================================================================================ 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 JUNE 30, 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...................... 2 Item 2 -- Management's Discussion and Analysis of Financial Condition and Results of Operations.......................................... 13 </Table> 1 PART I -- FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS DEAN HOLDING COMPANY CONDENSED CONSOLIDATED BALANCE SHEETS (Dollars in thousands) <Table> <Caption> JUNE 30, DECEMBER 31, 2002 2001 ------------ ------------ (UNAUDITED) Assets Current assets: Cash and cash equivalents ............................. $ 21,306 $ 15,920 Receivable from parent ................................ 104,528 29,000 Accounts receivable, net .............................. 272,839 292,926 Inventories ........................................... 216,112 242,977 Deferred income taxes ................................. 70,741 88,500 Prepaid expenses and other current assets ............. 38,655 30,624 ------------ ------------ Total current assets ............................. 724,181 699,947 Property, plant and equipment, net ......................... 599,373 624,149 Goodwill ................................................... 1,377,221 1,358,270 Identifiable intangibles and other assets .................. 255,188 258,063 ------------ ------------ Total ............................................ $ 2,955,963 $ 2,940,429 ============ ============ Liabilities and Stockholder's Equity Current liabilities: Accounts payable and accrued expenses ................. $ 419,053 $ 491,526 Income taxes payable .................................. 70,073 31,307 Current portion of long-term debt ..................... 1,586 1,493 ------------ ------------ Total current liabilities ........................ 490,712 524,326 Long-term debt ............................................. 798,633 814,500 Other long-term liabilities ................................ 154,253 151,635 Deferred income taxes ...................................... 87,595 123,613 Commitments and contingencies (Note 10) Stockholder's equity: Common stock, 1,000 shares issued and outstanding...... Additional paid-in capital ............................ 1,356,816 1,326,355 Retained earnings ..................................... 67,490 Accumulated other comprehensive income ................ 464 ------------ ------------ Total stockholder's equity ....................... 1,424,770 1,326,355 ------------ ------------ Total ............................................ $ 2,955,963 $ 2,940,429 ============ ============ </Table> See notes to condensed consolidated financial statements. 2 DEAN HOLDING COMPANY CONDENSED CONSOLIDATED STATEMENTS OF INCOME (In thousands) <Table> <Caption> SUCCESSOR PREDECESSOR SUCCESSOR PREDECESSOR ------------ ------------ ------------ ------------ THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30, 2002 2001 2002 2001 ------------ ------------ ------------ ------------ (unaudited) (unaudited) Net sales...................................................... $ 994,367 $ 1,049,880 $ 1,950,852 $ 2,041,021 Cost of sales.................................................. 745,951 824,299 1,475,396 1,592,992 ------------ ------------ ------------ ------------ Gross profit................................................... 248,416 225,581 475,456 448,029 Operating costs and expenses: Selling and distribution................................ 132,082 146,360 266,091 289,198 General and administrative.............................. 38,240 58,355 69,147 92,903 Amortization of intangibles............................. 1,351 6,011 3,018 11,351 ------------ ------------ ------------ ------------ Total operating costs and expenses................... 171,673 210,726 338,256 393,452 ------------ ------------ ------------ ------------ Operating income............................................... 76,743 14,855 137,200 54,577 Other (income) expense: Interest expense, net................................... 14,237 17,124 28,317 35,394 Other (income) expense, net............................. 77 (440) (808) (703) ------------ ------------ ------------ ------------ Total other (income) expense......................... 14,314 16,684 27,509 34,691 ------------ ------------ ------------ ------------ Income (loss) from continuing operations before income taxes... 62,429 (1,829) 109,691 19,886 Income tax (benefit) expense................................. 23,796 (587) 42,201 7,719 ------------ ------------ ------------ ------------ Income (loss) from continuing operations....................... 38,633 (1,242) 67,490 12,167 Income from discontinued operations, net of tax................ 2,339 3,141 ------------ ------------ ------------ ------------ Net income..................................................... $ 38,633 $ 1,097 $ 67,490 $ 15,308 ============ ============ ============ ============ </Table> See notes to condensed consolidated financial statements. 3 DEAN HOLDING COMPANY CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Dollars in thousands) <Table> <Caption> SUCCESSOR PREDECESSOR SIX MONTHS SIX MONTHS ENDED JUNE 30, ENDED JUNE 30, 2002 2001 -------------- -------------- (UNAUDITED) Cash flows from operating activities: Income from continuing operations ...................................................... $ 67,490 $ 12,167 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization ....................................................... 36,682 48,916 Gain on disposition of assets ....................................................... 10 238 Deferred income taxes ............................................................... (1,485) 16,439 Merger related costs ................................................................ 22,151 Other, net .......................................................................... (786) (2,412) Changes in operating assets and liabilities, net of acquisitions: Accounts receivable ............................................................... 16,023 (5,191) Inventories ....................................................................... 15,718 (3,202) Prepaid expenses and other assets ................................................. 14,444 (1,835) Accounts payable, accrued expenses and other liabilities .......................... (56,684) (2,668) Income taxes ...................................................................... 38,766 (14,298) -------------- -------------- Net cash provided by operating activities ...................................... 130,178 70,305 Cash flows from investing activities: Capital expenditures ................................................................... (18,903) (39,977) Proceeds from disposition of property, plant and equipment ............................. 198 2,036 Capitalized information system costs ................................................... (1,160) Cash outflows for acquisitions ......................................................... (17,156) Net proceeds from divestitures ......................................................... 2,561 -------------- -------------- Net cash used in investing activities .......................................... (33,300) (39,101) Cash flows from financing activities: Repayment of debt ...................................................................... (12,770) (3,389) Borrowing under revolving credit agreement, net ........................................ (36,382) Issuance of common stock, net of expenses .............................................. 5,264 Issuance of treasury stock ............................................................. 82 Cash dividends paid .................................................................... (16,274) Net transfer to parent ................................................................. (78,722) -------------- -------------- Net cash used in financing activities .......................................... (91,492) (50,699) Net cash used in discontinued operations ................................................. (19,154) -------------- -------------- Increase (decrease) in cash and cash equivalents ......................................... 5,386 (38,649) Cash and cash equivalents, beginning of period ........................................... 15,920 82,477 -------------- -------------- Cash and cash equivalents, end of period ................................................. $ 21,306 $ 43,828 ============== ============== </Table> See notes to condensed consolidated financial statements. 4 DEAN HOLDING COMPANY NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 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 June 30, 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, has 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 June 30, 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" or "EITF") 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 on 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 on 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 and six months ended June 30, 2001, $11.2 million and $24.1 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 combinations completed after June 30, 2001 are required to be accounted for by the purchase method. 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 a transitional goodwill impairment assessment and annual impairment tests thereafter. As a result of the acquisition by Dean Foods Company, 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. Therefore, no impairment of goodwill was indicated by the transitional goodwill impairment assessment. 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 the associated legal obligation for the liability 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 and amortized over the useful life of the 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. 5 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. In June 2002, FASB issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities." This statement addresses financial accounting and reporting for costs associated with exit or disposal activities and nullifies EITF Issue No. 94-3, "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring)." The statement requires that a liability for a cost associated with an exit or disposal activity be recognized when the liability is incurred, and is effective for exit or disposal activities that are initiated after December 31, 2002. We are currently evaluating the impact of adopting this pronouncement 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 0.858 (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 preliminary purchase accounting adjustments, including goodwill, have been "pushed down" and are reflected in our December 31, 2001 and June 30, 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. We are a wholly-owned subsidiary of Dean Foods Company. They provide us with management support, in return for a management fee. The management fee, which first began to be charged in the second quarter of 2002, is based on budgeted annual expenses for Dean Foods Company's corporate headquarters, which is then allocated among the segments of Dean Foods Company. Management fees paid in the second quarter amounted to $9.0 million. In addition, our cash is available for use, and is regularly "swept," by Dean Foods Company at its discretion. 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. 6 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's 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 June 30, 2002. Dean SoCal's operating results are included in our consolidated financial statements at June 30, 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. INVENTORIES <Table> <Caption> AT JUNE 30, AT DECEMBER 31, 2002 2001 --------------- --------------- (IN THOUSANDS) Raw materials and supplies ... $ 64,015 $ 65,863 Finished goods ............... 152,097 177,114 --------------- --------------- Total .............. $ 216,112 $ 242,977 =============== =============== </Table> Approximately $72.4 million and $131.7 million of our inventory was accounted for under the last-in, first-out (LIFO) method of accounting at June 30, 2002 and December 31, 2001, respectively. There was no material excess of current cost over the stated value of last-in, first-out inventories at either date. 5. 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 and six months ended June 30, 2002 and 2001, eliminating goodwill amortization and amortizing recognized intangible assets over their useful lives. <Table> <Caption> THREE MONTHS SIX MONTHS ENDED JUNE 30, ENDED JUNE 30, ------------------------- ------------------------- 2002 2001 2002 2001 ---------- ---------- ---------- ---------- (IN THOUSANDS) Reported net earnings .................. $ 38,633 $ 1,097 $ 67,490 $ 15,308 Goodwill amortization, net of tax ...... 2,770 4,707 Trademark amortization, net of tax ..... 908 1,543 ---------- ---------- ---------- ---------- Adjusted net earnings .................. $ 38,633 $ 4,775 $ 67,490 $ 21,558 ========== ========== ========== ========== </Table> The changes in the carrying amount of goodwill for the six months ended June 30, 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 ... 20,301 (1,350) 18,951 ----------- ----------- ----------- Balance at June 30, 2002 .......... $ 1,088,571 288,650 $ 1,377,221 =========== =========== =========== </Table> 7 The gross carrying amount and accumulated amortization of our intangible assets other than goodwill as of June 30, 2002 and December 31, 2001 are as follows: <Table> <Caption> JUNE 30, 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 ................................ $193,200 $ $193,200 $196,178 $ $196,178 Intangible assets with finite lives: Customer-related .......................... 28,200 (1,915) 26,285 30,500 30,500 -------- ------------ -------- -------- ------------ -------- Total other intangibles ..................... $221,400 $ (1,915) $219,485 $226,678 $ $226,678 ======== ============ ======== ======== ============ ======== </Table> Amortization expense on intangible assets, excluding goodwill, for the three months and six months ended June 30, 2002 and 2001 was $0.5 million and $1.9 million and $1.5 million and $2.5 million, respectively. Estimated aggregate intangible asset amortization expense for the next five years is as follows: <Table> 2003.................. $3.5 million 2004.................. $2.7 million 2005.................. $1.6 million 2006.................. $0.9 million 2007.................. $0.4 million </Table> 6. LONG-TERM DEBT <Table> <Caption> AT JUNE 30, 2002 AT DECEMBER 31, 2001 -------------------------------- -------------------------------- Amount Interest Amount Interest Outstanding Rate Outstanding Rate -------------- -------------- -------------- -------------- $250 million senior notes, maturing in 2007 ........... $ 250,535 8.150% $ 250,576 8.150% $200 million senior notes, maturing in 2009 ........... 183,476 6.625 187,357 6.625 $150 million senior notes, maturing in 2017 ........... 124,954 6.900 124,579 6.900 $100 million senior notes, maturing in 2005 ........... 96,241 6.750 95,699 6.750 Receivables-backed loan ............................... 117,048 2.370 128,855 2.290 Industrial development revenue bonds .................. 21,650 1.35 - 1.45 21,950 1.70 - 6.63 Capitalized lease obligations and other................ 6,315 6,977 ---------- ---------- 800,219 815,993 Less current portion .................................. (1,586) (1,493) ---------- ---------- Total ....................................... $ 798,633 $ 814,500 ========== ========== </Table> Senior Notes -- We had $700.0 million of senior notes outstanding at June 30, 2002, all of which was outstanding prior to 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. 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. 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 $0.3 million in 2002, increasing to $0.9 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. Letters of Credit -- At June 30, 2002 46.8 million of letters of credit were outstanding. These letters of credit were required by various utilities and government entities for performance and insurance guarantees. 8 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 $39.3 million and $68.0 million and $1.2 million and $15.3 million for the three months and six months ended June 30, 2002 and 2001, respectively. The amounts of deferred income tax (expense) benefit allocated to each component of other comprehensive income (loss) during the six months ended June 30, 2002 are included below. <Table> <Caption> TAX PRE-TAX BENEFIT NET INCOME (LOSS) (EXPENSE) 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) Accumulated foreign currency translation adjustment arising during period ............................................................... 1,071 (408) 663 --------- --------- --------- Accumulated other comprehensive income (loss), June 30, 2002 ......... $ 745 $ (281) $ 464 ========= ========= ========= </Table> 8. 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 a plan to close several plants, both in our Dairy Group (2 plants) and in our Specialty Foods segment (2 plants), and our old administrative offices. Dean Foods Company will continue to finalize and implement its initial integration and rationalization plan throughout 2002, and expects to refine its estimate of amounts in the purchase price allocations associated with this plan. The principal components of the plan include the following: o Workforce reductions as a result of plant closings, plant rationalizations and consolidation of administrative functions and offices. To date, Dean Foods Company has identified 677 plant and administrative personnel for termination pursuant to the plan. The costs incurred are charged against our acquisition liabilities for these costs. As of June 30, 2002, 183 employees had not yet been terminated; o Shutdown costs, including those costs that are necessary to clean and prepare the plant facilities for resale or 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 9 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 $27.6 million and $36.9 million for the three months and six months ended June 30, 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 $93.1 million and $188.8 million during the three months and six months ended June 30, 2002, respectively; and $100.4 million and $201.7 million during the three months and six months ended June 30, 2001, respectively. 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 June 30, 2002, there were outstanding borrowings of $1.914 billion under this facility, in addition to $56.6 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. 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 to the following, 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 4.11% at June 30, 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; 10 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 revolving line of credit until maturity on July 15, 2007. The credit agreement also 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) beginning in 2003, annually when Dean Foods Company's leverage ratio is greater than 3.0 to 1.0 As of June 30, 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 (beginning with the quarter ended March 31, 2002) 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 June 30, 2002, the minimum net worth requirement was $1.239 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 11 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. 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 an NRP segment. 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. <Table> <Caption> SUCCESSOR PREDECESSOR SUCCESSOR PREDECESSOR ------------ ------------ ------------ ------------ THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30, 2002 2001 2002 2001 ------------ ------------ ------------ ------------ (In thousands) Net sales from external customers: Dairy Group ....................... $ 817,003 $ 861,481 $ 1,612,274 $ 1,669,898 Specialty Foods ................... 177,364 188,399 338,578 371,123 ------------ ------------ ------------ ------------ Total ............................. $ 994,367 $ 1,049,880 $ 1,950,852 $ 2,041,021 ============ ============ ============ ============ Operating income: Dairy Group ....................... $ 67,984 $ 34,394 $ 123,970 $ 66,792 Specialty Foods ................... 25,367 13,122 46,154 28,648 Corporate/Other ................... (16,608) (32,661) (32,924) (40,863) ------------ ------------ ------------ ------------ Total ............................. $ 76,743 $ 14,855 $ 137,200 $ 54,577 ============ ============ ============ ============ </Table> <Table> <Caption> SUCCESSOR PREDECESSOR 2002 2001 ------------ ------------ Assets at June 30: Dairy Group ....................... $ 2,149,037 $ 1,527,367 Specialty Foods ................... 598,163 427,976 National Refrigerated Products .... 208,464 Corporate/Other ................... 208,763 136,737 ------------ ------------ Total ............................. $ 2,955,963 $ 2,300,544 ============ ============ </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. 12 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 SUCCESSOR PREDECESSOR -------------------- -------------------- -------------------- -------------------- THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30, 2002 2001 2002 2001 -------------------- -------------------- -------------------- -------------------- DOLLARS PERCENT DOLLARS PERCENT DOLLARS PERCENT DOLLARS PERCENT ----------- ------- ----------- ------- ----------- ------- ----------- ------- (Dollars in thousands) (Dollars in thousands) Net sales .............................. $ 994,367 100.0% $ 1,049,880 100.0% $ 1,950,852 100.0% $ 2,041,021 100.0% Cost of sales .......................... 745,951 75.0 824,299 78.5 1,475,396 75.6 1,592,992 78.0 ----------- ------- ----------- ------- ----------- ------- ----------- ------- Gross profit ........................... 248,416 25.0 225,581 21.5 475,456 24.4 448,029 22.0 Operating expenses: Selling and distribution ............. 132,082 13.3 146,360 13.9 266,091 13.6 289,198 14.2 General and administrative ........... 38,240 3.9 58,355 5.6 69,147 3.6 92,903 4.6 Amortization of intangibles .......... 1,351 .1 6,011 .6 3,018 .2 11,351 .5 ----------- ------- ----------- ------- ----------- ------- ----------- ------- Total operating expenses ..... 171,673 17.3 210,726 20.1 338,256 17.4 393,452 19.3 ----------- ------- ----------- ------- ----------- ------- ----------- ------- Total operating income ....... $ 76,743 7.7% $ 14,855 1.4% $ 137,200 7.0% $ 54,577 2.7% =========== ======= =========== ======= =========== ======= =========== ======= </Table> Financial information for all periods has been restated to reflect the results of our former NRP segment as a discontinued operation. THREE MONTH PERIOD FROM APRIL 1, 2002 TO JUNE 30, 2002 COMPARED TO THREE MONTH PERIOD FROM APRIL 1, 2001 TO JUNE 30, 2001 Net Sales -- Net sales decreased 5.3% to $994.4 million during the three month period ended June 30, 2002 from $1.050 billion in the three month period ended June 30, 2001. Dairy Group sales decreased 5.2% in the three month period ended June 30, 2002 to $817.0 million from $861.5 million in the three month period ended June 30, 2001. The decrease is due primarily to a decrease in raw milk costs compared to the prior year three month period; and also due to lower ice cream volumes. Specialty Foods' net sales decreased 5.9% in the three month period ended June 30, 2002 to $177.4 million from $188.4 million in the three month period ended June 30, 2002 primarily due to softness in branded pickle sales and overall softness in the food services industry. Cost of Sales -- Our cost of sales ratio was 75.0% for the three months ended June 30, 2002 compared to 78.5% in the same period last year. The cost of sales ratio for the Dairy Group decreased to 75.2% in the three months ended June 30, 2002 from 78.3% in the same period 2001 due primarily to lower raw milk costs. The cost of sales ratio for Specialty Foods' was 74.0% for the three months ended June 30, 2002 compared to 79.3% in the same period last year, due primarily to lower commodity prices and production synergies as the result of the closing and shifting of production lines in the current quarter. Operating Costs and Expenses -- Our operating expense ratio was 17.3% in the three month period ended June 30, 2002 compared to 20.1% in the three month period ended June 30, 2001. These ratios were affected by: o the implementation of SFAS No. 142 on January 1, 2002, which eliminated the amortization of goodwill and certain other intangible assets, and o realized synergies from our acquisition by Dean Foods Company. The operating expense ratio in the Dairy Group was 16.4% in the three month period ended June 30, 2002 compared to 17.7% in the three month period ended June 30, 2001. The decrease is due to realized synergies from our acquisition by Dean Foods Company, including a reduction of expenses as a result of streamlining operations under new regional management. The operating 13 expense ratio in the Specialty Foods segment was 11.7% in the three month period ended June 30, 2002 compared to 13.7% in the three month period ended June 30, 2001. The decrease is due primarily to realized synergies as a result of the acquisition by Dean Foods Company which included closing and realigning certain production facilities. Operating Income -- Operating income in the three month period ended June 30, 2002 was $76.7 million, an increase of $61.8 million from the three month period ended June 30, 2001 operating income of $14.9 million. Corporate expenses decreased $16.1 million in the three month period ended June 30, 2002 to $16.6 million from $32.7 million in the three month period ended June 30, 2001, primarily because the prior year amount includes $22.2 million for merger-related costs. Excluding those costs, corporate expenses increased by $6.1 million for the three months ended June 30, 2002, which is primarily the result of the management fee charged to us by Dean Foods Company. Without this fee, corporate expenses decreased by $2.9 million, as a 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. Operating margins in the Dairy Group increased to 8.3% in the three month period ended June 30, 2002 from 4.0% in the three month period ended June 30, 2001. This improvement was primarily due to lower raw milk costs during the 2002 period, and to realized synergies from our acquisition by Dean Foods Company. Operating margins in Specialty Foods increased to 14.3% in the three month period ended June 30, 2002 from 7.0% in the three month period ended June 30, 2001, due primarily to realized merger synergies. Other (Income) Expense -- Total other expense in the three month period ended June 30, 2002 decreased by $2.4 million from the same period last year. For the three month period ended June 30, 2002 interest expense, net of interest income, decreased $2.9 million to $14.2 million primarily due to 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 -- Income tax expense (benefit) was recorded at an effective rate of 38.1% for the three months ended June 30, 2002 compared to 32.1% for the same period last year. The lower tax rate in 2001 is the result of adjusting taxes to the expected annual tax rate. SIX MONTH PERIOD ENDED JUNE 30, 2002 COMPARED TO SIX MONTH PERIOD ENDED JUNE 30, 2001 Net Sales -- Net sales decreased 4.4% to $1.951 billion during the six month period ended June 30, 2002 from $2.041 billion in the six month period ended June 30, 2001. Dairy Group sales decreased 3.5% in the six month period ended June 30, 2002 to $1.612 billion from $1.670 billion in the six month period ended June 30, 2001. The decrease was due to lower raw milk costs in 2002, and to lower ice cream volumes. Specialty Foods' net sales decreased 8.8% in the six month period ended June 30, 2002 to $338.6 million from $371.1 million in the six month period ended June 30, 2002 primarily due to softness in branded pickle sales and overall softness in the food services industry. Cost of Sales -- Our cost of sales ratio was 75.6% for the six months ended June 30, 2002 compared to 78.0% in the same period last year. The cost of sales ratio in the Dairy Group decreased to 75.6% for the six month period ended June 30, 2002 from 78.0% in the same period 2001 due primarily to lower raw milk costs. The cost of sales ratio for Specialty Foods was 74.9% in the six months ended June 30, 2002 compared to 78.2% in the same period last year due primarily to lower commodity prices and production synergies as the result of the closing and shifting of production lines in the current year. Operating Costs and Expenses -- Our operating expense ratio was 17.3% in the six month period ended June 30, 2002 compared to 19.3% in the six month period ended June 30, 2001. These ratios were affected by: o the implementation of SFAS No. 142 on January 1, 2002, which eliminated the amortization of goodwill and certain other intangible assets, and o realized synergies from our acquisition by Dean Foods Company. The operating expense ratio in the Dairy Group was 16.8% in the six month period ended June 30, 2002 compared to 18.0% in the six month period ended June 30, 2001. The decrease is due primarily to realized synergies from our acquisition by Dean Foods Company including a reduction of expenses as a result of streamlining operations under new regional management. The operating expense ratio in the Specialty Foods segment, was 11.5% in the six month period ended June 30, 2002 compared to 14.1% in the six month period ended June 30, 2001 due to favorable variances in raw materials and synergies recognized from our acquisition by Dean Foods Company. Operating Income -- Operating income in the six month period ended June 30, 2002 was $137.2 million, an increase of 151.4% from the six month period ended June 30, 2001 operating income of $54.6 million. Corporate expenses decreased $8.0 million in the six month period ended June 30, 2002 to $32.9 million from $40.9 million in the six month period ended June 30, 2001, primarily because the prior year amount includes $22.2 million for merger-related costs. Excluding those costs, corporate expenses increased by $14.2 million for the six months ended June 30, 2002, which is primarily the result of the management fee charged to us by Dean Foods Company. Without the management fee, corporate expenses decreased by $5.1 million, primarily as a 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. Operating margins in the Dairy Group increased to 7.7% in the six month period ended June 30, 2002 from 4.0% in the six month period ended June 30, 2001. This improvement was primarily due to lower raw milk costs during the 2002 period, and to realized synergies from our acquisition by Dean Foods Company. Operating margins in Specialty Foods increased to 13.6% in the six month period ended June 30, 2002 from 7.7% in the six month period ended June 30, 2001, due primarily to realized merger synergies. Other (Income) Expense -- Total other expense in the six month period ended June 30, 2002 decreased by $7.2 million. For the six month period ended June 30, 2002 interest expense, net of interest income, decreased $7.1 million to $28.3 million primarily due to the pay-off of our former revolving line of credit by Dean Foods Company upon completion of our acquisition by Dean Foods Company. 14 Income Taxes -- Income tax expense was recorded at an effective rate of 38.5% for the six months ended June 30, 2002 compared to 38.8% for the same period last year. 15 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: August 14, 2002 16