================================================================================
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES AND EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2002
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
DEAN HOLDING COMPANY
(Exact name of the registrant as specified in its charter
[DEAN FOODS LOGO]
---------------
DELAWARE 75-2932967
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification no.)
2515 MCKINNEY AVENUE, SUITE 1200
DALLAS, TEXAS 75201
(214) 303-3400
(Address, including zip code, and telephone
number, including area code, of the
registrant's principal executive offices)
---------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
The registrant meets the conditions specified in General Instruction
H(1) to Form 10-Q and, therefore, is filing this form with the reduced
disclosure format permitted by General Instruction H(2) to Form 10-Q.
================================================================================
TABLE OF CONTENTS
<Table>
<Caption>
Page
----
PART I -- FINANCIAL INFORMATION
Item 1 -- Financial Statements.................................................................................... 3
Item 2 -- Management's Discussion and Analysis of Financial Condition and Results of Operations................... 15
PART II -- OTHER INFORMATION
Item 6 -- Exhibits and Reports on Form 8-K........................................................................ 17
</Table>
2
PART I -- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
DEAN HOLDING COMPANY
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
<Table>
<Caption>
MARCH 31, DECEMBER 31,
2002 2001
----------- ------------
(unaudited)
Assets
Current assets:
Cash and cash equivalents .............................................. $ 2,007 $ 15,920
Receivable from parent ................................................. 38,243 29,000
Accounts receivable, net ............................................... 291,936 292,926
Inventories ............................................................ 234,588 242,977
Deferred income taxes .................................................. 91,668 88,500
Prepaid expenses and other current assets .............................. 31,222 30,624
----------- -----------
Total current assets ............................................. 689,664 699,947
Property, plant and equipment, net ........................................ 606,762 624,149
Goodwill .................................................................. 1,368,203 1,358,270
Identifiable intangibles and other assets ................................. 257,019 258,063
----------- -----------
Total ............................................................ $ 2,921,648 $ 2,940,429
=========== ===========
Liabilities and Stockholder's Equity
Current liabilities:
Accounts payable and accrued expenses .................................. $ 443,579 $ 491,526
Income taxes payable ................................................... 37,203 31,307
Current portion of long-term debt ...................................... 1,487 1,493
----------- -----------
Total current liabilities ........................................ 482,269 524,326
Long-term debt ............................................................ 781,161 814,500
Other long-term liabilities ............................................... 147,203 151,635
Deferred income taxes ..................................................... 126,064 123,613
Commitments and contingencies (Note 10)
Stockholder's equity:
Common stock, 1,000 shares issued and outstanding ......................
Additional paid-in capital ............................................. 1,356,293 1,326,355
Retained earnings ...................................................... 28,857
Accumulated other comprehensive loss ................................... (199)
----------- -----------
Total stockholder's equity ....................................... 1,384,951 1,326,355
----------- -----------
Total ............................................................ $ 2,921,648 $ 2,940,429
=========== ===========
</Table>
See notes to condensed consolidated financial statements.
3
DEAN HOLDING COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Dollars in thousands)
<Table>
<Caption>
SUCCESSOR PREDECESSOR
--------------- ---------------
THREE MONTHS THREE MONTHS
ENDED MARCH 31, ENDED MARCH 31,
2002 2001
--------------- ---------------
(unaudited)
Net sales ....................................................... $ 956,485 $ 991,141
Cost of sales ................................................... 729,445 768,693
--------- ---------
Gross profit .................................................... 227,040 222,448
Operating costs and expenses:
Selling and distribution ..................................... 134,009 142,838
General and administrative ................................... 30,907 34,548
Amortization of intangibles .................................. 1,667 5,340
--------- ---------
Total operating costs and expenses ..................... 166,583 182,726
--------- ---------
Operating income ................................................ 60,457 39,722
Other (income) expense:
Interest expense, net ........................................ 14,080 18,270
Other (income) expense, net .................................. (885) (263)
--------- ---------
Total other (income) expense ........................... 13,195 18,007
--------- ---------
Income from continuing operations before income taxes ........... 47,262 21,715
Income taxes .................................................... 18,405 8,306
--------- ---------
Income from continuing operations ............................... 28,857 13,409
Income from discontinued operations, net of tax ................. 802
--------- ---------
Net income ...................................................... $ 28,857 $ 14,211
========= =========
</Table>
See notes to condensed consolidated financial statements.
4
DEAN HOLDING COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
<Table>
<Caption>
SUCCESSOR PREDECESSOR
--------------- ---------------
THREE MONTHS THREE MONTHS
ENDED MARCH 31, ENDED MARCH 31,
2002 2001
--------------- ---------------
(unaudited)
Cash flows from operating activities:
Income from continuing operations ........................................................ $ 28,857 $ 13,409
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization ........................................................ 19,501 27,714
Gain on disposition of assets ........................................................ (11) (35)
Deferred income taxes ................................................................ (717) 38
Other, net ........................................................................... 22 (35)
Changes in operating assets and liabilities, net of acquisitions:
Accounts receivable ............................................................... (2,324) 7,726
Inventories ....................................................................... 8,389 2,091
Prepaid expenses and other assets ................................................. (745) 1,930
Accounts payable and accrued expenses and other liabilities ....................... (11,579) (26,175)
Income taxes ...................................................................... 5,896 1,867
-------- --------
Net cash provided by operating activities ....................................... 47,289 28,530
Cash flows from investing activities:
Capital expenditures ..................................................................... (7,785) (15,855)
Proceeds from disposition of property, plant and equipment ............................... 24 1,266
Capitalized information system costs...................................................... (623) (1,160)
Cash outflows for acquisitions ........................................................... (15,901)
Net proceeds from divestitures ........................................................... 2,561
Other .................................................................................... 1,125
-------- --------
Net cash used in investing activities ........................................... (20,599) (15,749)
Cash flows from financing activities:
Repayment of debt ......................................................................... (29,242) (51)
Borrowing under revolving credit agreement, net ........................................... (3,215)
Issuance of common stock, net of expenses ................................................. 945
Cash dividends paid ....................................................................... (8,198)
Net transfer to parent .................................................................... (11,361)
-------- --------
Net cash used in financing activities ........................................... (40,603) (10,519)
-------- --------
Net cash used in discontinued operations ..................................................... (6,831)
-------- --------
Decrease in cash and cash equivalents ........................................................ (13,913) (4,569)
Cash and cash equivalents, beginning of period ............................................... 15,920 82,477
-------- --------
Cash and cash equivalents, end of period ..................................................... $ 2,007 $ 77,908
======== ========
</Table>
See notes to condensed consolidated financial statements.
5
DEAN HOLDING COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2002
1. GENERAL
Change in Fiscal Year -- On December 21, 2001, immediately after we
were acquired by Dean Foods Company (formerly known as Suiza Foods Corporation),
our Board of Directors voted to change our fiscal year to conform to the fiscal
year of Dean Foods Company. Accordingly, our fiscal year now ends on December
31, rather than on the last Sunday in May.
Basis of Presentation -- The unaudited condensed consolidated financial
statements contained in this report have been prepared on the same basis as the
consolidated financial statements in our Annual Report on Form 10-KT for the
period from May 28, 2001 to December 31, 2001. In our opinion, we have made all
necessary adjustments (which include only normal recurring adjustments) in order
to present fairly, in all material respects, our consolidated financial
position, results of operations and cash flows as of the dates and for the
periods presented. Certain information and footnote disclosures normally
included in financial statements prepared in accordance with generally accepted
accounting principles have been omitted. Our results of operations for the
period ended March 31, 2002 may not be indicative of our operating results for
the full year. The condensed consolidated financial statements contained in this
report should be read in conjunction with our 2001 consolidated financial
statements contained in our Annual Report on Form 10-KT as filed with the
Securities and Exchange Commission on April 1, 2002.
This Quarterly Report, including these notes, have been written in
accordance with the Securities and Exchange Commission's "Plain English"
guidelines. Unless otherwise indicated, references in this report to "we," "us"
or "our" refer to Dean Holding Company and its subsidiaries.
We have chosen December 31, 2001 as a "date of convenience" for
recording the effects of our acquisition by Dean Foods Company. Accordingly, for
financial statement purposes, we have treated the acquisition as if it occurred
on December 31, 2001 rather than December 21, 2001.
Our financial statements for all periods prior to December 31, 2001
have been prepared using our historical basis of accounting and are indicated in
our consolidated financial statements as "Predecessor." The December 31, 2001
and March 31, 2002 balance sheets reflect the preliminary purchase price
allocation related to the acquisition by Dean Foods Company.
Recently Issued Accounting Pronouncements -- In May 2000, the Emerging
Issues Task Force (the "Task Force") of the Financial Accounting Standards Board
("FASB") reached a consensus on Issue No. 00-14, "Accounting for Certain Sales
Incentives," which became effective for us May 28, 2001. This Issue addresses
the recognition, measurement and income statement classification of sales
incentives that have the effect of reducing the price of a product or service to
a customer at the point of sale. In April 2001, the Task Force reached a
consensus on Issue No. 00-25, "Vendor Income Statement Characterization of
Consideration Paid to a Reseller of the Vendor's Products," which also became
effective for us May 28, 2001. Under this Issue, certain consideration paid to
our customers (such as slotting fees) is required to be classified as a
reduction of revenue, rather than recorded as an expense. Upon adoption of these
Issues, certain sales incentives and trade spending amounts, which were
classified in selling and distribution expense, were reclassified as a reduction
of sales. For the three months ended March 31, 2001, $12.9 million was
reclassified to conform to the new requirements. This change did not affect our
reported net income.
In June 2001, FASB issued Statement of Financial Accounting Standard
("SFAS") No. 141, "Business Combinations" and SFAS No. 142, "Goodwill and Other
Intangible Assets." SFAS No. 141 addresses financial accounting and reporting
for business combinations. Under the new standard, all business
6
combinations completed after June 30, 2001 are required to be accounted for by
the purchase method. Our balance sheet reflects the new basis of accounting
effective December 31, 2001 at fair value in accordance with purchase accounting
requirements under SFAS No. 141. SFAS No. 142 addresses financial accounting and
reporting for acquired goodwill and other intangible assets. We adopted SFAS No.
142 on January 1, 2002. SFAS No. 142 requires that goodwill no longer be
amortized, but instead requires annual impairment tests. Any recognized
intangible asset determined to have an indefinite useful life will not be
amortized, but instead tested for impairment in accordance with the standard.
In June 2001, FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations." This statement requires that the fair value of a
liability for an asset retirement obligation be recognized in the period in
which it is incurred if a reasonable estimate of fair value can be made. The
associated asset retirement costs are capitalized as part of the carrying amount
of the long-lived asset. SFAS No. 143 will become effective for us January 1,
2003. We are currently evaluating the impact of adopting this pronouncement on
our consolidated financial statements.
FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets" in August 2001 and it became effective for us beginning
January 1, 2002. SFAS No. 144, which supercedes SFAS No. 121, provides a single,
comprehensive accounting model for impairment and disposal of long-lived assets
and discontinued operations. Our adoption of this standard will not have a
material impact on our consolidated financial statements.
SFAS No. 145, "Rescission of FASB Statements No. 4, 44 and 64,
Amendment of FASB Statement No. 13 and Technical Corrections", was issued in
April 2002 and is applicable to fiscal years beginning after May 15, 2002. One
of the provisions of this technical statement is the rescission of SFAS No. 4,
"Reporting Gains and Losses from Extinguishment of Debt", whereby any gain or
loss on the early extinguishment of debt that was classified as an extraordinary
item in prior periods in accordance with SFAS No. 4, which does not meet the
criteria of an extraordinary item as defined by APB Opinion 30, must be
reclassified. Our adoption of this standard will not have a material impact on
our consolidated financial statements.
2. ACQUISITION BY DEAN FOODS COMPANY
On December 21, 2001, we were acquired by Dean Foods Company (formerly
known as Suiza Foods Corporation). To accomplish this transaction, we were
merged with and into Blackhawk Acquisition Corp., a wholly owned subsidiary of
Dean Foods Company. Blackhawk Acquisition Corp. survived the merger and
immediately changed its name to Dean Holding Company, our current name.
Immediately after completion of the merger, Suiza Foods Corporation changed its
name to Dean Foods Company. We are now a wholly-owned subsidiary of Dean Foods
Company.
As a result of the merger, each share of our common stock was converted
into .858 (on a split-adjusted basis) shares of Dean Foods Company common stock
and the right to receive $21.00 in cash.
Dean Foods Company accounted for its acquisition of us as a purchase.
The aggregate purchase price recorded at Dean Foods Company was $1.6 billion,
including $756.8 million of cash, common stock valued at $739.4 million and
estimated transaction costs of $55.7 million. The value of the approximately 31
million common shares issued was determined based on the average market price of
Dean Foods Company common stock around the date of the announcement. This
purchase price and the related purchase accounting adjustments, including
goodwill, have been "pushed down" and are reflected in our December 31, 2001 and
March 31, 2002 balance sheets.
Dean Foods Company has not completed a final allocation of the purchase
price to the fair values of our assets and liabilities and the related business
integration plans. We expect that the ultimate purchase price allocation may
include additional adjustments to the fair values of depreciable tangible
assets, identifiable intangible assets (some of which will have indefinite
lives) and the carrying values of certain liabilities. Accordingly, to the
extent that such assessments indicate that the fair value of the assets and
liabilities differ from their preliminary purchase price allocations, such
difference would adjust the amounts allocated to those assets and liabilities
and would change the amounts allocated to goodwill.
7
3. DIVESTITURES
Divestiture of Plants -- In order to obtain regulatory approval for our
acquisition by Dean Foods Company, certain plants located in areas where our
operations overlapped with the operations of Dean Foods Company were required to
be divested. Four of the divested dairies were owned by us, including Coburg
Dairy based in North Charleston, South Carolina; Cream O Weber based in Salt
Lake City, Utah; H. Meyer Dairy based in Cincinnati, Ohio; and U.C. Milk
("Goldenrod") based in Madisonville, Kentucky. In order to accomplish the
divestitures, on December 21, 2001, immediately after our merger with Blackhawk
Acquisition Corporation was completed, we dividended these dairies to Dean Foods
Company, our sole shareholder. The dividend was recorded at book value after
applicable purchase accounting adjustments, with no gain or loss recorded. Prior
periods have not been restated to reflect the divestitures.
Exchange of National Refrigerated Products for Dean SoCal -- Also in
connection with our acquisition by Dean Foods Company, on December 21, 2001, we
entered into a Securities Exchange Agreement with Morningstar Foods Inc.,
another wholly-owned subsidiary of Dean Foods Company, pursuant to which, on
December 21, 2001 immediately after consummation of the acquisition, we
exchanged the operations of our former National Refrigerated Products ("NRP")
segment for the operations of Dean SoCal, a subsidiary of Dean Foods Company
Dairy Group. Accordingly, we no longer have our NRP segment, and we have
presented this group as a discontinued operation in the accompanying financial
statements. We accounted for this exchange as a dividend in our Consolidated
Financial Statements. Dean SoCal operates two plants in Southern California and
produces a full line of dairy and related products under the Swiss(R) and Adohr
Farms(R) brands. Dean SoCal is now operated as part of our Dairy Group and was
accounted for as a contribution in our Consolidated Financial Statements at
December 31, 2001 and March 31, 2002. Dean SoCal's operating results are
included in our Consolidated Financial Statements at March 31, 2002.
Divestitures of DFC Transportation and Boiled Peanut Business -- On
January 4, 2002, we completed the sale of the stock of DFC Transportation
Company, which was a part of our Specialty Foods segment. On February 7, 2002,
we completed the sale of the assets related to the boiled peanut business of
Dean Specialty Foods Company, a part of our Specialty Foods segment.
4. GOODWILL AND OTHER INTANGIBLE ASSETS
On January 1, 2002, we adopted SFAS No. 142, as discussed in more
detail in Note 1. As required by SFAS No. 142, our results for the first quarter
of 2001 have not been restated. The following sets forth a reconciliation of net
income for the three months ended March 31, 2002 and 2001 as if SFAS No. 142 had
been adopted January 1, 2001.
8
<Table>
<Caption>
THREE MONTHS ENDED
MARCH 31,
-----------------------
2002 2001
------ ------
(In thousands)
Reported net earnings.......................................... $28,857 $14,211
Goodwill amortization, net of tax ............................. 1,937
Trademark amortization, net of tax ............................ 635
------- -------
Adjusted earnings.............................................. $28,857 $16,783
======= =======
</Table>
The changes in the carrying amount of goodwill for the three months
ended March 31, 2002 are as follows:
<Table>
<Caption>
SPECIALTY
DAIRY GROUP FOODS TOTAL
----------- --------- -----
(In thousands)
Balance at December 31, 2001 .............. $1,068,270 $290,000 $1,358,270
Purchase accounting adjustments ........... 1,496 8,437 9,933
---------- -------- ----------
Balance at March 31, 2002 ................. $1,069,766 $298,437 $1,368,203
========== ======== ==========
</Table>
The gross carrying amount and accumulated amortization of our
intangible assets other than goodwill as of March 31, 2002 and December 31, 2001
are as follows:
<Table>
<Caption>
MARCH 31, 2002 DECEMBER 31, 2001
----------------------------------- ------------------------------------
GROSS NET GROSS NET
CARRYING ACCUMULATED CARRYING CARRYING ACCUMULATED CARRYING
AMOUNT AMORTIZATION AMOUNT AMOUNT AMORTIZATION AMOUNT
-------- ------------ -------- -------- ------------ --------
(In thousands)
Intangible assets with indefinite lives:
Trademarks .................................. $196,178 $ 0 $196,178 $196,178 $ 0 $196,178
Intangible assets with finite lives:
Customer-related ............................ 30,500 (1,384) 29,116 30,500 0 30,500
-------- ---------- --------- -------- ----------- --------
Total other intangibles ....................... $226,678 $ (1,384) $225,294 $226,678 $ 0 $226,678
======== ========== ========= ======== =========== ========
</Table>
Amortization expense on intangible assets, excluding goodwill, for the
three months ended March 31, 2002 and 2001 was $1.4 million and $1.0 million,
respectively. Estimated aggregate intangible asset amortization expense for the
next five years is as follows (in thousands):
<Table>
2003 $4,497
2004 $2,503
2005 $2,283
2006 $2,062
2007 $1,942
</Table>
5. INVENTORIES
<Table>
<Caption>
AT MARCH 31, AT DECEMBER 31,
2002 2001
------------ ---------------
(In thousands)
Raw materials and supplies ...................................... $ 68,534 $ 65,863
Finished goods .................................................. 166,438 177,114
Less excess of current cost over stated value of last-in,
first-out inventories ........................................... (384)
--------- ---------
Total ...................................................... $ 234,588 $ 242,977
========= =========
</Table>
6. LONG-TERM DEBT
<Table>
<Caption>
AT MARCH 31, AT DECEMBER 31,
2002 2001
------------- ---------------
(In thousands)
$250 million senior notes, 8.15%, maturing in 2007 .............. $ 250,556 $ 250,576
$200 million senior notes, 6.625%, maturing in 2009 ............. 182,820 187,357
$150 million senior notes, 6.9%, maturing in 2017 ............... 124,765 124,579
$100 million senior notes, 6.75%, maturing in 2005 .............. 95,967 95,699
Receivables-backed loan ......................................... 99,942 128,855
Industrial development revenue bonds ............................ 21,950 21,950
Capitalized lease obligations ................................... 6,597 6,920
Other obligations ............................................... 51 57
--------- ---------
782,648 815,993
Less current portion ............................................ (1,487) (1,493)
--------- ---------
Total .................................................... $ 781,161 $ 814,500
========= =========
</Table>
Senior Notes -- We had $700.0 million of senior notes outstanding at
March 31, 2002, $250.0 million of which were issued during the first quarter of
fiscal 2001. The net proceeds were used to fund acquisitions and to repay
commercial paper. These notes remain outstanding after our acquisition by Dean
Foods Company. The related indentures do not contain financial covenants but
they do contain certain restrictions including a prohibition against us and our
subsidiaries granting liens on our real property interests. At the date of our
acquisition by Dean Foods Company, our long-term debt was re-valued to its
current market value.
9
Receivables-Backed Loan -- On December 21, 2001, immediately upon
completion of our acquisition by Dean Foods Company, certain of our subsidiaries
sold their accounts receivable into Dean Foods Company's receivables
securitization facility. The securitization is treated as a borrowing for
accounting purposes. The receivables-backed loan bears interest at a variable
rate based on the commercial paper yield, as defined in the agreement. The
average interest rate on the receivables-backed loan at March 31, 2002 was
2.13%.
Industrial Development Revenue Bonds -- We have certain revenue bonds
outstanding, one of which requires an annual sinking fund redemption, the amount
of which will be of $0.3 million in 2002, increasing to $.9 million by 2012.
Typically, these bonds are secured by irrevocable letters of credit issued by
financial institutions, along with first mortgages on the related real property
and equipment. Interest on these bonds is due semiannually at interest rates
that vary based on market conditions, which at March 31, 2002 ranged from 1.6%
to 1.7%.
Other Obligations -- Other obligations include 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 -- SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities" (as amended) became effective for us as of
May 28, 2001. We do not currently have any derivative instruments. Prior to our
acquisition by Dean Foods Company, we entered into interest rate swap agreements
from time to time in order to hedge a portion of our interest rate exposure. On
December 19, 2001, we sold our interest rate swap in anticipation of our
acquisition by Dean Foods Company. During the period from May 28, 2001 to
December 31, 2001, we recorded derivatives as of the effective date on our
consolidated balance sheet at fair value, with an offset to other comprehensive
income to the extent the hedge was effective, as required by SFAS No. 133. Any
ineffectiveness in cash flow hedges or fair value hedges was recorded as an
adjustment to earnings and not other comprehensive income.
Our adoption of this accounting standard as of May 28, 2001 resulted in
the recognition of an asset related to our cash flow hedges of $2.1 million.
7. COMPREHENSIVE INCOME
Comprehensive income consists of net income plus all other changes in
equity from non-owner sources. Consolidated comprehensive income was $28.7
million and $14.1 million for the three months ended March 31, 2002 and 2001,
respectively. The amounts of deferred income tax benefit allocated to each
component of other comprehensive income (loss) during the three months ended
March 31, 2002 are included below.
<Table>
<Caption>
PRE-TAX TAX NET
LOSS BENEFIT AMOUNT
-------- --------- --------
(In thousands)
Accumulated other comprehensive income December 31, 2001 .................. $ 0 $ 0 $ 0
Cumulative foreign currency translation adjustment arising
during period .......................................................... (326) 127 (199)
-------- -------- --------
Accumulated other comprehensive income (loss), March 31, 2002 ............. $ (326) $ 127 $ (199)
======== ======== ========
</Table>
10
8. PLANT CLOSING COSTS
Plant Closing Costs -- As part of the purchase price allocation, Dean
Foods Company accrued costs to exit certain of our activities and operations, in
order to rationalize production and reduce costs and inefficiencies. Dean Foods
Company has implemented plans to close several plants and the Franklin Park
administrative offices. Dean Foods Company will continue to finalize and
implement its initial integration and rationalization plans throughout 2002, and
expects to refine its estimate of amounts in the purchase price allocations
associated with these plans.
The principal components of the plans include the following:
o Workforce reductions as a result of plant closings, plant
rationalizations and consolidation of administrative functions and
offices, resulting in an overall reduction of 557 plant and
administrative personnel. The costs incurred are charged against our
acquisition liabilities for these costs. As of March 31, 2002, 425
employees had not yet been terminated;
o Shutdown costs, including those costs that are necessary to clean and
prepare the plant facilities for closure; and
o Costs incurred after shutdown such as lease obligations or termination
costs, utilities and property taxes after shutdown of the plant or
administrative office.
9. SHIPPING AND HANDLING FEES
In September 2000, the Task Force reached a consensus on Issue No.
00-10, "Accounting for Shipping and Handling Fees and Costs," which became
effective for us in the fourth quarter of fiscal year 2001. This issue required
the disclosure of our accounting policies for shipping and handling costs and
their income statement classification. Previously, we classified shipping and
handling amounts billed to customers as revenue. However, certain costs incurred
related to shipping and handling were classified as a reduction of revenue. As a
result of our adoption of Issue No. 00-10 in the fourth quarter of fiscal 2001,
prior years' shipping and handling costs were reclassified from net sales to
cost of products sold and selling and distribution expenses. Those amounts
totaled $9.3 million for the three months ended March 31, 2001. This change did
not affect our reported net income. Shipping and handling costs in costs of
sales include the cost of shipping products to customers through third party
carriers, inventory warehouse costs and product loading and handling costs.
Shipping and handling costs in selling and distribution expense consist
primarily of route delivery costs for both company-owned delivery routes and
independent distributor routes, to the extent that such independent distributors
are paid a delivery fee. These shipping and handling costs that were recorded as
a component of selling and distribution expense were approximately $95.7 million
and $101.3 million during the three months ended March 31, 2002 and 2001.
10. COMMITMENT AND CONTINGENCIES
Guaranty of Dean Foods Company's Obligations Under Its Senior Credit
Facility -- Certain of Dean Foods Company's subsidiaries, including us, were
required, effective as of the merger date, to guarantee Dean Foods Company's
indebtedness under its new $2.7 billion credit facility. We pledged
substantially all of our assets (other than our real property and our ownership
interests in our subsidiaries) as security for the guaranty. The senior credit
facility provides Dean Foods Company with an $800.0 million revolving line of
credit, a Tranche a $900.0 million term loan and a Tranche B $1.0 billion term
loan. At March 31, 2002, there were outstanding borrowings of $1.903 billion
under this facility, in addition to $35.5 million of issued but undrawn letters
of credit.
Amounts outstanding under the revolver and the Tranche A term loan bear
interest at a rate per annum equal to one of the following rates, at Dean Foods
Company's option:
o a base rate equal to the higher of the Federal Funds rate plus 50
basis points or the prime rate, plus a margin that varies from 25
to 150 basis points, depending on Dean Foods Company's leverage
ratio (which is the ratio of defined indebtedness to EBITDA), or
o the London Interbank Offering Rate ("LIBOR") computed as LIBOR
divided by the product of one minus the Eurodollar Reserve
Percentage, plus a margin that varies from 150 to 275 basis
points, depending on Dean Foods Company's leverage ratio.
11
On April 30, 2002, Dean Foods Company entered into an amendment to its
credit facility pursuant to which the interest rate for amounts outstanding
under the Tranche B term loan was lowered by 50 basis points. Beginning May 1,
2002, borrowings under the Tranche B term loan will bear interest at a rate per
annum equal to one of the following rates, at Dean Foods Company's option:
o a base rate equal to the higher of the Federal Funds rate plus 50
basis points or the prime rate, plus a margin that varies from 75 to
150 basis points, depending on Dean Foods Company's leverage ratio,
or
o LIBOR divided by the product of one minus the Eurodollar Reserve
Percentage, plus a margin that varies from 200 to 275 basis points,
depending on Dean Foods Company's leverage ratio.
Prior to the effective date of the amendment, the margin for base rate
Tranche B borrowings was a range of 125 to 200 basis points and the margin for
Tranche B LIBOR borrowings was a range of 250 to 325 basis points.
The blended interest rate in effect on borrowings under the senior
credit facility, including the applicable interest rate margin, was 4.80% at
March 31, 2002. Dean Foods Company has interest rate swap agreements in place,
however, that hedge $925.0 million of its borrowings under this facility at an
average rate of 5.95%, plus the applicable interest rate margin. Interest is
payable quarterly or at the end of the applicable interest period.
Interest is payable quarterly or at the end of the applicable interest
period. Scheduled principal payments on the Tranche A $900.0 million term loan
are due in the following installments:
o $16.87 million quarterly from March 31, 2002 through December 31,
2002;
o $33.75 million quarterly from March 31, 2003 through December 31,
2004;
o $39.38 million quarterly from March 31, 2005 through December 31,
2005;
o $45.0 million quarterly from March 31, 2006 through December 31,
2006;
o $56.25 million quarterly from March 31, 2007 through June 30,
2007; and
o A final payment of $112.5 million on July 15, 2007.
Scheduled principal payments on the Tranche B $1.0 billion term loan
are due in the following installments:
o $1.25 million quarterly from March 31, 2002 through December 31,
2002;
o $2.5 million quarterly from March 31, 2003 through December 31,
2007;
o a payment of $472.5 million on March 31, 2008; and
o A final payment of $472.5 million on July 15, 2008.
No principal payments are due on the $800.0 million line of credit
until maturity on July 15, 2007.
12
The credit agreement requires mandatory principal prepayments in
certain circumstances including without limitation: (1) upon the occurrence of
certain asset dispositions not in the ordinary course of business, (2) upon the
occurrence of certain debt and equity issuances when Dean Foods Company's
leverage ratio is greater than 3.0 to 1.0, and (3) annually after December 31,
2002 when Dean Foods Company's leverage ratio is greater than 3.0 to 1.0 As of
March 31, 2002, Dean Foods Company's leverage ratio was 3.4 to 1.0.
The senior credit facility contains various financial and other
restrictive covenants and requirements that Dean Foods Company maintain
certain financial ratios, including a leverage ratio (computed as the ratio of
the aggregate outstanding principal amount of defined indebtedness to EBITDA)
and an interest coverage ratio (computed as the ratio of EBITDA to interest
expense). In addition, this facility requires Dean Foods Company maintain a
minimum level of net worth (as defined by the agreement).
Dean Foods Company's leverage ratio must be less than or equal to:
<Table>
<Caption>
PERIOD RATIO
- ------ ------------
12-21-01 through 12-31-02 .................. 4.25 to 1.00
01-01-03 through 12-31-03 .................. 4.00 to 1.00
01-01-04 through 12-31-04 .................. 3.75 to 1.00
01-01-05 and thereafter .................... 3.25 to 1.00
</Table>
Dean Foods Company's interest coverage ratio must be greater than or equal
to 3.00 to 1.00.
Dean Foods Company's consolidated net worth must be greater than or equal
to $1.2 billion, as increased each quarter by an amount equal to 50% of Dean
Foods Company's consolidated net income for the quarter, plus 75% of the amount
by which stockholders' equity is increased by certain equity issuances. As of
March 31, 2002, the minimum net worth requirement was $1.203 billion.
The facility also contains limitations for Dean Foods Company and its
subsidiaries (including us and our subsidiaries) on liens, investments, the
incurrence of additional indebtedness and acquisitions, and prohibits certain
dispositions of property and restricts certain payments, including dividends.
The agreement contains standard default triggers, including without
limitation: failure to maintain compliance with the financial and other
covenants contained in the agreement, default on certain of Dean Foods
Company's and its subsidiaries' other debt, a change in control and certain
other material adverse changes in Dean Foods Company's and its subsidiaries'
businesses. The agreement does not contain any default triggers based on Dean
Foods Company's debt rating.
Dean Foods Company is currently in compliance with all of the requirements
contained in its credit facility.
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 1 to 20 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.
13
Litigation, Investigations and Audits -- We and our subsidiaries are
parties, in the ordinary course of business, to certain other claims,
litigation, audits and investigations. We believe we have created adequate
reserves for any liability we may incur in connection with any such currently
pending or threatened matter. In our opinion, the settlement of any such
currently pending or threatened matter is not expected to have a material
adverse impact on our financial position, results of operations or cash flows.
11. BUSINESS AND GEOGRAPHIC INFORMATION AND MAJOR CUSTOMERS
We currently have two reportable segments: Dairy Group and Specialty Foods.
Our Dairy Group segment manufactures and distributes fluid milk, ice cream and
novelties, half-and-half and whipping cream, sour cream, cottage cheese and
yogurt, as well as fruit juices and other flavored drinks and bottled water.
Specialty Foods processes and markets pickles, powdered products such as
non-dairy coffee creamers, and sauces and puddings.
Prior to our acquisition by Dean Foods Company, we had an NRP segment. As a
result of the acquisition by Dean Foods Company, as discussed in Note 3, we no
longer have a reportable NRP segment under current accounting rules. Prior
periods have been restated to reflect NRP as a discontinued operation.
The accounting policies of the segments are the same as those described in
the summary of significant accounting policies set forth in Note 1 to our
Consolidated Financial Statements contained in our Transitional Report on Form
10-KT for the period from May 28, 2001 to December 31, 2001. We evaluate
performance based on operating profit not including non-recurring gains and
losses and foreign exchange gains and losses.
We do not allocate income taxes, management fees or unusual items to
segments. In addition, not all segments have significant non-cash items other
than depreciation and amortization in reported profit or loss. The amounts in
the following tables are the amounts obtained from reports used by our executive
management team for the three months ended March 31, 2002 and 2001:
<Table>
<Caption>
SUCCESSOR PREDECESSOR
--------------- ---------------
THREE MONTHS THREE MONTHS
ENDED MARCH 31, ENDED MARCH 31,
2002 2001
--------------- ---------------
(In thousands)
Net sales from external customers:
Dairy Group ..................................... $ 795,270 $ 808,417
Specialty Foods ................................. 161,215 182,724
----------- -----------
Total ........................................... $ 956,485 $ 991,141
=========== ===========
Operating income:
Dairy Group ..................................... $ 50,026 $ 32,398
Specialty Foods ................................. 19,887 15,526
Corporate/Other ................................. (9,456) (8,202)
----------- -----------
Total ........................................... $ 60,457 $ 39,722
=========== ===========
Assets:
Dairy Group ..................................... $ 2,148,834 $ 1,493,348
Specialty Foods ................................. 608,006 434,400
National Refrigerated Products .................. 193,752
Corporate/Other ................................. 164,808 166,856
----------- -----------
Total ........................................... $ 2,921,648 $ 2,288,356
=========== ===========
</Table>
Substantially all of our business is within the United States.
Intersegment sales are not material. We have no one customer within any segment
which represents greater than ten percent of our consolidated revenues.
14
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
We are a wholly-owned subsidiary of Dean Foods Company. Dean Foods
Company is the leading processor and distributor of fresh milk and other dairy
products in the United States, and a leader in the specialty foods industry. Our
operations consist of two segments: Dairy Group and Specialty Foods. Our Dairy
Group is part of the Dairy Group segment of Dean Foods Company and our Specialty
Foods segment comprises the entirety of Dean Foods Company's Specialty Foods
segment.
As permitted by General Instruction H to Form 10-Q, in lieu of
providing the information required by Item 7, we are providing only the
information required by General Instruction H(2)(a).
RESULTS OF OPERATIONS
The following table presents certain information concerning our results
of operations, including information presented as a percentage of net sales:
<Table>
<Caption>
SUCCESSOR PREDECESSOR
--------------------- -------------------------
THREE MONTHS ENDED THREE MONTHS ENDED
MARCH 31, MARCH 31,
2002 2001
--------------------- -------------------------
DOLLARS PERCENT DOLLARS PERCENT
--------- ------- --------- -------
(Dollars in thousands)
Net sales......................................... $ 956,485 100.0% $ 991,141 100.0%
Cost of sales..................................... 729,445 76.3 768,693 77.6
--------- ----- --------- -----
Gross profit...................................... 227,040 23.7 222,448 22.4
Operating expenses:
Selling and distribution...................... 134,009 14.0 142,838 14.4
General and administrative.................... 30,907 3.2 34,548 3.5
Amortization of intangibles................... 1,667 .2 5,340 .5
--------- ----- --------- -----
Total operating expenses................. 166,583 17.4 182,726 18.4
--------- ----- --------- -----
Total operating income................... $ 60,457 6.3% $ 39,722 4.0%
========= ===== ========= =====
</Table>
Three-Month Period Ended March 31, 2002 Compared to Three-Month Period
Ended March 31, 2001
Financial information for all periods has been restated to reflect the
results of our former NRP segment as a discontinued operation.
Net Sales - Net sales decreased 3.5% to $956.5 million during the
three-month period ended March 31, 2002 from $991.1 million in the three-month
period ended March 31, 2001. Dairy Group sales decreased 1.6% in the three-month
period ended March 31, 2002 to $795.3 million from $808.4 million in the
three-month period ended March 31, 2001. The decrease was primarily the result
of lower fluid milk and butterfat costs passed on to the customer through lower
prices. Specialty Foods' net sales decreased 11.8% in the three-month period
ended March 31, 2002 to $161.2 million from $182.7 million in the three month
period ended March 31, 2001 primarily due to softness in branded pickle sales
and overall softness in the food services industry.
15
Operating Costs and Expenses - Our operating expense ratio was 17.4% in
the three-month period ended March 31, 2002 compared to 18.4% in the
three-month period ended March 31, 2001. These ratios were affected by
o the implementation of FAS No. 142 on January 1, 2002, which eliminated
the amortization of goodwill and certain other intangible assets, and
o lower depreciation expense as a result of revaluing assets in
conjunction with our acquisition by Dean Foods Company.
The operating expense ratio in the Dairy Group was 17.8% in the
three-month period ended March 31, 2002 compared to 18.3% in the three-month
period ended March 31, 2001. The decrease is due to lower depreciation expense
from revaluing fixed assets as part of our acquisition by Dean Foods Company and
a reduction of expenses as a result of streamlining operations under new
regional management. The operating expense ratio in the Specialty Foods
segment, was 11.7% in the three-month period ended March 31, 2002 compared to
14.5% in the three-month period ended March 31, 2001.
Operating Income - Operating income in the three-month period ended
March 31, 2002 was $60.5 million, an increase of 52.2% from the three-month
period ended March 31, 2001 operating income of $39.7 million. Operating margins
in the Dairy Group increased to 6.3% in the three-month period ended March 31,
2002 from 4.0% in the three-month period ended March 31, 2001. Operating margins
in Specialty Foods increased to 12.3% in the three-month period ended March 31,
2002 from 8.5% in the three-month period ended March 31, 2001. Corporate
expenses decreased $7.5 million in the three-month period ended March 31, 2002
to $18.9 million from $26.4 million in the three-month period ended March 31,
2001. The decrease is primarily the result of the reduction of corporate staff
and shifting of corporate responsibilities to Dean Foods Company as a result of
our acquisition by Dean Foods Company.
Other (Income) Expense - Total other expense in the three month period
ended March 31, 2002 decreased by $4.8 million. For the three-month period ended
March 31, 2002 interest expense, net of interest income, decreased $4.1 million
to $14.1 million primarily due to lower short-term interest rates and lower debt
as a result of the pay-off of our former revolving line of credit by Dean Foods
Company upon completion of our acquisition by Dean Foods Company.
Income Taxes - Our March 31, 2002 effective tax rate was 38.9% compared
with 38.3% at March 31, 2001.
16
PART II -- OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
None
(b) Reports on Form 8-K
o Form 8-K filed January 7, 2002 in connection with our
acquisition by Dean Foods Company
o Form 8-KA filed January 15, 2002 in connection with our
acquisition by Dean Foods Company
o Form 8-KA filed March 6, 2002 in connection with our
acquisition by Dean Foods Company
17
SIGNATURES
Pursuant to the requirement of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
DEAN HOLDING COMPANY
/s/ Barry A. Fromberg
---------------------------------------------
Barry A. Fromberg
Executive Vice President,
Chief Financial Officer (Principal Accounting
Officer)
Date: May 15, 2002
18