- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTIONS 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
<Table>
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2003
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 1-08262
</Table>
DEAN HOLDING COMPANY
(Exact name of Registrant as specified in its charter)
(DEAN FOODS LOGO)
------------------
<Table>
DELAWARE 75-2932967
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
</Table>
2515 MCKINNEY AVENUE, SUITE 1200
DALLAS, TEXAS 75201
(214) 303-3400
(Address, including zip code, and telephone number, including
area code, of 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 [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2). Yes [ ] No [X]
The registrant meets the conditions specified in General Instruction H(1)(a)
and (b) of 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 -- Managements Discussion and Analysis of
Financial Condition and Results of Operations..... 14
Item 4 -- Controls and Procedures................. 16
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,
2003 2002
----------- ------------
(unaudited)
Assets
Current assets:
Cash and cash equivalents.............................. $ 8,948 $ 27,831
Receivables, net....................................... 224,700 247,432
Inventories............................................ 217,495 218,124
Deferred income taxes.................................. 92,239 93,018
Prepaid expenses and other current assets.............. 24,705 20,651
---------- ----------
Total current assets.............................. 568,087 607,056
Property, plant and equipment............................... 611,776 615,573
Goodwill.................................................... 1,425,864 1,425,398
Identifiable intangible and other assets.................... 225,813 227,796
---------- ----------
Total............................................. $2,831,540 $2,875,823
========== ==========
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable and accrued expenses.................. $ 367,129 $ 406,798
Income taxes payable................................... 36,206 58,987
Current portion of long-term debt...................... 307 307
---------- ----------
Total current liabilities......................... 403,642 466,092
Long-term debt.............................................. 762,874 727,873
Other long-term liabilities................................. 145,230 147,503
Deferred income taxes....................................... 173,983 166,302
Commitments and contingencies (Note 9)
Stockholders' equity:
Common stock, 1,000 shares issued and outstanding
Additional paid-in capital............................. 1,356,816 1,356,816
Retained earnings...................................... 186,105 149,643
Receivable from parent................................. (196,879) (138,331)
Accumulated other comprehensive loss................... (231) (75)
---------- ----------
Total stockholders' equity........................ 1,345,811 1,368,053
---------- ----------
Total............................................. $2,831,540 $2,875,823
========== ==========
</Table>
See notes to Condensed Consolidated Financial Statements.
-3-
DEAN HOLDING COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(In thousands)
<Table>
<Caption>
Three Months Ended
March 31,
--------------------
2003 2002
-------- --------
(unaudited)
Net sales................................................... $919,063 $956,485
Cost of sales............................................... 684,098 729,445
-------- --------
Gross profit................................................ 234,965 227,040
Operating costs and expenses:
Selling and distribution............................... 128,270 134,009
General and administrative............................. 33,070 30,907
Amortization of intangibles............................ 1,175 1,667
-------- --------
Total operating costs and expenses................ 162,515 166,583
-------- --------
Operating income............................................ 72,450 60,457
Other (income) expense:
Interest expense, net.................................. 13,570 14,080
Other (income) expense, net............................ (283) (885)
-------- --------
Total other (income) expense...................... 13,287 13,195
-------- --------
Income before income taxes.................................. 59,163 47,262
Income taxes................................................ 22,701 18,405
-------- --------
Net income.................................................. $ 36,462 $ 28,857
======== ========
</Table>
See notes to Condensed Consolidated Financial Statements.
-4-
DEAN HOLDING COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<Table>
<Caption>
Three Months Ended
March 31,
--------------------
2003 2002
-------- --------
(unaudited)
Cash flows from operating activities:
Net Income................................................ $ 36,462 $ 28,857
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization.......................... 18,206 19,501
(Gain) Loss on disposition of assets................... 2,028 (11)
Deferred income taxes.................................. 8,460 (717)
Other, net............................................. (156) 22
Changes in operating assets and liabilities, net of
acquisitions:
Accounts receivable.................................. 22,328 (2,324)
Inventories.......................................... 684 8,389
Prepaid expenses and other assets.................... (3,191) (745)
Accounts payable and accrued expenses and other
liabilities......................................... (41,942) (11,579)
Income taxes......................................... (22,781) 5,896
-------- --------
Net cash provided by operating activities......... 20,098 47,289
Cash flows from investing activities:
Capital expenditures...................................... (15,281) (7,785)
Proceeds from disposition of property, plant and
equipment.............................................. 1,478 24
Cash outflows for acquisitions............................ (637) (15,901)
Net proceeds from divestitures............................ 2,561
Other..................................................... 502
-------- --------
Net cash used in investing activities............. (14,440) (20,599)
Cash flows from financing activities:
Proceeds from issuance of debt............................ 34,102
Repayment of debt......................................... (29,242)
Net transfer to parent.................................... (58,643) (11,361)
-------- --------
Net cash used in financing activities............. (24,541) (40,603)
-------- --------
Decrease in cash and cash equivalents....................... (18,883) (13,913)
Cash and cash equivalents, beginning of period.............. 27,831 15,920
-------- --------
Cash and cash equivalents, end of period.................... $ 8,948 $ 2,007
======== ========
</Table>
See notes to Condensed Consolidated Financial Statements.
-5-
DEAN HOLDING COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2003
(unaudited)
1. GENERAL
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-K for the year
ended December 31, 2002. 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
reclassifications have been made to conform the prior year's Consolidated
Financial Statements to current year classifications. Certain information and
footnote disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been omitted. The
Condensed Consolidated Financial Statements contained in this report should be
read in conjunction with our 2002 Consolidated Financial Statements contained in
our Annual Report on Form 10-K as filed with the Securities and Exchange
Commission on March 27, 2003.
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 are a wholly-owned subsidiary of Dean Foods Company. Dean Foods Company
provides us with management support in return for a management fee. The
management fee is based on budgeted annual expenses for Dean Foods Company's
corporate headquarters, which is then allocated among the segments of Dean Foods
Company. We paid management fees of $9.3 million for the three-month period
ended March 31, 2003. Our cash is available for use, and is regularly
transferred to Dean Foods Company at its discretion. Cash that has been
transferred to Dean Foods Company is included on our balance sheet as
"Receivable from parent."
Recently Adopted Accounting Pronouncements -- In June 2001, Financial
Accounting Standards Board ("FASB") issued Statement of Financial Accounting
Standards ("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
became effective for us January 1, 2003. The adoption of this pronouncement did
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. Adoption of this standard requires us to reclassify extraordinary
losses previously reported from the early extinguishment of debt as a component
of "other expense."
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 Emerging Issues Task Force ("EITF") Issue No. 94-3, "Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit an
Activity (including Certain Costs Incurred in 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
-6-
disposal activities that are initiated after December 31, 2002. Our adoption of
this standard will change the timing of the recognition of certain charges
associated with exit and disposal activities.
In November 2002, FASB issued FASB Interpretation ("FIN") No. 45,
"Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others." FIN No. 45 clarifies the
requirements of SFAS No. 5 "Accounting for Contingencies," relating to the
guarantor's accounting for and disclosures of certain guarantees issued. FIN No.
45 requires disclosure of guarantees. It also requires liability recognition for
the fair value of guarantees made after December 31, 2002. We adopted the
liability recognition requirements of FIN No. 45 effective January 1, 2003. The
adoption of this pronouncement did not have a material effect on our
Consolidated Financial Statements.
In January 2003, FASB issued FIN No. 46, "Consolidation of Variable
Interest Entities." FIN No. 46 clarifies the application of Accounting Research
Bulletin No. 51, "Consolidated Financial Statements," to certain entities in
which equity investors do not have the characteristics of a controlling
financial interest or in which equity investors do not bear the residual
economic risks. The interpretation applies to variable interest entities
("VIEs") created after January 31, 2003 and to VIEs in which an enterprise
obtains an interest after that date. It applies in the fiscal or interim period
beginning after June 15, 2003, to VIEs in which an enterprise holds a variable
interest that was acquired before February 1, 2003. We currently utilize a
special purpose limited liability entity to facilitate our receivable-backed
loan. Since its formation, this entity has been consolidated in our financial
statements for financial reporting purposes. Therefore, FIN No. 46 will have no
impact on our Consolidated Financial Statements.
2. INVENTORIES
<Table>
<Caption>
March 31, December 31,
2003 2002
--------- ------------
(In thousands)
Raw materials and supplies.................................. $ 70,545 $ 68,570
Finished goods.............................................. 146,950 149,554
-------- --------
Total..................................................... $217,495 $218,124
======== ========
</Table>
Approximately $72.2 million and $97.3 million of our inventory was
accounted for under the last-in, first-out (LIFO) method of accounting at March
31, 2003 and December 31, 2002, respectively. There was no material excess of
current cost over the stated value of LIFO inventories at either date.
3. INTANGIBLE ASSETS
The changes in the carrying amount of goodwill for the three months ended
March 31, 2003 are as follows:
<Table>
<Caption>
Specialty
Dairy Group Foods Total
----------- --------- ----------
(In thousands)
Balance at December 31, 2002............................ $1,121,108 $304,290 $1,425,398
Acquisitions............................................ 523 523
Purchasing accounting adjustments....................... (57) (57)
---------- -------- ----------
Balance at March 31, 2003............................... $1,121,574 $304,290 $1,425,864
========== ======== ==========
</Table>
-7-
The gross carrying amount and accumulated amortization of our intangible
assets other than goodwill as of March 31, 2003 and December 31, 2002 are as
follows:
<Table>
<Caption>
March 31, 2003 December 31, 2002
---------------------------------- ----------------------------------
Gross Net Gross Net
Carrying Accumulated Carrying Carrying Accumulated Carrying
Amount Amortization Amount Amount Amortization Amount
-------- ------------ -------- -------- ------------ --------
(In thousands)
Intangible assets with
indefinite lives:
Trademarks............... $187,710 $ 0 $187,710 $188,010 $ 0 $188,010
Intangible assets with
finite lives:
Customer-related......... 31,173 (6,852) 24,321 31,173 (5,532) 25,641
-------- ------- -------- -------- ------- --------
Total other intangibles.... $218,883 $(6,852) $212,031 $219,183 $(5,532) $213,651
======== ======= ======== ======== ======= ========
</Table>
Amortization expense on intangible assets for the three months ended March
31, 2003 and 2002 was $1.2 million and $1.7 million respectively. Estimated
aggregate intangible asset amortization expense for the next five years is as
follows:
<Table>
2004.................................................... $3.2 million
2005.................................................... 3.2 million
2006.................................................... 3.2 million
2007.................................................... 3.0 million
2008.................................................... 3.0 million
</Table>
4. LONG-TERM DEBT
<Table>
<Caption>
March 31, 2003 December 31, 2002
------------------------- -------------------------
Amount Interest Amount Interest
Outstanding Rate Outstanding Rate
----------- ----------- ----------- -----------
(In thousands)
$250 million senior notes maturing in 2007... $250,470 8.150% $250,493 8.150%
$200 million senior notes maturing in 2009... 184,734 6.625 184,306 6.625
$150 million senior notes maturing in 2017... 125,549 6.900 125,346 6.900
$100 million senior notes maturing in 2005... 97,097 6.750 96,806 6.750
Receivables-backed loan...................... 87,300 1.92 53,197 2.280
Industrial development revenue bonds......... 18,000 1.27 - 1.35 18,000 1.65 - 1.90
Capitalized lease obligations and other...... 31 32
-------- --------
763,181 728,180
Less current portion....................... (307) (307)
-------- --------
Total.............................. $762,874 $727,873
======== ========
</Table>
Senior Notes -- We had $700 million (face value) of senior notes
outstanding at March 31, 2003. 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 material real estate
interests and a prohibition against granting liens on the stock of our
subsidiaries. The indentures also place certain restrictions on our ability to
divest assets not in the ordinary course of business. At the date of our
acquisition by Dean Foods Company, our long-term debt was re-valued to its
current market value. The adjustment to fair value is reflected as a discount on
senior notes in our consolidated financial statements.
Receivables-Backed Loan -- Dean Foods Company has entered into a $400
million receivables securitization facility pursuant to which certain of our
subsidiaries sell their accounts receivable to a wholly-owned special purpose
entity intended to be bankruptcy-remote. The special purpose entity then
-8-
transfers the receivables to a third-party asset-backed commercial paper conduit
sponsored by major financial institutions. The assets and liabilities of this
entity are fully reflected on our balance sheet, and 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 industrial
development revenue bonds outstanding, one of which requires annual sinking fund
redemptions. 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.
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.
Letters of Credit -- At March 31, 2003, $44.7 million of letters of credit
were outstanding. The majority of letters of credit were required by various
utilities and government entities for performance and insurance guarantees.
5. COMPREHENSIVE INCOME
Comprehensive income consists of net income plus all other changes in
equity from non-owner sources. Consolidated comprehensive income was $36.3
million for the three-month period ending March 31, 2003. The amount of income
tax benefit allocated to each component of other comprehensive income for the
three months ended March 31, 2003, is included below.
<Table>
<Caption>
Pre-Tax
Income Tax Net
(Loss) Benefit Amount
------- ------- ------
(In thousands)
Accumulated other comprehensive loss, December 31, 2002..... $(115) $ 40 $ (75)
Cumulative translation adjustment arising during period..... (241) 85 (156)
----- ---- -----
Accumulated other comprehensive loss, March 31, 2003........ $(356) $125 $(231)
===== ==== =====
</Table>
6. PLANT CLOSING COSTS
We accrued costs in 2002 pursuant to plans to exit certain activities and
operations of businesses in order to rationalize production and reduce costs and
inefficiencies. Several plants were closed in connection with our acquisition by
Dean Foods Company. Plants in Atkins, Arkansas and Cairo, Georgia in the
Specialty Foods segment and a plant in Escondido, California in the Dairy Group
were closed. We have also eliminated our administrative offices, closed Dairy
Group distribution depots in Parker Ford, Pennsylvania and Camp Hill,
Pennsylvania, shut down two pickle tank yards and relocated production between
plants as part of our overall integration and efficiency efforts.
The principal components of the plans include the following:
- Workforce reductions as a result of plant closings, plant
rationalizations and consolidation of administrative functions and
offices, resulting in an overall reduction of 722 plant and
administrative personnel. The costs incurred were charged against our
acquisition liabilities for these costs. As of March 31, 2003, 20
employees had not yet been terminated;
- Shutdown costs, including those costs that are necessary to clean and
prepare the plant facilities for closure; and
-9-
- Costs incurred after shutdown such as lease obligations or termination
costs, utilities and property taxes after shutdown of the plant or
administrative office.
Activity with respect to these liabilities for the first quarter of 2003 is
summarized below:
<Table>
<Caption>
Accrued Accrued
Charges at Charges at
December 31, March 31,
2002 Adjustments Payments 2003
------------ ----------- -------- ----------
(In thousands)
Workforce reduction costs................ $ 7,726 $(3,353) $ 4,373
Shutdown costs........................... 8,208 $891 (522) 8,577
------- ---- ------- -------
Total.................................... $15,934 $891 $(3,875) $12,950
======= ==== ======= =======
</Table>
These liabilities were established on December 31, 2001 in connection with
our acquisition by Dean Foods Company. No other significant charges were accrued
for transaction related closings.
7. SHIPPING AND HANDLING FEES
Our shipping and handling costs are included in both cost of sales and
selling and distribution expense depending on the nature of such costs. Shipping
and handling costs included in cost of sales reflect 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. Shipping and
handling costs that were recorded as a component of selling and distribution
expense were approximately $94.9 million during the first quarter 2003 and $95.7
million in the first quarter 2002.
8. COMMITMENTS AND CONTINGENCIES
Leases -- We lease certain property, plant and equipment used in our
operations under operating lease agreements. Such leases, which are primarily
for machinery, 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.
Guaranty of Dean Foods Company's Obligations Under Its Senior Credit
Facility -- Certain of Dean Foods Company's subsidiaries, including us, are
required to guarantee Dean Foods Company's indebtedness under its $2.7 billion
senior credit facility. We have pledged substantially all of our assets (other
than our real property and our ownership interests in our subsidiaries) as
security for our guaranty. The senior credit facility provides Dean Foods
Company with an $800 million revolving line of credit, a Tranche A $900 million
term loan and a Tranche B $1 billion term loan. At March 31, 2003 there were
outstanding term loan borrowings of $1.79 billion under this facility, plus $9.7
million that was outstanding under the revolving line of credit. $75 million of
letters of credit were issued but undrawn. At March 31, 2003 approximately
$715.3 million was available for future borrowings under Dean Foods Company's
revolving credit facility. Dean Foods Company is currently in compliance with
all of the requirements contained in its credit facility.
Amounts outstanding under Dean Foods Company's revolving line of credit and
Dean Foods Company's Tranche A term loan bear interest at a rate per annum equal
to one of the following rates, at Dean Foods Company's option:
- 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
computed as the ratio of indebtedness to EBITDA, as such terms are
defined in the credit agreement) or
-10-
- The London Interbank Offering Rate ("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.
Borrowings under the Tranche B term loan bear interest at a rate per annum
equal to one of the following rates, at Dean Foods Company's option:
- 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
- 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.
The blended interest rate in effect on borrowings under the senior credit
facility, including the applicable interest rate margin, was 3.54% at March 31,
2003. However, Dean Foods Company had interest rate swap agreements in place
that hedged $1.48 billion of their borrowings under this facility at March 31,
2003 at an average rate of 4.34%, plus the applicable interest rate margin.
Interest is payable quarterly or at the end of the applicable interest period.
The agreement requires principal payments on the Tranche A term loan as
follows:
- $16.87 million quarterly from March 31, 2002 through December 31, 2002;
- $33.75 million quarterly from March 31, 2003 through December 31, 2004;
- $39.38 million quarterly from March 31, 2005 through December 31, 2005;
- $45.0 million quarterly from March 31, 2006 through December 31, 2006;
- $56.25 million quarterly from March 31, 2007 through June 30, 2007; and
- A final payment of $112.5 million on July 15, 2007.
The agreement requires principal payments on the Tranche B term loan as
follows:
- $1.25 million quarterly from March 31, 2002 through December 31, 2002;
- $2.5 million quarterly from March 31, 2003 through December 31, 2007;
- A payment of $472.5 million on March 31, 2008; and
- A final payment of $472.5 million on July 15, 2008.
No principal payments are due on the $800 million 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 and (2) upon
the occurrence of certain debt and equity issuances when Dean Foods Company's
leverage ratio is greater than 3.75 to 1.0. The credit agreement requires that
Dean Foods Company prepay 50% of defined excess cash flow for any fiscal year
(beginning in 2003) in which their leverage ratio at year end is greater than
3.75 to 1.0. As of March 31, 2003, Dean Foods Company's leverage ratio was 3.4
to 1.0.
The senior credit facility contains various financial and other restrictive
covenants and requires 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 defined EBITDA) and an
interest coverage ratio (computed as the ratio of defined EBITDA to interest
expense). In addition, this facility requires that Dean Foods Company maintain a
minimum level of net worth (as defined by the agreement).
-11-
Dean Foods Company's leverage ratio must be less than or equal to:
<Table>
<Caption>
Period Ratio
- ------ ------------
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 their 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, 2003, the minimum net worth
requirement was $1.3 billion.
The facility also contains limitations on liens, investments and the
incurrence of additional indebtedness, and prohibits certain dispositions of
property and restricts certain payments, including dividends. The credit
facility is secured by liens on substantially all of Dean Foods Company's
domestic assets (including ours and those of our subsidiaries, but excluding the
capital stock of our subsidiaries and the real property owned by us and our
subsidiaries).
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
other debt, a change in control and certain other material adverse changes in
their business. The agreement does not contain any default triggers based on
Dean Foods Company's debt rating.
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 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.
9. BUSINESS AND GEOGRAPHIC INFORMATION AND MAJOR CUSTOMERS
Segment Information -- We currently have two reportable segments: Dairy
Group and Specialty Foods. Our Dairy Group segment manufactures and distributes
milk, ice cream and ice cream novelties, half-and-half and whipping cream,
cultured dairy products, fruit juices, other flavored drinks, bottled water,
coffee creamers, dips and condensed milk. Specialty Foods processes and sells
pickles, relishes and peppers; powdered products such as non-dairy coffee
creamers; aseptic sauces and puddings and nutritional beverages.
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 2002
Consolidated Financial Statements contained in our 2002 Annual Report on Form
10-K. We evaluate performance based on operating profit not including non-
recurring gains and losses.
-12-
The amounts in the following tables are obtained from reports used by our
executive management team and do not include any allocated income taxes or
management fees. There are no significant non-cash items reported in segment
profit or loss other than depreciation and amortization.
<Table>
<Caption>
Three Months Ended
March 31,
---------------------
2003 2002
-------- --------
(In thousands)
Net sales to external customers:
Dairy Group............................................ $756,125 $795,270
Specialty Foods........................................ 162,938 161,215
-------- --------
Total.................................................. $919,063 $956,485
======== ========
Intersegment sales:
Dairy Group............................................ $ 19,798 $ 4,456
Specialty Foods........................................ 4,294 3,876
-------- --------
Total.................................................. $ 24,092 $ 8,332
======== ========
Operating income:
Dairy Group............................................ $ 60,897 $ 50,026
Specialty Foods........................................ 23,827 19,887
Corporate/Other........................................ (12,274) (9,456)
-------- --------
Total.................................................. $ 72,450 $ 60,457
======== ========
</Table>
<Table>
<Caption>
At March 31,
-----------------------
2003 2002
---------- ----------
Assets:
Dairy Group............................................ $2,135,607 $2,148,834
Specialty Foods........................................ 597,396 608,006
Corporate/Other........................................ 98,537 164,808
---------- ----------
Total.................................................. $2,831,540 $2,921,648
========== ==========
</Table>
Substantially all of our business is within the United States.
Significant Customers -- Our Dairy Group had one customer that represented
greater than 10% of its sales in the first quarter of 2003. Approximately 12% of
our consolidated sales in the first quarter of 2003 were to that same customer.
-13-
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 milk and other dairy products in the
United States, and a leading manufacturer of specialty foods. 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>
Three Months Ended March 31,
---------------------------------------
2003 2002
------------------ ------------------
Dollars Percent Dollars Percent
-------- ------- -------- -------
(In thousands)
Net sales.................................... $919,063 100.0% $956,485 100.0%
Cost of sales................................ 684,098 74.4 729,445 76.3
-------- ----- -------- -----
Gross profit................................. 234,965 25.6 227,040 23.7
Operating expenses:
Selling and distribution..................... 128,270 14.0 134,009 14.0
General and administrative................... 33,070 3.6 30,907 3.2
Amortization of intangibles.................. 1,175 0.1 1,667 .2
-------- ----- -------- -----
Total operating expenses........... 162,515 17.7 166,583 17.4
-------- ----- -------- -----
Total operating income....................... $ 72,450 7.9% $ 60,457 6.3%
======== ===== ======== =====
</Table>
QUARTER ENDED MARCH 31, 2003 COMPARED TO QUARTER ENDED MARCH 31, 2002
Net Sales -- Net sales decreased 3.9% to $919.1 million during the first
quarter of 2003 from $956.5 million in 2002.
Net sales for the Dairy Group decreased 4.9%, or $39.1 million, in the
first quarter of 2003 compared to the first quarter of 2002. This decrease is
primarily due to the effects of decreased raw milk costs compared to the prior
year. In general, we change the prices that we charge our customers for our
products on a monthly basis, as the costs of our raw materials fluctuate. The
following table sets forth the average monthly Class I "mover" and average
monthly Class II minimum prices for raw skim milk and butterfat for the first
quarter of 2003 compared to the first quarter of 2002:
<Table>
<Caption>
Quarter Ended March 31*
----------------------------
2003 2002 % Change
----- ----- --------
Class I raw skim milk mover(3)........................ $6.30(1) $7.14(1) (11.8%)
Class I butterfat mover(3)............................ 1.18(2) 1.41(2) (16.3%)
Class II raw skim milk minimum(4)..................... 7.00(1) 7.70(1) (9.0%)
Class II butterfat minimum(4)......................... 1.16(2) 1.42(2) (18.3%)
</Table>
- ---------------
* The prices noted in this table are not the prices that we actually pay. The
federal order minimum prices at any given location for Class I raw skim milk
or Class I butterfat are based on the Class I mover prices plus a location
differential. Class II prices noted in the table are federal minimum prices,
applicable at all federally regulated locations. Our actual cost also
includes producer premiums, procurement costs and other related charges that
vary by location and vendor.
-14-
(1) Prices are per hundredweight.
(2) Prices are per pound.
(3) We process Class I raw skim milk and butterfat into fluid milk products.
(4) We process Class II raw skim milk and butterfat into products such as
cottage cheese, creams, ice cream and sour cream.
Net sales for our Specialty Foods segment increased slightly by
approximately 1%, or $1.7 million, during the first quarter of 2003 compared to
the first quarter of 2002. This increase was primarily due to an increase in
non-dairy coffee creamer and nutritional beverage sales volumes.
Cost of Sales -- Our cost of sales ratio was 74.4% in the first quarter
2003 compared to 76.3% in the first quarter of 2002. The cost of sales ratio for
the Dairy Group decreased to 74.4% in the first quarter of 2003 from 75.9% in
the first quarter of 2002 due primarily to lower raw milk costs and also to
realized merger synergies. Specialty Foods' cost of sales ratio decreased to
74.7% in the first quarter 2003 from 75.9% in the first quarter of 2002. This
decrease was due to synergies resulting from plant rationalizations in 2002,
offset by an increase in packaging costs and rising commodity prices.
Operating Costs and Expenses -- Our operating expense ratio was 17.7% in
the first quarter 2003 compared to 17.4% during the first quarter of 2002.
The operating expense ratio at the Dairy Group was 17.6% in the first
quarter of 2003 compared to 17.1% in the first quarter 2002. The increase in the
2003 operating expense ratio was primarily due to the effect of lower raw
material prices in 2003. Lower raw material prices generally result in lower
sales dollars. Therefore, falling raw milk prices will generally increase the
Dairy Group's operating expense ratio and rising raw milk prices will generally
reduce the Dairy Group's operating expense ratio.
The operating expense ratio for Specialty Foods was 10.7% in the first
quarter 2003 versus 11.2% in the first quarter 2002, due primarily to the sale
of EBI Foods, Ltd., which had higher operating expenses.
Operating Income -- Operating income during the first quarter of 2003 was
$72.5 million, an increase of $12.0 million from the first quarter of 2002
operating income of $60.5 million. Our operating margin in the first quarter of
2003 was 7.9% compared to 6.3% in the first quarter of 2002.
The Dairy Group's operating margin increased to 8.1% in the first quarter
of 2003 from 7.0% in the same period of 2002. This increase is primarily due to
the effects of decreased raw milk costs compared to the prior year.
Specialty Foods' operating margin was 14.6% in the first quarter of 2003
versus 12.9% in the first quarter of 2002. This increase was primarily due to
the increase in non-dairy creamer sales (which tend to have higher margins),
realization of merger synergies and lower promotional costs for pickle products.
Other (Income) Expense -- Total other expense was flat in the first quarter
of 2003 compared to the first quarter of 2002. Interest expense decreased to
$13.6 million in the first quarter of 2003 from $14.1 million in the first
quarter of 2002 as a result of lower interest rates and lower average debt
levels.
Income Taxes -- Income tax expense was recorded at an effective rate of
38.4% in the first quarter of 2003 compared to 38.9% in the first quarter of
2002. Our tax rate varies as the mix of earnings contributed by our various
business units changes, and as tax savings initiatives are adopted.
-15-
ITEM 4. CONTROLS AND PROCEDURES
Based on their evaluations as of a date within 90 days of the filing date
of this Quarterly Report on Form 10-Q, our Chief Executive Officer and Chief
Financial Officer concluded that our disclosure controls and procedures (as
defined in Rules 13-a and 15d-14 under the Securities Exchange Act of 1934) are
effective. There have been no significant changes in our internal controls or in
other factors that could significantly affect these controls subsequent to the
date of their evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
-16-
PART II -- OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
<Table>
99.1 Certification of Chief Executive Officer pursuant to 18
U.S.C. Section 1350, as adopted pursuant to section 906 of
the Sarbanes-Oxley Act of 2002
99.2 Certification of Chief Financial Officer pursuant to 18
U.S.C. Section 1350, as adopted pursuant to section 906 of
the Sarbanes-Oxley Act of 2002
</Table>
(b) Form 8-K's
None
-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, 2003
-18-
CERTIFICATION
I, Gregg Engles, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Dean Holding
Company;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of Dean
Holding Company as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a. Designed such disclosure controls and procedures to ensure that
material information relating the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is being
prepared;
b. Evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c. Presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
a. All significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in the Company's internal
controls; and
b. Any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
/s/ Gregg Engles
--------------------------------------
Gregg Engles
Chief Executive Officer
Date: May 15, 2003
-19-
CERTIFICATION
I, Barry A. Fromberg, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Dean Holding
Company;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of Dean
Holding Company as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a. Designed such disclosure controls and procedures to ensure that
material information relating the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is being
prepared;
b. Evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c. Presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
a. All significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in the Company's internal
controls; and
b. Any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
/s/ Barry A. Fromberg
--------------------------------------
Barry A. Fromberg
Chief Financial Officer
Date: May 15, 2003
-20-
EXHIBIT INDEX
<Table>
<Caption>
EXHIBIT
NUMBER DESCRIPTION
- ------- ------------
99.1 Certification of Chief Executive Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to section 906 of the
Sarbanes-Oxley Act of 2002
99.2 Certification of Chief Financial Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to section 906 of the
Sarbanes-Oxley Act of 2002.
</Table>