Annual Report — [x] Reg. S-K Item 405 — Form 10-K
Filing Table of Contents
Document/Exhibit Description Pages Size
1: 10-K405 10-K 19 115K
2: EX-10.13 Material Contract 107 466K
3: EX-10.14 Material Contract 99 429K
4: EX-11.1 Statement re: Computation of Earnings Per Share 1 8K
5: EX-13.1 Annual or Quarterly Report to Security Holders 26 161K
6: EX-23.1 Consent of Experts or Counsel 1 6K
7: EX-27.1 Exhibit 27.1 FDS 2 9K
EX-13.1 — Annual or Quarterly Report to Security Holders
Exhibit Table of Contents
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
Suiza Foods is a leading manufacturer and distributor of fresh milk
products, refrigerated ready-to-serve fruit drinks and coffee in Puerto Rico,
fresh milk and related dairy products in Florida, California and Nevada, and
packaged ice in Florida and the southwestern United States. The markets in
which the Company operates tend to be relatively mature and do not offer
opportunities for rapid internal growth. As a result of these dynamics, the
Company's strategy has been to grow primarily through acquisitions and to
realize economies of scale and operating efficiencies by eliminating
duplicative manufacturing, distribution, purchasing and administrative
operations.
RESULTS OF OPERATIONS
On March 31, 1995, the Company was formed as a holding company for the
operations of Suiza-Puerto Rico, Velda Farms and Reddy Ice. This combination
(the "Merger") was accounted for using the pooling of interests method of
accounting. The results of operations of Velda Farms are included only from
April 10, 1994, the date which it was acquired in a purchase business
combination. These transactions and other subsequent consolidating
acquisitions made throughout the periods presented increased the Company's
combined net sales from $341.1 million for the year ended December 31, 1994
to $520.9 million for the year ended December 31, 1996.
The following table presents certain information concerning the
Company's results of operations, including information presented as a
percentage of net sales (dollars in thousands):
[Enlarge/Download Table]
Year Ended December 31,
--------------------------------------------------------------
1996 1995 1994
------------------ ------------------- -------------------
Dollars Percent Dollars Percent Dollars Percent
--------- ------- ------- ------- ------- -------
NET SALES
Dairy $ 468,132 $ 379,959 $ 293,407
Ice 52,784 50,507 47,701
--------- ----- --------- ------ --------- ------
Net sales 520,916 100.0% 430,466 100.0% 341,108 100.0%
Cost of sales 388,548 74.6 312,633 72.6 240,468 70.5
--------- ----- --------- ------ --------- ------
Gross profit 132,368 25.4 117,833 27.4 100,640 29.5
OPERATING EXPENSES
Selling and distribution 70,709 13.6 64,289 14.9 54,248 15.9
General and administrative 21,913 4.2 19,277 4.5 16,935 5.0
Amortization of intangibles 4,624 0.9 3,703 0.9 3,697 1.1
--------- ----- --------- ------ --------- ------
Total operating expenses 97,246 18.7 87,269 20.3 74,880 22.0
OPERATING INCOME
Dairy 27,769 23,285 17,122
Ice 11,022 10,116 8,638
Corporate office (3,669) (2,837) -
--------- ----- --------- ------ --------- ------
Operating income $ 35,122 6.7% $ 30,564 7.1% $ 25,760 7.6%
--------- ----- --------- ------ --------- ------
--------- ----- --------- ------ --------- ------
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YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995
NET SALES. The Company's net sales increased 21.0% to $520.9 million in
1996 from $430.5 million in 1995. Net sales for the Company's dairy
operations increased by 23.2% to $468.1 million in 1996 when compared to
1995, primarily due to (i) the acquisition of Garrido in July 1996, Swiss
Dairy in September 1996 and Model Dairy in December 1996, which collectively
reported net sales of $61.1 million during 1996 for periods subsequent to
their respective acquisition dates and (ii) an increase in prices charged for
milk to recoup increases in raw milk costs in the U.S. dairy operations. Net
sales for the Company's ice operations increased by 4.5% to $52.8 million in
1996 when compared to 1995 due to the addition of new customers and the
acquisition of eleven small ice businesses during 1996.
COST OF SALES. The Company's cost of sales margin was 74.6% for 1996
compared to 72.6% for the same period in 1995. Cost of sales margins for the
Company's dairy operations increased primarily due to higher raw milk costs.
Cost of sales margins for the Company's ice operations decreased, reflecting
additional efficiencies realized from acquired businesses and increased
volumes when compared to the same periods over last year. The Company's
overall cost of sales margin increased due to a higher ratio of dairy
operations to the total.
OPERATING EXPENSES. The Company's operating expense ratio was 18.7% in
1996 compared to 20.3% in 1995. Operating expense increases were experienced
in both dairy and ice as the result of acquisitions. The operating expense
margin decreased in the year-to-year comparison because of (i) increased
dairy net sales due to higher milk costs (which had little impact on
operating expense levels) and (ii) the addition of Garrido, Swiss Dairy and
Model Dairy during 1996, which had lower operating expense margins than the
other operations.
OPERATING INCOME. The Company's operating income in 1996 was $35.1
million, an increase of 14.9% from operating income in 1995 of $30.6 million.
The Company's operating income margin decreased to 6.7% in 1996 from 7.1% in
1995 due primarily to the effect of higher milk costs and increased dairy
influence in the Company's mix of business. The Company's ice business has
higher operating income margins than the Company's dairy business.
OTHER (INCOME) EXPENSE. Interest expense declined to $17.5 million
during 1996 from $19.9 million during 1995. The reduction in interest expense
resulted from a decrease in interest rates from the repayment of certain
subordinated notes in April 1996 and lower average debt levels resulting
primarily from equity issuances during 1996. The Company incurred $8.8
million in non-recurring expenses on March 31, 1995 related to the Merger and
$1.4 million in non-recurring costs during the second quarter of 1995 related
to several uncompleted acquisitions and to an uncompleted debt offering
compared to $0.6 million in merger and other costs in 1996. Other income rose
to $4.0 million in 1996 from $0.5 million in 1995 primarily as a result of
$3.4 million realized during the third quarter of 1996 from the sale of tax
credits associated with the Company's Puerto Rico operations. See "--Tax
Benefits."
EXTRAORDINARY ITEM. During 1996, the Company incurred $2.2 million in
extraordinary costs (net of a $0.9 million tax benefit) as a result of the
early extinguishment of debt from the net cash proceeds of the Company's
initial public offering. These costs included $1.3 million for the write-off
of deferred financing costs and $1.8 million in prepayment penalties. During
1995, the Company incurred $8.5 million in extraordinary costs (net of $0.7
million tax benefit) to refinance the Company's debt in conjunction with the
Merger, which included the write-off of deferred financing costs and certain
prepayment penalties.
NET INCOME (LOSS). The Company reported net income of $25.7 million in
1996 compared to a loss of $10.0 million for 1995. The 1996 net income
improved due to: (i) improved results of operations resulting primarily from
several acquisitions consummated during 1996; (ii) one-time gains from the
recognition of tax credits in Puerto Rico; and (iii) reduced interest
expense. The 1995 loss resulted primarily from approximately $9.6 million in
one-time non-operating charges (net of related income tax benefits) as a
result of the Merger and uncompleted acquisitions and the $8.5 million
extraordinary loss on early extinguishment of debt mentioned above.
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YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED DECEMBER 31, 1994
NET SALES. The Company's net sales increased 26.2% to $430.5 million in
1995 from $341.1 million in 1994. Net sales for the Company's dairy
operations increased 29.5%, or $86.6 million, primarily due to (i) the
acquisition of Velda Farms in April 1994, (ii) the acquisition of Mayaguez
Dairy in June 1994, and (iii) the acquisition of Flav-O-Rich in November
1994. Net sales for the Company's ice operations increased 5.9%, or $2.8
million. Unit volumes of ice increased 5.2% from the addition of new
customers and from four small acquisitions made during 1995. During the
pre-acquisition periods during 1994, Velda Farms, Mayaguez Dairy and
Flav-O-Rich reported sales of $38.3 million, $8.5 million and $32.7 million,
respectively.
COST OF SALES. The cost of sales margin for the dairy business
substantially exceeds that of its ice business because of higher raw material
cost for dairy products compared to ice. The Company's cost of sales
increased $72.2 million, resulting in an increase in the cost of sales margin
to 72.6% in 1995 from 70.5% in 1994. The increase in cost of sales was due to
(i) the inclusion of the operating results of Velda Farms, Flav-O-Rich and
Mayaguez Dairy for the full year of 1995, (ii) an increase in dairy cost of
sales of $1.3 million due to higher plastic resin costs and $4.7 million in
higher milk costs, and (iii) an increase of $0.9 million in plastic bag costs
in the ice business. Velda Farms, Flav-O-Rich and Mayaguez Dairy reported an
aggregate of $62.7 million in cost of sales for their respective
pre-acquisition periods in 1994.
OPERATING EXPENSES. The Company's operating expenses increased $12.4
million in 1995, while the operating expense margin decreased to 20.3% in
1995 from 22.0% in 1994. The operating expense increase was due to the
inclusion of a full year of operating expenses of Velda Farms, Flav-O-Rich
and Mayaguez Dairy, which reported aggregate operating expenses of $16.3
million for their respective pre-acquisition periods in 1994. The operating
expense margin declined primarily because the ice business, which has higher
operating expense margins than the dairy business, became a smaller component
of the Company.
OPERATING INCOME. The Company's operating income increased 18.6% to
$30.6 million in 1995 from $25.8 million in 1994 primarily as a result of the
dairy acquisitions discussed above. The Company's operating income margin
decreased from 7.6% in 1994 to 7.1% in 1995 primarily due to an increased
proportion of net sales attributable to its dairy business.
OTHER (INCOME) EXPENSE. Interest expense rose to $19.9 million in 1995
from $19.3 million in 1994 primarily due to the additional indebtedness
incurred to finance the dairy acquisitions. The Company incurred $8.8 million
in non-recurring expenses in 1995 related to the Merger and $1.4 million
related to negotiation and due diligence in connection with uncompleted
acquisitions and an uncompleted debt offering. The Company incurred $1.7
million in non-recurring costs in 1994 related to the Merger and to an
uncompleted initial public offering.
EXTRAORDINARY ITEMS. The Company incurred $8.5 million in extraordinary
costs (net of a $0.7 million tax benefit) in 1995 to refinance the Company's
debt in conjunction with the Merger, which costs included the write-off of
deferred financing costs and certain prepayment penalties. The Company
incurred $0.2 million in extraordinary costs in 1994 for the early retirement
of debt related to its ice business.
NET INCOME (LOSS). The Company reported a net loss of $10.0 million in
1995 compared to net income of $4.0 million in 1994. The primary causes of
the 1995 net loss were $10.2 million in non-recurring merger and other costs
and $8.5 million in extraordinary losses from the early retirement of debt.
The Company incurred a $2.5 million income tax expense in 1995 on pre-tax
income of $0.9 million due to the non-deductibility of certain non-recurring
merger costs.
SEASONALITY
The Company's ice business is seasonal with peak demand for its products
occurring during the second and third calendar quarters. In 1995 and 1996,
the Company recorded an average of approximately 70% of its annual net sales
of ice during these two quarters. While this percentage for the second and
third quarters has remained relatively constant over recent years, the timing
of the hottest summer weather can impact the distribution of sales between
these two quarters. Because the Company's results of operations for its ice
business depend significantly on sales generated during its peak season,
adverse weather during this season (such as an unusually mild or rainy
period) could have a disproportionate impact on the Company's results of
operations for the full year. Management believes, however, that the
geographic diversity of its ice business helps mitigate the potential for a
significant impact from such adverse weather conditions.
The Company's dairy operations are not subject to large seasonal sales
fluctuations. The Company sells milk to schools, most of which are closed
during the summer months. Approximately 6.1% of the Company's dairy sales
were made to schools during 1996. In addition, the Company has traditionally
experienced slight shortages in its milk supply in Puerto Rico during the
months of September and October each year. Management estimates
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that these shortages reduce dairy sales by less than 2% during these months.
LIQUIDITY AND CAPITAL RESOURCES
As of December 31, 1996, the Company had total stockholders' equity of
$93.5 million and total indebtedness of $239.6 million (including long-term
debt and the current portion of long-term debt). The Company is currently in
compliance with all covenants and financial ratios contained in its debt
agreements.
CASH FLOW. The working capital needs of the Company historically have
been met with cash flow from operations along with borrowings under revolving
credit facilities. Net cash provided by operating activities was $23.6
million for 1996 and $23.0 million for 1995. Investing activities in 1996
included $14.0 million in capital expenditures, of which $10.3 million was
spent on the Company's dairy operations and $3.7 million was spent on its ice
operations. Investing activities also included net cash paid of $111.4
million for the acquisition of 13 small companies and the acquisitions of
Garrido, Swiss Dairy and Model Dairy. Financing activities for 1996 included
two equity offerings, the proceeds of which were used to repay existing debt,
and new borrowings to finance several acquisitions.
In April 1996, the Company completed an initial public offering (the
"IPO") of its Common Stock, $0.01 par value per share ("Common Stock"), which
provided net proceeds to the Company of $48.6 million. Of this amount, $4.6
million was used to repay amounts outstanding under the revolving credit
portion of the Senior Credit Facility (as defined herein), an aggregate of
$26.5 million was used to repay current and long-term maturities under the
term portion of the Senior Credit Facility, $15.7 million was used to repay
the Company's 15% Subordinated Notes and $1.8 million was used to pay
prepayment penalties related to the early extinguishment of the 15%
Subordinated Notes. In addition to the $1.8 million prepayment penalty, the
Company expensed approximately $1.3 million to write off previously incurred
deferred financing costs related to the indebtedness repaid. The expenses
were recognized as an extraordinary loss on the early extinguishment of debt,
which, net of income tax benefit, was approximately $2.2 million.
In July 1996, the Company purchased the stock of Garrido, a Puerto Rico
processor and distributor of coffee and coffee-related products, for
approximately $35.8 million, plus future performance-based payments of up to
an additional $5.5 million. Funding for this purchase was provided through an
amendment to the Company's existing Senior Credit Facility.
In August 1996, the Company completed the Private Placement of 625,000
shares of Common Stock for net proceeds of $9.7 million. The net proceeds
from this sale were used to retire outstanding indebtedness under the
revolving credit portion of the Senior Credit Facility.
In September 1996, the Company purchased the assets of Swiss Dairy, a
regional dairy based in Riverside, California, for approximately $55.1
million. Funding for this purchase was provided primarily from borrowings
under the Company's new $90.0 million acquisition facility of the Senior
Credit Facility.
In September 1996, the Company sold certain tax credits generated
pursuant to provisions of the Puerto Rico Agricultural Tax Incentives Act of
1995 for net proceeds of $3.4 million, before provision for income taxes.
Management used the net proceeds from this sale to repay amounts outstanding
under the acquisition facility of the Senior Credit Facility.
In December 1996, the Company acquired the assets of Model Dairy based
in Reno, Nevada, for approximately $27.0 million. The purchase price for this
acquisition was funded through additional borrowing under the acquisition
facility of the Senior Credit Facility.
FUTURE CAPITAL REQUIREMENTS
On January 28, 1997, the Company sold 4,270,000 shares of Common Stock,
$.01 par value per share, in a public offering at a price to the public of
$22.00 per share (the "Secondary Offering"). Following this offering, the
Company had 15,011,729 shares of common stock issued and outstanding. The
Secondary Offering provided net cash proceeds to the Company of approximately
$89.0 million. Of this amount, $36.0 million was used to repay the remaining
Subordinated Notes and $4.3 million was used to pay prepayment penalties
related to the early extinguishment of the Subordinated Notes. The remainder
of the net proceeds were used to repay a portion of the outstanding balance
of the acquisition facility of the Company's Senior Credit Facility. The
Company also will expense approximately $1.0 million to write off previously
incurred deferred financing costs related to the indebtedness repaid with the
proceeds of the Secondary Offering. The extraordinary loss net of applicable
tax benefit, to be recorded in the first quarter of 1997 will be $3.3 million.
Management expects that cash flow from operations along with additional
borrowings under existing and future credit facilities will be sufficient to
meet the Company's requirements for the remainder of 1997 and for the
foreseeable future. In the future, the Company intends to pursue additional
acquisitions in its existing regional markets and to seek acquisition
opportunities that are compatible with its core businesses. There can be no
assurance, however, that the Company will have sufficient available capital
resources to realize its acquisition and consolidation strategy.
CURRENT DEBT OBLIGATIONS. In March 1997, the Company amended its
existing $250 million credit facilities with a group of lenders, including
First Union National Bank of North Carolina, as agent, and The First National
Bank of Chicago, as syndication agent, which provide for an aggregate senior
credit facility (the "Senior Credit Facility") of
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$300.0 million comprised of: (i) a $150.0 million term loan; (ii) a $50.0
million revolving credit facility; and (iii) a $100.0 million acquisition
facility. Under the terms of the Senior Credit Facility, the term loan will be
amortized over six years beginning March 31, 1997 and the revolving credit
facility expires on March 31, 2001. Any amounts drawn under the acquisition
facility that are outstanding on March 31, 1999 will be amortized in sixteen
quarterly installments commencing June 30, 1999. Amounts outstanding under the
Senior Credit Facility will bear interest at a rate per annum equal to one of
the following rates, at the Company's option: (i) the sum of a base rate equal
to the higher of the Federal Funds rate plus 1/2% or First Union National Bank
of North Carolina's prime commercial lending rate, plus a margin that varies
from 0 to 25 basis points depending on the Company's ratio of defined
indebtedness to EBITDA (as defined in the Senior Credit Facility); or (ii) The
London Interbank Offering Rate ("LIBOR") plus a margin that varies from 75 to
150 basis points depending on the Company's ratio of defined indebtedness to
EBITDA. The Company will pay a commitment fee on unused amounts of the revolving
facility and the acquisition facility that ranges from 20 to 37.5 basis points,
based on the Company's ratio of defined indebtedness to EBITDA.
As of January 31, 1997, following the Secondary Offering, the Company
had approximately $157.4 million of indebtedness outstanding under the Senior
Credit Facility. The Company may prepay loans outstanding under the Senior
Credit Facility at any time in increments of $100,000 or, in the case of a
LIBOR loan, $1.0 million (subject to a $500,000 minimum or, in the case of a
LIBOR loan, a $2.0 million minimum), in whole or in part, without penalty. In
addition, the Senior Credit Facility requires mandatory prepayments, subject
to certain limitations, from the defined net proceeds of certain casualty
events, certain sales of assets, equity issuances and from excess cash flow.
The Company's Senior Credit Facility requires the Company to comply with
the following financial covenants at all times: (i) the leverage ratio
(defined as the ratio of aggregate debt to EBITDA) will not exceed 3.50 to 1;
(ii) net worth will not be less than $135.0 million after March 31, 1997,
plus 50% of net income for each quarter commencing on or after April 1, 1997,
plus certain additional amounts as a result of public or private offerings of
Common Stock by the Company; (iii) the fixed charges ratio will not be less
than 1.20 to 1; and (iv) the interest coverage ratio will not be less than
3.00 to 1.
Without lender consent, the Senior Credit Facility also: (i) prohibits
the payment of cash dividends; (ii) prohibits capital expenditures in excess
of specified amounts; (iii) prohibits acquisitions exceeding $30.0 million in
a single transaction and limits the use of the revolving credit facility to
fund acquisitions not exceeding $1.0 million in a single transaction or $5.0
million in the aggregate for any year; (iv) limits the incurrence of
additional debt; and (v) limits transactions with affiliates.
The Company has pledged all the capital stock of its subsidiaries
(except for 35% of the capital stock of Garrido) to secure the Senior Credit
Facility. Each of the Company's subsidiaries (other than Garrido) has
guaranteed, and pledged substantially all its assets and the proceeds
therefrom, to secure the indebtedness under the term loans, revolving
facility and/or the acquisition facility of the Senior Credit Facility. A
default with respect to any loan under the Senior Credit Facility is a
default with respect to all other loans under the Senior Credit Facility. The
Senior Credit Facility includes various events of default customary for
similar senior credit facilities, including defaults resulting from
nonpayment of principal when due, nonpayment of interest and fees, material
misrepresentations, default in the performance of any covenant and the
expiration of any applicable grace period, bankruptcy or insolvency, certain
judgments and a change in control of the Company (including certain changes
in the board of directors and certain acquisitions of Common Stock by third
parties).
The Company has five interest rate derivative agreements currently in
place, which have been designated as hedges against the Company's variable
interest rate exposure on its loans under the Senior Credit Facility. The
first agreement, which has a notional amount of $14.0 million, matures in May
1997 and caps interest on LIBOR loans at 7.5%, plus the applicable LIBOR
margin. The second and third agreements, which each have a notional amount of
$27.5 million and mature in June 1998, fix the interest rate on LIBOR loans
at 6.0%, plus the applicable LIBOR margin. The fourth and fifth agreements,
which each have a notional amount of $25.0 million and mature in December
1997, fix the interest rate on LIBOR loans at 6.01%, plus the applicable
LIBOR margin. These derivative agreements provide hedges for the term loans
and the acquisition facility under the Senior Credit Facility by limiting or
fixing the LIBOR loan rates on the amounts stated in the agreements until the
indicated expiration dates. The original costs and premiums of these
derivative agreements are being amortized on a straight-line basis as a
component of interest expense. There was no material income or expense
attributable to the amortization or periodic settlements of the derivative
agreements in 1995 or 1996.
TAX BENEFITS
Management believes that the Company's effective tax rate will range
from 25% to 35% for the next several years. The Company's effective tax rate
is significantly affected by various tax advantages applicable to the
Company's Puerto Rico based operations. Any additional acquisitions could
affect this effective tax rate.
The Company's Puerto Rico fruit drink and plastic bottle operations are
90% exempt from Puerto Rico income
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and property taxes. These operations are also 60% exempt from Puerto Rico
municipal taxes. These exemptions were granted through ten-year exemption
decrees issued pursuant to the Puerto Rico Tax Incentives Act. The decrees have
eight and six years remaining for the fruit drink and plastic bottle entities,
respectively. These types of grants are typically renewable beyond their initial
ten-year terms at reduced rates of exemption. The Company's Puerto Rico dairy
and coffee processing, sales and distribution operations are 90% exempt from
Puerto Rico income taxes and 100% exempt from property, municipal, certain
excise and other taxes and fees pursuant to the Puerto Rico Agricultural Tax
Incentives Act of 1995. Dividends to the Company from Suiza-Puerto Rico will
generally be subject to a 10 percent "tollgate" tax in Puerto Rico.
The Company currently is able to maintain the tax benefits from its
dairy, fruit drink and plastic bottle operations described above through U.S.
tax credits specified under Section 936 of the U.S. Internal Revenue Code of
1986, as amended. The Section 936 credit eliminates or reduces United States
income taxes for U.S. corporations on certain income derived from Puerto Rico
and is available to certain domestic corporations that earn 80% or more of
their gross income from sources within Puerto Rico and earn 75% or more of
their gross income from the active conduct of a trade or business in Puerto
Rico over a three-year period (or such shorter period as may be applicable).
Management believes that each of the operating subsidiaries based in Puerto
Rico (except Garrido) satisfy these conditions. In the Revenue Reconciliation
Act of 1993, Congress imposed certain limitations on the availability of the
Section 936 credit. Pursuant to these limitations, the Section 936 credit for
each eligible corporation generally cannot exceed the sum of 60% of certain
wage and fringe benefit expenses and a portion of depreciation allowances for
a taxable year or, if elected, a reduced credit computed without regard to
these economic activity limitations.
The Puerto Rico Agricultural Tax Incentives Act of 1995 provides a 50%
tax credit for certain "eligible investments" in qualified agricultural
businesses in Puerto Rico. These credits may be transferred to other
taxpaying entities. During 1996, the Company made investments in its Puerto
Rico dairy, fruit, plastics and coffee operations, all of which have been
certified as qualified agricultural businesses in Puerto Rico. The Company
believes that it has met the eligible investment criteria of this act related
to its investment in its Puerto Rico dairy operations. During 1996, the
Company recognized $15.75 million in tax credits related to this qualifying
investment. In September 1996, the Company sold $4.0 million of these tax
credits to third parties, resulting in net proceeds of $3.4 million before
provision for income taxes, and recognized a deferred tax asset for the
remainder of the tax credit in the amount of $11.75 million. The Company is
currently investigating whether its investment in its Puerto Rico fruit,
plastics and coffee operations will qualify for additional credits. If the
Company qualifies for such credits, there can be no assurances as to the
amounts or timing of any benefits that the Company may realize or whether
there will be opportunities for further sales of these credits to third
parties.
The Small Business Job Protection Act of 1996 (the "Job Protection Act")
eliminated the Section 936 credit for corporations other than "existing
credit claimants." As an existing credit claimant, the Company's Puerto
Rico-based dairy, fruit drink and plastic bottle operations will continue to
realize the benefits of Section 936 through December 31, 2005, the year in
which Section 936 will be eliminated. However, for tax years beginning after
December 31, 2001 and before January 1, 2006, the total amount of the
Company's Puerto Rico income that is eligible to be offset by the 936 credit
cannot exceed the "base period income" of the Company as determined under the
Job Protection Act. This limitation may reduce the amount of credits
otherwise available to the Company.
OUTLOOK AND UNCERTAINTIES
Certain information in this Annual Report may contain "forward-looking
statements" within the meaning of Section 21E of the Securities Exchange Act
of 1934, as amended. All statements other than statements of historical fact
are "forward-looking statements" for purposes of these provisions, including
any projections of earnings, revenues or other financial items, any
statements of the plans and objectives of management for future operations,
any statments concerning proposed new products or services, any statements
regarding future economic conditions or performance, and any statement of
assumptions underlying any of the foregoing. Although the Company believes
that the expectations reflected in its forward-looking statements are
reasonable, it can give no assurance that such expectations or any of its
forward-looking statements will prove to be correct, and actual results could
differ materially from those projected or assumed in the Company's
forward-looking statements. The Company's future financial condition and
results, as well as any forward-looking statements, are subject to inherent
risks and uncertainties, including, without limitation, potential limitations
on the Company's ability to pursue its acquisition strategy, significant
competition, limitations arising from the Company's substantial indebtedness,
government regulation, seasonality and dependence on key management.
Additional information concerning these and other risk factors is contained
in the Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 1996, a copy of which may be obtained from the Company upon
request.
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CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1996 AND 1995
ASSETS 1996 1995
--------- ---------
(In thousands)
CURRENT ASSETS:
Cash and cash equivalents $ 8,951 $ 3,177
Accounts receivable 50,608 31,045
Inventories 19,228 11,346
Prepaid expenses and other current assets 2,754 1,380
Refundable income taxes 2,312
Deferred income taxes 3,672 1,448
--------- ---------
Total current assets 87,525 48,396
PROPERTY, PLANT AND EQUIPMENT 123,260 92,715
DEFERRED INCOME TAXES 8,524
INTANGIBLE AND OTHER ASSETS 164,839 91,411
--------- ---------
TOTAL $ 384,148 $ 232,522
--------- ---------
--------- ---------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued expenses $ 46,664 $ 31,957
Income taxes payable 1,105 2,415
Current portion of long-term debt 12,876 15,578
--------- ---------
Total current liabilities 60,645 49,950
LONG-TERM DEBT 226,693 171,745
DEFERRED INCOME TAXES 3,278 1,367
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred stock
Common stock, 10,741,729 and 6,313,479 shares
issued and outstanding 107 63
Additional paid-in capital 89,337 31,023
Retained earnings (deficit) 4,088 (21,626)
--------- ---------
Total stockholders' equity 93,532 9,460
--------- ---------
TOTAL $ 384,148 $ 232,522
--------- ---------
--------- ---------
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
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CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
1996 1995 1994
--------- --------- ---------
(DOLLARS IN THOUSANDS
EXCEPT SHARE DATA)
NET SALES $ 520,916 $ 430,466 $ 341,108
COST OF SALES 388,548 312,633 240,468
--------- --------- ---------
GROSS PROFIT 132,368 117,833 100,640
OPERATING COSTS AND EXPENSES:
Selling and distribution 70,709 64,289 54,248
General and administrative 21,913 19,277 16,935
Amortization of intangibles 4,624 3,703 3,697
--------- --------- ---------
Total operating costs and expenses 97,246 87,269 74,880
--------- --------- ---------
INCOME FROM OPERATIONS 35,122 30,564 25,760
OTHER (INCOME) EXPENSE:
Interest expense, net 17,470 19,921 19,279
Merger and other costs 571 10,238 1,660
Other income, net (4,012) (469) (268)
--------- --------- ---------
Total other (income) expense 14,029 29,690 20,671
--------- --------- ---------
INCOME BEFORE INCOME TAXES AND
EXTRAORDINARY LOSS 21,093 874 5,089
INCOME TAXES (BENEFIT) (6,836) 2,450 844
--------- --------- ---------
INCOME (LOSS) BEFORE EXTRAORDINARY LOSS 27,929 (1,576) 4,245
EXTRAORDINARY LOSS FROM EARLY
EXTINGUISHMENT OF DEBT 2,215 8,462 197
--------- --------- ---------
NET INCOME (LOSS) $ 25,714 $(10,038) $ 4,048
--------- --------- ---------
--------- --------- ---------
NET EARNINGS (LOSS) PER SHARE:
Income (loss) before extraordinary loss $ 2.81 $ (0.26) $ 0.69
Extraordinary loss (0.22) (1.38) (0.03)
--------- --------- ---------
Net income (loss) $ 2.59 $ (1.64) $ 0.66
--------- --------- ---------
--------- --------- ---------
WEIGHTED AVERAGE SHARES OUTSTANDING 9,921,822 6,109,398 6,156,387
--------- --------- ---------
--------- --------- ---------
See notes to consolidated financial statements.
25
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
[Enlarge/Download Table]
Additional Retained
Common Stock Paid-In Earnings
Shares Amount Capital Warrants (Deficit) Total
-----------------------------------------------------------
(DOLLARS IN THOUSANDS)
BALANCE,
JANUARY 1, 1994 67,708 $ 1 $15,217 $523 $(15,579) $ 162
Issuance of common stock 11,960 5,677 5,677
Increase in market
value of warrants 57 (57) -
Net income 4,048 4,048
-----------------------------------------------------------
BALANCE,
DECEMBER 31, 1994 79,668 1 20,894 580 (11,588) 9,887
Issuance of common stock 11,832 5,080 (580) 4,500
Capital contribution
(Note 11) 5,111 5,111
Net loss (10,038) (10,038)
69 for 1 stock split
(Note 11) 6,221,979 62 (62) -
-----------------------------------------------------------
BALANCE,
DECEMBER 31, 1995 6,313,479 63 31,023 - (21,626) 9,460
Issuance of common stock 4,428,250 44 58,314 58,358
Net income 25,714 25,714
-----------------------------------------------------------
BALANCE,
DECEMBER 31, 1996 10,741,729 $107 $89,337 $ - $ 4,088 $ 93,532
-----------------------------------------------------------
-----------------------------------------------------------
See notes to consolidated financial statements.
26
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended DECEMBER 31, 1996, 1995 and 1994
[Enlarge/Download Table]
1996 1995 1994
---------- ---------- ----------
(IN THOUSANDS)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 25,714 $ (10,038) $ 4,048
Adjustments to reconcile net income (loss) to
net cash provided by operating activities:
Depreciation 9,930 9,258 8,244
Amortization of intangible assets, including
deferred financing costs 5,458 4,686 4,876
Gain on the sale of assets (21) (265) (177)
Extraordinary loss from early extinguishment of debt 2,215 8,462 197
Merger and other nonrecurring costs 571 10,238 1,660
Noncash and imputed interest 236 1,087 483
Minority interests 101 556
Deferred income taxes (8,895) (414) 333
Changes in operating assets and liabilities:
Accounts receivable (5,187) (1,881) (108)
Inventories (3,346) (599) (73)
Prepaid expenses and other assets (163) 1,007 (222)
Refundable income taxes (2,312)
Accounts payable and accrued expenses 967 716 4,862
Income tax payable (1,575) 649 254
--------- --------- ---------
Net cash provided by operating activities 23,592 23,007 24,933
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property, plant and equipment (14,022) (10,392) (4,784)
Proceeds from sale of property, plant and equipment 500 691 245
Purchases of investments and other assets (1,608)
Cash outflows for acquisitions (111,380) (2,425) (61,357)
--------- --------- ---------
Net cash used in investing activities (124,902) (12,126) (67,504)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from the issuance of debt 110,550 154,505 67,585
Repayment of debt (58,304) (154,387) (30,906)
Payments of deferred financing, debt restructuring and merger costs (3,520) (8,972) (1,660)
Issuance of common stock, net of expenses 58,358 4,087 5,677
Purchase of subsidiary preferred stock and minority interests (8,332) (61)
--------- --------- ---------
Net cash provided by (used in) financing activities 107,084 (13,099) 40,635
--------- --------- ---------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 5,774 (2,218) (1,936)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 3,177 5,395 7,331
--------- --------- ---------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 8,951 $ 3,177 $ 5,395
--------- --------- ---------
--------- --------- ---------
See notes to consolidated financial statements.
27
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BUSINESS. Suiza Foods Corporation (the "Company" or "Suiza Foods") is a
manufacturer and distributor of fresh milk products, refrigerated
ready-to-serve fruit drinks and coffee in Puerto Rico; fresh milk and related
dairy products in Florida, California and Nevada; and packaged ice in Florida
and the southwestern United States.
On March 31, 1995, the Company became the holding company for the
operations of Suiza Holdings, L.P. and subsidiaries; Velda Holdings, L.P.;
Velda Holdings, Inc. and subsidiaries; and Reddy Ice Corporation
(collectively, the "Combined Entities") through the issuance of 6,313,479
shares of its common stock in exchange for all of the outstanding equity
interests of the Combined Entities. The Company accounted for this
combination using the pooling of interests method of accounting, whereby the
assets acquired and liabilities assumed are reflected in the consolidated
financial statements of the Company at the historical amounts of the Combined
Entities, which, in the case of Velda Farms, only includes the results of
operations from April 10, 1994, the date it was acquired in a purchase
business combination.
The Company and its subsidiaries provide credit terms to customers
generally ranging up to 30 days, perform ongoing credit evaluations of their
customers and maintain allowances for potential credit losses based on
historical experience. The preparation of financial statements requires the
use of significant estimates and assumptions by management; actual results
could differ from these estimates. Certain prior year amounts have been
reclassified to conform to current year presentation.
PRINCIPLES OF CONSOLIDATION. The consolidated financial statements
include the accounts of the Company; its U.S. operating subsidiaries, Velda
Farms, Inc. ("Velda Farms"), Swiss Dairy Corporation ("Swiss Dairy"), Model
Dairy, Inc. ("Model Dairy") and Reddy Ice Corporation ("Reddy Ice"); and its
Puerto Rico operating subsidiaries, Suiza Dairy Corporation ("Suiza Dairy"),
Suiza Fruit Corporation ("Suiza Fruit"), Neva Plastics Manufacturing Corp.
("Neva Plastics") and Garrido & Compania ("Garrido") (collectively,
"Suiza-Puerto Rico"). All significant intercompany balances and transactions
are eliminated in consolidation.
INVENTORIES. Pasteurized and raw milk inventories are stated at the
lower of average cost or market. Raw materials, spare parts and supplies, and
merchandise for resale inventories are stated at the lower of cost, using the
first-in, first-out ("FIFO") method, or market. Manufactured finished goods
inventories are stated at the lower of average production cost or market.
Production costs include raw materials, direct labor and indirect production
and overhead costs.
PROPERTY, PLANT AND EQUIPMENT. Property, plant and equipment are stated
at cost. Depreciation and amortization are provided using the straight-line
method over the estimated useful lives of the assets, as follows:
ASSET USEFUL LIFE
Buildings and improvements Ten to 40 years
Machinery and equipment Five to 20 years
Motor vehicles Five to 15 years
Furniture and fixtures Three to ten years
Capitalized lease assets are amortized over the shorter of their lease term or
their estimated useful lives. Expenditures for repairs and maintenance which do
not improve or extend the life of the assets are expensed as incurred.
INTANGIBLE ASSETS. Intangible assets include the following intangibles
which are amortized over their related useful lives:
[Enlarge/Download Table]
INTANGIBLE ASSET USEFUL LIFE
Goodwill Straight-line method over 20 to 40 years
Identifiable intangible assets:
Customer list Straight-line method over seven to ten years
Trademarks/trade names Straight-line method over 30 years
Noncompetition agreements Straight-line method over the terms of the agreements
Deferred financing costs Interest method over the terms of the related debt (ranging from seven to 11 years)
Organization costs Straight-line method over five years
28
The Company periodically assesses the net realizable value of its
intangible assets, as well as all other assets, by comparing the expected
future net operating cash flows, undiscounted and without interest charges,
to the carrying amount of the underlying assets. The Company would evaluate a
potential impairment if the recorded value of these assets exceeded the
associated future net operating cash flows. Any potential impairment loss
would be measured as the amount by which the carrying value exceeds the fair
value of the asset. Fair value of assets would be measured by market value,
if an active market exists, or by a forecast of expected future net operating
cash flows, discounted at a rate commensurate with the risk involved.
INTEREST RATE AGREEMENTS. Interest rate swaps, caps and floors are
entered into as a hedge against interest exposure of variable rate debt.
Differences between amounts to be paid or received on these interest rate
agreements designated as hedges are included in interest expense as payments
are made or received. Gains or losses on other agreements not designated as
hedges are included in income as incurred. Amounts paid to acquire interest
rate caps and amounts received for interest rate floors are amortized as an
adjustment to interest expense over the life of the related agreement.
REVENUE. Revenue is recognized when the product is shipped to the customer.
INCOME TAXES. Since March 31, 1995, the Company's U.S. operating
subsidiaries have been included in the consolidated tax return of the
Company. The Company's Suiza Dairy, Suiza Fruit and Neva Plastics
subsidiaries are organized as Delaware companies and are required to file
separate U.S. and Puerto Rico income tax returns; however, since their
operations are in Puerto Rico, they are eligible for Section 936 tax credits
which may reduce or eliminate U.S. income taxes due. Garrido is organized
under the laws of the Commonwealth of Puerto Rico and is only required to
file a separate tax return in Puerto Rico.
Effective January 1, 1996, substantially all of the Company's Puerto
Rico operations are 90% exempt from Puerto Rico income taxes and 100% exempt
from property, municipal, certain excise and other taxes, and fees pursuant
to the Puerto Rico Agricultural Tax Incentives Act of 1995. Prior to this
date, only the Company's Suiza Fruit and Neva Plastics subsidiaries had
similar exemptions through separate tax grants in Puerto Rico. These
operations are, however, subject to a 10% withholding tax on distributions
from Puerto Rico to the United States.
Prior to March 31, 1995, the Combined Entities were separate taxpayers
and income taxes were provided for in the financial statements, where
applicable, based on each company's separate income tax return and tax
status. As a result, since certain of Suiza-Puerto Rico's operations were
organized as a partnership and Reddy Ice's operations were organized as a
small business corporation under Subchapter S, no income taxes were provided
in the financial statements. However, had these operations been subject to
corporate income taxes, available net operating losses would have been
sufficient to eliminate any corporate income taxes due.
Deferred income taxes are provided for temporary differences in the
financial statement and tax bases of assets and liabilities using current tax
rates. Deferred tax assets, including the benefit of net operating loss
carryforwards, are evaluated based on the guidelines for realization and may
be reduced by a valuation allowance.
CASH EQUIVALENTS. The Company considers all highly liquid investments
purchased with a remaining maturity of three months or less to be cash
equivalents.
EARNINGS (LOSS) PER SHARE. The Company computes earnings per
share based on the weighted average number of common shares outstanding
during the year, as adjusted for the stock split (Note 11), including common
equivalent shares, when dilutive.
2. ACQUISITIONS
In April 1994, the Company acquired all of the outstanding common stock
of Velda Farms, Inc., a wholly owned subsidiary of The Morningstar Group,
Inc. The total purchase price, including related acquisition and financing
costs, was approximately $54.8 million, which was funded with the net
proceeds from the issuance of common stock, the proceeds from the issuance of
subordinated notes, term loan and revolving credit facility advances, and
preferred stock issued to the seller. In connection with the refinancing of
debt at the date of the combination, the term loan, revolving credit facility
advances and preferred stock were repaid.
In June 1994, the Company acquired Mayaguez Dairy, Inc. for a total
purchase price, including costs and expenses, of approximately $7.6 million,
which was funded primarily by additional term loan borrowings of $7.0
million.
In November 1994, the Company acquired all of the net assets of the
Florida Division of Flav-O-Rich, Inc. The total purchase price, including
related acquisition and financing costs, was approximately $5.9 million,
which was funded with revolving credit agreement borrowings, along with a
subordinated note payable to the seller and an amount payable to the seller
upon the final purchase price settlement, which was paid subsequent to
year-end.
In July 1996, the Company acquired all of the outstanding common stock
of Garrido for approximately $35.8 million, including related acquisition and
financing costs, which was funded primarily by additional term loan
borrowings under the
29
Senior Credit Facility. In connection with this acquisition, the purchase
agreement requires the payment of a contingent purchase price of up to $5.5
million based on the future performance of this operation, which will be
accounted for as an adjustment to the purchase price when this contingency is
resolved should a payment of all or a portion of this contingent purchase
price be required. In addition, as a result of the adoption of the Puerto
Rico Agricultural Tax Incentives Act of 1995, as discussed in more detail in
Note 10, the Company may be eligible for tax credits on a portion of its
investment in Garrido of between $6.2 million and $8.8 million, which are
dependent on the receipt of a favorable ruling on the availability of such
tax credits from the Treasury Department in Puerto Rico. Should a favorable
ruling on these tax credits be received, the Company will account for these
tax benefits as an adjustment of the purchase price, which would result in a
reduction of goodwill.
In September 1996, the Company acquired all of the net assets of Swiss
Dairy for approximately $55.1 million, including related acquisition costs,
which was funded primarily by borrowings under the revolving credit and
acquisition facilities of the Senior Credit Facility.
In December 1996, the Company acquired all of the net assets of Model
Dairy, along with certain assets held by affiliates of the seller, for
approximately $27.0 million, including related acquisition costs, which was
funded primarily by borrowings under the acquisition facility of the Senior
Credit Facility.
In addition to the above acquisitions, during 1996, 1995 and 1994, the
Company acquired certain net assets of and entered into noncompetition
arrangements with 18 separate ice companies and two dairies for cash,
including costs and expenses, of approximately $8.4 million in 1996, $2.4
million in 1995 and $.3 million in 1994, along with the issuance of notes
payable to the sellers of approximately $.2 million in 1996, $.1 million in
1995 and $.4 million in 1994, all of which were funded by Senior Credit
Facility borrowings.
The above acquisitions were accounted for using the purchase method of
accounting as of their respective acquisition dates, and accordingly, only
the results of operations of the acquired companies subsequent to their
respective acquisition dates are included in the consolidated financial
statements of the Company. At the acquisition date, the purchase price was
allocated to assets acquired, including identifiable intangibles, and
liabilities assumed based on their fair market values. The excess of the
total purchase prices over the fair values of the net assets acquired
represented goodwill. In connection with the acquisitions, assets were
acquired and liabilities were assumed as follows:
Year ended December 31,
-----------------------------------
1996 1995 1994
---- ---- ----
(In thousands)
Purchase prices:
Net cash paid $ 111,380 $ 2,425 $ 61,357
Subsidiary preferred stock issued 3,000
Notes and amounts payable to seller 173 91 4,495
Cash acquired in acquisitions 14,937 142
---------- -------- ---------
Total purchase prices 126,490 2,516 68,994
Fair values of net assets acquired:
Fair values of assets acquired 63,598 2,317 53,590
Liabilities assumed (14,076) (10,924)
---------- -------- ---------
Total net assets acquired 49,522 2,317 42,666
---------- -------- ---------
Goodwill $ 76,968 $ 199 $ 26,328
---------- -------- ---------
---------- -------- ---------
30
The following table presents unaudited pro forma results of operations of the
Company for the years ended December 31, 1995 and 1996, as if the above 1996
acquisitions had occurred at the beginning of 1995.
Year ended December 31, 1996 1995
-------------------------------------------------------------------------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Net sales $662,174 $634,186
Income before extraordinary loss 30,634 2,008
Net income (loss) 28,419 (6,454)
Earnings (loss) per share 2.86 (1.06)
The unaudited pro forma results of operations are not necessarily indicative of
what the actual results of operations of the Company would have been had the
acquisitions occurred at the beginning of 1995, nor do they purport to be
indicative of the future results of operations of the Company.
3. ACCOUNTS RECEIVABLE
December 31, 1996 1995
-------------------------------------------------------------------------------
(IN THOUSANDS)
Trade customers, including
route receivables $ 47,785 $ 28,435
Milk industry and milk
price stabilization fund 168 1,839
Suppliers 715 604
Officers and employees 554 425
Other 2,594 1,090
-----------------------
51,816 32,393
Less allowance for
doubtful accounts (1,208) (1,348)
-----------------------
$ 50,608 $ 31,045
-----------------------
-----------------------
4. INVENTORIES
December 31, 1996 1995
-------------------------------------------------------------------------------
(IN THOUSANDS)
Pasteurized and raw milk
and raw materials $ 7,693 $ 4,278
Parts and supplies 5,584 3,105
Finished goods 5,951 3,963
-----------------------
$ 19,228 $ 11,346
-----------------------
-----------------------
5. PROPERTY, PLANT AND EQUIPMENT
December 31, 1996 1995
-------------------------------------------------------------------------------
(IN THOUSANDS)
Land $ 20,104 $ 15,582
Buildings and improvements 45,016 33,264
Machinery and equipment 63,614 47,119
Motor vehicles 13,173 9,994
Furniture and fixtures 22,360 18,219
-----------------------
164,267 124,178
Less accumulated depreciation (41,007) (31,463)
-----------------------
$123,260 $ 92,715
-----------------------
-----------------------
31
6. INTANGIBLE AND OTHER ASSETS
December 31, 1996 1995
-------------------------------------------------------------------------------
(IN THOUSANDS)
Goodwill $155,242 $ 78,503
Identifiable intangibles 14,652 13,374
Deferred financing costs 5,248 6,018
Deposits and other 724 994
-----------------------
175,866 98,889
Less accumulated
amortization (11,027) (7,478)
-----------------------
$164,839 $ 91,411
-----------------------
-----------------------
7. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
December 31, 1996 1995
-------------------------------------------------------------------------------
(IN THOUSANDS)
Accounts payable $ 31,005 $ 21,689
Accrued payroll and benefits 7,294 5,033
Accrued interest 1,413 1,845
Accrued insurance 3,437 2,436
Other 3,515 954
-----------------------
$ 46,664 $ 31,957
-----------------------
-----------------------
8. LONG-TERM DEBT
December 31, 1996 1995
-------------------------------------------------------------------------------
(IN THOUSANDS)
Senior Credit Facility:
Revolving loan facility $ 8,600 $ 10,900
Acquisition facility 69,100
Term loans 125,000 123,750
Subordinated notes 36,000 51,101
Capital lease obligations
and other 869 1,572
------------------------
239,569 187,323
Less current portion (12,876) (15,578)
------------------------
$226,693 $171,745
------------------------
------------------------
SENIOR CREDIT FACILITY. In September 1996, the Company amended its existing
credit facility and entered into a supplemental credit facility with a group of
lenders, including First Union National Bank of North Carolina, as agent, and
The First National Bank of Chicago, as syndication agent, which provide for an
aggregate senior credit facility (the "Senior Credit Facility") of
$250.0 million comprised of (i) a $130.0 million term loan facility; (ii) a
$30.0 million revolving credit facility and (iii) a $90.0 million acquisition
facility. Under the terms of the Senior Credit Facility, the term loan is
amortized over five and one-half years, and the revolving credit facility
expires on March 31, 2000. Any amounts drawn under the acquisition facility that
are outstanding on September 30, 1998, will be amortized in fifteen quarterly
installments. Amounts outstanding under the Senior Credit Facility bear interest
at a rate per annum equal to one of the following rates, at the Company's
option: (i) the sum of a base rate equal to the higher of the Federal Funds rate
plus 50 basis points or First Union National Bank of North Carolina's prime
commercial lending rate, plus a margin that varies from 0 to 75 basis points
depending on the Company's ratio of defined indebtedness to EBITDA (as defined
in the Senior Credit Facility); or (ii) The London Interbank Offering Rate
("LIBOR") plus a margin that varies from 75 to 200 basis points depending on the
Company's ratio of defined indebtedness to EBITDA. The Company pays a commitment
fee on unused amounts of the revolving facility and the acquisition
32
facility that ranges from 20 basis points to 37.5 basis points, based on the
Company's ratio of defined indebtedness to EBITDA. The blended interest rate in
effect at December 31, 1996, on the Senior Credit Facility was 7.2%.
Interest is payable quarterly, and scheduled principal installments on
the term loan facilities are due in quarterly installments of approximately
$2.5 million through June 1997, increasing to $3.75 million on September 30,
1997, $5.0 million on September 30, 1998, $5.375 million on September 30,
1999, and $6.0 million on September 30, 2000, with the remaining unpaid
balance due on March 31, 2002. Loans under the Senior Credit Facility are
collateralized by substantially all assets.
SUBORDINATED NOTES. On March 31, 1995, the Company issued subordinated
notes, which carried interest rates ranging from 12% to 15%, to replace
certain of the existing subordinated notes of the Combined Entities. On April
22, 1996, the Company used $15.7 million of the net proceeds from its initial
public offering to repay all the outstanding principal balances of the 15%
subordinated notes. The remaining subordinated notes bear interest at rates
ranging from 12% to 13.5% (12.5% on a weighted average basis), payable on a
semiannual basis in March and September of each year, with semiannual
principal installments due in varying amounts commencing in 2001, with the
remaining unpaid principal balances due at maturity on March 31, 2004. The
notes are subordinated to the loans under the Senior Credit Facility. As is
discussed in Note 19, in January 1997, the Company repaid all of the
outstanding principal balances of these remaining subordinated notes with a
portion of the proceeds from the sale of common stock.
OTHER DEBT. Other debt includes various promissory notes for the purchase
of property, plant and equipment and capital lease obligations. The various
promissory notes payable provided for interest at rates ranging from 10% to
prime plus 1% and were payable in monthly installments of principal and
interest until maturity, when the remaining principal balance was due. Capital
lease obligations represent machinery and equipment financing obligations
which are payable in monthly installments of principal and interest and are
collateralized by the related assets financed.
INTEREST RATE AGREEMENTS. The Company has five interest rate derivative
agreements in place, which have been designated as hedges against the
Company's variable interest rate exposure on its loans under the Senior Credit
Facility. The first agreement, which has a notional amount of $14.0 million,
matures in May 1997 and caps interest on LIBOR loans at 7.5%, plus the
applicable LIBOR margin. The second and third agreements, each of which has a
notional amount of $27.5 million and mature in June 1998, fix the interest
rates on LIBOR loans at 6.0%, plus the applicable LIBOR margin. The fourth and
fifth agreements, which each have a notional amount of $25.0 million and
mature in December 1997, fix the interest rates on LIBOR loans at 6.01%, plus
the applicable LIBOR margin. These derivative agreements provide hedges for
the Senior Credit Facility loans by limiting or fixing the LIBOR interest
rates specified in the Senior Credit Facility (5.6% at December 31, 1996) at
the above rates until the indicated expiration dates of these
interest-rate-derivative agreements. The original costs and premiums of these
derivative agreements are being amortized on a straight-line basis as a
component of interest expense. The Company has designated these interest rate
agreements as hedges against its interest rate exposure on its variable rate
loans under the Senior Credit Facility.
The Company is exposed to market risk under these arrangements due to the
possibility of exchanging a lower interest rate for a higher interest rate.
The counterparties are major financial institutions, and the risk of incurring
losses related to credit risk is considered by the Company to be remote.
DEBT COVENANTS. The Company's Senior Credit Facility contains various
financial and other restrictive covenants and requirements that the Company
maintain certain financial ratios, including leverage (computed as the ratio
of the aggregate outstanding principal amount of defined indebtedness to
EBITDA, as defined), fixed charges (computed as the ratio of EBITDA to defined
fixed charges), interest coverage (computed as the ratio of EBITDA to defined
interest expense) and minimum net worth. The Senior Credit Facility also
contains limitations on capital expenditures, investments, the payment of
dividends and the incurrence of additional indebtedness and requires certain
mandatory prepayments from the proceeds of certain dispositions of property.
SCHEDULED MATURITIES. The scheduled maturities of long-term debt, which
include capitalized lease obligations, at December 31, 1996, were as follows
(in thousands):
1996 $ 12,876
1997 19,544
1998 24,348
1999 34,826
2000 29,206
Thereafter 118,769
--------
$239,569
--------
--------
33
9. LEASES
The Company leases certain property, plant and equipment used in its
operations under both capital and operating lease agreements. Such leases,
which are primarily for machinery and equipment and vehicles, have lease terms
ranging from two 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 $8.0 million, $6.3 million and $4.5 million for
the years ended December 31, 1996, 1995 and 1994, respectively.
The composition of capital leases which are reflected as property, plant
and equipment in the balance sheets is as follows:
December 31, 1996 1995
--------------------------------------------------
(In thousands)
Machinery and equipment $ 812 $1,370
Less accumulated amortization (366) (415)
----------------
$ 446 $ 955
----------------
----------------
Future minimum payments at December 31, 1996, under noncancelable capital
and operating leases with terms in excess of one year are summarized below (in
thousands):
Capital Operating
Leases Leases
--------------------------------------------------------------------------
1997 $185 $ 4,539
1998 152 4,006
1999 112 3,188
2000 2,692
2001 2,216
Thereafter 2,770
---------------------
Total minimum lease payments 449 $19,411
-------
-------
Less amount representing imputed interest (27)
----
Present value of capitalized lease obligations $422
----
----
10. INCOME TAXES
The provisions for income taxes (benefit), excluding the current tax
benefits of $0.9 million and $0.7 million applicable to the extraordinary
losses during 1996 and 1995, respectively, are as follows:
Year ended December 31, 1996 1995 1994
--------------------------------------------------------
(In thousands)
Current taxes payable:
Federal $ 1,925 $2,763 $491
State 134 101 20
Deferred income taxes (8,895) (414) 333
---------------------------
$(6,836) $2,450 $844
---------------------------
---------------------------
34
The following is a reconciliation of income taxes expense (benefit)
reported in the statements of operations:
Year ended December 31, 1996 1995 1994
--------------------------------------------------------------------------
(IN THOUSANDS)
Tax expense at statutory rates $ 7,383 $ 306 $ 1,959
Tax benefit from tax-exempt earnings (2,711) (1,532) (2,745)
Tax expense from losses not subject to
taxes at the corporate level 1,612
Puerto Rico tax credits (11,750)
Net operating loss carryforwards 188 1,344
Nondeductible expenses 1,841 202
Other 242 35 84
-------- ------- ------
$ (6,836) $ 2,450 $ 844
-------- ------- ------
-------- ------- ------
The tax effects of temporary differences giving rise to deferred income
tax assets and liabilities were:
December 31, 1996 1995
--------------------------------------------------------------------------
(IN THOUSANDS)
Deferred income tax assets:
Asset valuation reserves $ 244 $ 326
Nondeductible accruals 1,785 1,122
Puerto Rico tax credits 10,076
Net operating loss carryforwards 91 1,989
Valuation allowance (1,989)
------- -------
12,196 1,448
Deferred income tax liabilities:
Depreciation (1,174) 312
Amortization of intangibles (2,177) (1,185)
Foreign distributions and other 73 (494)
------- -------
(3,278) (1,367)
------- -------
Net deferred income tax asset $ 8,918 $ 81
------- -------
------- -------
These net deferred income tax assets are classified in the consolidated
balance sheet as follows:
December 31, 1996 1995
--------------------------------------------------------------------------
(IN THOUSANDS)
Current assets $ 3,672 $ 1,448
Noncurrent assets 8,524
Noncurrent liabilities (3,278) (1,367)
------- -------
$ 8,918 $ 81
------- -------
------- -------
The Company had established a valuation allowance for deferred tax
assets related to net operating loss carryforwards of the Company's Suiza
Dairy subsidiary in Puerto Rico, which under Puerto Rico law were only
available for utilization against future taxable income of this subsidiary.
Because of the continuing operating losses of this subsidiary, the Company
was unable to determine that it is more likely than not that the net deferred
tax assets of this subsidiary would be realized. During 1996, the deferred
tax asset related to these net operating loss carryforwards and the related
valuation allowance was substantially eliminated as a result of the reduction
in tax rates in Puerto Rico from the Puerto Rico Agricultural Tax Incentives
Act of 1995.
35
In December 1995, the Commonwealth of Puerto Rico adopted the Puerto
Rico Agricultural Tax Incentives Act of 1995, which reduced the effective
income tax rate for qualified agricultural business from 39% to 3.9% and
provided for a 50% tax credit for certain "eligible investments" in qualified
agricultural businesses in Puerto Rico. During 1996, the Company made
investments in its Puerto Rico dairy, fruit, plastics and Garrido operations,
all of which were certified as qualified agricultural businesses in Puerto
Rico during 1996.
In connection with these investments, the Company believes that it has
met the eligible investment criteria of this act related to its investment in
its Puerto Rico dairy subsidiary. Accordingly, in 1996, the Company
recognized $15.75 million in tax credits related to this qualifying
investment. Of this amount, the Company (i) sold $4.0 million of tax credits
to third parties, resulting in a cash gain of $3.4 million (net of a discount
and related expenses), which is recorded in other income, and (ii) recognized
a deferred tax asset for the remainder of the tax credit in the amount of
$11.75 million, resulting in a corresponding credit to tax expense. These tax
credits can be used by the Company to eliminate both Puerto Rico income taxes
and the 10% Puerto Rico withholding tax on distributions from the Company's
Puerto Rico operations.
The Company is currently investigating whether its $43.0 million
investment in its fruit and plastics operations will qualify for tax credits
based on recent rulings by Puerto Rico tax authorities and has requested a
formal ruling on the allowability of such tax credits from the Treasury
Department in Puerto Rico. If a favorable ruling on the availability of these
additional tax credits is obtained, the Company will recognize substantial
additional tax benefits in the form of either a deferred tax asset or
proceeds from the sale of such credits.
11. STOCKHOLDERS' EQUITY
CAPITAL SHARES. Authorized capital shares of the Company include
1,000,000 shares of preferred stock with a par value of $.01 per share and
20,000,000 shares of common stock with a par value of $.01 per share. There
have been no shares of preferred stock issued by the Company. The rights and
preferences of preferred stock are established by the Company's Board of
Directors upon issuance. On March 31, 1995, the Company issued 6,313,479
shares of common stock in exchange for all of the outstanding equity
interests of the Combined Entities, including profits interests that were
granted to certain individuals as compensation for services in identifying,
structuring and negotiating certain acquisitions. Immediately prior to the
combination date, the existing investors fixed this profits interest by
mutual agreement and exchanged equity interests among investors and these
individuals. In connection with this exchange, the Company recorded a
compensation expense charge to merger expense of $5.1 million, which
approximated the fair value of these interests, and resulted in a capital
contribution in the same amount.
COMMON STOCK SPLIT. On February 28, 1996, the Company's Board of
Directors authorized a 69 for 1 stock split in the form of a common stock
dividend payable to stockholders of record on February 29, 1996. All
references in the consolidated financial statements to number of common
shares outstanding and per share amounts, and all references to common stock
issued, stock options and related prices in the notes to the consolidated
financial statements have been restated to reflect the split.
STOCK OFFERINGS. On April 22, 1996, the Company sold 3,795,000 shares
of common stock, $.01 par value per share, in an initial public offering at a
price to the public of $14.00 per share. Following this offering, the Company
had 10,108,479 shares of common stock issued and outstanding. The public
offering provided net cash proceeds to the Company of approximately $48.6
million. Of this amount, $31.1 million was used to repay senior debt, $15.7
million was used to repay the Company's 15% subordinated notes, and $1.8
million was used to pay prepayment penalties related to the early
extinguishment of the 15% subordinated notes. As a result of these
transactions, the Company recorded a $2.2 million extraordinary loss from
extinguishment of debt which included $1.8 million in prepayment penalties
and $1.3 million for the write-off of deferred financing costs related to the
repaid debt, net of a tax benefit of $0.9 million. In addition, on August 7,
1996, the Company sold 625,000 shares of its common stock at a price of
$16.00 per share in a private placement to a single investor. Following the
private sale, the Company had 10,739,729 shares of common stock issued and
outstanding. As is discussed in more detail in Note 19, in January 1997, the
Company completed the sale of additional shares of its common stock.
STOCK OPTION AND RESTRICTED STOCK PLANS. In connection with the
combination, the Company adopted an exchange option and restricted stock
plan, whereby the outstanding stock options granted by the Combined Entities
were converted into options to acquire 586,523 shares of common stock on
substantially the same terms as the prior options. These options are
exercisable at prices ranging from $.03 to $6.79 per share, which
approximated the fair market value of such shares at the date of original
grant. At December 31, 1996, 577,760 of such options were outstanding, of
which 480,450 were exercisable at prices ranging from $.03 to $6.79 per
share. The options vest ratably in five annual increments and may be
exercised, to the extent vested, over the ten-year period following the award
date.
36
Effective March 31, 1995, the Company also adopted the Option and
Restricted Stock Plan (the "Plan"), which provides for grants of incentive
and nonqualified stock options and awards of restricted stock to directors
and key employees of the Company or its subsidiaries of up to 1,069,500
shares, provided that no more than 379,500 shares may be awarded as
restricted stock. Under the terms of the Plan, the options vest ratably over
a three-year period, except for options granted to outside directors, which
vest immediately. The Plan also provides that the exercise price of stock
options will not be less than the fair market value on the date of grant, and
in the case of an incentive stock option granted to an employee owning more
than 10% of the common stock of the Company on the date of grant, not less
than 110% of the fair market value. On March 31, 1995, the Company's Board of
Directors granted 474,375 options pursuant to the Plan at an exercise price
per share of $10.51. In addition, during the remainder of 1995, the Company
granted options for an additional 3,450 shares at the same exercise price per
share. At December 31, 1995, 477,825 options were outstanding at an exercise
price of $10.51 per share, of which 3,450 shares were exercisable.
In 1996, the Company granted options to purchase 398,153 shares at
exercise prices ranging from $12.32 to $17.50 per share. At December 31,
1996, 873,978 options were outstanding at exercise prices ranging from $10.51
to $17.50 per share, of which 739,035 shares were exercisable.
Effective January 1, 1997, the Board of Directors authorized the grant
of options for 141,500 shares at an exercise price of $20.25 per share.
The Company applies APB Opinion No. 25 and related interpretations in
accounting for its stock option plans, and accordingly, no compensation has
been recognized since stock options granted under these plans were at
exercise prices which approximated market value at the grant date. Had
compensation expense been determined for current period stock option grants
using fair value methods provided for in SFAS 123, the Company's pro forma
net income (loss) and net earnings (loss) per common share would have been
the amounts indicated below:
Year ended December 31, 1996 1995
--------------------------------------------------------------------------
(IN THOUSANDS, EXCEPT SHARE DATA)
Compensation cost $ 1,697 $ 765
Net income (loss):
As reported $ 25,714 $(10,038)
Pro forma 24,611 (10,543)
Net earnings (loss) per share:
As reported $ 2.59 $ (1.64)
Pro forma 2.48 (1.73)
Stock option share data:
Stock options granted during period 398,153 477,825
Weighted average exercise price $ 14.87 $ 10.51
Average option compensation value (a) 8.86 6.41
(a) Calculated in accordance with the Black-Scholes option pricing model, using
the following assumptions: expected volatility of 30% to 35%; expected
dividend yield of 0%; expected option term of ten years and risk-free rate
of return as of the date of grant which ranged from 5.64% to 7.15% based on
the yield of ten-year U.S. treasury securities.
WARRANTS. Prior to March 31, 1995, each of the Combined Entities had
entered into various warrant agreements with their subordinated and junior
subordinated noteholders which granted such holders the right to purchase
equity interests in each of the companies. These warrants were exercisable,
in whole or in part, at various dates through December 31, 2005. Immediately
prior to the combination, all warrant holders exercised their warrants to
acquire equity interests in the Combined Entities in consideration for
aggregate proceeds of $4.1 million and received shares of the Company's
common stock in the combination.
37
12. PENSION AND PROFIT SHARING PLANS
The Company's subsidiaries each sponsor an employees savings and profit
sharing plan. 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 the plans. The employees participating in the plans can
generally make contributions to the plans of between 6% and 8% of their
annual compensation, and each of the subsidiaries can elect to match such
contributions. During each of the years ended December 31, 1996, 1995 and
1994, the Company expensed contributions to the plans of approximately $0.8
million.
Certain of the Company's recently acquired subsidiaries participate in
various multiemployer union pension plans, which are administered jointly by
management and union representatives and which sponsor most full-time and
certain part-time union employees who are not covered by the Company's other
plans. The pension expense for these plans approximated $0.2 million during
1996. The Company could, under certain circumstances, be liable for unfunded
vested benefits or other expenses of jointly administered union/management
plans. At this time, the Company has not established any liabilities because
withdrawal from these plans is not probable or reasonably possible.
13. MERGER AND OTHER COSTS
MERGER AND OTHER COSTS. During 1995 and 1994, the Company incurred
merger and other costs of $10.2 million and $1.7 million, respectively, which
consisted of the costs associated with the negotiation of the merger and
preparation of related merger documents and agreements, financial consulting
costs and other costs related to the combination of $8.8 million and $1.4
million in 1995 and 1994, respectively; and other non-operating costs of $1.4
million and $0.3 million, respectively. During 1995, these other merger costs
included a one-time $0.5 million payment to cancel an existing management
consulting agreement; a one-time tax cost of $1.5 million to convert the
Company's Puerto Rico operating subsidiaries to United States corporations;
the write-off of $0.4 million in unamortized organization costs; and $5.1
million to recognize compensation expense related to the issuance of common
stock in exchange for a negotiated profits interest (Note 12), which resulted
in a capital contribution in the same amount. Other non-operating costs
included $0.3 million of bank fees in 1994 related to the funding of bridge
loans to repay certain indebtedness, and during 1995, $0.7 million of costs
associated with several uncompleted acquisitions and $0.7 million of costs
associated with an uncompleted debt offering.
During 1996, the Company expensed non-operating costs of $0.6 million in
connection with fees and expenses paid to amend its Senior Credit Facility.
EXTRAORDINARY LOSS. During 1996, 1995 and 1994, as a result of the
repayment of the outstanding indebtedness, the Company expensed approximately
$2.2 million (net of income tax benefit of $0.9 million), $8.5 million (net
of income tax benefit of $0.7 million) and $0.2 million, respectively, of
debt issuance, legal and other costs associated with extinguishment of prior
credit facilities. These amounts have been classified as an extraordinary
loss in accordance with the provisions of Statement of Financial Accounting
Standards No. 4, "Reporting Gains and Losses From the Extinguishment of Debt."
38
14. SUPPLEMENTAL CASH FLOW INFORMATION
Year Ended December 31, 1996 1995 1994
--------------------------------------------------------------------------
(IN THOUSANDS)
Cash paid for interest $16,932 $ 17,226 $16,929
Cash paid for taxes 4,662 1,432 362
Noncash transactions:
Issuance of subsidiary preferred
stock in connection with acquisitions 3,000
Issuance of subordinated notes and
amounts payable to the seller in
connection with acquisitions 173 91 4,495
Dividends payable or paid in additional
preferred stock on subsidiary stock 197
Distribution of investment and related
debt in a bread bag manufacturer to
shareholders of Reddy Ice 1,534
Acquisition of minority interest common
stock and exercise of warrants 993
Compensation expense recorded as a
capital contribution 5,111
Subordinated notes issued in lieu
of interest 236 671 430
15. COMMITMENTS AND CONTINGENCIES
The Company and its subsidiaries are parties, in the ordinary course of
business, to certain claims and litigation. In management's opinion, the
settlement of such matters is not expected to have a material impact on the
consolidated financial statements.
In addition, the Company is a party to employment agreements with
certain officers which provided for minimum compensation levels and incentive
bonuses along with provisions for termination of benefits in certain
circumstances. The Company also entered into a consulting and noncompetition
arrangement with a former officer providing for monthly payments of $12,500
for services to be rendered in the future, which expires in March 1998.
16. RELATED PARTY TRANSACTIONS
Prior to March 31, 1995, the Company had consulting agreements with
certain stockholders and affiliates requiring the payment of monthly
consulting fees, plus expenses, in consideration for financial advisory and
oversight services provided to it by such stockholders. These consulting
agreements, which were cancelable only at the option of such stockholders
over their term, were canceled in the combination. During the years ended
December 31, 1995 and 1994, the Company expensed $0.2 million and $0.9
million, respectively, plus expenses under the provisions of these
agreements, which are included in general and administrative expenses. In
addition, the Company paid an affiliate of one of its stockholders investment
banking fees of $1.1 million, along with related expenses, during the year
ended December 31, 1994, for acquisition and financing services, which were
included as part of the costs and expenses of the acquisition.
39
17. BUSINESS AND GEOGRAPHIC INFORMATION AND MAJOR CUSTOMERS
Information about the Company's operations in the Dairy and Ice businesses and
in different geographic areas for the three years ended December 31, 1996, is as
follows:
Year Ended December 31, 1996 1995 1994
-------------------------------------------------------------------------------
(IN THOUSANDS)
Net sales to unaffiliated customers:
Dairy:
United States $252,826 $175,553 $102,073
Puerto Rico 215,306 204,406 191,334
---------------------------------
468,132 379,959 293,407
Ice -- United States 52,784 50,507 47,701
---------------------------------
Total $520,916 $430,466 $341,108
---------------------------------
---------------------------------
Operating income:
Dairy:
United States $ 11,339 $ 9,125 $ 4,848
Puerto Rico 16,430 14,160 12,274
---------------------------------
27,769 23,285 17,122
Ice -- United States 11,022 10,116 8,638
Corporate (3,669) (2,837)
---------------------------------
Total $ 35,122 $ 30,564 $ 25,760
---------------------------------
---------------------------------
Identifiable assets (at end of period):
Dairy:
United States $167,179 $ 68,852 $ 68,781
Puerto Rico 152,198 119,977 125,207
---------------------------------
319,377 188,829 193,988
Ice -- United States 47,096 40,519 44,964
Corporate 17,675 3,174
---------------------------------
Total $384,148 $232,522 $238,952
---------------------------------
---------------------------------
Capital expenditures:
Dairy $ 10,229 $ 6,676 $ 3,364
Ice 3,715 3,573 1,420
Corporate 78 143
---------------------------------
Total $ 14,022 $ 10,392 $ 4,784
---------------------------------
---------------------------------
Depreciation expense:
Dairy $ 6,786 $ 5,995 $ 4,943
Ice 3,115 3,263 3,301
Corporate 29
---------------------------------
Total $ 9,930 $ 9,258 $ 8,244
---------------------------------
---------------------------------
40
18. FAIR VALUE OF FINANCIAL INSTRUMENTS
Pursuant to SFAS No. 107, "Disclosure About Fair Value of Financial
Instruments," the Company is required to disclose an estimate of the fair
value of the Company's financial instruments as of December 31, 1996 and
1995. Differences between the historical presentation and estimated fair
values can occur for many reasons, including taxes, commissions, prepayment
penalties, make-whole provisions and other restrictions as well as the
inherent limitations in any estimation technique.
Due to their near-term maturities, the carrying amounts of accounts
receivable and accounts payable are considered equivalent to fair value. In
addition, because the interest rates on the Company's revolving credit and
term loan facilities and certain other debt are variable, their fair values
approximate their carrying values.
Certain of the Company's long-term debt bears fixed interest rates and
is privately placed with unique terms and no active market. The fair value of
such long-term debt was determined by discounting future cash flows at
current market yields. In addition, the Company has entered into various
interest rate agreements to reduce the Company's sensitivity to changes in
interest rates on its variable rate debt. The fair values of these
instruments were determined based on current values for similar instruments
with similar terms. The following is a summary of the asset (liability)
values for both the carrying values and fair values of such instruments:
December 31, 1996 1995
--------------------------------------------------------------------------------
Historical Historical
Carrying Fair Carrying Fair
Amount Value Amount Value
---------------------------------------------------
(IN THOUSANDS)
Fixed rate debt $(36,696) $(34,036) $(52,472) $(53,621)
Interest rate agreements (143) (1,220)
19. SUBSEQUENT EVENTS
On January 28, 1997, the Company sold 4,270,000 shares of common stock,
$.01 par value per share, in a public offering at a price to the public of
$22.00 per share. Following this offering, the Company had 15,011,729 shares
of common stock issued and outstanding. The public offering provided net cash
proceeds to the Company of approximately $89.0 million. Of this amount, $36
million was used to repay subordinated notes and $4.3 million was used to pay
prepayment penalties related to the early extinguishment of the subordinated
notes, which, along with the remaining balance of unamortized deferred loan
costs, will be reported as an extraordinary loss from the early
extinguishment of debt in 1997. The remainder of the net proceeds were used
to repay a portion of the outstanding balance of the acquisition facility of
the Company's Senior Credit Facility.
As discussed in Note 11, on April 22, 1996, and August 7, 1996, the
Company sold 3,795,000 shares and 625,000 shares, respectively, of its common
stock, which provided net cash proceeds to the Company of approximately $58.4
million, which was used to repay existing debt. In addition, as discussed
above, on January 28, 1997, the Company sold an additional 4,270,000 shares
of its common stock, which provided net cash proceeds to the Company of
approximately $89.0 million, which was used to repay debt. Had these sales of
common stock occurred on January 1, 1996, the supplemental pro forma net
earnings per share before extraordinary losses from the early extinguishment
of debt for the year ended December 31, 1996, would have decreased by $.47 to
$2.34.
41
20. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The following is a summary of the unaudited quarterly results of
operations for 1996 and 1995 (dollars in thousands, except per share data):
[Enlarge/Download Table]
Quarter
---------------------------------------------------------
1996 First Second Third Fourth Full Year
--------- --------- --------- --------- ---------
Net sales $ 109,035 $ 116,272 $ 139,304 $ 156,305 $ 520,916
Gross profit 26,420 32,970 38,090 34,888 132,368
Income before extraordinary loss 383 4,553 18,937 4,056 27,929
Net income 383 2,338 18,937 4,056 25,714
Earnings per common share:
Income before extraordinary loss 0.06 0.46 1.68 0.35 2.81
Net income 0.06 0.24 1.68 0.35 2.59
1995 First Second Third Fourth Full Year
--------- --------- --------- --------- ---------
Net sales $ 104,876 $ 110,029 $ 110,549 $ 105,012 $ 430,466
Gross profit 26,207 31,046 33,439 27,141 117,833
Income (loss) before extraordinary loss (9,889) 2,332 4,711 1,270 (1,576)
Net income (loss) (18,351) 2,332 4,711 1,270 (10,038)
Earnings per common share:
Income (loss) before extraordinary loss (1.80) 0.37 0.75 0.20 (0.26)
Net income (loss) (3.34) 0.37 0.75 0.20 (1.64)
Earnings per common share calculations for each of the quarters were
based on the weighted average number of shares outstanding for each period,
and the sum of the quarters may not necessarily be equal to the full year
earnings per common share amount.
The results for the first quarter of 1995 included $8.8 million of
merger costs related to the combination along with $8.5 million of
extraordinary losses from the early extinguishment of debt repaid at the
combination date.
The results for the second quarter of 1996 include $2.2 million of
extraordinary losses from the early extinguishment of debt repaid with the
proceeds of the Company's initial public offering.
The results for the third quarter of 1996 include a gain on the sale of
Puerto Rico tax credits of $3.4 million and a tax benefit related to the
recognition of the remaining amount of such credits of $11.8 million,
partially offset by $0.6 million in financing costs related to the amendment
of the Company's Senior Credit Facility.
42
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, 1996
and 1995, and the related consolidated statements of operations, stockholders'
equity and cash flows for each of the three years in the period ended
December 31, 1996. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly,
in all material respects, the consolidated financial position of Suiza Foods
Corporation and subsidiaries at December 31, 1996 and 1995, and the results
of their operations and their cash flows for each of the three years in the
period ended December 31, 1996, in conformity with generally accepted
accounting principles.
DELOITTE & TOUCHE LLP
Deloitte & Touche LLP
Dallas, Texas
February 18, 1997
43
Dates Referenced Herein and Documents Incorporated by Reference
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