1
Our Dairy Products business,
consisting of fluid milk
and cultured products,
ice creams and frozen
desserts and extended
shelf life products, drove our
overall sales increase in fiscal
1998 and accounted for 75
percent of our total revenue.
-------------------
The Pickle Products group
furthered its position as the
market leader in pickle sales
to retail and foodservice
customers. The group also
supplies peppers, relishes,
olives, sauces and syrups from
its nine strategically located
processing plants in the U.S.
-------------------
The Specialty Products group
recorded an 11 percent sales
increase in fiscal 1998. Each
product line, which includes
non-dairy creamers and other
powdered products, dips and
dressings, and aseptic shelf
stable puddings and cheese
sauces, contributed to
this performance.
2
Financial
Highlights Contents
In thousands, except for items marked with an* 1998 1997 1996
- ------------------------------------------------------------------------------------------- FINANCIAL HIGHLIGHTS 1
OPERATIONS
- -------------------------------------------------------------------------------------------
Net Sales $2,735,834 $2,460,563 $2,240,517
- -------------------------------------------------------------------------------------------
Operating Earnings (Loss) $ 162,519 $ 138,671 $ (593)(a)
- -------------------------------------------------------------------------------------------
Income (Loss) from Continuing Operations $ 87,980 $ 73,988 $ (16,865)(a) LETTER TO SHAREHOLDERS 2
- -------------------------------------------------------------------------------------------
Net Income (Loss) $ 106,302 $ 86,704 $ (49,688)(a)
- -------------------------------------------------------------------------------------------
DAIRY PRODUCTS REVIEW 6
COMMON STOCK DATA*
- -------------------------------------------------------------------------------------------
Income (Loss) from Continuing Operations
per Diluted Share $ 2.13 $ 1.83 $ (.42)(a)
- -------------------------------------------------------------------------------------------
Net Income (Loss) per Diluted Share $ 2.57 $ 2.15 $ (1.24)(a)
- -------------------------------------------------------------------------------------------
Dividend Rate per Share $ .80 $ .76 $ .72
- -------------------------------------------------------------------------------------------
YEAR-END POSITION PICKLE PRODUCTS REVIEW 12
- -------------------------------------------------------------------------------------------
Working Capital $ 67,324 $ 64,988 $ 24,649
- -------------------------------------------------------------------------------------------
Identifiable Assets $1,319,152 $ 820,825 $ 791,888
- -------------------------------------------------------------------------------------------
Long-Term Obligations $ 558,233 $ 208,931 $ 217,984 SPECIALTY PRODUCTS REVIEW 14
- -------------------------------------------------------------------------------------------
Shareholders' Equity $ 619,266 $ 567,681 $ 507,692
- -------------------------------------------------------------------------------------------
Shares Outstanding 39,970 40,284 40,134
- -------------------------------------------------------------------------------------------
OTHER DATA* FINANCIAL REVIEW 17
- -------------------------------------------------------------------------------------------
Production Plants 52 37 40(b)
- -------------------------------------------------------------------------------------------
Employees 11,200 8,300 8,600(b)
- -------------------------------------------------------------------------------------------
Shareholders 8,600 8,838 9,481 FINANCIAL STATEMENT 22
- -------------------------------------------------------------------------------------------
(a) 1996 continuing operations results include a pre-tax charge of $102,439
($64,906 after-tax, or $1.62 per share) related to the adoption of a plan
to reduce costs, rationalize production capacity and provide for severance
and environmental costs. The 1996 Net Loss includes a pre-tax charge of
$150,000 ($97,720 after-tax, or $2.44 per share) related to the plan NOTES TO FINANCIAL STATEMENTS 27
adoption.
(b) 1996 includes certain plants that have been closed or disposed of and
certain employees that have been affected by the adoption of a plan to
reduce costs, rationalize production capacity and provide for severance and
environmental costs. OFFICERS AND CORPORATE DATA 38
DIRECTORS INSIDE BACK COVER
- --------------------------------------------------------------------------------
ON THE COVER:
(top to bottom)
- - Teammates at Green Bay quality control lab for pickle products take a break to
celebrate their division's success.
- - Greeters and tour guides at Mayfield Dairy's Braselton, Georgia plant perform
valuable service giving the public an inside look at a top-quality dairy
operations.
- - Store route drivers at Purity Dairies in Nashville pause between driving and
delivering to mark a great year serving their customers.
- - Quality milk flows from Midwest's first Chug line at Chemung, Illinois.
1
3
After a year of dramatic
growth and record earnings,
we pause to reflect on our
key accomplishments. To Our Shareholders:
Everything we achieved Fiscal 1998 was a fast-paced, extremely
active year for the Dean Foods Team.
started with hard-working We aggressively pursued acquisition
opportunities in our core business
teams, whether on the plant segments, acquiring eight dairies, one
pickle and one specialty operation. We
floor, in the board room, also successfully launched the Milk
Chugs product line in two of our major
at the office, at the store, regional dairy markets. Dean remains
committed to focus on profitable growth
or on the road. opportunities, and as this annual report
demonstrates, we are delivering on our
------------------- commitment.
This year's annual report
features teams from
each of our business
segments; Dairy, Pickles HOWARD M. DEAN
Chairman of the Board
and Specialty. We invite and Chief Executive Officer
you to read about how
RICHARD E. BAILEY
"The Team Works"! President and
Chief Operating Officer
August 7, 1998
2
4
The Company reported outstanding performance for the second consecutive year.
Sales from continuing operations increased more than 11% in 1998 to $2.7
billion due to acquisitions and growth in our base businesses. Income from
continuing operations was up more than 18% and income per diluted share grew to
$2.13, surpassing the record established in fiscal year 1997 by $.30 per share.
Of particular interest to you, the shareholder, is the fact that during 1998,
Dean Foods provided a 34% total return on your investment - which includes
stock price appreciation and reinvested dividends - on top of a 62% return last
year. Dean intends to meet the challenges of a quickly changing food industry,
and by doing so, deliver superior value to our shareholders.
Our fiscal 1998 accomplishments keep Dean positioned as a leader in our
respective food industry segments. In addition, the Dean Team is committed to
delivering profitable top-line growth, consistent with excellent
consumer-oriented companies. Dean continues to actively pursue innovative
product opportunities, and be proactive in leading a changing industry. The
future looks very bright.
STRATEGIC DIRECTION
We continue to refine and execute our previously announced long-term strategic
plan. As part of this on-going review, we recently announced the divestiture of
our Vegetable segment. The sale, which is expected to close the first half of
fiscal 1999, includes cash of $400 million and the aseptic foods business of
Agrilink Foods, Inc.
We expect the aseptic foods business acquired to immediately triple sales in
our Specialty aseptic foods business.
Dean's commitment to create and deliver long-term sustainable value through our
five key strategies is the foundation on which we will build Dean Food's future:
CORE BUSINESS GROWTH - In fiscal 1998, we profitably grew our core
businesses through new products and acquisitions. Dean is actively pursuing the
introduction of innovative products such as our successful Milk Chug, for
on-the-go consumers. Chugs are expected to be available in all of our Dairy
regions by the middle of 1999. Consumer response to this new products has been
extraordinary and revenue from these products has exceeded our most optimistic
expectations. The Dean Team will continue to invest aggressively in fiscal 1999
to expand the Chugs' market penetration.
INVESTED CAPITAL MANAGEMENT - Return on invested capital (ROIC) is the
primary measure we use to evaluate our annual performance and to motivate our
managers. Our Company goal is to attain a minimum ROIC of 17% consistent with
leading food companies. Investments supporting our growth strategies are
assessed using value based measures to ensure acquisitions and new product
initiatives enhance shareholder value. While these investments support our
growth strategy and maximize long term shareholder value, they will temporarily
reduce annual ROIC until expected synergies and optional production
efficiencies are achieved.
(3)
5
Our future looks
bright thanks to the
continuing contributions CONTINUOUS MARGIN IMPROVEMENT - The
cost compression initiative, which drives
of dedicated margin improvement, is a central component
of our strategy. We call our program
Dean Team members. Leveraging Ideas for Tomorrow, or LIFT. In
fiscal 1998, through two dedicated teams, we
------------------- implemented LIFT a nine plants in two of our
business segments. The best practices we are
Our mission developing have improved our cost position
and enhanced margins in all of our business
remains clear: segments. Based on our success to date, we
have raised the bar with regard to
provide superior anticipated bottom line savings in the
future.
value to consumers,
ACQUISITIONS - Dean Foods is committed
customers, employees to enhancing shareholder value through
profitable growth and acquisitions,
and shareholders. especially in the Dairy segment. In fiscal
1998, the Company acquired eight dairies,
most of them contiguous to geographic
markets that we currently serve.
Additionally, we entered the California
marketplace for the first time, with five
strategic plants whose sales on an annual
basis approximate $250 million.
In the Pickles segment, we acquired the
Schwartz refrigerated pickle company. This
acquisition expands our capabilities in the
rapidly growing refrigerated foodservice
pickle category.
In our Specialty segment, we acquired the
Marie's refrigerated salad dressing and dip
business, which has performed extremely well
in its first full year of operation. We also
believe that Agrilink's aseptic business will
be an excellent addition to our existing
aseptic line.
(4)
6
Looking at the acquisitions we have made this past fiscal year, the Company
added nearly $750 million in annualized sales, in line with our commitment to
deliver profitable top-line growth. We expect the dynamic pace of the Dairy
industry consolidation to continue and we intend to pursue strategic
opportunities in the upcoming fiscal year.
FINANCIAL STRATEGY - Our financial strategy is consistent with and
supports the operating strategy of the Company and remains focused on balancing
our investment and future growth needs while providing strong financial returns
to our shareholders. Following the completion of the pending Vegetables segment
divestiture, the Company's debt to capitalization ratio will shrink to near 30%
and our financial flexibility will be significantly bolstered.
MANAGEMENT AND BOARD CHANGES
In the spring of 1998, the Company announced the election of Richard E. Bailey,
a former Kraft executive, as President and Chief Operating Officer. Many of
our key initiatives, including our cost compression and acquisition programs,
will benefit greatly from Dick's management experience and leadership.
Also this past fiscal year, Janet Hill, an executive with Alexander and
Associates, joined the Company as a Director. We are pleased to have such a
highly qualified and experienced individual join our Board.
DEAN'S FUTURE
In today's environment of low inflation and industry consolidation, reducing
costs and serving the customer are the key to creating long-term shareholder
value. Consumers now have less time to shop and prepare meals, driving their
demand for on-the-go foods and beverages. Dean continues to focus its efforts
on introducing innovative new beverage and snack products in convenient
packages which satisfy today's consumer demands. Our mission is still very
clear: we will provide superior value to consumers, customers, employees and
shareholders.
The Dean Team is a group of dedicated people with the desire to profitably grow
the Company and we will continue to invest in their development and growth. We
thank all of our employees for their excellent service and loyalty. We also
thank our customer, suppliers and shareholders for their continued support.
The Team Works!
5
7
DAIRY
PRODUCTS
In our flagship Dairy Products
business, we had many more
"The Team Works" candidates
than we had space. So, with an
appreciative salute to all of our
many Dairy Teams, the following DEAN FOODS COMPANY SHOWED
dramatic growth in Dairy Products
teams represent the Dean Foods sales in fiscal 1998, driven
mainly by a geographically-
Dairy employees across the nation. strategic acquisition program,
innovative new products, and
------------------- continuing market share gains
in on-going operations.
In fluid milk an cultured products,
We added eight new high-performing
our teams worked, and they operations to our already strong
dairy roster in 1998, helping to
worked exceedingly hard... boost our revenues nearly 15 percent
from $1.8 billion in fiscal 1997 to
on a fluid milk line at our Purity $2.1 billion this past fiscal year.
Dairy Products account for 75
Dairy (Nashville, Tennesee) and percent of the Company's total
revenues.
Coburg Dairy (Charleston, South
The acquisitions, coupled with
Carolina) acquisitions, or at an innovative marketing and
productivity gains at our existing
engineering desk at our new facilities, helped Dean Foods
Company maintain its position as the
Mayfield Dairy's fluid milk facility nation's number one processor of
fluid milk.
in Braselton, Georgia.
The Company is also one of the
country's leading processors of
cultured dairy products, ice cream,
frozen novelties, juices, and
extended shelf life dairy products.
FLUID MILK/CULTURED PRODUCTS
This business is built solidly on a
core group of market-leading regional
brands, including Bell, Cream o'
Weber, Creamland, Dean's, Gandy's,
Mayfield, McArthur, Meadow Brook,
Price's, Reiter, T.G. Lee and
Verifine.
8
Building further on that base in fiscal 1998, we
added other strong brands such as Maplehurst and
H. Meyer in the Midwest; Purity in the Midsouth, Coburg
in the Southeast and Wengert's in Pennsylvania. We also
acquired the Luckey Stores dairy operations of American
Stores in California. This acquisition gives us access to that
state's huge population base.
We now distribute dairy products in supermarkets,
convenience stores, warehouse and club stores, and
foodservice and institutional customers from 38 facilities
in 15 states covering the Midwest, Midsouth, Northeast,
Southeast, Southwest, and California.
During fiscal 1998, sales in the fluid milk/cultured
products category reached a record high of $1.6 billion.
The unparalleled success of our Milk Chug roll-out under
regional brand names in the Southeast and the Midwest
has far exceeded our initial expectations. Overwhelming
customer and consumer demand for these products bodes
well for our future growth in this category as we introduce
it in other geographic market areas across the country.
(7)
9
DAIRY
PRODUCTS
From the top route salespeople
at Coburg Dairy to the award- Milk chugs are available in 8-ounce,
wining bottle manufacturing team pint and quart plastic resealable
at Mayfield Dairy, our people bottles shaped like the original round
are dedicated to be the best. glass milk bottles. They have quickly
become a favorite where convenience and
----------------------- portability are a factor, especially
convenience stores, gasoline stations
Perhaps the most popular and other specialty stores with limited
team project is the taste panel inventory space and a need for fast-
for new ice cream products at selling products. The 8-ounce chugs
the corporate headquarters in are also available in an easy-to-carry
Franklin Park, Illinois. Results six-pack format.
are often a good indicator
of consumer tastes and Chocolate milk Chugs have proven to be
preferences the most popular with consumers, and are
also available in a low-fat chocolate
version. Other varieties available are
Vitamin D regular, fat-free regular, 2%
reduced fat, half & half, and
(8) buttermilk.
10
During the holiday seasons, in November and December, eggnog is also produced
and sold in Milk Chug quart bottles.
For the future we are already looking to leverage the market acceptance of the
Chug packaging by developing new products such as additional milk flavors,
juices, and other types of drinks. In addition, we are testing a wraparound
gallon label to provide greater brand name exposure to consumers.
Among other significant achievements in fiscal 1998 was our increased emphasis
on category management programs with our major customers. These activities
resulted in higher customer sales and reduced supply chain costs -- a
"win/win" for Dean, customers, and consumers. These and other programs should
continue to reap valuable benefits for us in fiscal 1999 and beyond.
ICE CREAM & FROZEN DESSERTS
Dean foods Company's frozen dessert strategy is to provide our customers with a
total program, including regional branded and private label packaged ice cream
and novelties, and fast, efficient distribution capabilities to deliver the
entire needs of the customer's dessert/ice cream department.
(9)
11
DAIRY
PRODUCTS
The LIFT team, as it is known
at Dean Foods, is a
cross-functional team that
Leverages Ideas For Tomorrow.
That means helping our
employees to identify and
execute their own ideas for Sales in this category rose 27
improving business processes. percent to $332 million, driven in
part by our ability to add
- --------------- outstanding regional brands to our
existing and highly popular
Our largest Extended Shelf portfolio of brands such as Dean,
Life dairy plant in Murray, Mayfield, Reiter and Verifine, as
Kentucky was home for the LIFT well as expanded distribution
team earlier this year. Even through our Meadows acquisition.
in this state-of-the-art
plant, many cost reduction and Another factor in our market growth
productivity improvement is the success of our "Really Cool
opportunities were uncovered. Flavors" program. New fiscal 1998
The dramatic growth of the ESL flavors "Brown Cow," "Hog heaven"
product group makes these and "Banana Pudding" have
opportunities all the more been extremely successful line
important. additions to our existing "Moose
Tracks," "Chocohula" and "Banana
Split" flavors.
Dean manufactures and markets
(10) nearly 70 million gallons of ice
cream and frozen desserts in six
facilities serving customers and
consumers in 26 states.
EXTENDED SHELF LIFE PRODUCTS
Extended Shelf Life (ESL) dairy
products are becoming more
important to the overall dairy
category as retailers and
foodservice distributors recognize
the value of longer code lives in
distribution and at the grocery
shelf.
This product group includes
whipping creams, half & half dairy
creamers, cottage cheese, sour
cream, dressings, aerosol whipped
creams and non-dairy toppings.
12
A substantial portion of this business also comes from products made on a
licensee basis. We process, sell and deliver Carnation Coffeemate liquid and
Nestle Quik in a 25 state territory.
We also have the exclusive rights for several other licensed brands, including
Nestea iced tea, Dairy Ease lactose-free milk, Vitamite non-dairy beverage, and
Health Source soy beverages.
Foodservice business accounts for about 11 percent of the ESL group's sales
total. An ongoing campaign of improved distribution, new product introductions,
and value-added customer service is aimed at increasing this penetration. In
fiscal 1998, for the second consecutive year, Sysco Food Service Co., one of the
largest foodservice distributors in the industry, named the ESL division as one
of its top 100 suppliers.
(11)
13
PICKLE
PRODUCTS
How many new ideas and additional
quality can you stuff into a jar or
pail of pickles? Well, at Dean
Foods, where everything we do must DEAN PICKLE AND SPECIALTY PRODUCTS
be top notch or we simply don't do Group experience another strong
it, the answer is a whole lot. performance in fiscal 1998. Our
fiscal 1998 sales were $349
-------------- million.
Our recent acquisition of Schwartz We were successful in reducing our
Pickle, the country's leading invested capital by over $15
packer of refrigerated pickles for million, though ongoing
the foodservice trade, fits right consolidation and operational
in with this philosophy. Schwartz improvements, as we focus an
packs to the tightest specification increasing return on an invested
in the industry using the finest capital.
quality and freshest cucumbers.
Operationally, these efforts have
-------------- been focused on improving labor and
productivity and throughput by
Our original LIFT team was so utilizing automation and warehouse
successful in the Dairy plants they efficiencies A prime example is the
visited, we organized a separate complete rebuilding of our facility
team to bring the same discipline in Faison, North Carolina, due for
to our Pickle and Specialty completion in mid-fiscal 1999.
operations. We expect similar This plant will be a showcase of
results here. state-of-the-art technology and
automation, and will substantially
reduce operating costs.
At the retail sales level we
continue to stress more effective
selling programs. This includes
building stronger relationships
with key customers, and managing
the category for more sales and
better customer profitability.
(12)
14
We hold the leading share of private label retail and foodservice pickle sales
in the U.S. Our family of retail pickle brands,including Arnold's, Atkins, Aunt
Jane's, Cates, Heifetz, Paramount, Peter Piper, Rainbo and Roddenberry, as well
as our Bennett's and Hoffman House sauces, remain household favorites in their
regional markets.
Near the end of fiscal 1998, we completed the acquisition of Schwartz Pickle
Co., the premier packer of refrigerated pickles to the foodservice industry. At
its two-year old plant in Chicago, Illinois, Schwartz sets the quality standard
for pickles served by restaurant chains and other institutions throughout the
U.S.
Dean Pickle and Specialty Products operates nine processing plants strategically
located throughout the U.S. From these facilities we supply the country's
largest retail and foodservice customers with pickles, peppers, relishes,
olives,sauces and syrups.
(13)
15
SPECIALTY
PRODUCTS
The team at the Marie's plant
in Thornton, Illinois,
acquired at the beginning of
fiscal 1998, hardly got to
know us before we asked them
to change their labeling
process to bring a fresh look
to Marie's salad dressings.
They made the change without DEAN FOODS COMPANY'S SPECIALTY
missing a beat, and the new Group recorded an 11 percent
package is a huge success. increase in sales in fiscal
1998 to $335 million. Every
--------------- product line in this segment
contributed to growth,
All of our Specialty Products, including our non-dairy
including dips, dressings, creamers and other powdered
powdered products and aseptic products, our dip and dressing
puddings and sauces, rely product lines, and our aseptic
heavily on or experienced shelf-stable puddings and
Research & Development Group cheese sauces.
in Rockford, Illinois. The
team's consistent ability to The addition of new spray
improve quality, taste, dryer at our Wayland, Michigan
shelf-life and cost -- plant supports our continued
sometimes all at once -- gives growth in the powdered
Dean Foods a competitive non-dairy creamer market. The
advantage in every one of our dryer will also allow us to
product lines. enter the shortening and other
high fat powder markets.
The cappuccino craze continues
to drive growth in our creamer
products, which serve as an
ingredient. We also gained
market share in the retail
club stores and mass
merchandising channels of
distribution by adding new
products such as our 40-ounce
canister pack for club stores.
(14)
(15)
16
Dean Dip & Dressing once again delivered record sales growth in fiscal 1998.
Last year's acquisition of Marie's salad dressings and dips has been
successfully integrated into the overall operations of this division and has
helped drive sales volume, particularly in the fresh produce department of
retail stores where Marie's is a familiar and favorite brand name.
This division's product offerings continue to broaden, including refrigerated
snack dips,refrigerated salad dressings,sour cream,and aerosol whipped toppings
under such strong brand names as Dean's,Marie's,Imo, and Rod's. In most
markets,we maintain the number one or number two brand of refrigerated dairy and
produce dips and salad dressings.
During the past year, we significantly improved the Marie's formula for dips and
salsa, rolled out guacamole dip in all markets and installed a mew aerosol
whipped topping production line at our California plant. The Dip & Dressing
unit's sales and marketing teams are forging strategic partnerships with key
retail customers to ensure a continuation of this strong growth pattern.
15
17
Specialty Products
Amboy Specialty Foods offers aseptically-produced cheese sauces, puddings, and
other shelf-stable products to manufacturing and foodservice customers
throughout the nation. Sales increased in fiscal 1998, while better production
efficiencies brought down processing cost.
New products and packaging alternatives present excellent opportunities for
continued growth in this category. Several new ethnic-oriented sauces, such as
Stir Fry Sauce, were added to the product line during fiscal 1998. The plastic
pouch continues to enjoy excellent success with foodservice customers interested
in its advantages over the traditional can, We see a huge opportunity to
utilize this technology along with new packaging sizes to pursue other channels
of distribution.
E.B.I. Foods, the Company's affiliate located in the United Kingdom, recorded
another excellent year. Its dry ingredient blends are sold to industrial
customers throughout Europe, and to the Middle East, Far East and Africa.
E.B.I.'s new Abingdon, England production facility has helped this division
provide product to meet the increased demand.
DFC Transportation Company directs and coordinates a vast fleet of vehicles as
part of the largest and most efficient temperature-controlled transportation
systems and full-service logistics support groups in the nation.
Dedicated to maximizing supply chain efficiencies and customer service, DFC
provides added value and cost competitiveness to several Dean product lines, as
well as serving the transportation and logistics needs of other premier food
companies.
We transport truckload and consolidate less-than-truckload shipments of dry,
refrigerated, and frozen products throughout the U.S., Canada and Mexico. A
network of operating centers nationwide connects this transportation function,
which continues to be a powerful support tool for our marketing and selling
efforts.
(16)
18
DEAN FOODS COMPANY & SUBSIDIARIES
FINANCIAL REVIEW
STRATEGIC DIRECTION
The Company's primary objective is the maximization of shareholder value through
long-term stock appreciation and dividend growth. The Company's fiscal 1998
performance contributed to this objective by delivering record income from
continuing operations of $88.0 million, or $2.13 per diluted share, surpassing
the record established in fiscal year 1997 by $.30 per share. The Company's
strategy remains focused on profitable top-line growth, primarily through
acquisitions and new product initiatives and continuous margin improvements
through our cost compression initiative.
The Company continues to refine and execute its previously announced
long-term strategic plan, the underlying goal of which is to improve
profitability and enhance shareholder value. As part of this on-going review,
the Company recently announced the divestiture of the Vegetables segment for
cash consideration of $400 million plus the aseptic foods business of Agrilink
Foods, Inc. The transaction is expected to close in the first half of fiscal
1999. Due to this announcement, the results of operations have been restated for
all periods to present the Vegetables segment as a discontinued operation. The
following management discussion and analysis pertains to continuing operations
and excludes the impact of the fiscal 1996 special charge, unless otherwise
noted.
FINANCIAL OBJECTIVES AND STRATEGIES
Among the financial objectives and strategies employed by the Company are:
SOUND WORKING CAPITAL MANAGEMENT
The Company employs various procedures to monitor and control the quality and
levels of current assets and liabilities. Due to the quick turn of the Company's
current assets, which consist primarily of accounts receivable and inventory,
working capital is expected to be maintained at relatively moderate levels in
the future. The Company`s historical usage of short-term borrowings to finance
seasonal crop-related requirements will decline substantially after the
completion of the pending sale of the Vegetables segment.
CAPITAL INVESTMENTS
The Company's goal is to maintain and improve the productivity of its assets,
making capital investments which offer returns to the Company greater than its
weighted average cost of capital.
MODERATE AND PRUDENT USE OF DEBT
The Company maintains moderate debt levels considering its business strategy,
cash flow, access to both short-and long-term debt capital markets and leverage
of comparable firms in the food industry. The Company allocates its borrowings
between the short- and long-term debt markets after considering factors such as
cost, stability and liquidity. The long-term debt market has primarily been used
to fund acquisitions and major capital expenditures. The Company`s total debt to
total capitalization ratio at fiscal year-end 1998 was 48.3%, a level which the
Company believes will allow access to both short- and long-term debt markets in
order to fund the Company`s growth. In addition, the proceeds to be received
upon the completion of the pending Vegetables segment sale will provide
additional financial flexibility.
FINANCIAL RISK MANAGEMENT
The Company's primary financial risk is interest rate exposure, which is managed
through a mix of fixed and floating rate debt. Foreign currency risk is not
significant. The Company's policies and controls preclude the use of "leveraged"
derivatives and the use of financial derivatives for purposes considered
speculative.
DIVIDEND POLICY
The Company paid quarterly dividends of $.20 per share in fiscal 1998, up from
$.19 and $.18 per share in fiscal 1997 and 1996, respectively. On July 24, 1998,
the Company increased the quarterly dividend rate 5% to $.21 per share, the
Company's twenty-sixth increase since 1974. The Company has paid a dividend for
55 consecutive years.
STOCK REPURCHASE
The Company may, from time to time, repurchase stock on the open market. During
fiscal 1998, the Company repurchased 730,500 shares of its outstanding common
stock. No shares were repurchased during fiscal years 1997 or 1996. At May 31,
1998, the Company had authorization to repurchase up to an additional 970,000
shares of its common stock.
OPERATING RESULTS
The Company's fiscal year ends on the last Sunday in May; therefore, the 1998
fiscal year included 53 weeks versus 52 weeks in 1997 and 1996.
- --------------------------------------------------------------------------------
(17) Financial Review
- --------------------------------------------------------------------------------
19
FISCAL YEAR 1998 COMPARED TO FISCAL YEAR 1997
RESULTS OF CONTINUING OPERATIONS
The Company's net sales for fiscal 1998 were $2.7 billion compared to $2.5
billion for fiscal 1997, an increase of 11.2%. Acquisitions in the Dairy and
Specialty segments accounted for most of the fiscal 1998 increase. Improved
sales volume in the Dairy and Specialty segments also contributed to the overall
sales increase, with the Specialty segment experiencing a 16% growth in volume,
exclusive of acquisitions.
Income from continuing operations for fiscal year 1998 increased 18.9% to
$88.0 million or $2.13 per diluted share, compared to $74.0 million or $1.83 per
diluted share in the prior year. Fiscal 1998 earnings growth was primarily due
to the Dairy and Specialty business segments.
DEAN FOODS COMPANY & SUBSIDIARIES
FINANCIAL REVIEW
The Company's return on invested capital decreased from 17.5% in fiscal
1997 to 16.0% in fiscal 1998. This decline was primarily due to the additional
invested capital associated with acquisitions and new product initiatives, which
did not contribute substantially to 1998 earnings. Each of these initiatives is
expected to contribute significantly to the Company`s future growth and return
on invested capital.
BUSINESS SEGMENTS
The Company is a diversified food processor and distributor engaged in three
business segments. The Company is a major processor of fluid milk and related
products, ice cream and extended shelf life dairy products serving various
regional markets, with some products distributed nationwide and to Mexico. Dairy
is the Company's largest segment, accounting for 75% of total fiscal 1998 sales,
while the Pickles and Specialty product segments accounted for 13% and 12% of
total sales, respectively. Pickles and Specialty products are sold in regional
markets and nationally, with certain products sold internationally.
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 pricing as well as changes in
other production and distribution related costs.
Segment operating earnings represent total sales less operating expenses
with the following items not deducted: general corporate expense, interest
expense and federal and state income taxes.
DAIRY - Net sales for the Dairy segment increased 14.8%, from $1.8 billion
in fiscal 1997, to $2.1 billion in fiscal 1998. The Dairy sales growth can
largely be attributed to the eight acquisitions completed during fiscal 1998,
the introduction of the Milk Chugs product line and an extra week of sales
activity due to the 53 week fiscal year. Dairy volume for the fiscal year
increased by 20%, also attributable to the fluid milk and ice cream acquisitions
completed during the year and in late fiscal 1997.
Dairy operating earnings for fiscal 1998 were $114.1 million, a 9.9%
increase over the $103.8 in fiscal 1997. The fiscal 1998 earnings benefited from
the impact of 1997 acquisitions and favorable raw milk costs early in the fiscal
year, which resulted in significantly improved first half operating earnings.
The segment`s second half operating earnings declined from fiscal 1997 levels as
less favorable raw milk costs, competitive pricing conditions in selected
regions and increased distribution costs in the extended shelf life operation
more than offset the benefits of the 1997 and 1998 acquisitions.
The Dairy segment`s return on invested capital declined from 18.5% in
fiscal 1997 to 15.0% in fiscal 1998 due to the additional invested capital from
fiscal 1998 acquisitions and increased capital spending associated with the Milk
Chugs product line. Each of these initiatives is expected to improve overall
Company performance in the future.
PICKLES - Fiscal year 1998 Pickles net sales declined to $348.7 million, a
6.0% decrease from $370.8 million in fiscal year 1997. Pickle category trends,
which were flat to declining during fiscal 1998, combined with competitive
market pressures and rationalization of the segment`s product offerings led to
lower fiscal year sales. The Pickles segment volume decline was in line with the
overall industry volume decline of approximately 3%.
Pickles operating earnings of $37.1 million in fiscal 1998 increased from
$36.0 million in fiscal 1997 due largely to overall lower operating costs.
Additionally, the Pickles segment benefited from aggressive invested capital
management, increasing the segment's return on invested capital from 16.1% in
fiscal year 1997 to 18.7% in fiscal year 1998.
SPECIALTY - Fiscal 1998 net sales increased 10.8%, from $301.9 million in
fiscal 1997, to $334.6 million. The addition of Marie's refrigerated salad
dressing business in early fiscal 1998 accounted for most of this increase. Each
of the businesses in this segment reported increased sales and volumes during
fiscal 1998 compared to the prior year.
Operating earnings of $52.2 million in fiscal 1998 were 42.3% higher than
the $36.7 million in fiscal 1997, primarily due to earnings generated by the
Marie's acquisition, increased operating efficiencies at the Dean Dip and
Dressing California operation and significantly improved performance in the
Amboy aseptic cheese and pudding business.
Return on invested capital for the Specialty segment dropped to 23.7% in
fiscal 1998 from 28.9% in fiscal 1997 due to the additional invested capital
associated with the Marie's acquisition and a new dryer in the powdered products
business.
CORPORATE
Fiscal 1998 Corporate expenses of $40.8 million were $3.0 million higher than
fiscal 1997 expenses of $37.8 million. This change was primarily due to
increased incentive and equity-based compensation expenses as a result of
overall improved fiscal year performance.
- --------------------------------------------------------------------------------
(18) Financial Review
- --------------------------------------------------------------------------------
20
INTEREST EXPENSE
Interest expense increased $6.0 million, to $21.1 million, in fiscal 1998
primarily due to the issuance of additional short- and long-term debt to fund
acquisitions and a significantly higher level of capital expenditures during the
fiscal year.
INCOME TAXES
The effective tax rate for fiscal year 1998 was 38.8% compared to a rate of
40.6% in the prior year. The decline in the effective rate is due to lower state
taxes and increased export and other tax credits in fiscal 1998.
DISCONTINUED OPERATIONS
Income from discontinued operations, net of taxes, was $18.3 million in fiscal
1998 versus $12.7 million in fiscal 1997.
FISCAL YEAR 1997 COMPARED TO FISCAL YEAR 1996
RESULTS OF CONTINUING OPERATIONS
Net sales increased 9.8% to $2.5 billion in fiscal 1997, from $2.2 billion in
fiscal 1996. An improved sales mix and business acquisitions were the primary
contributing factors to the fiscal 1997 increase.
Earnings for fiscal year 1997 increased over fiscal 1996 with income from
continuing operations of $74.0 million, or $1.83 per diluted share, compared
with a loss of $16.9 million, or $.42 per diluted share, in the prior year.
Fiscal 1996 results included a pre-tax charge to income of continuing operations
of $102.4 million ($64.9 million after-tax, or $1.62 per share) related to the
adoption of a strategic plan to reduce costs, rationalize production capacity
and provide for severance and environmental costs. Absent the fiscal 1996
special charge, fiscal 1997 operating earnings increased by 36.2% over the prior
year. Each of the Company's business segments reported increased earnings during
fiscal 1997. The Company's return on invested capital increased to 17.5% in
fiscal 1997 from 11.1% (pre-special charge) in fiscal 1996.
The strategic plan adopted in fiscal 1996 included the planned elimination
of more than 500 manufacturing and administrative positions and the disposition
or closure of six manufacturing facilities. As of May 31, 1998, the Company had
disposed of or closed all six manufacturing facilities and eliminated all of the
500 positions. Further discussion of the special charge appears in Note 14 to
the consolidated financial statements.
The pre-tax impact of the special charge on the Company's fiscal 1996
operating earnings (loss) by business segment is summarized below:
Operating Operating Earnings
(In thousands) Earnings (Loss) Special Charge before Special Charge
- ------------------------------------------------------------------------------
Dairy $ (2,644) $ 76,694 $ 74,050
- ------------------------------------------------------------------------------
Pickles 10,299 13,704 24,003
- ------------------------------------------------------------------------------
Specialty 25,737 999 26,736
- ------------------------------------------------------------------------------
Corporate (33,985) 11,042 (22,943)
- ------------------------------------------------------------------------------
Consolidated $ (593) $ 102,439 $ 101,846
==============================================================================
BUSINESS SEGMENTS
DAIRY - Dairy sales for fiscal 1997 increased 11.0%, primarily the result
of increased selling prices which reflected the pass-through of higher raw milk
costs during the year and increased sales related to new customers. Overall,
Dairy volume was up 2%, as a 5% increase in fluid milk volume was offset by a
slight decrease in ice cream volume, and a decline resulting from the sale of an
extended shelf life plant.
Raw milk costs peaked at record levels in the second quarter of fiscal
1997, then declined sharply during the third quarter and rose during the last
quarter of fiscal 1997 to a level comparable to the end of fiscal 1996.
Fiscal 1997 Dairy operating earnings of $103.8 million reflect a 40.1%
increase over the same period in 1996. Performance improved in each of the fluid
milk, ice cream, and extended shelf life operations as a result of higher sales
and improved operating efficiencies.
PICKLES - Sales in fiscal 1997 of $370.8 million were slightly lower in
relation to fiscal 1996 sales of $373.2 million primarily due to a shift in
customer sales mix which focused on rationalizing the segment`s product
offerings and customer base.
Operating earnings of $36.0 million in fiscal 1997 increased from $24.0
million in fiscal 1996, primarily due to more effective procurement, increased
operating efficiencies and improved promotional activities management.
SPECIALTY - Sales for fiscal 1997 increased 17.9% to $301.9 million from
$256.0 million in fiscal 1996. The increase is largely due to the full-year
inclusion of sales generated by a mid-fiscal 1996 acquisition and the increased
sales volume of the segment's non-dairy creamer products.
Fiscal 1997 operating earnings of $36.7 million increased 37.2% over
earnings of $26.7 million in fiscal 1996. The improvement in operating earnings
is attributable to the higher sales of powdered products and the full-year
earnings of the mid-fiscal 1996 acquisition.
CORPORATE
Corporate expenses increased in fiscal 1997 over fiscal 1996 principally as the
result of increased compensation and stock plan accruals reflecting improved
1997 results, as well as increased pension and other expenses related to 1997
management changes.
INTEREST EXPENSE
Fiscal 1997 interest expense decreased $1.2 million, or 7.6%, principally as a
result of decreased debt service on short-term borrowings. The Company had lower
average borrowings at lower weighted average interest rates during fiscal 1997
in comparison to fiscal 1996.
INCOME TAXES
The Company recognized an effective tax rate of 40.6% for fiscal 1997 versus an
effective rate of (8.2)% for fiscal 1996. The 1996 tax provision of $1.3
million, on a pre-tax loss from continuing operations of $15.6 million was due
to the impact of non-deductible goodwill.
DISCONTINUED OPERATIONS
Income from discontinued operations, net of taxes, was $12.7 million in fiscal
1997 versus a loss of $32.8 million in fiscal 1996. The fiscal 1996 loss
includes a pre-tax charge of $47.6 million related to the adoption of a plan to
reduce costs, rationalize production capacity and provide for severance costs.
- --------------------------------------------------------------------------------
(19) Financial Review
- --------------------------------------------------------------------------------
21
DEAN FOODS COMPANY & SUBSIDIARIES
FINANCIAL REVIEW
FINANCIAL CONDITION
LIQUIDITY AND CAPITAL RESOURCES
The Company's operating cash and capital expenditure requirements have
historically been met through funds generated internally from assets employed.
Working capital at May 31, 1998 was $67.3 million, an increase of $2.3
million over the prior year. The Company's current ratio was 1.19 compared to
1.22 at the end of fiscal 1997. Cash and temporary cash investments at May 31,
1998 were $11.9 million, an increase of $7.5 million from the prior year-end.
Inventories increased $13.3 million principally the result of inventories of
businesses acquired during fiscal 1998.
Seasonal working capital requirements of continuing operations are funded
using short-term debt under the Company`s Revolving Credit Agreement or its
bilateral lines of credit. During fiscal 1998, funds drawn under the Revolving
Credit Agreement and bilateral lines of credit were also used to fund
acquisitions. The short-term borrowings outstanding at the end of fiscal 1998
were $12.0 million, whereas the borrowings outstanding at the end of fiscal 1997
were $3.0 million.
Net property, plant, and equipment at May 31, 1998 increased $169.3 million
this year principally due to the assets of businesses acquired and capital
expenditures, net of dispositions and depreciation. The fiscal 1998 capital
expenditures increase reflects 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 the
long-term debt markets in its funding of acquisitions and major capital
expenditures.
During fiscal 1998, the Company entered into a $500 million Revolving
Credit Agreement which matures in 2003. This Credit Agreement replaces the
Company`s prior $300 million Amended and Restated Credit Agreement. Borrowings
under this facility as of May 31, 1998 were $210.0 million. In October 1997, the
Company issued $150 million of 6.9% Notes due 2017. Long-term obligations at May
31, 1998 were $558.2 million, an increase of $349.3 million from last year-end.
The increased debt was used to finance 1998 acquisitions and increased capital
expenditures. The Company's total debt to total capital ratio at May 31, 1998
was 48.3% compared to 28.3% a year ago. The net cash proceeds to be received
upon the completion of the pending sale of the Vegetables segment are expected
to be utilized to repay borrowings under the Revolving Credit Agreement. This
will provide additional capacity to fund future acquisitions and capital
expenditures.
Shareholders' equity at May 31, 1998 was $619.3 million, an increase of
$51.6 million from last year-end, reflecting fiscal year 1998 earnings less
dividends paid to shareholders and common stock repurchased. The Treasury Stock
held at May 31, 1998 is available for use in future acquisitions, for stock
options or for other general business purposes.
CASH FLOWS
The change in cash for fiscal 1998 was an increase of $7.5 million, whereas cash
decreased by $6.0 million during fiscal 1997. The Company's cash flow activities
are as follows:
OPERATING ACTIVITIES - Cash provided from operations for fiscal 1998 was
$162.7 million compared to $147.3 million and $108.9 million for fiscal years
1997 and 1996, respectively. The increased cash provided in 1998 was principally
the result of increased earnings during fiscal 1998.
INVESTING ACTIVITIES - Net cash used in the Company's investing activities
in fiscal 1998 was $472.3 million compared to $67.8 million and $113.7 million
in fiscal years 1997 and 1996, respectively. Capital expenditures and business
acquisitions are the Company's principal investing activities. During 1998, the
Company invested $104.7 million in capital expenditures, compared with $55.6
million and $71.1 million in fiscal 1997 and 1996, respectively. The $49.1
million increase between fiscal 1998 and 1997 reflects the company's commitment
to focus on investing in innovative product growth such as the small bottle
initiative, improved production efficiencies and expansion of existing product
lines. Fiscal 1999 capital expenditures are expected to be slightly higher than
fiscal 1998 due to capital projects related to new product growth, primarily the
continued roll-out of the Dairy segment's small bottle initiative.
The Company invested $369.6 million in 1998 to acquire eight dairies, one
pickle and one specialty operation. The significant fiscal 1998 acquisition
activity reflects the Company's commitment to focus on profitable growth in its
core business segments. During the three years ended May 31, 1998, a total of
$430.2 million was spent to acquire businesses which are discussed in Note 2 to
the consolidated financial statements.
Subsequent to fiscal 1998 year-end, the Company completed the acquisitions
of Barber Dairies, Inc. and Hillside Dairy, each for cash consideration. The
Company also announced it has reached a definitive agreement to acquire U.C.
Milk Company for cash consideration.
FINANCING ACTIVITIES - Net cash provided by financing activities during
fiscal 1998 was $279.0 million compared to net cash used of $125.0 million in
fiscal 1997 and net cash provided of $30.5 million in fiscal 1996. The issuance
of long-term obligations to fund acquisitions and increased capital expenditure
activity is the principal
- --------------------------------------------------------------------------------
(20) Financial Review
- --------------------------------------------------------------------------------
22
reason for the change in net financing activities between fiscal 1998 and 1997.
The net repayment of $89.0 million of short-term borrowings in fiscal 1997,
which was possible due to the lower level of acquisitions and capital
expenditures in that year, is the principal reason for the fluctuation in net
financing activities between fiscal 1997 and 1996.
Short-term borrowings outstanding at fiscal year end 1998 and 1997 were
$12.0 million and $3.0 million, respectively. Cash dividends paid were $32.0
million in fiscal 1998 compared to $30.1 million and $28.5 million during fiscal
years 1997 and 1996, respectively.
YEAR 2000 COMPLIANCE
The Year 2000 issue results from computer programs using two digits rather than
four to define the applicable year. As the year 2000 approaches, systems using
such programs may be unable to accurately process certain date-based
information. Like many other companies, the Company is continuing to assess and
modify its computer, production and facility systems and business processes to
provide for their continued functionality. The Company is also assessing the
readiness of external entities, including suppliers, vendors, and banking and
insurance partners, and is coordinating its efforts to address the Year 2000
issue with those entities.
In addition, the Company is addressing the Year 2000 issue by both
augmenting previously scheduled computer maintenance with procedures designed to
locate and correct Year 2000 problems and by slightly accelerating its normal
equipment and software replacement schedules. The Company expects that
substantially all new system upgrades or reprogramming efforts, including
contingency planning, will be completed by December 31, 1998. The costs
associated with these procedures have not been and are not expected to be
material to the Company's financial condition or results of operations.
The Company believes that modification of existing software and conversions
to new software will result in Year 2000 compliance. However, given the
complexity of the Year 2000 issue, the impact on business operations due to
failure by the Company to achieve compliance or failure by external entities,
such as suppliers and vendors, to achieve compliance, which the Company cannot
control, could adversely affect the Company's consolidated results of
operations.
ENVIRONMENTAL MATTERS
On July 10, 1996, a subsidiary of the Company was fined approximately $4 million
in a lawsuit filed by the United States of America in the United States District
Court for the Middle District of Pennsylvania alleging violations of the Federal
Water Pollution Control Act relating to the discharge of conventional,
non-hazardous substances. The Company has appealed the lower court ruling on the
grounds that the fine should be substantially reduced. The Appellate Court has
upheld the lower court ruling and the Company is currently considering its
options for settlement or further proceedings. If the Company's efforts in this
regard are ultimately unsuccessful, the fine would be covered by existing
reserves. The Company continues to give attention to the impact of operations on
the environment and compliance with current federal, state and local regulations
relating to the protection of the environment.
NEW ACCOUNTING STANDARDS
In June 1997, the Financial Accounting Standards Board (FASB) issued Statement
of Accounting Standards (SFAS) No. 130, "Reporting Comprehensive Income." This
new pronouncement establishes standards for the reporting and display of
comprehensive income and its components in a full set of general-purpose
financial statements. This standard is effective for the Company's fiscal year
ending May 30, 1999.
SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information," was also issued in June 1997, and establishes new standards for
reporting information about operating segments in annual financial statements
and requires that those enterprises report selected information about operating
segments in interim financial reports issued to shareholders. SFAS No. 131 also
establishes standards for related disclosures about products and services,
geographic areas and major customers. This standard is effective for the
Company's fiscal year ending May 30, 1999. The Company expects that the adoption
of SFAS No. 131 will not have a material effect on its existing segment
information disclosures.
SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities," was issued in June, 1998. This statement standardizes 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. This standard is effective for the Company's 1999 fiscal year and
adoption of this standard is not expected to have a material impact on the
Company's financial condition or results of operations.
FORWARD LOOKING STATEMENTS
Certain statements in this Annual Report are "forward looking statements" as
defined by the Private Securities Litigation Reform Law of 1995. 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 the Report. These risks include, but are not
limited to, risks associated with the Company's acquisition strategy, adverse
weather conditions resulting in poor harvest conditions, raw milk costs,
interest rate fluctuations, competitive pricing pressures, marketing and
cost-management programs, changes in government programs and shifts in market
demand.
- --------------------------------------------------------------------------------
(21) Financial Review
- --------------------------------------------------------------------------------
23
DEAN FOODS COMPANY & SUBSIDIARIES
CONSOLIDATED
BALANCE SHEETS
May 31, 1998 and May 25, 1997 (In thousands)
ASSETS 1998 1997
- --------------------------------------------------------------------------------------------------
CURRENT ASSETS
- --------------------------------------------------------------------------------------------------
Cash and temporary cash investments $ 11,932 $ 4,386
------------------------------------------------------------------------------------------
Accounts and notes receivable, less allowance for doubtful
accounts of $4,212 and $3,085, respectively 225,970 174,784
------------------------------------------------------------------------------------------
Inventories 135,405 122,130
------------------------------------------------------------------------------------------
Deferred tax assets 12,329 16,939
------------------------------------------------------------------------------------------
Other 34,602 40,644
------------------------------------------------------------------------------------------
TOTAL CURRENT ASSETS 420,238 358,883
------------------------------------------------------------------------------------------
PROPERTY, PLANT AND EQUIPMENT, AT COST
- --------------------------------------------------------------------------------------------------
Land 35,072 22,554
------------------------------------------------------------------------------------------
Buildings and improvements 280,567 211,604
------------------------------------------------------------------------------------------
Machinery and equipment 542,782 457,588
------------------------------------------------------------------------------------------
Transportation equipment 64,033 50,551
------------------------------------------------------------------------------------------
Construction in progress 43,772 25,179
------------------------------------------------------------------------------------------
966,226 767,476
------------------------------------------------------------------------------------------
Less - Accumulated depreciation 415,162 385,676
------------------------------------------------------------------------------------------
TOTAL PROPERTIES, NET 551,064 381,800
------------------------------------------------------------------------------------------
NET ASSETS OF DISCONTINUED OPERATIONS 288,037 312,855
- --------------------------------------------------------------------------------------------------
OTHER ASSETS
- --------------------------------------------------------------------------------------------------
Goodwill, net of amortization of $9,984 and $6,169, respectively 329,692 62,801
------------------------------------------------------------------------------------------
Other intangible assets, net of amortization of $1,553 and
$1,540, respectively 4,905 2,044
------------------------------------------------------------------------------------------
Other 13,253 15,297
------------------------------------------------------------------------------------------
TOTAL OTHER ASSETS 347,850 80,142
------------------------------------------------------------------------------------------
TOTAL ASSETS $1,607,189 $1,133,680
==================================================================================================
See accompanying notes to consolidated financial statements.
- --------------------------------------------------------------------------------
(22) Consolidated Balance Sheets
- --------------------------------------------------------------------------------
24
(In thousands)
LIABILITIES AND SHAREHOLDERS' EQUITY 1998 1997
- -------------------------------------------------------------------------------------------------
CURRENT LIABILITIES
- -------------------------------------------------------------------------------------------------
Notes payable to banks $ 12,000 $ 3,000
-----------------------------------------------------------------------------------------
Current installments of long-term obligations 9,014 12,657
-----------------------------------------------------------------------------------------
Accounts payable and accrued expenses 311,303 254,522
-----------------------------------------------------------------------------------------
Dividends payable 8,079 7,738
-----------------------------------------------------------------------------------------
Federal and state income taxes 12,518 15,978
-----------------------------------------------------------------------------------------
TOTAL CURRENT LIABILITIES 352,914 293,895
------------------------------------------------------------------------------------------
LONG-TERM OBLIGATIONS 558,233 208,931
- -------------------------------------------------------------------------------------------------
DEFERRED LIABILITIES
- -------------------------------------------------------------------------------------------------
Deferred income taxes 43,536 25,262
-----------------------------------------------------------------------------------------
Other 33,240 37,911
-----------------------------------------------------------------------------------------
TOTAL DEFERRED LIABILITIES 76,776 63,173
------------------------------------------------------------------------------------------
SHAREHOLDERS' EQUITY
- -------------------------------------------------------------------------------------------------
Preferred stock, $1 par value, 10,000,000 shares authorized,
none issued - -
-----------------------------------------------------------------------------------------
Common stock, $1 par value, 80,000,000 shares authorized,
41,962,091 and 41,544,923 shares issued, respectively 41,962 41,545
-----------------------------------------------------------------------------------------
Capital in excess of par value 31,127 18,073
-----------------------------------------------------------------------------------------
Retained earnings 612,390 538,450
-----------------------------------------------------------------------------------------
Cumulative translation adjustment (290) (218)
-----------------------------------------------------------------------------------------
Less - Treasury stock, at cost, 1,992,420 and 1,261,920
shares, respectively 65,923 30,169
-----------------------------------------------------------------------------------------
TOTAL SHAREHOLDERS' EQUITY 619,266 567,681
------------------------------------------------------------------------------------------
COMMITMENTS AND CONTINGENT LIABILITIES - -
- -------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 1,607,189 $ 1,133,680
=================================================================================================
See accompanying notes to consolidated financial statements.
- --------------------------------------------------------------------------------
(23) Consolidated Balance Sheets
- --------------------------------------------------------------------------------
25
DEAN FOODS COMPANY & SUBSIDIARIES
CONSOLIDATED STATEMENTS
OF INCOME
For the Three Fiscal Years Ended May 31, 1998 (In thousands) 1998 1997 1996
- ------------------------------------------------------------------------------------------------------
NET SALES $ 2,735,834 $ 2,460,563 $ 2,240,517
- ------------------------------------------------------------------------------------------------------
Costs of products sold 2,105,849 1,901,791 1,757,810
- ------------------------------------------------------------------------------------------------------
Delivery, selling and administrative expenses 467,466 420,101 380,861
- ------------------------------------------------------------------------------------------------------
Special charge - - 102,439
- ------------------------------------------------------------------------------------------------------
OPERATING EARNINGS (LOSS) 162,519 138,671 (593)
- ------------------------------------------------------------------------------------------------------
Interest expense 21,101 15,071 16,316
- ------------------------------------------------------------------------------------------------------
Interest income 2,312 929 1,323
- ------------------------------------------------------------------------------------------------------
INCOME (LOSS) FROM CONTINUING OPERATIONS
BEFORE INCOME TAXES 143,730 124,529 (15,586)
- ------------------------------------------------------------------------------------------------------
Provision for income taxes 55,750 50,541 1,279
- ------------------------------------------------------------------------------------------------------
INCOME (LOSS) FROM CONTINUING OPERATIONS 87,980 73,988 (16,865)
- ------------------------------------------------------------------------------------------------------
Income (loss) from discontinued operations, net of taxes 18,322 12,716 (32,823)
- ------------------------------------------------------------------------------------------------------
NET INCOME (LOSS) $ 106,302 $ 86,704 $ (49,688)
======================================================================================================
BASIC INCOME (LOSS) PER SHARE:
- ------------------------------------------------------------------------------------------------------
Income (loss) from continuing operations $ 2.17 $ 1.84 $ (.42)
----------------------------------------------------------------------------------------------
Income (loss) from discontinued operations .46 .32 (.82)
----------------------------------------------------------------------------------------------
Net income (loss) $ 2.63 $ 2.16 $ (1.24)
==============================================================================================
DILUTED INCOME (LOSS) PER SHARE:
- ------------------------------------------------------------------------------------------------------
Income (loss) from continuing operations $ 2.13 $ 1.83 $ (.42)
----------------------------------------------------------------------------------------------
Income (loss) from discontinued operations .44 .32 (.82)
----------------------------------------------------------------------------------------------
Net income (loss) $ 2.57 $ 2.15 $ (1.24)
==============================================================================================
WEIGHTED AVERAGE COMMON SHARES:
- ------------------------------------------------------------------------------------------------------
Basic 40,469 40,181 40,122
----------------------------------------------------------------------------------------------
Diluted 41,395 40,377 40,140
==============================================================================================
See accompanying notes to consolidated financial statements.
- --------------------------------------------------------------------------------
(24) Consolidated Statements of Income
- --------------------------------------------------------------------------------
26
DEAN FOODS COMPANY & SUBSIDIARIES
CONSOLIDATED STATEMENTS
OF SHAREHOLDERS' EQUITY
For the Three Fiscal Years Ended May 31, 1998 (In thousands)
- -------------------------------------------------------------------------------------------------------------------
COMMON COMMON CAPITAL IN CUMULATIVE
STOCK STOCK EXCESS OF RETAINED TRANSLATION TREASURY
SHARES VALUE PAR VALUE EARNINGS ADJUSTMENT STOCK
- -------------------------------------------------------------------------------------------------------------------
BALANCES AT MAY 28, 1995 40,078 $41,339 $12,705 $ 560,881 $(228) $(30,171)
- -------------------------------------------------------------------------------------------------------------------
Net loss - - - (49,688) - -
- -------------------------------------------------------------------------------------------------------------------
Issuance of common stock 47 47 1,275 - - -
- -------------------------------------------------------------------------------------------------------------------
Exercise of stock options 9 9 178 - - -
- -------------------------------------------------------------------------------------------------------------------
Cash dividends declared, $.72 per share - - - (28,894) - -
- -------------------------------------------------------------------------------------------------------------------
Cumulative translation adjustment - - - - 239 -
- -------------------------------------------------------------------------------------------------------------------
BALANCES AT MAY 26, 1996 40,134 41,395 14,158 482,299 11 (30,171)
- -------------------------------------------------------------------------------------------------------------------
Net income - - - 86,704 - -
- -------------------------------------------------------------------------------------------------------------------
Issuance of common stock 120 120 3,222 - - -
- -------------------------------------------------------------------------------------------------------------------
Exercise of stock options 30 30 692 - - -
- -------------------------------------------------------------------------------------------------------------------
Issuance of treasury stock - - 1 - - 2
- -------------------------------------------------------------------------------------------------------------------
Cash dividends declared, $.76 per share - - - (30,553) - -
- -------------------------------------------------------------------------------------------------------------------
Cumulative translation adjustment - - - - (229) -
- -------------------------------------------------------------------------------------------------------------------
BALANCES AT MAY 25, 1997 40,284 41,545 18,073 538,450 (218) (30,169)
- -------------------------------------------------------------------------------------------------------------------
Net income - - - 106,302 - -
- -------------------------------------------------------------------------------------------------------------------
Issuance of common stock 358 358 2,397 - - -
- -------------------------------------------------------------------------------------------------------------------
Exercise of stock options 59 59 10,657 - - -
- -------------------------------------------------------------------------------------------------------------------
Purchase of treasury stock (731) - - - - (35,754)
- -------------------------------------------------------------------------------------------------------------------
Cash dividends declared, $.80 per share - - - (32,362) - -
- -------------------------------------------------------------------------------------------------------------------
Cumulative translation adjustment - - - - (72) -
- -------------------------------------------------------------------------------------------------------------------
BALANCES AT MAY 31, 1998 39,970 $41,962 $31,127 $ 612,390 $(290) $(65,923)
===================================================================================================================
See accompanying notes to consolidated financial statements.
- --------------------------------------------------------------------------------
(25) Consolidated Statements of Shareholders' Equity
- --------------------------------------------------------------------------------
27
DEAN FOODS COMPANY & SUBSIDIARIES
CONSOLIDATED STATEMENTS
OF CASH FLOWS
For the Three Fiscal Years Ended May 31, 1998 (In thousands) 1998 1997 1996
- -------------------------------------------------------------------------------------------------------------------
CONTINUING OPERATIONS
- -------------------------------------------------------------------------------------------------------------------
Income (loss) from continuing operations $ 87,980 $ 73,988 $ (16,865)
-----------------------------------------------------------------------------------------------------------
Adjustments to reconcile income (loss) from continuing
operations to net cash provided from continuing operations:
-----------------------------------------------------------------------------------------------------------
Depreciation and amortization 60,418 51,434 51,962
--------------------------------------------------------------------------------------------------------
Deferred income taxes 16,131 6,888 (26,932)
--------------------------------------------------------------------------------------------------------
Other long-term deferred liabilities (5,409) 5,351 12,070
--------------------------------------------------------------------------------------------------------
Special charge - - 102,439
--------------------------------------------------------------------------------------------------------
(Increase) decrease in working capital items, net of acquisitions:
--------------------------------------------------------------------------------------------------------
Accounts and notes receivable (16,581) (16,925) (11,002)
----------------------------------------------------------------------------------------------------
Inventories and other current assets 19,857 (3,059) 5,786
----------------------------------------------------------------------------------------------------
Accounts payable and accrued expenses (10,294) 21,199 2,607
----------------------------------------------------------------------------------------------------
Federal and state income taxes 9,342 8,402 (8,970)
----------------------------------------------------------------------------------------------------
Other 1,266 (14) (2,171)
--------------------------------------------------------------------------------------------------------
NET CASH PROVIDED FROM CONTINUING OPERATIONS 162,710 147,264 108,924
-----------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES
- -------------------------------------------------------------------------------------------------------------------
Capital expenditures (104,683) (55,580) (71,086)
-----------------------------------------------------------------------------------------------------------
Proceeds from dispositions of property,
plant and equipment 1,943 2,093 273
-----------------------------------------------------------------------------------------------------------
Acquisitions, net of cash acquired (369,560) (16,332) (44,305)
-----------------------------------------------------------------------------------------------------------
Proceeds from businesses divested - 2,000 1,399
-----------------------------------------------------------------------------------------------------------
NET CASH USED IN INVESTING ACTIVITIES (472,300) (67,819) (113,719)
-----------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
- -------------------------------------------------------------------------------------------------------------------
Issuance of long-term obligations 357,575 8,200 9,799
-----------------------------------------------------------------------------------------------------------
Repayment of long-term obligations (35,509) (13,475) (11,719)
-----------------------------------------------------------------------------------------------------------
Issuance (repayment) of notes payable to banks, net 9,000 (89,000) 63,000
-----------------------------------------------------------------------------------------------------------
Unexpended industrial revenue bond proceeds 4,656 (4,662) (3,608)
-----------------------------------------------------------------------------------------------------------
Cash dividends paid (32,021) (30,113) (28,474)
-----------------------------------------------------------------------------------------------------------
Issuance of common stock 11,020 4,064 1,509
-----------------------------------------------------------------------------------------------------------
Issuance (purchase) of treasury stock (35,754) 3 -
-----------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 278,967 (124,983) 30,507
-----------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY (USED IN) DISCONTINUED OPERATIONS 38,169 39,525 (20,139)
- -------------------------------------------------------------------------------------------------------------------
INCREASE (DECREASE) IN CASH AND TEMPORARY CASH INVESTMENTS 7,546 (6,013) 5,573
- -------------------------------------------------------------------------------------------------------------------
CASH AND TEMPORARY CASH INVESTMENTS - BEGINNING OF YEAR 4,386 10,399 4,826
- -------------------------------------------------------------------------------------------------------------------
CASH AND TEMPORARY CASH INVESTMENTS - END OF YEAR $ 11,932 $ 4,386 $ 10,399
===================================================================================================================
See accompanying notes to consolidated financial statements.
- --------------------------------------------------------------------------------
(26) Consolidated Statements of Cash Flows
- --------------------------------------------------------------------------------
28
DEAN FOODS COMPANY & SUBSIDIARIES
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, pickle
and other specialty food products. The Company operates in three business
segments. The Company's principal products in the Dairy segment are fluid milk
and cultured products, ice cream and extended shelf life products. The Pickles
segment's principal products are pickles, relishes and related items. Specialty
segment products include powdered products, refrigerated salad dressings,
sauces, puddings and dips, as well as the operations of the Company's
transportation subsidiary.
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 53 weeks in the fiscal year ended May 31, 1998,
whereas there were 52 weeks in fiscal 1997 and 1996.
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 are
excluded from the statements.
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 Pickles inventories are valued on the last-in, first-out (LIFO)
method. Dairy and certain Specialty inventories are valued on the first-in,
first-out (FIFO) method.
PROPERTY, PLANT AND EQUIPMENT - Major renewals and betterments are
capitalized while repairs and maintenance which do not improve or extend useful
life are expensed currently. 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 reflected in income. For
financial statement purposes, depreciation is calculated by the straight-line
method. For income tax purposes, depreciation is calculated using accelerated
methods for certain assets.
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 various periods between three years and
forty years.
LONG-LIVED ASSETS - The Company continually reviews 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. An estimate of the undiscounted future cash flows or, in the case
of goodwill, undiscounted operating earnings, over the remaining life of the
asset is compared to the carrying amount to determine whether an impairment
exists. The Company believes that no indicators of impairment of long-lived
assets existed at May 31, 1998.
PENSIONS - Substantially all of the Company's 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.
INCOME PER COMMON SHARE - Income per share is computed in accordance with
Statement of Financial Accounting Standards (SFAS) No. 128, "Earnings per
Share." Basic income per common share is based upon the weighted average number
of common shares outstanding during each year. Diluted income per common share
is calculated based upon the sum of the weighted average number of shares
outstanding and the weighted average number of potential common shares
outstanding. Potential common shares consist solely of the outstanding options
under the Company's stock option plans. There are no differences in the income
used to compute the Company's basic and diluted income per share.
STOCK-BASED COMPENSATION - Statement of Financial Accounting Standards 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 (APB) Opinion 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.
RECLASSIFICATIONS - Certain previously reported amounts have been
reclassified to conform with year-end 1998 presentations.
- --------------------------------------------------------------------------------
(27) Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
29
DEAN FOODS COMPANY & SUBSIDIARIES
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
2. BUSINESS ACQUISITIONS
During fiscal 1998, the Company made the following ten acquisitions:
ACQUISITION CLOSING DATE
- -----------------------------------------------------
DAIRY SEGMENT:
Purity Dairies May 14, 1998
Coburg Dairy March 31, 1998
Dairy Business of American
Stores Company (Lucky Stores) March 2, 1998
Wengert's Dairy February 23, 1998
Sani-Dairy Division of the
Penn Traffic Company January 20, 1998
Maplehurst Dairy, Inc. January 6, 1998
H. Meyer Dairy Company November 24, 1997
Milk Products LLC November 21, 1997
- -----------------------------------------------------
PICKLES SEGMENT:
Schwartz Pickle May 18, 1998
- -----------------------------------------------------
SPECIALTY SEGMENT:
Marie's Salad Dressing May 27, 1997
- -----------------------------------------------------
All of the acquisitions were asset purchases, except the Coburg and Purity
acquisitions which were stock purchases. Cash consideration for all of the above
transactions totaled $369.6 million. In addition to the cash consideration paid
for these businesses, the Company assumed certain liabilities.
On a pro forma basis, the net sales (unaudited) of the Company would have
been $3,254.5 million in 1998 and $3,178.0 million in 1997. The pro forma sales
amounts assume that all of the above acquisitions occurred at the beginning of
each period presented. 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 income per common share in 1998 or 1997.
During fiscal 1997, the Company acquired a dairy operation and a dairy
distributor for $16.3 million in cash consideration. During fiscal 1996, the
Company acquired one operation in each of the Pickles and Specialty segments for
$44.3 million in cash consideration. The pro forma impact as if these
acquisitions had taken place at the beginning of the fiscal year prior to
acquisition is not significant.
All of the above 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. The fiscal 1998 acquisitions have been recorded at their estimated
fair values using preliminary valuations of the opening balance sheets. These
estimates of fair value are subject to change when final information concerning
asset and liability valuations are obtained. Goodwill arising from the
acquisitions, totaling an estimated $276.4 million in 1998, $13.5 million in
1997, and $22.6 million in 1996, will be amortized using the straight-line
method over periods up to forty years.
3. DISCONTINUED OPERATIONS
On July 27, 1998, the Company announced it had reached a definitive agreement to
sell its vegetable operations to Agrilink Foods, Inc. for approximately $400
million in cash plus an aseptic foods business, which will be folded into the
Company's Specialty business segment. The transaction is subject to regulatory
approval and is expected to close in the first half of fiscal 1999. Accordingly,
financial information has been restated to present the Vegetables segment as
discontinued operations.
Net Assets of Discontinued Operations are summarized as follows:
1998 1997
- ------------------------------------------------------
Current assets $180,930 $203,249
- ------------------------------------------------------
Net plant, property
and equipment 133,276 145,374
- ------------------------------------------------------
Other assets 46,204 47,910
- ------------------------------------------------------
Current liabilities 49,251 60,206
- ------------------------------------------------------
Long-term obligations 2,450 2,995
- ------------------------------------------------------
Deferred liabilities 20,672 20,477
- ------------------------------------------------------
Net assets of discontinued
operations $288,037 $312,855
======================================================
Net sales of discontinued operations were $533.3 million, $557.8 million and
$573.8 million for 1998, 1997, and 1996, respectively. The income tax provision
(benefit) included in Income (Loss) from Discontinued Operations was $12.2
million, $8.5 million and $(21.0) million for 1998, 1997 and 1996, respectively.
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 $9.2 million, $10.3 million and $12.0 million in
1998, 1997 and 1996, respectively. The fiscal 1996 loss from discontinued
operations includes a pre-tax charge of $47.6 million related to the adoption of
a plan to reduce costs, rationalize production capacity and provide for
severance costs.
- --------------------------------------------------------------------------------
(28) Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
30
4. BORROWING ARRANGEMENTS
Long-term obligations, less installments due within one year, are summarized
below:
1998 1997
- -----------------------------------------------------------------
Senior note, 6.75%,
maturing in 2005 $ 99,293 $ 99,192
- -----------------------------------------------------------------
Senior note, 6.9%,
maturing in 2017 147,650 -
- -----------------------------------------------------------------
Revolving Credit Agreement,
maturing in 2003
(average 6.0%) 210,000 -
- -----------------------------------------------------------------
Installment note, 9.64%,
maturing in equal amounts
of $6,500 through 2005 45,500 52,000
- -----------------------------------------------------------------
Installment note, 10.1% - 24,500
- -----------------------------------------------------------------
Industrial revenue bonds,
maturing in varying amounts
through 2021:
Fixed rate, 7.4% 1,900 2,238
--------------------------------------------------------------
Floating rate, 3.85% to
6.2% (average 4.13%) 39,355 33,575
- -----------------------------------------------------------------
Capitalized lease obligations,
6.1% to 9.75%, maturing in
various installments through 2011 20,464 8,956
- -----------------------------------------------------------------
Other obligations, maturing
in varying amounts
through 2004, 6.0% to
10.0% (average 6.42%) 3,085 1,127
- -----------------------------------------------------------------
567,247 221,588
- -----------------------------------------------------------------
Less: Installments due
within one year 9,014 12,657
- -----------------------------------------------------------------
Total long-term obligations $558,233 $208,931
=================================================================
In fiscal 1998, the Company entered into a $500 million Revolving Credit
Agreement maturing in 2003. The borrowings under the Credit Agreement are
unsecured and for which the Company presently pays a facility fee of 0.07%.
Borrowings under the Credit Agreement bear interest, at the Company's option, at
either fixed or variable rates linked to the Company's overall public debt
credit rating. During fiscal 1998, the maximum borrowings under the Credit
Agreement were $210.0 million; average borrowings were $14.9 million at a
weighted average interest rate of 6.0%. At May 31, 1998, there were $210.0
million of direct borrowings outstanding under this facility.
The Company has $50 million in committed short-term lines of credit
available for borrowing needs. Lending banks are compensated on a fee basis for
the credit lines. During 1998, maximum borrowings under the Company's committed
and uncommitted lines of credit were $150.0 million; average borrowings for the
year were $29.3 million at a weighted average interest rate of 5.8%. At May 31,
1998, the Company had $12.0 million outstanding from uncommitted short-term
lines of credit.
In October 1997, the Company issued $150 million of 6.9% Notes due 2017.
The net proceeds were used to repay existing short-term indebtedness under the
bank credit facilities and for acquisitions.
At May 31, 1998, the most restrictive provisions of the Company's borrowing
arrangements, as included in the Installment Note, were as follows: tangible net
worth of at least $175 million, working capital of at least $60 million, and a
current ratio of at least 1.25 were required to be maintained; approximately $36
million of retained earnings was unrestricted for the payment of cash dividends
and repurchase of common stock; and the Company's ratio of Funded Indebtedness
to Consolidated Total Capitalization (the definition of which reduces
Shareholders' Equity by consolidated intangible assets), the "Indebtedness
Ratio," cannot exceed 65%. As a result of fiscal 1998 acquisition activity, the
Company's Indebtedness Ratio was 65.4% for the period ended May 31, 1998. The
Company received waivers from its Installment Note lenders addressing the
deficiency. The Company was in compliance with all other debt covenants as of
May 31, 1998. The Company has received the necessary waivers from its lenders to
permit the sale of its Vegetables segment.
Maturities of long-term obligations during each of the years 2000 through
2003 are $9,079, $11,974, $10,226 and $219,124, respectively.
Certain land, buildings and machinery and equipment having a net carrying
value of approximately $23 million were mortgaged or otherwise encumbered
against long-term debt of $21 million at May 31, 1998.
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 31, 1998 and May 25, 1997 the fair value of long-term debt is
estimated to be $579.0 million and $227.4 million, respectively.
5. SHAREHOLDERS' EQUITY
The 1998 shareholders' rights plan, adopted in May 1998 to replace the 1988
plan, 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
- --------------------------------------------------------------------------------
(29) Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
31
DEAN FOODS COMPANY & SUBSIDIARIES
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
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 Company may repurchase shares of its common stock from time to time in
the open market, in privately-negotiated transactions or otherwise at a price or
prices reasonably related to the then prevailing market price.
6. 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 28, 1995 1,072,802 $28.09
- -------------------------------------------------------
Changes during the year:
- -------------------------------------------------------
Granted 313,564 28.08
- -------------------------------------------------------
Terminated (18,222) 29.04
- -------------------------------------------------------
Exercised (17,380) 24.87
- -------------------------------------------------------
Options outstanding
at May 26, 1996 1,350,764 28.12
- -------------------------------------------------------
Changes during the year:
- -------------------------------------------------------
Granted 779,570 26.28
- -------------------------------------------------------
Terminated (114,329) 27.94
- -------------------------------------------------------
Exercised (123,211) 26.94
- -------------------------------------------------------
Options outstanding
at May 25, 1997 1,892,794 27.45
- -------------------------------------------------------
Changes during the year:
- -------------------------------------------------------
Granted 828,074 34.77
- -------------------------------------------------------
Terminated (92,771) 30.23
- -------------------------------------------------------
Exercised (416,924) 27.44
- -------------------------------------------------------
Options outstanding
at May 31, 1998 2,211,173 $30.07
=======================================================
Options exercisable and available for grants at the end of each respective
year are as follows:
1998 1997 1996
- -------------------------------------------------------
Exercisable 1,020,194 880,533 715,167
- -------------------------------------------------------
Average option
price per share $28.92 $28.03 $27.96
=======================================================
Available for grants 2,330,613 697,969 1,381,444
=======================================================
All outstanding options are within the range of $22.87 to $38.00 per share,
except for 60,000 shares granted in fiscal 1998 at approximately $55.00 per
share. The weighted average contractual life of all outstanding options is seven
years.
The Company has adopted the disclosure-only provision under SFAS No. 123,
"Accounting for Stock-Based Compensation," while continuing to measure
compensation cost under APB Opinion No. 25, "Accounting for Stock Issued to
Employees." Had the accounting provisions of SFAS No.123 been adopted, the
effect on net earnings for 1998, 1997, and 1996 would have been immaterial. The
weighted average fair value of options at date of grant was $15.00, $6.64 and
$9.60 during 1998, 1997 and 1996, respectively. The fair value of each option at
date of grant was estimated using the Black-Scholes model with the following
weighted average assumptions:
1998 1997 1996
- --------------------------------------------------------
Expected life (years) 8.0 8.0 8.0
- --------------------------------------------------------
Risk-free rate of return 6.9% 6.9% 6.5%
- --------------------------------------------------------
Volatility 20.6% 20.0% 23.7%
- --------------------------------------------------------
Dividend yield 2.0% 2.0% 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 5,415,000 shares of the Company's common stock. Of these shares, a
maximum of 215,000 may be granted to non-employee directors. A total of 139,500
shares have been granted to non-employee directors. A total of 92,932
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). Key employees elected to receive
47,225 and 29,858 shares under the Stock Bonus Awards Program which related to
bonuses in fiscal 1998 and 1997, respectively.
- --------------------------------------------------------------------------------
(30) Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
32
7. INVENTORIES
At May 31, 1998 and May 25, 1997, inventories comprised the following:
1998 1997
- -------------------------------------------------------
Raw materials and supplies $ 45,266 $ 36,154
- -------------------------------------------------------
Materials in process 12,432 16,326
- -------------------------------------------------------
Finished goods 87,390 80,342
- -------------------------------------------------------
145,088 132,822
- -------------------------------------------------------
Less: Excess of current cost over
stated value of last-in,
first-out inventories 9,683 10,692
- -------------------------------------------------------
Total inventories $135,405 $122,130
=======================================================
The percentage of costs of products sold determined on the basis of last-in,
first-out cost approximated 23.9% and 28.5% for 1998 and 1997, respectively.
8. 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:
1998 1997 1996
- -----------------------------------------------------
Current tax expense:
- -----------------------------------------------------
Federal $34,196 $ 37,859 $ 23,243
- -----------------------------------------------------
State and foreign 5,423 5,794 4,968
- -----------------------------------------------------
39,619 43,653 28,211
- -----------------------------------------------------
Deferred tax expense
(benefit):
- -----------------------------------------------------
Federal 12,852 5,191 (25,455)
- -----------------------------------------------------
State and foreign 3,279 1,697 (1,477)
- -----------------------------------------------------
16,131 6,888 (26,932)
- -----------------------------------------------------
Provision for
income taxes $55,750 $ 50,541 $ 1,279
=====================================================
The effective tax rates differ from the prevailing statutory federal rate
as follows:
1998 1997 1996
- ------------------------------------------------------------
Statutory federal tax rate 35.0% 35.0% 35.0 %
- ------------------------------------------------------------
State and foreign,
net of federal benefit 4.0 4.6 3.5
- ------------------------------------------------------------
Goodwill amortization 0.7 0.5 (48.4)
- ------------------------------------------------------------
Other, net (0.9) 0.5 1.7
- ------------------------------------------------------------
Effective tax rate 38.8% 40.6% (8.2)%
============================================================
The components of the deferred income tax assets and liabilities were as
follows:
1998 1997
- ----------------------------------------------------------
Deferred tax assets:
- ----------------------------------------------------------
Accounts receivable $ (3,100) $ 569
- ----------------------------------------------------------
Inventory (4,089) (5,113)
- ----------------------------------------------------------
Self-insurance reserves 14,472 13,404
- ----------------------------------------------------------
Vacation pay 1,670 3,697
- ----------------------------------------------------------
Marketing accruals 4,176 2,156
- ----------------------------------------------------------
Future benefit of special charge - 2,509
- ----------------------------------------------------------
Other (800) (283)
- ----------------------------------------------------------
Total deferred tax assets $ 12,329 $ 16,939
==========================================================
Deferred tax liabilities:
- ----------------------------------------------------------
Fixed assets $(65,062) $(64,006)
- ----------------------------------------------------------
Deferred compensation 10,070 10,238
- ----------------------------------------------------------
DISC deferral (2,428) (2,735)
- ----------------------------------------------------------
Intangibles 4,741 4,603
- ----------------------------------------------------------
Future benefit of special charge 11,659 26,510
- ----------------------------------------------------------
Other (2,516) 128
- ----------------------------------------------------------
Total deferred tax liabilities $(43,536) $(25,262)
==========================================================
9. EMPLOYEE BENEFIT PLANS
The Company has various profit sharing and retirement plans covering certain
salaried and hourly employees. Amounts charged to operations under all plans
were $17,807, $14,664 and $13,740 in 1998, 1997 and 1996, respectively.
DEFINED BENEFIT PENSION PLANS - Costs for noncontributory defined benefit
plans were $4,675, $3,558 and $3,137 in 1998, 1997 and 1996, respectively. Plan
assets are primarily invested in bonds, stocks and real estate. Significant
weighted average assumptions used in determining net pension costs were:
1998 1997
- ----------------------------------------------------
Discount rate 7.25% 8.0%
- ----------------------------------------------------
Expected long-term rate of
return on assets 9.0% 8.0%
- ----------------------------------------------------
Rate of increase in
compensation levels (range) 0-5.0% 0-5.0%
- ----------------------------------------------------
- --------------------------------------------------------------------------------
(31) Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
33
DEAN FOODS COMPANY & SUBSIDIARIES
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
The Company's defined benefit net pension costs included the following
components:
1998 1997 1996
- -------------------------------------------------------------
Current service costs $ 3,919 $ 2,732 $ 1,972
- -------------------------------------------------------------
Interest cost on projected
benefit obligation 4,068 4,096 3,369
- -------------------------------------------------------------
Actual return on
plan assets (14,359) (4,167) (8,957)
- -------------------------------------------------------------
Net amortization
and deferral 11,047 897 6,753
- -------------------------------------------------------------
Net pension costs $ 4,675 $ 3,558 $ 3,137
=============================================================
The following table sets forth the funded status of the Company's defined
benefit plans reconciled to accrued pension costs:
1998 1997
- -----------------------------------------------------------------------
Present value of projected
benefit obligation:
- -----------------------------------------------------------------------
Vested employees $ 80,795 $ 60,771
- -----------------------------------------------------------------------
Non-vested employees 5,224 5,829
- -----------------------------------------------------------------------
Accumulated benefit obligation 86,019 66,600
- -----------------------------------------------------------------------
Additional amounts due to
future salary increases 27,881 25,096
- -----------------------------------------------------------------------
Total projected benefit obligation 113,900 91,696
- -----------------------------------------------------------------------
Fair value of net assets
available for benefits (103,134) (73,615)
- -----------------------------------------------------------------------
Projected benefit obligation greater
than net assets available 10,766 18,081
- -----------------------------------------------------------------------
Unrecognized prior service cost (2,814) (2,135)
- -----------------------------------------------------------------------
Unrecognized net obligation 2,760 3,247
- -----------------------------------------------------------------------
Unrecognized net loss (9,516) (13,860)
- -----------------------------------------------------------------------
Net accrued pension costs $ 1,196 $ 5,333
=======================================================================
The Company will retain the earned pension liability related to the vegetable
operations for liabilities through the date of disposition. Accordingly, the
funded status table above includes continuing and discontinued operations.
The majority of pension benefits are based upon the participant's highest
average "total compensation" paid during any sixty consecutive months out of the
last 180 months of service accumulated for each year of service.
The Company participates in various multi-employer union-management-
administered defined contribution pension plans that principally cover
production workers. Pension expense under these plans was $6,606, $5,061 and
$5,236 in 1998, 1997 and 1996, respectively.
PROFIT SHARING PLANS - The Company maintains noncontributory profit sharing
plans for certain employees. Company contributions under these plans are made at
the discretion of the Board of Directors. Expense for these plans was $6,244,
$5,830 and $4,717 in 1998, 1997 and 1996, respectively.
OTHER POSTRETIREMENT BENEFITS - The Company 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 postretirement benefits expense was $282, $215 and $650 in
1998, 1997 and 1996, respectively. The components of expense follow:
1998 1997 1996
- ------------------------------------------------
Service cost of
benefits earned $ 52 $ 7 $252
- ------------------------------------------------
Interest cost on liability 230 208 398
- ------------------------------------------------
Net periodic postretirement
benefit cost $282 $215 $650
================================================
As a result of changes in employee benefit plans during fiscal 1996,
postretirement medical benefits for certain union plans were eliminated
resulting in a curtailment gain of $3,994.
The following table summarizes the postretirement benefit liability:
1998 1997
- -------------------------------------------------------
Retirees $ 2,797 $ 2,022
- -------------------------------------------------------
Fully eligible active participants 381 294
- -------------------------------------------------------
Other active participants 1,061 775
- -------------------------------------------------------
Total 4,239 3,091
- -------------------------------------------------------
Unrecognized net gain (loss) (862) 456
=======================================================
Accrued postretirement benefits $ 3,377 $ 3,547
=======================================================
The accumulated postretirement benefit obligation was determined using
weighted average discount rates of 7.25% in 1998 and 8.0% in 1997 and 1996,
respectively, and an assumed compensation increase of 5.0%. The health care cost
trend rates were assumed to be 7.0% in 1998, gradually declining to 5.0% over
four years and remaining at that level thereafter. In 1997 the cost trend rates
were assumed to be 7.5%, gradually declining to 5.0% over five years. In 1996
the cost trend rates were assumed to be 8.0%, gradually declining to 5.0% over
six years. The health care cost trend rate assumption has an effect on the
amounts reported. For example, a 1% increase in the health care cost trend rate
would increase the accumulated postretirement benefit obligation by $181 at May
31, 1998, and the net periodic cost by $23.
- --------------------------------------------------------------------------------
(32) Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
34
10. LEASES
Net rental expense, including amounts for leases of one year or less, was
$32,601, $25,505 and $26,470 in 1998, 1997 and 1996, 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 31, 1998, annual minimum rental payments under capital and operating
leases that have initial noncancelable terms in excess of one year were as
follows:
Capital Operating
Leases Leases
- --------------------------------------------------------
1999 $ 2,959 $17,786
- --------------------------------------------------------
2000 2,980 13,752
- --------------------------------------------------------
2001 3,001 9,684
- --------------------------------------------------------
2002 2,852 7,693
- --------------------------------------------------------
2003 2,804 5,861
- --------------------------------------------------------
Thereafter 17,329 10,261
- --------------------------------------------------------
Total minimum
lease payments 31,925 $65,037
- -------------------------------------------------=======
Less: Imputed interest 11,436
- --------------------------------------
Present value of minimum
lease payments $20,489
======================================
11. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Consolidated accounts payable and accrued expenses at May 31, 1998 and May 25,
1997 comprised the following items:
1998 1997
- -------------------------------------------------------
Trade payables $115,597 $ 93,397
- -------------------------------------------------------
Accrued expenses 97,104 62,958
- -------------------------------------------------------
Accrued insurance 42,608 43,516
- -------------------------------------------------------
Special charge reserve 5,217 9,818
- -------------------------------------------------------
Accrued payroll 41,610 32,672
- -------------------------------------------------------
Accrued taxes, other
than income 6,207 3,977
- -------------------------------------------------------
Accrued pension and
profit sharing 2,960 8,184
- -------------------------------------------------------
Total accounts payable
and accrued expenses $311,303 $254,522
=======================================================
12. CASH FLOW DATA
Interest and taxes paid included in the Company's cash flow from operations were
as follows:
1998 1997 1996
- ----------------------------------------------------------
Interest paid $ 19,358 $ 15,099 $ 13,330
- ----------------------------------------------------------
Taxes paid 33,573 26,049 39,147
==========================================================
Liabilities assumed in conjunction with business acquisitions were:
1998 1997 1996
- ----------------------------------------------------------
Fair value of assets
acquired $ 460,650 $ 31,172 $ 44,375
- ----------------------------------------------------------
Consideration paid (369,560) (16,332) (44,305)
- ----------------------------------------------------------
Liabilities assumed $ 91,090 $ 14,840 $ 70
==========================================================
13. COMMITMENTS AND CONTINGENT LIABILITIES
The Company is a current defendant in assorted legal matters and from time to
time is the subject of routine investigations by various state and federal
agencies. On July 10, 1996, a federal judge imposed a fine of approximately $4
million on a subsidiary of the Company, alleging violations of the Federal Water
Pollution Control Act relating to the discharge of conventional, non-hazardous
substances. The Company appealed the lower court ruling on the grounds that the
fine should be substantially reduced. The appellate court affirmed the lower
court's decision and the Company is considering its options for settlement or
further proceedings. The Company provided for this exposure in 1996 and in light
of reserves existing, the ultimate resolution of these matters, including the
resolution of the imposed fine, is not expected to have a material effect on the
financial position or results of operations of the Company.
14. SPECIAL CHARGE
In May 1996, the Company adopted a plan to reduce costs, rationalize production
capacity and provide for projected severance and environmental costs which
reduced fiscal 1996 continuing operations' income before taxes, income and
income per share by $102.4 million, $64.9 million and $1.62 per share,
respectively. Included in the original $102.4 million charge was $79.7 million
associated with the write-down to net realizable value of certain assets. The
implementation of the plan included the elimination of more than 500
manufacturing and administrative positions and disposition or closure of six
manufacturing plants.
As of May 31, 1998, the Company had disposed of or closed all six
manufacturing facilities and eliminated all of the 500 positions. Charges
against the provision in 1998 included cash payments of $6.3 million primarily
related to plant closure costs. Non-cash asset write-downs totaling $4.4 million
were also charged against the provision in fiscal 1998. The remaining reserves
are anticipated to be used primarily for the payment of obligations related to
continuing severance benefits and projected environmental costs.
In fiscal 1997, charges against the provision included cash charges of $8.1
million and non-cash charges of $5.2 million. In fiscal 1996, $71.6 million of
non-cash charges were recorded, including $48.1 million of asset write-offs and
$21.3 million of intangible write-offs.
- --------------------------------------------------------------------------------
(33) Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
35
DEAN FOODS COMPANY & SUBSIDIARIES
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
15. BUSINESS SEGMENT INFORMATION
The nature of products classified in the business segments presented herein is
described on pages 6 through 16. Intersegment sales are not material. Operating
earnings (loss) 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.
DAIRY PICKLES SPECIALTY CORPORATE CONSOLIDATED
- ---------------------------------------------------------------------------------------------
1998
- ---------------------------------------------------------------------------------------------
Net sales $ 2,052,532 $348,695 $334,607 $ -- $ 2,735,834
- ---------------------------------------------------------------------------------------------
Operating earnings 114,084 37,054 52,187 (40,806) 162,519
- ---------------------------------------------------------------------------------------------
Identifiable assets 919,116 182,463 164,956 52,617 1,319,152
- ---------------------------------------------------------------------------------------------
Depreciation and amortization 43,568 6,880 6,958 3,012 60,418
- ---------------------------------------------------------------------------------------------
Capital expenditures 68,142 12,095 18,829 5,617 104,683
- ---------------------------------------------------------------------------------------------
1997
- ---------------------------------------------------------------------------------------------
Net sales $ 1,787,862 $370,825 $301,876 $ -- $ 2,460,563
- ---------------------------------------------------------------------------------------------
Operating earnings 103,764 35,974 36,685 (37,752) 138,671
- ---------------------------------------------------------------------------------------------
Identifiable assets 510,499 141,344 107,623 61,359 820,825
- ---------------------------------------------------------------------------------------------
Depreciation and amortization 36,913 7,360 5,133 2,028 51,434
- ---------------------------------------------------------------------------------------------
Capital expenditures 34,429 5,751 11,298 4,102 55,580
- ---------------------------------------------------------------------------------------------
1996
- ---------------------------------------------------------------------------------------------
Net sales $ 1,611,266 $373,213 $256,038 $ -- $ 2,240,517
- ---------------------------------------------------------------------------------------------
Operating earnings (loss) (2,644) 10,299 25,737 (33,985) (593)
- ---------------------------------------------------------------------------------------------
Identifiable assets 456,632 151,578 98,480 85,198 791,888
- ---------------------------------------------------------------------------------------------
Depreciation and amortization 37,633 7,903 4,476 1,950 51,962
- ---------------------------------------------------------------------------------------------
Capital expenditures 49,905 6,733 13,544 904 71,086
- ---------------------------------------------------------------------------------------------
Fiscal 1996 segment operating earnings (loss) include the special charge related
to the adoption of a plan to reduce costs, rationalize production capacity and
provide for severance and environmental costs of $76,694, $13,704, $999 and
$11,042 in the Dairy, Pickles, Specialty and Corporate segments, respectively.
- --------------------------------------------------------------------------------
(34) Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
36
DEAN FOODS COMPANY & SUBSIDIARIES
QUARTERLY
FINANCIAL DATA
Unaudited (In thousands, except for share data) FIRST SECOND THIRD FOURTH FISCAL YEAR
- -----------------------------------------------------------------------------------------------------------------------
FISCAL 1998
- -----------------------------------------------------------------------------------------------------------------------
Net sales $ 619,856 624,933 665,375 825,670 2,735,834
- -----------------------------------------------------------------------------------------------------------------------
Gross profit $ 150,101 145,413 148,234 186,237 629,985
- -----------------------------------------------------------------------------------------------------------------------
Income from continuing operations $ 24,308 20,525 18,512 24,635 87,980
- -----------------------------------------------------------------------------------------------------------------------
Net income $ 21,547 26,575 24,995 33,185 106,302
- -----------------------------------------------------------------------------------------------------------------------
Per common share data:
- -----------------------------------------------------------------------------------------------------------------------
Basic income (loss) per share
------------------------------------------------------------------------------------------------------------------
Continuing operations $ .60 .51 .45 .61 2.17
--------------------------------------------------------------------------------------------------------------
Discontinued operations $ (.07) .15 .16 .22 .46
--------------------------------------------------------------------------------------------------------------
Net income $ .53 .66 .61 .83 2.63
--------------------------------------------------------------------------------------------------------------
Diluted income (loss) per share
------------------------------------------------------------------------------------------------------------------
Continuing operations $ .59 .50 .44 .60 2.13
--------------------------------------------------------------------------------------------------------------
Discontinued operations $ (.07) .14 .16 .21 .44
--------------------------------------------------------------------------------------------------------------
Net income $ .52 .64 .60 .81 2.57
--------------------------------------------------------------------------------------------------------------
Stock price range
------------------------------------------------------------------------------------------------------------------
High $ 48 1/2 51 3/16 60 5/16 57 5/8 60 5/16
--------------------------------------------------------------------------------------------------------------
Low $ 37 5/8 43 7/16 51 3/4 45 1/2 37 5/8
--------------------------------------------------------------------------------------------------------------
Dividend rate (cents) 20.0 20.0 20.0 20.0 80.0
------------------------------------------------------------------------------------------------------------------
FISCAL 1997
- -----------------------------------------------------------------------------------------------------------------------
Net sales $ 595,745 622,872 601,566 640,380 2,460,563
- -----------------------------------------------------------------------------------------------------------------------
Gross profit $ 135,396 130,776 135,417 157,183 558,772
- -----------------------------------------------------------------------------------------------------------------------
Income from continuing operations $ 18,715 13,966 17,115 24,192 73,988
- -----------------------------------------------------------------------------------------------------------------------
Net income $ 17,910 19,076 20,635 29,083 86,704
- -----------------------------------------------------------------------------------------------------------------------
Per common share data:
- -----------------------------------------------------------------------------------------------------------------------
Basic income (loss) per share
------------------------------------------------------------------------------------------------------------------
Continuing operations $ .47 .34 .43 .60 1.84
--------------------------------------------------------------------------------------------------------------
Discontinued operations $ (.02) .13 .08 .13 .32
--------------------------------------------------------------------------------------------------------------
Net income $ .45 .47 .51 .73 2.16
--------------------------------------------------------------------------------------------------------------
Diluted income (loss) per share
------------------------------------------------------------------------------------------------------------------
Continuing operations $ .47 .34 .43 .59 1.83
--------------------------------------------------------------------------------------------------------------
Discontinued operations $ (.02) .13 .08 .12 .32
--------------------------------------------------------------------------------------------------------------
Net income $ .45 .47 .51 .71 2.15
--------------------------------------------------------------------------------------------------------------
Stock price range
------------------------------------------------------------------------------------------------------------------
High $ 25 29 7/8 33 5/8 39 3/4 39 3/4
--------------------------------------------------------------------------------------------------------------
Low $ 22 1/8 24 1/8 25 7/8 31 7/8 22 1/8
--------------------------------------------------------------------------------------------------------------
Dividend rate (cents) 19.0 19.0 19.0 19.0 76.0
------------------------------------------------------------------------------------------------------------------
The Company's common stock is traded on the New York Stock Exchange under the
ticker symbol: DF.
- --------------------------------------------------------------------------------
(35) Quarterly Financial Data
- --------------------------------------------------------------------------------
37
DEAN FOODS COMPANY & SUBSIDIARIES
SUMMARY
OF OPERATIONS
(In thousands, except for items marked with an *)
Fiscal Year Ended May, 1998 1997 1996 1995 1994
- ---------------------------------------------------------------------------------------------------------------------
OPERATING DATA
- ---------------------------------------------------------------------------------------------------------------------
Net sales $2,735,834 2,460,563 2,240,517 2,087,079 2,011,273
----------------------------------------------------------------------------------------------------------------
Operating earnings (loss) $ 162,519 138,671 (593)(a) 112,368 106,036
----------------------------------------------------------------------------------------------------------------
Interest expense $ 21,101 15,071 16,316 13,298 11,030
----------------------------------------------------------------------------------------------------------------
Income (loss) from continuing operations $ 87,980 73,988 (16,865)(a) 58,504 56,859
----------------------------------------------------------------------------------------------------------------
Income (loss) from discontinued operations $ 18,322 12,716 (32,823) 21,555 13,903
----------------------------------------------------------------------------------------------------------------
Net income (loss) $ 106,302 86,704 (49,688)(a) 80,059 71,941(b)
----------------------------------------------------------------------------------------------------------------
Depreciation on properties $ 54,060 48,566 47,968 45,788 43,322
----------------------------------------------------------------------------------------------------------------
Capital expenditures $ 104,683 55,580 71,086 66,597 68,046
----------------------------------------------------------------------------------------------------------------
Number of employees* 11,200 8,300 8,600 9,200 8,200
----------------------------------------------------------------------------------------------------------------
BALANCE SHEET DATA
- ---------------------------------------------------------------------------------------------------------------------
Working capital $ 67,324 64,988 24,649 52,150 (31,724)
----------------------------------------------------------------------------------------------------------------
Total assets $1,607,189 1,133,680 1,131,625 1,114,157 1,027,149
----------------------------------------------------------------------------------------------------------------
Net plant and equipment $ 551,064 381,800 375,072 399,340 378,388
----------------------------------------------------------------------------------------------------------------
Long-term obligations $ 558,233 208,931 217,984 220,553 131,820
----------------------------------------------------------------------------------------------------------------
Shareholders' equity $ 619,266 567,681 507,692 584,526 524,774
----------------------------------------------------------------------------------------------------------------
COMMON STOCK DATA*
- ---------------------------------------------------------------------------------------------------------------------
Basic income (loss) per share
----------------------------------------------------------------------------------------------------------------
Continuing operations $ 2.17 1.84 (.42)(a) 1.47 1.46(b)
------------------------------------------------------------------------------------------------------------
Discontinued operations $ .46 .32 (.82) .54 .35
------------------------------------------------------------------------------------------------------------
Net income (loss) $ 2.63 2.16 (1.24)(a) 2.01 1.81(b)
------------------------------------------------------------------------------------------------------------
Diluted income (loss) per share
----------------------------------------------------------------------------------------------------------------
Continuing operations $ 2.13 1.83 (.42)(a) 1.46 1.46(b)
------------------------------------------------------------------------------------------------------------
Discontinued operations $ .44 .32 (.82) .54 .35
------------------------------------------------------------------------------------------------------------
Net income (loss) $ 2.57 2.15 (1.24)(a) 2.00 1.81(b)
------------------------------------------------------------------------------------------------------------
Cash dividends per share $ .80 .76 .72 .68 .64
----------------------------------------------------------------------------------------------------------------
Book value per share $ 15.49 14.09 12.65 14.58 13.19
----------------------------------------------------------------------------------------------------------------
Number of shareholders 8,690 8,838 9,481 9,989 8,936
----------------------------------------------------------------------------------------------------------------
(a) 1996 continuing operations results include a pre-tax charge of $102,439
($64,906 after-tax, or $1.62 per share) related to the adoption of a plan
to reduce costs, rationalize production capacity and provide for severance
and environmental costs. The 1996 Net Loss includes a pre-tax charge of
$150,000 ($97,720 after-tax, or $2.44 per share) related to the plan
adoption.
(b) 1994 includes an after-tax net gain of $1,179 ($.03 per share) related to
changes in accounting principles.
- --------------------------------------------------------------------------------
(36) Summary of Operations
- --------------------------------------------------------------------------------
38
DEAN FOODS COMPANY & SUBSIDIARIES
REPORT OF INDEPENDENT
ACCOUNTANTS
PRICEWATERHOUSECOOPERS
TO THE BOARD OF DIRECTORS AND SHAREHOLDERS OF DEAN FOODS COMPANY:
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of income, of shareholders' equity and of cash flows
present fairly, in all material respects, the financial position of Dean Foods
Company and subsidiaries at May 31, 1998 and May 25, 1997, and the results of
their operations and their cash flows for each of the three years in the period
ended May 31, 1998, in conformity with generally accepted accounting principles.
These financial statements are the responsibility of the Company's management;
our responsibility is to express an opinion on these financial statements based
on our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards 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 the opinion expressed
above.
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
Chicago, IL
June 29, 1998, except as to Note 3
which is as of July 27, 1998
- --------------------------------------------------------------------------------
(37) Report of Independent Accountants
- --------------------------------------------------------------------------------
39
DEAN FOODS COMPANY & SUBSIDIARIES
OFFICERS
HOWARD M. DEAN
Chairman of the Board and
Chief Executive Officer
RICHARD E. BAILEY
President and Chief Operating Officer
ROBERT E. BAKER
Vice President, Strategic Planning
ERIC A. BLANCHARD
Vice President, Secretary and
General Counsel
JENNY L. CARPENTER
Group Vice President, Specialty Business Unit and General Manager, Dean Dip &
Dressing Co.
GARY A. CORBETT
Vice President, Governmental
and Dairy Industry Relations
NEIL J. FINERTY
Vice President, Human Resources
GARY D. FLICKINGER
Vice President, Production & Engineering
DANIEL E. GREEN
Group Vice President and President,
Ryan Foods Company
JAMES R. GREISINGER
Group Vice President and President,
Dean Pickle and Specialty Products Company
CAMERON C. HITCHCOCK
Treasurer
ALAN W. HOOPER
Vice President, Special Projects
DALE E. KLEBER
Vice President and Associate
General Counsel
WILLIAM M. LUEGERS, JR.
Corporate Controller
WILLIAM R. MCMANAMAN
Vice President, Finance and
Chief Financial Officer
GEORGE A. MUCK
Vice President, Research and Development
DOUGLAS A. PARR
Vice President, Dairy Sales and Marketing
DENNIS J. PURCELL
Group Vice President and President, Specialty Business Unit
THOMAS A. RAVENCROFT
Senior Vice President and President,
Dairy Division
GARY P. RIETZ
Chief Information Officer
JEFFREY P. SHAW
Vice President and President,
Dean Foods Vegetable Company
CORPORATE DATA
DIVIDEND REINVESTMENT SERVICE
A service for Dean shareholders is available whereby dividends can be
automatically reinvested in the Company`s common stock. The plan also provides
for a voluntary quarterly cash payment option for the purchase of additional
stock and safekeeping of shares.
If interested in this service, please write to the transfer agent and request a
copy of Dean's dividend reinvestment brochure:
Harris Trust and Savings Bank
Dividend Reinvestment Service
P.O. Box A3309
Chicago, Illinois 60690
FORM 10-K
Single copies of the Company`s 1998 Annual Report on Securities and Exchange
Commission Form 10-K (without exhibits) will be provided without charge to
shareholders upon written request directed to Director, Corporate
Communications.
STOCK EXCHANGE
New York Stock Exchange Ticker Symbol: DF
FINANCIAL INFORMATION &
INVESTOR RELATIONS INQUIRIES
The Company maintains a direct mailing list to ensure that shareholders with
stock held in broker nominee accounts ("street name") and other interested
parties receive information on a timely basis. Current company financial
information can also be accessed on the Internet through our web site at:
www.deanfoods.com
To be added to the mailing list, or to request financial information, please
direct requests to:
Lu Ann Lilja
Director, Corporate Communications
Dean Foods Company
3600 N. River Road
Franklin Park, Illinois 60131
E-Mail address: luann@deancorp.attmail.com
TRANSFER AGENT AND REGISTRAR
For inquiries regarding change of address, stock transfer, registered
shareholdings, dividends and lost certificates, please contact:
Harris Trust and Savings Bank
311 West Monroe Street
Chicago, Illinois 60606
800/721-5167
ANNUAL MEETING
September 29, 1998, 10:00 A.M.
Drury Lane Oak Brook Terrace
100 Drury Lane
Oak Brook Terrace, Illinois 60181
(Location map appears in Proxy Statement.)
CORPORATE OFFICE
3600 N. River Road
Franklin Park, Illinois 60131
847/678-1680
Dairy Ease is a registered trademark of Sterling Winthrop, Inc. Nestle Quik,
Carnation Coffeemate and Nestea are registered trademarks of Nestle Food
Company. Health Source and Vitamite are registered trademarks of Ralston Purina
Company.
- --------------------------------------------------------------------------------
(38) Officers / Corporate Data
- --------------------------------------------------------------------------------
40
Directors
John P. Frazee, Jr. (2) (4)
Chairman, President and
Chief Executive Officer,
Paging Network, Inc.,
a wireless messaging and
information delivery company
Janet Hill (2)
Vice-President, Alexander
& Associates, a corporate
consulting firm
Howard M. Dean (1)
chairman of the Board
and Chief Executive Officer
- --------------------
Richard E. Bailey (1)
President and Chief
Operating Officer
Richard P. Mayer (3)
Retired Chairman and
Chief Executive Officer, Kraft
General Foods North America,
a diversified food company
Bert A. Getz (3) (4)
Chairman, President and
Director, Globe Corporation,
a diversified investment firm
- -------------------
Lewis M. Collens (2) (4)
President, Illinois Institute
of Technology, and Chairman
and Chief Executive Officer,
IIT Research Institute
Thomas A. Ravencroft
Senior Vice President and
President, Dairy Division
Andrew J. McKenna (1) (3) (4)
Chairman and Chief Executive
Officer, Schwarz Paper Company,
a national printer, converter and
distributor of packaging and
promotional materials
- ----------------------
John S. Llewellyn, Jr. (3) (4)
Retired President and Chief
Executive Officer, Ocean Spray
Cranberries, Inc., a marketing
cooperative of cranberry and
citrus growers
Paula H. Crown (2)
Vice President of Henry
Crown and Company,
a private investment firm
Edward A. Brennan (2)(1)
Retired Chairman and
Chief Executive Officer,
Sears, Roebuck & Co.,
a merchandising company
(1) Executive Committee
(2) Audit Committee
(3) Compensation Committee
(4) Corporate Governance Committee