, the establishment of captive dairy manufacturing operations by large
grocery retailers and relatively little growth in the demand for fresh milk
products. The dairy industry is in the process of consolidation. As the industry
is consolidating, large regional dairy processors have emerged. As a result of
this consolidation trend, which we believe will continue, we have had numerous
opportunities to pursue our business strategy.
Packaging
The segment of the packaging industry in which we compete is primarily
extrusion blow-molded plastic bottles. This segment is experiencing continued
growth as a result of ongoing customer conversions from glass, metal and paper
packaging to plastic packaging. The blow-molded plastic packaging industry is
fragmented and regional due to the high cost of transporting empty bottles.
According to published industry statistics there are over 300 plastic bottle
manufacturers in the continental United States. Annual sales of a majority of
these competitors range from a few million dollars to over $500 million.
Consolidation of these manufacturers has been a recent trend, with several
transactions occurring within the past two years. We believe this consolidation
to be evidence of an industry-wide drive to remove duplicative costs and
increase efficiency.
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PRODUCTS AND SERVICES
The following table sets forth the total net sales of our two segments,
dairy products and packaging, in dollars and as a percentage of consolidated
total net sales in 1998, 1997 and 1996 (dollars in millions).
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1998 1997 1996
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DOLLARS PERCENT DOLLARS PERCENT DOLLARS PERCENT
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<S> <C> <C> <C> <C> <C> <C>
Dairy......................... $2,816.2 84.8% $1,743.2 97.1% $1,207.6 100%
Packaging..................... 504.7 15.2 52.6 2.9
</TABLE>
For more information about the financial results of our segments (including
certain geographic information), see Note 19 to our Consolidated Financial
Statements (page F-26).
Dairy
Our dairy products include
- fluid milk, including flavored milks
- ice cream and novelties
- dairy and non-dairy coffee creamers
- half-and-half and whipping cream
- sour cream
- cottage cheese
- yogurt
- dairy and non-dairy frozen whipped toppings
We also manufacture and distribute fruit juices and other flavored drinks,
bottled water and coffee.
In 1998, we manufactured and marketed approximately two thirds of our dairy
products under proprietary brand names. We manufactured the remaining one third
of our products on a private-label (or "customer brand") basis for certain
customers. Our proprietary brands include
- national brands including International Delight(R), Second Nature(R),
Naturally Yours(R) and Mocha Mix(R)
- regional brands including Country Fresh(R), Dairymens(R), Lehigh Valley
Farms(R), Model(TM), Natural by Garelick Farms(R), Suiza(TM), Louis
Trauth(TM), Tuscan(R), Velda Farms(R) and West Lynn Creamery(R)
- partner or licensed brands in certain regions including Lactaid(R)
(manufactured under a license with McNeil Consumer Products, an affiliate
of Johnson & Johnson), Flav-O-Rich(R) (licensed from Dairy Farmers of
America, Inc.) and Pet(R) (licensed from Grand Metropolitan Public
Liability Company)
Packaging
A majority of the packaging products that we manufacture are extrusion
blow-molded rigid plastic containers made primarily from polyethylene for
packaging products such as milk, water and other beverages. We also produce
plastic containers in a variety of sizes for use in packaging consumer and
industrial products, such as household chemicals, automotive products and motor
oil, industrial and agricultural chemicals, cosmetics and toiletries. In
addition, we produce metal cans, plastic bags and plastic films.
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We are currently considering strategic alternatives for our packaging
business, which could include a partial or complete spin-off, a sale of all or a
portion of the business, or a continuation of our acquisition and integration
strategy.
SALES AND DISTRIBUTION
Dairy
We have organized our dairy operations primarily by geographic regions. We
currently operate five regions, in addition to our Morningstar group. We have
established a strong presence in each of our regions. For more information about
our regions, see "Properties" on page 12.
We market and sell our dairy products primarily through our internal
regional sales forces to a wide variety of retail and food service customers
including grocery stores, club stores, convenience stores, institutional food
service, gas stores, schools, restaurants and hotels.
We deliver a majority of our dairy products directly from our plants or our
distribution warehouses to our customers, primarily in trucks that we own or
lease. This form of delivery is called a "direct store delivery" system.
Our sales of dairy products are slightly seasonal, with sales tending to be
higher in the third and fourth quarters.
Our Morningstar group produces and sells a majority of our specialty and
long shelf-life food products. We market and sell these products on a national
basis to a wide variety of retail, food service and dairy outlets and in a
number of foreign countries through an internal sales force and independent
brokers. Our specialty and long shelf-life food products are delivered primarily
by common carrier. Sales of some of these products, such as whipping cream and
pre-whipped toppings, sour cream and coffee creamers, experience higher sales in
the fourth quarter.
We are not dependent in our dairy segment on any single customer or group
of customers.
Packaging
In our packaging segment, we operate stand-alone manufacturing facilities
and facilities located on certain of our customers' premises. These on-site
manufacturing facilities manufacture and convey containers directly to our
customers' filling operations. At these facilities, we also manufacture
containers for distribution to off-site customers.
Our packaging customers include dairy and bottled water processors,
beverage manufacturers and consumer and industrial products companies. Our
packaging business markets and sells its products through its internal sales
force.
Sales in our packaging business are slightly seasonal, since sales in our
European metal can business tend to depend on agricultural production and sales
of plastic bottles tend to be higher in the second and third quarters.
We are not dependent in our packaging segment upon any single customer or
group of customers.
RESEARCH AND DEVELOPMENT
Dairy
The development of new products and the processes under which they are
manufactured is an important part of our growing emphasis on branded dairy
products. We utilize consumer research to test new products prior to market
introduction, and we are currently test marketing several new products and
packaging innovations. While company-sponsored research and development is
important to our operations, our total expenditures to date related to this
function in our dairy segment have not been material to our overall financial
results.
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Packaging
The development of new products and the processes under which they are
manufactured is also an important part of our packaging business. We have
several full-time packaging employees devoted to research and development.
However, as in our dairy segment, our total expenditures related to this
function are not material to our overall financial results.
RAW MATERIALS AND SUPPLY
Dairy
We purchase raw milk, our primary raw material, from farmers and farm
co-operatives typically pursuant to contractual arrangements. Raw milk is
generally readily available. After raw milk, cream (including butterfat) is our
most used raw material. We use cream in the manufacture of creamers, ice cream
and certain other dairy products. Although we produce a significant amount of
cream in our fluid milk operations, we also purchase cream from unaffiliated
third parties from time to time. Cream (including butterfat) is generally
readily available. Other raw materials, such as coffee, juice concentrates,
sweeteners, and packaging supplies are generally available from numerous
suppliers and we are not dependent on any single supplier for these materials.
Certain of our raw materials are purchased under long-term contracts in order to
obtain lower costs. The prices of our raw materials increase and decrease
depending on supply and demand and in some cases, governmental regulation.
Prices of raw milk and cream can fluctuate widely.
Packaging
The primary raw material for our packaging operations is high density
polyethylene ("HDPE"). Currently, we purchase HDPE from several suppliers. We
have generally found HDPE to be readily available. During periods of higher
demand, which can result in part from unit growth of this industry, the price of
HDPE can be expected to rise until such time as new production capacity is
added, which has historically caused the price of HDPE to fluctuate widely.
Other raw materials used in our packaging business are readily available
commodity materials and chemicals produced by a large number of manufacturers.
It is our practice to obtain raw materials from several sources in order to
ensure an economical, adequate and timely supply.
COMPETITION
The industries in which we operate are highly competitive. We have many
competitors in each of our major product, service and geographic markets, and
some of these competitors are larger, more established and better capitalized.
Dairy
Our dairy business is subject to significant competition from dairy
operations and large national food service distributors that operate in our
markets. Competition in the dairy business is based primarily on
- service
- price
- brand recognition
- quality
- breadth of product line
The dairy industry has excess capacity. Excess capacity has resulted from
the development of more efficient manufacturing techniques, the establishment of
captive dairy manufacturing operations by large
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grocery retailers and relatively little growth in the demand for fresh milk
products. Any expansion of production capacity in one of our regional markets
could have an adverse effect on us.
Packaging
The packaging industry is also subject to significant competition. We
compete with larger independent manufacturing companies and vertically
integrated food and industrial companies that operate captive packaging
manufacturing facilities. The primary competitive factors in the packaging
industry are price, quality and service.
TRADEMARKS
We have developed or acquired a number of trademarks, brand names and
patents for use in our dairy and packaging businesses. We are also constantly
developing new trademarks, brand names and patents. In addition, we hold
licenses for the use of several registered trademarks from third parties. We
believe that our use of trademarks, brand names and patented packaging designs
creates goodwill and results in product differentiation and, therefore, is
important to our business.
GOVERNMENT REGULATION
Public Health
As a manufacturer and distributor of food products, we are subject to the
Federal Food, Drug and Cosmetic Act and regulations promulgated thereunder by
the Food and Drug Administration ("FDA"). This comprehensive regulatory scheme
governs the manufacture (including composition and ingredients), labeling,
packaging and safety of food. The FDA
- regulates manufacturing practices for foods through its current good
manufacturing practices regulations
- specifies the standards of identity for certain foods, including many of
the products we sell
- prescribes the format and content of certain information required to
appear on food product labels
In addition, the FDA enforces the Public Health Service Act and regulations
issued thereunder, which authorize regulatory activity necessary to prevent the
introduction, transmission or spread of communicable diseases. These regulations
require, for example, pasteurization of milk and milk products. We are also
subject to state and local regulation through such measures as the licensing of
dairy manufacturing facilities, enforcement by state and local health agencies
of standards for our products, inspection of our facilities and regulation of
our trade practices in connection with the sale of dairy products. Although we
maintain quality control programs designed to address food quality and safety
issues, an actual or perceived problem with the quality or safety of products at
any of our facilities could lead to product withdrawals, product recalls,
remediation expenses, temporary plant closings and related negative publicity,
any of which could have a material adverse effect on us.
We use quality control laboratories to test raw milk and other ingredients
and finished products. Product quality and freshness are essential to the
successful distribution of dairy products. To monitor product quality at our
facilities, we maintain quality control programs to test products during various
processing stages. We believe that our dairy facilities and manufacturing
practices comply with all material government regulations.
Employee Safety Regulations
We are subject to certain health and safety regulations including
regulations issued pursuant to the Occupational Safety and Health Act. These
regulations require us to comply with certain manufacturing, health and safety
standards to protect our employees from accidents. We believe that we are in
material compliance with all employee safety regulations.
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Environmental Regulations
We are subject to certain federal, state and local environmental
regulations. Certain of our dairy facilities discharge biodegradable wastewater
into municipal waste treatment facilities in excess of levels permitted under
local regulations. Because of this, certain of our dairy subsidiaries are
required to pay waste water surcharges or to construct waste water pretreatment
facilities. To date, such waste water surcharges have not had a material effect
on our consolidated financial statements.
We maintain above-ground or underground petroleum storage tanks at many of
our facilities. These tanks are periodically inspected to determine compliance
with applicable regulations. We may be required to make expenditures from time
to time in order to maintain compliance of these tanks.
We do not expect environmental compliance to have a material impact on our
capital expenditures, earnings or competitive position in the foreseeable
future.
U.S. Milk Industry Regulation
Pursuant to the Federal Milk Marketing Order program, the federal
government and several state agencies establish minimum regional prices paid to
producers for raw milk. In 1996, the U.S. Congress passed legislation to phase
out the Federal Milk Marketing Order program. This program is currently
scheduled to be phased out by October 1999. The U.S. Department of Agriculture
has also recently proposed changes to this program, including changes in pricing
classifications for certain dairy products. We do not know whether the
Department of Agriculture will adopt its proposed changes in their current or
another form, and we do not know what effect any final changes or the
termination of this federal program will have on the market for dairy products.
In addition, various states have adopted or are considering adopting compacts
among milk producers, which would establish minimum prices paid by milk
processors, including us, to raw milk producers. We do not know whether new
compacts will be adopted or the extent to which these compacts would affect the
prices we pay for raw milk.
EMPLOYEES
As of December 31, 1998 we employed approximately 16,716 people in the
following categories:
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NO. OF EMPLOYEES % OF TOTAL
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<S> <C> <C>
Dairy....................................................... 11,099 66.4%
Packaging................................................... 5,562 33.3
Corporate................................................... 55 0.3
</TABLE>
RISK FACTORS
This report contains certain statements about our future that are not
statements of historical fact. In some cases, you can identify these statements
by terminology such as "may," "will," "should," "expects," "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.
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We May Have Difficulties Executing Our Acquisition Strategy
We intend to expand our dairy and packaging businesses primarily through
acquisitions. Our ability to expand through acquisitions is subject to various
risks, including
- limitations on our financing sources
- rising acquisition prices
- increased antitrust constraints on our proposed acquisitions and
acquisition strategy
- fewer suitable acquisition candidates and increased competition for such
candidates
If we are not able to expand our business through acquisitions at the rate
we have planned, our stock price may be adversely affected.
We May Have Difficulties Managing Our Growth
We have expanded our operations rapidly in recent years and intend to
continue this expansion. This rapid growth places a significant demand on our
management and our financial and operational resources. Our growth strategy is
subject to various risks, including
- inability on our part to successfully integrate or operate acquired
businesses
- inability to retain key customers of acquired businesses
- inability to realize or delays in realizing expected benefits from our
increased size
The integration of businesses we have acquired or may acquire in the future may
also require us to invest more capital than we expected or require more time and
effort by management than we expected. If we fail to effectively manage the size
and growth of our business, our operations and financial results will be
affected, both materially and adversely.
We Operate in Highly Competitive Markets
Our dairy and packaging businesses are subject to significant competition.
See "Competition" on page 6.
We could be adversely affected by any expansion of capacity by our existing
competitors or by new entrants in our markets. We expect to encounter additional
competition as we enter new markets.
We Have Substantial Debt and Other Financial Obligations And We May Incur
Additional Debt
As of December 31, 1998, we had substantial debt and other financial
obligations, including
- $933.0 million of indebtedness (including $719.5 million under our senior
credit facility, $46.2 million under our subsidiary lines of credit and
$167.3 million of subsidiary debt obligations)
- $682.9 million of 5.0% preferred securities and 5.5% preferred securities
Those amounts compare to our stockholders' equity of $655.8 million as of
December 31, 1998.
Our senior credit facility provides us with a line of credit of up to $1
billion to be used for general corporate and working capital purposes. As of
December 31, 1998, we would have been able to borrow an additional $246.2
million under our senior credit facility. We have pledged the stock of certain
subsidiaries to secure this facility and the assets of other subsidiaries to
secure other indebtedness. Our senior credit facility and related debt service
obligations
- limit our ability to obtain additional financing in the future without
obtaining prior consent
- 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
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- limit our flexibility in planning for, or reacting to, changes in our
business and market conditions
- impose on us additional financial and operational restrictions
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
senior credit facility, we may default under this facility. Upon default, our
lenders could accelerate the indebtedness under this facility, foreclose against
their collateral or seek other remedies.
Our Raw Material Costs Could Increase
The most important raw materials that we use in our operations are raw
milk, cream (including butterfat) and high density polyethylene resin. The
prices of these materials increase and decrease depending on supply and demand
and, in some cases, governmental regulation. In many cases, we are not able to
pass on the increased price of raw materials to our customers due primarily to
timing problems. Therefore, volatility in the cost of our raw materials can
adversely affect our performance.
We Could Be Adversely Affected By Changes in Regulations
Our operations are subject to federal, foreign, state and local
governmental regulation. See "Government Regulation" on page 7. 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, could have on our business.
We May Be Subject to Product Liability Claims
We sell food products for human consumption, which involves risks such as
- product contamination or spoilage
- product tampering
- 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 or safety of products at any
of our facilities could result in
- product withdrawals
- product recalls
- negative publicity
- temporary plant closings
- substantial costs of compliance
Any of these events could have a material and adverse effect on our financial
condition.
Loss of Key Personnel Could Adversely Affect Our Business
Our success depends to a large extent on the skills, experience and
performance of our executive management. 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 or directors.
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A Spin-Off or Sale of Our Packaging Business Could Affect Our Stock Price
We are considering strategic alternatives with respect to our packaging
business. We cannot predict how any partial or complete spin-off or sale of this
business, or how a decision to retain and expand this business, would affect the
market price of our common stock.
We May Be Affected By Year 2000 Problems
We are in the process of addressing our Year 2000 computer issues. If we do
not complete the necessary systems modifications on a timely basis or if
important service providers, suppliers or customers are unable to resolve their
Year 2000 issues in a timely manner, we could 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
- 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
- divide our board of directors into three classes so that only
approximately one-third of the total number of directors is elected each
year
- permit directors to be removed only for cause
- specify advance notice requirements for stockholder proposals and
director nominations
In addition, with certain 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.
We Are Subject to Environmental Regulations
We, like others in similar businesses, are subject to a variety of federal,
foreign, state and local environmental laws and regulations including, but not
limited to, those regulating waste water and stormwater, air emissions, storage
tanks and hazardous materials. We believe that we are in material compliance
with these laws and regulations. Future developments, including increasingly
stringent regulations, could require us to make currently unforeseen
environmental expenditures.
WHERE YOU CAN GET MORE INFORMATION
If you want more information about us, write or call us at:
Suiza Foods Corporation
2515 McKinney Avenue, Suite 1200
Dallas, Texas 75201
(214) 303-3400
Attention: Investor Relations
11
<PAGE> 14
Our fiscal year ends on December 31. We furnish our stockholders with
annual reports containing audited financial statements and other appropriate
reports. In addition, we file annual, quarterly and current reports, proxy
statements and other information with the Securities and Exchange Commission.
You may read and copy any reports, statements or other information we file at
the Securities and Exchange Commission's public reference rooms in Washington
D.C. You can request copies of these documents, upon payment of a duplicating
fee, by writing to the Securities and Exchange Commission. Please call the
Securities and Exchange Commission at 1-800-SEC-0330 for further information on
the operation of the public reference rooms. Our Securities and Exchange
Commission filings are also available to the public on the Internet at
http://www.sec.gov.
ITEM 2. PROPERTIES
We currently conduct our dairy manufacturing and distribution operations
from the following locations:
<TABLE>
<CAPTION>
NUMBER NUMBER OF LOCATION OF
REGION OF PLANTS LOCATIONS OF PLANTS DISTRIBUTION CENTERS DISTRIBUTION CENTERS
- ------ --------- ------------------- -------------------- --------------------
<S> <C> <C> <C> <C>
Midwest 8 - Indiana 6 - Michigan
- Michigan (4)
- Ohio (2)
- Tennessee
Northeast 12 - Connecticut 11 - Maine
- Maine - Massachusetts
- Massachusetts (2) - New Hampshire
- New Jersey (2) - Delaware
- New York (2) - Maryland
- Pennsylvania (2) - New Jersey
- Rhode Island - Pennsylvania
- Vermont
Southeast 17 - Florida (3) 52 - Florida
- Georgia - Georgia
- Illinois - Indiana
- Kentucky (2) - Kentucky
- North Carolina (4) - North Carolina
- South Carolina (2) - South Carolina
- Tennessee (2) - Tennessee
- Virginia (2) - Virginia
West 2 - California 0
- Nevada
Caribbean 4 - Puerto Rico 7 - Puerto Rico
Morningstar 10 - Arizona 0
- California (4)
- Maryland
- Tennessee
- Texas
- Wisconsin (2)
</TABLE>
We conduct our packaging manufacturing operations from the following
locations:
<TABLE>
<S> <C> <C> <C>
- - Arkansas - Kentucky - New York - West Virginia
- - California - Louisiana - North Carolina - Czech Republic
- - Connecticut - Maine - Ohio - France
- - Florida - Maryland - Pennsylvania - Germany
- - Georgia - Massachusetts - Puerto Rico - Romania
- - Illinois - New Hampshire - Texas
- - Kansas - New Jersey - Virginia
</TABLE>
We believe that each of our properties is suitable for its current use.
12
<PAGE> 15
Our executive offices are located in leased premises at 2515 McKinney
Avenue, Suite 1200, Dallas, Texas 75201.
ITEM 3. LEGAL PROCEEDINGS
From time to time we are party to legal proceedings that arise in the
ordinary course of business. We do not believe that the resolution of any
currently pending legal proceedings will have a material adverse affect on our
financial position, results of operations or liquidity.
On March 18, 1999, the United States Department of Justice Antitrust
Division ("DOJ") filed a Motion for Temporary Restraining Order ("TRO"), Motion
for Preliminary Injunction and a Complaint in the United States District Court
for the Eastern District of Kentucky, London Division (the "Court"), seeking to
enjoin our pending acquisition of Broughton Foods Company. On that day, the
Court entered a TRO enjoining us and Broughton from closing the proposed
acquisition. The TRO will remain in effect until the Court addresses the DOJ's
Motion for Preliminary Injunction. The DOJ alleges that competition in the
production and sale of school milk in South Central Kentucky school districts
would be substantially lessened as a result of our proposed acquisition. We
believe the DOJ's allegations are unwarranted and we are currently reviewing our
options for responding to the DOJ's actions.
PART II
ITEM 5. MARKET FOR OUR COMMON STOCK AND RELATED MATTERS
Our common stock began trading in the Nasdaq National Market on April 17,
1996. Our common stock began trading on the New York Stock Exchange on March 5,
1997. The following table sets forth, for the periods from April 17, 1996 to
March 22, 1999, the high and low sales prices of our common stock as quoted on
the Nasdaq National Market or the New York Stock Exchange, as applicable. At
March 22, 1999, there were approximately 400 record holders of our common stock.
<TABLE>
<CAPTION>
HIGH LOW
------ ------
<S> <C> <C>
1996:
Second Quarter (from April 17, 1996)...................... $18.75 $14.00
Third Quarter............................................. $17.75 $15.75
Fourth Quarter............................................ $20.75 $16.75
1997:
First Quarter............................................. $29.25 $19.25
Second Quarter............................................ $42.00 $24.75
Third Quarter............................................. $57.50 $39.12
Fourth Quarter............................................ $62.50 $43.50
1998:
First Quarter............................................. $67.00 $55.00
Second Quarter............................................ $63.00 $53.31
Third Quarter............................................. $61.25 $26.50
Fourth Quarter............................................ $51.63 $25.69
1999:
First Quarter (through March 22, 1999).................... $50.25 $35.00
</TABLE>
We have never declared or paid a cash dividend on our common stock. We
intend to retain all earnings to cover working capital fluctuations and to fund
capital expenditures, scheduled debt repayments and acquisitions and we do not
anticipate paying cash dividends on our common stock in the foreseeable future.
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<PAGE> 16
ITEM 6.SELECTED FINANCIAL DATA
The following selected financial data as of and for each of the five years
in the period ended December 31, 1998 have been derived from our audited
consolidated financial statements. The selected financial data do not purport to
indicate results of operations as of any future date or for any future period.
The selected financial data should be read in conjunction with our consolidated
financial statements and related notes (beginning on page F-3).
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------------------------------
1998 1997 1996 1995 1994
----------- ----------- ----------- ----------- -----------
(DOLLARS IN THOUSANDS EXCEPT SHARE DATA)
<S> <C> <C> <C> <C> <C>
OPERATING DATA:
Net sales....................................... $ 3,320,940 $ 1,795,868 $ 1,207,565 $ 1,014,926 $ 891,165
Cost of sales................................... 2,557,908 1,381,084 970,796 813,091 710,175
----------- ----------- ----------- ----------- -----------
Gross profit.................................... 763,032 414,784 236,769 201,835 180,990
Operating costs and expenses:
Selling and distribution...................... 376,928 209,271 123,161 107,885 99,877
General and administrative.................... 112,169 58,708 44,352 39,649 34,903
Amortization of intangibles................... 31,479 14,916 7,675 5,609 5,378
Merger and other costs........................ 37,003 571 9,300 832
----------- ----------- ----------- ----------- -----------
Total operating costs and expenses.............. 520,576 319,898 175,759 162,443 140,990
----------- ----------- ----------- ----------- -----------
Operating income................................ 242,456 94,886 61,010 39,392 40,000
Other (income) expense:
Interest expense, net......................... 52,082 36,664 15,707 18,942 16,855
Financing charges on preferred securities..... 30,213
Other income, net............................. (4,290) (24,483) (4,499) (2,241) (1,422)
----------- ----------- ----------- ----------- -----------
Total other expense............................. 78,005 12,181 11,208 16,701 15,433
----------- ----------- ----------- ----------- -----------
Income from continuing operations before income
taxes......................................... 164,451 82,705 49,802 22,691 24,567
Income taxes.................................... 59,823 43,375 2,939 10,003 7,452
Minority interest............................... 1,559
----------- ----------- ----------- ----------- -----------
Income from continuing operations............... 103,069 39,330 46,863 12,688 17,115
Income (loss) from discontinued operations...... (3,161) 717 2,315 1,329 1,745
----------- ----------- ----------- ----------- -----------
Income before cumulative effect of change in
accounting and extraordinary gain (loss)...... 99,908 40,047 49,178 14,017 18,860
Cumulative effect of change in accounting
principle..................................... (2,272)
Extraordinary gain (loss)....................... 31,698 (11,283) (2,215) (8,462) (197)
----------- ----------- ----------- ----------- -----------
Net income...................................... $ 131,606 $ 28,764 $ 46,963 $ 5,555 $ 16,391
=========== =========== =========== =========== ===========
Net income applicable to common stock........... $ 131,369 $ 28,464 $ 46,661 $ 5,251 $ 16,391
=========== =========== =========== =========== ===========
Basic earnings per common share:
Income from continuing operations............... $ 3.12 $ 1.32 $ 1.99 $ 0.60 $ 0.78
Income (loss) from discontinued operations...... (0.10) 0.02 0.10 0.06 0.08
Cumulative effect of change in accounting
principle..................................... (0.10)
Extraordinary gain (loss)....................... 0.96 (0.38) (0.10) (0.41) (0.01)
----------- ----------- ----------- ----------- -----------
Net income...................................... $ 3.98 $ 0.96 $ 1.99 $ 0.25 $ 0.75
=========== =========== =========== =========== ===========
Diluted earnings per common share:
Income from continuing operations............... $ 2.90 $ 1.25 $ 1.90 $ 0.59 $ 0.75
Income (loss) from discontinued operations...... (0.08) 0.02 0.10 0.06 0.08
Cumulative effect of change in accounting
principle..................................... (0.10)
Extraordinary gain (loss)....................... 0.76 (0.36) (0.09) (0.40) (0.01)
----------- ----------- ----------- ----------- -----------
Net income...................................... $ 3.58 $ 0.91 $ 1.91 $ 0.25 $ 0.72
=========== =========== =========== =========== ===========
Average common shares:
Basic........................................... 32,953,290 29,508,791 23,424,322 20,708,467 21,844,157
=========== =========== =========== =========== ===========
Diluted......................................... 41,965,564 31,348,591 24,491,899 20,935,161 22,761,925
=========== =========== =========== =========== ===========
OTHER DATA:
Ratio of earnings to combined fixed charges and
preferred stock dividends(1).................. 3.36x 2.89x 3.38x 1.94x 2.22x
BALANCE SHEET DATA (AT END OF PERIOD):
Total assets.................................... $ 3,013,783 $ 1,403,462 $ 833,624 $ 484,852 $ 443,307
Mandatorily redeemable convertible trust issued
preferred securities.......................... 682,938
Long-term debt(2)............................... 932,969 828,659 455,880 265,749 209,355
Total stockholders' equity...................... 655,771 359,310 213,854 111,909 127,954
</TABLE>
14
<PAGE> 17
- ---------------
(1) For purposes of calculating the ratio of earnings to combined fixed charges
and preferred stock dividends, "earnings" represent income before income
taxes plus fixed charges. "Fixed charges" consist of interest on all debt,
amortization of deferred financing costs and the portion of rental expense
that we believe is representative of the interest component of rent expense.
Preferred stock dividends consists of dividends, adjusted to a pre-tax
basis, on our Series A Preferred Stock, which we redeemed in 1998.
(2) Includes amounts outstanding under subsidiary lines of credit and the
current portion of long-term debt.
ITEM 7.MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
We are a leading manufacturer and distributor of dairy products and a
leading manufacturer of rigid plastic packaging in the United States. The
following table presents certain information concerning our results of
operations, including information presented as a percentage of net sales.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------------------------------
1998 1997 1996
-------------------- -------------------- --------------------
DOLLARS PERCENT DOLLARS PERCENT DOLLARS PERCENT
---------- ------- ---------- ------- ---------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
NET SALES
Dairy............................................ $2,816,195 $1,743,240 $1,207,565
Packaging........................................ 504,745 52,628
---------- ---------- ----------
Net sales........................................ 3,320,940 100.0% 1,795,868 100.0% 1,207,565 100.0%
Cost of sales.................................... 2,557,908 77.0 1,381,084 76.9 970,796 80.4
---------- ----- ---------- ----- ---------- -----
Gross profit..................................... 763,032 23.0 414,784 23.1 236,769 19.6
OPERATING COSTS AND EXPENSES
Selling and distribution......................... 376,928 11.4 209,271 11.7 123,161 10.2
General and administrative....................... 112,169 3.4 58,708 3.3 44,352 3.7
Amortization of intangibles...................... 31,479 0.9 14,916 0.8 7,675 0.6
Merger and other costs........................... 37,003 2.0 571 0.0
---------- ----- ---------- ----- ---------- -----
Total operating expenses......................... 520,576 15.7 319,898 17.8 175,759 14.5
---------- ----- ---------- ----- ---------- -----
OPERATING INCOME
Dairy............................................ 204,319 6.1 133,996 7.4 64,770 5.4
Packaging........................................ 56,186 1.7 4,862 0.3
Corporate office................................. (18,049) (0.5) (43,972) (2.4) (3,760) (0.3)
---------- ----- ---------- ----- ---------- -----
Operating income................................. $ 242,456 7.3% $ 94,886 5.3% $ 61,010 5.1%
========== ===== ========== ===== ========== =====
</TABLE>
YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1997
Net Sales. Our net sales increased by $1.525 billion, or 85%, in 1998
compared to 1997, primarily as a result of acquisitions.
We began operating in the packaging segment in July 1997 with the
acquisition of Franklin Plastics and extended our market presence with our
acquisition of Continental Can in May 1998. Our packaging business has grown
rapidly through these acquisitions, as well as through several smaller
acquisitions and through newly opened facilities at Franklin Plastics.
Cost of Sales. Our cost of sales ratio was 77.0% in 1998 compared to 76.9%
in 1997. In our dairy segment, the cost of sales ratio rose to 77.1% in 1998
compared to 76.9% in 1997. This slight increase is due to higher milk and
butterfat costs which were mostly offset by realized operating synergies in our
dairy segment.
In our packaging segment, our cost of sales ratio improved to 76.7% in 1998 from
77.6% in 1997 primarily due to lower raw materials costs.
15
<PAGE> 18
Operating Costs and Expenses. Our operating expense ratio was 15.7% in 1998
compared to 17.8% in 1997. In 1997 we recorded merger costs related to our
acquisitions of Country Fresh and Morningstar. Without these merger costs, the
operating expense ratio in 1997 was also 15.7%. The operating expense ratio in
our dairy segment in 1998 was 15.7% compared to 15.4% in 1997 mostly due to
higher operating expenses in acquired businesses. The operating expense ratio
for our dairies owned for more than one year improved in 1998 as a result of
realized synergies in those businesses. Our packaging segment improved its
operating expense ratio to 12.2% in 1998 from 13.2% in 1997 due primarily to our
acquisition of Continental Can, which has relatively low distribution costs.
Operating Income. Our operating income in 1998 was $242.5 million, an
increase of 155.5% from 1997 operating income of $94.9 million. Our operating
income margin increased to 7.3% in 1998 from 5.3% in 1997. After adjusting our
1997 results for merger costs, our operating income margin fell slightly from
7.4% in 1997 to 7.3% in 1998. This decline is primarily due to lower margins at
companies acquired in 1998 and record high raw material prices.
Other (Income) Expense. Our interest expense increased to $52.1 million in
1998 from $36.7 million in 1997 primarily due to increased levels of debt used
to finance acquisitions. Financing charges on our preferred securities amounted
to $30.2 million in 1998, reflecting
- the issuance on February 20, 1998 of $100 million of 5.0% preferred
securities related to the acquisition of Land-O-Sun
- the issuance on March 24, 1998 of $600 million of 5.5% preferred
securities
Other income decreased to $4.3 million in 1998 from $24.5 million in 1997.
In 1997 we sold tax credits which resulted in a gain of $21.8 million.
Discontinued Operations and Extraordinary Items. In 1998, we reported a
loss from discontinued operations of $3.2 million, net of an income tax benefit
of $2.1 million, compared to income from discontinued operations of $.7 million
in 1997, net of income tax expense of $.4 million. Extraordinary items in 1998
were
- In April 1998 we sold our packaged ice business, resulting in a $35.5
million extraordinary gain, net of income tax expense of $22.0 million
- In May 1998, in connection with the early extinguishment of the term
portion of our credit facility, we recorded a $3.8 million loss, net of
an income tax benefit of $2.3 million, from the write-off of deferred
financing costs and the recognition of interest rate swap losses
During 1997 extraordinary items were
- In the first quarter of 1997 we incurred costs of $3.3 million, net of an
income tax benefit of $2.0 million, related to the early extinguishment
of subordinated debt
- In the fourth quarter of 1997 we recorded a loss of $8.0 million, net of
an income tax benefit of $5.0 million, related to the refinancing
connected to the Country Fresh and Morningstar mergers
Net Income. We reported net income of $131.6 million in 1998 compared to
$28.8 million in 1997. Pretax income for 1998 was $164.5 million compared to
$82.7 million in 1997, which included merger costs of $37.0 million. Income tax
expense was higher than statutory rates in 1997 because most merger costs were
not tax deductible and they generated a tax benefit of only $2.3 million. Income
from continuing operations was $103.1 million in 1998 compared to $39.3 million
in 1997, or $64.6 million after adjusting for the gain on tax credits and the
merger costs.
YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996
Net Sales. Our net sales increased 48.7% to $1.8 billion in 1997 from $1.2
billion in 1996. Net sales in our dairy segment increased by 44.4%, or $535.7
million, to $1.7 billion in 1997 from $1.2 billion in
16
<PAGE> 19
1996, primarily due to our acquisitions. The increased sales reported from these
acquired companies in 1997 over 1996 was $513.8 million. Net sales in our
packaging segment were $52.6 million in 1997. We had no packaging business
during 1996.
Cost of Sales. Our cost of sales ratio was 76.9% in 1997 compared to 80.4%
for 1996. Our cost of sales ratio in our dairy segment decreased from 80.4% in
1996 to 76.9% in 1997 primarily due to lower average milk costs in our domestic
milk operations, which reduced sales and costs of sales by similar amounts as
cost decreases were passed through to customers.
Our cost of sales ratio in our packaging segment was 77.6% in 1997 with no
comparison to 1996 due to the recent acquisition of these operations.
Operating Costs and Expenses. Our operating expense ratio was 17.8% in 1997
compared to 14.5% in 1996. Operating expenses increased in both our dairy and
packaging groups as a result of acquisitions. Operating expenses also increased
significantly in 1997 due to $37.0 million in merger and other costs recorded in
the fourth quarter of 1997 primarily related to the Country Fresh and
Morningstar mergers. Our operating expense ratio prior to the recognition of
these mergers and other costs was 15.7% in 1997 compared to 14.5% in 1996. This
operating expense ratio increase was primarily the result of lower average milk
costs in 1997. Our operating expense ratio in our packaging group was 13.2%
during the portion of 1997 it was owned.
Operating Income. Our operating income in 1997 was $94.9 million, an
increase of 55.5% from operating income of $61.0 million during 1996. Our
operating income margin increased slightly from 5.1% in 1996 to 5.3% in 1997.
When adjusted for merger and other costs, our operating income margin increased
from 5.1% in 1996 to 7.4% in 1997 primarily due to
- lower average milk costs in our domestic dairy operations
- higher inherent margins at Morningstar in addition to improved
Morningstar operating margins as a result of cost improvements resulting
from Morningstar's acquisition of Presto Foods
Other (Income) Expense. Interest expense increased from $15.7 million in
1996 to $36.7 million in 1997 resulting from higher average outstanding debt
levels due to our acquisitions in 1996 and 1997. We reported $24.5 million in
other income during 1997 compared to $4.5 million during 1996. The increase in
other income was primarily the result of gains of $21.8 million in 1997 as
compared to $3.4 million in 1996 from the sale of tax credits.
Discontinued Operations and Extraordinary Items. Income from discontinued
operations was $0.7 million in 1997, net of income tax expense of $0.4 million,
compared to $2.3 million, net of income tax expense of $1.5 million, in 1996. In
addition, during 1997 we incurred $11.3 million in extraordinary costs, net of
$7.0 million in income tax benefits, as a result of the early extinguishment of
debt. Of this amount, $3.3 million, net of income tax benefits of $2.0 million,
was related to the first quarter early extinguishment of subordinated debt and
$8.0 million, net of income tax benefits of $5.0 million, was related to the
refinancing accomplished during the fourth quarter in connection with our
acquisition of Country Fresh and Morningstar. Both of these extraordinary items
included the write-off of deferred financing costs. During 1996 we incurred $2.2
million in extraordinary costs, net of income tax benefits of $0.9 million,
resulting from the early extinguishment of debt from the net cash proceeds of
our initial public offering in April 1996. These costs included $1.3 million for
the write-off of deferred financing costs and $1.8 million in prepayment
penalties.
Net Income. We reported net income of $28.8 million in 1997 compared to
$47.0 million for 1996. Pretax income for 1997 was $82.7 million, which includes
merger and other costs of $37.0 million, compared to $49.8 million for 1996.
Income tax expense increased from $2.9 million in 1996 to $43.4 million in 1997.
Income tax expense was lower than statutory rates at 5.9% of pretax income in
1996 primarily as a result of the recognition of $11.75 million of deferred tax
assets from Puerto Rico tax credits, as compared to income tax expense as a
percent of pretax income of 52.4% in 1997, which was
17
<PAGE> 20
higher than statutory rates primarily as a result of the tax effect of
non-deductible merger costs in 1997. Net income declined primarily due to merger
and other costs which were in large part not deductible for tax purposes, only
generating an income tax benefit of approximately $2.0 million. The increased
level of extraordinary items also contributed to the reduced reported income.
LIQUIDITY AND CAPITAL RESOURCES
Cash Flow
Historically, we have met our working capital needs with cash flow from
operations along with borrowings under our senior credit facility. Net cash
provided by continuing operations was $196.3 million for 1998 as contrasted to
$129.0 million for 1997. Investing activities in 1998 included approximately
$176.9 million in capital expenditures of which $100.9 million was spent in our
dairy segment, $72.3 million was spent in our packaging segment and $3.7 million
was spent developing our corporate infrastructure. Investing activities during
1998 also included $599.2 million of cash paid for acquisitions and net proceeds
of $172.7 million from the sale of our packaged ice business.
On February 20, 1998, we completed the acquisition of Land-O-Sun for a
purchase price of approximately $248 million, including approximately $128
million in cash. The non-cash portion of the purchase price was funded through
the issuance of $100 million of 5.0% preferred securities and the issuance of
$20 million of preferred interests of Land-O-Sun. In addition, we refinanced
Land-O-Sun's existing outstanding long-term indebtedness, which totaled
approximately $52 million as of the closing date. We financed the cash portion
of the purchase price and refinanced the existing long-term indebtedness with
borrowings of $180 million under our senior credit facility. Land-O-Sun reported
net sales of approximately $464 million during 1997.
On March 24, 1998, we completed the sale of $600 million of 5.5% preferred
securities, resulting in net proceeds after expenses of approximately $582.5
million. The net proceeds were used to repay amounts outstanding under the
revolving loan facility of our senior credit facility.
On May 29, 1998, we completed the acquisition of Continental Can for a
purchase price of approximately $354 million, including the assumption of
Continental Can's long-term indebtedness of approximately $196 million. The
balance of the purchase price was funded through the issuance of 2,050,635
shares of our common stock and our stock options to replace outstanding stock
options of Continental Can, along with net cash of approximately $18 million.
Continental Can reported net sales of approximately $546 million during 1997.
On June 30, 1998, we acquired West Lynn Creamery, which processes and
distributes milk, juice, water, ice cream and ultra pasteurized products in the
northeast. West Lynn reported net sales of approximately $214 million in 1997.
On August 14, 1998, we completed the purchase of the assets of the fluid
dairy division of Cumberland Farms. Cumberland Farms' fluid dairy division,
which processes and distributes milk, juice, water and related dairy products
and operates in the northeast, reported net sales of approximately $200 million
in 1997. We financed the purchase price with borrowings under our senior credit
facility.
On September 15, 1998, our board of directors authorized an open market
share repurchase program of up to $100 million of common stock. During the third
and fourth quarters of 1998, we repurchased 1,510,400 shares of our common stock
for a total purchase price of approximately $46.0 million pursuant to this board
authorization. On September 29, 1998, we also redeemed all outstanding shares of
Series A preferred stock for the stated value of $320 per share, plus
accumulated unpaid dividends, for a total cost of approximately $3.8 million.
Also during 1998, we acquired Louis Trauth Dairy, Oberlin Farms Dairy,
seven additional small dairy businesses and seven small plastic packaging
businesses. We financed these acquisitions with borrowings under our senior
credit facility.
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<PAGE> 21
Current Debt Obligations
On May 29, 1998, we amended our senior credit facility, terminated and
repaid the term loan facility and expanded the revolving loan facility to $1
billion. At December 31, 1998, we had outstanding borrowings of $719.5 million
under our senior credit facility. In addition, $34.3 million of letters of
credit secured by our senior credit facility were issued but undrawn. As of
December 31, 1998, approximately $246.2 million was available for future
borrowings under our senior credit facility. As of March 22, 1999, the
outstanding balance of our senior credit facility was approximately $763.0
million. In addition, $37.3 million of letters of credit secured by our senior
credit facility were issued but undrawn as of that date. We are currently in
compliance with all covenants and financial ratios contained in our debt
agreements.
Future Capital Requirements
We intend to invest a total of approximately $150 million to $160 million
in our manufacturing facilities and distribution capabilities during 1999. Of
this amount, we intend to spend approximately $100 million to $110 million in
our dairy business to expand and maintain our manufacturing facilities and for
fleet replacement. We intend to spend approximately $40 million to $50 million
in our packaging business to maintain and improve facilities and equipment.
These amounts are comparable to 1998 expenditures.
We have spent approximately $48.0 million for acquisitions in 1999 to date.
We have a current commitment, subject to certain conditions, to spend
approximately $90.3 million on the currently pending acquisition of Broughton
Foods Company.
We expect that cash flow from operations will be sufficient to meet our
requirements for our existing businesses for the foreseeable future. We expect
to fund currently proposed acquisitions out of cash flow from operations and
borrowings under our senior credit facility. In the future, we intend to pursue
additional acquisitions in our existing regional markets as well as in new
markets, and to seek strategic acquisition opportunities that are compatible
with our core businesses. We believe that we have the ability to secure
additional financing to pursue our acquisition and consolidation strategy. There
can be no assurance, however, that we will have sufficient available capital
resources to realize our acquisition and consolidation strategy.
Preferred Securities
On February 20, 1998, we issued $100 million of company-obligated 5%
mandatorily redeemable convertible preferred securities of a subsidiary trust as
part of the consideration paid to acquire Land-O-Sun, and on March 24, 1998, we
issued $600 million of company-obligated 5.5% mandatorily redeemable convertible
preferred securities of a subsidiary trust in a private placement transaction,
the proceeds of which were primarily used to repay amounts outstanding under our
senior credit facility. The 5% preferred securities mature 20 years from the
date of issue and the 5.5% preferred securities mature 30 years from the date of
issue.
The preferred securities have quarterly distributions payable at their
respective stated rates per annum, and have a liquidation preference of $50 per
security. Distributions may be deferred for up to 20 consecutive quarters. The
preferred securities are convertible, at the option of the holder thereof, into
an aggregate of approximately 9.1 million shares of our common stock.
The preferred securities are redeemable, at our option, at any time after
three years from their respective issue dates at specified amounts and are
mandatorily redeemable at their liquidation preference amount of $50 per share
at maturity or upon the occurrence of certain specified events.
We entered into a guaranty agreement in favor of the holders of the
preferred securities whereby we have fully guaranteed all of the respective
subsidiary trust obligations under the preferred securities, to the extent the
subsidiary trust has funds on hand available therefor. We also agreed to
register the resale of the common stock issuable upon conversion of the
preferred securities under certain circumstances.
19
<PAGE> 22
KNOWN TRENDS AND UNCERTAINTIES
Tax Rate
Our 1998 tax rate was approximately 36.4%. We believe that our effective
tax rate will range from 37% to 40% for the next several years. Our effective
tax rate is affected by various tax advantages applicable to our Puerto Rico
based operations. Any additional acquisitions could change this effective tax
rate.
Year 2000 Compliance
The inability of computers, software and other equipment utilizing
microprocessors to recognize and properly process data fields containing a
two-digit year is commonly referred to as the Year 2000 problem. The Year 2000
problem arises from the way dates are recorded and computed in most
applications, operating systems, hardware and embedded chips. If the problem is
not corrected, systems that use a date in its prescribed function may fail or
produce erroneous results before, on and after the year 2000.
We are currently engaged in a comprehensive project to identify and address
any Year 2000 issues that may adversely impact our business. The areas being
assessed are: enterprise systems and related applications; plant floor systems
and equipment; personal computers and related applications; networks and
communications; supplier and customer chains; internal and external Electronic
Data Interchange and associated interfaces; and miscellaneous equipment (time
clocks, postage machines, facsimiles, etc.). These areas relate not only to
"information technology" but also to all segments of our business, finance,
sales and marketing, operations.
A corporate project team consisting of corporate and regional employees
representing key segments of our business is guiding our Year 2000 compliance
effort. This team has developed a structured approach that includes detailed
specific tasks needed to satisfy Year 2000 compliance. The plan is broken into
five phases including awareness, assessment/inventory, remediation,
certification and testing. These phases are designed to enable us to
comprehensively and effectively track all activities. External consultants are
being utilized to assist in compliance efforts.
We have completed the assessment of our information systems and are
aggressively proceeding with remediation, testing and implementation processes
using both internal and external resources. For information and non-information
applications that are provided by a third party software vendor, available
upgrades have been identified and are being certified and implemented.
As a result of the diverse information systems that are being used by
acquired companies and also due to technological enhancements, we have had an
ongoing information systems development plan to move these acquired companies'
systems to our standard platform systems with scheduled replacement of systems
throughout the organization. Year 2000 compliance is a significant portion of
our overall development plan. We have delayed certain nonessential information
projects in order to reassign resources to the Year 2000 strategic plan.
We have finalized the inventory and assessment phase for our plant
equipment and are in the process of researching the detailed inventories for
compliance issues. We believe that the Year 2000 issue will have no significant
impact on our plant operations.
A critical step in our strategic plan is the coordination of Year 2000
readiness with third parties. We have a program in effect to determine the
extent to which we and any interface systems are vulnerable if they fail to
resolve Year 2000 issues. Our program is designed to ensure that the external
business contributors (suppliers, vendors and customers) are pursuing acceptable
compliance efforts so that they will have minimal impact on our business.
Contingency plans are being developed in any areas that pose a possible threat.
We believe that all Year 2000 remediation efforts for our businesses will
be completed on time and within budget estimates. Should any critical service
providers, suppliers (including utility suppliers) or customers be unable to
achieve timely compliance, there may be an adverse impact on our operation. We
20
<PAGE> 23
believe the most reasonably likely worst case scenario to be temporary
interruptions in production as a result of failure of utility suppliers to
provide adequate power, which could result in potential lost sales and profits.
Our current assessment of risks, based on the most reasonable worst case
scenario, is that there will be no significant adverse impact on our operations
or financial performance. We believe that if any disruption to operations does
occur, it will be isolated and/or short-term in duration.
We have incurred and expensed approximately $2 million through December 31,
1998 for remediation costs associated with our Year 2000 compliance activities
and we expect to incur and expense an additional $4 million in the future to
remediate our information systems and to write off unamortized costs for systems
replaced. In addition to these remediation costs expensed, we have also
capitalized approximately $6 million of capital expenditures through December
31, 1998 for the replacement and upgrading of purchased software and hardware
for both existing systems and the systems of acquired businesses pursuant to our
Year 2000 compliance activities and our on-going information systems development
plan and we have budgeted an additional $9 million of capital expenditures in
1999 for the purchase of additional replacement systems. Budgeted amounts are
based on our conservative estimates and actual results could differ as the plan
is further implemented.
Euro Currency Conversion
Companies conducting business in or having transactions denominated in
certain European currencies are facing the European Union's conversion to a new
common currency, the "euro". This conversion is expected to be implemented over
a three year period. On January 1, 1999, the euro became the official currency
for accounting and tax purposes of several countries of the European Union and
the exchange rate between the euro and local currencies was fixed. In 2002, the
euro will replace the individual nation's currencies. Since our packaging group
has manufacturing facilities, and otherwise conducts business, in Europe, the
conversion to the euro will have an effect on us. We are currently considering
the specific nature of the impact of the conversion on our operations, but we
currently believe that there will be no material adverse impact of the
conversion on our operations or financial performance.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
INTEREST RATE AGREEMENTS
At December 31, 1998, we had interest rate derivative agreements in place,
including interest rate caps, swaps and collars which have been designated as
hedges against our variable interest rate exposure on loans under our senior
credit facility. The following table summarizes our various interest rate
agreements:
<TABLE>
<CAPTION>
TYPE INTEREST RATE LIMITS NOTIONAL AMOUNTS EXPIRATION DATE
---- -------------------- ----------------- ---------------
<S> <C> <C> <C>
Caps....................................... 8.0% $ 60.0 million March 2000
Swaps...................................... 6.03% to 6.14% 110.0 million December 2000
50.0 million March 2001
225.0 million December 2002
50.0 million December 2003
Collars.................................... 6.08% and 7.50% 100.0 million December 2002
To June 2003
</TABLE>
The original costs and premiums of these derivative agreements are being
amortized on a straight-line basis as a component of interest expense. These
derivative agreements provide hedges for senior credit facility loans by
limiting or fixing the LIBOR interest rates specified in the senior credit
facility (5.6% at December 31, 1998, excluding the LIBOR margin) at the interest
rates specified above until the indicated expiration dates of these interest
rate derivative agreements.
21
<PAGE> 24
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 French franc and the
German mark. Potential losses due to foreign currency fluctuations would not
have a material impact on our consolidated financial position, results of
operations or operating cash flow.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Our consolidated financial statements are included as an exhibit as
described in Item 14.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS
Incorporated herein by reference to our proxy statement for our May 19,
1999 Annual Meeting of Stockholders.
ITEM 11. EXECUTIVE COMPENSATION
Incorporated herein by reference to our proxy statement for our May 19,
1999 Annual Meeting of Stockholders.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Incorporated herein by reference to our proxy statement for our May 19,
1999 Annual Meeting of Stockholders.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Incorporated herein by reference to our proxy statement for our May 19,
1999 Annual Meeting of Stockholders.
22
<PAGE> 25
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
FINANCIAL STATEMENTS
The following consolidated financial statements are incorporated by
reference to our Annual Report to Stockholders for our fiscal year ended
December 31, 1998 attached hereto:
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Independent Auditors' Report of Deloitte & Touche LLP....... F-1
Independent Auditors' Report of Arthur Andersen LLP......... F-2
Consolidated Balance Sheets as of December 31, 1998 and
1997...................................................... F-3
Consolidated Statements of Income for the years ended
December 31, 1998, 1997 and 1996.......................... F-4
Consolidated Statements of Stockholders' Equity for the
years ended December 31, 1998, 1997 and 1996.............. F-5
Consolidated Statements of Cash Flows for the years ended
December 31, 1998, 1997 and 1996.......................... F-6
Notes to Consolidated Financial Statements.................. F-7
</TABLE>
EXHIBITS
See Index to Exhibits.
FINANCIAL STATEMENT SCHEDULES
Schedule II -- Valuation and Qualifying Accounts
REPORTS ON FORM 8-K
We have filed the following current Reports on Form 8-K since September 30,
1998
- Form 8-K filed on December 18, 1998 to report our acquisition of Tuscan
Farms/Lehigh Valley Dairies
- Form 8-K filed on February 12, 1999 to report our fourth quarter and
year-end 1998 sales and earnings
23
<PAGE> 26
INDEPENDENT AUDITORS' REPORT
To the Board of Directors
Suiza Foods Corporation
Dallas, Texas
We have audited the accompanying consolidated balance sheets of Suiza Foods
Corporation and subsidiaries (the "Company") as of December 31, 1998 and 1997,
and the related consolidated statements of income, stockholders' equity and cash
flows for each of the three years in the period ended December 31, 1998. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits. We did not audit the consolidated
statements of income, stockholders' equity and cash flows of The Morningstar
Group Inc. for the year ended December 31, 1996 which reflects total revenues of
$394.3 million. Those consolidated 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 period, 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.
In our opinion, based on our audits and the report of the other auditors,
the consolidated financial statements referred to above present fairly, in all
material respects, the consolidated financial position of Suiza Foods
Corporation and subsidiaries as of December 31, 1998 and 1997, and the results
of their operations and their cash flows for each of the three years in the
period ended December 31, 1998, in conformity with generally accepted accounting
principles.
DELOITTE & TOUCHE LLP
Dallas, Texas
February 11, 1999
F-1
<PAGE> 27
INDEPENDENT AUDITORS' REPORT
To the Board of Directors
The Morningstar Group Inc.
Dallas, Texas
We have audited the consolidated statements of income, stockholders' equity
and cash flows of The Morningstar Group Inc. (a Delaware corporation) and
subsidiaries ("Morningstar") for the year ended December 31, 1996 prior to the
restatement (and, therefore, are not presented herein) for the merger of Suiza
Foods Corporation ("Suiza") with Morningstar on November 26, 1997, which has
been accounted for as a pooling of interests as described in Note 1 to the Suiza
consolidated financial statements. These consolidated financial statements are
the responsibility of Morningstar's management. Our responsibility is to express
an opinion on these consolidated financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated results of operations
and cash flows of The Morningstar Group Inc. and subsidiaries for the year ended
December 31, 1996, in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Dallas, Texas
November 26, 1997
F-2
<PAGE> 28
SUIZA FOODS CORPORATION
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1998 1997
---------- ----------
<S> <C> <C>
Current assets:
Cash and cash equivalents................................. $ 54,922 $ 24,388
Temporary investments..................................... 9,216
Receivables, net of allowance for doubtful accounts of
$19,303 and $3,589..................................... 452,185 164,284
Inventories............................................... 223,338 76,087
Prepaid expenses and other current assets................. 25,924 7,978
Refundable income taxes................................... 24,455 19,836
Deferred income taxes..................................... 23,859 2,718
Net assets of discontinued operations..................... 100,785
---------- ----------
Total current assets.............................. 813,899 396,076
Property, plant and equipment............................... 846,956 363,649
Deferred income taxes....................................... 2,528 4,484
Intangible and other assets................................. 1,350,400 639,253
---------- ----------
Total............................................. $3,013,783 $1,403,462
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses..................... $ 500,303 $ 178,021
Income taxes payable...................................... 18,876 4,006
Current portion of long-term debt......................... 39,892 50,846
---------- ----------
Total current liabilities......................... 559,071 232,873
Long-term debt.............................................. 893,077 777,813
Other long-term liabilities................................. 64,449 13,230
Deferred income taxes....................................... 28,702 20,236
Mandatorily redeemable convertible trust issued preferred
securities (redemption value of $700,000 plus accrued
dividends)................................................ 682,938
Minority interest in subsidiaries........................... 129,775
Commitments and contingencies (Note 17)
Stockholders' equity:
Preferred stock, 11,691 shares of Series A preferred stock
issued and outstanding in 1997, with a stated value of
$320 per share......................................... 3,741
Common stock, 33,598,074 and 30,614,037 shares issued and
outstanding, with a par value of $0.01 per share....... 336 306
Additional paid-in capital................................ 446,230 281,773
Retained earnings......................................... 204,859 73,490
Accumulated other comprehensive income.................... 4,346
---------- ----------
Total stockholders' equity........................ 655,771 359,310
---------- ----------
Total............................................. $3,013,783 $1,403,462
========== ==========
</TABLE>
See notes to consolidated financial statements.
F-3
<PAGE> 29
SUIZA FOODS CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------------------
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
Net sales............................................. $ 3,320,940 $ 1,795,868 $ 1,207,565
Cost of sales......................................... 2,557,908 1,381,084 970,796
----------- ----------- -----------
Gross profit.......................................... 763,032 414,784 236,769
Operating costs and expenses:
Selling and distribution............................ 376,928 209,271 123,161
General and administrative.......................... 112,169 58,708 44,352
Amortization of intangibles......................... 31,479 14,916 7,675
Merger and other costs.............................. 37,003 571
----------- ----------- -----------
Total operating costs and expenses.......... 520,576 319,898 175,759
----------- ----------- -----------
Operating income...................................... 242,456 94,886 61,010
Other (income) expense:
Interest expense, net............................... 52,082 36,664 15,707
Financing charges on trust issued preferred
securities....................................... 30,213
Other income, net................................... (4,290) (24,483) (4,499)
----------- ----------- -----------
Total other expense......................... 78,005 12,181 11,208
----------- ----------- -----------
Income from continuing operations before income
taxes............................................... 164,451 82,705 49,802
Income taxes.......................................... 59,823 43,375 2,939
Minority interest in earnings......................... 1,559
----------- ----------- -----------
Income from continuing operations..................... 103,069 39,330 46,863
Income (loss) from discontinued operations............ (3,161) 717 2,315
----------- ----------- -----------
Income before extraordinary gain (loss)............... 99,908 40,047 49,178
Extraordinary gain (loss)............................. 31,698 (11,283) (2,215)
----------- ----------- -----------
Net income............................................ $ 131,606 $ 28,764 $ 46,963
=========== =========== ===========
Net income applicable to common stock................. $ 131,369 $ 28,464 $ 46,661
=========== =========== ===========
Basic earnings per common share:
Income from continuing operations................... $ 3.12 $ 1.32 $ 1.99
Income (loss) from discontinued operations.......... (0.10) 0.02 0.10
Extraordinary gain (loss)........................... 0.96 (0.38) (0.10)
----------- ----------- -----------
Net income.......................................... $ 3.98 $ 0.96 $ 1.99
=========== =========== ===========
Diluted earnings per common share:
Income from continuing operations................... $ 2.90 $ 1.25 $ 1.90
Income (loss) from discontinued operations.......... (0.08) 0.02 0.10
Extraordinary gain (loss)........................... 0.76 (0.36) (0.09)
----------- ----------- -----------
Net income.......................................... $ 3.58 $ 0.91 $ 1.91
=========== =========== ===========
Average common shares -- Basic........................ 32,953,290 29,508,791 23,424,322
=========== =========== ===========
Average common shares -- Diluted...................... 41,965,564 31,348,591 24,491,899
=========== =========== ===========
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE> 30
SUIZA FOODS CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
PREFERRED ACCUMULATED
STOCK COMMON STOCK ADDITIONAL OTHER TOTAL
--------- ------------------- PAID-IN RETAINED COMPREHENSIVE STOCKHOLDERS'
AMOUNT SHARES AMOUNT CAPITAL EARNINGS INCOME EQUITY
--------- ---------- ------ ---------- -------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1996............. $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............................. (59) (456,559) (5) (4,296) (4,360)
Dividends on preferred stock........ (302) (302)
Net income and comprehensive
income............................ 46,963 46,963
------ ---------- ---- -------- -------- --------
Balance, December 31, 1996........... 3,741 25,002,823 250 164,390 45,473 213,854
Issuance of common stock............ 5,611,214 56 117,383 117,439
Dividends on preferred stock........ (300) (300)
Net income and comprehensive
income............................ 28,764 28,764
Adjustment for conforming the
year-end of Country Fresh......... (447) (447)
------ ---------- ---- -------- -------- --------
Balance, December 31, 1997........... 3,741 30,614,037 306 281,773 73,490 359,310
Issuance of common stock............ 4,494,437 45 210,443 210,488
Purchase and retirement of treasury
stock............................. (1,510,400) (15) (45,986) (46,001)
Repurchase of 11,691 shares of
preferred stock................... (3,741) (3,741)
Dividends on preferred stock........ (237) (237)
Net income.......................... 131,606 131,606
Other comprehensive income:
Cumulative translation
adjustment...................... $4,273 4,273
Minimum pension liability
adjustment...................... 73 73
Comprehensive income................
------ ---------- ---- -------- -------- ------ --------
Balance, December 31, 1998........... $ -- 33,598,074 $336 $446,230 $204,859 $4,346 $655,771
====== ========== ==== ======== ======== ====== ========
<CAPTION>
COMPREHENSIVE
INCOME
-------------
<S> <C>
Balance, January 1, 1996.............
Issuance of common stock............
Redemption of common and preferred
stock.............................
Dividends on preferred stock........
Net income and comprehensive
income............................ $ 46,963
========
Balance, December 31, 1996...........
Issuance of common stock............
Dividends on preferred stock........
Net income and comprehensive
income............................ $ 28,764
========
Adjustment for conforming the
year-end of Country Fresh.........
Balance, December 31, 1997...........
Issuance of common stock............
Purchase and retirement of treasury
stock.............................
Repurchase of 11,691 shares of
preferred stock...................
Dividends on preferred stock........
Net income.......................... $131,606
Other comprehensive income:
Cumulative translation
adjustment...................... 4,273
Minimum pension liability
adjustment...................... 73
--------
Comprehensive income................ $135,952
========
Balance, December 31, 1998...........
</TABLE>
See notes to consolidated financial statements.
F-5
<PAGE> 31
SUIZA FOODS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------------
1998 1997 1996
----------- ---------- ---------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income............................................ $ 131,606 $ 28,764 $ 46,963
Adjustments to reconcile net income to net cash
provided by operating activities:
Loss (income) from discontinued operations......... 3,161 (717) (2,315)
Depreciation and amortization...................... 91,779 44,607 28,003
Minority interest.................................. 1,559
Extraordinary (gain) loss.......................... (31,698) 11,283 2,215
Merger and other costs............................. 37,003 571
Deferred income taxes.............................. 20,386 27,355 (14,511)
Other.............................................. (764) 462 (178)
Changes in operating assets and liabilities, net of
acquisitions:
Receivables...................................... (49,065) 6,685 (10,740)
Inventories...................................... (4,600) (5,259) (6,084)
Prepaid expenses and other assets................ (13,566) (3,284) (778)
Accounts payable and accrued expenses............ 24,481 (12,667) 13,913
Income taxes..................................... 22,998 (5,189) (325)
----------- ---------- ---------
Net cash provided by continuing operations.... 196,277 129,043 56,734
Net cash provided by (used in) discontinued
operations.................................. (2,068) 7,578 7,449
----------- ---------- ---------
Net cash provided by operating activities..... 194,209 136,621 64,183
----------- ---------- ---------
Cash flows from investing activities:
Net additions to property, plant, and equipment....... (176,870) (62,120) (30,079)
Cash outflows for acquisitions........................ (599,197) (429,898) (251,961)
Net proceeds from the sale of discontinued
operations......................................... 172,732
Other................................................. 1,369 (477)
----------- ---------- ---------
Net cash used in continuing operations........ (601,966) (492,018) (282,517)
Net cash used in discontinued operations...... (14,022) (58,028) (8,330)
----------- ---------- ---------
Net cash used in investing activities......... (615,988) (550,046) (290,847)
----------- ---------- ---------
Cash flows from financing activities:
Proceeds from issuance of debt........................ 965,820 1,230,604 270,550
Repayment of debt..................................... (1,082,464) (856,980) (92,164)
Payments of deferred financing, debt restructuring and
merger costs....................................... (1,256) (54,410) (3,520)
Issuance of common stock, net of expenses............. 37,808 95,076 59,644
Redemption of common and preferred stock.............. (49,742) (4,360)
Issuance of trust issued preferred securities, net of
expenses........................................... 582,500
Preferred dividends paid and other.................... (353) (300) (302)
----------- ---------- ---------
Net cash provided by financing activities..... 452,313 413,990 229,848
----------- ---------- ---------
Increase in cash and cash equivalents................... 30,534 565 3,184
Cash and cash equivalents, beginning of period.......... 24,388 23,823 20,639
----------- ---------- ---------
Cash and cash equivalents, end of period................ $ 54,922 $ 24,388 $ 23,823
=========== ========== =========
</TABLE>
See notes to consolidated financial statements.
F-6
<PAGE> 32
SUIZA FOODS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation -- Our consolidated financial statements have been
prepared to give retroactive effect for all periods presented to our 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 interests, whereby the assets acquired
and liabilities assumed are reflected in our consolidated financial statements
at the historical amounts of these entities.
Our consolidated financial statements include the accounts of our wholly
owned and majority owned subsidiaries. All significant intercompany balances and
transactions are eliminated in consolidation.
The preparation of our consolidated financial statements in conformity with
generally accepted accounting principles requires us to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the consolidated
financial statements and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from these estimates.
Our fiscal year ends on December 31. During 1997, our Country Fresh
subsidiary changed its year end to conform to our December 31 year-end date.
Accordingly, the financial statements for the year ended December 31, 1997
reflect the conversion of Country Fresh's financial information to the same
period as ours, which has resulted in nine weeks of operations of Country Fresh
being included in our operating results for both the year ended December 31,
1997 and the year ended December 31, 1996.
Cash Equivalents and Temporary Investments -- We consider all highly liquid
investments purchased with a remaining maturity of three months or less to be
cash equivalents. Temporary investments consist of held-to-maturity U.S.
government obligations due within one year, certificates of deposit or
Eurodollar deposits due within one year, and highly rated commercial paper.
These temporary investments are stated at amortized cost, which approximates
market value.
Inventories -- Inventories are stated at the lower of cost, using the
first-in, first-out ("FIFO") method, or market. 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.
F-7
<PAGE> 33
SUIZA FOODS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Long-lived Assets -- Long-lived assets include the following intangibles
which are amortized over their related useful lives:
<TABLE>
<CAPTION>
ASSET USEFUL LIFE
- ----- -----------------------------------------------------
<S> <C>
Goodwill Straight-line method over 25 to 40 years
Identifiable intangible
assets:
Customer lists Straight-line method over seven to ten years
Trademarks/trade names Straight-line method over ten 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
</TABLE>
We periodically assess the net realizable value of our long-lived 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. We 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 hedges 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.
Cumulative Translation Adjustment -- Cumulative translation adjustment in
stockholders' equity reflects the unrealized adjustments resulting from
translating the financial statements of our foreign subsidiaries. The functional
currency of our foreign subsidiaries is generally the local currency of the
country. Accordingly, assets and liabilities of the foreign subsidiaries are
translated to U.S. dollars at year-end exchange rates. Income and expense items
are translated at the average rates prevailing during the year. Changes in
exchange rates which affect cash flows and the related receivables or payables
are recognized as transaction gains and losses in the determination of net
income.
Minority Interest in Subsidiaries -- Minority interest in results of
operations of consolidated subsidiaries represents the minority shareholders'
share of the net income (loss) of various consolidated subsidiaries. The
minority interest in the consolidated balance sheets reflects the proportionate
interest in the equity of these consolidated subsidiaries.
Employee Stock Options and Restricted Stock -- Compensation cost for stock
options and restricted stock is measured based on intrinsic value under
Accounting Principles Board Opinion 25, Accounting for Stock Issued to
Employees.
Revenue -- Revenue is recognized when the product is shipped to the
customer. We provide credit terms to customers generally ranging up to 30 days,
perform ongoing credit evaluation of our customers and maintain allowances for
potential credit losses based on historical experience.
Income Taxes -- All of our U.S. operating subsidiaries have been included
in our consolidated tax return. Our Puerto Rico and foreign subsidiaries are
required to file separate income tax returns and are eligible for tax credits
which may reduce or eliminate U.S. 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
F-8
<PAGE> 34
SUIZA FOODS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
loss carryforwards, are evaluated based on the guidelines for realization and
may be reduced by a valuation allowance if deemed necessary.
Advertising Expense -- Advertising expense is comprised of media, agency
and production expenses. Advertising expenses are charged to income during the
period incurred, except for expenses related to the development of a major
commercial or media campaign which are charged to income during the period in
which the advertisement or campaign is first presented by the media. Advertising
expenses charged to income totaled $28.9 million in 1998, $26.0 million in 1997,
and $18.4 million in 1996. Additionally, prepaid advertising costs were $0.9
million at December 31, 1998. There were no prepaid advertising costs at
December 31, 1997.
Comprehensive Income -- During 1998, we adopted SFAS No. 130, "Reporting of
Comprehensive Income," which requires reporting and display of comprehensive
income and its components to be disclosed in the financial statements. We
consider all changes in equity from transactions and other events and
circumstances except those resulting from investments by owners and
distributions to owners to be comprehensive income.
Segment Reporting -- During 1998, we adopted SFAS No. 131, "Disclosures
about Segments of an Enterprise and Related Information," which requires
disclosures of certain information about operating segments on a basis
consistent with the way in which we manage and operate the company. The adoption
of this statement did not materially change the segment information previously
disclosed.
Recently Issued Accounting Pronouncements -- SFAS No. 133, "Accounting for
Derivative Financial Instruments and Hedging Activities," was issued in June
1998, and establishes standards for accounting and reporting for derivative
instruments, including certain derivative instruments embedded in other
contracts, and for hedging activities. SFAS No. 133 is effective for our year
ending December 31, 2000. We are currently analyzing the effect of this standard
and do not expect it to have a material effect on our consolidated financial
position, results of operations or cash flows.
Reclassifications -- Certain reclassifications have been made to conform
the prior years' consolidated financial statements to the current year
classifications.
2. ACQUISITIONS
During 1996, 1997 and 1998 we completed the acquisitions of 23 dairy
businesses and nine packaging businesses which were accounted for as purchase
business combinations and included the following significant acquisitions:
<TABLE>
<CAPTION>
PURCHASE
DATE COMPANY SEGMENT PRICE
- ---- ------- -------- --------------
(IN THOUSANDS)
<S> <C> <C> <C>
July 1996 Garrido Dairy $ 35,800
September 1996 Swiss Dairy Dairy 55,100
December 1996 Model Dairy Dairy 27,000
July 1997 Dairy Fresh Dairy 106,300
July 1997 Garelick Farms Dairy 160,000
July 1997 Franklin Plastics Packaging 139,600
February 1998 Land-O-Sun Dairies Dairy 248,000
May 1998 Continental Can Packaging 354,400
</TABLE>
These acquisitions and the smaller dairy and packaging businesses acquired
were funded primarily with borrowings under our senior credit facility, along
with the issuance of 297,400 shares of our common stock with a fair market value
of $10.0 million in 1997 in connection with the Garelick Farms acquisition. In
connection with the acquisition of Continental Can, we issued 2,050,635 shares
of our common stock
F-9
<PAGE> 35
SUIZA FOODS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
with a fair market value of $139.6 million, assumed debt of $196.4 million,
including $125 million of senior secured notes, and funded $18.4 million in
cash. These notes were revalued to a fair value of approximately $135.4 million
at acquisition date. In connection with the Land-O-Sun acquisition, we issued
approximately $100 million of trust issued preferred securities and $20 million
of preferred membership interests in this subsidiary to one of the sellers.
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 our consolidated financial statements. 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, subject to final purchase
price adjustments, as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------
1998 1997 1996
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Purchase prices:
Cash paid, net of cash acquired........ $599,197 $429,898 $251,961
Cash acquired in acquisitions.......... 24,353 4,202 15,110
Common stock issued.................... 136,751 10,000
Subsidiary preferred and common
securities issued................... 220,000
-------- -------- --------
Total purchase prices.......... 980,301 444,100 267,071
Fair values of net assets acquired:
Fair values of assets acquired......... 798,902 194,437 209,508
Liabilities assumed.................... (541,447) (55,350) (56,676)
-------- -------- --------
Total net assets acquired...... 257,455 139,087 152,832
-------- -------- --------
Goodwill................................. $722,846 $305,013 $114,239
======== ======== ========
</TABLE>
The following table presents our unaudited pro forma results of operations
as if our acquisitions of Dairy Fresh, Garelick Farms, Franklin Plastics,
Land-O-Sun and Continental Can had occurred at the beginning of 1997:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------
1998 1997
---------- ----------
(IN THOUSANDS, EXCEPT
PER SHARE DATA)
<S> <C> <C>
Net sales........................................... $3,596,687 $3,089,440
========== ==========
Income from continuing operations before income
taxes............................................. $ 184,378 $ 82,236
========== ==========
Net income.......................................... $ 114,715 $ 81,936
========== ==========
Earnings per share:
Basic............................................. $ 3.39 $ 2.18
========== ==========
Diluted........................................... $ 2.56 $ 2.07
========== ==========
</TABLE>
The unaudited pro forma results of operations are not necessarily
indicative of what our actual results of operations would have been had the
acquisitions occurred at the beginning of 1997, nor do they purport to be
indicative of our future results of operations.
F-10
<PAGE> 36
SUIZA FOODS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The above table of pro forma financial information includes only our
unaudited pro forma results of operations for our significant acquisitions
during 1997 and 1998. If we included all of our 1997 and 1998 acquisitions in
our pro forma results of operations, we would have reported pro forma revenues
of $4.8 billion during 1998.
Related Party Transactions -- During 1998 and 1997, we paid fees to a
non-employee member of the Board of Directors for acquisition consulting
services related to certain completed acquisitions totaling $5.1 million and
$1.4 million, respectively, which have been capitalized as part of the purchase
price of the acquisition.
3. DISCONTINUED OPERATIONS AND EXTRAORDINARY GAINS AND LOSSES
Discontinued Operations -- On April 30, 1998, we consummated the sale of
our packaged ice operations for net cash proceeds of approximately $172.7
million. We reported an extraordinary gain of $35.5 million from the sale of
this operation, net of $22 million of income taxes. Our packaged ice segment had
revenues of approximately $17.9 million during the four months ended April 30,
1998, $66.3 million during 1997 and $52.8 million during 1996. The results of
discontinued operations includes interest expense of $2.4 million during 1998,
$7.1 million during 1997 and $7.0 million during 1996. Interest charges
allocated to discontinued operations are based on debt specifically attributed
to our packaged ice operations. The results of discontinued operations are
presented net of the related income tax benefit of $2.1 million in 1998, and
income tax expense of $.4 million in 1997 and $1.5 million in 1996.
Extraordinary Gains and Losses -- The following table summarizes
extraordinary gains and losses for the years ended December 31:
<TABLE>
<CAPTION>
1998 1997 1996
------- -------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Extraordinary gain on sale of packaged ice
operations.................................... $35,494 $ -- $ --
Extraordinary loss from early extinguishment of
debt.......................................... (3,796) (11,283) (2,215)
------- -------- -------
Extraordinary gain (loss)....................... $31,698 $(11,283) $(2,215)
======= ======== =======
</TABLE>
In 1998, an extraordinary loss of $3.8 million, net of a $2.3 million
income tax benefit, was recognized in connection with the early extinguishment
of the term loan of our senior credit facility, and included losses from the
write-off of deferred financing costs and interest rate swap losses. We also
recognized extraordinary losses in connection with the early extinguishment of
prior credit facilities in 1997 and 1996 and expensed $11.3 million in 1997, net
of an income tax benefit of $7.0 million, and $2.2 million in 1996, net of
income tax benefit of $.9 million. These costs related to debt issuance, legal
and other costs associated with the extinguishment of these prior credit
facilities.
4. INVENTORIES
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1998 1997
-------- -------
(IN THOUSANDS)
<S> <C> <C>
Raw materials and supplies............................ $113,118 $43,764
Finished goods........................................ 110,220 32,323
-------- -------
Total....................................... $223,338 $76,087
======== =======
</TABLE>
F-11
<PAGE> 37
SUIZA FOODS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
5. PROPERTY, PLANT AND EQUIPMENT
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1998 1997
---------- ---------
(IN THOUSANDS)
<S> <C> <C>
Land................................................. $ 60,176 $ 35,944
Buildings and improvements........................... 229,940 149,717
Machinery and equipment.............................. 761,545 310,716
---------- ---------
1,051,661 496,377
Less accumulated depreciation........................ (204,705) (132,728)
---------- ---------
Total...................................... $ 846,956 $ 363,649
========== =========
</TABLE>
6. INTANGIBLE AND OTHER ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1998 1997
---------- --------
(IN THOUSANDS)
<S> <C> <C>
Goodwill.............................................. $1,266,663 $559,750
Identifiable intangibles.............................. 108,038 97,114
Deferred financing costs.............................. 4,104 4,600
Deposits and other.................................... 26,946 1,761
---------- --------
1,405,751 663,225
Less accumulated amortization......................... (55,351) (23,972)
---------- --------
Total....................................... $1,350,400 $639,253
========== ========
</TABLE>
7. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1998 1997
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Accounts payable........................................ $304,775 $117,131
Payroll and benefits.................................... 73,049 19,523
Other accrued liabilities............................... 122,479 41,367
-------- --------
$500,303 $178,021
======== ========
</TABLE>
8. INCOME TAXES
The following table presents the 1998, 1997 and 1996 provisions for income
taxes.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------
1998(1) 1997(2) 1996(3)
------- ------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Current taxes payable:
Federal...................................... $31,554 $13,419 $ 11,559
State and foreign............................ 10,542 2,601 1,981
Deferred income taxes.......................... 17,727 27,355 (10,601)
------- ------- --------
Total................................ $59,823 $43,375 $ 2,939
======= ======= ========
</TABLE>
- ---------------
(1) Excludes a $2.1 million income tax benefit related to discontinued
operations and a $19.9 million income tax expense related to net
extraordinary gains.
(2) Excludes a $0.4 million income tax expense related to discontinued
operations and a $7.0 million income tax benefit related to extraordinary
losses.
(3) Excludes a $1.5 million income tax expense related to discontinued
operations and a $0.9 million income tax benefit related to extraordinary
losses.
F-12
<PAGE> 38
SUIZA FOODS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following is a reconciliation of income taxes reported in the
consolidated statements of income:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------
1998 1997 1996
------- ------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Tax expense at statutory rates................. $57,557 $28,946 $ 17,431
State income taxes............................. 7,967 1,710 1,330
Tax effect of tax-exempt earnings.............. (4,765) (4,429) (2,711)
Sale/(recognition) of Puerto Rico tax
credits...................................... 4,350 (11,750)
Utilization of previously unrecognized deferred
tax assets................................... (2,265)
Nondeductible merger and other expenses........ 11,832 486
Other.......................................... (936) 966 418
------- ------- --------
Total................................ $59,823 $43,375 $ 2,939
======= ======= ========
</TABLE>
The tax effects of temporary differences giving rise to deferred income tax
assets and liabilities were:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1998 1997
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Deferred income tax assets:
Net operating loss carryforwards...................... $ 22,471 $ --
Asset valuation reserves.............................. 2,083 1,055
Nondeductible accruals................................ 49,638 11,073
Puerto Rico tax credits............................... 2,528 4,484
Other................................................. 15
-------- --------
76,720 16,627
Deferred income tax liabilities:
Depreciation and amortization......................... (63,650) (22,654)
Tax credit basis differences.......................... (12,514) (6,991)
Other................................................. (2,871) (16)
-------- --------
(79,035) (29,661)
-------- --------
Net deferred income tax liability............. $ (2,315) $(13,034)
======== ========
</TABLE>
These net deferred income tax assets (liabilities) are classified in our
consolidated balance sheet as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1998 1997
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Current assets.......................................... $ 23,859 $ 2,718
Noncurrent assets....................................... 2,528 4,484
Noncurrent liabilities.................................. (28,702) (20,236)
-------- --------
Total......................................... $ (2,315) $(13,034)
======== ========
</TABLE>
Prior to 1996, we 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 operating loss carryforwards of our
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
F-13
<PAGE> 39
SUIZA FOODS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
operating losses, we were unable to determine in those years that it was more
likely than not that these net deferred tax assets would be realized. 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.
This tax incentive act 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, we made investments in our Puerto Rico dairy, fruit, plastics
and coffee operations, all of which were certified as qualified agricultural
businesses in Puerto Rico during 1996.
In 1996, we recognized $15.75 million in earned tax credits related to our
investment in our Puerto Rico dairy operations; however, we did not recognize
any of the potential tax credits related to our investments in our Puerto Rico
fruit, plastics and coffee operations since certain rulings in 1996 by Puerto
Rico tax authorities created uncertainty as to whether these investments were
eligible investments and whether these additional tax credits had been earned.
During the first quarter of 1997, we obtained a ruling from the Commonwealth of
Puerto Rico confirming that these investments qualified for the tax credit.
Accordingly, in March 1997, we recognized in other income a nonrecurring gain of
$18.1 million, net of discounts and related expenses ($11.5 million after income
taxes), for earned tax credits we sold to third parties during the second
quarter of 1997. In addition, during the fourth quarter of 1997, we sold $4.4
million of previously recognized tax credits for cash proceeds of $3.7 million,
net of discounts and related expenses, which is recorded in other income.
However, since these tax credits had been previously recognized, this sale
resulted in income tax expense of $5.6 million for an after tax loss of $1.9
million.
9. LONG-TERM DEBT
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1998 1997
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Senior credit facility:
Revolving loan facility............................... $719,500 $265,500
Term loans facility................................... 550,000
Subsidiary debt obligations:
Lines of credit....................................... 46,160
Senior secured notes.................................. 131,078
Industrial development revenue bonds.................. 12,635 12,660
Capital lease obligations and other................... 23,596 499
-------- --------
932,969 828,659
Less current portion.................................... (39,892) (50,846)
-------- --------
Total $893,077 $777,813
======== ========
</TABLE>
Senior Credit Facilities -- Effective as of May 29, 1998, we amended and
restated our existing credit facility with a group of lenders, including First
Union National Bank, as administrative agent, and The First National Bank of
Chicago, as syndication agent, which terminated the term loan facility of the
prior agreement and expanded the revolving loan facility. Our new senior credit
facility provides us with a line of credit of up to $1 billion to be used for
general corporate and working capital purposes, including the financing of
acquisitions. Our senior credit facility expires March 31, 2003, unless extended
in accordance with its terms.
F-14
<PAGE> 40
SUIZA FOODS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Amounts outstanding under the senior credit facility bear interest at a
rate per annum equal to one of the following rates, at our 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 50 to 75 basis points depending on our ratio of defined
indebtedness to EBITDA (as defined in the senior credit facility). We pay a
commitment fee on unused amounts of the senior credit facility that ranges from
15 to 23 basis points, based on our ratio of defined indebtedness to EBITDA.
Interest is payable quarterly or at the end of the applicable interest period.
The interest rate in effect on our senior credit facility, including the
applicable interest rate margin, was 6.4% at December 31, 1998.
Our senior credit facility contains 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) and an interest coverage
ratio (computed as the ratio of EBITDA to interest expense as defined). In
addition, the senior credit facility requires that we maintain a minimum level
of net worth as defined. The senior credit facility also contains limitations on
liens, investments, the incurrence of additional indebtedness and acquisitions,
and prohibits certain dispositions of property. Our senior credit facility is
secured by capital stock of certain of our subsidiaries.
Subsidiary Debt Obligations -- Subsidiary debt obligations include lines of
credit of domestic and foreign subsidiaries, senior secured notes of one of
Continental Can's subsidiaries, industrial development revenue bond obligations
of certain subsidiaries and other debt obligations of certain subsidiaries.
In connection with our acquisition of Continental Can, we assumed existing
subsidiary lines of credit of certain of Continental Can's domestic and foreign
subsidiaries. Borrowings under these subsidiary lines of credit are generally
subject to limitations based on a borrowing base, as defined in the respective
agreements, and bear interest generally at floating interest rates determined
for each subsidiary. Outstanding borrowings under these subsidiary lines of
credit, which at December 31, 1998 included foreign subsidiary borrowings, have
been classified as a current liability since such borrowings are expected to be
repaid within one year. The weighted average interest rate in effect on our
subsidiaries' lines of credit at December 31, 1998 was 6.14%.
The senior secured notes were issued in December 1996 by one of Continental
Can's subsidiaries, Plastic Containers, Inc., and have an original par value of
$125 million. These notes, which are due in 2006, bear interest at a fixed
interest rate of 10%, payable semi-annually in July and December of each year,
and are secured by substantially all assets other than inventory, receivables
and certain equipment of Plastic Containers, Inc., along with the stock of
certain of Plastic Containers, Inc.'s subsidiaries. In connection with the
acquisition of Continental Can, these notes were revalued to fair value using a
market yield of 8.6% resulting in a premium of $10.4 million at acquisition
date. This premium is being amortized as an adjustment to interest expense over
the life of the notes. These notes are redeemable, in whole or in part, at the
option of Plastic Containers, Inc., beginning on December 16, 2001, at an
initial price of 105% of par value, declining ratably each year to par value on
December 15, 2004. In addition, the indenture requires Plastic Containers, Inc.
to offer to redeem the notes at a redemption price of 101% of par value in the
event of a change in control, and at 100% of par value upon the occurrence of
certain other events. Our tender offer to redeem these notes in connection with
the acquisition of Continental Can resulted in the redemption of $3.8 million of
these notes. The indenture places certain restrictions on the payment of
dividends, additional liens, disposition of the proceeds of asset sales, sale
and leaseback transactions and additional borrowings.
Certain of our subsidiaries have revenue bonds outstanding, certain of
which require aggregate 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
F-15
<PAGE> 41
SUIZA FOODS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
bonds is due semiannually at interest rates that vary based on market conditions
which, at December 31, 1998, ranged from 3.90% to 4%.
Other 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 derivative agreements in
place, including interest rate caps, swaps and collars that have been designated
as hedges against our variable interest rate exposure on our loans under our
senior credit facility.
The following table summarizes our various interest rate agreements as of
December 31, 1998:
<TABLE>
<CAPTION>
1998 1997
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Interest rate caps with an interest limit of 8% expiring $ 60,000
March 2000. .............................................. $ 60,000
Interest rate swaps with an interest range of 6% to 6.14% 435,000
expiring between June 1998 and December 2003. ............ 490,000
Interest rate collars with an interest range of 6.08% to 100,000..
7.5% expiring between December 2002 and June 2003......... 100,000
</TABLE>
These derivative agreements provide hedges for loans under our senior
credit facility by limiting or fixing the LIBOR interest rates specified in the
senior credit facility at the interest rates noted above 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.
We are 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 the credit risk is considered to be remote.
Scheduled Maturities -- The scheduled maturities of long-term debt, which
include capitalized lease obligations, at December 31, 1998, were as follows (in
thousands):
<TABLE>
<S> <C>
1999............................................. $ 39,892
2000............................................. 12,878
2001............................................. 13,612
2002............................................. 6,005
2003............................................. 727,374
Thereafter....................................... 133,208
--------
Total.................................. $932,969
========
</TABLE>
In addition, there were $34.3 million of issued but undrawn letters of
credit secured by our senior credit facility and $16.2 million of issued but
undrawn letters of credit secured by other credit facilities as of December 31,
1998.
F-16
<PAGE> 42
SUIZA FOODS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
10. MANDATORILY REDEEMABLE TRUST ISSUED PREFERRED SECURITIES
In connection with our acquisition of Land-O-Sun, we issued $100 million of
company-obligated 5% mandatorily redeemable convertible preferred securities of
a Delaware business trust. On March 24, 1998, we also completed the sale of $600
million of company-obligated 5.5% mandatorily redeemable convertible preferred
securities of a Delaware business trust in a private placement to "qualified
institutional buyers" under Rule 144A under the Securities Act of 1933, as
amended. The 5% preferred securities mature 20 years from the date of issue and
the 5.5% preferred securities mature 30 years from the date of issue. These
trust issued preferred securities, which are recorded net of related fees and
expenses, are convertible at the option of the holders into an aggregate of
approximately 9.1 million shares of our common stock, subject to adjustment in
certain circumstances. These preferred securities are also redeemable, at our
option, at any time after three years from their respective issue dates at
specified amounts and are mandatorily redeemable at their liquidation preference
amount of $50 per share at maturity or upon occurrence of certain specified
events.
11. STOCKHOLDERS' EQUITY
Our authorized shares of capital stock include 1,000,000 shares of
preferred stock and 500,000,000 shares of common stock with a par value of $.01
per share.
Preferred Stock -- The rights and preferences of preferred stock are
established by our Board of Directors upon issuance. The Series A preferred
stock represented 11,691 shares of preferred stock with a stated and redemption
value of $320 per share provided for cumulative dividends at a rate of 8% and
were redeemable only at our option. On September 29, 1998, we redeemed all
outstanding shares of Series A preferred stock for the stated value of $320 per
share, plus accumulated unpaid dividends, for a total cost of $3.8 million.
Stock Offerings -- On April 22, 1996, we 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. The public offering provided net cash proceeds to us
of approximately $48.6 million which was used to repay senior and subordinated
debt and prepayment penalties related to the early extinguishment of the
subordinated notes. On August 7, 1996, we sold 625,000 shares of common stock at
a price of $16.00 per share in a private placement to a single investor and on
January 28, 1997, we sold 4,270,000 shares of common stock in a public offering
at a price to the public of $22.00 per share. The public offering provided net
cash proceeds to us of approximately $89.0 million which was used to repay
senior and subordinated debt and prepayment penalties related to the early
extinguishment of the subordinated notes.
Stock Option and Restricted Stock Plans -- We have three stock option and
restricted stock plans. These plans provide for grants of stock options and
restricted stock to employees, officers, directors and consultants to acquire
4,656,023 shares of common stock. The plans stipulate that the exercise prices
of stock options will approximate or be above fair market value on the grant
date. The options vest in accordance with provisions as set forth in the
applicable option agreements.
Morningstar, Country Fresh and Continental Can had stock-based compensation
plans for their key employees, officers and directors. Subsequent to our mergers
with Morningstar and Country Fresh and our acquisition of Continental Can, the
options granted under these plans were exchanged for our stock options. The
options granted under these plans approximated fair market value at their grant
dates. These options vest over variable periods and expire over the next six
months to twelve years.
F-17
<PAGE> 43
SUIZA FOODS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following table summarizes the status of our stock-based compensation
programs:
<TABLE>
<CAPTION>
WEIGHTED AVERAGE
OPTIONS EXERCISE PRICE
---------- ----------------
<S> <C> <C>
Outstanding at January 1, 1996........................... 2,180,784 $ 6.90
Granted................................................ 1,474,519 12.89
Canceled............................................... (8,143) 5.78
Exercised.............................................. (39,273) 7.87
----------
Outstanding at December 31, 1996......................... 3,607,887 9.34
Granted................................................ 2,798,958 30.40
Canceled............................................... (96,738) 13.89
Exercised.............................................. (621,866) 8.66
----------
Outstanding at December 31, 1997......................... 5,688,241 19.70
Granted................................................ 1,444,412 49.40
Canceled............................................... (75,447) 39.99
Exercised.............................................. (2,349,335) 15.72
----------
Outstanding at December 31, 1998......................... 4,707,871 $30.56
==========
Exercisable at December 31, 1996......................... 2,201,785 $ 7.73
Exercisable at December 31, 1997......................... 4,423,601 17.49
Exercisable at December 31, 1998......................... 3,157,266 21.80
</TABLE>
The following table summarizes information about options outstanding at
December 31, 1998:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
------------------------------------------------- OPTIONS EXERCISABLE
WEIGHTED-AVERAGE ------------------------------
NUMBER REMAINING WEIGHTED-AVERAGE NUMBER WEIGHTED-AVERAGE
RANGE OF EXERCISE PRICES OUTSTANDING CONTRACTUAL LIFE EXERCISE PRICE EXERCISABLE EXERCISE PRICE
- ------------------------ ----------- ---------------- ---------------- ----------- ----------------
<S> <C> <C> <C> <C> <C>
$ 0 to $15.15........ 1,302,962 5.81 $ 8.63 1,245,943 $ 8.58
16.00 to 34.50........ 1,935,115 7.62 27.80 1,719,329 28.12
38.15 to 65.25........ 1,469,794 8.98 53.63 191,994 50.96
</TABLE>
F-18
<PAGE> 44
SUIZA FOODS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
We have elected to follow APB 25 and related interpretations in accounting
for our stock options. Accordingly, no compensation has been recognized since
stock options granted under these plans were at exercise prices which
approximated or exceeded market value at the grant date. Had compensation
expense been determined for stock option grants using fair value methods
provided for in SFAS No. 123, Accounting for Stock-Based Compensation, our pro
forma net income and net earnings per common share would have been the amounts
indicated below:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------
1998 1997 1996
---------- ---------- ----------
(IN THOUSANDS, EXCEPT SHARE DATA)
<S> <C> <C> <C>
Compensation cost................................ $ 34,198 $ 21,706 $ 7,886
Net income:
As reported.................................... 131,606 28,764 46,963
Pro forma...................................... 110,745 15,415 42,113
Net income per share:
As reported -- basic........................... 3.98 0.96 1.99
As reported -- diluted......................... 3.58 0.91 1.91
Pro forma -- basic............................. 3.36 0.52 1.80
Pro forma -- diluted........................... 3.08 0.49 1.72
Stock option share data:
Stock options granted during period............ 1,444,412 2,798,958 1,474,519
Weighted average option fair value(a).......... $ 29.23 $ 7.75 $ 10.64
</TABLE>
- ---------------
(a) Calculated in accordance with the Black-Scholes option pricing model, using
the following assumptions: expected volatility of 40%; expected dividend
yield of 0%; expected option term of four to ten years and risk-free rates
of return as of the date of grant of 5.5% based on the yield of ten-year
U.S. Treasury securities.
Rights Plan -- On February 27, 1998, our board of directors declared a
dividend of one common share purchase right for each outstanding share of common
stock to the stockholders of record on March 18, 1998. The rights are not
exercisable until ten days subsequent to the announcement of the acquisition of
or intent to acquire a beneficial ownership of 15% or more in Suiza. At such
time, each right entitles the registered holder to purchase from us that number
of shares of common stock at an exercise price of $210, with a market value of
up to two times the exercise price. At any time prior to such date, a required
majority may redeem the rights in whole, but not in part, at a price of $0.01
per right. The rights will expire on March 18, 2008, unless our board of
directors extends the term of, or redeems, the rights.
F-19
<PAGE> 45
SUIZA FOODS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Earnings Per Share -- Earnings per share is based on the weighted average
number of common and common equivalent shares outstanding during each period.
The following table reconciles the numerators and denominators used in the
computations of both basic and diluted EPS:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------
1998 1997 1996
----------- ----------- -----------
(IN THOUSANDS, EXCEPT SHARE DATA)
<S> <C> <C> <C>
Basic EPS computation:
Numerator:
Income from continuing operations........ $ 103,069 $ 39,330 $ 46,863
Less preferred stock dividends........... (237) (300) (302)
----------- ----------- -----------
Income applicable to common stock........ $ 102,832 $ 39,030 $ 46,561
=========== =========== ===========
Denominator:
Average common shares.................... 32,953,290 29,508,791 23,424,322
=========== =========== ===========
Basic EPS................................... $ 3.12 $ 1.32 $ 1.99
=========== =========== ===========
Diluted EPS computation:
Numerator:
Income from continuing operations........ $ 103,069 $ 39,330 $ 46,863
Less preferred stock dividends........... (237) (300) (302)
Net effect on earnings from conversion of
mandatorily redeemable convertible
preferred securities................... 18,732
----------- ----------- -----------
Income applicable to common stock........ $ 121,564 $ 39,030 $ 46,561
=========== =========== ===========
Denominator:
Average common shares -- basic........... 32,953,290 29,508,791 23,424,322
Stock option conversion.................. 1,838,193 1,815,017 1,067,577
Earnings contingency..................... 24,783
Dilutive effect of conversion of
mandatorily redeemable convertible
preferred securities................... 7,174,081
----------- ----------- -----------
Average common shares -- diluted......... 41,965,564 31,348,591 24,491,899
=========== =========== ===========
Diluted EPS................................. $ 2.90 $ 1.25 $ 1.90
=========== =========== ===========
</TABLE>
Stock Redemptions -- During 1996 we repurchased, through open market or
negotiated transactions, 456,559 shares of common stock at a cost of $4.4
million.
On September 15, 1998, our Board of Directors authorized an open market
share repurchase program of up to $100 million of our common stock. During the
third and fourth quarters of 1998, we repurchased 1,510,400 shares of our common
stock for a total purchase price of approximately $46.0 million pursuant to this
Board authorization.
These repurchased shares were treated as effectively retired in the
consolidated financial statements.
F-20
<PAGE> 46
SUIZA FOODS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
12. OTHER COMPREHENSIVE INCOME
During 1998, we adopted SFAS No. 130, "Reporting Comprehensive Income,"
which establishes standards for reporting and displaying comprehensive income
and its components in a financial statement that is displayed with the same
prominence as other financial statements. The changes in the components of other
comprehensive income during the year ended December 31, 1998 are included below.
There were no components of comprehensive income during 1996 and 1997.
<TABLE>
<CAPTION>
PRE-TAX NET
INCOME TAX EXPENSE AMOUNT
------- ----------- ------
(IN THOUSANDS)
<S> <C> <C> <C>
Cumulative translation adjustment........................... $7,005 $(2,732) $4,273
Minimum pension liability adjustment........................ 120 (47) 73
------ ------- ------
Other comprehensive income.................................. $7,125 $(2,779) $4,346
====== ======= ======
</TABLE>
13. EMPLOYEE RETIREMENT AND PROFIT SHARING PLANS
We sponsor various defined benefit and defined contribution retirement
plans, including various employee savings and profit sharing plans, and
contribute to various multi-employer pension plans on behalf of our 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 1998, 1997 and 1996, our
retirement and profit sharing plan expenses were as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------
1998 1997 1996
------- -------------- ------
(IN THOUSANDS)
<S> <C> <C> <C>
Defined benefit plans................................ $ 3,176 $1,061 $1,136
Defined contribution plans........................... 7,077 2,232 1,677
Multi-employer pension plans......................... 3,987 2,715 2,493
------- ------ ------
$14,240 $6,008 $5,306
======= ====== ======
</TABLE>
Defined Benefit Plans -- The benefits under our defined benefit plans are
based on years of service and employee compensation. Our 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.
F-21
<PAGE> 47
SUIZA FOODS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following table sets forth the funded status of our defined benefit
plans and the amounts recognized in our consolidated balance sheets:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1998 1997
---------- -----------
(IN THOUSANDS)
<S> <C> <C>
CHANGE IN BENEFIT OBLIGATION
Benefit obligation at beginning of year..................... $ 23,758 $ 20,161
Service cost.............................................. 4,047 1,200
Interest cost............................................. 5,842 1,454
Assumption change......................................... 396 847
Actuarial loss............................................ 3,996 298
Acquisitions.............................................. 117,099
Benefits paid............................................. (6,355) (846)
Other..................................................... (564) 644
---------- -----------
Benefit obligation at end of year........................... 148,219 23,758
---------- -----------
CHANGE IN PLAN ASSETS
Fair value of plan assets at beginning of year.............. 20,480 16,987
Actual return on plan assets.............................. 8,138 2,573
Acquisitions.............................................. 107,358
Employer contribution..................................... 6,886 1,773
Benefits paid............................................. (6,355) (846)
Other..................................................... 70 (7)
---------- -----------
Fair value of plan assets at end of year.................... 136,577 20,480
---------- -----------
Funded status............................................... (11,642) (3,278)
Unrecognized net transition obligation.................... 2,281 2,354
Unrecognized prior service cost........................... 1,319 1,427
Unrecognized net (gain)loss............................... 1,542 (1,519)
---------- -----------
Net amount recognized....................................... $ (6,500) $ (1,016)
========== ===========
Amounts recognized in the statement of financial position
consist of:
Prepaid benefit cost........................................ $ 2,585 $ 1,069
Accrued benefit liability................................... (10,596) (3,547)
Intangible asset............................................ 1,391 1,462
Accumulated other comprehensive income...................... 120
---------- -----------
Net amount recognized....................................... $ (6,500) $ (1,016)
========== ===========
Weighted-average assumptions as of December 31:
Discount rate............................................... 6.50% 6.50-6.80%
Expected return on plan assets.............................. 3.50-9.00% 3.50%-9.00%
Rate of compensation increase............................... 0%-9.00% 0%-9.00%
</TABLE>
F-22
<PAGE> 48
SUIZA FOODS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
DECEMBER 31,
----------------
1998 1997
------- ------
(IN THOUSANDS)
<S> <C> <C>
COMPONENTS OF NET PERIODIC BENEFIT COST
Service cost.............................................. $ 4,057 $1,200
Interest cost............................................. 5,842 1,454
Expected return on plan assets............................ (6,890) (1,467)
Amortization of unrecognized transition
(asset)/obligation..................................... 194 180
Amortization of prior service cost........................ 109 118
Amortization of unrecognized net (gain)/loss.............. (13) (17)
Recognized net actuarial loss from curtailment............ (670)
------- ------
Net periodic benefit cost................................... $ 2,629 $1,468
======= ======
</TABLE>
Defined Contribution Plans -- Certain of our non-union personnel may elect
to participate in savings and profit sharing plans sponsored by us. These plans
generally provide for salary reduction contributions to the plans on behalf of
the participants of between 1% and 17% of a participant's annual compensation
and provide for employer matching and profit sharing contributions as determined
by our 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 $21 to $39 per pay period
per participant.
Multi-Employer Pension Plans -- Certain of our 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 our other plans. 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. We could, under certain circumstances, be liable for
unfunded vested benefits or other expenses of jointly administered
union/management plans. At this time, we have not established any liabilities
because withdrawal from these plans is not probable or reasonably possible.
14. POSTRETIREMENT BENEFITS OTHER THAN PENSIONS
Certain of our subsidiaries provide health care benefits to certain
retirees who are covered under specific group contracts. 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.
<TABLE>
<CAPTION>
DECEMBER 31,
---------------
1998 1997
------ ------
(IN THOUSANDS)
<S> <C> <C>
CHANGE IN BENEFIT OBLIGATION
Benefit obligation at beginning of year..................... $3,198 $3,161
Service cost.............................................. 41
Interest cost............................................. 247 184
Actuarial (gain)/loss..................................... (146) 27
Acquisition............................................... 906
Benefits paid............................................. (298) (174)
------ ------
Benefit obligation at end of year........................... $3,948 $3,198
------ ------
</TABLE>
F-23
<PAGE> 49
SUIZA FOODS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------
1998 1997
------- -------
(IN THOUSANDS)
<S> <C> <C>
Fair value of plan assets at end of year.................... $ -- $ --
------- -------
Funded status............................................... (3,948) (3,198)
Unrecognized net loss..................................... (411) (286)
------- -------
Net amount recognized -- accrued benefit liability.......... $(4,359) $(3,484)
======= =======
Weighted-average assumptions as of December 31
Discount rate............................................. 6.50% 7.00%
HEALTH CARE INFLATION
Initial rate................................................ 7.68% 8.17%
Ultimate rate............................................... 4.75% 5.00%
Year of ultimate rate achievement........................... 2005 2005
</TABLE>
For measurement purposes, a 7.68 and 8.17 percent annual rate of increase
in the per capita cost of covered health care benefits was assumed for 1998 and
1997, respectively. The rate was assumed to decrease gradually to 4.75 and 5.00
percent for 2005 and remain at that level thereafter for 1998 and 1997,
respectively.
<TABLE>
<CAPTION>
DECEMBER 31,
---------------
1998 1997
------ ------
(IN THOUSANDS)
<S> <C> <C>
COMPONENTS OF NET PERIODIC BENEFIT COST
Service and interest cost................................... $289 $184
Amortization of unrecognized net (gain)/loss................ (21) (6)
---- ----
Net periodic benefit cost................................... $268 $178
==== ====
</TABLE>
Assumed health care cost trend rates have a significant effect on the
amounts reported for the health care plans. A one-percentage-point change in
assumed health care cost trend rates would change the amount of the net periodic
benefit cost and the post-retirement benefit obligation by between 7% and 10%.
15. MERGER AND OTHER COSTS
During 1997 and 1996 we incurred merger and other costs of $37.0 million
and $.6 million, respectively. The following table summarizes the nature and
amount of the costs recorded in merger and other costs:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------
1997 1996
------- ----
(IN THOUSANDS)
<S> <C> <C>
Merger fees and expenses.................................... $17,766 $ --
Severance and employment costs.............................. 17,555
Costs of uncompleted transactions........................... 505
Other costs................................................. 1,177 571
------- ----
$37,003 $571
======= ====
</TABLE>
Merger fees and expenses include primarily fees paid to investment bankers
and investment advisors, professional fees and various merger-related filing
fees. Severance and employment costs include primarily payments to employees
terminated at the merger date and payments for retention bonuses and excise
F-24
<PAGE> 50
SUIZA FOODS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
taxes, pursuant to preexisting employment agreements. Costs of uncompleted
transactions include the costs and expenses related to abandoned acquisitions in
1997. Other costs primarily include certain bank fees and bridge loan fees paid
in 1996 and the cost of the consolidation of our corporate offices in connection
with the Morningstar merger in 1997.
16. SUPPLEMENTAL CASH FLOW INFORMATION
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------
1998 1997 1996
-------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Cash paid for interest and financing charges......... $ 74,989 $43,386 $21,896
Cash paid for taxes.................................. 17,908 23,668 10,477
Noncash transactions:
Issuance of notes payable and common and preferred
stock in connection with business and property
acquisitions.................................... 136,751 17,049 1,993
Issuance of mandatorily redeemable preferred
securities and subsidiary preferred and common
securities in connection with two
acquisitions.................................... 220,000
Subordinated notes and preferred stock issued in
lieu of interest and dividends.................. 236
</TABLE>
17. COMMITMENTS AND CONTINGENCIES
Leases -- We lease certain property, plant and equipment used in our
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 $48.0 million, $18.5 million and $14.2 million for the years ended
December 31, 1998, 1997 and 1996, respectively.
The composition of capital leases which are reflected as property, plant
and equipment in our balance sheets is as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1998 1997
------- -----
(IN THOUSANDS)
<S> <C> <C>
Buildings and improvements.................................. $ 8,591 $ --
Machinery and equipment..................................... 13,984 713
Less accumulated amortization............................... (3,833) (437)
------- -----
$18,742 $ 276
======= =====
</TABLE>
F-25
<PAGE> 51
SUIZA FOODS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Future minimum payments at December 31, 1998, under noncancelable capital
and operating leases with terms in excess of one year are summarized below:
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES
------- ---------
(IN THOUSANDS)
<S> <C> <C>
1999........................................................ $ 5,882 $ 46,745
2000........................................................ 4,622 42,322
2001........................................................ 4,296 37,912
2002........................................................ 2,987 32,030
2003........................................................ 2,283 27,316
Thereafter.................................................. 3,017 21,214
------- --------
Total minimum lease payments................................ 23,087 207,539
========
Less amount representing interest........................... (2,444)
-------
Present value of capital lease obligations.................. $20,643
=======
</TABLE>
Litigation -- We and our subsidiaries are parties, in the ordinary course
of business, to certain claims and litigation. In our opinion, the settlement of
such matters is not expected to have a material impact on our financial
position, results of operations or cash flows.
Employment Agreements -- As of December 31, 1998, we 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.
18. FAIR VALUE OF FINANCIAL INSTRUMENTS
Pursuant to SFAS No. 107, "Disclosure About Fair Value of Financial
Instruments," we are required to disclose an estimate of the fair value of our
financial instruments as of December 31, 1998 and 1997. 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 our revolving credit and certain other
debt are variable, their fair values approximate their carrying values. In
addition, we have entered into various interest rate agreements to reduce our
sensitivity to changes in interest rates on our variable rate debt. The fair
values of these instruments were determined based on current values for similar
instruments with similar terms. At December 31, 1998 the recorded liability
related to these instruments was $5.9 million compared to a fair market
liability of $17.3 million. The fair value of these instruments approximated
their carrying value at December 31, 1997.
Certain subsidiary fixed rate senior secured notes are carried at a value
of approximately $131.1 million at December 31, 1998. The fair value of these
notes was determined by discounting future cash flows at current market yields
and approximated $127.5 million at December 31, 1998. These notes were assumed
in a 1998 acquisition. The carrying value of other fixed rate debt approximates
fair value at December 31, 1998 and 1997.
19. BUSINESS AND GEOGRAPHIC INFORMATION AND MAJOR CUSTOMERS
We have two reportable segments: dairy and packaging. Our dairy products
and related distribution businesses manufacture and distribute fluid milk, ice
cream and novelties, dairy and non-dairy coffee
F-26
<PAGE> 52
SUIZA FOODS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
creamers, half-and-half and whipping cream, sour cream, cottage cheese, yogurt,
dairy and non-dairy frozen whipped toppings as well as certain refrigerated,
frozen and extended shelf-life products on a national basis. We also manufacture
and distribute fruit juices and other flavored drinks, bottled water and coffee.
Our plastic packaging businesses manufacture rigid plastic bottles and
containers and metal cans for dairy manufacturers, bottled water processors,
beverage manufacturers, and consumer and industrial products companies.
The accounting policies of the segments are the same as those described in
the summary of significant accounting policies. We evaluate performance based on
profit or loss from operations before income taxes not including nonrecurring
gains and losses and foreign exchange gains and losses.
Our reportable segments are strategic business units that offer different
products and services. They are managed separately because each business
requires different technology and marketing strategies. The underlying
businesses were acquired as individual units, and the management at the time of
the acquisition was, in large part, retained.
We do not allocate income taxes or unusual items to segments. In addition,
not all segments have significant noncash items other than depreciation and
amortization in reported profit or loss. The amounts in the following tables are
those amounts from reports used by our executive management team for the year
ended December 31:
<TABLE>
<CAPTION>
SEGMENT
DAIRY PACKAGING TOTAL
---------- --------- ----------
(IN THOUSANDS)
<S> <C> <C> <C>
1998
Revenues from external customers................... $2,816,195 $504,745 $3,320,940
Intersegment revenues.............................. 19,088 29,379 48,467
Segment operating income........................... 204,319 56,186 260,505
Income from continuing operations before income
taxes........................................... 182,843 28,055 210,898
Depreciation and amortization...................... 68,616 22,309 90,925
Total segment assets............................... 2,136,560 825,454 2,962,014
Capital expenditures for segment assets............ 100,854 72,323 173,177
1997
Revenues from external customers................... $1,743,240 $ 52,628 $1,795,868
Intersegment revenues.............................. 6,300 2,312 8,612
Segment operating income........................... 133,996 4,862 138,858
Income from continuing operations before income
taxes........................................... 83,140 (178) 82,962
Depreciation and amortization...................... 41,162 2,233 43,395
Total segment assets............................... 1,121,791 156,351 1,278,142
Capital expenditures for segment assets............ 52,642 9,313 61,955
1996
Revenues from external customers................... $1,207,565 $1,207,565
Intersegment revenues..............................
Segment operating income........................... 64,770 64,770
Income from continuing operations before income
taxes........................................... 50,598 50,598
Depreciation and amortization...................... 27,160 27,160
Total segment assets............................... 774,574 774,574
Capital expenditures for segment assets............ 30,001 30,001
</TABLE>
F-27
<PAGE> 53
SUIZA FOODS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following are reconciliations of reportable segment amounts to our
consolidated totals for each year:
<TABLE>
<CAPTION>
SEGMENT CORPORATE TOTAL
---------- --------- ----------
(IN THOUSANDS)
<S> <C> <C> <C>
1998
Operating income................................ $ 260,505 $(18,049) $ 242,456
Income from continuing operations before income
taxes........................................ 210,898 (46,447) 164,451
Depreciation and amortization................... 90,925 854 91,779
Total segment assets............................ 2,962,014 51,769 3,013,783
Capital expenditures for segment assets......... 173,177 3,693 176,870
1997
Operating income................................ $ 138,858 $(43,972) $ 94,886
Income from continuing operations before income
taxes........................................ 82,962 (257) 82,705
Depreciation and amortization................... 43,395 1,212 44,607
Total segment assets............................ 1,278,142 125,320 1,403,462
Capital expenditures for segment assets......... 61,955 165 62,120
1996
Operating income................................ $ 64,770 $ (3,760) $ 61,010
Income from continuing operations before income
taxes........................................ 50,598 (796) 49,802
Depreciation and amortization................... 27,160 843 28,003
Total segment assets............................ 774,574 59,050 833,624
Capital expenditures for segment assets......... 30,001 78 30,079
</TABLE>
<TABLE>
<CAPTION>
LONG-LIVED
REVENUES ASSETS
---------- ----------
(IN THOUSANDS)
<S> <C> <C>
Geographic Information
United States............................................. $2,904,498 $1,992,879
Puerto Rico............................................... 243,870 122,336
Europe.................................................... 172,572 90,958
---------- ----------
Total............................................. $3,320,940 $2,206,173
========== ==========
</TABLE>
We have no one customer within any segment which represents greater than
ten percent of our consolidated revenues.
F-28
<PAGE> 54
SUIZA FOODS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
20. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The following is a summary of the unaudited quarterly results of operations
for 1998 and 1997 (in thousands, except per share data):
<TABLE>
<CAPTION>
QUARTER
-------------------------------------------
FIRST SECOND THIRD FOURTH
-------- -------- -------- --------
<S> <C> <C> <C> <C>
1998
Net sales.............................. $593,121 $768,120 $968,104 $991,595
Gross profit........................... 136,973 185,907 220,795 219,357
Income from continuing operations...... 18,053(2) 29,630 28,313 27,073
Income before extraordinary gain....... 14,892(2) 29,630 28,313 27,073
Net income............................. 14,892 61,328(3) 28,313 27,073
Basic earnings per common share(1):
Income before extraordinary gain.... 0.48 0.91 0.82 0.81
Net income.......................... 0.48 1.88 0.82 0.81
Diluted earnings per common share(1):
Income before extraordinary gain.... 0.45 0.82 0.76 0.76
Net income.......................... 0.45 1.54 0.76 0.76
1997
Net sales.............................. $365,678 $381,689 $499,836 $548,665
Gross profit........................... 82,320 90,080 114,662 127,722
Income (loss) from continuing
operations.......................... 22,405 16,263 16,937 (16,275)
Income (loss) before extraordinary
loss................................ 20,739 17,577 19,711 (17,980)
Net income (loss)...................... 17,469(4) 17,577 19,711 (25,993)(5)
Basic earnings (loss) per common
share(1):
Income (loss) before extraordinary
loss.............................. 0.74 0.59 0.65 (0.60)
Net income (loss)................... 0.62 0.59 0.65 (0.86)
Diluted earnings (loss) per common
share(1):
Income (loss) before extraordinary
loss.............................. 0.70 0.56 0.61 (0.60)
Net income (loss)................... 0.59 0.56 0.61 (0.86)
</TABLE>
(1) Earnings per common share calculations for each of the quarters were
based on the basic and diluted weighted average number of shares
outstanding for each quarter, and the sum of the quarters may not
necessarily be equal to the full year earnings per common share amount.
(2) The difference between income (loss) from continuing operations and
income (loss) before extraordinary gain (loss) represents the results
of the discontinued operations of the packaged ice business, net of
income taxes.
(3) The results for the second quarter of 1998 include an extraordinary
gain on the sale of our packaged ice business of $35.5 million, net of
income tax, and an extraordinary loss on the early extinguishment of
our credit facility of $3.8 million, net of income tax.
(4) The results for the first quarter of 1997 include a gain on the sale of
Puerto Rico tax credits of $18.1 million ($11.5 million after income
taxes), partially offset by $3.3 million, net of income tax, of
extraordinary losses from early extinguishment of debt repaid with the
proceeds of our January 1997 equity offering.
(5) The results for the fourth quarter of 1997 include merger and other
costs of $37.0 million ($34.7 million after income tax benefits) and
$8.0 million, net of income tax, of extraordinary losses from early
extinguishment of debt repaid with the proceeds of our new senior
credit facility in November 1997, along with a gain of $3.7 million
from the sale of previously recognized tax credits which resulted in an
after tax loss of $1.9 million.
F-29
<PAGE> 55
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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
By: /s/ GREGG L. ENGLES
----------------------------------
Gregg L. Engles
Chairman of the Board,
Chief Executive Officer
By: /s/ BARRY A. FROMBERG
----------------------------------
Barry A. Fromberg
Executive Vice President and
Chief Financial Officer
Dated March 26, 1999
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below by the following persons in the capacities and on
the dates indicated.
<TABLE>
<CAPTION>
NAME TITLE DATE
- ---- ----- ----
<S> <C> <C>
/s/ GREGG L. ENGLES Chief Executive Officer and March 26, 1999
- ----------------------------------------------------- Chairman of the Board
Gregg L. Engles
/s/ ALAN BERNON Director March 26, 1999
- -----------------------------------------------------
Alan Bernon
/s/ CLETES O. BESHEARS Director March 26, 1999
- -----------------------------------------------------
Cletes O. Beshears
/s/ HECTOR M. NEVARES Director March 26, 1999
- -----------------------------------------------------
Hector M. Nevares
/s/ STEPHEN L. GREEN Director March 26, 1999
- -----------------------------------------------------
Stephen L. Green
/s/ ROBERT L. KAMINSKI Director March 26, 1999
- -----------------------------------------------------
Robert L. Kaminski
/s/ DAVID F. MILLER Director March 26, 1999
- -----------------------------------------------------
David F. Miller
/s/ JOHN MUSE Director March 26, 1999
- -----------------------------------------------------
John Muse
</TABLE>
F-30
<PAGE> 56
<TABLE>
<CAPTION>
NAME TITLE DATE
- ---- ----- ----
<S> <C> <C>
/s/ DELTON PARKS Director March 26, 1999
- -----------------------------------------------------
Delton Parks
/s/ P. EUGENE PENDER Director March 26, 1999
- -----------------------------------------------------
P. Eugene Pender
/s/ JOSEPH S. HARDIN, JR. Director March 26, 1999
- -----------------------------------------------------
Joseph S. Hardin, Jr.
/s/ JIM TURNER Director March 26, 1999
- -----------------------------------------------------
Jim Turner
</TABLE>
F-31
<PAGE> 57
SCHEDULE II
SUIZA FOODS CORPORATION AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
(IN THOUSANDS)
Allowance for doubtful accounts deducted from accounts receivable:
<TABLE>
<CAPTION>
RECOVERIES
BALANCE - CHARGED TO OF WRITE-OFF OF
BEGINNING PROFIT & LOSS ACCOUNTS UNCOLLECTIBLE BALANCE -
YEAR OF YEAR OR INCOME ACQUISITIONS WRITTEN OFF ACCOUNTS END OF YEAR
- ---- ---------- -------------- ------------ ----------- ------------- ------------
<S> <C> <C> <C> <C> <C> <C>
1996 3,225 1,110 232 21 1,645 2,943
1997 2,943 1,838 260 8 1,460 3,589
1998 3,589 4,260 13,836 47 2,429 19,303
</TABLE>
<PAGE> 58
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT NUMBER DESCRIPTION
-------------- -----------
<S> <C>
2.1 -- Amended and Restated Reorganization Agreement
(incorporated by reference from our Registration
Statement on Form S-1 (File No. 333-1858)).
3.1 -- Certificate of Incorporation dated September 19, 1994
(incorporated by reference from our Quarterly Report on
Form 10-Q for the quarter ended June 30, 1997 (File No.
1-12755).
3.2 -- Certificate of Amendment to Certificate of Incorporation
dated March 27, 1995 (incorporated by reference from our
Quarterly Report on Form 10-Q for the quarter ended June
30, 1997 (File No. 1-12755)).
3.3 -- Certificate of Correction of Certificate of Amendment to
Certificate of Incorporation Dated June 6, 1995
(incorporated by reference from our Quarterly Report on
Form 10-Q for the quarter ended June 30, 1997 (File No.
1-12755)).
3.4 -- Certificate of Amendment to Certificate of Incorporation
dated February 29, 1996 (incorporated by reference from
our Quarterly Report on Form 10-Q for the quarter ended
June 30, 1997 (File No. 1-12755)).
3.5 -- Certificate of Amendment to Certificate of Incorporation
dated May 15, 1997 (incorporated by reference from our
Quarterly Report on Form 10-Q for the quarter ended June
30, 1997 (File No. 1-12755)).
3.6 -- Certificate of Amendment of Certificate of Incorporation
(incorporated by reference from our Quarterly Report on
Form 10-Q for the quarter ended June 30, 1998 (File No.
1-12755)).
3.7 -- Bylaws (incorporated by reference to the Company's
Registration Statement on Form S-1 (File No. 333-1858)).
4.1 -- Specimen of Common Stock Certificate (incorporated by
reference to our Registration Statement On Form S-1 (File
No. 333-1858)).
4.2 -- Registration Rights Agreement (incorporated by reference
to our Registration Statement on Form S-1 (File No.
333-1858)).
4.3 -- Rights Agreement dated March 6, 1998 among us and Harris
Trust & Savings Bank, as rights agent, which includes as
Exhibit A the Form of Rights Certificate (incorporated by
reference from the Registration Statement on Form 8-A
filed on March 10, 1998 (File No. 1-12755)).
4.4 -- Certificate of Trust of Suiza Capital Trust II
(incorporated by reference from our Quarterly Report on
Form 10-Q for the quarter ended March 31, 1998 (File No.
1-12755)).
4.5 -- Amended and Restated Declaration of Trust of Suiza
Capital Trust II, dated as of March 24, 1998, among us,
as Sponsor, Wilmington Trust Company, as Property
Trustee, Wilmington Trust Company, as Delaware Trustee,
and Tracy L. Noll, J. Michael Lewis and Joseph B. Armes,
as Regular Trustees (incorporated by reference from our
Quarterly Report on Form 10-Q for the quarter ended March
31, 1998 (File No. 1-12755)).
4.6 -- Indenture for the 5.5% Convertible Subordinated
Debentures, dated as of March 24, 1998, among us and
Wilmington Trust Company, as Indenture Trustee
(incorporated by reference from our Quarterly Report on
Form 10-Q for the quarter ended March 31, 1998 (File No.
1-12755)).
4.7 -- Form of 5.5% Preferred Securities (incorporated by
reference from our Quarterly Report on Form 10-Q for the
quarter ended March 31, 1998 (File No. 1-12755)).
</TABLE>
<PAGE> 59
<TABLE>
<CAPTION>
EXHIBIT NUMBER DESCRIPTION
-------------- -----------
<S> <C>
4.8 -- Form of 5.5% Convertible Subordinated Debenture
(incorporated by reference from our Quarterly Report on
Form 10-Q for the quarter ended March 31, 1998 (File No.
1-12755)).
4.9 -- Preferred Securities Guarantee Agreement, dated as of
March 24, 1998, between us, as Guarantor, and Wilmington
Trust Company, as Guarantee Trustee (incorporated by
reference from our Quarterly Report on Form 10-Q for the
quarter ended March 31, 1998 (File No. 1-12755)).
4.10 -- Registration Rights Amendment, dated March 24, 1998,
between us, Suiza Capital Trust II, and Donaldson,
Lufkin, Jenrette Securities Corporation, Bear, Stearns &
Co. Inc. and J.P. Morgan & Co. (incorporated by reference
from our Quarterly Report on Form 10-Q for the quarter
ended March 31, 1998 (File No. 1-12755)).
*10.1 -- Suiza Foods Corporation Exchange Stock Option and
Restricted Stock Plan (incorporated by reference to our
Registration Statement on Form S-1 (File No. 333-1858)).
*10.2 -- Suiza Foods Corporation 1995 Stock Option and Restricted
Stock Plan (incorporated by reference to our Registration
Statement on Form S-1 (File No. 333-18263)).
*10.3 -- Amended and Restated 1997 Stock Option and Restricted
Stock Plan (incorporated by reference from our Quarterly
Report on Form 10-Q for the quarter ended June 30, 1998
(File No. 1-12755)).
*10.4 -- 1997 Employee Stock Purchase Plan (incorporated by
reference from our Quarterly Report on Form 10-Q for the
quarter ended June 30, 1997, as amended on October 24,
1997 (File No. 1-12755)).
*10.5 -- First Amendment to the 1997 Employee Stock Purchase Plan
(incorporated by reference from our Quarterly Report on
Form 10-Q for the quarter ended June 30, 1997, as amended
on October 24, 1997 (File No. 1-12755)).
*10.6 -- Second Amendment to the 1997 Employee Stock Purchase Plan
(incorporated by reference from our Quarterly Report on
Form 10-Q for the quarter ended June 30, 1997, as amended
on October 24, 1997 (File No. 1-12755)).
*10.7 -- 1991 Incentive and Nonstatutory Stock Option Plan of
Morningstar (incorporated by reference from Morningstar's
Registration Statement on Form S-1 (No. 33-45805) filed
on February 19, 1992).
*10.8 -- 1992 Incentive and Nonstatutory Stock Option Plan
(incorporated by reference from Morningstar's
Registration Statement on Form S-1 (No. 33-45805) filed
on February 19, 1992).
*10.9 -- 1994 Incentive and Nonstatutory Stock Option Plan
(incorporated by reference from Morningstar's
Registration Statement on Form S-8 (No. 33-53975) filed
on June 6, 1994).
*10.10 -- 1996 Director Stock Option Plan (incorporated by
reference from Morningstar's Annual Report on Form 10-K
(No. 0-19075) for the year ended December 31, 1996).
*10.11 -- Country Fresh, Inc. 1989 Stock Option Plan (incorporated
by reference from our Annual Report on Form 10-K for the
year ended December 31, 1997 (File No. 1-12755)).
*10.14 -- Form of Stock Option Agreement for Messrs. Gregg L.
Engles, C.O. Beshears, William P. Brick, Hector M.
Nevares and Tracy L. Noll under the 1995 Stock Option and
Restricted Stock Plan (incorporated by reference from our
Quarterly Report on Form 10-Q for the quarter ended June
30, 1997, as amended on October 24, 1997 (File No.
1-12755)).
</TABLE>
<PAGE> 60
<TABLE>
<CAPTION>
EXHIBIT NUMBER DESCRIPTION
-------------- -----------
<S> <C>
*10.15 -- Form of Restricted Stock Agreement for Messrs. C.O.
Beshears and William P. Brick under the 1995 Stock Option
and Restricted Stock Plan (incorporated by reference from
our Quarterly Report on Form 10-Q for the quarter ended
June 30, 1997, as amended on October 24, 1997 (File No.
1-12755)).
*10.16 -- Form of Stock Option Agreement for Messrs. Gregg L.
Engles, William P. Brick, Hector M. Nevares and Tracy L.
Noll under the 1997 Stock Option and Restricted Stock
Plan (incorporated by reference from our Quarterly Report
on Form 10-Q for the quarter ended June 30, 1997, as
amended on October 24, 1997 (File No. 1-12755)).
*10.17 -- Stock Option Agreement dated as of October 13, 1994 among
Country Fresh, Inc. and Delton C. Parks under the Country
Fresh, Inc. 1989 Stock Option Plan (incorporated by
reference from our Annual Report on Form 10-K for the
year ended December 31, 1997 (File No. 1-12755)).
10.18 -- Asset Purchase Agreement, dated as of June 11, 1997, by
and among DF Acquisition Corp., Dairy Fresh L.P., and us
(incorporated by reference from our Current Report on
Form 8-K filed July 14, 1997, as amended on August 22,
1997 (File No. 1-12755)).
10.19 -- Stock Purchase Agreement dated June 20, 1997 among us,
Peter M. Bernon, Alan J. Bernon, and the other
stockholders named therein and the Garelick Companies
(incorporated by reference from our Quarterly Report on
Form 10-Q for the quarter ended June 30, 1997, as amended
on October 24, 1997 (File No. 1-12755)).
10.20 -- Amendment No. 1 to the Stock Purchase Agreement dated
July 30, 1997 among us, Peter M. Bernon, Alan J. Bernon,
and the other stockholders named therein and the Garelick
Companies (incorporated by reference from our Quarterly
Report on Form 10-Q for the quarter ended June 30, 1997,
as amended on October 24, 1997 (File No. 1-12755)).
10.21 -- Stockholders Agreement dated July 31, 1997 among us,
Franklin Plastics, Peter M. Bernon and Alan J. Bernon
(incorporated by reference from our Quarterly Report on
Form 10-Q for the quarter ended June 30, 1997, as amended
on October 24, 1997 (File No. 1-12755)).
10.22 -- Agreement and Plan of Merger dated as of September 18,
1997 by and among us, CF Acquisition Corp. and Country
Fresh, Inc. (incorporated by reference from our
Registration Statement on Form S-4 (File No. 333-37861)).
10.23 -- Agreement and Plan of Merger dated as of September 28,
1997 by and among us, SF Acquisition Corp. and The
Morningstar Group Inc. (incorporated by reference from
our Registration Statement on Form S-4 (File No.
333-37869)).
10.24 -- Agreement and Plan of Merger dated as of January 14, 1998
by and among us, CC Acquisition Corp. and Continental Can
Company, Inc. (incorporated by reference from our
Registration Statement on Form S-4 (File No. 333-46519)).
10.25 -- Membership Interest Purchase Agreement and
Recapitalization Agreement, dated as of January 31, 1998,
by and among us, Dairy Farmers of America, Inc., DFA
Investment Company and Land-O-Sun Dairies, Inc.
(incorporated by reference from our Current Report on
Form 8-K filed on March 9, 1998 (File No. 1-12755)).
10.26 -- First Amendment to Membership Interest Purchase Agreement
and Recapitalization Agreement, dated as of February 20,
1998, by and among LOS Holdings, Inc. (as our assignee),
Dairy Farmers of America, Inc., DFA Investment Company
and LOS Dairies, Inc. (as assignee of Land-O-Sun Dairies,
Inc.) (incorporated by reference from our Current Report
on Form 8-K filed on March 9, 1998 (File No. 1-12755)).
</TABLE>
<PAGE> 61
<TABLE>
<CAPTION>
EXHIBIT NUMBER DESCRIPTION
-------------- -----------
<S> <C>
10.27 -- Amended and Restated Declaration of Trust of Suiza
Capital Trust, dated as of February 20, 1998
(incorporated by reference from our Current Report on
Form 8-K filed on March 9, 1998 (File No. 1-12755)).
10.28 -- Preferred Securities Guarantee Agreement, dated as of
February 20, 1998 (incorporated by reference from our
Current Report on Form 8-K filed on March 9, 1998 (File
No. 1-12755)).
10.29 -- Registration Rights Agreement, dated as of February 20,
1998, between DFA Investment Company and us (incorporated
by reference from our Current Report on Form 8-K filed on
March 9, 1998 (File No. 1-12755)).
10.30 -- Indenture, dated as of February 20, 1998, between us, as
Issuer, and Wilmington Trust Company, as Trustee
(incorporated by reference from our Current Report on
Form 8-K filed on March 9, 1998 (File No. 1-12755)).
10.31 -- 5% Convertible Subordinated Debenture due 2018, issued by
us to Suiza Capital Trust on February 20, 1998
(incorporated by reference from our Current Report on
Form 8-K filed on March 9, 1998 (File No. 1-12755)).
10.34 -- Certificate for Preferred Securities of Suiza Capital
Trust, issued to DFA Investment Company on February 20,
1998 (incorporated by reference from our Current Report
on Form 8-K filed March 9, 1998 (File No. 1-12755)).
10.35 -- Amended and Restated Credit Agreement dated as of May 22,
1998 between us, each of the Lenders identified therein;
and First Union National Bank, as administrative agent
for the Lenders (incorporated by reference from our
Quarterly Report on Form 10-Q for the quarter ended June
30, 1998 (File No. 1-12755)).
10.36 -- Consent and Waiver dated as of December 1, 1998 between
us, each of the Lenders identified therein; and First
Union National Bank, as administrative agent for the
Lenders (filed herewith).
10.37 -- Agreement and Plan of Merger dated as of September 10,
1998 by and among us, Broughton Foods Acquisition
Corporation and Broughton Foods Company (incorporated by
reference from our Quarter by Report on Form 10-Q for the
quarter ended September 30, 1998 (File No. 1-12755)).
*10.38 -- Form of Severance Agreement for our dairy executive
officers (filed herewith).
*10.39 -- Form of Severance Agreement for certain senior officers
(filed herewith).
*10.40 -- Form of Severance Agreement for certain other officers
(filed herewith).
*10.41 -- Form of Severance Agreement for our packaging executive
officers (filed herewith).
*10.42 -- Form of Severance Agreement for certain packaging senior
officers (filed herewith).
11 -- Computation of Per Share Earnings (filed herewith).
12 -- Statement re computation of ratios (filed herewith).
21 -- List of Subsidiaries (filed herewith).
23 -- Consent of Arthur Andersen LLP (filed herewith).
27 -- Financial Data Schedule (filed herewith).
</TABLE>
- ---------------
* Management or compensatory contract
<PAGE> 1
EXHIBIT 10.36
CONSENT AND WAIVER
[Northeast Venture]
CONSENT AND WAIVER (this "Consent and Waiver"), dated as of December
1, 1998, relating to the Amended and Restated Credit Agreement, dated as of May
22, 1998 (as amended, supplemented or otherwise modified and in effect on the
date hereof, the "Credit Agreement"), between Suiza Foods Corporation, a
Delaware corporation (the "Company"), the lenders party thereto (the "Lenders")
and First Union National Bank, as administrative agent for the Lenders (in such
capacity, the "Agent").
WHEREAS, the corporations named on Schedule A, Part I, hereto
(hereinafter collectively referred to as the "Suiza Contributed Subsidiaries")
are, directly or indirectly, Wholly Owned Subsidiaries of the Company and
parties to the Subsidiary Guarantee and Security Agreement (as defined in the
Credit Agreement);
WHEREAS, the entities named on Schedule A, Part II, hereto
(hereinafter collectively referred to as the "DFA Contributed Subsidiaries")
are, directly or indirectly, Subsidiaries of Dairy Farmers of America, Inc., a
Kansas cooperative marketing association ("DFA"), and/or Mid-Am Capital,
L.L.C., a limited liability company ("Mid-Am");
WHEREAS, the Company, DFA and Mid-Am desire to enter into a series of
transactions pursuant to which: (i) the Suiza Contributed Subsidiaries will be
merged with and into a Delaware limited liability company (the "Northeast
Venture"), such that the Northeast Venture will survive as a Subsidiary of the
Company; and (ii) DFA and Mid-Am will contribute ownership interests of,
transfer assets of, or cause the merger of, the DFA Contributed Subsidiaries
with or to the Northeast Venture (collectively, the "Transaction");
WHEREAS, upon consummation of the Transaction: (i) seventy-five
percent (75%) of each of the common and preferred ownership interests of the
Northeast Venture will be owned and controlled by the Company or its
Subsidiaries (other than the Northeast Venture); (ii) the remaining twenty-five
percent (25%) of the common ownership interests of the Northeast Venture will
be owned and controlled by DFA; and (iii) the remaining twenty-five percent
(25%) of the preferred ownership interests of the Northeast Venture will be
owned and controlled by Mid-Am; and
WHEREAS, pursuant to the Transaction, the dairy operations of the
Company, DFA and Mid-Am located in the States of Pennsylvania, Delaware, New
Jersey, New York, Connecticut, Rhode Island, Massachusetts, Vermont, New
Hampshire, Maine and Maryland will be operated by Northeast Venture; and
WHEREAS, certain aspects of the Transaction require the consent of the
Majority Lenders or the waiver by the Majority Lenders of certain provisions of
the Credit Agreement and the Security Documents, in each case in accordance
with the terms thereof.
<PAGE> 2
NOW, THEREFORE, the Majority Lenders hereby agree as follows:
1. Defined Terms. Except as otherwise defined in this Consent and
Waiver, terms defined in the Credit Agreement are used herein as defined
therein.
2. Consent and Waiver of Credit Agreement Provisions. Subject to the
conditions set forth in Section 6 hereto and compliance with the covenants set
forth in Section 7 hereto, notwithstanding Sections 7.15, 8.03, 8.05 and 8.17
of the Credit Agreement and the other terms and provisions of the Credit
Agreement:
(a) the Majority Lenders hereby consent to the consummation
of the Transaction on substantially the terms set forth in the
recitals to this Consent and Waiver;
(b) the Majority Lenders hereby waive the provisions of
Sections 8.03 and 8.05 of the Credit Agreement to the extent
application of such provisions would prohibit the merger of the Suiza
Contributed Subsidiaries or the DFA Contributed Subsidiaries with and
into the Northeast Venture, the contribution of ownership interests in
or the transfer of assets of the DFA Contributed Subsidiaries to the
Northeast Venture or the issuance of ownership interests in the
Northeast Venture to the Company, DFA, Mid-Am or other Persons;
(c) the Majority Lenders hereby waive the provisions of
Section 7.15 of the Credit Agreement to the extent they restrict or
prevent the Northeast Venture from issuing or having outstanding
Equity Rights;
(d) the Majority Lenders hereby waive the provisions of
Sections 8.17(a), (b) and (c) of the Credit Agreement to the extent
such provisions:
(i) would require that the Northeast Venture or any
now-owned or hereafter acquired or formed Subsidiary of the
Northeast Venture be a Wholly Owned Subsidiary;
(ii) would require that the Northeast Venture or any
now-owned or hereafter acquired or formed Subsidiary of the
Northeast Venture become a party, by Joinder Agreement or
otherwise, to the Subsidiary Guarantee and Security Agreement
or any similar agreement; or
(iii) would prohibit or prevent the constituent
documents of the Northeast Venture, or of any now-owned or
hereafter acquired or formed Subsidiary thereof, or any
indenture, agreement, instrument or other arrangement to
which the Northeast Venture or such Subsidiary may be a
party, from prohibiting or restraining or having the effect
of prohibiting or restraining or imposing materially adverse
conditions upon the ability of the Northeast Venture, or any
such Subsidiary thereof, to incur Indebtedness, grant Liens,
make loans, advances or Investments or sell, assign, transfer
or otherwise dispose of Property;
2
<PAGE> 3
provided, that the Northeast Venture shall not incur Indebtedness or
grant Liens other than Indebtedness or Liens of the DFA Contributed
Subsidiaries or Persons or Property acquired by, or merged into, the
Northeast Venture, which Indebtedness and Liens (x) otherwise satisfy
the requirements of Sections 8.06 and 8.07 of the Credit Agreement, as
applicable, (y) existed before such acquisition or merger and were not
created in anticipation thereof and (z) in the case of Liens, were
created solely for the purpose of securing Indebtedness representing,
or incurred to finance, refinance or refund, the cost of the Property
subject thereto (provided that (A) no such Lien shall extend to or
cover any Property of the Company or any Subsidiary other than the
Property so acquired, and (B) the principal amount of Indebtedness
secured by any such Lien shall at no time exceed the fair market value
(as determined in good faith by a Responsible Financial Officer of the
Company) of such Property at the time it was acquired);
provided, further, that the Northeast Venture shall not make loans,
advances or Investments or sell, assign, transfer or otherwise dispose
of Property except in accordance with Sections 8.08 or 8.05(c) of the
Credit Agreement, as applicable; and
provided, further, that such constituent documents, indentures,
agreements or other arrangements shall impose no restrictions on the
ability of the Northeast Venture to pay dividends or make other
distributions, other than to give priority to the payment of any
dividends or distributions to any preferred capital stock or other
preferred ownership interests in the Northeast Venture;
(e) the Majority Lenders hereby acknowledge and agree that
Northeast Venture and each of its Subsidiaries shall be a Subsidiary
of the Company, but shall not be an Affiliate of the Company, for all
purposes of the Credit Agreement; and
(f) subject to compliance with the other terms of the Credit
Agreement, the Majority Lenders hereby consent to the Company's future
acquisition of all or any portion of the remaining ownership interests
in the Northeast Venture; provided, however, upon the acquisition by
the Company or its Subsidiaries of all the outstanding capital stock,
Equity Rights and other ownership interests of the Northeast Venture,
the Northeast Venture shall execute a Joinder Agreement and thereby
become a party to the Subsidiary Guarantee and Security Agreement.
3. Waiver of Security Agreement Provisions. Notwithstanding Sections 2
and 5.04 of the Security Agreement, the Majority Lenders hereby waive any
violation of the Security Agreement that would occur as a result of: (a) the
Company's ownership of less than all the ownership interests of the Northeast
Venture; or (b) any restrictions on the transfer or encumbrance of the
Company's interest in the Northeast Venture.
4. Release of Capital Stock of Suiza Contributed Subsidiaries. The
Agent is hereby authorized and directed to deliver all stock certificates and
related stock powers with respect to the Suiza Contributed Subsidiaries to the
Company to facilitate the consummation of the
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Transaction. Effective upon the merger of a Suiza Contributed Subsidiary into
the Northeast Venture, (i) the Subsidiary Guarantee and Security Agreement is
hereby terminated as to such Suiza Contributed Subsidiary and each such Suiza
Contributed Subsidiary is hereby released from all obligations thereunder, (ii)
the capital stock of each such Suiza Contributed Subsidiary is hereby released
from the Lien of the Security Agreement or the Subsidiary Guarantee and
Security Agreement, as the case maybe, and (iii) all references to such Suiza
Contributed Subsidiary in the Credit Agreement and the Security Documents are
hereby deleted.
5. Representations and Warranties of the Company. The Company
represents and warrants to the Agent and the Lenders that (with respect to
matters pertaining to itself and each of its Subsidiaries) as of the date
hereof and as of the date of the consummation of the Transaction:
(a) no Default has occurred and is otherwise continuing under
the Credit Agreement; and
(b) except as permitted by this Consent and Waiver, the
representations and warranties made by the Company in Section 7 of the
Credit Agreement, and by each Obligor in each of the other Loan
Documents to which it is a party, are true and complete on and as of
the date of this Consent and Waiver, and the date of the consummation
of the Transaction, with the same force and effect as if made on and
as of each such date (or, if any such representation or warranty is
expressly stated to have been made as of a specific date, as of such
specific date);
(c) on a pro forma basis after giving effect to the
Transaction, the Company shall remain in compliance with Sections
8.10, 8.11 and 8.13 of the Credit Agreement; and
(d) the businesses being conducted by the DFA Contributed
Subsidiaries are in the same line or lines of business currently
engaged in by certain Subsidiaries of the Company, or as permitted by
Section 8.14 of the Credit Agreement.
6. Conditions Precedent. The effectiveness of this Consent and Waiver
is subject to the receipt by the Agent of the following documents, each of
which shall be satisfactory to the Agent in form and substance:
(a) certified copies of the Amended and Restated Operating
Agreement and Certificate of Formation of Limited Liability Company
(or equivalent documents) of the Northeast Venture;
(b) Uniform Commercial Code searches for each DFA Contributed
Subsidiary for each jurisdiction in which such Person conducts its
respective business or in which any of its respective Properties are
located (or otherwise as the Agent may reasonably request);
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(c) appropriately completed and duly executed copies of
Uniform Commercial Code Financing Statements, sufficient to perfect in
the Agent a security interest in the ownership interests of the
Northeast Venture owned by the Company, in accordance with the
Security;
(d) an opinion, appropriately dated, of counsel to the
Northeast Venture covering such matters as the Agent may reasonably
request;
(e) an opinion, appropriately dated, of Milbank, Tweed,
Hadley & McCloy, special New York counsel to First Union, covering
such matters as the Agent may reasonably request;
(f) if requested by the Agent, environmental surveys and
assessments prepared by one or more firms of licensed engineers
(familiar with the identification of toxic and hazardous substances)
in form and substance satisfactory to the Agent, such environmental
survey and assessment to be based upon physical on-site inspections by
such firm of each of the existing sites and facilities owned, operated
or leased by the DFA Contributed Subsidiaries as well as an historical
review of the uses of such sites and facilities and of the business
and operations of the DFA Contributed Subsidiaries; and
(g) an amendment to the Security Agreement pursuant to which
the Company shall pledge all of its right, title and interest in or to
the Northeast Venture to the Agent for the benefit of the Lenders.
7. Covenants. In addition to any covenants set forth in the Credit
Agreement, the Company covenants and agrees with the Lenders and the Agent
that:
(a) the Company, together with its Subsidiaries (other than
the Northeast Venture), shall at all times collectively retain voting
control of at least 51% of each class of capital stock or other
ownership interests of the Northeast Venture;
(b) notwithstanding anything to the contrary in the
definitions of "EBITDA", the Company shall include within EBITDA for
any period no more than the pro rata share (equal to the aggregate
shares of capital stock or other ownership interests in the Northeast
Venture then held by the Company and its Subsidiaries (other than the
Northeast Venture) divided by the total shares of outstanding capital
stock or other ownership interests in the Northeast Venture) of the
Northeast Venture's operating income, depreciation and amortization,
and other income for such period; and
(c) notwithstanding anything to the contrary in the
definition of "Applicable Margin", the Applicable Margin for
Eurodollar Loans shall be 0.75% from the date of the effectiveness of
the Transaction until the Company has delivered to the Agent the
financial statements for the period ended March 31, 1999 required by
Section 8.01 of the Credit Agreement.
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8. Miscellaneous. Except as expressly provided herein, the Credit
Agreement and the Security Documents shall remain unmodified and in full force
and effect. This Consent and Waiver may be executed in any number of
counterparts, all of which taken together shall constitute one and the same
instrument and any of the parties hereto may execute this Consent and Waiver by
signing any such counterpart. This Consent and Waiver shall be governed by, and
construed in accordance with, the law of the State of New York.
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IN WITNESS WHEREOF, the parties hereto have caused this Consent and
Waiver to be duly executed and delivered as of the day and year first above
written.
COMPANY:
SUIZA FOODS CORPORATION
By: J. Michael Lewis
Title: Vice President and Treasurer
AGREED AND ACCEPTED:
FIRST UNION NATIONAL BANK,
as Administrative Agent
By: Jorge Gonzalez
Title: Senior Vice President
LENDERS
FIRST UNION NATIONAL BANK
By: Jorge Gonzalez
Title: Senior Vice President
THE FIRST NATIONAL BANK OF
CHICAGO
By: Cory M. Olson
Title: First Vice President
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<PAGE> 8
BANK OF AMERICA NT&SA
By: W. Thomas Barnett
Title: Managing Director
NATIONSBANK, N.A.
By: W. Thomas Barnett
Title: Managing Director
BANCO POPULAR DE PUERTO RICO
By: Maria Juenv
Title: Senior Vice President
By: Wilfred Fuentes
Title: Vice President
THE BANK OF NOVA SCOTIA
By: F.C.H. Ashby
Title: Senior Manager, Loan Operations
THE BANK OF TOKYO - MITSUBISHI, LTD.,
HOUSTON AGENCY
By: D. Barnell
Title: Vice President
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CREDIT AGRICOLE INDOSUEZ
By: W. Leroy Startz
Title: First Vice President
By: David Bouhl, F.V.P.
Title: Head of Corporate Banking
Chicago
CREDIT LYONNAIS NEW YORK BRANCH
By: Robert Ivosevich
Title: Senior Vice President
FLEET NATIONAL BANK
By: Steve Kalin
Title: Vice President
WELLS FARGO BANK (TEXAS) N.A.
By: Austin O. Sierra
Title: Banking Officer
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CIBC INC.
By: Gerald Girardi
Title: Executive Director CIBC
Oppenheimer Corp., as Agent
COMPAGNIE FINANCIERE DE CIC ET DE
L'UNION EUROPEENNE
By: Brian O'Leary
Title: Vice President
By: Marcus Edward
Title: Vice President
COOPERATIEVE CENTRALE RAIFFEISEN-
BOERENLEENBANK B.A., "RABOBANK
NEDERLAND", NEW YORK BRANCH
By: W. Jeffrey Vollack
Title: Senior Credit Officer Senior
Vice President
By: David L. Streeter
Title: Vice President
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<PAGE> 11
HARRIS TRUST AND SAVINGS BANK
By: Karen L. Knudsen
Title: Vice President
SOCIETE GENERALE, SOUTHWEST
AGENCY
By: Christopher J. Speltz
Title: Director, Head of SG - Dallas
By:
Title:
AMSOUTH BANK
By:
Title:
BANK ONE, TEXAS, N.A.
By: Christopher W. Holder
Title: Vice President
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<PAGE> 12
BANKBOSTON N.A.
By: Esteban Arrondo
Title: Vice President
BANQUE NATIONALE DE PARIS HOUSTON
AGENCY
By: Warren G. Parham
Title: Vice President
BHF-BANK AKTIENGESELLSCHAFT
By: John Sykes
Title: Vice President
By: Robert Nash
Title: Assistant Treasurer
THE INDUSTRIAL BANK OF JAPAN, LIMITED
By:
Title:
By:
Title:
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THE LONG-TERM CREDIT BANK OF JAPAN,
LIMITED
By: Sadao Muraoka
Title: Head of Southwest Region
MELLON BANK, N.A.
By: Martin J. Randal
Title: Assistant Vice President
THE MITSUBISHI TRUST AND BANKING
CORPORATION
By: Mr. Nobuo Tominaga
Title: Chief Manager
NATEXIS BANQUE BFCE
By: Timothy L. Polvado
Title: Vice President
By: Paul H. Diouri
Title: Assistant Treasurer
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<PAGE> 14
NATIONAL CITY BANK OF KENTUCKY
By: Tom Gurbach
Title: Vice President
THE ROYAL BANK OF SCOTLAND PLC
By:
Title:
THE SANWA BANK, LIMITED, NEW YORK BRANCH
By: John J. Jeeney
Title: Vice President
STB DELAWARE FUNDING TRUST I
By: Donald C. Hargadon
Title: Assistant Vice President
SUNTRUST BANK, ATLANTA
By: F. Steven Parrish
Title: Vice President
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<PAGE> 15
By: Patrick M. Kotora
Title: Banking Officer
THE TOKAI BANK, NEW YORK BRANCH
By: Shinichi Nakatani
Title: Assistant General Manager
THE TOYO TRUST & BANKING CO., LTD.
By: T. Mikumo
Title: Vice President
UNION BANK OF CALIFORNIA
By: Robert C. Peiler
Title: Vice President
MICHIGAN NATIONAL BANK
By: Eric Haeger
Title: Commercial Relationship Manager
Exhibit A, Part I--Suiza Contributed Subsidiaries
Exhibit A, Part II--DFA Contributed Subsidiaries
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EXHIBIT A
EXHIBIT A, PART I--SUIZA CONTRIBUTED SUBSIDIARIES.
o Garelick Farms, Inc. (MA)
o Scangas Bros. Holdings, Inc. (MA)
o West Lynn Creamery, Inc. (MA)
o West Lynn Creamery Realty Corp. (MA)
o Fairdale Farms, Inc. (VT)
o Grant's Dairy, Inc. (ME)
o Miscoe Springs, Inc. (MA)
EXHIBIT A, PART II--DFA CONTRIBUTED SUBSIDIARIES.
o Tuscan/Lehigh Dairies, L.P. (DE)
o New England Dairies, Inc. (CT) (Owner of 44% of Terrace
Dairy, Inc.)
o Meola's Mt. Wachusett Dairy, Inc. (MA)
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<PAGE> 1
EXHIBIT 10.38
SEVERANCE AGREEMENT
THIS SEVERANCE AGREEMENT (this "Agreement") is made as of January 1,
1999, by and between SUIZA FOODS CORPORATION, a Delaware corporation (together
with its subsidiaries, the "Company"), and ((Executive)) (the "Executive").
RECITALS
A. The Board of Directors of the Company (the "Board") has determined
that the interests of the Company will be advanced by providing the key
executives of the Company with certain benefits in the event of the termination
of employment of any such executive in connection with or following a Change in
Control (as hereinafter defined).
B. The Board believes that such benefits will enable the Company to
continue to attract and retain competent and qualified executives, will assure
continuity and cooperation of management and will encourage such executives to
diligently perform their duties without personal financial concerns, thereby
enhancing shareholder value and ensuring a smooth transition.
C. The Executive is a key executive of the Company.
AGREEMENTS
NOW, THEREFORE, for good and valuable consideration, including the
mutual covenants set forth herein, the parties hereto agree as follows:
1. DEFINITIONS. The following terms shall have the following meanings
for purposes of this Agreement.
"AFFILIATE" means any entity controlled by, controlling or under
common control with, a person or entity.
"ANNUAL PAY" means the sum of (i) an amount equal to the annual base
salary rate payable to the Executive by the Company at the time of termination
of his or her employment plus (ii) an amount equal to the target bonus
established for the Executive for the Company's fiscal year in which his or her
termination of employment occurs.
"CAUSE" means the Executive's (i) willful and intentional material
breach of this Agreement, (ii) willful and intentional misconduct or gross
negligence in the performance of, or willful neglect of, the Executive's
duties, which has caused material injury (monetary or otherwise) to the
Company, or (iii) conviction of, or plea of nolo contendere to, a felony;
provided, however, that no act or omission shall constitute "Cause" for
purposes of this Agreement unless the Board or the Chairman of the Board
provides to the Executive (a) written notice clearly and fully describing the
particular acts or omissions which the Board or the
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Chairman of the Board reasonably believes in good faith constitutes "Cause" and
(b) an opportunity, within thirty (30) days following his or her receipt of
such notice, to meet in person with the Board or the Chairman of the Board to
explain or defend the alleged acts or omissions relied upon by the Board and,
to the extent practicable, to cure such acts or omissions. Further, no act or
omission shall be considered as "willful" or "intentional" if the Executive
reasonably believed such acts or omissions were in the best interests of the
Company.
"CHANGE IN CONTROL" means (1) any "person" (as such term is used in
Section 13(d) of the Securities Exchange Act of 1934, as amended (the "Exchange
Act")) becomes the "beneficial owner" (as determined pursuant to Rule 13d-3
under the Exchange Act), directly or indirectly, of securities of the Company
representing thirty percent (30%) or more of the combined voting power of the
Company's then outstanding securities; or (2) individuals who currently serve
on the Board, or whose election to the Board or nomination for election to the
Board was approved by a vote of at least two-thirds (2/3) of the directors who
either currently serve on the Board, or whose election or nomination for
election was previously so approved, cease for any reason to constitute a
majority of the Board; or (3) the Company or any subsidiary of the Company
shall merge with or consolidate into any other corporation, other than a merger
or consolidation which would result in the holders of the voting securities of
the Company outstanding immediately prior thereto holding immediately
thereafter securities representing more than sixty percent (60%) of the
combined voting power of the voting securities of the Company or such surviving
entity (or its ultimate parent, if applicable) outstanding immediately after
such merger or consolidation; or (4) the stockholders of the Company approve a
plan of complete liquidation of the Company or an agreement for the sale or
disposition by the Company of all or substantially all of the Company's assets,
or such a plan is commenced.
"CODE" means the Internal Revenue Code of 1986, as amended.
"CONFIDENTIAL INFORMATION" means all information, whether oral or
written, previously or hereafter developed, acquired or used by the Company or
its subsidiaries and relating to the business of the Company and its
subsidiaries that is not generally known to others in the Company's area of
business, including without limitation trade secrets, methods or practices
developed by the Company or any of its subsidiaries, financial results or
plans, customer or client lists, personnel information, information relating to
negotiations with clients or prospective clients, proprietary software,
databases, programming or data transmission methods, or copyrighted materials
(including without limitation, brochures, layouts, letters, art work, copy,
photographs or illustrations). It is expressly understood that the foregoing
list shall be illustrative only and is not intended to be an exclusive or
exhaustive list of "Confidential Information."
"GOOD REASON" means any of the following events occurring, without the
Executive's prior written consent specifically referring to this Agreement,
within two (2) years following a Change in Control:
(1) (A) Any reduction in the amount of the Executive's Annual
Pay, (B) any reduction in the amount of Executive's other long-term
aggregate incentive compensation opportunities, or (C) any significant
reduction in the aggregate value of the Executive's
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benefits as in effect from time to time (unless in the case of either
B or C, such reduction is pursuant to a general change in compensation
or benefits applicable to all similarly situated employees of the
Company and its Affiliates);
(2) (A) the removal of the Executive from the Executive's
position as ((Position)) of the ultimate parent of the business of the
Company or (B) any other significant reduction in the nature or status
of the Executive's duties or responsibilities;
(3) transfer of the Executive's principal place of employment
to a metropolitan area other than that of the Executive's place of
employment immediately prior to the Change in Control without the
Executive's consent; or
(4) failure by the Company to obtain the assumption agreement
referred to in Section 7 of this Agreement prior to the effectiveness
of any succession referred to therein, unless the purchaser, successor
or assignee referred to therein is bound to perform this Agreement by
operation of law.
"TERMINATION PAY" means a payment made by the Company to the Executive
pursuant to Section 2(a)(ii) or Section 2(b)(ii) hereof.
2. CHANGE IN CONTROL TERMINATION PAYMENT AND BENEFITS.
(a) Involuntary or Constructive Termination. In the event
that the Executive's employment with the Company or its successor is terminated
by the Company or its successor without Cause or by the Executive for Good
Reason in connection with or within two years after a Change in Control, the
Executive shall be entitled to the following payments and other benefits:
(i) A cash payment in an amount equal to the sum of
(A) the Executive's accrued and unpaid salary as of his or her date of
termination of employment, plus (B) his or her accrued and unpaid
bonus, if any, for the Company's prior fiscal year. This amount shall
be paid on the date of the Executive's termination of employment.
(ii) A cash payment in an amount equal to three (3)
times the Executive's Annual Pay. This amount shall be paid by the
Company in accordance with Section 2(d) hereof.
(iii) A cash payment in an amount equal to the
Executive's unvested account balance under the Company's 401(k) plan.
(iv) The Executive and his or her eligible
dependents shall be entitled for a period of two (2) years following
his or her date of termination of employment to continued coverage, on
the same basis as similarly situated active employees, under the
Company's group health, dental, long-term disability and life
insurance plans as in effect from time to time (but not any other
welfare benefit plans or any retirement plans); provided that coverage
under any particular benefit plan shall expire with respect to the
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period after the Executive becomes covered under another employer's
plan providing for a similar type of benefit. In the event the Company
is unable to provide such coverage on account of any limitations under
the terms of any applicable contract with an insurance carrier or
third party administrator, the Company shall pay the Executive an
amount equal to the cost of such coverage.
(v) All of the Executive's unvested options to
purchase shares of the Company's common stock shall be automatically
vested and shall remain exercisable by the Executive on the same terms
(other than vesting provisions) and for the same periods as were in
effect prior to termination of the Executive's employment. In the
event of any conflict between this provision and the provisions of any
stock option award agreements entered into before or after the
effective date of this Agreement, the foregoing provision shall
control.
(b) Voluntary Termination. If, at any time during the period
beginning 12 months after a Change in Control and ending 24 months after a
Change in Control, the Executive voluntarily terminates his or her employment
with the Company for any reason (other than for Good Reason), the Executive
shall be entitled to receive the following payments and benefits:
(i) A cash payment in an amount equal to the sum of
(A) the Executive's accrued and unpaid salary as of his or her date of
termination of employment, plus (B) his or her accrued and unpaid
bonus, if any, for the Company's prior fiscal year. This amount shall
be paid on the date of the Executive's termination of employment.
(ii) A cash payment in an amount equal to one and
one-half (11/2) times the Executive's Annual Pay. This amount shall be
paid by the Company in accordance with Section 2(d) hereof.
(c) No Duplication; Other Severance Pay. There shall be no
duplication of severance pay in any manner. In this regard, the Executive shall
not be entitled to Termination Pay hereunder for more than one position with
the Company and its Affiliates. If the Executive is entitled to any notice or
payment in lieu of any notice of termination of employment required by Federal,
state or local law, including but not limited to the Worker Adjustment and
Retraining Notification Act, the severance compensation to which the Executive
would otherwise be entitled under this Agreement shall be reduced by the amount
of any such payment, in lieu of notice. If Executive is entitled to any
severance or termination payments under any employment or other agreement with
the Company or any of its Affiliates, the severance compensation to which
Executive would otherwise be entitled under this Agreement shall be reduced by
the amount of such payment. Except as set forth above, the foregoing payments
and benefits shall be in addition to and not in lieu of any payments or
benefits to which the Executive and his or her dependents may otherwise be
entitled to under the Company's compensation and employee benefit plans.
Nothing herein shall be deemed to restrict the right of the Company from
amending or terminating any such plan in a manner generally applicable to
similarly situated active employees of the Company and its Affiliates, in which
event the Executive shall be entitled to participate on the
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same basis (including payment of applicable contributions) as similarly
situated active executives of the Company and its Affiliates.
(d) Mutual Release. Termination Pay shall be conditioned upon
the execution by the Executive and the Company of a valid mutual release to be
prepared by the Company pursuant to which the Executive and the Company shall
each mutually release each other, to the maximum extent permitted by law, from
any and all claims either party may have against the other that relate to or
arise out of the employment or termination of employment of the Executive,
except such claims arising under this Agreement, any employee benefit plan, or
any other written plan or agreement (a "Mutual Release"). The full amount of
Termination Pay shall be paid in a lump sum in cash to the Executive within ten
(10) days following receipt by the Company of a Mutual Release which is
properly executed by the Executive; provided, however, that in the event
applicable law allows the Executive to revoke the Mutual Release for a period
of time, and the Mutual Release is not revoked during such period, the full
amount of Termination Pay shall be paid to the Executive following the
expiration of such period.
3. EXCISE TAXES.
(a) Gross-Up Payment. Anything in this Agreement to the
contrary notwithstanding and except as set forth below, if it is determined
that any payment or distribution (a "Payment") by the Company to or for the
benefit of the Executive (whether paid or payable or distributed or
distributable pursuant to the terms of this Agreement or otherwise, but
determined without regard to any additional payments required under this
Section 3) including, without limitation, vesting of options, would be subject
to the excise tax imposed by Section 4999 of the Code, or if any interest or
penalties are incurred by the Executive with respect to such excise tax (such
excise tax, together with any such interest and penalties, being hereinafter
collectively referred to as the "Excise Tax"), then the Executive shall be
entitled to receive an additional payment (a "Gross-Up Payment") in an amount
sufficient to pay all taxes (including any interest or penalties imposed with
respect to such taxes), including, without limitation, any income taxes (and
any interest and penalties imposed with respect thereto) and Excise Tax imposed
upon the Gross-Up Payment.
(b) Calculation of Gross-Up Payment. Subject to the
provisions of paragraph (c) of this Section 3, all determinations required to
be made under this Section 3, including whether and when a Gross-Up Payment is
required and the amount of such Gross-Up Payment and the assumptions to be used
in arriving at such determination, shall be made by a certified public
accounting firm selected by the Company and reasonably acceptable to the
Executive (the "Accounting Firm"), which shall be retained to provide detailed
supporting calculations both to the Company and the Executive. If the
Accounting Firm is serving as accountant or auditor for the individual, entity
or group effecting the Change in Control, the Executive shall have the right to
appoint another nationally recognized accounting firm to make the
determinations required hereunder (which accounting firm shall then be referred
to as the Accounting Firm hereunder). All fees and expenses of the Accounting
Firm shall be paid solely by the Company. Any Gross-Up Payment, as determined
pursuant to this Section 3, shall be paid by the Company to the Executive
within five (5) days of the receipt of the Accounting Firm's determination. Any
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determination by the Accounting Firm shall be binding upon the Company and the
Executive. As a result of the uncertainty in the application of Section 4999 of
the Code at the time of the initial determination by the Accounting Firm
hereunder, it is possible that Gross-Up Payments which should have been made
will not have been made by the Company ("Underpayment"), consistent with the
calculations required to be made hereunder. If the Company exhausts its
remedies pursuant to paragraph (c) of this Section 3 and the Executive
thereafter is required to pay an Excise Tax in an amount that exceeds the
Gross-Up Payment received by the Executive the Accounting Firm shall determine
the amount of the Underpayment that has occurred and any such Underpayment
shall be promptly paid by the Company to or for the benefit of the Executive.
(c) Contested Taxes. The Executive shall notify the Company
in writing of any claim by the Internal Revenue Service that, if successful,
would result in an Underpayment. Such notification shall be given as soon as
practicable but no later than ten (10) business days after the Executive is
informed in writing of such claim and shall apprise the Company of the nature
of such claim and the date on which such claim is requested to be paid or
appealed. The Executive shall not pay such claim prior to the expiration of the
30-day period following the date on which it gives such notice to the Company
(or such shorter period ending on the date that any payment of taxes with
respect to such claim is due). If the Company notifies the Executive in writing
prior to the expiration of such period that it desires to contest such claim,
the Executive shall:
(i) give the Company any information reasonably
requested by the Company relating to such claim,
(ii) take such action in connection with contesting
such claims as the Company shall reasonably request in writing from
time to time, including, without limitation, accepting legal
representation with respect to such claim by an attorney reasonably
selected by the Company,
(iii) cooperate with the Company in good faith in
order to effectively contest such claim, and
(iv) permit the Company to participate in any
proceedings relating to such claim;
provided, however, that the Company shall bear and pay directly all
costs and expenses (including additional interest and penalties) incurred in
connection with such contest and shall indemnify and hold the Executive
harmless, on an after-tax basis, for any Excise Tax or income tax (including
interest and penalties with respect thereto) imposed as a result of such
representation and payment of costs and expenses. Without limitation on the
foregoing provisions of this paragraph (c), the Company shall control all
proceedings taken in connection with such contest and, at its sole option, may
pursue or forego any and all administrative appeals, proceedings, hearings and
conferences with the taxing authority in respect of such claim and may, at its
sole option, either direct the Executive to pay the tax claimed and sue for a
refund or to contest the claim in any permissible manner, and the Executive
agrees to prosecute such contest
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to a determination before any administrative tribunal, in a court of initial
jurisdiction and in one or more appellate courts, as the Company shall
determine; provided, however, that if the Company directs the Executive to pay
such claim and sue for a refund, the Company shall advance the amount of such
payment to the Executive, on an interest-free basis, and shall indemnify and
hold the Executive harmless, on an after-tax basis, from any Excise Tax or
income tax (including interest or penalties with respect thereto) imposed with
respect to such advance or with respect to any imputed income with respect to
such advance; and further provided that any extension of the statute of
limitations relating to payment of taxes for the taxable year of the Executive
with respect to which such contested amount is claimed to be due is limited
solely to such contested amount. Furthermore, the Company's control of the
contest shall be limited to issues with respect to the amount of the Gross-Up
Payment, and the Executive shall be entitled to settle or contest, as the case
may be, any other issue raised by the Internal Revenue Service or any other
taxing authority.
(d) Refunds. If, after the receipt by the Executive of an
amount advanced by the Company pursuant to this Section 3, the Executive
becomes entitled to receive any refund with respect to such claim, the
Executive shall promptly pay to the Company the amount of such refund (together
with any interest paid or credited thereon after taxes applicable thereto).
4. CERTAIN COVENANTS BY THE EXECUTIVE.
(a) Covenant Not to Compete. In consideration of the payments
made to the Executive pursuant to this Agreement, the Executive shall not
during the term of his or her employment with the Company and for a period of
two years after termination of the Executive's employment with the Company,
directly or indirectly, engage (whether as owner, partner, stockholder, joint
venturer, manager, investor, employee, consultant, independent contractor or
agent) in any business that competes, directly or indirectly, with the Company
in any jurisdiction in which the Company is conducting business at the time
(provided that the Executive shall not be restricted hereby from owning or
acquiring 5% or less of the outstanding voting securities of a public company),
provided that, the foregoing restriction will terminate immediately if the
Executive's employment with the Company is terminated by the Company without
Cause or by the Executive for Good Reason. The foregoing provision is not
intended to override, supercede, reduce, modify or affect in any manner any
other noncompetition covenant or agreement entered into between Executive and
the Company or any of its Affiliates. Any such covenant or agreement shall
remain in full force and effect in accordance with its terms.
(b) Protection of Confidential Information. The Executive
agrees that he or she will not at any time during or following his or her
employment by the Company, without the Company's prior written consent, divulge
any Confidential Information to any other person or entity or use any
Confidential Information for his or her own benefit. Upon termination of
employment, for any reason whatsoever, regardless of whether either party may
be at fault, the Executive will return to the Company all physical Confidential
Information in the Executive's possession.
(c) Nondisclosure of Agreement. The Executive agrees, at all
times during his or her employment by the Company, not to disclose or discuss
in any manner (whether to
7
<PAGE> 8
individuals inside or outside the Company), the existence or terms of, this
Agreement without the prior written consent of the Company, except to the extent
required by law.
(d) Non-Solicitation of Employees. The Executive agrees, for
so long as the Executive remains employed by the Company, and for a period of
two years following the termination of the Executive's employment, that the
Executive shall not, either for the Executive's own account, or on behalf of
any other person or entity, solicit, suggest or request that any other person
employed by the Company or one of its Affiliates leave such employment for the
purpose of becoming employed by the Executive or any other person or entity.
(e) Extent of Restrictions. The Executive acknowledges that
the restrictions contained in this Section 4 correctly set forth the
understanding of the parties at the time this Agreement is entered into, are
reasonable and necessary to protect the legitimate interests of the Company,
and that any violation will cause substantial injury to the Company. In the
event of any such violation, the Company shall be entitled, in addition to any
other remedy, to preliminary or permanent injunctive relief. If any court
having jurisdiction shall find that any part of the restrictions set forth in
this Agreement are unreasonable in any respect, it is the intent of the parties
that the restrictions set forth herein shall not be terminated, but that this
Agreement shall remain in full force and effect to the extent (as to time
periods and other relevant factors) that the court shall find reasonable.
5. TAX WITHHOLDING. All payments to the Executive under this Agreement
will be subject to the withholding of all applicable employment and income
taxes.
6. SEVERABILITY. In the event that any provision or portion of this
Agreement shall be determined to be invalid or unenforceable for any reason,
the remaining provisions of this Agreement shall be unaffected thereby and
shall remain in full force and effect.
7. SUCCESSORS. This Agreement shall be binding upon and inure to the
benefit of the Company and any successor of the Company. The Company will
require any successor to all or substantially all of the business and/or assets
of the Company to expressly assume and agree to perform this Agreement in the
same manner and to the same extent that the Company would be required to
perform if no succession had taken place.
8. ENTIRE AGREEMENT. This Agreement constitutes the entire agreement
between the parties hereto with respect to the subject matter hereof. This
Agreement may not be modified in any manner except by a written instrument
signed by both the Company and the Executive.
8
<PAGE> 9
9. NOTICES. Any notice required under this Agreement shall be in
writing and shall be delivered by certified mail return receipt requested to
each of the parties as follows:
To the Executive:
((Executive))
((Company))
((Address1))
((Address2))
To the Company:
SUIZA FOODS CORPORATION
2515 McKinney Avenue, Suite 1200, LB 30
Dallas, Texas 75201
Attn.: General Counsel
Tel.: 214-303-3400
Fax: 214-303-3499
10. GOVERNING LAW. The provisions of this Agreement shall be construed
in accordance of the laws of the State of Delaware, except to the extent
preempted by ERISA or other federal laws, as applicable, without reference to
the conflicts of laws provisions thereof.
IN WITNESS WHEREOF, the Executive and the Company have executed this
Agreement as of the date and year first above written.
SUIZA FOODS CORPORATION
-----------------------------------------
((SuizaSignature))
((SuizaTitle))
-----------------------------------------
((Executive))
9
<PAGE> 1
EXHIBIT 10.39
SEVERANCE AGREEMENT
THIS SEVERANCE AGREEMENT (this "Agreement") is made as of January 1,
1999, by and between SUIZA FOODS CORPORATION, a Delaware corporation (together
with its subsidiaries, the "Company"), and ((Executive)) (the "Executive").
RECITALS
A. The Board of Directors of the Company (the "Board") has determined that the
interests of the Company will be advanced by providing the key executives of the
Company with certain benefits in the event of the termination of employment of
any such executive in connection with or following a Change in Control (as
hereinafter defined).
B. The Board believes that such benefits will enable the Company to continue to
attract and retain competent and qualified executives, will assure continuity
and cooperation of management and will encourage such executives to diligently
perform their duties without personal financial concerns, thereby enhancing
shareholder value and ensuring a smooth transition.
C. The Executive is a key executive of the Company.
AGREEMENTS
NOW, THEREFORE, for good and valuable consideration, including the
mutual covenants set forth herein, the parties hereto agree as follows:
1. DEFINITIONS. The following terms shall have the following
meanings for purposes of this Agreement.
"AFFILIATE" means any entity controlled by, controlling or under common
control with, a person or entity.
"ANNUAL PAY" means the sum of (i) an amount equal to the annual base
salary rate payable to the Executive by the Company at the time of termination
of his or her employment plus (ii) an amount equal to the target bonus
established for the Executive for the Company's fiscal year in which his or her
termination of employment occurs.
"CAUSE" means the Executive's (i) willful and intentional material
breach of this Agreement, (ii) willful and intentional misconduct or gross
negligence in the performance of, or willful neglect of, the Executive's duties,
which has caused material injury (monetary or otherwise) to the Company, or
(iii) conviction of, or plea of nolo contendere to, a felony; provided, however,
that no act or omission shall constitute "Cause" for purposes of this Agreement
unless the Board or the Chairman of the Board provides to the Executive (a)
written notice clearly and fully describing the particular acts or omissions
which the Board or the
<PAGE> 2
Chairman of the Board reasonably believes in good faith constitutes "Cause" and
(b) an opportunity, within thirty (30) days following his or her receipt of such
notice, to meet in person with the Board or the Chairman of the Board to explain
or defend the alleged acts or omissions relied upon by the Board and, to the
extent practicable, to cure such acts or omissions. Further, no act or omission
shall be considered as "willful" or "intentional" if the Executive reasonably
believed such acts or omissions were in the best interests of the Company.
"CHANGE IN CONTROL" means (1) any "person" (as such term is used in
Section 13(d) of the Securities Exchange Act of 1934, as amended (the "Exchange
Act")) becomes the "beneficial owner" (as determined pursuant to Rule 13d-3
under the Exchange Act), directly or indirectly, of securities of the Company
representing thirty percent (30%) or more of the combined voting power of the
Company's then outstanding securities; or (2) individuals who currently serve on
the Board, or whose election to the Board or nomination for election to the
Board was approved by a vote of at least two-thirds (2/3) of the directors who
either currently serve on the Board, or whose election or nomination for
election was previously so approved, cease for any reason to constitute a
majority of the Board; or (3) the Company or any subsidiary of the Company shall
merge with or consolidate into any other corporation, other than a merger or
consolidation which would result in the holders of the voting securities of the
Company outstanding immediately prior thereto holding immediately thereafter
securities representing more than sixty percent (60%) of the combined voting
power of the voting securities of the Company or such surviving entity (or its
ultimate parent, if applicable) outstanding immediately after such merger or
consolidation; or (4) the stockholders of the Company approve a plan of complete
liquidation of the Company or an agreement for the sale or disposition by the
Company of all or substantially all of the Company's assets, or such a plan is
commenced.
"CODE" means the Internal Revenue Code of 1986, as amended.
"CONFIDENTIAL INFORMATION" means all information, whether oral or
written, previously or hereafter developed, acquired or used by the Company or
its subsidiaries and relating to the business of the Company and its
subsidiaries that is not generally known to others in the Company's area of
business, including without limitation trade secrets, methods or practices
developed by the Company or any of its subsidiaries, financial results or plans,
customer or client lists, personnel information, information relating to
negotiations with clients or prospective clients, proprietary software,
databases, programming or data transmission methods, or copyrighted materials
(including without limitation, brochures, layouts, letters, art work, copy,
photographs or illustrations). It is expressly understood that the foregoing
list shall be illustrative only and is not intended to be an exclusive or
exhaustive list of "Confidential Information."
"GOOD REASON" means any of the following events occurring, without the
Executive's prior written consent specifically referring to this Agreement,
within two (2) years following a Change in Control:
(1) (A) Any reduction in the amount of the Executive's Annual
Pay, (B) any reduction in the amount of Executive's other long-term
aggregate incentive compensation opportunities, or (C) any significant
reduction in the aggregate value of the Executive's
2
<PAGE> 3
benefits as in effect from time to time (unless in the case of either B
or C, such reduction is pursuant to a general change in compensation or
benefits applicable to all similarly situated employees of the Company
and its Affiliates);
(2) (A) the removal of the Executive from the position held by
him or her immediately prior to the Change in Control, or (B) any other
significant reduction in the nature or status of the Executive's duties
or responsibilities;
(3) transfer of the Executive's principal place of employment
to a metropolitan area other than that of the Executive's place of
employment immediately prior to the Change in Control without the
Executive's consent; or
(4) failure by the Company to obtain the assumption agreement
referred to in Section 7 of this Agreement prior to the effectiveness
of any succession referred to therein, unless the purchaser, successor
or assignee referred to therein is bound to perform this Agreement by
operation of law.
"TERMINATION PAY" means a payment made by the Company to the Executive
pursuant to Section 2(a)(ii).
2. CHANGE IN CONTROL TERMINATION PAYMENT AND BENEFITS.
(a) Involuntary or Constructive Termination. In the event that the
Executive's employment with the Company or its successor is terminated by the
Company or its successor without Cause or by the Executive for Good Reason in
connection with or within two years after a Change in Control, the Executive
shall be entitled to the following payments and other benefits:
(i) A cash payment in an amount equal to the sum of (A) the
Executive's accrued and unpaid salary as of his or her date of
termination of employment, plus (B) his or her accrued and unpaid
bonus, if any, for the Company's prior fiscal year. This amount shall
be paid on the date of the Executive's termination of employment.
(ii) A cash payment in an amount equal to two (2) times the
Executive's Annual Pay. This amount shall be paid by the Company in
accordance with Section 2(c) hereof.
(iii) A cash payment in an amount equal to the Executive's
unvested account balance under the Company's 401(k) plan.
(iv) The Executive and his or her eligible dependents shall be
entitled for a period of two (2) years following his or her date of
termination of employment to continued coverage, on the same basis as
similarly situated active employees, under the Company's group health,
dental, long-term disability and life insurance plans as in effect from
time to time (but not any other welfare benefit plans or any retirement
plans); provided that coverage under any particular benefit plan shall
expire with respect to the
3
<PAGE> 4
period after the Executive becomes covered under another employer's
plan providing for a similar type of benefit. In the event the Company
is unable to provide such coverage on account of any limitations under
the terms of any applicable contract with an insurance carrier or third
party administrator, the Company shall pay the Executive an amount
equal to the cost of such coverage.
(v) All of the Executive's unvested options to purchase shares
of the Company's common stock shall be automatically vested and shall
remain exercisable by the Executive on the same terms (other than
vesting provisions) and for the same periods as were in effect prior to
termination of the Executive's employment. In the event of any conflict
between this provision and the provisions of any stock option award
agreements entered into before or after the effective date of this
Agreement, the foregoing provision shall control.
(b) No Duplication; Other Severance Pay. There shall be no
duplication of severance pay in any manner. In this regard, the Executive shall
not be entitled to Termination Pay hereunder for more than one position with the
Company and its Affiliates. If the Executive is entitled to any notice or
payment in lieu of any notice of termination of employment required by Federal,
state or local law, including but not limited to the Worker Adjustment and
Retraining Notification Act, the severance compensation to which the Executive
would otherwise be entitled under this Agreement shall be reduced by the amount
of any such payment, in lieu of notice. If Executive is entitled to any
severance or termination payments under any employment or other agreement with
the Company or any of its Affiliates, the severance compensation to which
Executive would otherwise be entitled under this Agreement shall be reduced by
the amount of such payment. Except as set forth above, the foregoing payments
and benefits shall be in addition to and not in lieu of any payments or benefits
to which the Executive and his or her dependents may otherwise be entitled to
under the Company's compensation and employee benefit plans. Nothing herein
shall be deemed to restrict the right of the Company from amending or
terminating any such plan in a manner generally applicable to similarly situated
active employees of the Company and its Affiliates, in which event the Executive
shall be entitled to participate on the same basis (including payment of
applicable contributions) as similarly situated active executives of the Company
and its Affiliates.
(c) Mutual Release. Termination Pay shall be conditioned upon the
execution by the Executive and the Company of a valid mutual release to be
prepared by the Company pursuant to which the Executive and the Company shall
each mutually release each other, to the maximum extent permitted by law, from
any and all claims either party may have against the other that relate to or
arise out of the employment or termination of employment of the Executive,
except such claims arising under this Agreement, any employee benefit plan, or
any other written plan or agreement (a "Mutual Release"). The full amount of
Termination Pay shall be paid in a lump sum in cash to the Executive within ten
(10) days following receipt by the Company of a Mutual Release which is properly
executed by the Executive; provided, however, that in the event applicable law
allows the Executive to revoke the Mutual Release for a period of time, and the
Mutual Release is not revoked during such period, the full amount of Termination
Pay shall be paid to the Executive following the expiration of such period.
4
<PAGE> 5
3. EXCISE TAXES.
(a) Gross-Up Payment. Anything in this Agreement to the contrary
notwithstanding and except as set forth below, if it is determined that any
payment or distribution (a "Payment") by the Company to or for the benefit of
the Executive (whether paid or payable or distributed or distributable pursuant
to the terms of this Agreement or otherwise, but determined without regard to
any additional payments required under this Section 3) including, without
limitation, vesting of options, would be subject to the excise tax imposed by
Section 4999 of the Code, or if any interest or penalties are incurred by the
Executive with respect to such excise tax (such excise tax, together with any
such interest and penalties, being hereinafter collectively referred to as the
"Excise Tax"), then the Executive shall be entitled to receive an additional
payment (a "Gross-Up Payment") in an amount sufficient to pay all taxes
(including any interest or penalties imposed with respect to such taxes),
including, without limitation, any income taxes (and any interest and penalties
imposed with respect thereto) and Excise Tax imposed upon the Gross-Up Payment.
(b) Calculation of Gross-Up Payment. Subject to the provisions of
paragraph (c) of this Section 3, all determinations required to be made under
this Section 3, including whether and when a Gross-Up Payment is required and
the amount of such Gross-Up Payment and the assumptions to be used in arriving
at such determination, shall be made by a certified public accounting firm
selected by the Company and reasonably acceptable to the Executive (the
"Accounting Firm"), which shall be retained to provide detailed supporting
calculations both to the Company and the Executive. If the Accounting Firm is
serving as accountant or auditor for the individual, entity or group effecting
the Change in Control, the Executive shall have the right to appoint another
nationally recognized accounting firm to make the determinations required
hereunder (which accounting firm shall then be referred to as the Accounting
Firm hereunder). All fees and expenses of the Accounting Firm shall be paid
solely by the Company. Any Gross-Up Payment, as determined pursuant to this
Section 3, shall be paid by the Company to the Executive within five (5) days of
the receipt of the Accounting Firm's determination. Any determination by the
Accounting Firm shall be binding upon the Company and the Executive. As a result
of the uncertainty in the application of Section 4999 of the Code at the time of
the initial determination by the Accounting Firm hereunder, it is possible that
Gross-Up Payments which should have been made will not have been made by the
Company ("Underpayment"), consistent with the calculations required to be made
hereunder. If the Company exhausts its remedies pursuant to paragraph (c) of
this Section 3 and the Executive thereafter is required to pay an Excise Tax in
an amount that exceeds the Gross-Up Payment received by the Executive the
Accounting Firm shall determine the amount of the Underpayment that has occurred
and any such Underpayment shall be promptly paid by the Company to or for the
benefit of the Executive.
(c) Contested Taxes. The Executive shall notify the Company in
writing of any claim by the Internal Revenue Service that, if successful, would
result in an Underpayment. Such notification shall be given as soon as
practicable but no later than ten (10) business days after the Executive is
informed in writing of such claim and shall apprise the Company of the nature of
such claim and the date on which such claim is requested to be paid or appealed.
The
5
<PAGE> 6
Executive shall not pay such claim prior to the expiration of the 30-day period
following the date on which it gives such notice to the Company (or such shorter
period ending on the date that any payment of taxes with respect to such claim
is due). If the Company notifies the Executive in writing prior to the
expiration of such period that it desires to contest such claim, the Executive
shall:
(i) give the Company any information reasonably requested by
the Company relating to such claim,
(ii) take such action in connection with contesting such
claims as the Company shall reasonably request in writing from time to
time, including, without limitation, accepting legal representation
with respect to such claim by an attorney reasonably selected by the
Company,
(iii) cooperate with the Company in good faith in order to
effectively contest such claim, and
(iv) permit the Company to participate in any proceedings
relating to such claim;
provided, however, that the Company shall bear and pay directly all
costs and expenses (including additional interest and penalties) incurred in
connection with such contest and shall indemnify and hold the Executive
harmless, on an after-tax basis, for any Excise Tax or income tax (including
interest and penalties with respect thereto) imposed as a result of such
representation and payment of costs and expenses. Without limitation on the
foregoing provisions of this paragraph (c), the Company shall control all
proceedings taken in connection with such contest and, at its sole option, may
pursue or forego any and all administrative appeals, proceedings, hearings and
conferences with the taxing authority in respect of such claim and may, at its
sole option, either direct the Executive to pay the tax claimed and sue for a
refund or to contest the claim in any permissible manner, and the Executive
agrees to prosecute such contest to a determination before any administrative
tribunal, in a court of initial jurisdiction and in one or more appellate
courts, as the Company shall determine; provided, however, that if the Company
directs the Executive to pay such claim and sue for a refund, the Company shall
advance the amount of such payment to the Executive, on an interest-free basis,
and shall indemnify and hold the Executive harmless, on an after-tax basis, from
any Excise Tax or income tax (including interest or penalties with respect
thereto) imposed with respect to such advance or with respect to any imputed
income with respect to such advance; and further provided that any extension of
the statute of limitations relating to payment of taxes for the taxable year of
the Executive with respect to which such contested amount is claimed to be due
is limited solely to such contested amount. Furthermore, the Company's control
of the contest shall be limited to issues with respect to the amount of the
Gross-Up Payment, and the Executive shall be entitled to settle or contest, as
the case may be, any other issue raised by the Internal Revenue Service or any
other taxing authority.
6
<PAGE> 7
(d) Refunds. If, after the receipt by the Executive of an amount
advanced by the Company pursuant to this Section 3, the Executive becomes
entitled to receive any refund with respect to such claim, the Executive shall
promptly pay to the Company the amount of such refund (together with any
interest paid or credited thereon after taxes applicable thereto).
4. CERTAIN COVENANTS BY THE EXECUTIVE.
(a) Covenant Not to Compete. In consideration of the payments made
to the Executive pursuant to this Agreement, the Executive shall not during the
term of his or her employment with the Company and for a period of two years
after termination of the Executive's employment with the Company, directly or
indirectly, engage (whether as owner, partner, stockholder, joint venturer,
manager, investor, employee, consultant, independent contractor or agent) in any
business that competes, directly or indirectly, with the Company in any
jurisdiction in which the Company is conducting business at the time (provided
that the Executive shall not be restricted hereby from owning or acquiring 5% or
less of the outstanding voting securities of a public company), provided that,
the foregoing restriction will terminate immediately if the Executive's
employment with the Company is terminated by the Company without Cause or by the
Executive for Good Reason. The foregoing provision is not intended to override,
supercede, reduce, modify or affect in any manner any other noncompetition
covenant or agreement entered into between Executive and the Company or any of
its Affiliates. Any such covenant or agreement shall remain in full force and
effect in accordance with its terms.
(b) Protection of Confidential Information. The Executive agrees
that he or she will not at any time during or following his or her employment by
the Company, without the Company's prior written consent, divulge any
Confidential Information to any other person or entity or use any Confidential
Information for his or her own benefit. Upon termination of employment, for any
reason whatsoever, regardless of whether either party may be at fault, the
Executive will return to the Company all physical Confidential Information in
the Executive's possession.
(c) Nondisclosure of Agreement. The Executive agrees, at all times
during his or her employment by the Company, not to disclose or discuss in any
manner (whether to individuals inside or outside the Company), the existence or
terms of, this Agreement without the prior written consent of the Company,
except to the extent required by law.
(d) Non-Solicitation of Employees. The Executive agrees, for so
long as the Executive remains employed by the Company, and for a period of two
years following the termination of the Executive's employment, that the
Executive shall not, either for the Executive's own account, or on behalf of any
other person or entity, solicit, suggest or request that any other person
employed by the Company or one of its Affiliates leave such employment for the
purpose of becoming employed by the Executive or any other person or entity.
(e) Extent of Restrictions. The Executive acknowledges that the
restrictions contained in this Section 4 correctly set forth the understanding
of the parties at the time this Agreement is entered into, are reasonable and
necessary to protect the legitimate interests of the Company, and that any
violation will cause substantial injury to the Company. In the event of any
7
<PAGE> 8
such violation, the Company shall be entitled, in addition to any other remedy,
to preliminary or permanent injunctive relief. If any court having jurisdiction
shall find that any part of the restrictions set forth in this Agreement are
unreasonable in any respect, it is the intent of the parties that the
restrictions set forth herein shall not be terminated, but that this Agreement
shall remain in full force and effect to the extent (as to time periods and
other relevant factors) that the court shall find reasonable.
5. TAX WITHHOLDING. All payments to the Executive under this
Agreement will be subject to the withholding of all applicable employment and
income taxes.
6. SEVERABILITY. In the event that any provision or portion of this
Agreement shall be determined to be invalid or unenforceable for any reason, the
remaining provisions of this Agreement shall be unaffected thereby and shall
remain in full force and effect.
7. SUCCESSORS. This Agreement shall be binding upon and inure to the
benefit of the Company and any successor of the Company. The Company will
require any successor to all or substantially all of the business and/or assets
of the Company to expressly assume and agree to perform this Agreement in the
same manner and to the same extent that the Company would be required to perform
if no succession had taken place.
8. ENTIRE AGREEMENT. This Agreement constitutes the entire agreement
between the parties hereto with respect to the subject matter hereof. This
Agreement may not be modified in any manner except by a written instrument
signed by both the Company and the Executive.
9. NOTICES. Any notice required under this Agreement shall be in
writing and shall be delivered by certified mail return receipt requested to
each of the parties as follows:
To the Executive:
((Executive))
((Company))
((Address1))
((Address2))
To the Company:
SUIZA FOODS CORPORATION
2515 McKinney Avenue, Suite 1200, LB 30
Dallas, Texas 75201
Attn.: General Counsel
Tel.: 214-303-3400
Fax: 214-303-3499
8
<PAGE> 9
10. GOVERNING LAW. The provisions of this Agreement shall be
construed in accordance of the laws of the State of Delaware, except to the
extent preempted by ERISA or other federal laws, as applicable, without
reference to the conflicts of laws provisions thereof.
IN WITNESS WHEREOF, the Executive and the Company have executed this
Agreement as of the date and year first above written.
SUIZA FOODS CORPORATION
----------------------------------
((SuizaSignature))
((SuizaTitle))
----------------------------------
((Executive))
9
<PAGE> 1
EXHIBIT 10.40
SEVERANCE AGREEMENT
THIS SEVERANCE AGREEMENT (this "Agreement") is made as of January 1,
1999, by and between SUIZA FOODS CORPORATION, a Delaware corporation (together
with its subsidiaries, the "Company"), and ((Executive)) (the "Executive").
RECITALS
A. The Board of Directors of the Company (the "Board") has determined
that the interests of the Company will be advanced by providing the key
executives of the Company with certain benefits in the event of the termination
of employment of any such executive in connection with or following a Change in
Control (as hereinafter defined).
B. The Board believes that such benefits will enable the Company to
continue to attract and retain competent and qualified executives, will assure
continuity and cooperation of management and will encourage such executives to
diligently perform their duties without personal financial concerns, thereby
enhancing shareholder value and ensuring a smooth transition.
C. The Executive is a key executive of the Company.
AGREEMENTS
NOW, THEREFORE, for good and valuable consideration, including the
mutual covenants set forth herein, the parties hereto agree as follows:
1. DEFINITIONS. The following terms shall have the following meanings
for purposes of this Agreement.
"AFFILIATE" means any entity controlled by, controlling or under
common control with, a person or entity.
"ANNUAL PAY" means the sum of (i) an amount equal to the annual base
salary rate payable to the Executive by the Company at the time of termination
of his or her employment plus (ii) an amount equal to the target bonus
established for the Executive for the Company's fiscal year in which his or her
termination of employment occurs.
"CAUSE" means the Executive's (i) willful and intentional material
breach of this Agreement, (ii) willful and intentional misconduct or gross
negligence in the performance of, or willful neglect of, the Executive's
duties, which has caused material injury (monetary or otherwise) to the
Company, or (iii) conviction of, or plea of nolo contendere to, a felony;
provided, however, that no act or omission shall constitute "Cause" for
purposes of this Agreement unless the Board or the Chairman of the Board
provides to the Executive (a) written notice clearly and fully describing the
particular acts or omissions which the Board or the
1
<PAGE> 2
Chairman of the Board reasonably believes in good faith constitutes "Cause" and
(b) an opportunity, within thirty (30) days following his or her receipt of
such notice, to meet in person with the Board or the Chairman of the Board to
explain or defend the alleged acts or omissions relied upon by the Board and,
to the extent practicable, to cure such acts or omissions. Further, no act or
omission shall be considered as "willful" or "intentional" if the Executive
reasonably believed such acts or omissions were in the best interests of the
Company.
"CHANGE IN CONTROL" means (1) any "person" (as such term is used in
Section 13(d) of the Securities Exchange Act of 1934, as amended (the "Exchange
Act")) becomes the "beneficial owner" (as determined pursuant to Rule 13d-3
under the Exchange Act), directly or indirectly, of securities of the Company
representing thirty percent (30%) or more of the combined voting power of the
Company's then outstanding securities; or (2) individuals who currently serve
on the Board, or whose election to the Board or nomination for election to the
Board was approved by a vote of at least two-thirds (2/3) of the directors who
either currently serve on the Board, or whose election or nomination for
election was previously so approved, cease for any reason to constitute a
majority of the Board; or (3) the Company or any subsidiary of the Company
shall merge with or consolidate into any other corporation, other than a merger
or consolidation which would result in the holders of the voting securities of
the Company outstanding immediately prior thereto holding immediately
thereafter securities representing more than sixty percent (60%) of the
combined voting power of the voting securities of the Company or such surviving
entity (or its ultimate parent, if applicable) outstanding immediately after
such merger or consolidation; or (4) the stockholders of the Company approve a
plan of complete liquidation of the Company or an agreement for the sale or
disposition by the Company of all or substantially all of the Company's assets,
or such a plan is commenced.
"CODE" means the Internal Revenue Code of 1986, as amended.
"CONFIDENTIAL INFORMATION" means all information, whether oral or
written, previously or hereafter developed, acquired or used by the Company or
its subsidiaries and relating to the business of the Company and its
subsidiaries that is not generally known to others in the Company's area of
business, including without limitation trade secrets, methods or practices
developed by the Company or any of its subsidiaries, financial results or
plans, customer or client lists, personnel information, information relating to
negotiations with clients or prospective clients, proprietary software,
databases, programming or data transmission methods, or copyrighted materials
(including without limitation, brochures, layouts, letters, art work, copy,
photographs or illustrations). It is expressly understood that the foregoing
list shall be illustrative only and is not intended to be an exclusive or
exhaustive list of "Confidential Information."
"GOOD REASON" means any of the following events occurring, without the
Executive's prior written consent specifically referring to this Agreement,
within two (2) years following a Change in Control:
(1) (A) Any reduction in the amount of the Executive's Annual
Pay, (B) any reduction in the amount of Executive's other long-term
aggregate incentive compensation opportunities, or (C) any significant
reduction in the aggregate value of the Executive's
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benefits as in effect from time to time (unless in the case of either
B or C, such reduction is pursuant to a general change in compensation
or benefits applicable to all similarly situated employees of the
Company and its Affiliates);
(2) (A) the removal of the Executive from the position held
by him or her immediately prior to the Change in Control, or (B) any
other significant reduction in the nature or status of the Executive's
duties or responsibilities;
(3) transfer of the Executive's principal place of employment
to a metropolitan area other than that of the Executive's place of
employment immediately prior to the Change in Control without the
Executive's consent; or
(4) failure by the Company to obtain the assumption agreement
referred to in Section 7 of this Agreement prior to the effectiveness
of any succession referred to therein, unless the purchaser, successor
or assignee referred to therein is bound to perform this Agreement by
operation of law.
"TERMINATION PAY" means a payment made by the Company to the Executive
pursuant to Section 2(a)(ii).
2. CHANGE IN CONTROL TERMINATION PAYMENT AND BENEFITS.
(a) Involuntary or Constructive Termination. In the event
that the Executive's employment with the Company or its successor is terminated
by the Company or its successor without Cause or by the Executive for Good
Reason in connection with or within two years after a Change in Control, the
Executive shall be entitled to the following payments and other benefits:
(i) A cash payment in an amount equal to the sum of
(A) the Executive's accrued and unpaid salary as of his or her date of
termination of employment, plus (B) his or her accrued and unpaid
bonus, if any, for the Company's prior fiscal year. This amount shall
be paid on the date of the Executive's termination of employment.
(ii) A cash payment in an amount equal to one (1) times
the Executive's Annual Pay. This amount shall be paid by the Company
in accordance with Section 2(c) hereof.
(iii) A cash payment in an amount equal to the
Executive's unvested account balance under the Company's 401(k) plan.
(iv) The Executive and his or her eligible dependents
shall be entitled for a period of one (1) years following his or her
date of termination of employment to continued coverage, on the same
basis as similarly situated active employees, under the Company's
group health, dental, long-term disability and life insurance plans as
in effect from time to time (but not any other welfare benefit plans
or any retirement plans); provided that coverage under any particular
benefit plan shall expire with respect to the
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period after the Executive becomes covered under another employer's
plan providing for a similar type of benefit. In the event the Company
is unable to provide such coverage on account of any limitations under
the terms of any applicable contract with an insurance carrier or
third party administrator, the Company shall pay the Executive an
amount equal to the cost of such coverage.
(v) All of the Executive's unvested options to purchase
shares of the Company's common stock shall be automatically vested and
shall remain exercisable by the Executive on the same terms (other
than vesting provisions) and for the same periods as were in effect
prior to termination of the Executive's employment. In the event of
any conflict between this provision and the provisions of any stock
option award agreements entered into before or after the effective
date of this Agreement, the foregoing provision shall control.
(b) No Duplication; Other Severance Pay. There shall be no
duplication of severance pay in any manner. In this regard, the Executive shall
not be entitled to Termination Pay hereunder for more than one position with
the Company and its Affiliates. If the Executive is entitled to any notice or
payment in lieu of any notice of termination of employment required by Federal,
state or local law, including but not limited to the Worker Adjustment and
Retraining Notification Act, the severance compensation to which the Executive
would otherwise be entitled under this Agreement shall be reduced by the amount
of any such payment, in lieu of notice. If Executive is entitled to any
severance or termination payments under any employment or other agreement with
the Company or any of its Affiliates, the severance compensation to which
Executive would otherwise be entitled under this Agreement shall be reduced by
the amount of such payment. Except as set forth above, the foregoing payments
and benefits shall be in addition to and not in lieu of any payments or
benefits to which the Executive and his or her dependents may otherwise be
entitled to under the Company's compensation and employee benefit plans.
Nothing herein shall be deemed to restrict the right of the Company from
amending or terminating any such plan in a manner generally applicable to
similarly situated active employees of the Company and its Affiliates, in which
event the Executive shall be entitled to participate on the same basis
(including payment of applicable contributions) as similarly situated active
executives of the Company and its Affiliates.
(c) Mutual Release. Termination Pay shall be conditioned upon
the execution by the Executive and the Company of a valid mutual release to be
prepared by the Company pursuant to which the Executive and the Company shall
each mutually release each other, to the maximum extent permitted by law, from
any and all claims either party may have against the other that relate to or
arise out of the employment or termination of employment of the Executive,
except such claims arising under this Agreement, any employee benefit plan, or
any other written plan or agreement (a "Mutual Release"). The full amount of
Termination Pay shall be paid in a lump sum in cash to the Executive within ten
(10) days following receipt by the Company of a Mutual Release which is
properly executed by the Executive; provided, however, that in the event
applicable law allows the Executive to revoke the Mutual Release for a period
of time, and the Mutual Release is not revoked during such period, the full
amount of Termination Pay shall be paid to the Executive following the
expiration of such period.
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3. EXCISE TAXES.
(a) Gross-Up Payment. Anything in this Agreement to the
contrary notwithstanding and except as set forth below, if it is determined
that any payment or distribution (a "Payment") by the Company to or for the
benefit of the Executive (whether paid or payable or distributed or
distributable pursuant to the terms of this Agreement or otherwise, but
determined without regard to any additional payments required under this
Section 3) including, without limitation, vesting of options, would be subject
to the excise tax imposed by Section 4999 of the Code, or if any interest or
penalties are incurred by the Executive with respect to such excise tax (such
excise tax, together with any such interest and penalties, being hereinafter
collectively referred to as the "Excise Tax"), then the Executive shall be
entitled to receive an additional payment (a "Gross-Up Payment") in an amount
sufficient to pay all taxes (including any interest or penalties imposed with
respect to such taxes), including, without limitation, any income taxes (and
any interest and penalties imposed with respect thereto) and Excise Tax imposed
upon the Gross-Up Payment.
(b) Calculation of Gross-Up Payment. Subject to the
provisions of paragraph (c) of this Section 3, all determinations required to
be made under this Section 3, including whether and when a Gross-Up Payment is
required and the amount of such Gross-Up Payment and the assumptions to be used
in arriving at such determination, shall be made by a certified public
accounting firm selected by the Company and reasonably acceptable to the
Executive (the "Accounting Firm"), which shall be retained to provide detailed
supporting calculations both to the Company and the Executive. If the
Accounting Firm is serving as accountant or auditor for the individual, entity
or group effecting the Change in Control, the Executive shall have the right to
appoint another nationally recognized accounting firm to make the
determinations required hereunder (which accounting firm shall then be referred
to as the Accounting Firm hereunder). All fees and expenses of the Accounting
Firm shall be paid solely by the Company. Any Gross-Up Payment, as determined
pursuant to this Section 3, shall be paid by the Company to the Executive
within five (5) days of the receipt of the Accounting Firm's determination. Any
determination by the Accounting Firm shall be binding upon the Company and the
Executive. As a result of the uncertainty in the application of Section 4999 of
the Code at the time of the initial determination by the Accounting Firm
hereunder, it is possible that Gross-Up Payments which should have been made
will not have been made by the Company ("Underpayment"), consistent with the
calculations required to be made hereunder. If the Company exhausts its
remedies pursuant to paragraph (c) of this Section 3 and the Executive
thereafter is required to pay an Excise Tax in an amount that exceeds the
Gross-Up Payment received by the Executive the Accounting Firm shall determine
the amount of the Underpayment that has occurred and any such Underpayment
shall be promptly paid by the Company to or for the benefit of the Executive.
(c) Contested Taxes. The Executive shall notify the Company
in writing of any claim by the Internal Revenue Service that, if successful,
would result in an Underpayment. Such notification shall be given as soon as
practicable but no later than ten (10) business days after the Executive is
informed in writing of such claim and shall apprise the Company of the nature
of such claim and the date on which such claim is requested to be paid or
appealed. The
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Executive shall not pay such claim prior to the expiration of the 30-day period
following the date on which it gives such notice to the Company (or such
shorter period ending on the date that any payment of taxes with respect to
such claim is due). If the Company notifies the Executive in writing prior to
the expiration of such period that it desires to contest such claim, the
Executive shall:
(i) give the Company any information reasonably
requested by the Company relating to such claim,
(ii) take such action in connection with contesting
such claims as the Company shall reasonably request in writing from
time to time, including, without limitation, accepting legal
representation with respect to such claim by an attorney reasonably
selected by the Company,
(iii) cooperate with the Company in good faith in
order to effectively contest such claim, and
(iv) permit the Company to participate in any
proceedings relating to such claim;
provided, however, that the Company shall bear and pay directly all
costs and expenses (including additional interest and penalties) incurred in
connection with such contest and shall indemnify and hold the Executive
harmless, on an after-tax basis, for any Excise Tax or income tax (including
interest and penalties with respect thereto) imposed as a result of such
representation and payment of costs and expenses. Without limitation on the
foregoing provisions of this paragraph (c), the Company shall control all
proceedings taken in connection with such contest and, at its sole option, may
pursue or forego any and all administrative appeals, proceedings, hearings and
conferences with the taxing authority in respect of such claim and may, at its
sole option, either direct the Executive to pay the tax claimed and sue for a
refund or to contest the claim in any permissible manner, and the Executive
agrees to prosecute such contest to a determination before any administrative
tribunal, in a court of initial jurisdiction and in one or more appellate
courts, as the Company shall determine; provided, however, that if the Company
directs the Executive to pay such claim and sue for a refund, the Company shall
advance the amount of such payment to the Executive, on an interest-free basis,
and shall indemnify and hold the Executive harmless, on an after-tax basis,
from any Excise Tax or income tax (including interest or penalties with respect
thereto) imposed with respect to such advance or with respect to any imputed
income with respect to such advance; and further provided that any extension of
the statute of limitations relating to payment of taxes for the taxable year of
the Executive with respect to which such contested amount is claimed to be due
is limited solely to such contested amount. Furthermore, the Company's control
of the contest shall be limited to issues with respect to the amount of the
Gross-Up Payment, and the Executive shall be entitled to settle or contest, as
the case may be, any other issue raised by the Internal Revenue Service or any
other taxing authority.
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(d) Refunds. If, after the receipt by the Executive of an
amount advanced by the Company pursuant to this Section 3, the Executive
becomes entitled to receive any refund with respect to such claim, the
Executive shall promptly pay to the Company the amount of such refund (together
with any interest paid or credited thereon after taxes applicable thereto).
4. CERTAIN COVENANTS BY THE EXECUTIVE.
(a) Covenant Not to Compete. In consideration of the payments
made to the Executive pursuant to this Agreement, the Executive shall not
during the term of his or her employment with the Company and for a period of
two years after termination of the Executive's employment with the Company,
directly or indirectly, engage (whether as owner, partner, stockholder, joint
venturer, manager, investor, employee, consultant, independent contractor or
agent) in any business that competes, directly or indirectly, with the Company
in any jurisdiction in which the Company is conducting business at the time
(provided that the Executive shall not be restricted hereby from owning or
acquiring 5% or less of the outstanding voting securities of a public company),
provided that, the foregoing restriction will terminate immediately if the
Executive's employment with the Company is terminated by the Company without
Cause or by the Executive for Good Reason. The foregoing provision is not
intended to override, supercede, reduce, modify or affect in any manner any
other noncompetition covenant or agreement entered into between Executive and
the Company or any of its Affiliates. Any such covenant or agreement shall
remain in full force and effect in accordance with its terms.
(b) Protection of Confidential Information. The Executive
agrees that he or she will not at any time during or following his or her
employment by the Company, without the Company's prior written consent, divulge
any Confidential Information to any other person or entity or use any
Confidential Information for his or her own benefit. Upon termination of
employment, for any reason whatsoever, regardless of whether either party may
be at fault, the Executive will return to the Company all physical Confidential
Information in the Executive's possession.
(c) Nondisclosure of Agreement. The Executive agrees, at all
times during his or her employment by the Company, not to disclose or discuss
in any manner (whether to individuals inside or outside the Company), the
existence or terms of, this Agreement without the prior written consent of the
Company, except to the extent required by law.
(d) Non-Solicitation of Employees. The Executive agrees, for
so long as the Executive remains employed by the Company, and for a period of
two years following the termination of the Executive's employment, that the
Executive shall not, either for the Executive's own account, or on behalf of
any other person or entity, solicit, suggest or request that any other person
employed by the Company or one of its Affiliates leave such employment for the
purpose of becoming employed by the Executive or any other person or entity.
(e) Extent of Restrictions. The Executive acknowledges that
the restrictions contained in this Section 4 correctly set forth the
understanding of the parties at the time this Agreement is entered into, are
reasonable and necessary to protect the legitimate interests of the Company,
and that any violation will cause substantial injury to the Company. In the
event of any
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such violation, the Company shall be entitled, in addition to any other remedy,
to preliminary or permanent injunctive relief. If any court having jurisdiction
shall find that any part of the restrictions set forth in this Agreement are
unreasonable in any respect, it is the intent of the parties that the
restrictions set forth herein shall not be terminated, but that this Agreement
shall remain in full force and effect to the extent (as to time periods and
other relevant factors) that the court shall find reasonable.
5. TAX WITHHOLDING. All payments to the Executive under this Agreement
will be subject to the withholding of all applicable employment and income
taxes.
6. SEVERABILITY. In the event that any provision or portion of this
Agreement shall be determined to be invalid or unenforceable for any reason,
the remaining provisions of this Agreement shall be unaffected thereby and
shall remain in full force and effect.
7. SUCCESSORS. This Agreement shall be binding upon and inure to the
benefit of the Company and any successor of the Company. The Company will
require any successor to all or substantially all of the business and/or assets
of the Company to expressly assume and agree to perform this Agreement in the
same manner and to the same extent that the Company would be required to
perform if no succession had taken place.
8. ENTIRE AGREEMENT. This Agreement constitutes the entire agreement
between the parties hereto with respect to the subject matter hereof. This
Agreement may not be modified in any manner except by a written instrument
signed by both the Company and the Executive.
9. NOTICES. Any notice required under this Agreement shall be in
writing and shall be delivered by certified mail return receipt requested to
each of the parties as follows:
To the Executive:
((Executive))
((Company))
((Address1))
((Address2))
To the Company:
SUIZA FOODS CORPORATION
2515 McKinney Avenue, Suite 1200, LB 30
Dallas, Texas 75201
Attn.: General Counsel
Tel.: 214-303-3400
Fax: 214-303-3499
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10. GOVERNING LAW. The provisions of this Agreement shall be construed
in accordance of the laws of the State of Delaware, except to the extent
preempted by ERISA or other federal laws, as applicable, without reference to
the conflicts of laws provisions thereof.
IN WITNESS WHEREOF, the Executive and the Company have executed this
Agreement as of the date and year first above written.
SUIZA FOODS CORPORATION
----------------------------------
((SuizaSignature))
((SuizaTitle))
----------------------------------
((Executive))
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EXHIBIT 10.41
SEVERANCE AGREEMENT
THIS SEVERANCE AGREEMENT (this "Agreement") is made as of January 1, 1999,
by and between SUIZA FOODS CORPORATION, a Delaware corporation (together with
its subsidiaries, the "Company"), and William Estes (the "Executive").
RECITALS
A. The Board of Directors of the Company (the "Board") has determined that
the interests of the Company will be advanced by providing the key executives of
the Company with certain benefits in the event of the termination of employment
of any such executive in connection with or following a Change in Control (as
hereinafter defined).
B. The Board believes that such benefits will enable the Company to
continue to attract and retain competent and qualified executives, will assure
continuity and cooperation of management and will encourage such executives to
diligently perform their duties without personal financial concerns, thereby
enhancing shareholder value and ensuring a smooth transition.
C. The Executive is a key executive of Franklin Plastics, Inc. ("Franklin")
a subsidiary of the Company.
AGREEMENTS
NOW, THEREFORE, for good and valuable consideration, including the mutual
covenants set forth herein, the parties hereto agree as follows:
1. DEFINITIONS. The following terms shall have the following meanings for
purposes of this Agreement.
"AFFILIATE" means any entity controlled by, controlling or under common
control with, a person or entity.
"ANNUAL PAY" means the sum of (i) an amount equal to the annual base salary
rate payable to the Executive by the Company at the time of termination of his
or her employment plus (ii) an amount equal to the target bonus established for
the Executive for the Company's fiscal year in which his or her termination of
employment occurs.
"CAUSE" means the Executive's (i) willful and intentional material breach
of this Agreement, (ii) willful and intentional misconduct or gross negligence
in the performance of, or willful neglect of, the Executive's duties, which has
caused material injury (monetary or otherwise) to the Company, or (iii)
conviction of, or plea of nolo contendere to, a felony; provided, however, that
no act or omission shall constitute "Cause" for purposes of this Agreement
unless the Board or the Chairman of the Board provides to the Executive (a)
written
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notice clearly and fully describing the particular acts or omissions which the
Board or the Chairman of the Board reasonably believes in good faith constitutes
"Cause" and (b) an opportunity, within thirty (30) days following his or her
receipt of such notice, to meet in person with the Board or the Chairman of the
Board to explain or defend the alleged acts or omissions relied upon by the
Board and, to the extent practicable, to cure such acts or omissions. Further,
no act or omission shall be considered as "willful" or "intentional" if the
Executive reasonably believed such acts or omissions were in the best interests
of the Company.
"CHANGE IN CONTROL" means:
1. (A) any "person" (as such term is used in Section 13(d) of the
Securities Exchange Act of 1934, as amended (the "Exchange Act")) becomes the
"beneficial owner" (as determined pursuant to Rule 13d-3 under the Exchange
Act), directly or indirectly, of securities of the Company representing thirty
percent (30%) or more of the combined voting power of the Company's then
outstanding securities; or (B) individuals who currently serve on the Board, or
whose election to the Board or nomination for election to the Board was approved
by a vote of at least two-thirds (2/3) of the directors who either currently
serve on the Board, or whose election or nomination for election was previously
so approved, cease for any reason to constitute a majority of the Board; or (C)
the Company or any subsidiary of the Company shall merge with or consolidate
into any other corporation, other than a merger or consolidation which would
result in the holders of the voting securities of the Company outstanding
immediately prior thereto holding immediately thereafter securities representing
more than sixty percent (60%) of the combined voting power of the voting
securities of the Company or such surviving entity (or its ultimate parent, if
applicable) outstanding immediately after such merger or consolidation; or (D)
the stockholders of the Company approve a plan of complete liquidation of the
Company or an agreement for the sale or disposition by the Company of all or
substantially all of the Company's assets, or such a plan is commenced;
OR
2. (A) any "person" (as such term is used in Section13(d) of the Securities
Exchange Act of 1934, as amended (the "Exchange Act")) other than the Company or
an affiliate of the Company (as that term is defined in the Exchange Act),
becomes the "beneficial owner" (as determined pursuant to Rule 13d-3 under the
Exchange Act), directly or indirectly, of securities of Franklin representing
fifty percent (50%) or more of the combined voting power of Franklin's then
outstanding securities; or (B) Franklin or any subsidiary of Franklin shall
merge with or consolidate into any other entity other than an affiliate of
Franklin or the Company, other than a merger or consolidation which would result
in the holders of the voting securities of Franklin outstanding immediately
prior thereto holding immediately thereafter securities representing more than
fifty percent (50%) of the combined voting power of the voting securities of
Franklin or such surviving entity (or its ultimate parent, if applicable )
outstanding immediately after such merger or consolidation; or (C) the
stockholders of Franklin approve a plan of complete liquidation of Franklin or
such a plan is commenced; or (D) any merger, consolidation, sale of stock or
other transaction or series of related transactions, that results in Alan and
Peter Bernon and their affiliates, personal representatives and heirs (the
"Bernons") and the Company or an affiliate of the
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Company owning an aggregate of less than 50% of the combined voting power of the
outstanding securities of Franklin, other than an underwritten public offering
for cash of Franklin's securities or a distribution of Franklin's securities
held by the Company to the stockholders of the Company; or (E) any sale of all
or substantially all of the assets of Franklin other than to an affiliate of
Franklin or the Company, unless the Company, the Bernons and their affiliates
own at least 50% of the combined voting power of the purchaser.
"CODE" means the Internal Revenue Code of 1986, as amended.
"CONFIDENTIAL INFORMATION" means all information, whether oral or written,
previously or hereafter developed, acquired or used by the Company or its
subsidiaries and relating to the business of the Company and its subsidiaries
that is not generally known to others in the Company's area of business,
including without limitation trade secrets, methods or practices developed by
the Company or any of its subsidiaries, financial results or plans, customer or
client lists, personnel information, information relating to negotiations with
clients or prospective clients, proprietary software, databases, programming or
data transmission methods, or copyrighted materials (including without
limitation, brochures, layouts, letters, art work, copy, photographs or
illustrations). It is expressly understood that the foregoing list shall be
illustrative only and is not intended to be an exclusive or exhaustive list of
"Confidential Information."
"GOOD REASON" means any of the following events occurring, without the
Executive's prior written consent specifically referring to this Agreement,
within two (2) years following a Change in Control:
(1) (A) Any reduction in the amount of the Executive's Annual Pay, (B)
any reduction in the amount of Executive's other long-term aggregate
incentive compensation opportunities, or (C) any significant reduction in
the aggregate value of the Executive's benefits as in effect from time to
time (unless in the case of either B or C, such reduction is pursuant to a
general change in compensation or benefits applicable to all similarly
situated employees of the Company and its Affiliates);
(2) (A) the removal of the Executive from the Executive's position as
President - Suiza Packaging Group (or as President of any successor to the
operations of Suiza Packaging Group) or (B) any other significant reduction
in the nature or status of the Executive's duties or responsibilities;
(3) transfer of the Executive's principal place of employment to a
metropolitan area other than that of the Executive's place of employment
immediately prior to the Change in Control without the Executive's consent;
or
(4) failure by the Company to obtain the assumption agreement referred
to in Section 7 of this Agreement prior to the effectiveness of any
succession referred to therein, unless the purchaser, successor or assignee
referred to therein is bound to perform this Agreement by operation of law.
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"TERMINATION PAY" means a payment made by the Company to the Executive
pursuant to Section 2(a)(ii) or Section 2(b)(ii) hereof.
2. CHANGE IN CONTROL TERMINATION PAYMENT AND BENEFITS.
(a) Involuntary or Constructive Termination. In the event that the
Executive's employment with the Company or its successor is terminated by the
Company or its successor without Cause or by the Executive for Good Reason in
connection with or within two years after a Change in Control, the Executive
shall be entitled to the following payments and other benefits:
(i) A cash payment in an amount equal to the sum of (A) the
Executive's accrued and unpaid salary as of his or her date of termination
of employment, plus (B) his or her accrued and unpaid bonus, if any, for
the Company's prior fiscal year. This amount shall be paid on the date of
the Executive's termination of employment.
(ii) A cash payment in an amount equal to three (3) times the
Executive's Annual Pay. This amount shall be paid by the Company in
accordance with Section 2(d) hereof.
(iii) A cash payment in an amount equal to the Executive's unvested
account balance under the Company's 401(k) plan.
(iv) The Executive and his or her eligible dependents shall be
entitled for a period of two (2) years following his or her date of
termination of employment to continued coverage, on the same basis as
similarly situated active employees, under the Company's group health,
dental, long-term disability and life insurance plans as in effect from
time to time (but not any other welfare benefit plans or any retirement
plans); provided that coverage under any particular benefit plan shall
expire with respect to the period after the Executive becomes covered under
another employer's plan providing for a similar type of benefit. In the
event the Company is unable to provide such coverage on account of any
limitations under the terms of any applicable contract with an insurance
carrier or third party administrator, the Company shall pay the Executive
an amount equal to the cost of such coverage.
(v) All of the Executive's unvested options to purchase shares of
Franklin's common stock shall be automatically vested and shall remain
exercisable by the Executive on the same terms (other than vesting
provisions) and for the same periods as were in effect prior to termination
of the Executive's employment. In the event of any conflict between this
provision and the provisions of any stock option award agreements entered
into before or after the effective date of this Agreement, the foregoing
provision shall control.
(b) Voluntary Termination. If, at any time during the period beginning
12 months after a Change in Control and ending 24 months after a Change in
Control, the Executive
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voluntarily terminates his or her employment with the Company for any reason
(other than for Good Reason), the Executive shall be entitled to receive the
following payments and benefits:
(i) A cash payment in an amount equal to the sum of (A) the
Executive's accrued and unpaid salary as of his or her date of
termination of employment, plus (B) his or her accrued and unpaid
bonus, if any, for the Company's prior fiscal year. This amount shall
be paid on the date of the Executive's termination of employment.
(ii) A cash payment in an amount equal to one and one-half (1
1/2) times the Executive's Annual Pay. This amount shall be paid by
the Company in accordance with Section 2(d) hereof.
(c) No Duplication; Other Severance Pay. There shall be no duplication
of severance pay in any manner. In this regard, the Executive shall not be
entitled to Termination Pay hereunder for more than one position with the
Company and its Affiliates. If the Executive is entitled to any notice or
payment in lieu of any notice of termination of employment required by Federal,
state or local law, including but not limited to the Worker Adjustment and
Retraining Notification Act, the severance compensation to which the Executive
would otherwise be entitled under this Agreement shall be reduced by the amount
of any such payment, in lieu of notice. If Executive is entitled to any
severance or termination payments under any employment or other agreement with
the Company or any of its Affiliates, the severance compensation to which
Executive would otherwise be entitled under this Agreement shall be reduced by
the amount of such payment. Except as set forth above, the foregoing payments
and benefits shall be in addition to and not in lieu of any payments or benefits
to which the Executive and his or her dependents may otherwise be entitled to
under the Company's compensation and employee benefit plans. Nothing herein
shall be deemed to restrict the right of the Company from amending or
terminating any such plan in a manner generally applicable to similarly situated
active employees of the Company and its Affiliates, in which event the Executive
shall be entitled to participate on the same basis (including payment of
applicable contributions) as similarly situated active executives of the Company
and its Affiliates.
(d) Mutual Release. Termination Pay shall be conditioned upon the
execution by the Executive and the Company of a valid mutual release to be
prepared by the Company pursuant to which the Executive and the Company shall
each mutually release each other, to the maximum extent permitted by law, from
any and all claims either party may have against the other that relate to or
arise out of the employment or termination of employment of the Executive,
except such claims arising under this Agreement, any employee benefit plan, or
any other written plan or agreement (a "Mutual Release"). The full amount of
Termination Pay shall be paid in a lump sum in cash to the Executive within ten
(10) days following receipt by the Company of a Mutual Release which is properly
executed by the Executive; provided, however, that in the event applicable law
allows the Executive to revoke the Mutual Release for a period of time, and the
Mutual Release is not revoked during such period, the full amount of Termination
Pay shall be paid to the Executive following the expiration of such period.
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3. EXCISE TAXES.
(a) Gross-Up Payment. Anything in this Agreement to the contrary
notwithstanding and except as set forth below, if it is determined that any
payment or distribution (a "Payment") by the Company to or for the benefit of
the Executive (whether paid or payable or distributed or distributable pursuant
to the terms of this Agreement or otherwise, but determined without regard to
any additional payments required under this Section 3) including, without
limitation, vesting of options, would be subject to the excise tax imposed by
Section 4999 of the Code, or if any interest or penalties are incurred by the
Executive with respect to such excise tax (such excise tax, together with any
such interest and penalties, being hereinafter collectively referred to as the
"Excise Tax"), then the Executive shall be entitled to receive an additional
payment (a "Gross-Up Payment") in an amount sufficient to pay all taxes
(including any interest or penalties imposed with respect to such taxes),
including, without limitation, any income taxes (and any interest and penalties
imposed with respect thereto) and Excise Tax imposed upon the Gross-Up Payment.
(b) Calculation of Gross-Up Payment. Subject to the provisions of
paragraph (c) of this Section 3, all determinations required to be made under
this Section 3, including whether and when a Gross-Up Payment is required and
the amount of such Gross-Up Payment and the assumptions to be used in arriving
at such determination, shall be made by a certified public accounting firm
selected by the Company and reasonably acceptable to the Executive (the
"Accounting Firm"), which shall be retained to provide detailed supporting
calculations both to the Company and the Executive. If the Accounting Firm is
serving as accountant or auditor for the individual, entity or group effecting
the Change in Control, the Executive shall have the right to appoint another
nationally recognized accounting firm to make the determinations required
hereunder (which accounting firm shall then be referred to as the Accounting
Firm hereunder). All fees and expenses of the Accounting Firm shall be paid
solely by the Company. Any Gross-Up Payment, as determined pursuant to this
Section 3, shall be paid by the Company to the Executive within five (5) days of
the receipt of the Accounting Firm's determination. Any determination by the
Accounting Firm shall be binding upon the Company and the Executive. As a result
of the uncertainty in the application of Section 4999 of the Code at the time of
the initial determination by the Accounting Firm hereunder, it is possible that
Gross-Up Payments which should have been made will not have been made by the
Company ("Underpayment"), consistent with the calculations required to be made
hereunder. If the Company exhausts its remedies pursuant to paragraph (c) of
this Section 3 and the Executive thereafter is required to pay an Excise Tax in
an amount that exceeds the Gross-Up Payment received by the Executive the
Accounting Firm shall determine the amount of the Underpayment that has occurred
and any such Underpayment shall be promptly paid by the Company to or for the
benefit of the Executive.
(c) Contested Taxes. The Executive shall notify the Company in writing
of any claim by the Internal Revenue Service that, if successful, would result
in an Underpayment. Such notification shall be given as soon as practicable but
no later than ten (10) business days after the Executive is informed in writing
of such claim and shall apprise the Company of the nature of such claim and the
date on which such claim is requested to be paid or appealed. The Executive
shall not pay such claim prior to the expiration of the 30-day period following
the date
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on which it gives such notice to the Company (or such shorter period ending on
the date that any payment of taxes with respect to such claim is due). If the
Company notifies the Executive in writing prior to the expiration of such period
that it desires to contest such claim, the Executive shall:
(i) give the Company any information reasonably requested by the
Company relating to such claim,
(ii) take such action in connection with contesting such claims
as the Company shall reasonably request in writing from time to time,
including, without limitation, accepting legal representation with
respect to such claim by an attorney reasonably selected by the
Company,
(iii) cooperate with the Company in good faith in order to
effectively contest such claim, and
(iv) permit the Company to participate in any proceedings
relating to such claim;
provided, however, that the Company shall bear and pay directly all
costs and expenses (including additional interest and penalties) incurred in
connection with such contest and shall indemnify and hold the Executive
harmless, on an after-tax basis, for any Excise Tax or income tax (including
interest and penalties with respect thereto) imposed as a result of such
representation and payment of costs and expenses. Without limitation on the
foregoing provisions of this paragraph (c), the Company shall control all
proceedings taken in connection with such contest and, at its sole option, may
pursue or forego any and all administrative appeals, proceedings, hearings and
conferences with the taxing authority in respect of such claim and may, at its
sole option, either direct the Executive to pay the tax claimed and sue for a
refund or to contest the claim in any permissible manner, and the Executive
agrees to prosecute such contest to a determination before any administrative
tribunal, in a court of initial jurisdiction and in one or more appellate
courts, as the Company shall determine; provided, however, that if the Company
directs the Executive to pay such claim and sue for a refund, the Company shall
advance the amount of such payment to the Executive, on an interest-free basis,
and shall indemnify and hold the Executive harmless, on an after-tax basis, from
any Excise Tax or income tax (including interest or penalties with respect
thereto) imposed with respect to such advance or with respect to any imputed
income with respect to such advance; and further provided that any extension of
the statute of limitations relating to payment of taxes for the taxable year of
the Executive with respect to which such contested amount is claimed to be due
is limited solely to such contested amount. Furthermore, the Company's control
of the contest shall be limited to issues with respect to the amount of the
Gross-Up Payment, and the Executive shall be entitled to settle or contest, as
the case may be, any other issue raised by the Internal Revenue Service or any
other taxing authority.
(d) Refunds. If, after the receipt by the Executive of an amount
advanced by the Company pursuant to this Section 3, the Executive becomes
entitled to receive any refund
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with respect to such claim, the Executive shall promptly pay to the Company the
amount of such refund (together with any interest paid or credited thereon after
taxes applicable thereto).
4. CERTAIN COVENANTS BY THE EXECUTIVE.
(a) Covenant Not to Compete. In consideration of the payments made to
the Executive pursuant to this Agreement, the Executive shall not during the
term of his or her employment with the Company and for a period of two years
after termination of the Executive's employment with the Company, directly or
indirectly, engage (whether as owner, partner, stockholder, joint venturer,
manager, investor, employee, consultant, independent contractor or agent) in any
business that competes, directly or indirectly, with the Company in any
jurisdiction in which the Company is conducting business at the time (provided
that the Executive shall not be restricted hereby from owning or acquiring 5% or
less of the outstanding voting securities of a public company), provided that,
the foregoing restriction will terminate immediately if the Executive's
employment with the Company is terminated by the Company without Cause or by the
Executive for Good Reason. The foregoing provision is not intended to override,
supercede, reduce, modify or affect in any manner any other noncompetition
covenant or agreement entered into between Executive and the Company or any of
its Affiliates. Any such covenant or agreement shall remain in full force and
effect in accordance with its terms.
(b) Protection of Confidential Information. The Executive agrees that
he or she will not at any time during or following his or her employment by the
Company, without the Company's prior written consent, divulge any Confidential
Information to any other person or entity or use any Confidential Information
for his or her own benefit. Upon termination of employment, for any reason
whatsoever, regardless of whether either party may be at fault, the Executive
will return to the Company all physical Confidential Information in the
Executive's possession. (c) Nondisclosure of Agreement. The Executive agrees, at
all times during his or her employment by the Company, not to disclose or
discuss in any manner (whether to individuals inside or outside the Company),
the existence or terms of, this Agreement without the prior written consent of
the Company, except to the extent required by law.
(d) Non-Solicitation of Employees. The Executive agrees, for so long
as the Executive remains employed by the Company, and for a period of two years
following the termination of the Executive's employment, that the Executive
shall not, either for the Executive's own account, or on behalf of any other
person or entity, solicit, suggest or request that any other person employed by
the Company or one of its Affiliates leave such employment for the purpose of
becoming employed by the Executive or any other person or entity.
(e) Extent of Restrictions. The Executive acknowledges that the
restrictions contained in this Section 4 correctly set forth the understanding
of the parties at the time this Agreement is entered into, are reasonable and
necessary to protect the legitimate interests of the Company, and that any
violation will cause substantial injury to the Company. In the event of any such
violation, the Company shall be entitled, in addition to any other remedy, to
preliminary or permanent injunctive relief. If any court having jurisdiction
shall find that any part of the
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restrictions set forth in this Agreement are unreasonable in any respect, it is
the intent of the parties that the restrictions set forth herein shall not be
terminated, but that this Agreement shall remain in full force and effect to the
extent (as to time periods and other relevant factors) that the court shall find
reasonable.
5. TAX WITHHOLDING. All payments to the Executive under this Agreement
will be subject to the withholding of all applicable employment and income
taxes.
6. SEVERABILITY. In the event that any provision or portion of this
Agreement shall be determined to be invalid or unenforceable for any reason, the
remaining provisions of this Agreement shall be unaffected thereby and shall
remain in full force and effect.
7. SUCCESSORS. This Agreement shall be binding upon and inure to the
benefit of the Company and any successor of the Company. The Company will
require any successor to all or substantially all of the business and/or assets
of the Company to expressly assume and agree to perform this Agreement in the
same manner and to the same extent that the Company would be required to perform
if no succession had taken place.
8. ENTIRE AGREEMENT. This Agreement constitutes the entire agreement
between the parties hereto with respect to the subject matter hereof. This
Agreement may not be modified in any manner except by a written instrument
signed by both the Company and the Executive.
9. NOTICES. Any notice required under this Agreement shall be in
writing and shall be delivered by certified mail return receipt requested to
each of the parties as follows:
To the Executive:
William Estes
Suiza Packaging Group
2515 McKinney Avenue, Suite 850
Dallas, TX 75201
To the Company:
SUIZA FOODS CORPORATION
2515 McKinney Avenue, Suite 1200, LB 30
Dallas, Texas 75201
Attn.: General Counsel
Tel.: 214-303-3400
Fax: 214-303-3499
10. GOVERNING LAW. The provisions of this Agreement shall be construed
in accordance of the laws of the State of Delaware, except to the extent
preempted by ERISA or other federal laws, as applicable, without reference to
the conflicts of laws provisions thereof.
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IN WITNESS WHEREOF, the Executive and the Company have executed this
Agreement as of the date and year first above written.
SUIZA FOODS CORPORATION
-------------------------------------------------
Gregg L. Engles
Chairman of the Board and Chief Executive Officer
-------------------------------------------------
William Estes
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EXHIBIT 10.42
SEVERANCE AGREEMENT
THIS SEVERANCE AGREEMENT (this "Agreement") is made as of January 1,
1999, by and between SUIZA FOODS CORPORATION, a Delaware corporation (together
with its subsidiaries, the "Company"), and Ron Justice (the "Executive").
RECITALS
A. The Board of Directors of the Company (the "Board") has determined
that the interests of the Company will be advanced by providing the key
executives of the Company with certain benefits in the event of the termination
of employment of any such executive in connection with or following a Change in
Control (as hereinafter defined).
B. The Board believes that such benefits will enable the Company to
continue to attract and retain competent and qualified executives, will assure
continuity and cooperation of management and will encourage such executives to
diligently perform their duties without personal financial concerns, thereby
enhancing shareholder value and ensuring a smooth transition.
C. The Executive is a key executive of Franklin Plastics, Inc.
("Franklin") a subsidiary of the Company.
AGREEMENTS
NOW, THEREFORE, for good and valuable consideration, including the
mutual covenants set forth herein, the parties hereto agree as follows:
1. DEFINITIONS. The following terms shall have the following meanings
for purposes of this Agreement.
"AFFILIATE" means any entity controlled by, controlling or under common
control with, a person or entity.
"ANNUAL PAY" means the sum of (i) an amount equal to the annual base
salary rate payable to the Executive by the Company at the time of termination
of his or her employment plus (ii) an amount equal to the target bonus
established for the Executive for the Company's fiscal year in which his or her
termination of employment occurs.
"CAUSE" means the Executive's (i) willful and intentional material
breach of this Agreement, (ii) willful and intentional misconduct or gross
negligence in the performance of, or willful neglect of, the Executive's duties,
which has caused material injury (monetary or otherwise) to the Company, or
(iii) conviction of, or plea of nolo contendere to, a felony; provided, however,
that no act or omission shall constitute "Cause" for purposes of this Agreement
unless the Board or the Chairman of the Board provides to the Executive (a)
written
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notice clearly and fully describing the particular acts or omissions which the
Board or the Chairman of the Board reasonably believes in good faith constitutes
"Cause" and (b) an opportunity, within thirty (30) days following his or her
receipt of such notice, to meet in person with the Board or the Chairman of the
Board to explain or defend the alleged acts or omissions relied upon by the
Board and, to the extent practicable, to cure such acts or omissions. Further,
no act or omission shall be considered as "willful" or "intentional" if the
Executive reasonably believed such acts or omissions were in the best interests
of the Company.
"CHANGE IN CONTROL" means:
1. (A) any "person" (as such term is used in Section 13(d) of the
Securities Exchange Act of 1934, as amended (the "Exchange Act")) becomes the
"beneficial owner" (as determined pursuant to Rule 13d-3 under the Exchange
Act), directly or indirectly, of securities of the Company representing thirty
percent (30%) or more of the combined voting power of the Company's then
outstanding securities; or (B) individuals who currently serve on the Board, or
whose election to the Board or nomination for election to the Board was approved
by a vote of at least two-thirds (2/3) of the directors who either currently
serve on the Board, or whose election or nomination for election was previously
so approved, cease for any reason to constitute a majority of the Board; or (C)
the Company or any subsidiary of the Company shall merge with or consolidate
into any other corporation, other than a merger or consolidation which would
result in the holders of the voting securities of the Company outstanding
immediately prior thereto holding immediately thereafter securities representing
more than sixty percent (60%) of the combined voting power of the voting
securities of the Company or such surviving entity (or its ultimate parent, if
applicable) outstanding immediately after such merger or consolidation; or (D)
the stockholders of the Company approve a plan of complete liquidation of the
Company or an agreement for the sale or disposition by the Company of all or
substantially all of the Company's assets, or such a plan is commenced;
OR
2. (A) any "person" (as such term is used in Section 13(d) of the
Securities Exchange Act of 1934, as amended (the "Exchange Act")) other than the
Company or an affiliate of the Company (as that term is defined in the Exchange
Act), becomes the "beneficial owner" (as determined pursuant to Rule 13d-3 under
the Exchange Act), directly or indirectly, of securities of Franklin
representing fifty percent (50%) or more of the combined voting power of
Franklin's then outstanding securities; or (B) Franklin or any subsidiary of
Franklin shall merge with or consolidate into any other entity other than an
affiliate of Franklin or the Company, other than a merger or consolidation which
would result in the holders of the voting securities of Franklin outstanding
immediately prior thereto holding immediately thereafter securities representing
more than fifty percent (50%) of the combined voting power of the voting
securities of Franklin or such surviving entity (or its ultimate parent, if
applicable ) outstanding immediately after such merger or consolidation; or (C)
the stockholders of Franklin approve a plan of complete liquidation of Franklin
or such a plan is commenced; or (D) any merger, consolidation, sale of stock or
other transaction or series of related transactions, that results in Alan and
Peter Bernon and their affiliates, personal representatives and heirs (the
"Bernons") and the Company or an affiliate of the
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Company owning an aggregate of less than 50% of the combined voting power of the
outstanding securities of Franklin, other than an underwritten public offering
for cash of Franklin's securities or a distribution of Franklin's securities
held by the Company to the stockholders of the Company; or (E) any sale of all
or substantially all of the assets of Franklin other than to an affiliate of
Franklin or the Company, unless the Company, the Bernons and their affiliates
own at least 50% of the combined voting power of the purchaser.
"CODE" means the Internal Revenue Code of 1986, as amended.
"CONFIDENTIAL INFORMATION" means all information, whether oral or
written, previously or hereafter developed, acquired or used by the Company or
its subsidiaries and relating to the business of the Company and its
subsidiaries that is not generally known to others in the Company's area of
business, including without limitation trade secrets, methods or practices
developed by the Company or any of its subsidiaries, financial results or plans,
customer or client lists, personnel information, information relating to
negotiations with clients or prospective clients, proprietary software,
databases, programming or data transmission methods, or copyrighted materials
(including without limitation, brochures, layouts, letters, art work, copy,
photographs or illustrations). It is expressly understood that the foregoing
list shall be illustrative only and is not intended to be an exclusive or
exhaustive list of "Confidential Information."
"GOOD REASON" means any of the following events occurring, without the
Executive's prior written consent specifically referring to this Agreement,
within two (2) years following a Change in Control:
(1) (A) Any reduction in the amount of the Executive's Annual
Pay, (B) any reduction in the amount of Executive's other long-term
aggregate incentive compensation opportunities, or (C) any significant
reduction in the aggregate value of the Executive's benefits as in
effect from time to time (unless in the case of either B or C, such
reduction is pursuant to a general change in compensation or benefits
applicable to all similarly situated employees of the Company and its
Affiliates);
(2) (A) the removal of the Executive from the position held by
him or her immediately prior to the Change in Control, or (B) any other
significant reduction in the nature or status of the Executive's duties
or responsibilities;
(3) transfer of the Executive's principal place of employment
to a metropolitan area other than that of the Executive's place of
employment immediately prior to the Change in Control without the
Executive's consent; or
(4) failure by the Company to obtain the assumption agreement
referred to in Section 7 of this Agreement prior to the effectiveness
of any succession referred to therein, unless the purchaser, successor
or assignee referred to therein is bound to perform this Agreement by
operation of law.
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"TERMINATION PAY" means a payment made by the Company to the Executive
pursuant to Section 2(a)(ii).
2. CHANGE IN CONTROL TERMINATION PAYMENT AND BENEFITS.
(a) Involuntary or Constructive Termination. In the event that
the Executive's employment with the Company or its successor is terminated by
the Company or its successor without Cause or by the Executive for Good Reason
in connection with or within two years after a Change in Control, the Executive
shall be entitled to the following payments and other benefits:
(i) A cash payment in an amount equal to the sum of
(A) the Executive's accrued and unpaid salary as of his or her date of
termination of employment, plus (B) his or her accrued and unpaid
bonus, if any, for the Company's prior fiscal year. This amount shall
be paid on the date of the Executive's termination of employment.
(ii) A cash payment in an amount equal to two (2)
times the Executive's Annual Pay. This amount shall be paid by the
Company in accordance with Section 2(c) hereof.
(iii) A cash payment in an amount equal to the
Executive's unvested account balance under the Company's 401(k) plan.
(iv) The Executive and his or her eligible dependents
shall be entitled for a period of two (2) years following his or her
date of termination of employment to continued coverage, on the same
basis as similarly situated active employees, under the Company's group
health, dental, long-term disability and life insurance plans as in
effect from time to time (but not any other welfare benefit plans or
any retirement plans); provided that coverage under any particular
benefit plan shall expire with respect to the period after the
Executive becomes covered under another employer's plan providing for a
similar type of benefit. In the event the Company is unable to provide
such coverage on account of any limitations under the terms of any
applicable contract with an insurance carrier or third party
administrator, the Company shall pay the Executive an amount equal to
the cost of such coverage.
(v) All of the Executive's unvested options to
purchase shares of Franklin's common stock shall be automatically
vested and shall remain exercisable by the Executive on the same terms
(other than vesting provisions) and for the same periods as were in
effect prior to termination of the Executive's employment. In the event
of any conflict between this provision and the provisions of any stock
option award agreements entered into before or after the effective date
of this Agreement, the foregoing provision shall control.
(b) No Duplication; Other Severance Pay. There shall be no
duplication of severance pay in any manner. In this regard, the Executive shall
not be entitled to Termination Pay hereunder for more than one position with the
Company and its Affiliates. If the Executive is
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entitled to any notice or payment in lieu of any notice of termination of
employment required by Federal, state or local law, including but not limited to
the Worker Adjustment and Retraining Notification Act, the severance
compensation to which the Executive would otherwise be entitled under this
Agreement shall be reduced by the amount of any such payment, in lieu of notice.
If Executive is entitled to any severance or termination payments under any
employment or other agreement with the Company or any of its Affiliates, the
severance compensation to which Executive would otherwise be entitled under this
Agreement shall be reduced by the amount of such payment. Except as set forth
above, the foregoing payments and benefits shall be in addition to and not in
lieu of any payments or benefits to which the Executive and his or her
dependents may otherwise be entitled to under the Company's compensation and
employee benefit plans. Nothing herein shall be deemed to restrict the right of
the Company from amending or terminating any such plan in a manner generally
applicable to similarly situated active employees of the Company and its
Affiliates, in which event the Executive shall be entitled to participate on the
same basis (including payment of applicable contributions) as similarly situated
active executives of the Company and its Affiliates.
(c) Mutual Release. Termination Pay shall be conditioned upon
the execution by the Executive and the Company of a valid mutual release to be
prepared by the Company pursuant to which the Executive and the Company shall
each mutually release each other, to the maximum extent permitted by law, from
any and all claims either party may have against the other that relate to or
arise out of the employment or termination of employment of the Executive,
except such claims arising under this Agreement, any employee benefit plan, or
any other written plan or agreement (a "Mutual Release"). The full amount of
Termination Pay shall be paid in a lump sum in cash to the Executive within ten
(10) days following receipt by the Company of a Mutual Release which is properly
executed by the Executive; provided, however, that in the event applicable law
allows the Executive to revoke the Mutual Release for a period of time, and the
Mutual Release is not revoked during such period, the full amount of Termination
Pay shall be paid to the Executive following the expiration of such period.
3. EXCISE TAXES.
(a) Gross-Up Payment. Anything in this Agreement to the
contrary notwithstanding and except as set forth below, if it is determined that
any payment or distribution (a "Payment") by the Company to or for the benefit
of the Executive (whether paid or payable or distributed or distributable
pursuant to the terms of this Agreement or otherwise, but determined without
regard to any additional payments required under this Section 3) including,
without limitation, vesting of options, would be subject to the excise tax
imposed by Section 4999 of the Code, or if any interest or penalties are
incurred by the Executive with respect to such excise tax (such excise tax,
together with any such interest and penalties, being hereinafter collectively
referred to as the "Excise Tax"), then the Executive shall be entitled to
receive an additional payment (a "Gross-Up Payment") in an amount sufficient to
pay all taxes (including any interest or penalties imposed with respect to such
taxes), including, without limitation, any income taxes (and any interest and
penalties imposed with respect thereto) and Excise Tax imposed upon the Gross-Up
Payment.
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(b) Calculation of Gross-Up Payment. Subject to the provisions
of paragraph (c) of this Section 3, all determinations required to be made under
this Section 3, including whether and when a Gross-Up Payment is required and
the amount of such Gross-Up Payment and the assumptions to be used in arriving
at such determination, shall be made by a certified public accounting firm
selected by the Company and reasonably acceptable to the Executive (the
"Accounting Firm"), which shall be retained to provide detailed supporting
calculations both to the Company and the Executive. If the Accounting Firm is
serving as accountant or auditor for the individual, entity or group effecting
the Change in Control, the Executive shall have the right to appoint another
nationally recognized accounting firm to make the determinations required
hereunder (which accounting firm shall then be referred to as the Accounting
Firm hereunder). All fees and expenses of the Accounting Firm shall be paid
solely by the Company. Any Gross-Up Payment, as determined pursuant to this
Section 3, shall be paid by the Company to the Executive within five (5) days of
the receipt of the Accounting Firm's determination. Any determination by the
Accounting Firm shall be binding upon the Company and the Executive. As a result
of the uncertainty in the application of Section 4999 of the Code at the time of
the initial determination by the Accounting Firm hereunder, it is possible that
Gross-Up Payments which should have been made will not have been made by the
Company ("Underpayment"), consistent with the calculations required to be made
hereunder. If the Company exhausts its remedies pursuant to paragraph (c) of
this Section 3 and the Executive thereafter is required to pay an Excise Tax in
an amount that exceeds the Gross-Up Payment received by the Executive the
Accounting Firm shall determine the amount of the Underpayment that has occurred
and any such Underpayment shall be promptly paid by the Company to or for the
benefit of the Executive.
(c) Contested Taxes. The Executive shall notify the Company in
writing of any claim by the Internal Revenue Service that, if successful, would
result in an Underpayment. Such notification shall be given as soon as
practicable but no later than ten (10) business days after the Executive is
informed in writing of such claim and shall apprise the Company of the nature of
such claim and the date on which such claim is requested to be paid or appealed.
The Executive shall not pay such claim prior to the expiration of the 30-day
period following the date on which it gives such notice to the Company (or such
shorter period ending on the date that any payment of taxes with respect to such
claim is due). If the Company notifies the Executive in writing prior to the
expiration of such period that it desires to contest such claim, the Executive
shall:
(i) give the Company any information reasonably
requested by the Company relating to such claim,
(ii) take such action in connection with contesting
such claims as the Company shall reasonably request in writing from
time to time, including, without limitation, accepting legal
representation with respect to such claim by an attorney reasonably
selected by the Company,
(iii) cooperate with the Company in good faith in
order to effectively contest such claim, and
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(iv) permit the Company to participate in any
proceedings relating to such claim;
provided, however, that the Company shall bear and pay directly all
costs and expenses (including additional interest and penalties) incurred in
connection with such contest and shall indemnify and hold the Executive
harmless, on an after-tax basis, for any Excise Tax or income tax (including
interest and penalties with respect thereto) imposed as a result of such
representation and payment of costs and expenses. Without limitation on the
foregoing provisions of this paragraph (c), the Company shall control all
proceedings taken in connection with such contest and, at its sole option, may
pursue or forego any and all administrative appeals, proceedings, hearings and
conferences with the taxing authority in respect of such claim and may, at its
sole option, either direct the Executive to pay the tax claimed and sue for a
refund or to contest the claim in any permissible manner, and the Executive
agrees to prosecute such contest to a determination before any administrative
tribunal, in a court of initial jurisdiction and in one or more appellate
courts, as the Company shall determine; provided, however, that if the Company
directs the Executive to pay such claim and sue for a refund, the Company shall
advance the amount of such payment to the Executive, on an interest-free basis,
and shall indemnify and hold the Executive harmless, on an after-tax basis, from
any Excise Tax or income tax (including interest or penalties with respect
thereto) imposed with respect to such advance or with respect to any imputed
income with respect to such advance; and further provided that any extension of
the statute of limitations relating to payment of taxes for the taxable year of
the Executive with respect to which such contested amount is claimed to be due
is limited solely to such contested amount. Furthermore, the Company's control
of the contest shall be limited to issues with respect to the amount of the
Gross-Up Payment, and the Executive shall be entitled to settle or contest, as
the case may be, any other issue raised by the Internal Revenue Service or any
other taxing authority.
(d) Refunds. If, after the receipt by the Executive of an
amount advanced by the Company pursuant to this Section 3, the Executive becomes
entitled to receive any refund with respect to such claim, the Executive shall
promptly pay to the Company the amount of such refund (together with any
interest paid or credited thereon after taxes applicable thereto).
4. CERTAIN COVENANTS BY THE EXECUTIVE.
(a) Covenant Not to Compete. In consideration of the payments
made to the Executive pursuant to this Agreement, the Executive shall not during
the term of his or her employment with the Company and for a period of two years
after termination of the Executive's employment with the Company, directly or
indirectly, engage (whether as owner, partner, stockholder, joint venturer,
manager, investor, employee, consultant, independent contractor or agent) in any
business that competes, directly or indirectly, with the Company in any
jurisdiction in which the Company is conducting business at the time (provided
that the Executive shall not be restricted hereby from owning or acquiring 5% or
less of the outstanding voting securities of a public company), provided that,
the foregoing restriction will terminate immediately if the Executive's
employment with the Company is terminated by the Company without Cause or by the
Executive for Good Reason. The foregoing provision is not intended to override,
supercede,
7
<PAGE> 8
reduce, modify or affect in any manner any other noncompetition covenant or
agreement entered into between Executive and the Company or any of its
Affiliates. Any such covenant or agreement shall remain in full force and effect
in accordance with its terms.
(b) Protection of Confidential Information. The Executive
agrees that he or she will not at any time during or following his or her
employment by the Company, without the Company's prior written consent, divulge
any Confidential Information to any other person or entity or use any
Confidential Information for his or her own benefit. Upon termination of
employment, for any reason whatsoever, regardless of whether either party may be
at fault, the Executive will return to the Company all physical Confidential
Information in the Executive's possession.
(c) Nondisclosure of Agreement. The Executive agrees, at all
times during his or her employment by the Company, not to disclose or discuss in
any manner (whether to individuals inside or outside the Company), the existence
or terms of, this Agreement without the prior written consent of the Company,
except to the extent required by law.
(d) Non-Solicitation of Employees. The Executive agrees, for
so long as the Executive remains employed by the Company, and for a period of
two years following the termination of the Executive's employment, that the
Executive shall not, either for the Executive's own account, or on behalf of any
other person or entity, solicit, suggest or request that any other person
employed by the Company or one of its Affiliates leave such employment for the
purpose of becoming employed by the Executive or any other person or entity.
(e) Extent of Restrictions. The Executive acknowledges that
the restrictions contained in this Section 4 correctly set forth the
understanding of the parties at the time this Agreement is entered into, are
reasonable and necessary to protect the legitimate interests of the Company, and
that any violation will cause substantial injury to the Company. In the event of
any such violation, the Company shall be entitled, in addition to any other
remedy, to preliminary or permanent injunctive relief. If any court having
jurisdiction shall find that any part of the restrictions set forth in this
Agreement are unreasonable in any respect, it is the intent of the parties that
the restrictions set forth herein shall not be terminated, but that this
Agreement shall remain in full force and effect to the extent (as to time
periods and other relevant factors) that the court shall find reasonable.
5. TAX WITHHOLDING. All payments to the Executive under this Agreement
will be subject to the withholding of all applicable employment and income
taxes.
6. SEVERABILITY. In the event that any provision or portion of this
Agreement shall be determined to be invalid or unenforceable for any reason, the
remaining provisions of this Agreement shall be unaffected thereby and shall
remain in full force and effect.
7. SUCCESSORS. This Agreement shall be binding upon and inure to the
benefit of the Company and any successor of the Company. The Company will
require any successor to all or substantially all of the business and/or assets
of the Company to expressly assume and agree to
8
<PAGE> 9
perform this Agreement in the same manner and to the same extent that the
Company would be required to perform if no succession had taken place.
8. ENTIRE AGREEMENT. This Agreement constitutes the entire agreement
between the parties hereto with respect to the subject matter hereof. This
Agreement may not be modified in any manner except by a written instrument
signed by both the Company and the Executive.
9. NOTICES. Any notice required under this Agreement shall be in writing
and shall be delivered by certified mail return receipt requested to each of the
parties as follows:
To the Executive:
Ron Justice
Suiza Packaging Group
2515 McKinney Avenue, Ste 850
Dallas, TX 75201
To the Company:
SUIZA FOODS CORPORATION
2515 McKinney Avenue, Suite 1200, LB 30
Dallas, Texas 75201
Attn.: General Counsel
Tel.: 214-303-3400
Fax: 214-303-3499
10. GOVERNING LAW. The provisions of this Agreement shall be construed
in accordance of the laws of the State of Delaware, except to the extent
preempted by ERISA or other federal laws, as applicable, without reference to
the conflicts of laws provisions thereof.
IN WITNESS WHEREOF, the Executive and the Company have executed this
Agreement as of the date and year first above written.
SUIZA FOODS CORPORATION
---------------------------------------
Gregg L. Engles
Chairman of the Board and Chief
Executive Officer
---------------------------------------
Ron Justice
9
<PAGE> 1
EXHIBIT 11
Statement re: computation of per share earnings
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------------------
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
Basic EPS computation:
Numerator:
Income from continuing operations....... $ 103,069 $ 39,330 $ 46,863
Less preferred stock dividends.......... (237) (300) (302)
------------ ------------ ------------
Income applicable to common stock....... $ 102,832 $ 39,030 $ 46,561
============ ============ ============
Denominator:
Average common shares................... 32,953,290 29,508,791 23,424,322
============ ============ ============
Basic EPS................................ $ 3.12 $ 1.32 $ 1.99
============ ============ ============
Diluted EPS computation:
Numerator:
Income from continuing operations....... $ 103,069 $ 39,330 $ 46,863
Less preferred stock dividends.......... (237) (300) (302)
Net effect on earnings from conversion
of mandatorily redeemable convertible
preferred securities................. 18,732
------------ ------------ ------------
Income applicable to common stock....... $ 121,564 $ 39,039 $ 46,561
============ ============ ============
Denominator:
Average common shares--basic............ 32,953,290 29,508,791 23,424,322
Stock option conversion................. 1,838,193 1,815,017 1,067,577
Earnings contingency.................... 24,783
Dilutive effect of conversion of
mandatorily redeemable convertible
preferred securities.................. 7,174,081
------------ ------------ ------------
Average common shares--diluted........... 41,965,564 31,348,591 24,491,899
============ ============ ============
Diluted EPS $ 2.90 $ 1.25 $ 1.90
============ ============ ============
</TABLE>
<PAGE> 1
EXHIBIT 12
Statement re:computation of ratios
Ratios of earnings to combined fixed charges and preferred stock dividends
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------------
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
Earnings
Pretax income from continuing operations $ 164,451 $ 82,705 $ 49,802
Fixed charges 69,576 43,444 20,785
Less included preferred stock dividend requirements (237) (628) (329)
--------- --------- ---------
Total earnings $ 233,790 $ 125,521 $ 70,258
========= ========= =========
Fixed charges and preferred stock dividends
Interest expense $ 53,339 $ 36,664 $ 15,707
Interest factor of rent expense 16,000 6,152 4,749
Preferred stock dividend requirement 237 628 329
--------- --------- ---------
Total fixed charges $ 69,576 $ 43,444 $ 20,785
========= ========= =========
Ratio 3.36 2.89 3.38
========= ========= =========
</TABLE>
<PAGE> 1
EXHIBIT 21
LIST OF SUBSIDIARIES
Name of Subsidiary State of Incorporation
- ------------------ ----------------------
Neptune Delaware Corporation Delaware
Suiza Capital Trust Delaware
Suiza Capital Trust II Delaware
Suiza Management Corporation Delaware
Country Delite Farms, Inc. Delaware
Country Fresh, Inc. Michigan
Burger Dairy Company Indiana
CFI-TMP, Inc. Michigan
Country Fresh Wesley, Inc. Michigan
Dairy Products of Michigan, Inc. Michigan
Frostbite Brands, Inc. Michigan
East Coast Ice Cream, L.L.C. Michigan
Northern Falls Water Company, Inc. Delaware
Southeastern Juice Packers, Inc. Michigan
Dairy Fresh, Inc. Delaware
Suiza GTL Holdings, Inc. Delaware
Suiza GTL, LLC Delaware
Assumed Names for Suiza GTL, LLC:
Footman's, LLC Maine
Footman's Dairy, LLC Maine
Grant's Dairy - Maine, LLC Maine
Sunrise Farms, LLC Maine
West Lynn Creamery - Maine, LLC Maine
Garelick Farms - Massachusetts Massachusetts
Miscoe Springs - Massachusetts Massachusetts
Scangas Bros. Holdings - Massachusetts Massachusetts
West Lynn Creamery - Massachusetts Massachusetts
West Lynn Creamery Realty - Massachusetts Massachusetts
West Lynn Creamery - New Hampshire New Hampshire
Garelick Farms - New Jersey New Jersey
West Lynn Creamery - New Jersey New Jersey
Fairdale Farms - New York New York
Garelick Farms - New York New York
West Lynn Creamery - New York New York
Nature's Best Rhode Island
West Lynn Creamery - Vermont Vermont
New England Dairies, LLC Delaware
Tuscan/Lehigh Management, LLC Delaware
Tuscan/Lehigh Dairies, L.P. Delaware
Garrido y Compania, Inc. Puerto Rico
Land-O-Sun Dairies, L.L.C. Delaware
LOS Holdings, Inc. Delaware
Louis Trauth Dairy, Inc. Delaware
Model Dairy, Inc. Delaware
<PAGE> 2
EXHIBIT 21
LIST OF SUBSIDIARIES
Name of Subsidiary State of Incorporation
- ------------------ ----------------------
The Morningstar Group Inc. Delaware
Morningstar Foods Inc. Delaware
Ultra Products, L.L.C. Arizona
Oberlin Farms Dairy, Inc. Ohio
Suiza Dairy Corporation Delaware
Suiza Foods Acquisition Corp. Ohio
Suiza Fruit Corporation Delaware
Swiss Dairy Corporation Delaware
Thompson Beverage Acquisition Corporation Delaware
Velda Farms, Inc. Delaware
Continental Can Company, Inc. Delaware
Dixie Holdings, Inc. New York
Ferembal S.A. France
Obalex A.S. Czech Republic
Lockbart Realty Corp. New York
Plastic Containers, Inc. Delaware
Continental Caribbean Containers, Inc. Delaware
Continental Plastic Containers, Inc. Delaware
Viatech Espana SA Spain
Franklin Plastics, Inc. Delaware
Allentown Plastics, Inc. Pennsylvania
Atlanta Container, Inc. Georgia
Chester County Container Corporation Pennsylvania
Consolidated Plastechs, Inc. New Hampshire
First Capital Plastics, Inc. Pennsylvania
Florida Plastics, Inc. Florida
Franklin Plastics, Inc. Massachusetts
Illinois Plastics, Inc. Illinois
Kentwood Plastics, Inc. Louisiana
Liquitane Acquistion Corporation Delaware
Maine Plastics, Inc. Maine
Marlborough Plastics, Inc. Massachusetts
Middlesex Plastics, Inc. Connecticut
New Jersey Plastics, Inc. New Jersey
North Carolina Plastics, Inc. North Carolina
Ohio State Plastics, Inc. Ohio
Plastics Management Group, LLC Massachusetts
Richmond Container, Inc. Virginia
Rostan Acquistion Corp. Delaware
Sherman Plastics, Inc. Texas
Vanguard Manufacturing, Inc. New Jersey
Neva Plastics Manufacturing Corp. Delaware
-2-
<PAGE> 1
EXHIBIT 23
CONSENT OF ARTHUR ANDERSEN LLP
As independent public accountants, we hereby consent to the incorporation
of our reports included in this Form 10-K, into Suiza Foods Corporation's
previously filed Registration Statements as follows:
<TABLE>
<CAPTION>
FORM REGISTRATION NUMBER AMENDED BY
- ---- ------------------- ----------
<S> <C> <C>
S-3 333-45749 Pre-Effective Amendment No. 1
S-3 333-13119 Post-Effective Amendment No. 2
S-3 333-29207 Post-Effective Amendment No. 1
S-3 333-34133
S-3 333-56613
S-3 333-69627
S-3 333-70235
S-3/A 333-45749
S-3/A 333-69627
S-4 333-29741 Post-Effective Amendment No. 1
S-4 333-46519
S-4/A 333-46519
S-8 333-11185
S-8 333-28019
S-8 333-28021
S-8 333-41353
S-8 333-50013
S-8 333-55969
S-8 333-68319
</TABLE>
ARTHUR ANDERSEN LLP
Dallas, Texas
March 22, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM CONDENSED
FINANCIAL STATEMENTS FOR THE 12-MONTH PERIOD ENDED DECEMBER 31, 1998 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 54,922
<SECURITIES> 9,216
<RECEIVABLES> 452,185
<ALLOWANCES> 0
<INVENTORY> 223,338
<CURRENT-ASSETS> 813,899
<PP&E> 846,956
<DEPRECIATION> 0
<TOTAL-ASSETS> 3,013,783
<CURRENT-LIABILITIES> 559,071
<BONDS> 893,077
682,938
0
<COMMON> 336
<OTHER-SE> 655,435
<TOTAL-LIABILITY-AND-EQUITY> 3,013,783
<SALES> 3,320,940
<TOTAL-REVENUES> 3,320,940
<CGS> 2,557,908
<TOTAL-COSTS> 520,576
<OTHER-EXPENSES> (4,290)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 82,295
<INCOME-PRETAX> 164,451
<INCOME-TAX> 59,823
<INCOME-CONTINUING> 103,069
<DISCONTINUED> (3,161)
<EXTRAORDINARY> 31,698
<CHANGES> 0
<NET-INCOME> 131,606
<EPS-PRIMARY> 3.98
<EPS-DILUTED> 3.58
</TABLE>
