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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended May 27, 2001
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 NO.: 1-08262
DEAN FOODS COMPANY
(Exact name of registrant as specified in its charter)
DELAWARE 36-0984820
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
3600 N. RIVER ROAD, FRANKLIN PARK, ILLINOIS 60131
(Address of principal executive offices) (Zip Code)
(847) 678-1680
Registrant's telephone number, including area code
Securities registered pursuant to Sections 12(b) and 12(g) of the Act:
NAME OF EACH EXCHANGE ON
TITLE OF EACH CLASS WHICH REGISTERED
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COMMON STOCK, PAR VALUE $1 PER SHARE NEW YORK STOCK EXCHANGE
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the Registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K (Section 229.405 of this chapter) is not contained herein, and
will not be contained, to the best of registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. [X]
The number of shares of Common Stock, Par Value $1 Per Share, of the Registrant
outstanding as of August 1, 2001 was 35,764,726. The aggregate market value of
such outstanding shares on August 1, 2001 was $1.47 billion, based upon the
closing price for the Common Stock on the New York Stock Exchange on such date.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Proxy Statement for its Annual Meeting of
Stockholders to be held on September 26, 2001 (referred to herein as the
"Company's 2001 Proxy Statement") are incorporated by reference into Part III of
this report.
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DEAN FOODS COMPANY
FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
PART I............................................................................................................3
ITEM 1. BUSINESS...........................................................................................3
ITEM 2. PROPERTIES........................................................................................10
ITEM 3. LEGAL PROCEEDINGS.................................................................................11
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS...............................................11
PART II .........................................................................................................12
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS..............................12
ITEM 6. SELECTED FINANCIAL DATA...........................................................................12
ITEM 7. MANAGEMENTS' DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.............13
ITEM 7A. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK........................................20
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.......................................................21
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE..............21
PART III.........................................................................................................22
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT................................................22
ITEM 11. EXECUTIVE COMPENSATION............................................................................24
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT....................................24
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS....................................................24
PART IV..........................................................................................................25
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K...................................25
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PART I
ITEM 1. BUSINESS.
GENERAL
Dean Foods Company and its subsidiaries ("the Company") is one of the
nation's leading processors and distributors of dairy products, producing a full
line of branded and private label products. The Company is also a leading
manufacturer and distributor of specialty food products, including pickles and
non-dairy coffee creamers, and refrigerated products, including dips and salad
dressings. The predecessor to the Company was incorporated in Illinois in 1925.
The Company is organized into three operating segments: the Dairy Group,
the Specialty Foods Group and the National Refrigerated Products Group. The
Company's principal products are dairy products (fluid milk and cultured
products and ice cream and ice cream novelties), specialty food products
(non-dairy coffee-creamers, pickles, relishes, pickled peppers and assorted
specialty food items, and aseptic cheese sauces, puddings and other aseptically
packaged products) and national refrigerated products (extended shelf life dairy
products, refrigerated dips, produce dips and refrigerated salad dressings).
MERGER
On April 5, 2001, the Company announced it had signed a definitive
merger agreement with Suiza Foods Corporation ("Suiza"), a fluid dairy processor
and distributor based in Dallas, Texas. Under the terms of the agreement,
shareholders of the Company will receive, for each share of Dean common stock,
$21.00 in cash plus 0.429 shares of Suiza common stock, subject to adjustment if
Suiza's stock price is below $32.71 at the time of merger. Upon completion of
the transaction, there will be approximately 43 million shares of Suiza common
stock outstanding, with current Suiza shareholders owning approximately 65% of
the company and Dean Foods shareholders holding approximately 35% of the
company.
Completion of the merger transaction is contingent upon approval by the
shareholders of both companies, certain regulatory approvals and other customary
closing conditions. The transaction is expected to be completed during the
fourth calendar quarter of 2001.
The Company recorded a pre-tax charge of $22.2 million ($13.7 million
after-tax, or $.38 per share) in the fourth quarter of fiscal 2001 for
merger-related costs. These charges consist of professional fees of $4.5
million, severance and employee stay costs of $2.7 million and a $15.0 million
charge relating to a lease commitment on office space that the Company will not
occupy. The Company expects to incur additional merger-related charges until the
merger is completed.
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BUSINESS ACQUISITIONS
The Company's acquisition strategy has historically focused on food
companies having a well-established reputation for quality products and services
that meet selected financial criteria, including return on invested capital and
market value added. If the Suiza transaction is not completed, the Company
intends to continue to take advantage of industry consolidation trends,
specifically within the dairy segment, and to focus on companies that can
provide significant operating efficiencies. The Company has completed 25
acquisitions in the last five fiscal years. These companies, businesses and
assets were acquired for cash, installment notes or a combination thereof,
except for the fiscal 1999 and 1998 acquisitions of U.C. Milk Company, Berkeley
Farms, Purity Dairies and Coburg Dairy, which were stock purchases. The listing
below summarizes the acquisitions completed by fiscal year:
FISCAL YEAR 2001
Land O'Lakes Upper Midwest fluid division, Woodbury, Minnesota; Thief River Falls,
a dairy processor Minnesota; Bismarck, North Dakota;
Sioux Falls, South Dakota; and Richland
Center, Wisconsin
Nalley's pickle business, a pickle processor Tacoma, Washington
FISCAL YEAR 2000
Dairy Express, a dairy processor Philadelphia, Pennsylvania
Steinfeld's Pickle Products, a pickle processor Portland, Oregon
FISCAL YEAR 1999
Alta Dena Certified Dairy, a dairy processor City of Industry, California
Berkeley Farms, a dairy processor Hayward, California
U.C. Milk Company, a dairy processor Madisonville, Kentucky
Barber Dairy, a dairy processor Birmingham, Alabama
Hillside Dairy, a dairy processor Cleveland Heights, Ohio
R.G. Clark, a dairy distributor Paducah, Kentucky
Modern Dairy, a dairy distributor Ashland, Kentucky
Ice Cream Products, an ice cream distributor Columbia, South Carolina
Custom Food Processors International, a dry New Hampton, Iowa
ingredients processor
FISCAL YEAR 1998
Purity Dairies, a dairy processor Nashville, Tennessee
Coburg Dairy, a dairy processor Charleston, South Carolina
Dairy business of American Stores Company Buena Park, Escondido, San Leandro and
(Lucky Stores) Sacramento, California
Wengert's Dairy, a dairy processor Lebanon, Pennsylvania
Sani-Dairy Division of Penn Traffic Company, a Johnstown, Pennsylvania
dairy processor
Maplehurst Dairy, a dairy processor Indianapolis, Indiana
H. Meyer Dairy Company, a dairy processor Cincinnati, Ohio
Milk Products LLC, a dairy processor Albuquerque, New Mexico and El Paso, Texas
Schwartz Pickle Company, a refrigerated pickles Chicago, Illinois
processor
Marie's Salad Dressing, a processor of salad Thornton, Illinois
dressings and vegetable dips
FISCAL YEAR 1997
Tri-State Dairy, Inc., a dairy processor Miami, Florida
Meadows Distribution Co., Inc., an ice cream and Batavia, Illinois
frozen foods distributor
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BUSINESS SEGMENTS
Information regarding the Company's Dairy, Specialty Foods and National
Refrigerated Products business segments for the last three fiscal years is
included in Note 17 to the Company's consolidated financial statements on page
47 of this Annual Report on Form 10-K.
Dairy Group
Fluid Milk and Cultured Dairy Products
The Company processes raw milk and other raw materials into fluid milk
and cultured products. The Company believes that it is one of the two largest
fluid milk processors in the United States. Included in the fluid products
category is homogenized, low-fat and skim milk plus buttermilk, chocolate milk
and juice products. Cultured dairy products include cottage cheese, sour cream
and yogurt. The Company also produces and distributes organic dairy products,
which include a wide variety of homogenized and pasteurized milk and cultured
products.
Fluid milk and fresh cultured products are sold to grocery store chains,
mass merchandisers, convenience stores, smaller retail grocery outlets,
warehouse club stores, grocery warehouses, institutional and governmental
customers in the Midwest and Midsouth, in parts of the Southeastern,
Southwestern and Rocky Mountain states, parts of Pennsylvania and New York,
California and Mexico.
In addition to the strong Dean's brand in the Midwest and Midsouth,
fluid milk and cultured dairy products are sold in various areas under
well-established labels such as Alta Dena, Barber's, Berkeley Farms, Land O'
Lakes, Coburg, Cream o'Weber, Creamland, Gandy's, Mayfield, McArthur, Meadow
Brook, Price's, Purity, Reiter, T.G. Lee, Verifine and Wengert's. A substantial
portion of the Company's fluid milk and cultured products volume is sold under
private labels.
The fluid milk and cultured products business is extremely competitive
and productivity is very important. The Company continues to reinvest a
substantial portion of its total capital budget in its dairy plants and
distribution systems to maintain and improve efficiencies. Fiscal 2001, 2000 and
1999 capital expenditures included the new and continued installation of small
plastic bottle (Milk Chugs) filling lines at plants located in Alabama,
California, Florida, Illinois, Pennsylvania and Utah. Fiscal 2000 and 1999
expenditures included spending associated with wrap-around labeling equipment at
the Florida dairy plants and spending associated with the Company's enterprise
wide information systems initiative. Fiscal 2000 expenditures also included
spending related to distribution equipment in the Florida, Alabama and Ohio
dairies. Fiscal 1999 expenditures included cooler expansion at its Sharpsville,
Pennsylvania facility, as well as costs associated with production consolidation
at its Southwest facilities. Fiscal 1998 expenditures included costs associated
with the completion of a fluid milk plant in Braselton, Georgia. Major capital
expenditures in fiscal 1997 included the initial construction of the new
Braselton, Georgia, fluid milk processing plant, expansion of the filler room at
the Sharpsville, Pennsylvania facility and new labeling equipment at the Athens,
Tennessee plant.
Sales of fluid milk and cultured products to unaffiliated customers for
the fiscal years 2001, 2000 and 1999 were $2.7 billion, $2.6 billion and $2.4
billion, respectively.
Ice Cream and Frozen Novelties
The Company produces packaged and bulk ice cream products which are sold
through grocery store chains, mass merchandisers, convenience stores, smaller
retail grocery outlets, restaurants and other foodservice outlets. The product
line includes ice cream (regular, low-fat and non-fat), fruit sherbets, frozen
yogurts, and novelties made with ice cream, sherbet and ices. These products are
sold under a variety of regional brands and numerous private labels in the
Midwest, Midsouth, Southeast, Southwest, California, parts of the Rocky Mountain
states, Pennsylvania, New York, California and Mexico. The brands include
Dean's, Dean's Country Charm, Alta Dena, Bud's of San Francisco, Barber's,
Berkeley Farms, Creamland, Cream o'Weber, Gandy's, Price's, Purity, Fitzgerald,
Fieldcrest, Mayfield, McArthur/T.G. Lee, Reiter and Verifine. Sales of ice cream
and frozen dessert products are substantially greater during the summer months
than during the rest of the year. Additionally, the Company produces and
supplies Baskin-Robbins ice cream products throughout the United States.
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Fiscal 2001 capital expenditures included cooler expansions in the
Southwest region and South Carolina. Fiscal 2000 capital expenditures included
the purchase and expansion of ice cream storage facilities in the Alabama
dairies, as well as the purchase and installation of two-piece carton equipment
in the Georgia dairy. Fiscal 1999 and 1998 capital expenditures included the
purchase and installation of frozen novelties vending machines in the Midsouth.
Capital expenditures during fiscal 1999 also included freezer expansion at the
Birmingham, Alabama facility and the purchase of freezer equipment for the
Company's Athens, Tennessee facility. Fiscal 1998 capital expenditures included
the expansion of an ice cream storage facility. Capital expenditures during
fiscal 1997 included additional processing equipment at the Company's Belvidere,
Illinois and Athens, Tennessee ice cream plants.
Sales to unaffiliated customers for the fiscal years 2001, 2000 and 1999
were $507 million, $483 million and $467 million, respectively.
Specialty Foods Group
Pickles, Relishes and Other Specialty Items
The Company is one of the largest pickle processors and marketers in the
United States. Pickles, relishes, pickled peppers and other specialty items are
sold nationally under brand names, including Arnold's, Atkins, Cates, Dailey,
Heifetz, Nalley's, Paramount, Peter Piper, Rainbo, Roddenbery, Schwartz and
Steinfeld's. Branded and private label products are marketed and distributed to
grocery store chains, wholesalers and the foodservice industry and in bulk to
other food processors.
There were no major capital expenditures during fiscal 2001. Capital
expenditures in fiscal 2000 included the purchase of a produce cooler for the
Green Bay facility and investments in a warehouse management system. During
fiscal 1999, the Company closed its Croswell, Michigan plant and consolidated
production into existing facilities and continued to modernize its remaining
manufacturing facilities. Fiscal 1999 capital expenditures included costs to
further automate pickle production at the Faison, North Carolina facility.
Capital expenditures in fiscal 1998 included non-fermenting processing
equipment, a new water treatment system and banana pepper handling equipment.
During fiscal 1997 the Company closed its Eaton Rapids, Michigan plant and
consolidated production.
The processing of pickle products is seasonal, dependent to a large
extent upon the growing season of cucumbers in the summer months. Inventories
are therefore higher in the fall and winter months than in the spring and early
summer.
The Company markets a number of specialty sauces, including shrimp,
seafood, tartar, horseradish, chili and sweet and sour sauces, in the Eastern,
Midwestern and Southern United States to retail grocers. Products are sold under
the Bennett's and Hoffman House brand names.
Sales to unaffiliated customers for the fiscal years 2001, 2000 and 1999
were $428 million, $394 million and $377 million, respectively.
Non-Dairy Coffee Creamers and Other Powdered Products
Non-dairy coffee creamers are the Company's principal powdered products.
However, as a result of the fiscal 1999 acquisition of a New Hampton, Iowa
manufacturing facility, the Company's capabilities have been extended into
shortening powders and other high fat formulas used in baking, beverage mixes,
gravies and sauces. Our core business includes premium and low-fat powdered
products sold primarily under private labels to vending operators, office
beverage service companies and institutional foodservice distributors with
national distribution to restaurants, schools, health care institutions, hotels,
vending and fast-food operators. Non-dairy creamers are also sold for private
label distribution to all classes of the retail trade and sold in bulk to a
number of other food companies for use as an ingredient in their food products.
Powdered products are also sold to international customers in Australia, Canada,
the Far East, Mexico, South America, Europe, Africa and the Middle East. The
Company believes that it is the largest manufacturer of powdered non-dairy
coffee creamers in the United States. The Company's non-dairy coffee creamers
are an economical and convenient substitute for milk and cream. These products
require no refrigeration and have long shelf lives.
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While continuing to grow its non-dairy creamer business, the Company
entered into the nutritionally-based products market in fiscal 1999. The
nutritional beverage operations were acquired in conjunction with the
disposition of the Company's vegetables business, which was sold to Agrilink
Foods, Inc. in September 1998. The Company continues to leverage its private
label expertise and launch beverages in the meal supplement, weight loss and
sports categories.
The Company, through an affiliate, provides stabilizers and other dry
ingredients to customers in the United Kingdom, Continental Europe and other
foreign markets.
Fiscal 2001 capital expenditures included waste water equipment at the
Wayland, Michigan facility and dryer improvement at the Pecatonica, Illinois
facility. Capital expenditures in fiscal 2000 included the purchase and
installation of equipment to increase creamer capacity and the purchase and
installation of emission and waste treatment equipment at the Wayland, Michigan
facility. There were no major capital expenditures during fiscal 1999. Fiscal
1998 and fiscal 1997 capital expenditures included the construction of a new
dryer in Wayland, Michigan, which began operation during the third quarter of
fiscal 1998.
Sales to unaffiliated customers for the fiscal years 2001, 2000 and 1999
were $233 million, $217 million and $184 million, respectively.
Sauces and Puddings
The Company produces aseptic products including ready-to-serve natural
cheese sauces, puddings and other specialty sauces. These products are
sterilized under a process which allows storage for prolonged periods without
refrigeration. Aseptic products are sold nationally, primarily under private
labels, to distributors that supply restaurants, schools, hotels and other
segments of the foodservice industry.
Capital expenditures in fiscal 2001 included the installation of waste
water treatment equipment at the Dixon, Illinois facility. There were no major
capital expenditures in fiscal 2000. Capital expenditures during fiscal 1999
included a small-pouch filler line at the Company's Dixon, Illinois plant. There
were no major capital expenditures during fiscal years 1998 and 1997.
Sales to unaffiliated customers for the fiscal years 2001, 2000 and 1999
were $93 million, $104 million and $100 million, respectively.
DFC Transportation
DFC Transportation Company, a transportation and logistics subsidiary of
the Company, operates nationally with a fleet of approximately 68 tractors and
86 trailers, providing primarily frozen and refrigerated truckload services
within the United States, Canada and Mexico. Its customers include food and
industrial companies.
Revenues from unaffiliated customers for fiscal years 2001, 2000 and
1999 were approximately $30 million, $26 million and $32 million, respectively.
Revenues relating to hauling products for other divisions and subsidiaries of
the Company have been eliminated in consolidation.
National Refrigerated Products Group
Extended Shelf Life Products
The Company processes extended shelf life fluid, aerosol and other dairy
products. Extended shelf life products include flavored milks, non-dairy coffee
creamers, whipping creams, half-and-half dairy creamers, aerosol whipped creams
and lactose-reduced milks.
Extended shelf life products are distributed nationally under Dean
brands including Dairy Pure, Dean Ultra and Easy 2%, as well as well-known
licensed national brands and private labels. The extended shelf life products
business is extremely competitive and productivity is very important. The
Company continues to reinvest in its extended shelf life plants and distribution
systems to maintain and improve efficiencies. Fiscal 2001, 2000 and 1999 capital
expenditures included investments in small bottle lines and infrastructure
improvements to the Murray, Kentucky facility. Fiscal 1999 capital expenditures
included cooler capacity expansion. Capital expenditures in
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fiscal 1998 included investment in a new high-temperature processor and cooler
expansion at its Murray, Kentucky plant. In fiscal 1997, the Company divested
its Ready Foods plant in Philadelphia, Pennsylvania and consolidated production
into the Murray, Kentucky facility, where the Company invested in a new aerosol
filling line.
Sales of extended shelf life products to unaffiliated customers for
fiscal 2001, 2000 and 1999 were $287 million, $184 million and $167 million,
respectively.
Dips and Salad Dressings
The Company manufactures snack dips, flavored salad dressing, sour cream
and sour cream replacements. Branded and private label retail products are sold
nationally, under the Dean's brand name primarily east of the Rockies and under
the Rod's and Imo brand names primarily west of the Rockies. Retail products are
sold in supermarkets and other retail outlets through direct warehouse delivery.
At the beginning of fiscal 1998, the Company completed the acquisition of the
Marie's business. The Marie's product line includes refrigerated salad
dressings, vegetable dips, and fruit glazes, which are marketed in the produce
section of supermarkets. Dean's dips and Marie's refrigerated salad dressings
are the leading brand names in their respective categories. Marie's dips are the
second leading produce dips.
There were no major capital expenditures in fiscal years 2001, 2000 and
1999. Fiscal 1998 capital expenditures included receiving room upgrades at the
Company's City of Industry, California facility. There were no major capital
expenditures during fiscal 1997.
Sales to unaffiliated customers for the fiscal years 2001, 2000 and 1999
were $113 million, $106 million and $107 million, respectively.
RAW MATERIALS AND SUPPLIES
The Company's business depends on obtaining adequate supplies of raw and
processed agricultural products. Historically, the Company has been able to
obtain adequate supplies of agricultural products.
Raw milk and other agricultural products are generally purchased
directly from farmers and farm cooperatives. The Company generally does not have
long-term purchase contracts for agricultural products. The price of raw milk is
extensively regulated and can be quite volatile month to month. On average, raw
milk costs have been trending downward for the last three fiscal years. Early
indications are that raw milk costs will be substantially higher in the first
half of fiscal 2002 than in fiscal 2001. Additionally, advanced forward milk
pricing was adopted by the National Federal Order System in January 2000,
substantially reducing the quarterly earnings volatility associated with the
previous federal order milk pricing system.
The Company produces most of its plastic gallon and half-gallon
containers for its fluid milk business. Glass containers for pickles and related
products are purchased from one primary supplier.
Certain commodities, such as corn syrups, vegetable oils, sugar and
casein, and various packaging supplies are purchased from numerous sources on a
normal purchase order basis, with cucumbers purchased under seasonal grower
contracts. The Company is confident that any lost supplier requirements could be
replaced in the ordinary course of business.
The Company supplies seed and advises growers regarding planting
techniques for the cucumbers it uses in its pickle products. In addition, the
Company monitors and arranges for the control of insects, directs the harvest,
and, for some crops, provides automated harvesting service.
Favorable weather conditions in the Southeast and Midwest led to higher
quality and consistent cucumber crops during fiscal 2001. The increased volume
from domestic crops in conjunction with lower volumes from Mexico resulted in
slightly lower fiscal 2001 cucumber costs as compared with fiscal 2000. Fiscal
2000 cucumber costs were higher than fiscal 1999 primarily as a result of
reduced volume from domestic crops, due to less favorable weather conditions, in
conjuction with higher volumes and higher costs from Mexican crops. Fiscal 2002
cucumber costs are expected to approximate fiscal 2001 costs.
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DISTRIBUTION
Dairy products are delivered directly to grocery chain stores or
warehouses from the Company's processing plants. Products are delivered by the
Company in trucks that it owns or leases and by independent distributors. In
certain states, products are also delivered to the Company's distribution
branches from which distribution is then made to customers. The Company has
continued its efforts to streamline its distribution system for dairy products.
Major economies have been affected in recent years through consolidation of
distribution branches and routes, with emphasis on direct truck delivery to
retail stores and warehouses of grocery chains. The Company's Specialty Foods
products are delivered to warehouses and food distributors by the Company's
fleet of trucks and outside freight carriers.
COMPETITION
The Company's business is highly price competitive with relatively low
operating margins, consistent with other food companies. Quality and customer
service are important factors in securing and maintaining business. An important
aspect of the Company's service to customers is computer ordering, shipping and
billing services. Referred to in the food industry as "Efficient Consumer
Response", the Company has over the last several years made a substantial
commitment to this effort. The Company's Dairy business operates in a number of
different geographical markets. In these markets, the Company competes against
national, regional and local companies. In certain markets, some supermarket
chain stores have their own dairy products processing plants. There are usually
a number of competitors in each major market and product class. Some of the
competitors have greater sales and assets than the Company's operations in that
market. The Company's Specialty Foods products are marketed nationally and, in
some cases, internationally. National Refrigerated Products Group products are
also sold nationally and largely serve customers through warehouse channels. The
degree of penetration and competitive conditions in each market varies, but the
Company does not believe it has any material competitive advantage in any of its
major markets or product classes.
EMPLOYEES
The Company employs approximately 14,100 employees (14,000 full-time).
Approximately 5,500 employees are represented by the International Brotherhood
of Teamsters and other unions under 65 collective bargaining agreements. Seven
of these agreements expire during fiscal 2002. Generally, the Company considers
its employee relations to be very good.
The Company has approximately 800 seasonal positions at its pickle
processing plants, principally during the summer months. At times, the Company
has experienced difficulties in meeting seasonal employee needs. A number of
strategies have been employed to retain seasonal employees including incentive
programs and employee sharing programs.
ENVIRONMENT
The Company's compliance with federal, state and local regulations
relating to the discharge of material into the environment or otherwise relating
to the protection of the environment has not had a material effect on the
Company's capital expenditures, earnings or competitive position. The Company
continues to give considerable attention to the impact or potential impact of
its operations on the environment.
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ITEM 2. PROPERTIES
The Company owns fifty-eight of its processing plants (two of which are
subject to mortgage) and leases the other five under leases expiring from fiscal
2002 through fiscal 2007. The Company has owned and leased distribution branches
and storage warehouses located throughout the country. The Company considers its
properties suitable and adequate for the conduct of its business. Production
facilities are principally operated at or near capacity levels, but generally on
the basis of fewer than three shifts per day. Further information relating to
the Company's leases is contained in Note 12 to the Company's consolidated
financial statements. Such information is included on page 44 of this Annual
Report on Form 10-K.
The locations of the Company's processing facilities, by product
category within business segment, are included below:
DAIRY
Fluid Milk and Cultured Dairy Products
Birmingham, Alabama Woodbury, Minnesota
Buena Park, California Albuquerque, New Mexico
City of Industry, California Bismarck, North Dakota
Escondido, California Barberton, Ohio
Hayward, California Cincinnati, Ohio
San Leandro, California Springfield, Ohio
Miami, Florida Belleville, Pennsylvania
Orange City, Florida Erie, Pennsylvania
Orlando, Florida Lebanon, Pennsylvania
Braselton, Georgia Sharpsville, Pennsylvania
Chemung, Illinois North Charleston, South Carolina
Huntley, Illinois Sioux Falls, South Dakota
Rockford, Illinois Athens, Tennessee
Rochester, Indiana Nashville, Tennessee
Louisville, Kentucky El Paso, Texas
Madisonville, Kentucky Lubbock, Texas
Evart, Michigan Salt Lake City, Utah
Thief River Falls, Minnesota Sheboygan, Wisconsin
Ice Cream and Frozen Novelties
Birmingham, Alabama Albuquerque, New Mexico
Buena Park, California Athens, Tennessee
City of Industry, California Nashville, Tennessee
Belvidere, Illinois
SPECIALTY FOODS
Pickles, Relishes and Specialty Items
Atkins, Arkansas Faison, North Carolina
LaJunta, Colorado Portland, Oregon
Cairo, Georgia Scappoose, Oregon
Chicago, Illinois Green Bay, Wisconsin
Plymouth, Indiana
Non-Dairy Coffee Creamers and Other Powdered Products
Pecatonica, Illinois Wayland, Michigan
Rockford, Illinois Abingdon, Oxon, United Kingdom
New Hampton, Iowa
Sauces and Puddings
Dixon, Illinois Benton Harbor, Michigan
NATIONAL REFRIGERATED PRODUCTS
Extended Shelf Life Products
Jacksonville, Florida Richland Center, Wisconsin
Murray, Kentucky
Dips and Salad Dressings
City of Industry, California Thornton, Illinois
Rockford, Illinois
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Distribution branches for the Dairy Group are located in Alabama,
California, Florida, Georgia, Illinois, Indiana, Kentucky, Nevada, Minnesota,
New Mexico, New York, North Carolina, North Dakota, Ohio, Pennsylvania, South
Carolina, South Dakota, Tennessee, Texas, and West Virginia.
Distribution warehouses for the Specialty Foods Group are located in
Arkansas, Colorado, Georgia, Illinois, Indiana, Michigan, North Carolina,
Oregon, Washington, and Wisconsin.
Distribution warehouses for the National Refrigerated Products Group are
located in California, Illinois and Tennessee.
ITEM 3. LEGAL PROCEEDINGS
The Company is a current defendant in assorted legal matters and has
been the subject of routine investigations by various state and federal
agencies. The ultimate resolution of these matters is not expected to have a
material adverse effect on the financial position or results of operations of
the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of security holders, through the
solicitation of proxies or otherwise, during the fourth quarter of the fiscal
year ended May 27, 2001.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's common stock is traded on the New York Stock Exchange
under the ticker symbol DF. The range of common stock sales prices for each of
the quarters during the past two fiscal years (as reported by the New York Stock
Exchange) and the frequency and amount of common stock dividends declared the
past two fiscal years are set forth under the caption "Unaudited Quarterly
Financial Data" on page 48 of this Annual Report on Form 10-K, in the rows
captioned "Stock Price Range" and "Dividend Rate". Such rows and the column and
row captions related thereto are hereby incorporated by reference.
The approximate number of holders of record of the Company's common
stock on August 1, 2001 was 7,808.
ITEM 6. SELECTED FINANCIAL DATA
The following selected historical financial data has been derived from
the Company's audited consolidated financial statements as of and for each of
the fiscal years ended May 1997 through 2001. This information is a summary and
should be read together with the Company's historical financial statements and
related notes beginning on page 30 of this Annual Report on Form 10-K and in
other reports that the Company has filed with the Securities and Exchange
Commission.
FISCAL YEAR ENDED MAY (a)
--------------------------------------------------------------------------
2001 2000 1999 1998 1997
--------------------------------------------------------------------------
(In thousands, except per share data)
OPERATING DATA
Net sales (b) $4,440,366 $4,102,572 $3,784,893 $2,762,277 $2,487,498
Income from continuing operations 74,652 (d) 106,118 (e) 70,331 (f) 87,980 73,988
Net income 74,652 (d) 106,118 (e) 151,222 (f) 106,302 86,704
BALANCE SHEET DATA
Total assets $2,317,387 $2,003,542 $1,911,876 $1,607,189 $1,133,680
Long-term obligations (c) 940,170 758,725 631,286 558,233 208,931
Shareholders' equity 704,616 657,685 716,414 619,266 567,681
COMMON STOCK DATA
Basic earnings per share
Continuing operations $ 2.10 (d) $ 2.79 (e) $ 1.77 (f) $ 2.17 $ 1.84
Net income 2.10 (d) 2.79 (e) 3.80 (f) 2.63 2.16
Diluted earnings per share
Continuing operations $ 2.07 (d) $ 2.77 (e) $ 1.74 (f) $ 2.13 $ 1.83
Net income 2.07 (d) 2.77 (e) 3.74 (f) 2.57 2.15
OTHER DATA
Cash dividends per share $ .90 $ .88 $ .84 $ .80 $ .76
- -----------------------------------------------------------------------------------------------------------------------------
(a) Fiscal years end on the last Sunday in May.
(b) Net sales have been restated to reflect the adoption of Emerging Issues Task
Force Issue No. 00-10 "Accounting for Shipping and Handling Fees and Costs"
in the fourth quarter of fiscal 2001. The effect of the adoption was to
increase 2000 net sales by $36,936, 1999 net sales by $29,745, 1998 net
sales by $26,443 and 1997 net sales by $26,935. The adoption of EITF 00-10
did not impact earnings results.
(c) Excludes current portion of long-term debt.
(d) Fiscal 2001 includes a pre-tax charge of $22,151 ($13,734 after-tax, or $.38
per share) for merger-related costs and a pre-tax gain of $10,000 ($6,200
after-tax, or $.17 per share) related to sale of a note associated with the
divestiture of the Company's vegetables business in fiscal 1999.
(e) Fiscal 2000 includes a pre-tax charge of $6,078 ($3,768 after-tax, or
$.10 per share) related to plant closures.
(f) Fiscal 1999 include a pre-tax charge of $18,105 ($11,044 after-tax, or $.27
per share) related to plant closures. Fiscal 1999 net income also includes
an after-tax gain of $83,820 ($2.07 per diluted share) related to the sale
of discontinued operations.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
Dean Foods Company is one of the nation's leading processors and
distributors of dairy products, producing a full line of branded and private
label products. The Company is also a leading manufacturer and distributor of
specialty food products, including pickles and non-dairy coffee creamers, and
refrigerated products, including dips and salad dressings. The Company operates
under three business segments. The Dairy Group is the Company's largest segment,
accounting for 73% of fiscal 2001 sales, with the Specialty Foods Group and
National Refrigerated Products Group accounting for 18% and 9% of total sales,
respectively. The Dairy Group produces and distributes fluid milk, ice cream and
ice cream novelties, and cultured products, including cottage cheese, sour cream
and yogurt. Other products sold by the Dairy Group include juice, juice drinks
and water. The Specialty Foods Group manufactures and distributes a number of
specialty food products to supermarkets, other retail outlets and foodservice
customers. Products include non-dairy coffee creamers, pickles, relishes,
pickled peppers and other specialty food items, and aseptic cheese sauces,
puddings and other aseptically packaged products. The National Refrigerated
Products Group manufactures and distributes extended shelf life dairy products,
refrigerated dips and refrigerated salad dressings. Segment operating earnings
represent sales less operating expenses. Operating expenses exclude general
corporate expense, interest expense and federal and state income taxes.
OPERATING RESULTS
The Company's fiscal year ends on the last Sunday in May. In the first
quarter of fiscal 2001, the Company announced the realignment of its business
segment structure to that described above. As such, the following discussion
reflects prior year amounts that have been restated to conform to the new
structure. In addition, the following discussion reflects the Company's adoption
of Emerging Issues Task Force Issue No. 00-10 ("EITF 00-10") "Accounting for
Shipping and Handling Fees and Costs" in the fourth quarter of fiscal 2001.
Prior year net sales, cost of products sold and selling, delivery and
administrative expenses have been restated to reflect the reclassification of
shipping and handling costs upon adoption of EITF 00-10. The adoption of EITF
00-10 did not impact reported operating earnings or net income.
FISCAL YEAR 2001 COMPARED TO FISCAL YEAR 2000
CONSOLIDATED RESULTS OF OPERATIONS - Fiscal 2001 net sales increased 8.2% to
$4.4 billion as each of the Company's business segments reported increased sales
over fiscal 2000. Higher fiscal 2001 sales reflect increases due to business
acquisitions in the Dairy and Specialty Foods Groups and new product launches
and base business growth in the National Refrigerated Products Groups.
Net income in fiscal 2001 was $74.7 million, or $2.07 per diluted share
versus $106.1 million, or $2.77 per diluted share in fiscal 2000. The fiscal
2001 results include merger-related costs of $22.2 million ($13.7 million
after-tax, or $.38 per diluted share) and a gain of $10.0 million ($6.2 million
after-tax, or $.17 per diluted share) from the sale of a note associated with
the divestiture of the Company's vegetables business in fiscal 1999. The fiscal
2000 results include a plant closure charge of $6.1 million ($3.8 million
after-tax, or $.10 per diluted share). Absent the merger costs, gain on the note
and plant closure charge, net income for fiscal 2001 was $82.2 million, or $2.28
per diluted share, compared to net income of $109.9 million, or $2.87 per
diluted share in fiscal 2000. The decrease in net income was primarily due to
reduced operating earnings in the National Refrigerated Products and Specialty
Foods Group and increased interest expense.
The Company is a large user of certain agricultural-related commodities,
the prices for which can vary greatly. The competitive conditions and relatively
low profit margins in the food industry necessitate timely adjustment of the
Company's pricing to reflect changes in commodity prices, as well as changes in
other production and distribution-related costs, including fuel costs.
DAIRY GROUP - Dairy Group sales increased 6.0% in fiscal 2001 to $3.3 billion
and volume increased 2.5% over fiscal 2000. The increases in sales and volume
are primarily the result of the Land O' Lakes acquisition which was completed in
July 2000. Absent the impact of the fiscal 2001 acquisition, volume in fiscal
2001 declined slightly in comparison to fiscal 2000, due to declines in fluid
milk volumes, primarily in the West region. Fiscal 2001 operating earnings of
$156.9 million increased 6.0% over fiscal 2000 operating earnings of $148.0
million (excluding the fiscal 2000 plant closure charge), primarily due to the
fiscal 2001 acquisition.
SPECIALTY FOODS GROUP - Specialty Foods Group sales increased 5.9% in fiscal
2001 to $784.9 million from $741.3 million in fiscal 2000, primarily as the
result of the acquisition of the Nalley's pickle business in July 2000. Absent
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the Nalley's acquisition, sales declined slightly from fiscal 2000. Operating
earnings of $73.0 million in fiscal 2001 declined 10.4% from operating earnings
of $81.5 million in fiscal 2000. The decline in earnings is due to increased
commodity costs for powdered products and increased promotional spending related
to pickles.
NATIONAL REFRIGERATED PRODUCTS GROUP - National Refrigerated Products Group
sales grew 37.5% in fiscal 2001 to $399.6 million from $290.6 million in fiscal
2000. Operating earnings of $10.4 million decreased from fiscal 2000 operating
earnings of $37.5 million. Sales increased as a result of new products, growth
in sales of intermediate and extended shelf life products and the Land O' Lakes
acquisition. The decrease in earnings partially resulted from investments of
approximately $18 million in marketing and promotional spending to support new
product introductions. Earnings were also negatively impacted by the start-up of
a new production line for licensed branded products and inefficiencies
associated with new production technology to produce intermediate and extended
shelf life products.
CORPORATE - Corporate expenses increased $20.5 million in fiscal 2001 to $58.7
million from $38.2 million in fiscal 2000. The increase is primarily the result
of $22.2 million of merger-related costs associated with the proposed merger
transaction with Suiza Foods Corporation. The Company will incur additional
merger-related costs until the transaction is closed. Excluding the
merger-related costs, corporate expenses declined slightly from fiscal 2000 due
primarily to lower incentive compensation expense.
INTEREST EXPENSE, NET OF INTEREST INCOME - Fiscal 2001 interest expense, net of
interest income, increased $21.4 million to $70.7 million. The increase is the
result of higher debt balances used to fund acquisitions and fiscal 2000 share
repurchases as well as higher short-term interest rates in fiscal 2001.
GAIN ON SALE OF NOTE - In December 2000, the Company sold for $10.0 million, a
$30.0 million subordinated note which was received as part of the proceeds from
the sale of the Company's vegetable business to Agrilink Foods, Inc. in fiscal
1999. Due to the uncertainty of the realizability of the $30.0 million
subordinated note, the note was originally valued at a nominal amount. As a
result of the sale, the Company reversed $10.0 million of the original reserve
against the note, resulting in the recognition of a $10.0 million pre-tax gain
in the second quarter of fiscal 2001.
INCOME TAXES - The Company's fiscal 2001 effective tax rate was 38.3% compared
with 38.8% in fiscal 2000.
FISCAL YEAR 2000 COMPARED TO FISCAL YEAR 1999
CONSOLIDATED RESULTS OF CONTINUING OPERATIONS - Fiscal 2000 net sales increased
8.4% to $4.1 billion. Each of the Company's business segments reported increased
sales over fiscal 1999, primarily as a result of business acquisitions and the
successful launch of new products.
Income from continuing operations was $106.1 million, or $2.77 per
diluted share versus $70.3 million, or $1.74 per diluted share in fiscal 1999.
The fiscal 2000 results include a pre-tax plant closure charge of $6.1 million
($3.8 million after-tax, or $.10 per diluted share) and fiscal 1999 results
include pre-tax plant closure charges of $18.1 million ($11.0 million after-tax,
or $.27 per diluted share). Absent the plant closure charges, income from
continuing operations advanced 35.2% to $109.9 million from $81.3 million and
earnings per diluted share from continuing operations increased 42.8% to $2.87
from $2.01 in fiscal 1999. The increased earnings were primarily the result of
strong performances in the Dairy Group and National Refrigerated Products Group
which more than offset the decline in earnings in the Specialty Foods Group and
increases in corporate costs and interest expense.
DAIRY GROUP - Dairy Group sales increased 9.0% in fiscal 2000 to $3.1 billion
and volume increased 9.5% over fiscal 1999. The increases in sales and volume
are primarily the result of business acquisitions completed during fiscal 1999.
Absent the impact of acquisitions, volume in fiscal 2000 was approximately flat
in comparison to fiscal 1999, as record high raw milk costs during the second
and third quarters of fiscal 2000 dampened consumption.
Fiscal 2000 operating earnings of $148.0 million, before plant closure
charges, increased 48.2% over 1999 due to improved operating efficiencies, plant
rationalizations and a more favorable overall commodity environment. Fiscal 1999
also included significant costs of integration of acquisitions.
SPECIALTY FOODS GROUP - Specialty Foods Group sales increased 7.0% in fiscal
2000 to $741.3 million from $692.9 million in fiscal 1999, primarily as the
result of the acquisition of Steinfeld's Products Company in July 1999.
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Operating earnings of $81.5 million in fiscal 2000 declined 5.7% from earnings
of $86.4 million, before plant closure charges, in fiscal 1999. The decline in
earnings is due to aggressive promotion and advertising activity by the branded
market leader in pickles during the second half of fiscal 2000 and incremental
costs from weather-related poor cucumber crop conditions.
NATIONAL REFRIGERATED PRODUCTS GROUP - National Refrigerated Products Group
sales grew 5.9% in fiscal 2000 to $290.6 million from $274.3 million in fiscal
1999. Operating earnings of $37.5 million increased significantly over fiscal
1999 operating earnings of $20.4 million. The increases in sales and earnings
are primarily attributable to business acquisitions completed in fiscal 1999.
The increase in earnings is also the result of increased operating efficiencies.
CORPORATE - Corporate expenses in fiscal 2000 increased $3.1 million to $38.2
million from fiscal 1999. The increase is primarily the result of costs
associated with the initial implementation of the Company's enterprise-wide
information system initiative.
INTEREST EXPENSE, NET OF INTEREST INCOME - Fiscal 2000 interest expense, net of
interest income, increased $11.3 million to $49.3 million. The increase is the
result of higher debt balances resulting from acquisitions and the Company's
share repurchase program as well as higher short-term market interest rates in
fiscal 2000.
INCOME TAXES - The Company's fiscal 2000 effective tax rate was 38.8% compared
with 39.0% in fiscal 1999.
PLANT CLOSURE CHARGES AND DISCONTINUED OPERATIONS
During the past three fiscal years, management initiated reorganization
and operational streamlining programs. The long-term objectives of these
initiatives were to optimize the Company's resources, improve operating
efficiencies and reduce the cost structure. This review resulted in the closure
of plants, the sale of the Company's vegetables business and the realignment of
the Company's business segments.
During the fourth quarter of fiscal 2000, the Company announced the
closure of the Sacramento, California and Mobile, Alabama fluid milk plants,
which resulted in a pre-tax charge of $6.1 million ($3.8 million after-tax, or
$.10 per diluted share) in the Dairy Group. The plant closure charge consisted
of $1.9 million of cash charges, which include severance and exit costs, and
$4.2 million of non-cash charges associated with the write-down to net
realizable value of certain assets. The closures, which affected approximately
118 hourly and salaried employees, was finalized by the end of the second
quarter of fiscal 2001. Production from the facilities was relocated to existing
dairy plants.
Also during fiscal 1999, the Company announced plant closures in the
Dairy and Specialty Food Groups, which resulted in a pre-tax charge of $18.1
million ($11.0 million after-tax, or $.27 per share). The pre-tax impact of the
plant closure charges on the Company's fiscal 1999 operating earnings by
business segment is summarized as follows:
<Table>
<Caption>
Operating Plant Closure Operating Earnings
(in millions) Earnings Charges before Closure Charges
- ---------------------------------------------------------------------------------------------------------------------
Dairy Group $ 91.0 $ 8.9 $ 99.9
Specialty Foods Group 77.1 9.2 86.3
National Refrigerated Products Group 20.3 - 20.3
Corporate (35.1) - (35.1)
- ---------------------------------------------------------------------------------------------------------------------
Consolidated $ 153.3 $ 18.1 $ 171.4
=====================================================================================================================
</Table>
The $8.9 million Dairy charge was recorded in the fourth quarter of
fiscal 1999 in association with the Company's announcement to close the Indiana
fluid milk plant. Production volume from this facility was integrated into
existing dairy plants.
The $9.2 million plant closure charge in the Specialty Foods Group
included an initial charge of $7.7 million, recorded in the third quarter, to
cover the costs of a Michigan plant shutdown. An additional $1.5 million was
recorded in the fourth quarter, primarily related to the removal and relocation
of equipment from the plant and the closure of an Illinois warehouse. Production
from the closed facility was integrated into existing plants.
In July 1998, the Company announced the divestiture of its vegetables
business to Agrilink Foods, Inc. ("Agrilink"). In September 1998 the transaction
closed for cash consideration of $378.2 million, a $30.0 million Agrilink
subordinated note and Agrilink's aseptic foods business, which was valued at
$80.2 million. In fiscal 1999,
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loss from discontinued operations was $2.9 million, or $.07 per diluted share,
compared to fiscal 1998 income from discontinued operations of $18.3 million, or
$.44 per diluted share. The fiscal 1999 loss reflects the results of operations
until September 1998, the date of sale of the Company's vegetables business. As
a result of the divestiture, the vegetables business operations results have
been presented as discontinued operations.
FINANCIAL CONDITION
LIQUIDITY AND CAPITAL RESOURCES - The Company's operating cash and capital
expenditure requirements have historically been met from internally generated
funds. Working capital at May 27, 2001 was $171.4 million compared to $151.3
million at May 28, 2000. The Company's fiscal 2001 year-end current ratio was
1.33 compared to 1.34 at the end of fiscal 2000.
Net property, plant, and equipment increased $104.0 million during
fiscal 2001 due to the assets of acquired businesses and capital expenditures,
net of dispositions and depreciation. The fiscal 2001 capital expenditures
reflect the Company's continued emphasis on investing to achieve growth from new
products, improved operating efficiencies, and expansion of existing product
lines.
The Company's financial strategy includes utilizing a combination of
debt and equity that will maintain a competitive weighted average cost of
capital and provide sufficient liquidity for growth. The Company has access to
significant capital via debt and equity markets. The Company will continue to
use both short-term and long-term debt markets in its funding of major capital
expenditures and, if the Suiza transaction is not completed, further
acquisitions. Pending the completion of the Company's merger with Suiza, the
Company does not expect to enter into any significant acquisitions or capital
expenditures.
Long-term obligations increased $181.4 million to $940.2 million at May
27, 2001. The increased debt levels are due to acquisitions and fiscal 2000
share repurchases. Long-term obligations include $694.1 million of senior notes,
consisting of four separate notes with maturities of $99.6 million in 2005,
$246.7 million in 2007, $199.9 million in 2009 and $148.0 million in 2017. In
March 1999, the Company entered into a $500 million commercial paper program
backed entirely by the Company's $500 million revolving credit agreement. Both
the commercial paper program and the revolving credit agreement mature in 2003.
At May 27, 2001, there was $209.0 million outstanding under the revolving credit
agreement. No commercial paper was outstanding at May 27, 2001. In June 2001,
the Company amended its revolving credit agreement to revise the interest rate
structure and change certain covenant tests and covenant definitions. The
Company has been, and expects to remain, in compliance with the covenants under
the amended revolving credit agreement.
In June 2000, the Company filed a shelf registration to issue, from time
to time, up to $650 million in various debt and equity securities. During the
first quarter of fiscal 2001, the Company issued $250 million of 8.15% Notes due
in 2007. The proceeds of these notes were used to fund acquisitions and to repay
commercial paper.
Shareholders' equity at May 27, 2001 was $704.6 million, an increase of
$46.9 million from last year-end, reflecting fiscal year 2000 earnings less
dividends paid to shareholders. The treasury stock held at May 27, 2001 is
available for use in future acquisitions and stock option issuances, if any, and
other general business purposes.
CASH FLOWS - Cash and temporary cash investments of $22.6 million at May 27,
2001 decreased $4.0 million from the level at May 28, 2000. The changes in cash
for fiscal 2000 and fiscal 1999 were increases of $10.7 million and $4.0
million, respectively. The Company's cash flow activities are as follows:
OPERATING ACTIVITIES - Fiscal 2001 cash provided from operations was
$206.5 million compared to $234.4 million and $163.9 million for fiscal 2000 and
1999, respectively. Excluding fiscal 2001 merger-related costs and fiscal 2000
and 1999 plant closure charges, operating earnings before depreciation and
amortization were $332.3 million, $336.3 million and $259.4 million, in fiscal
2001, 2000 and 1999, respectively.
INVESTING ACTIVITIES - Net cash used in the Company's investing
activities in fiscal 2001 was $364.6 million compared to $186.9 million and
$380.7 million in fiscal years 2000 and 1999, respectively. In fiscal 2001, the
Company invested $147.6 million in capital expenditures compared to $147.5
million and $139.3 million in fiscal 2000 and 1999, respectively. These levels
of capital expenditures reflect the Company's continued focus on investing in
innovative product growth, such as the Milk Chug initiative, improving
production efficiencies and expanding existing product lines. Business
acquisitions continued to be a significant investment activity for the Company.
In fiscal 2001, the Company invested $220.3 million in business acquisitions
compared to $38.2 million in fiscal 2000 and $238.8 million in fiscal 1999. Also
included in investing activities in fiscal 2001, 2000 and 1999
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was $4.1 million, $8.1 million and $7.3 million, respectively, related to the
Company's investment to upgrade and integrate the Company's sales, production
and financial information systems.
FINANCING ACTIVITIES - Net cash provided by financing activities was
$154.0 million in fiscal 2001. Net cash used in financing activities during
fiscal 2000 was $36.8 million and $76.7 million in fiscal 1999. The cash
provided during fiscal 2001 came from the issuance of $250 million of 8.15%
Notes and $209.0 million of borrowings under the revolving credit agreement,
offset by the repayment of $267.8 million of outstanding commercial paper. In
fiscal 2000, the Board of Directors authorized a two million share increase in
the number of shares available for repurchase. In fiscal 2000, the Company
repurchased 3.9 million shares of stock for $134.9 million compared to 1.8
million shares of stock for $70.4 million in fiscal 1999. No stock was
repurchased in fiscal 2001. The fiscal 2000 share repurchase program was
primarily funded by proceeds from the issuance of commercial paper of $131.4
million. The Company paid cash dividends of $31.7 million ($.90 per share) in
fiscal 2001 compared to $33.6 million ($.88 per share) and $33.3 ($.84 per
share) in fiscal 2000 and 1999, respectively.
DISCONTINUED OPERATIONS - In September 1998, the Company sold the stock
of Dean Foods Vegetable Company to Agrilink Foods, Inc. Net cash provided by
discontinued operations of $297.6 million includes the proceeds from the sale of
$378.2 million, less cash used for the payment of income taxes related to the
gain and for business operations until the date of sale.
MERGER
On April 5, 2001, the Company announced it had signed a definitive
merger agreement with Suiza Foods Corporation ("Suiza"), a fluid dairy processor
and distributor based in Dallas, Texas. Under the terms of the agreement,
shareholders of the Company will receive, for each share of Dean common stock,
$21.00 in cash plus 0.429 shares of Suiza common stock, subject to adjustment if
Suiza's stock price is below $32.71 at the time of merger. Upon completion of
the transaction, there will be approximately 43 million shares of Suiza common
stock outstanding, with current Suiza shareholders owning approximately 65% of
the company and Dean Foods shareholders holding approximately 35% of the
company.
Completion of the merger transaction is contingent upon approval by the
shareholders of both companies, certain regulatory approvals and other customary
closing conditions. The transaction is expected to be completed during the
fourth calendar quarter of 2001.
The Company recorded a pre-tax charge of $22.2 million ($13.7 million
after-tax, or $.38 per share) in the fourth quarter of fiscal 2001 for
merger-related costs. These charges consist of professional fees of $4.5
million, severance and employee stay costs of $2.7 million and a $15.0 million
charge relating to a lease commitment on office space that the Company will not
occupy. The lease charge was determined based on the Company's decision in the
fourth quarter to not occupy the office space under an operating lease, and the
charge reflects the rental payments over the term of the lease and other
termination costs reduced by estimated sublease income. The Company expects to
incur additional merger-related charges until the merger is completed.
RECENTLY ISSUED ACCOUNTING STANDARDS
In May 2000, the EITF reached consensus on Issue No. 00-14 "Accounting
for Certain Sales Incentives." This issue addresses the recognition, measurement
and income statement classification of sales incentives that have the effect of
reducing the price of a product or service to a customer at the point of sale.
Upon adoption, in the first quarter of fiscal 2002, certain sales incentives,
which are currently classified in delivery, selling and administrative expense,
will be reclassified as a reduction of sales. Prior period amounts will be
reclassified to conform to the new requirements. This change will not affect the
Company's financial position or results of operations.
In April 2001, the EITF reached consensus on Issue 00-25 "Vendor Income
Statement Characterization of Consideration Paid to a Reseller of the Vendor's
Products." This issue addresses when consideration from a vendor to a retailer
is (a) an adjustment of the selling price of the vendor's products to the
retailer and, therefore, should be deducted from revenue when recognized in the
vendor's income statement or (b) a cost incurred by the vendor for assets and
services provided by the retailer to the vendor and, therefore, should be
included as a cost or an expense when recognized in the vendor's income
statement. Upon adoption, in the first quarter of fiscal 2002, certain trade
spending amounts, which are currently classified in delivery, selling and
administrative expense, will be reclassified as a reduction of sales. Prior
period amounts will be reclassified to conform to the new requirements. This
change will not affect the Company's financial position or results of
operations.
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Statement of Accounting Standard (SFAS) No. 133, "Accounting for
Derivative Instruments and Hedging Activities" was issued in June 1998, and
amended by SFAS No. 138, "Accounting for Certain Derivative Instruments and
Certain Hedging Activities", in June 2000. These Statements standardize the
accounting for derivative instruments, including certain derivative instruments
embedded in other contracts, by requiring that an entity recognize those items
as assets or liabilities in the statement of financial position and measure them
at fair value. SFAS No. 133 was to be effective for fiscal years beginning after
June 15, 1999. In July 1999, the Financial Accounting Standards Board issued
SFAS No. 137, "Accounting for Derivative Instruments and Hedging Activities -
Deferral of the Effective Date of SFAS No. 133", which delayed the effective
date by one year. The adoption of SFAS No. 133, in the first quarter of fiscal
2002, will not have a material impact on the Company's results of operations or
financial condition.
In June 2001, the Financial Accounting Standards Board ("FASB") issued
SFAS 141, "Business Combinations" and SFAS 142, "Goodwill and Other Intangible
Assets" that supersede Accounting Principles Board ("APB") Opinion No. 16,
"Business Combinations," and APB Opinion No. 17, "Intangible Assets." The two
statements modify the method of accounting for business combinations and address
the accounting and reporting for goodwill and intangible assets. SFAS 141 is
effective for all business combinations initiated after June 30, 2001 and all
business combinations accounted for by the purchase method for which the date of
acquisition is after June 30, 2001. SFAS 142 is effective for fiscal years
beginning after December 15, 2001. Beginning in fiscal year 2003, the Company
will no longer amortize goodwill, but will, however, evaluate goodwill for
impairment annually. The Company is currently reviewing these statements to
determine their effect on the Company's financial statements.
FORWARD LOOKING STATEMENTS AND RELATED RISKS
Certain statements in this Annual Report on Form 10-K are
"forward-looking statements" as defined by the Private Securities Litigation
Reform Act of 1995. The Company intends that these forward-looking statements be
subject to the safe harbor created by that law. These statements, which may be
indicated by words such as "expects," "intends," "believes," "forecasts" or
other words of similar meaning, involve certain risks and uncertainties that may
cause actual results to differ materially from expectations as of the date of
this Annual Report. These risks include, but are not limited to, risks
associated with the Company's recent acquisitions, adverse weather conditions
resulting in poor harvests, raw milk and butterfat costs, interest rate
fluctuations, competitive pricing pressures, marketing and cost management
programs, changes in government programs, shifts in market demand and the timing
of the completion of the proposed merger transaction with Suiza. Investors are
strongly urged to consider these risks relating to the Company's business,
including those discussed in detail below.
WE MAY EXPERIENCE DIFFICULTIES MANAGING OUR GROWTH
The Company expanded its operations rapidly in recent years through
acquisitions and internal growth. See "Business--Business Acquisitions." The
Company has experienced some difficulties in integrating several of its recent
acquisitions, and these acquisitions continue to place a significant demand on
the Company's management and financial and operational resources.
As a result of its recent acquisitions, the Company is subject to
various continuing risks, including among others:
- inability to successfully integrate or operate acquired businesses,
- inability to retain key customers of acquired or existing businesses,
and
- inability to realize, or delays in realizing, expected benefits from
our increased size.
In particular, the integration of businesses the Company has acquired,
or may in the future acquire, may also require us to invest more capital than we
expected or require more time and effort by management than we expected. If we
continue to experience difficulties in integrating the businesses we have
acquired, or may in the future acquire, the Company's operations and financial
results could be materially and adversely affected.
OUR FAILURE TO SUCCESSFULLY COMPETE COULD ADVERSELY AFFECT OUR PROSPECTS AND
FINANCIAL RESULTS
The Company's business is subject to significant competition based on a
number of factors. See "Business--Competition." If we fail to successfully
compete against our competitors, our business will be adversely affected.
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Significant consolidation is currently underway in the retail grocery
and food service industries. As the Company's customer base continues to
consolidate, we expect competition to further intensify as we compete for the
business of fewer customers. As this consolidation continues, we cannot assure
you that the Company will be able to keep existing customers, or to gain new
customers. Moreover, as our customers become larger, they will have
significantly greater purchasing leverage, and may force dairy prices and
margins significantly lower than current levels.
We could also be adversely affected by any expansion of capacity by our
existing competitors or by new entrants in our markets. In addition, dairy
processors like the Company are facing pressure from other beverage companies
seeking to expand their influence over consumer beverage choices. These larger
competitors may adversely affect the Company in its fight for shelf space and
consumption of its products.
OUR INNOVATION EFFORTS MAY NOT SUCCEED
The Company has invested, and intends to continue to invest, significant
resources in product innovation in an effort to increase sales and profit
margins as well as the overall consumption of dairy products. We believe that
sales and profit growth through innovation is a significant source of growth in
the dairy industry, which has experienced relatively flat demand for a number of
years. Further, innovation is particularly important because we expect margins
on non value-added dairy products to be compressed as the Company's customer
base consolidates. The success of our innovation initiatives will depend on
customer and consumer acceptance of our products, of which there can be no
assurance. If the Company's innovation efforts do not succeed, we may not be
able to increase sales or profit margins.
OUR RAW MATERIAL AND SUPPLY COSTS COULD INCREASE
The most important raw materials that the Company uses in its operations
are raw milk and butterfat. In addition, the Company uses cucumbers in its
pickle and relish processing operations. The prices of these materials increase
and decrease depending on supply and demand and, in some cases, governmental
regulation. For more information about the pricing of raw milk, see
"Business--Raw Materials and Supplies." Prices of raw milk and butterfat can
fluctuate widely over short periods of time. The supply of cucumbers, and
related prices, can fluctuate based on adverse weather conditions affecting
cucumber crops.
In many cases, we are not able to pass on the increased price of raw
materials to our customers. Therefore, volatility in the cost of our raw
materials can adversely affect the Company's performance.
WE COULD BE ADVERSELY AFFECTED BY CHANGES IN REGULATIONS
The Company's operations are subject to federal, state, local and
foreign governmental regulation. While we believe that the Company is in
compliance with all material existing governmental regulations, any future
material noncompliance, or any material changes in these laws and regulations,
including changes in the laws regulating minimum prices for raw milk, could
adversely affect the Company's ability to operate its business as currently
conducted or the profitability of its operations.
The Company, like others in similar businesses, is also subject to a
variety of federal, state, local and foreign environmental laws and regulations
including, but not limited to, those regulating waste water and stormwater, air
emissions, storage tanks and hazardous materials.
The Company believes that it is currently in material compliance with
all applicable laws and regulations. Future developments, including increasingly
stringent regulations, could require us to make currently unforeseen
environmental expenditures to comply with changed or new regulations, which
could have an adverse effect on our results of operations.
WE MAY BE SUBJECT TO PRODUCT LIABILITY CLAIMS
The Company sells food products for human consumption, which involves
risks such as:
- product contamination or spoilage,
- product tampering, and
- other adulteration of food products.
19
20
Consumption of an adulterated, contaminated or spoiled product may
result in personal illness or injury. The Company could be subject to claims or
lawsuits relating to an actual or alleged illness or injury, and we could incur
liabilities that are not insured or that exceed our insurance coverages.
Although the Company maintains quality control programs designed to
address food quality and safety issues, an actual or alleged problem with the
quality, safety or integrity of our products at any of our facilities could
result in:
- product withdrawals,
- product recalls,
- remediation expenses,
- negative publicity,
- reduced demand for our products,
- temporary plant closings, and
- substantial costs of compliance or remediation.
Any of these events could have a material and adverse effect on the
Company's financial condition, results of operations or cash flows.
LOSS OF OR INABILITY TO ATTRACT KEY PERSONNEL COULD ADVERSELY AFFECT OUR
BUSINESS
The Company's success depends to a large extent on the skills,
experience and performance of key personnel. The loss of one or more of these
persons could hurt our business. If we are unable to attract and retain key
personnel, our business could be adversely affected.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The principal market risks to which the Company is exposed that may
adversely affect its results of operations and financial position include
changes in future interest rates and commodity prices and, to a lesser extent,
foreign currency exchange rates. The Company seeks to minimize or manage these
market risks through normal operating and financing activities and through the
use of commodity contracts, where practicable. Management believes that its use
of these instruments to manage risk is in the Company's best interest. The
Company does not trade or use instruments with the objective of earning
financial gains on the commodity price, exchange rate or interest rate
fluctuations. Complex instruments involving leverage or multipliers are not
used.
The Company's long-term debt structure consists of both fixed and
floating rate debt. The Company's exposure to market risk for changes in
interest rates relates primarily to debt obligations under the Company's
commercial paper program and revolving credit agreement. The Company enters into
short-term debt obligations primarily to support general corporate purposes,
including capital expenditures and working capital needs, and to fund
acquisitions. At May 27, 2001, the Company had $209 million outstanding under
its revolving credit agreement with a weighted average interest rate of
approximately 6.1%. A 10% increase in the revolving credit agreement interest
rate would result in additional interest expense of approximately $1.3 million.
The Company entered into two interest rate swaps with a total notional
amount of $75 million in the first quarter of fiscal 2000. These swaps hedge a
portion of the $200 million, 6.625% senior notes maturing in fiscal 2009. Under
the terms of the swaps, which mature in fiscal 2009, the Company receives a
fixed payment of 6.625% on the notional amount and pays a floating rate based on
six-month LIBOR plus a spread of four to six basis points.
Company products are manufactured from raw materials and ingredients,
including raw milk, cucumbers and corn syrup, and packaging materials, including
resin, cartons and glass, the costs of which are affected by the supply and
demand for the underlying commodities. Although these items are expected to
remain in adequate supply, market prices can be influenced by external factors
such as weather conditions and crop yields, as well as industry capacity. The
Company mitigates the impact of varying commodity prices by occasionally
entering into contracts for certain materials and ingredients and by attempting
to establish product prices which are reflective of the commodity cost changes.
The Company does not have significant exposure to market risk associated with
foreign currency exchange rates and as a result does not maintain foreign
exchange contracts.
20
21
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Company's consolidated balance sheet as of May 27, 2001 and May 28,
2000 and related consolidated statements of income, cash flows and shareholders'
equity for each of the three fiscal years in the period ended May 27, 2001, and
the notes thereto, as listed under Item 14, appear in a separate section of this
Annual Report on Form 10-K beginning on page 30.
Financial data for each quarter within the two most recent fiscal years
is set forth under the caption "Unaudited Quarterly Financial Data" on page 48
of this Annual Report on Form 10-K in the rows captioned "Net Sales," "Gross
Profit," "Income from Continuing Operations," "Net Income" and "Per Common Share
Data: Basic Income (Loss) Per Share and Diluted Income (Loss) Per Share."
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
21
22
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
Information regarding the Company's directors (including nominees for
election at the Company's Annual Meeting of Stockholders to be held September
26, 2001) is set forth in the Company's 2001 Proxy Statement, under the captions
"ELECTION OF DIRECTORS" and "CERTAIN INFORMATION REGARDING THE BOARD OF
DIRECTORS". Such information is hereby incorporated by reference.
Information supplied by the Company's executive officers who are not
also directors of the Company concerning their ages, business experience, and
periods of service as executive officers is as follows:
Served in
Position with such position
the Company Age since
----------- --- -----
Eric A. Blanchard...........................Vice President and President, 45 1999
Dairy Group
Jenny L. Carpenter..........................Vice President and 55 1995
Brand Manager, National
Refrigerated Products Group
Gary A. Corbett.............................Vice President, Governmental 53 1993
and Dairy Industry Relations
Daniel M. Dressel...........................Vice President, 58 1999
Human Resources
Neil J. Finerty.............................Vice President, 56 1997
Industrial Relations
Gary D. Flickinger..........................Vice President, 60 1993
Manufacturing and Engineering
Daniel E. Green.............................Vice President, Business Development 56 1999
James R. Greisinger.........................Vice President and 61 1992
President, Specialty Foods Group
Alan W. Hooper..............................Vice President, Operations 52 1997
Dale E. Kleber..............................Vice President, Secretary and 45 1999
General Counsel
Barbara A. Klein............................Vice President, Finance and 47 2000
Chief Financial Officer
William M. Luegers, Jr. ....................Vice President and Treasurer 47 1999
Daniel R. Morrison..........................Vice President and Controller 44 2000
22
23
Luis P. Nieto...............................Vice President and President, 46 1999
National Refrigerated Products
Group
Douglas A. Parr.............................Vice President 59 1993
Dairy Sales and Marketing
Dennis J. Purcell...........................Group Vice President 58 1993
Gary P. Rietz...............................Vice President and 45 1997
Chief Information Officer
Each of the executive officers, including executive officers who are
also directors, was elected to serve as an executive officer until the next
annual meeting of directors, scheduled for September 26, 2001.
All of the Company's executive officers listed in Part III, Item 10 have
been employees of the Company for more than five years, with the exception of
Mr. Dressel, Ms. Klein, Mr. Nieto and Mr. Rietz. Prior to assuming their current
positions,
- - Mr. Blanchard was a Company Vice President and Secretary and General
Counsel;
- - Ms. Carpenter was the Company's Director of Marketing and Sales-Specialty
Foods Division;
- - Mr. Corbett was in the Company's sales administration management;
- - Mr. Finerty was the Director of Industrial Relations;
- - Mr. Flickinger was the Director of Production - Dairy and a divisional
general manager;
- - Mr. Green was Group Vice President and President-Ryan Foods Company;
- - Mr. Greisinger was a Company Vice President and President of Dean Pickle
and Specialty Products Company;
- - Mr. Hooper was the Company's Director of Strategic Projects;
- - Mr. Kleber was Vice President, Associate General Counsel;
- - Mr. Luegers was Corporate Controller;
- - Mr. Morrison was Vice President of Finance for the Dairy Division;
- - Mr. Parr was a Company regional sales manager; and
- - Mr. Purcell was Senior Vice President of Sales and Marketing of Dean
Pickle and Specialty Products Company.
Mr. Dressel has been employed by the Company since 1999. Mr. Dressel,
prior to his employment with the Company, was Vice President - Human Resources
at Kraft Foods, Inc., a diversified food company.
Ms. Klein has been employed by the Company since 2000. Ms. Klein, prior
to her employment with the Company, was Vice President and Corporate Comptroller
of Ameritech Corporation, a telecommunications company.
Mr. Nieto has been employed by the Company since 1999. Prior to assuming
his present duties, he was Vice President - Marketing of the Specialty business
unit. Mr. Nieto, prior to his employment with the Company, was Executive Vice
President of Marketing, Sales & Distribution with Mission Foods Company, a
diversified food company.
Mr. Rietz has been employed by the Company since 1997. Mr. Rietz, prior
to his employment with the Company, was Business Systems Manager - North
American Beverage Division of Quaker Oats Company, a diversified food and
beverage company.
23
24
ITEM 11. EXECUTIVE COMPENSATION.
Information regarding the cash compensation of the Company's executive
officers, compensation pursuant to plans and compensation of the Company's
directors (including nominees for election at the Company's Annual Meeting of
stockholders to be held September 26, 2001) is set forth in the Company's 2001
Proxy Statement, under the caption "CERTAIN INFORMATION REGARDING THE BOARD OF
DIRECTORS" and under the caption "EXECUTIVE COMPENSATION." Such information is
hereby incorporated by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
Information regarding security ownership of certain beneficial owners
and management is set forth in the Company's 2001 Proxy Statement, under the
caption "PRINCIPAL HOLDERS OF VOTING SECURITIES". Such information is hereby
incorporated by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
None.
24
25
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a) The following documents are included in this report:
(1) Financial Statements
Page
----
Index to Consolidated Financial Statements of
Dean Foods Company and Subsidiaries
Report of Independent Accountants 29
Consolidated Statement of Income for the
three fiscal years ended May 27, 2001 30
Consolidated Balance Sheet at May 27, 2001
and May 28, 2000 31
Consolidated Statement of Cash Flows for the
three fiscal years ended May 27, 2001 32
Consolidated Statement of Shareholders' Equity
for the three fiscal years ended May 27, 2001 33
Notes to Consolidated Financial Statements 34
(2) Financial Statement Schedules
Schedule II - Valuation and qualifying accounts
All other schedules have been omitted because they are not
applicable, or not required, or because the required
information is shown in the consolidated financial statements
or notes thereto.
(3) Exhibits
(2) Plan of acquisition, reorganization, arrangement,
liquidation or succession
a. Agreement and Plan of Merger dated as of April 4,
2001, by and among Suiza Foods Corporation,
Blackhawk Acquisition Corp. and Dean Foods
Company (filed as Exhibit 2.1 to the Company's
Form 10-Q Quarterly Report for the quarterly
period ended February 25, 2001 and incorporated
herein by reference)
(3) Articles of Incorporation and By-Laws
a. Dean Foods Company Restated Certificate of
Incorporation dated February 8, 1988 as amended
October 5, 1998 (filed as Exhibit 3(a)) to
Registrant's Form 10-Q Quarterly Report for
quarterly period ended August 30, 1998 and
incorporated herein by reference)
b. By-Laws of Registrant, as amended May 22, 1998
(filed as Exhibit 4(a) to the Registrant's Form
10-K Annual Report for the Fiscal Year Ended May
28, 1998 and incorporated herein by reference)
(4) Instruments defining the rights of security holders,
including indentures
a. Rights Agreement dated May 22, 1998 (filed as
Exhibit 4(a) to the Registrant's Form 10-K Annual
Report for the Fiscal Year Ended May 31, 1998 and
incorporated herein by reference)
b. Amendment No. 1, dated as of January 1, 2001, to
Rights Agreement, dated May 22, 1998 (filed as
Exhibit 4.1 to the Company's Form 10-Q Quarterly
Report for the quarterly period ended February
25, 2001 and incorporated herein by reference)
25
26
(10) Material contracts
a. Amended and Restated Dean Foods Company
Management Deferred Compensation Plan, dated as
of June 1, 1994 (filed as Exhibit 10(a) to
Registrant's Form 10-K Annual Report for Fiscal
Year Ended May 29, 1994 and incorporated herein
by reference)*
b. Dean Foods Company Retirement Plan for Certain
Directors (filed as Exhibit 10(a) to Registrant's
Form 10-K Annual Report for Fiscal Year Ended
December 28, 1985 and incorporated herein by
reference)*
c. Form of Change in Control Agreement between Dean
Foods Company and Executives (filed as Exhibit
10.1 to the Company's Form 10-Q Quarterly Report
for the quarterly period ended February 25, 2001
and incorporated herein by reference)*
d. Form of First Amendment to Form of Change in
Control Agreement between Dean Foods Company and
Executives*
e. Form of Indemnification Agreement between
Registrant and each of its directors and officers
serving at any time after October 5, 1987 (filed
as Exhibit 10(m) to Registrant's Form 10-K Annual
Report for Fiscal Year Ended May 29, 1988, and
incorporated herein by reference)*
f. Amended and Restated Dean Foods Company Directors
Deferred Compensation Plan, dated March 25, 1988
(filed as Exhibit 10(j) to Registrant's Form 10-K
Annual Report for Fiscal Year Ended May 28, 1989
and incorporated herein by reference)*
g. Dean Foods Company Supplemental Benefit Plan, as
amended and restated, effective as of October 1,
1996 (filed as Exhibit 10.2 to the Company's Form
10-Q Quarterly Report for the quarterly period
ended February 25, 2001 and incorporated herein
by reference)*
h. Dean Foods Company Supplemental Incentive
Compensation Plan for certain officers, as
amended March 31, 1989 (filed as Exhibit 10(l) to
Registrant's Form 10-K Annual Report for Fiscal
Year Ended May 28, 1989 and incorporated herein
by reference)*
i. Dean Foods Company Director Stock Option Plan,
dated September 30, 1992 (filed as Exhibit 10(i)
to Registrant's Form 10-K Annual Report for
Fiscal Year Ended May 30, 1993 and incorporated
herein by reference)*
j. Dean Foods Company Director Stock Awards Plan,
dated October 1, 1996, and the First Amendment
thereto, effective as of May 26, 2000 (filed as
Exhibit 10.3 to the Company's Form 10-Q Quarterly
Report for the quarterly period ended February
25, 2001 and incorporated herein by reference)*
k. Severance Agreement, dated April 30, 2001,
between Dean Foods Company and Richard E. Bailey*
l. Amendment No. 1, dated May 23, 2001, to Severance
Agreement, dated April 30, 2001, between Dean
Foods Company and Richard E. Bailey*
26
27
m. $500 million Credit Agreement dated as of March
31, 1998, between Dean Foods Company and the
Banks parties thereto (filed as Exhibit 10(i) to
Registrant's Form 10-K Annual Report for Fiscal
Year Ended May 31, 1998 and incorporated herein
by reference)
n. Amendment No. 2, dated June 26, 2001, to $500
million Credit Agreement dated as of March 31,
1998, between Dean Foods Company and the Banks
parties thereto
(12) Statements re: computation of ratios
a. Computation of Ratio of Earnings to Fixed Charges
b. Computation of Ratio of Earnings to Fixed Charges
and Preferred Stock Dividends
(21) Subsidiaries of the Registrant
a. Subsidiaries of the Registrant as of May 27, 2001
(23) Consents of Experts and Counsel
a. Consent of Independent Accountants
- -------------------------
* Represents a management contract, compensation plan or arrangement.
(b) Reports on Form 8-K.
A report on Form 8-K dated March 9, 2001 was filed by the Company
stating under Item 5 that the Company had announced that it expects to
report earnings for the third quarter ending February 25, 2001, and for
the full fiscal year ending May 27, 2001, below Wall Street consensus
estimates as a result of weaker than expected results in the Dairy and
National Refrigerated Products segments. The company also announced that
it was working with Goldman, Sachs & Co. to explore strategic and
financial alternatives.
A report on Form 8-K dated March 23, 2001 was filed by the
Company stating under Item 5 that the Company had announced results for
its third quarter and year-to-date fiscal 2001 results.
A report on Form 8-K dated April 19, 2001, was filed by the
Company stating under Item 5 that Richard E. Bailey, President and Chief
Operating Officer, would resign effective April 30, 2001. In light of
the previously announced merger of Dean Foods and Suiza Foods, Mr.
Bailey decided to pursue other options for future career opportunities.
Howard M. Dean, Chairman and Chief Executive Officer, assumed Mr.
Bailey's responsibilities.
A report on Form 8-K dated June 19, 2001 was filed by the Company
stating under Item 5 that the Company had announced that it expects to
report earnings for the fourth quarter ending May 27, 2001, below Wall
Street consensus estimates as a result of weaker than expected results
in the Specialty Foods and National Refrigerated Products segments.
A report on Form 8-K dated June 27, 2001 was filed by the Company
stating under Item 5 that the Company had announced results for its
fourth quarter and full year ended May 27, 2001.
27
28
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be signed on
its behalf by the undersigned, thereunto duly authorized.
DEAN FOODS COMPANY
By /s/ Barbara A. Klein
-----------------------------
Barbara A. Klein
Vice President, Finance and
Chief Financial Officer
Date: August 10, 2001
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated:
SIGNATURE TITLE DATE
/s/ Howard M. Dean Chairman of the Board and August 10, 2001
- ------------------------------------ Chief Executive Officer
Howard M. Dean
/s/ Edward A. Brennan Director August 10, 2001
- ------------------------------------
Edward A. Brennan
/s/ Lewis M. Collens Director August 10, 2001
- ------------------------------------
Lewis M. Collens
/s/ Paula H. Crown Director August 10, 2001
- ------------------------------------
Paula H. Crown
/s/ John P. Frazee, Jr. Director August 10, 2001
- ------------------------------------
John P. Frazee, Jr.
/s/ Bert A. Getz Director August 10, 2001
- ------------------------------------
Bert A. Getz
/s/ Janet Hill Director August 10, 2001
- ------------------------------------
Janet Hill
/s/ John S. Llewellyn, Jr. Director August 10, 2001
- ------------------------------------
John S. Llewellyn, Jr.
/s/ Richard P. Mayer Director August 10, 2001
- ------------------------------------
Richard P. Mayer
/s/ J. Christopher Reyes Director August 10, 2001
- ------------------------------------
J. Christopher Reyes
28
29
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and
Shareholders of Dean Foods Company
In our opinion, the consolidated financial statements listed in the index
appearing under Item 14(a)(1) on page 25 present fairly, in all material
respects, the financial position of Dean Foods Company and its subsidiaries at
May 27, 2001 and May 28, 2000, and the results of their operations and their
cash flows for each of the three years in the period ended May 27, 2001, in
conformity with accounting principles generally accepted in the United States of
America. In addition, in our opinion, the financial statement schedule listed in
the index appearing under Item 14(a)(2) on page 25 presents fairly, in all
material respects, the information set forth therein when read in conjunction
with the related consolidated financial statements. These financial statements
and financial statement schedule are the responsibility of the Company's
management; our responsibility is to express an opinion on these financial
statements and financial statement schedule based on our audits. We conducted
our audits of these statements in accordance with auditing standards generally
accepted in the United States of America, which require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for our opinion.
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
June 26, 2001
Chicago, Illinois
29
30
Dean Foods Company
Consolidated Statement of Income
(In Thousands, Except for Per Share Amounts)
For the Three Fiscal Years Ended May 2001 2000 1999
- ---------------------------------------------------------------------------------------------------------------------------------
NET SALES $ 4,440,366 $ 4,102,572 $ 3,784,893
Costs of products sold 3,387,707 3,107,996 2,943,241
Delivery, selling and administrative expenses 848,950 765,886 670,209
Merger-related costs 22,151 - -
Plant closure charges - 6,078 18,105
- ---------------------------------------------------------------------------------------------------------------------------------
OPERATING EARNINGS 181,558 222,612 153,338
Interest expense, net of interest income 70,655 49,338 38,041
Gain on sale of note 10,000 - -
- ---------------------------------------------------------------------------------------------------------------------------------
INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES 120,903 173,274 115,297
Provision for income taxes 46,251 67,156 44,966
- ---------------------------------------------------------------------------------------------------------------------------------
INCOME FROM CONTINUING OPERATIONS 74,652 106,118 70,331
- ---------------------------------------------------------------------------------------------------------------------------------
Discontinued operations, net of taxes:
Loss from discontinued operations - - (2,929)
Gain on sale of discontinued operations - - 83,820
- ---------------------------------------------------------------------------------------------------------------------------------
Total discontinued operations, net of taxes - - 80,891
- ---------------------------------------------------------------------------------------------------------------------------------
NET INCOME $ 74,652 $ 106,118 $ 151,222
=================================================================================================================================
BASIC EARNINGS (LOSS) PER SHARE:
Income from continuing operations $ 2.10 $ 2.79 $ 1.77
Loss from discontinued operations - - (.07)
Gain on sale of discontinued operations - - 2.10
- ---------------------------------------------------------------------------------------------------------------------------------
Net income $ 2.10 $ 2.79 $ 3.80
=================================================================================================================================
DILUTED EARNINGS (LOSS) PER SHARE:
Income from continuing operations $ 2.07 $ 2.77 $ 1.74
Loss from discontinued operations - - (.07)
Gain on sale of discontinued operations - - 2.07
- ---------------------------------------------------------------------------------------------------------------------------------
Net income $ 2.07 $ 2.77 $ 3.74
=================================================================================================================================
WEIGHTED AVERAGE COMMON SHARES:
Basic 35,562 37,965 39,842
Diluted 36,003 38,311 40,482
=================================================================================================================================
See accompanying notes to consolidated financial statements.
30
31
Dean Foods Company
Consolidated Balance Sheet
(In Thousands)
May 27, 2001 and May 28, 2000 2001 2000
- --------------------------------------------------------------------------------------------------------------------------------
ASSETS
CURRENT ASSETS
Cash and temporary cash investments $ 22,616 $ 26,649
Accounts and notes receivable, less allowance for doubtful
accounts of $6,482 and $6,311, respectively 363,079 302,557
Inventories 220,087 178,438
Deferred tax assets 49,340 56,720
Other 39,909 36,020
- --------------------------------------------------------------------------------------------------------------------------------
Total Current Assets 695,031 600,384
- --------------------------------------------------------------------------------------------------------------------------------
PROPERTY, PLANT AND EQUIPMENT
Land 61,580 58,420
Buildings and improvements 408,390 371,107
Machinery and equipment 895,643 790,929
Transportation equipment 105,719 90,321
Construction in progress 79,017 45,410
- --------------------------------------------------------------------------------------------------------------------------------
Total Property, Plant and Equipment, gross 1,550,349 1,356,187
Less - Accumulated depreciation 631,051 540,923
- --------------------------------------------------------------------------------------------------------------------------------
Total Property, Plant and Equipment, net 919,298 815,264
- --------------------------------------------------------------------------------------------------------------------------------
OTHER ASSETS
Goodwill, net of amortization of $54,225 and $36,550, respectively 661,701 557,721
Other intangible assets, net of amortization of $7,786 and $5,560, respectively 4,631 6,085
Other 36,726 24,088
- --------------------------------------------------------------------------------------------------------------------------------
Total Other Assets 703,058 587,894
- --------------------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $ 2,317,387 $ 2,003,542
================================================================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Current installments of long-term obligations $ 4,398 $ 3,603
Accounts payable and accrued expenses 486,435 396,400
Dividends payable 8,203 7,876
Federal and state income taxes 24,574 41,219
- --------------------------------------------------------------------------------------------------------------------------------
Total Current Liabilities 523,610 449,098
- --------------------------------------------------------------------------------------------------------------------------------
LONG-TERM OBLIGATIONS 940,170 758,725
- --------------------------------------------------------------------------------------------------------------------------------
DEFERRED LIABILITIES
Deferred income taxes 118,313 99,410
Other 30,678 38,624
- --------------------------------------------------------------------------------------------------------------------------------
Total Deferred Liabilities 148,991 138,034
- --------------------------------------------------------------------------------------------------------------------------------
COMMITMENTS AND CONTINGENT LIABILITIES - -
- --------------------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES 1,612,771 1,345,857
- --------------------------------------------------------------------------------------------------------------------------------
SHAREHOLDERS' EQUITY
Preferred stock, $1 par value, 10,000,000 shares authorized, none issued - -
Common stock, $1 par value, 150,000,000 shares authorized,
42,516,003 and 42,364,508 shares issued, respectively 42,516 42,365
Capital in excess of par value 70,520 65,172
Retained earnings 845,720 803,096
Cumulative translation adjustment (890) (361)
Less - Treasury stock, at cost, 6,875,971 and 6,879,155 shares, respectively 253,250 252,587
- --------------------------------------------------------------------------------------------------------------------------------
Total Shareholders' Equity 704,616 657,685
- --------------------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 2,317,387 $ 2,003,542
================================================================================================================================
See accompanying notes to consolidated financial statements.
31
32
Dean Foods Company
Consolidated Statement of Cash Flows
(In Thousands)
For the Three Fiscal Years Ended May 2001 2000 1999
- ----------------------------------------------------------------------------------------------------------------------------------
CONTINUING OPERATIONS
Income from continuing operations $ 74,652 $ 106,118 $ 70,331
Adjustments to reconcile income from continuing
operations to net cash provided from continuing operations:
Depreciation and amortization 128,623 107,571 87,942
Deferred income taxes 26,283 16,463 9,834
Other long-term deferred liabilities (5,180) (4,762) (4,240)
Merger-related costs 22,151 - -
Plant closure charges - 6,078 18,105
(Increase) decrease in working capital items, net of acquisitions:
Accounts and notes receivable (32,090) 6,817 (15,108)
Inventories and other current assets (32,033) 1,363 (963)
Accounts payable and accrued expenses 46,632 (14,580) (17,102)
Federal and state income taxes (16,363) 10,912 18,096
Other (6,163) (1,560) (2,977)
- ----------------------------------------------------------------------------------------------------------------------------------
Net cash provided from continuing operations 206,512 234,420 163,918
- ----------------------------------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Capital expenditures (147,566) (147,541) (139,346)
Proceeds from dispositions of property, plant and equipment 7,451 6,898 4,693
Acquisitions and equity investments, net of cash acquired (220,335) (38,204) (238,786)
Capitalized information systems costs and other (4,100) (8,081) (7,284)
- ----------------------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (364,550) (186,928) (380,723)
- ----------------------------------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Issuance of long-term obligations 245,818 - 201,627
Repayment of long-term obligations (5,855) (3,217) (107,256)
Issuance (repayment) of commercial paper, net (267,811) 131,401 136,410
Borrowing under (repayment of) revolving credit agreement, net 209,000 - (210,000)
Repayment of notes payable to banks - - (12,000)
Unexpended industrial revenue bond proceeds - - 5,965
Cash dividends paid (31,701) (33,574) (33,263)
Issuance of common stock 4,554 3,488 12,180
Purchase of treasury stock - (134,899) (70,384)
- ----------------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities 154,005 (36,801) (76,721)
- ----------------------------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY DISCONTINUED OPERATIONS - - 297,552
- ----------------------------------------------------------------------------------------------------------------------------------
INCREASE (DECREASE) IN CASH AND TEMPORARY CASH INVESTMENTS (4,033) 10,691 4,026
CASH AND TEMPORARY CASH INVESTMENTS - BEGINNING OF YEAR 26,649 15,958 11,932
- ----------------------------------------------------------------------------------------------------------------------------------
CASH AND TEMPORARY CASH INVESTMENTS - END OF YEAR $ 22,616 $ 26,649 $ 15,958
==================================================================================================================================
See accompanying notes to consolidated financial statements.
32
33
Dean Foods Company
Consolidated Statement of Shareholders' Equity
(In Thousands)
COMMON COMMON CAPITAL IN CUMULATIVE TOTAL
STOCK STOCK EXCESS OF RETAINED TRANSLATION TREASURY SHAREHOLDERS'
SHARES VALUE PAR VALUE EARNINGS ADJUSTMENT STOCK EQUITY
- -----------------------------------------------------------------------------------------------------------------------------------
BALANCES AT MAY 31, 1998 39,970 $ 41,962 $ 31,127 $ 612,390 $ (290) $ (65,923) $ 619,266
Net income - - - 151,222 - - 151,222
Issuance of common stock 250 250 2,765 - - - 3,015
Exercise of stock options 64 64 9,101 - - - 9,165
Purchase of treasury stock (1,783) - - - - (70,384) (70,384)
Issuance of treasury stock 6 - (155) - - 155 -
Issuance of treasury stock for
acquisition 769 - 19,282 - - 18,117 37,399
Cash dividends declared,
$.84 per share - - - (33,538) - - (33,538)
Cumulative translation adjustment - - - - 269 - 269
- -----------------------------------------------------------------------------------------------------------------------------------
BALANCES AT MAY 30, 1999 39,276 42,276 62,120 730,074 (21) (118,035) 716,414
Net income - - - 106,118 - - 106,118
Issuance of common stock 27 27 1,099 - - - 1,126
Exercise of stock options 62 62 2,300 - - - 2,362
Purchase of treasury stock (3,893) - - - - (134,899) (134,899)
Issuance of treasury stock 13 - (347) - - 347 -
Cash dividends declared,
$.88 per share - - - (33,096) - - (33,096)
Cumulative translation adjustment - - - - (340) - (340)
- -----------------------------------------------------------------------------------------------------------------------------------
BALANCES AT MAY 28, 2000 35,485 42,365 65,172 803,096 (361) (252,587) 657,685
Net income - - - 74,652 - - 74,652
Issuance of common stock 46 46 1,494 - - - 1,540
Exercise of stock options 105 105 3,191 - - - 3,296
Issuance of treasury stock 4 - (82) - - 82 -
Cash dividends declared,
$.90 per share - - - (32,028) - - (32,028)
Cumulative translation adjustment - - - - (529) - (529)
Other - - 745 - - (745) -
- -----------------------------------------------------------------------------------------------------------------------------------
BALANCES AT MAY 27, 2001 35,640 $ 42,516 $ 70,520 $ 845,720 $ (890) $ (253,250) $ 704,616
===================================================================================================================================
See accompanying notes to consolidated financial statements.
33
34
Dean Foods Company
Notes to Consolidated Financial Statements
Dollar amounts in thousands unless otherwise noted.
1. NATURE OF THE BUSINESS AND SUMMARY OF ACCOUNTING POLICIES
NATURE OF BUSINESS - Dean Foods Company and its subsidiaries ("the Company") are
engaged in the processing, distribution and sales of dairy and specialty food
products. The Company operates in three business segments. The Company's
principal products in the Dairy Group are fluid milk, ice cream and cultured
products. The Specialty Foods Group products include pickles, non-dairy
creamers, aseptic sauces and assorted specialty food items. Principal products
of the National Refrigerated Products Group include extended shelf life dairy
products, refrigerated dips, produce dips and refrigerated salad dressings.
USE OF ESTIMATES IN THE FINANCIAL STATEMENTS - The preparation of financial
statements in conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and the disclosure of contingent assets and liabilities
at the date of the financial statements as well as the reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from those estimates.
DEFINITION OF FISCAL YEAR - The Company's fiscal year ends on the last Sunday in
May. There were 52 weeks in each of the fiscal years ended May 2001, 2000 and
1999.
PRINCIPLES OF CONSOLIDATION - The consolidated financial statements include the
accounts of the Company and all of its wholly-owned and majority-owned
subsidiaries. All significant intercompany transactions and balances have been
eliminated.
CASH AND TEMPORARY CASH INVESTMENTS - The Company considers temporary cash
investments with an original maturity of three months or less to be cash
equivalents.
INVENTORIES - Inventories are stated at the lower of cost or market. The
majority of pickle and powdered products inventories are valued on the last-in,
first-out (LIFO) method. Dairy and certain specialty products inventories are
valued on the first-in, first-out (FIFO) method.
PROPERTY, PLANT AND EQUIPMENT - Property, plant and equipment are stated at cost
and depreciated using the straight-line method over the estimated useful lives
of the assets as follows:
ASSET USEFUL LIFE
- ---------------------------------------------------------------------
Buildings and improvements 5 to 40 years
Machinery and equipment 2 to 25 years
Transportation equipment 5 to 12 years
Major renewals and betterment are capitalized, while repairs and maintenance,
which do not improve or extend useful life, are expensed. Upon sale, retirement,
abandonment or other disposition of property, the cost and related accumulated
depreciation are eliminated from the accounts and any gain or loss is included
in income. For income tax purposes, certain assets are depreciated using
accelerated methods. Depreciation expense on properties was $103.3 million,
$87.5 million and $72.8 million for fiscal years 2001, 2000 and 1999,
respectively.
INTANGIBLE ASSETS - Excess of cost over fair market value of net identifiable
assets of acquired companies and other intangible assets are amortized on a
straight-line basis over periods up to forty years.
LONG-LIVED ASSETS - The Company continually reviews goodwill, other intangible
assets and property, plant and equipment for impairment whenever events or
changes in circumstances indicate that the carrying amount of the asset may not
be recoverable. To determine whether impairment exists, an estimate of the
undiscounted future cash flows are compared to the carrying amount. The Company
believes that there is no impairment of long-lived assets at May 27, 2001.
COMPUTER SOFTWARE - The Company expenses or capitalizes computer software
developed or obtained for internal use in accordance with AICPA Statement of
Position ("SOP") 98-1, "Accounting for the Costs of Computer Software Developed
or Obtained for Internal Use." Capitalized costs are amortized over a period of
five years, beginning when the capitalized software is ready for its intended
use.
34
35
Dean Foods Company
Notes to Consolidated Financial Statements (continued)
PENSIONS - All Company employees are covered by Company or
union-management-administered pension plans or profit sharing plans. The policy
with respect to Company-administered pension plans is to fund accrued pension
costs based on determinations made by independent actuaries which include
provisions for service cost, interest cost, return on pension assets and
amortization of prior service cost and unrecognized initial net assets.
INCOME TAXES - Deferred tax assets and liabilities are recognized for the future
tax consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled.
REVENUE RECOGNITION - Revenues are recognized when products are shipped to the
customers. Revenues are recorded net of all applicable provisions for discounts,
returns and allowances.
ADVERTISING EXPENSE - Advertising expense is comprised of media, agency and
production expenses. Advertising expenses are charged to income during the
period incurred, except for expenses related to the development of a major
commercial or media campaign, which are charged to income during the period in
which the advertisement or campaign is first presented by the media.
EARNINGS PER COMMON SHARE - Basic and diluted earnings per share (EPS) is
computed in accordance with Statement of Financial Accounting Standards ("SFAS")
No. 128, "Earnings per Share." Basic EPS is computed by dividing reported net
income by the weighted average number of common shares outstanding. Diluted EPS
includes the incremental shares issuable upon the assumed exercise of stock
options and warrants, using the treasury stock method. A reconciliation of the
numerators and denominators of the basic and diluted per share computations is
as follows:
2001 2000 1999
Income from Continuing Operations (Numerator) $ 74,652 $106,118 $ 70,311
- -------------------------------------------------------------------------------------------------
Shares (Denominator)
Weighted average common shares outstanding 35,562 37,965 39,842
Incremental common shares attributable to dilutive stock options 441 346 640
- -------------------------------------------------------------------------------------------------
Diluted number of shares outstanding 36,003 38,311 40,482
=================================================================================================
Income from Continuing Operations per Share:
Basic $ 2.10 $ 2.79 $ 1.77
Diluted $ 2.07 $ 2.77 $ 1.74
- -------------------------------------------------------------------------------------------------
STOCK-BASED COMPENSATION - SFAS No. 123, "Accounting for Stock-Based
Compensation," encourages, but does not require, companies to record
compensation cost for stock-based employee compensation plans at fair value. The
Company has elected to continue to measure compensation cost using the intrinsic
value-based method of accounting as prescribed by Accounting Principles Board
Opinion ("APB") No. 25, "Accounting for Stock Issued to Employees." Income tax
benefits attributable to stock options exercised are credited to capital in
excess of par value. The pro forma effects of SFAS No. 123 are presented in Note
9 of the Consolidated Financial Statements.
COMPREHENSIVE INCOME - SFAS No. 130, "Reporting Comprehensive Income," which
requires comprehensive income and its components to be disclosed in the
financial statements for all periods presented, became applicable during fiscal
1999. The only item of comprehensive income reported separately in equity is a
cumulative translation adjustment.
SEGMENT REPORTING - SFAS No. 131, "Disclosures about Segments of an Enterprise
and Related Information," requires disclosures of certain information about
operating segments on a basis consistent with the way in which the Company
manages and operates. The disclosures as required by SFAS No. 131 are included
in Note 17 to the Consolidated Financial Statements.
35
36
Dean Foods Company
Notes to Consolidated Financial Statements (continued)
SHIPPING AND HANDLING FEES AND COSTS - In September 2000, the Emerging Issues
Task Force ("EITF") of the Financial Accounting Standards Board reached a final
consensus on Issue No. 00-10, "Accounting for Shipping and Handling Fees and
Costs," which the Company adopted during the fourth quarter of fiscal 2001. The
issue states that all amounts billed to a customer in a sale transaction related
to shipping and handling should be classified as revenue. Issue No. 00-10 also
addresses the disclosure of the classification of shipping and handling costs.
Previously, the Company 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. Upon adoption of Issue No.
00-10 in the fourth quarter of fiscal 2001, the Company's shipping and handling
costs are included either in cost of products sold or delivery, selling and
administrative expenses, depending on the nature of such costs. Accordingly,
prior years' shipping and handling costs that were reclassified from net sales
to cost of products sold and delivery, selling and administrative expenses
totaled $37 million and $30 million, in 2000 and 1999, respectively. Included in
delivery, selling and administrative expenses are approximately $422 million,
$372 million and $321 million of shipping and handling costs for fiscal years
2001, 2000 and 1999, respectively.
RECENTLY ISSUED ACCOUNTING STANDARDS - In May 2000, the EITF reached consensus
on Issue No. 00-14 "Accounting for Certain Sales Incentives." This issue
addresses the recognition, measurement and income statement classification of
sales incentives that have the effect of reducing the price of a product or
service to a customer at the point of sale. Upon adoption, in the first quarter
of fiscal 2002, certain sales incentives, which are currently classified in
delivery, selling and administrative expense, will be reclassified as a
reduction of sales. Prior period amounts will be reclassified to conform to the
new requirements. This change will not affect the Company's financial position
or results of operations.
In April 2001, the EITF reached consensus on Issue 00-25 "Vendor Income
Statement Characterization of Consideration Paid to a Reseller of the Vendor's
Products." This issue addresses when consideration from a vendor to a retailer
is (a) an adjustment of the selling price of the vendor's products to the
retailer and, therefore, should be deducted from revenue when recognized in the
vendor's income statement or (b) a cost incurred by the vendor for assets and
services provided by the retailer to the vendor and, therefore, should be
included as a cost or an expense when recognized in the vendor's income
statement. Upon adoption, in the first quarter of fiscal 2002, certain trade
spending amounts, which are currently classified in delivery, selling and
administrative expense, will be reclassified as a reduction of sales. Prior
period amounts will be reclassified to conform to the new requirements. This
change will not affect the Company's financial position or results of
operations.
Statement of Accounting Standard (SFAS) No. 133, "Accounting for
Derivative Instruments and Hedging Activities" was issued in June 1998, and
amended by SFAS No. 138, "Accounting for Certain Derivative Instruments and
Certain Hedging Activities", in June 2000. These Statements standardize the
accounting for derivative instruments, including certain derivative instruments
embedded in other contracts, by requiring that an entity recognize those items
as assets or liabilities in the statement of financial position and measure them
at fair value. SFAS No. 133 was to be effective for fiscal years beginning after
June 15, 1999. In July 1999, the Financial Accounting Standards Board issued
SFAS No. 137, "Accounting for Derivative Instruments and Hedging Activities -
Deferral of the Effective Date of SFAS No. 133", which delayed the effective
date by one year. The adoption of SFAS No. 133, in the first quarter of fiscal
2002, will not have a material impact on the Company's results of operations or
financial condition.
In June 2001, the Financial Accounting Standards Board ("FASB") issued
SFAS 141, "Business Combinations" and SFAS 142, "Goodwill and Other Intangible
Assets" that supersede Accounting Principles Board ("APB") Opinion No. 16,
"Business Combinations," and APB Opinion No. 17, "Intangible Assets." The two
statements modify the method of accounting for business combinations and address
the accounting and reporting for goodwill and intangible assets. SFAS 141 is
effective for all business combinations initiated after June 30, 2001 and all
business combinations accounted for by the purchase method for which the date of
acquisition is after June 30, 2001. SFAS 142 is effective for fiscal years
beginning after December 15, 2001. Beginning in fiscal year 2003, the Company
will no longer amortize goodwill, but will, however, evaluate goodwill for
impairment annually. The Company is currently reviewing these statements to
determine their effect on the Company's financial statements.
RECLASSIFICATIONS - Certain previously reported amounts have been reclassified
to conform to current year-end presentations.
36
37
Dean Foods Company
Notes to Consolidated Financial Statements (continued)
2. MERGER
On April 5, 2001, the Company announced it had signed a definitive merger
agreement with Suiza Foods Corporation ("Suiza"), a fluid dairy processor and
distributor based in Dallas, Texas. Under the terms of the agreement,
shareholders of the Company will receive, for each share of Dean common stock,
$21.00 in cash plus 0.429 shares of Suiza common stock, subject to adjustment if
Suiza's stock price is below $32.71 at the time of merger. Upon completion of
the transaction, there will be approximately 43 million shares of Suiza common
stock outstanding, with current Suiza shareholders owning approximately 65% of
the company and Dean Foods shareholders holding approximately 35% of the
company.
Completion of the merger transaction is contingent upon approval by the
shareholders of both companies, certain regulatory approvals and other customary
closing conditions. The transaction is expected to be completed during the
fourth calendar quarter of 2001.
The Company recorded a pre-tax charge of $22.2 million ($13.7 million after-tax,
or $.38 per share) in the fourth quarter of fiscal 2001 for merger-related
costs. These charges consist of professional fees of $4.5 million, severance and
employee stay costs of $2.7 million and a $15.0 million charge relating to a
lease commitment on office space that the Company will not occupy. The lease
charge was determined based on the Company's decision in the fourth quarter to
not occupy the new office space under an operating lease, and the charge
reflects the rental payments over the term of the lease and other termination
costs reduced by estimated sublease income. The Company expects to incur
additional merger-related charges until the merger is completed.
3. BUSINESS ACQUISITIONS
During fiscal 2001 the Company completed the following two acquisitions:
FISCAL 2001 ACQUISITIONS CLOSING DATE
- -------------------------------------------------------------------------
DAIRY AND NATIONAL REFRIGERATED PRODUCTS GROUPS:
Land O'Lakes Upper Midwest July 10, 2000
(Fluid Dairy and Extended Shelf Life operations)
SPECIALTY FOODS GROUP:
Nalley's pickle business June 27, 2000
- --------------------------------------------------------------------------
Each of the fiscal 2001 acquisitions was an asset purchase for cash
consideration. The Company also assumed certain liabilities in addition to cash
consideration paid. On a pro forma basis, which assumes the above acquisitions
occurred at the beginning of each period presented, sales and net income are not
materially impacted. During fiscal 2001, the Company made an additional equity
investment in White Wave, Inc., a processor of soy based products, the results
of which are included in the National Refrigerated Products segment. The
acquisitions and equity investments were made for cash consideration totaling
$220.3 million, net of cash acquired.
During fiscal 2000 the Company completed the following two acquisitions:
FISCAL 2000 ACQUISITIONS CLOSING DATE
- -------------------------------------------------------------------------
DAIRY GROUP:
Dairy Express July 16, 1999
SPECIALTY FOODS GROUP:
Steinfeld's Pickle Products July 1, 1999
- -------------------------------------------------------------------------
Each of the fiscal 2000 acquisitions was an asset purchase for cash
consideration. The Company also assumed certain liabilities in addition to cash
consideration paid. On a pro forma basis, which assumes the above acquisitions
occurred at the beginning of each period presented, sales and net income are not
materially impacted. On August 23, 1999, the Company made an initial equity
investment in White Wave, Inc. The acquisitions and equity investment were made
for cash consideration totaling $38.2 million, net of cash acquired.
37
38
Dean Foods Company
Notes to Consolidated Financial Statements (continued)
During fiscal 1999 the Company completed the following six acquisitions:
FISCAL 1999 ACQUISITIONS CLOSING DATE
- -------------------------------------------------------------------------
DAIRY GROUP:
Alta Dena Certified Dairy May 5, 1999
Berkeley Farms November 4, 1998
U.C. Milk Company September 17, 1998
Barber Dairies August 11, 1998
Hillside Dairy July 1, 1998
SPECIALTY FOODS GROUP:
Custom Food Processors, International March 8, 1999
- -------------------------------------------------------------------------
The Company also acquired three dairy distributors and, in conjunction with the
sale of the Company's vegetable operations, an aseptic products business, which
is included in the Specialty Foods Group.
All of the fiscal 1999 acquisitions were asset purchases, except U.C. Milk
Company and Berkeley Farms, which were stock purchases. Cash consideration for
fiscal 1999 acquisitions totaled $238.8 million, net of cash acquired. In
addition to the cash consideration paid for these operations, the Company
assumed certain liabilities.
On a pro forma basis, the net sales (unaudited) of the Company would have been
$4,146.7 million in 1999. The pro forma sales amounts assume that all of the
fiscal 1999 acquisitions occurred at the beginning of fiscal 1999. On a pro
forma basis, the results of operations (unaudited) of the companies acquired
would not have had a material effect on the Company's net income or earnings per
common share in 1999.
All of the acquisitions were accounted for using the purchase method of
accounting as of their respective acquisition dates and, accordingly, the
operating results of the acquired companies subsequent to their respective
acquisition dates are included in the Company's consolidated financial
statements. Goodwill arising from the acquisitions, totaling an estimated $124.5
million, $22.2 million and $221.4 million in 2001, 2000 and 1999, respectively,
is presently being amortized using the straight-line method over periods up to
forty years.
4. PLANT CLOSURE CHARGES
During the fourth quarter of fiscal 2000, the Company announced two plant
closures in the Dairy Group, which resulted in a pre-tax charge of $6.1 million
($3.8 million after-tax, or $.10 per share). Cash charges related to the plant
closures, which included severance and exit costs, totaled $1.9 million.
Non-cash charges of $4.2 million were associated with the write-down to net
realizable value of certain assets. As of May 27, 2001, all cash charges related
to the plant closures have been paid. Fiscal 2000 plant closures were completed
by the end of the second quarter of fiscal 2001, resulting in the elimination of
approximately 118 hourly and salaried employees. Production was relocated and
consolidated into existing facilities.
During fiscal 1999, the Company announced plant closures in the Dairy and
Specialty Foods segments, which resulted in a pre-tax charge of $18.1 million
($11.0 million after-tax, or $.27 per share). Cash charges related to the plant
closures, which primarily included severance, lease termination and exit costs,
totaled $8.9 million. Non-cash charges of $9.2 million associated with the
write-down to net realizable value of certain assets comprised the remainder of
the provision. Fiscal 1999 plant closures were completed by the end of the first
quarter of fiscal 2000, resulting in the elimination of approximately 400 hourly
and salaried employees. As of May 27, 2001, all cash charges related to the
plant closures have been paid. Production from the Dairy and Specialty Foods
plants was relocated and consolidated into existing facilities and a Specialty
Foods warehouse was replaced by public warehousing.
5. GAIN ON SALE OF NOTE
On December 1, 2000, the Company sold for $10.0 million, a $30.0 million
subordinated note which was received as part of the proceeds from the sale of
the Company's vegetable segment to Agrilink Foods, Inc. in fiscal 1999. Due to
the uncertainty of the realizability of the $30.0 million subordinated note, the
note was originally valued at a nominal amount. As a result of the sale, the
Company reversed $10.0 million of the original reserve against the note,
resulting in the recognition of a $10.0 million pre-tax ($6.2 million after-tax,
or $.17 per share) gain in the second quarter of fiscal 2001.
38
39
Dean Foods Company
Notes to Consolidated Financial Statements (continued)
6. DISCONTINUED OPERATIONS
On September 23, 1998, the Company sold the stock of Dean Foods Vegetable
Company to Agrilink Foods, Inc. ("Agrilink") for $378.2 million in cash, a $30.0
million Agrilink subordinated note and Agrilink's aseptic foods business, which
was valued at $80.2 million. Cash proceeds were utilized to repay debt
outstanding under the Company's Revolving Credit Agreement. Due to the initial
uncertainty of the realizability of the $30.0 million subordinated note, the
note was valued at a nominal amount. In fiscal year 1999, the Company recorded
an after-tax gain on the sale of the vegetables business of $83.8 million ($2.07
per diluted share). Accordingly, Vegetables business results are presented as
discontinued operations.
Net sales of discontinued operations were $139.8 million in 1999. The income tax
benefit included in Loss from Discontinued Operations was $1.9 million for 1999.
Income from operations of the discontinued segment includes interest expense
allocations (based on short-term interest expense incurred and changes in
working capital levels) of $2.5 million in 1999.
7. BORROWING ARRANGEMENTS
Long-term obligations, less installments due within one year, are summarized
below:
2001 2000
$250 million senior note, 8.15%, maturing in 2007 $ 246,667 $ --
$200 million senior note, 6.625%, maturing in 2009 199,861 199,844
$150 million senior note, 6.9%, maturing in 2017 148,014 147,893
$100 million senior note, 6.75%, maturing in 2005 99,596 99,495
$500 million Revolving Credit Facility, maturing 2003
(weighted average 6.47%) 209,000 --
Commercial paper, maturing in 2003 -- 267,811
Industrial revenue bonds, maturing in varying amounts through 2021:
Fixed rate, 4.75% to 6.63% -- 3,675
Floating rate, 3.1% to 3.9% (weighted average 3.31%) 25,200 25,400
Capitalized lease obligations, 2.0% to 10.0%,
maturing in various installments through 2011
(weighted average 8.13%) 15,953 17,782
Other obligations, 6.9% to 10.0%,
maturing in varying amounts through 2004 (weighted average 6.93%) 277 428
- -----------------------------------------------------------------------------------------------------
944,568 762,328
Less: Installments due within one year 4,398 3,603
- ------------------------------------------------------------------------------------------------------
Total long-term obligations $ 940,170 $ 758,725
======================================================================================================
On June 23, 2000, the Company filed a shelf registration to issue, from time to
time, up to $650 million in various debt and equity securities. During the first
quarter of fiscal 2001, the Company issued $250 million of 8.15% Notes due in
2007. The net proceeds were used to fund acquisitions and to repay commercial
paper.
In March 1999, the Company entered into a $500 million Commercial Paper program
backed entirely by the Company's $500 million Revolving Credit Agreement. As the
Company has the ability and intent to refinance such borrowings, outstanding
commercial paper is classified as long-term. During fiscal 2001, the maximum
commercial paper outstanding was $489.9 million; average commercial paper
outstanding during the year was $252.9 million at a weighted average interest
rate of 6.76%. At May 27, 2001, there were no borrowings outstanding under this
facility. During fiscal 2000, the maximum commercial paper outstanding was
$306.4 million; average commercial paper outstanding during the year was $223.1
million at a weighted average interest rate of 5.69%. At May 28, 2000, the
Company had $267.8 million of outstanding commercial paper.
The Company has an unsecured $500 million Revolving Credit Agreement maturing in
2003. Borrowings under the Credit Agreement bear interest, at the Company's
option, at either fixed or variable rates linked to the Company's public debt
credit rating. During fiscal 2001, the maximum Credit Agreement balance was
$250.0 million; average Credit Agreement balance during the year was $38.4
million at a weighted average interest rate of 6.47%. At May 27, 2001 the
Company had $209.0 million outstanding under the Credit Agreement. During fiscal
2000 there were no borrowings under this facility.
39
40
Dean Foods Company
Notes to Consolidated Financial Statements (continued)
The Company is subject to certain debt covenants. In June 2001, the Company
amended the Credit Agreement to revise the interest rate structure and change
certain covenant tests and covenant definitions. The most restrictive provisions
of the Company's amended borrowing arrangements are as follows: the Company's
fixed charge coverage ratio, as defined in the Credit Agreement, must exceed
2.4; and the Company's ratio of Consolidated Debt to Consolidated Total Capital
cannot exceed 65%.
Maturities of long-term obligations, by the Company's fiscal year, are shown
below:
2002 $ 4,398
2003 210,207
2004 1,327
2005 3,509
2006 100,141
Thereafter 624,986
- -------------------------------------------------------
Total $ 944,568
=======================================================
Certain land, buildings and machinery and equipment having a net carrying value
of approximately $19 million were mortgaged or otherwise encumbered against
long-term debt of $16 million at May 27, 2001.
The fair value of the Company's long-term debt was determined using valuation
techniques that considered cash flows discounted at current market rates and
management's best estimate for instruments without quoted market prices. At May
27, 2001 and May 28, 2000 the fair value of long-term debt is estimated to be
$873.4 million and $718.7 million, respectively.
8. SHAREHOLDERS' EQUITY
The 1998 shareholders' rights plan, as amended, protects shareholders in the
event the Company becomes the target of coercive and unfair takeover tactics.
The rights were distributed to shareholders on the basis of one preferred share
purchase right for each share of Dean Foods Company common stock. Each right is
attached to and traded with the Company's common stock, but will detach and
become exercisable ten days after a public announcement that a person or group
has acquired, or has announced a tender offer for, 15% or more of the Company's
common stock. The rights will initially be exercisable to purchase common stock
equivalents for $200 per share. Upon a person acquiring 15% or more of the
Company's common stock, the rights will entitle the holders (other than the
acquiring person) to purchase shares of common stock at a 50% discount. The
rights may be redeemed by the Company for $.01 per right at any time prior to a
public announcement that a person or group has acquired 15% or more of the
Company's common stock. The rights expire on August 10, 2008, unless previously
redeemed or exercised. The pending merger between the Company and Suiza will not
result in the rights of this plan becoming exercisable.
The Company, from time to time, may repurchase shares of its common stock in the
open market, in privately-negotiated transactions or otherwise at a price or
prices reasonably related to the then prevailing market price. The Company did
not repurchase any common stock during fiscal 2001. During fiscal 2000, the
Company repurchased a total of 3,893,341 shares of its common stock for $134.9
million. Total shares classified on the May 27, 2001 and May 28, 2000
consolidated balance sheets as treasury stock are 6,875,971 and 6,879,155,
respectively, resulting in a decrease in stockholders' equity of approximately
$253.2 million and $252.6 million, respectively.
40
41
Dean Foods Company
Notes to Consolidated Financial Statements (continued)
9. STOCK PLANS
A summary of stock option activity for the Company's stock option plans follows:
Number Average
of Shares Option Price
Under Option Per Share
- -----------------------------------------------------------------------
Options outstanding at May 31, 1998 2,211,173 $30.07
Changes during the year:
Granted 600,300 48.89
Terminated (21,689) 40.14
Exercised (300,075) 28.45
- -----------------------------------------------------------------------
Options outstanding at May 30, 1999 2,489,709 34.72
Changes during the year:
Granted 955,200 37.31
Terminated (146,222) 42.77
Exercised (81,960) 28.73
- -----------------------------------------------------------------------
Options outstanding at May 28, 2000 3,216,727 35.28
Changes during the year:
Granted 1,187,345 31.67
Terminated (199,654) 35.83
Exercised (150,498) 26.13
- -----------------------------------------------------------------------
Options outstanding at May 27, 2001 4,053,920 $34.53
=======================================================================
Options exercisable and available for grants at the end of each respective year
are as follows:
2001 2000 1999
Exercisable 2,160,569 1,693,572 1,351,210
- -----------------------------------------------------------------------------
Average option price per share $33.71 $31.33 $30.53
- -----------------------------------------------------------------------------
Available for grants 1,859,726 2,837,647 1,691,193
- -----------------------------------------------------------------------------
<Table>
<Caption>
Weighted Average
Number of Shares Remaining Contractual Weighted Average
Range of Exercise Prices Under Option Life (years) Exercise Price
$22.87 to $24.67 238,247 5.28 $23.04
$26.87 to $27.50 409,797 3.88 27.20
$28.13 to $29.87 330,252 4.04 28.86
$32.00 to $32.87 1,403,050 8.00 31.85
$36.50 to $39.00 1,159,487 7.56 37.46
$49.43 to $55.38 513,087 6.96 50.09
- ----------------------------------------------------------------------------------------------------------------
Options Outstanding at May 27, 2001 4,053,920 6.84 $34.53
=================================================================================================================
</Table>
Options vest in accordance with provisions as set forth in the applicable option
agreements. Upon completion of the anticipated merger between the Company and
Suiza, it is expected that all Company options not currently exercisable will
automatically vest and will be converted into fully exercisable options to
acquire Suiza common stock. The conversion rate for the Company's options will
depend on the price of Suiza's stock when the merger occurs. The exercise price
of each outstanding option will also be adjusted.
41
42
Dean Foods Company
Notes to Consolidated Financial Statements (continued)
The Company adopted the disclosure-only provision under SFAS No. 123,
"Accounting for Stock-Based Compensation," while continuing to measure
compensation cost under APB No. 25, "Accounting for Stock Issued to Employees."
If the accounting provisions of SFAS No. 123 had been adopted over the last
three years, the Company's income from continuing operations and earnings per
share would have been reduced to the following pro forma amounts:
<Table>
<Caption>
2001 2000 1999
Income from continuing operations:
As reported $ 74,652 $ 106,118 $ 70,331
Pro forma $ 68,742 $ 100,422 $ 65,195
- ---------------------------------------------------------------------------------------------
Basic income per share:
As reported $ 2.10 $ 2.79 $ 1.77
Pro forma $ 1.93 $ 2.64 $ 1.64
- ---------------------------------------------------------------------------------------------
Diluted income per share:
As reported $ 2.07 $ 2.77 $ 1.74
Pro forma $ 1.91 $ 2.62 $ 1.61
- ---------------------------------------------------------------------------------------------
</Table>
The weighted average fair value of options at date of grant was $11.55, $11.25
and $15.20 during 2001, 2000 and 1999, respectively. The fair value of each
option at date of grant was estimated using the Black-Scholes model with the
following weighted average assumptions:
2001 2000 1999
Expected life (years) 8.0 8.0 8.0
Risk-free rate of return 6.4% 6.0% 5.6%
Volatility 26.8% 23.1% 22.2%
Dividend yield 2.0% 2.5% 2.0%
Under the stock option plans, key employees and directors may be granted stock
awards or options to purchase, at fair market value on the date of grant, a
maximum of 7,415,000 shares of the Company's common stock. Of these shares, a
maximum of 315,000 may be granted to non-employee directors. The Company does
not expect to grant any new options pending completion of the merger between the
Company and Suiza. A total of 193,500 shares have been granted to non-employee
directors. A total of 22,000 director non-qualified options are outstanding,
which obligate the Company to make a cash payment to the optionee, upon
exercise, of an amount up to the aggregate increase in the market value of the
common stock since the date of grant. Options terminate ten years after date of
grant.
The Company may, from time to time, offer key employees the opportunity to elect
to receive, in lieu of all or a portion of the cash bonuses otherwise payable to
them, stock awards of shares of the Company's common stock having a fair market
value on the date of the award equal to 115% of such cash bonuses or portions
thereof (Stock Bonus Awards Program). In fiscal 2001 and 2000, key employees
elected to receive 21,658 and 27,068 shares, respectively, under the Stock Bonus
Awards Program.
10. INVENTORIES
Inventories at May 27, 2001 and May 28, 2000 comprised the following:
2001 2000
Raw materials and supplies $ 62,490 $ 53,726
Materials in process 8,700 9,593
Finished goods 159,348 124,381
- --------------------------------------------------------------------------------
230,538 187,700
Less: Excess of current cost over stated value
of last-in, first-out inventories 10,451 9,262
- --------------------------------------------------------------------------------
Total inventories $ 220,087 $ 178,438
================================================================================
The percentage of inventories determined on the basis of last-in, first-out cost
approximated 33.1% and 36.8% for 2001 and 2000, respectively.
42
43
Dean Foods Company
Notes to Consolidated Financial Statements (continued)
11. INCOME TAXES
Deferred tax assets and liabilities are determined based on the difference
between the financial statement and tax bases of assets and liabilities using
enacted tax rates in effect for the year in which the differences are expected
to reverse.
Provision for income taxes was as follows:
2001 2000 1999
Current tax expense:
Federal $ 14,721 $ 44,297 $ 28,013
State and foreign 5,247 6,396 7,119
- -----------------------------------------------------------------------------------
19,968 50,693 35,132
- -----------------------------------------------------------------------------------
Deferred tax expense (benefit):
Federal 25,064 14,067 10,070
State and foreign 1,219 2,396 (236)
- -----------------------------------------------------------------------------------
26,283 16,463 9,834
- -----------------------------------------------------------------------------------
Provision for income taxes $ 46,251 $ 67,156 $ 44,966
===================================================================================
The effective tax rates differ from the prevailing statutory federal rate as
follows:
2001 2000 1999
Statutory federal tax rate 35.0% 35.0% 35.0%
State and foreign, net of federal benefit 3.8 3.3 4.0
Nondeductible goodwill 1.3 0.9 1.5
Other, net (1.8) (0.4) (1.5)
- -----------------------------------------------------------------------------
Effective tax rate 38.3% 38.8% 39.0%
=============================================================================
The components of the current and long-term deferred income tax assets and
liabilities as presented in the consolidated balance sheet were as follows:
2001 2000
Deferred tax assets:
Accounts receivable $ 1,415 $ 1,928
Inventory (2,085) (2,238)
Self-insurance reserves 18,882 19,987
Plant shutdown, idle facilities and
environmental costs 3,515 8,504
Note receivable - 13,523
Employee benefits and compensation 9,998 8,002
Merger-related costs 8,498 -
Other 9,117 7,014
- --------------------------------------------------------------------------------
Total deferred tax assets $ 49,340 $ 56,720
================================================================================
Deferred tax liabilities:
Fixed assets $ (90,682) $ (77,310)
Goodwill and other intangibles (46,903) (41,272)
Deferred compensation 12,749 14,559
Loss carryforwards 4,264 5,812
Other 2,259 (1,199)
- --------------------------------------------------------------------------------
Total deferred tax liabilities $ (118,313) $ (99,410)
================================================================================
43
44
Dean Foods Company
Notes to Consolidated Financial Statements (continued)
12. LEASES
Net rental expense, including amounts for leases of one year or less, was $55.8
million, $50.9 million and $42.2 million in 2001, 2000 and 1999, respectively.
Sublease rental income is not significant. A majority of the Company's leases
provide that the Company pay taxes, maintenance, insurance and certain other
operating expenses.
At May 27, 2001, annual minimum rental payments under capital and operating
leases that have initial noncancelable terms in excess of one year, excluding
costs associated with the lease commitment included in merger-related costs
discussed in Note 2, were as follows:
Capital Operating
Leases Leases
2002 $ 2,866 $ 16,965
2003 2,807 15,370
2004 2,804 10,834
2005 4,762 8,234
2006 1,164 5,137
Thereafter 8,598 16,388
- ----------------------------------------------------------------------
Total minimum lease payments 23,001 $ 72,928
==========
Less: Imputed interest 7,048
- --------------------------------------------------------
Present value of minimum lease payments $ 15,953
========================================================
13. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses at May 27, 2001 and May 28, 2000 comprised
the following items:
2001 2000
Trade payables $ 185,954 $ 151,398
Accrued expenses 125,984 108,607
Accrued insurance 61,059 58,669
Accrued payroll 53,669 53,738
Accrued pension and profit sharing 24,878 17,518
Merger-related costs 21,246 -
Accrued interest 13,645 6,470
- ------------------------------------------------------------------------------
Total accounts payable and accrued expenses $ 486,435 $ 396,400
==============================================================================
14. CASH FLOW DATA
Interest and taxes paid included in the Company's cash flow from operations were
as follows:
2001 2000 1999
Interest paid $ 66,851 $ 49,559 $ 39,125
- -----------------------------------------------------------------------
Taxes paid $ 36,294 $ 39,400 $ 83,313
- -----------------------------------------------------------------------
Liabilities assumed in conjunction with business acquisitions were:
2001 2000 1999
Fair value of assets and goodwill acquired $ 239,236 $ 42,197 $ 367,470
Consideration paid (220,335) (38,204) (238,786)
- -------------------------------------------------------------------------------------
Liabilities assumed $ 18,901 $ 3,993 $ 128,684
=====================================================================================
44
45
Dean Foods Company
Notes to Consolidated Financial Statements (continued)
15. EMPLOYEE BENEFITS PLANS
The Company maintains or participates in defined benefit plans or
union-management-administered pension or profit sharing plans covering
substantially all of its employees. Benefits are based on years of service and
comprehensive or stated amounts for each year of service. Plan assets are
invested in equities and fixed income securities. The Company's funding policy
is to contribute annually not less than the ERISA minimum funding standards nor
more than the maximum funding standards nor more than the maximum amount which
can be deducted for federal income tax purposes.
The Company also provides health care and life insurance benefits to certain of
its retired employees and eligible dependents. Employees are eligible for such
benefits subject to minimum age and service requirements. Eligible employees
that retire before the normal retirement age, along with their dependents, are
entitled to benefits on a shared contribution basis. Substantially all benefits
terminate at age sixty-five. The Company retains the right to modify or
eliminate these benefits.
Net periodic benefit cost included the following components:
PENSION BENEFITS
2001 2000 1999
Service cost $ 16,039 $ 14,189 $ 12,429
Interest cost 9,536 9,343 7,429
Expected return on assets (9,035) (9,150) (6,867)
Amortization of unrecognized net transition obligation
(asset) (488) (488) (461)
Amortization of prior service cost 260 215 203
Amortization of unrecognized net loss (gain) 297 432 722
- ------------------------------------------------------------------------------------------------------
Net benefit cost - Company plans 16,609 14,541 13,455
Net benefit cost - multi-employer plans 12,706 10,911 9,891
- ------------------------------------------------------------------------------------------------------
Total net benefit cost $ 29,315 $ 25,452 $ 23,346
======================================================================================================
</Table>
Net periodic benefit cost included the following components:
POSTRETIREMENT BENEFITS
2001 2000 1999
Service cost $ 256 $ 200 $ 98
Interest cost 761 496 290
Amortization of prior service cost 253 38 --
Amortization of unrecognized net loss (gain) 484 337 46
- ------------------------------------------------------------------------------------------------------
Net benefit cost - Company plans $ 1,754 $ 1,071 $ 434
======================================================================================================
</Table>
45
46
Dean Foods Company
Notes to Consolidated Financial Statements (continued)
The changes in benefit obligations and plan assets, as well as, the funded
status of the Company's pension and postretirement benefit plans are as follows:
<Table>
<Caption>
PENSION BENEFITS POSTRETIREMENT BENEFITS
2001 2000 2001 2000
Change in benefit obligation:
Benefit obligation at beginning of year $ 134,889 $ 138,581 $ 11,039 $ 7,698
Service cost 16,039 14,189 256 200
Interest cost 9,536 9,343 761 496
Plan amendments 293 844 -- 2,021
Actuarial loss (gain) 4,898 (6,869) 1,060 1,854
Benefits paid (17,380) (21,199) (1,772) (1,230)
- -----------------------------------------------------------------------------------------------------------------------------
Benefit obligation at end of year 148,275 134,889 11,344 11,039
- -----------------------------------------------------------------------------------------------------------------------------
Change in plan assets:
Fair value of plan assets at
beginning of year 115,207 114,187 -- --
Actual return on plan assets (10,823) 15,929 -- --
Company contributions 10,134 6,290 1,772 1,230
Benefits paid (17,380) (21,199) (1,772) (1,230)
- -----------------------------------------------------------------------------------------------------------------------------
Fair value of plan assets at end of year 97,138 115,207 -- --
- -----------------------------------------------------------------------------------------------------------------------------
Funded status (51,137) (19,682) (11,344) (11,039)
Unrecognized net transition asset (1,297) (1,785) -- --
Unrecognized prior service cost 3,000 2,966 2,109 2,362
Unrecognized net loss (gain) 20,414 (4,044) 6,233 5,657
Accrued pension cost $ (29,020) $ (22,545) $ (3,002) $ (3,020)
=============================================================================================================================
Total amounts recognized in the
consolidated balance sheet $ (29,020) $ (22,545) $ (3,002) $ (3,020)
=============================================================================================================================
</Table>
Included in the above pension benefits table is an unfunded supplemental
retirement plan with a liability of $7.1 million and $8.0 million at May 27,
2001 and May 28, 2000, respectively.
The following weighted-average assumptions were used to determine the Company's
obligations under the plans:
PENSION BENEFITS POSTRETIREMENT BENEFITS
2001 2000 1999 2001 2000 1999
Discount rate 7.25% 7.50% 7.00% 7.25% 7.50% 7.00%
Expected return on plan assets 9.00% 9.00% 9.00% -- -- --
Rate of compensation increase 0-5.0% 0-5.0% 0-5.0% -- -- --
- ------------------------------------------------------------------------------------------------------------------------------
</Table>
The assumed health care cost trend was 5.5% in 2001, decreasing gradually to
5.0% in the next year and remaining level thereafter. If the health care trend
was increased one percentage point, postretirement benefit costs for the year
ended May 27, 2001, would have been $71 thousand higher, and the accumulated
postretirement benefit obligation as of May 27, 2001, would have been
$611 thousand higher. If the health care trend was decreased one percentage
point, postretirement benefit costs for the year ended May 27, 2001, would have
been $65 thousand lower, and the accumulated postretirement benefit obligation
as of May 27, 2001, would have been $577 thousand lower.
The Company retained the earned pension liability related to the Vegetables
operations for liabilities through the date of disposition. Accordingly, the
projected benefit obligation, change in plan assets, funded status and prepaid
benefit cost tables above include continuing and discontinued operations.
The Company sponsors contributory savings plans that allow employees to make
regular contributions of up to 16% of their salary, subject to certain
limitations prescribed by the Internal Revenue Service. The Company contributes
an additional amount equal to 50% of the first 6% of salary contributed by the
employee. Contributions by the Company to the savings plan were $7.5 million,
$6.5 million and $5.5 million for fiscal 2001, 2000 and 1999, respectively.
46
47
Dean Foods Company
Notes to Consolidated Financial Statements (concluded)
16. COMMITMENTS AND CONTINGENT LIABILITIES
The Company is a current defendant in assorted legal matters and has been the
subject of routine investigations by various state and federal agencies. The
ultimate resolution of these matters is not expected to have a material adverse
effect on the financial position or results of operations of the Company.
17. BUSINESS SEGMENT INFORMATION
In the first quarter of fiscal 2001, the Company realigned its business segment
structure. Under the new structure, the Company continues to operate under three
business segments. The nature of products classified in the business segments
presented herein is described in Note 1. Prior year segment information has been
reclassified to conform with the new structure.
Outside the United States, no single country is deemed material for separate
disclosure. Intersegment sales are not material. The Company has no one customer
that represents greater than ten percent of the Company's consolidated net
sales. Operating earnings of segments do not include interest income or expense
and provision for income taxes. Identifiable assets are those used in the
Company's operations in each segment. Corporate assets consist primarily of cash
and temporary cash investments and deferred tax assets.
NATIONAL
SPECIALTY REFRIGERATED
DAIRY FOODS PRODUCTS CORPORATE CONSOLIDATED
2001
Net sales $ 3,255,884 $ 784,907 $ 399,575 $ -- $ 4,440,366
Operating earnings (a) 156,905 73,017 10,354 (58,718) 181,558
Identifiable assets 1,526,818 418,185 251,836 120,548 2,317,387
Depreciation and amortization 90,273 20,763 9,914 7,673 128,623
Capital expenditures 84,530 15,610 41,588 5,838 147,566
2000
Net sales $ 3,070,636 $ 741,339 $ 290,597 $ -- $ 4,102,572
Operating earnings (b) 141,893 81,450 37,464 (38,195) 222,612
Identifiable assets 1,317,208 403,434 153,601 129,299 2,003,542
Depreciation and amortization 76,196 19,016 7,262 5,097 107,571
Capital expenditures 111,228 15,082 18,610 2,621 147,541
1999
Net sales $ 2,817,704 $ 692,880 $ 274,309 $ -- $ 3,784,893
Operating earnings (c) 90,952 77,136 20,352 (35,102) 153,338
Identifiable assets 1,275,065 390,521 137,130 109,160 1,911,876
Depreciation and amortization 63,327 15,316 5,834 3,465 87,942
Capital expenditures 106,772 14,574 13,506 4,494 139,346
- -------------------------------------------------------------------------------
(a) Fiscal 2001 segment operating earnings include merger-related costs of
$22,151 in the Corporate segment.
(b) Fiscal 2000 segment operating earnings include plant closure charges of
$6,078 in the Dairy segment.
(c) Fiscal 1999 segment operating earnings include plant closure charges of
$8,882 and $9,223 in the Dairy and Specialty Foods segments, respectively.
47
48
DEAN FOODS COMPANY
UNAUDITED QUARTERLY FINANCIAL DATA
(In thousands, except for share data) FIRST SECOND THIRD FOURTH FISCAL YEAR
-------------------------------------------------------------------------------------------
FISCAL 2001
Net sales (a) $ 1,063,173 $1,112,882 $ 1,103,894 $ 1,160,417 $ 4,440,366
Gross profit (a) 261,561 265,427 258,627 267,044 1,052,659
Net income 26,448 29,807(b) 16,616 1,781(c) 74,652
Per common share data:
Basic earnings per share $ .74 $ .84(b) $ .47 $ .05(c) $ 2.10
Diluted earnings per share .74 .84(b) .47 .05(c) 2.07
Stock price range
High $ 35.69 $ 34.31 $ 36.40 $ 40.77 $ 40.77
Low 30.38 27.63 26.56 32.10 26.56
Dividend Rate $ .225 $ .225 $ .225 $ .225 $ .90
FISCAL 2000
Net sales (a) $ 1,009,713 $1,075,621 $ 986,524 $ 1,030,714 $ 4,102,572
Gross profit (a) 246,933 246,627 242,023 258,993 994,576
Net income 27,835 27,010 25,177 26,096(d) 106,118
Per common share data:
Basic earnings per share $ .71 $ .69 $ .67 $ .72(d) $ 2.79
Diluted earnings per share .70 .68 .67 .72(d) 2.77
Stock price range (e)
High $ 43.81 $ 46.25 $ 40.13 $ 31.13 $ 46.25
Low 37.31 38.25 28.69 23.94 23.94
Dividend rate $ .22 $ .22 $ .22 $ .22 $ .88
- -------------------------------------------------------------------------------
(a) Net sales and gross profit for fiscal 2001 and 2000 have been restated to
reflect the adoption of Emerging Issues Task Force Issue No. 00-10
"Accounting for Shipping and Handling Fees and Costs" in the fourth quarter
of fiscal 2001. The effect of the adoption was to increase net sales by
$8,857, $9,420 and $10,589 in the first, second and third quarters of
fiscal 2001, respectively, and to increase net sales by $8,353, $8,611,
$9,708 and $10,264 in the first, second, third and fourth quarters of
fiscal 2000, respectively. In addition, the effect of the adoption was to
increase gross profit by $8,267, $8,964 and $9,769 in the first, second and
third quarters of fiscal 2001, respectively, and to increase gross profit
by $7,577, $7,558, $8,573 and $9,450 in the first, second, third and fourth
quarters of fiscal 2000, respectively. The adoption of EITF 00-10 did not
impact net income.
(b) Includes a pre-tax gain of $10,000 ($6,200 after-tax, or $.17 per share)
related to sale of a note associated with the divestiture of the Company's
vegetables business in fiscal 1999.
(c) Includes a pre-tax charge of $22,151 ($13,734 after-tax, or $.38 per share)
for merger-related costs.
(d) Includes a pre-tax charge of $6,078 ($3,768 after-tax, or $.10 per share)
related to plant closures.
(e) The Company's common stock is traded on the New York Stock Exchange under
the ticker symbol: DF.
48
49
DEAN FOODS COMPANY AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
(In thousands)
Amount
Balance at charged Accounts Additions Balance at
beginning of to costs and written due to end of
Classification period expenses off acquisitions period
- -------------- ------------ ------------- ----------- ------------ -----------
Fiscal Year Ended May 27, 2001
Allowance for doubtful
accounts and notes receivable $ 6,311 $ 2,250 $ 2,780 $ 701 $ 6,482
======== ========= ========= ======== =========
Fiscal Year Ended May 28, 2000
Allowance for doubtful
accounts and notes receivable $ 7,570 $ 3,516 $ 4,775 $ -- $ 6,311
======== ========= ========= ======== =========
Fiscal Year Ended May 30, 1999
Allowance for doubtful
accounts and notes receivable $ 4,212 $ 1,410 $ 1,302 $ 3,250 $ 7,570
======== ========= ========= ======== =========
49