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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES AND EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER 1-08262
DEAN HOLDING COMPANY
(Exact name of the registrant as specified in its charter)
(DEAN FOODS LOGO)
---------------
DELAWARE 75-2932967
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification no.)
2515 MCKINNEY AVENUE, SUITE 1200
DALLAS, TEXAS 75201
(214) 303-3400
(Address, including zip code, and telephone number, including
area code, of the registrant's principal executive offices)
---------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
The registrant meets the conditions specified in General Instructions
H(1)(a) and (b) to Form 10-Q and, therefore, is filing this form with the
reduced disclosure format permitted by General Instruction H(2) to Form 10-Q.
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TABLE OF CONTENTS
PAGE
PART I -- FINANCIAL INFORMATION
Item 1 -- Financial Statements........................................ 3
Item 2 -- Management's Discussion and Analysis
of Financial Condition and Results of Operations............ 14
Item 4 -- Controls and Procedures..................................... 17
PART II -- OTHER INFORMATION
Item 6 -- Exhibits and Reports on Form 8-K............................ 17
2
PART I -- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
DEAN HOLDING COMPANY
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
SEPTEMBER 30, DECEMBER 31,
2002 2001
------------- -------------
(UNAUDITED)
Assets
Current assets:
Cash and cash equivalents ............................................ $ 24,578 $ 15,920
Receivable from parent ............................................... 108,935 29,000
Accounts receivable, net ............................................. 252,295 292,926
Inventories .......................................................... 239,442 242,977
Deferred income taxes ................................................ 74,512 88,500
Prepaid expenses and other current assets ............................ 49,800 30,624
------------- -------------
Total current assets ............................................ 749,562 699,947
Property, plant and equipment, net ........................................ 602,767 624,149
Goodwill .................................................................. 1,403,664 1,358,270
Identifiable intangibles and other assets ................................. 238,982 258,063
------------- -------------
Total ........................................................... $ 2,994,975 $ 2,940,429
============= =============
Liabilities and Stockholder's Equity
Current liabilities:
Accounts payable and accrued expenses ................................ $ 436,487 $ 491,526
Income taxes payable ................................................. 78,749 31,307
Current portion of long-term debt .................................... 1,575 1,493
------------- -------------
Total current liabilities ....................................... 516,811 524,326
Long-term debt ............................................................ 769,519 814,500
Other long-term liabilities ............................................... 138,843 151,635
Deferred income taxes ..................................................... 104,761 123,613
Commitments and contingencies (Note 10)
Stockholder's equity:
Common stock, 1,000 shares issued and outstanding ....................
Additional paid-in capital ........................................... 1,356,816 1,326,355
Retained earnings .................................................... 108,046
Accumulated other comprehensive income ............................... 179
------------- -------------
Total stockholder's equity ...................................... 1,465,041 1,326,355
------------- -------------
Total ........................................................... $ 2,994,975 $ 2,940,429
============= =============
See notes to condensed consolidated financial statements.
3
DEAN HOLDING COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(In thousands)
SUCCESSOR PREDECESSOR SUCCESSOR PREDECESSOR
----------- ----------- ----------- -----------
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
--------------------------- ----------------------------
2002 2001 2002 2001
----------- ----------- ----------- -----------
(UNAUDITED) (UNAUDITED)
Net sales ........................................... $ 959,970 $ 1,042,645 $ 2,910,822 $ 3,083,666
Cost of sales ....................................... 717,071 815,751 2,192,467 2,408,743
----------- ----------- ----------- -----------
Gross profit ........................................ 242,899 226,894 718,355 674,923
Operating costs and expenses:
Selling and distribution ....................... 127,952 136,305 394,043 425,503
General and administrative ..................... 34,478 45,070 103,625 137,973
Amortization of intangibles .................... 1,555 5,617 4,573 16,968
----------- ----------- ----------- -----------
Total operating costs and expenses ......... 163,985 186,992 502,241 580,444
----------- ----------- ----------- -----------
Operating income .................................... 78,914 39,902 216,114 94,479
Other (income) expense:
Interest expense, net .......................... 13,915 16,151 42,232 51,545
Other (income) expense, net .................... 195 (469) (613) (1,172)
----------- ----------- ----------- -----------
Total other (income) expense .............. 14,110 15,682 41,619 50,373
----------- ----------- ----------- -----------
Income from continuing operations
before income taxes ............................... 64,804 24,220 174,495 44,106
Income tax expense .................................. 24,248 9,282 66,449 17,001
----------- ----------- ----------- -----------
Income from continuing operations ................... 40,556 14,938 108,046 27,105
Income from discontinued operations, net of tax ..... 3,781 6,922
----------- ----------- ----------- -----------
Net income .......................................... $ 40,556 $ 18,719 $ 108,046 $ 34,027
=========== =========== =========== ===========
See notes to condensed consolidated financial statements.
4
DEAN HOLDING COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
SUCCESSOR PREDECESSOR
------------- -------------
NINE MONTHS NINE MONTHS
ENDED ENDED
SEPTEMBER 30 SEPTEMBER 30
2002 2001
------------- -------------
(UNAUDITED)
Cash flows from operating activities:
Income from continuing operations ........................................ $ 108,046 $ 27,105
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization ......................................... 53,399 80,515
Deferred income taxes ................................................. 11,910 16,543
Merger related costs .................................................. 31,973
Other, net ............................................................ 1,816 (4,319)
Changes in operating assets and liabilities, net of
acquisitions:
Accounts receivable ................................................. 34,083 (12,814)
Inventories ......................................................... (13,648) (38,697)
Prepaid expenses and other assets ................................... 20,915 2,989
Accounts payable, accrued expenses and other
liabilities ...................................................... (77,484) (30,055)
Income taxes ........................................................ 47,666 (4,249)
------------- -------------
Net cash provided by operating activities ........................ 186,703 68,991
Cash flows from investing activities:
Capital expenditures ..................................................... (40,122) (54,066)
Proceeds from disposition of property, plant and
equipment ............................................................. 1,397 2,450
Capitalized information system costs ..................................... (1,160)
Cash outflows for acquisitions ........................................... (17,156)
Net proceeds from divestitures ........................................... 2,561
------------- -------------
Net cash used in investing activities ............................ (53,320) (52,776)
Cash flows from financing activities:
Repayment of debt ........................................................ (42,758) (4,841)
Repayments under revolving credit agreement, net ......................... (32,770)
Issuance of common stock, net of expenses ................................ 9,637
Issuance of treasury stock ............................................... 82
Cash dividends paid ...................................................... (24,329)
Net transfer to parent ................................................... (81,967)
------------- -------------
Net cash used in financing activities ............................ (124,725) (52,221)
Net cash used in discontinued operations ..................................... (13,056)
------------- -------------
Increase (decrease) in cash and cash equivalents ............................. 8,658 (49,062)
Cash and cash equivalents, beginning of period ............................... 15,920 82,477
------------- -------------
Cash and cash equivalents, end of period ..................................... $ 24,578 $ 33,415
============= =============
See notes to condensed consolidated financial statements.
5
DEAN HOLDING COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2002
(Unaudited)
1. GENERAL
Change in Fiscal Year -- On December 21, 2001, immediately after we were
acquired by Dean Foods Company (formerly known as Suiza Foods Corporation), our
Board of Directors voted to change our fiscal year to conform to the fiscal year
of Dean Foods Company. Accordingly, our fiscal year now ends on December 31,
rather than on the last Sunday in May.
Basis of Presentation -- The unaudited condensed consolidated financial
statements contained in this report have been prepared on the same basis as the
consolidated financial statements in our Annual Report on Form 10-KT for the
period from May 28, 2001 to December 31, 2001. In our opinion, we have made all
necessary adjustments (which include only normal recurring adjustments) in order
to present fairly, in all material respects, our consolidated financial
position, results of operations and cash flows as of the dates and for the
periods presented. Certain information and footnote disclosures normally
included in financial statements prepared in accordance with generally accepted
accounting principles have been omitted. The condensed consolidated financial
statements contained in this report should be read in conjunction with our 2001
consolidated financial statements contained in our Annual Report on Form 10-KT
as filed with the Securities and Exchange Commission on April 1, 2002.
This Quarterly Report, including these notes, has been written in accordance
with the Securities and Exchange Commission's "Plain English" guidelines. Unless
otherwise indicated, references in this report to "we," "us" or "our" refer to
Dean Holding Company and its subsidiaries.
We have chosen December 31, 2001 as a "date of convenience" for recording
the effects of our acquisition by Dean Foods Company. Accordingly, for financial
statement purposes, we have treated the acquisition as if it occurred on
December 31, 2001 rather than December 21, 2001.
Our financial statements for all periods prior to December 31, 2001 have
been prepared using our historical basis of accounting and are indicated in our
consolidated financial statements as "Predecessor." The December 31, 2001 and
September 30, 2002 balance sheets reflect the preliminary purchase price
allocation related to the acquisition by Dean Foods Company.
Recently Issued Accounting Pronouncements -- In May 2000, the Emerging
Issues Task Force (the "Task Force" or "EITF") of the Financial Accounting
Standards Board ("FASB") reached a consensus on Issue No. 00-14, "Accounting for
Certain Sales Incentives," which became effective for us May 28, 2001. This
Issue addresses the recognition, measurement and income statement classification
of sales incentives that have the effect of reducing the price of a product or
service to a customer at the point of sale. In April 2001, the Task Force
reached a consensus on Issue No. 00-25, "Vendor Income Statement
Characterization of Consideration Paid to a Reseller of the Vendor's Products,"
which also became effective for us on May 28, 2001. Under this Issue, certain
consideration paid to our customers (such as slotting fees) is required to be
classified as a reduction of revenue, rather than recorded as an expense. Upon
adoption of these Issues, certain sales incentives and trade spending amounts,
which were classified in selling and distribution expense, were reclassified as
reductions of sales. For the nine months ended September 30, 2001, $24.1 million
was reclassified to conform to the new requirements. This change did not affect
our reported net income.
In June 2001, FASB issued Statement of Financial Accounting Standard
("SFAS") No. 141, "Business Combinations" and SFAS No. 142, "Goodwill and Other
Intangible Assets." SFAS No. 141 addresses financial accounting and reporting
for business combinations. Under the new standard, all business combinations
completed after June 30, 2001 are required to be accounted for by the purchase
method. SFAS No. 142 addresses financial accounting and reporting for acquired
goodwill and other intangible assets. We adopted SFAS No. 142 on January 1,
2002. SFAS No. 142 requires that goodwill no longer be amortized, but instead
requires a transitional goodwill impairment assessment and annual impairment
tests thereafter. As a result of the acquisition by Dean Foods Company, our
balance sheet reflects the new basis of accounting effective December 31, 2001
at fair value in accordance with purchase accounting requirements under SFAS No.
141. Therefore, no impairment of goodwill was indicated by the transitional
goodwill impairment assessment. Our annual impairment test will be completed in
the fourth quarter of 2002. Any recognized intangible asset determined to have
an indefinite useful life will not be amortized, but instead tested for
impairment in accordance with the standard.
6
In June 2001, FASB issued SFAS No. 143, "Accounting for Asset Retirement
Obligations." This statement requires that the fair value of a liability for an
asset retirement obligation be recognized in the period in which the associated
legal obligation for the liability is incurred if a reasonable estimate of fair
value can be made. The associated asset retirement costs are capitalized as part
of the carrying amount of the long-lived asset and amortized over the useful
life of the asset. SFAS No. 143 will become effective for us January 1, 2003. We
are currently evaluating the impact of adopting this pronouncement on our
consolidated financial statements.
FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets" in August 2001 and it became effective for us beginning
January 1, 2002. SFAS No. 144, which supercedes SFAS No. 121, provides a single,
comprehensive accounting model for impairment and disposal of long-lived assets
and discontinued operations. Our adoption of this standard will not have a
material impact on our consolidated financial statements.
SFAS No. 145, "Rescission of FASB Statements No. 4, 44 and 64, Amendment of
FASB Statement No. 13 and Technical Corrections", was issued in April 2002 and
is applicable to fiscal years beginning after May 15, 2002. One of the
provisions of this technical statement is the rescission of SFAS No. 4,
"Reporting Gains and Losses from Extinguishment of Debt", whereby any gain or
loss on the early extinguishment of debt that was classified as an extraordinary
item in prior periods in accordance with SFAS No. 4, which does not meet the
criteria of an extraordinary item as defined by APB Opinion 30, must be
reclassified. Our adoption of this standard will not have a material impact on
our consolidated financial statements.
In June 2002, FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities." This statement addresses financial accounting
and reporting for costs associated with exit or disposal activities and
nullifies EITF Issue No. 94-3, "Liability Recognition for Certain Employee
Termination Benefits and Other Costs to Exit an Activity (including Certain
Costs Incurred in a Restructuring)." The statement requires that a liability for
a cost associated with an exit or disposal activity be recognized when the
liability is incurred, and is effective for exit or disposal activities that are
initiated after December 31, 2002. We are currently evaluating the impact of
adopting this pronouncement on our consolidated financial statements.
2. ACQUISITION BY DEAN FOODS COMPANY
On December 21, 2001, we were acquired by Dean Foods Company (formerly known
as Suiza Foods Corporation). To accomplish this transaction, we were merged with
and into Blackhawk Acquisition Corp., a wholly owned subsidiary of Dean Foods
Company. Blackhawk Acquisition Corp. survived the merger and immediately changed
its name to Dean Holding Company, our current name. Immediately after completion
of the merger, Suiza Foods Corporation changed its name to Dean Foods Company.
We are now a wholly-owned subsidiary of Dean Foods Company.
As a result of the merger, each share of our common stock was converted into
0.858 (on a split-adjusted basis) shares of Dean Foods Company common stock and
the right to receive $21.00 in cash.
Dean Foods Company accounted for its acquisition of us as a purchase. The
aggregate purchase price recorded at Dean Foods Company was $1.6 billion,
including $756.8 million of cash and common stock valued at $739.4 million. The
value of the approximately 31 million common shares issued was determined based
on the average market price of Dean Foods Company common stock around the date
of the announcement. This purchase price and the related preliminary purchase
accounting adjustments, including goodwill, have been "pushed down" and are
reflected in our December 31, 2001 and September 30, 2002 balance sheets.
The final allocation of the purchase price to the fair values of our assets
and liabilities and the related business integration plans will be completed
during the fourth quarter of 2002. We expect that the ultimate purchase price
allocation may include additional adjustments to the fair values of depreciable
tangible assets, identifiable intangible assets (some of which will have
indefinite lives) and the carrying values of certain liabilities. Accordingly,
to the extent that such assessments indicate that the fair value of the assets
and liabilities differ from their preliminary purchase price allocations, such
difference would adjust the amounts allocated to those assets and liabilities
and would change the amounts allocated to goodwill.
We are a wholly-owned subsidiary of Dean Foods Company. They provide us with
management support, in return for a management fee. The management fee, which
first began to be charged in the second quarter of 2002, is based on budgeted
annual expenses for Dean Foods Company's corporate headquarters, which is then
allocated among the segments of Dean Foods Company. Management fees for the
three-month and nine-month periods ended September 30, 2002 amounted to $8.0
million and $16.4 million, respectively. In addition, our cash is available for
use, and is regularly "swept," by Dean Foods Company at its discretion. Cash
that has been "swept" is included on our balance sheet as "Receivable from
parent."
7
3. DIVESTITURES
Divestiture of Plants -- In order to obtain regulatory approval for our
acquisition by Dean Foods Company, certain plants located in areas where our
operations overlapped with the operations of Dean Foods Company were required to
be divested. Four of the divested dairies were owned by us, including Coburg
Dairy based in North Charleston, South Carolina; Cream O Weber based in Salt
Lake City, Utah; H. Meyer Dairy based in Cincinnati, Ohio; and U.C. Milk
("Goldenrod") based in Madisonville, Kentucky. In order to accomplish the
divestitures, on December 21, 2001, immediately after our merger with Blackhawk
Acquisition Corporation was completed, we transferred these dairies, via
dividend, to Dean Foods Company, our sole shareholder. The dividend was recorded
at book value after applicable purchase accounting adjustments, with no gain or
loss recorded. Prior periods have not been restated to reflect the divestitures.
Exchange of National Refrigerated Products for Dean SoCal -- Also in
connection with our acquisition by Dean Foods Company, on December 21, 2001, we
entered into a Securities Exchange Agreement with Morningstar Foods Inc.,
another wholly-owned subsidiary of Dean Foods Company, pursuant to which, on
December 21, 2001, immediately after consummation of the acquisition, we
exchanged the operations of our former National Refrigerated Products ("NRP")
segment for the operations of Dean SoCal, a subsidiary of Dean Foods Company's
Dairy Group. Accordingly, we no longer have our NRP segment, and we have
presented this group as a discontinued operation in the accompanying financial
statements. We accounted for this exchange as a dividend in our consolidated
financial statements. Dean SoCal operates two plants in Southern California and
produces a full line of dairy and related products under the Swiss(R) and Adohr
Farms(R) brands. Dean SoCal is now operated as part of our Dairy Group and was
accounted for as a contribution in our consolidated financial statements at
December 31, 2001 and September 30, 2002. Dean SoCal's operating results are
included in our consolidated financial statements as of September 30, 2002.
Divestitures of DFC Transportation and Boiled Peanut Business -- On January
4, 2002, we completed the sale of the stock of DFC Transportation Company, which
was a part of our Specialty Foods segment. On February 7, 2002, we completed the
sale of the assets related to the boiled peanut business of Dean Specialty Foods
Company, a part of our Specialty Foods segment.
4. INVENTORIES
AT SEPTEMBER 30, AT DECEMBER 31,
2002 2001
---------------- ---------------
(IN THOUSANDS)
Raw materials and supplies ......... $ 70,010 $ 65,863
Finished goods ..................... 169,432 177,114
--------------- ---------------
Total ............................ $ 239,442 $ 242,977
=============== ===============
Approximately $112.8 million and $131.7 million of our inventory was
accounted for under the last-in, first-out (LIFO) method of accounting at
September 30, 2002 and December 31, 2001, respectively. There was no material
excess of current cost over the stated value of last-in, first-out inventories
at either date.
5. GOODWILL AND OTHER INTANGIBLE ASSETS
On January 1, 2002, we adopted SFAS No. 142, as discussed in more detail in
Note 1. As required by SFAS No. 142, our results for the first quarter of 2001
have not been restated. The following sets forth a reconciliation of net income
for the three months and nine months ended September 30, 2002 and 2001,
eliminating goodwill amortization and amortizing recognized intangible assets
over their useful lives.
THREE MONTHS NINE MONTHS
ENDED SEPTEMBER 30 ENDED SEPTEMBER 30
--------------------- ---------------------
2002 2001 2002 2001
-------- -------- -------- --------
(IN THOUSANDS)
Reported net earnings ................................................. $ 40,556 $ 18,719 $108,046 $ 34,027
Goodwill amortization, net of tax ..................................... 2,610 7,317
Trademark amortization, net of tax .................................... 856 2,399
-------- -------- -------- --------
Adjusted net earnings ................................................. $ 40,556 $ 22,185 $108,046 $ 43,743
======== ======== ======== ========
8
The changes in the carrying amount of goodwill for the nine months ended
September 30, 2002 are as follows:
SPECIALTY
DAIRY GROUP FOODS TOTAL
------------- ------------- -------------
(IN THOUSANDS)
Balance at December 31, 2001 .... $ 1,068,270 $ 290,000 $ 1,358,270
Purchase accounting adjustments.. 50,250 (4,856) 45,394
------------- ------------- -------------
Balance at September 30, 2002 ... $ 1,118,520 $ 285,144 $ 1,403,664
============= ============= =============
The gross carrying amount and accumulated amortization of our intangible
assets other than goodwill as of September 30, 2002 and December 31, 2001 are as
follows:
SEPTEMBER 30, 2002 DECEMBER 31, 2001
------------------------------------- ------------------------------------
GROSS NET GROSS NET
CARRYING ACCUMULATED CARRYING CARRYING ACCUMULATED CARRYING
AMOUNT AMORTIZATION AMOUNT AMOUNT AMORTIZATION AMOUNT
---------- ------------ ----------- ---------- ------------ ----------
(IN THOUSANDS)
Intangible assets with indefinite lives:
Trademarks ........................... $ 193,200 $ $ 193,200 $ 196,178 $ $ 196,178
Intangible assets with finite lives:
Customer-related ..................... 30,918 (4,009) 26,909 30,500 30,500
---------- ----------- ---------- ---------- ------------ ----------
Total other intangibles ................ $ 224,118 $ (4,009) $ 220,109 $ 226,678 $ $ 226,678
========== =========== ========== ========== ============ ==========
Amortization expense on intangible assets, excluding goodwill, for the three
months and nine months ended September 30, 2002 and 2001 was $2.1 million and
$4.0 million and $1.4 million and $3.9 million, respectively. Estimated
aggregate intangible asset amortization expense for the next five years is as
follows:
2003...................................................$3.4 million
2004...................................................$2.6 million
2005...................................................$1.5 million
2006...................................................$0.8 million
2007...................................................$0.3 million
6. LONG-TERM DEBT
AT SEPTEMBER 30, 2002 AT DECEMBER 31, 2001
-------------------------------- --------------------------------
AMOUNT INTEREST AMOUNT INTEREST
OUTSTANDING RATE OUTSTANDING RATE
------------- ------------- ------------- -------------
$250 million senior notes, maturing in 2007... $ 250,514 8.150% $ 250,576 8.150%
$200 million senior notes, maturing in 2009... 183,888 6.625 187,357 6.625
$150 million senior notes, maturing in 2017... 125,148 6.900 124,579 6.900
$100 million senior notes, maturing in 2005... 96,520 6.750 95,699 6.750
Receivables-backed loan ...................... 91,048 2.400 128,855 2.290
Industrial development revenue bonds ......... 18,000 1.75 - 1.90 21,950 1.70 -- 6.63
Capitalized lease obligations and other ...... 5,976 6,977
------------- -------------
771,094 815,993
Less current portion ......................... (1,575) (1,493)
------------- -------------
Total .............................. $ 769,519 $ 814,500
============= =============
Senior Notes -- We had $700 million (face value) of senior notes outstanding
at September 30, 2002, all of which was outstanding prior to our acquisition by
Dean Foods Company. The related indentures do not contain financial covenants
but they do contain certain restrictions including a prohibition against us and
our subsidiaries granting liens on our real property interests. At the date of
our acquisition by Dean Foods Company, our long-term debt was re-valued to its
current market value.
9
Receivables-Backed Loan -- On December 21, 2001, immediately upon completion
of our acquisition by Dean Foods Company, certain of our subsidiaries sold their
accounts receivable into Dean Foods Company's receivables securitization
facility. The securitization is treated as a borrowing for accounting purposes.
The receivables-backed loan bears interest at a variable rate based on the
commercial paper yield, as defined in the agreement.
Industrial Development Revenue Bonds -- We have certain revenue bonds
outstanding, one of which requires an annual sinking fund redemption, the amount
of which will be $0.3 million in 2002, increasing to $0.9 million by 2012.
Typically, these bonds are secured by irrevocable letters of credit issued by
financial institutions, along with first mortgages on the related real property
and equipment. Interest on these bonds is due semiannually at interest rates
that vary based on market conditions.
Letters of Credit -- At September 30, 2002, $38.0 million of letters of
credit were outstanding. These letters of credit were required by various
utilities and government entities for performance and insurance guarantees.
Other Obligations -- Other obligations include various promissory notes for
the purchase of property, plant, and equipment and capital lease obligations.
The various promissory notes payable provide for interest at varying rates and
are payable in monthly installments of principal and interest until maturity,
when the remaining principal balances are due. Capital lease obligations
represent machinery and equipment financing obligations which are payable in
monthly installments of principal and interest and are collateralized by the
related assets financed.
Interest Rate Agreements -- SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities" (as amended) became effective for us as of
May 28, 2001. We do not currently have any derivative instruments. Prior to our
acquisition by Dean Foods Company, we entered into interest rate swap agreements
from time to time in order to hedge a portion of our interest rate exposure. On
December 19, 2001, we sold our interest rate swap in anticipation of our
acquisition by Dean Foods Company. During the period from May 28, 2001 to
December 31, 2001, we recorded derivatives as of the effective date on our
consolidated balance sheet at fair value, with an offset to other comprehensive
income to the extent the hedge was effective, as required by SFAS No. 133. Any
ineffectiveness in cash flow hedges or fair value hedges was recorded as an
adjustment to earnings and not other comprehensive income.
Our adoption of this accounting standard as of May 28, 2001 resulted in the
recognition of an asset related to our cash flow hedges of $2.1 million.
7. COMPREHENSIVE INCOME
Comprehensive income consists of net income plus all other changes in equity
from non-owner sources. Consolidated comprehensive income was $40.3 million and
$108.2 million for the three months and nine months ended September 30, 2002.
The amounts of deferred income tax (expense) benefit allocated to each component
of other comprehensive income (loss) during the nine months ended September 30,
2002 are included below.
PRE-TAX TAX
INCOME BENEFIT NET
(LOSS) (EXPENSE) AMOUNT
------- --------- ------
(IN THOUSANDS)
Accumulated other comprehensive income December 31, 2001 .. $ 0 $ 0 $ 0
Cumulative foreign currency translation adjustment arising
during period ........................................... (326) 127 (199)
------- --------- ------
Accumulated other comprehensive income, March 31,
2002 .................................................... $ (326) $ 127 $ (199)
Accumulated foreign currency translation adjustment arising
during period ........................................... 1,071 (408) 663
------- --------- ------
Accumulated other comprehensive income, June 30,
2002 .................................................... $ 745 $ (281) $ 464
Accumulated foreign currency translation adjustment arising
during period ........................................... (460) 175 (285)
------- --------- ------
Accumulated other comprehensive income, September 30, 2002 $ 285 $ (106) $ 179
======= ========= ======
10
8. PLANT CLOSING COSTS
As part of the purchase price allocation, Dean Foods Company accrued costs
to exit certain of our activities and operations, in order to rationalize
production and reduce costs and inefficiencies. Since the acquisition, Dean
Foods Company has closed 4 of our plants (including 2 Dairy Group plants and 2
Specialty Foods plants) and restructured our old administrative offices. During
the fourth quarter of 2002, Dean Foods Company will finalize its initial
integration and rationalization plan, and refine its estimate of amounts in the
purchase price allocations associated with this plan.
The principal components of the plan include the following:
o Workforce reductions as a result of plant closings, plant
rationalizations and consolidation of administrative functions and
offices. To date, Dean Foods Company has identified 605 plant and
administrative personnel for termination pursuant to the plan. The costs
incurred are charged against our acquisition liabilities for these
locations. As of September 30, 2002, 43 employees had not yet been
terminated.
o Shutdown costs, including those costs that are necessary to clean and
prepare the plant facilities for resale or closure; and
o Costs incurred after shutdown such as lease obligations or termination
costs, utilities and property taxes after shutdown of the plant or
administrative office.
9. SHIPPING AND HANDLING FEES
In September 2000, the Task Force reached a consensus on Issue No. 00-10,
"Accounting for Shipping and Handling Fees and Costs," which became effective
for us in the fourth quarter of fiscal year 2001. This issue required the
disclosure of our accounting policies for shipping and handling costs and their
income statement classification. Previously, we classified shipping and handling
amounts billed to customers as revenue. However, certain costs incurred related
to shipping and handling were classified as a reduction of revenue. As a result
of our adoption of Issue No. 00-10 in the fourth quarter of fiscal 2001, prior
years' shipping and handling costs were reclassified from net sales to cost of
products sold and selling and distribution expenses. The amount totaled $36.9
million for the nine months ended September 30, 2001. This change did not affect
our reported net income. Shipping and handling costs in cost of sales include
inventory warehouse costs and product loading and handling costs. Shipping and
handling costs in selling and distribution expense are related to shipping
products to customers and consist primarily of (i) delivery costs for
company-owned delivery routes, (ii) independent distributor routes (to the
extent that such independent distributors are paid a delivery fee) and (iii)
third-party carrier expenses. Shipping and handling costs that were recorded as
a component of selling and distribution expense were approximately $92.4 million
and $281.2 million during the three months and nine months ended September 30,
2002, respectively; and $99.2 million and $300.9 million during the three months
and nine months ended September 30, 2001, respectively.
10. COMMITMENTS AND CONTINGENCIES
Guaranty of Dean Foods Company's Obligations Under Its Senior Credit
Facility -- Certain of Dean Foods Company's subsidiaries, including us, were
required, effective as of the merger date, to guarantee Dean Foods Company's
indebtedness under its new $2.7 billion credit facility. We pledged
substantially all of our assets (other than our real property and our ownership
interests in our subsidiaries) as security for the guaranty. The senior credit
facility provides Dean Foods Company with an $800 million revolving line of
credit, a Tranche A $900 million term loan and a Tranche B $1 billion term loan.
At September 30, 2002, there were outstanding borrowings of $1.88 billion under
this facility, along with $65.4 million of issued but undrawn letters of credit.
In addition to the letters of credit secured by this facility, there were an
additional $38.0 million of letters of credit outstanding at September 30, 2002.
Amounts outstanding under the revolving line of credit and the Tranche A
term loan bear interest at a rate per annum equal to one of the following rates,
at Dean Foods Company's option:
o a base rate equal to the higher of the Federal Funds rate plus 50 basis
points or the prime rate, plus a margin that varies from 25 to 150 basis
points, depending on Dean Foods Company's leverage ratio (which is the
ratio of defined indebtedness to EBITDA), or
o the London Interbank Offering Rate ("LIBOR") computed as LIBOR divided
by the product of one minus the Eurodollar Reserve Percentage, plus a
margin that varies from 150 to 275 basis points, depending on Dean Foods
Company's leverage ratio.
11
On April 30, 2002, Dean Foods Company entered into an amendment to its
credit facility pursuant to which the interest rate for amounts outstanding
under the Tranche B term loan was lowered by 50 basis points to the following,
at Dean Foods Company's option:
o a base rate equal to the higher of the Federal Funds rate plus 50 basis
points or the prime rate, plus a margin that varies from 75 to 150 basis
points, depending on Dean Foods Company's leverage ratio, or
o LIBOR divided by the product of one minus the Eurodollar Reserve
Percentage, plus a margin that varies from 200 to 275 basis points,
depending on Dean Foods Company's leverage ratio.
The blended interest rate in effect on borrowings under the senior credit
facility, including the applicable interest rate margin, was 4.05% at September
30, 2002. Dean Foods Company has interest rate swap agreements in place,
however, that hedge $925.0 million of its borrowings under this facility at an
average rate of 5.95%, plus the applicable interest rate margin. Interest is
payable quarterly or at the end of the applicable interest period.
Scheduled principal payments on the Tranche A term loan are due in the
following installments:
o $16.87 million quarterly from March 31, 2002 through December 31, 2002;
o $33.75 million quarterly from March 31, 2003 through December 31, 2004;
o $39.38 million quarterly from March 31, 2005 through December 31, 2005;
o $45.00 million quarterly from March 31, 2006 through December 31, 2006;
o $56.25 million quarterly from March 31, 2007 through June 30, 2007; and
o A final payment of $112.5 million on July 15, 2007.
Scheduled principal payments on the Tranche B term loan are due in the
following installments:
o $1.25 million quarterly from March 31, 2002 through December 31, 2002;
o $2.5 million quarterly from March 31, 2003 through December 31, 2007;
o A payment of $472.5 million on March 31, 2008; and
o A final payment of $472.5 million on July 15, 2008.
No principal payments are due on the revolving line of credit until maturity
on July 15, 2007.
The credit agreement also requires mandatory principal prepayments in
certain circumstances including without limitation: (1) upon the occurrence of
certain asset dispositions not in the ordinary course of business, (2) upon the
occurrence of certain debt and equity issuances when Dean Foods Company's
leverage ratio is greater than 3.0 to 1.0, and (3) beginning in 2003, annually
when Dean Foods Company's leverage ratio is greater than 3.0 to 1.0. As of
September 30, 2002, Dean Foods Company's leverage ratio was 3.4 to 1.0.
The credit agreement requires that Dean Foods Company prepay 50% of defined
excess cash flow for any fiscal year (beginning in 2003) in which Dean Foods
Company's leverage ratio is at year end is greater than 3.0 to 1.0.
The senior credit facility contains various financial and other restrictive
covenants and requires that Dean Foods Company maintain certain financial
ratios, including a leverage ratio (computed as the ratio of the aggregate
outstanding principal amount of defined indebtedness to EBITDA) and an interest
coverage ratio (computed as the ratio of EBITDA to interest expense). In
addition, this facility requires Dean Foods Company to maintain a minimum level
of net worth (as defined by the agreement).
12
Dean Foods Company's leverage ratio must be less than or equal to:
PERIOD RATIO
------------------------------ ------------
12-21-01 through 12-31-02..... 4.25 to 1.00
01-01-03 through 12-31-03..... 4.00 to 1.00
01-01-04 through 12-31-04..... 3.75 to 1.00
01-01-05 and thereafter....... 3.25 to 1.00
Dean Foods Company's interest coverage ratio must be greater than or equal
to 3.0 to 1.0.
Dean Foods Company's consolidated net worth must be greater than or equal to
$1.2 billion, as increased each quarter (beginning with the quarter ended March
31, 2002) by an amount equal to 50% of Dean Foods Company's consolidated net
income for the quarter, plus 75% of the amount by which stockholders' equity is
increased by certain equity issuances. As of September 30, 2002, the minimum net
worth requirement was $1.27 billion.
The facility also contains limitations for Dean Foods Company and its
subsidiaries (including us and our subsidiaries) on liens, investments, the
incurrence of additional indebtedness and acquisitions, and prohibits certain
dispositions of property and restricts certain payments, including dividends.
The agreement contains standard default triggers, including without
limitation: failure to maintain compliance with the financial and other
covenants contained in the agreement, default on certain of Dean Foods Company's
and its subsidiaries' other debt, a change in control and certain material
adverse changes in Dean Foods Company's and its subsidiaries' businesses. The
agreement does not contain any default triggers based on Dean Foods Company's
debt rating.
Dean Foods Company is currently in compliance with all of the requirements
contained in its credit facility.
Leases -- We lease certain property, plant and equipment used in our
operations under both capital and operating lease agreements. Such leases, which
are primarily for machinery and equipment and vehicles, have lease terms ranging
from 1 to 20 years. Certain of the operating lease agreements require the
payment of additional rentals for maintenance, along with additional rentals
based on miles driven or units produced.
Litigation, Investigations and Audits -- We and our subsidiaries are
parties, in the ordinary course of business, to certain other claims,
litigation, audits and investigations. We believe we have adequate reserves for
any liability we may incur in connection with any such currently pending or
threatened matter. In our opinion, the settlement of any such currently pending
or threatened matter is not expected to have a material adverse impact on our
financial position, results of operations or cash flows.
11. BUSINESS AND GEOGRAPHIC INFORMATION AND MAJOR CUSTOMERS
We currently have two reportable segments: Dairy Group and Specialty Foods.
Our Dairy Group segment manufactures and distributes fluid milk, ice cream and
novelties, half-and-half and whipping cream, sour cream, cottage cheese and
yogurt, as well as fruit juices and other flavored drinks and bottled water.
Specialty Foods processes and markets pickles, powdered products such as
non-dairy coffee creamers, and sauces and puddings.
Prior to our acquisition by Dean Foods Company, we had an NRP segment. As a
result of the acquisition by Dean Foods Company, as discussed in Note 3, we no
longer have an NRP segment. Prior periods have been restated to reflect NRP as a
discontinued operation.
The accounting policies of the segments are the same as those described in
the summary of significant accounting policies set forth in Note 1 to our
consolidated financial statements contained in our Transitional Report on Form
10-KT for the period from May 28, 2001 to December 31, 2001. We evaluate
performance based on operating profit not including non-recurring gains and
losses and foreign exchange gains and losses.
13
We do not allocate income taxes, management fees or unusual items to
segments. In addition, not all segments have significant non-cash items other
than depreciation and amortization in reported profit or loss.
SUCCESSOR PREDECESSOR SUCCESSOR PREDECESSOR
----------- ----------- ----------- -----------
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
---------------------------- ----------------------------
2002 2001 2002 2001
----------- ----------- ----------- -----------
(IN THOUSANDS)
Net sales from external customers:
Dairy Group ................................. $ 795,867 $ 868,094 $ 2,408,141 $ 2,537,992
Specialty Foods ............................. 164,103 174,551 502,681 545,674
----------- ----------- ----------- -----------
Total ....................................... $ 959,970 $ 1,042,645 $ 2,910,822 $ 3,083,666
=========== =========== =========== ===========
Operating income:
Dairy Group ................................. $ 65,591 $ 40,313 $ 189,561 $ 107,105
Specialty Foods ............................. 28,321 19,449 74,475 48,097
Corporate/Other ............................. (14,998) (19,860) (47,922) (60,723)
----------- ----------- ----------- -----------
Total ....................................... $ 78,914 $ 39,902 $ 216,114 $ 94,479
=========== =========== =========== ===========
SUCCESSOR PREDECESSOR
2002 2001
----------- -----------
Assets at September 30:
Dairy Group ..................... $ 2,156,573 $ 1,518,919
Specialty Foods ................. 645,946 466,961
National Refrigerated Products... 206,148
Corporate/Other ................. 192,456 123,094
----------- -----------
Total ........................... $ 2,994,975 $ 2,315,122
=========== ===========
Substantially all of our business is within the United States. Intersegment
sales are not material. We have no one customer within any segment which
represents greater than ten percent of our consolidated revenues.
12. SUBSEQUENT EVENTS
On October 11, 2002, we completed the sale of our 94% interest in EBI Foods,
Limited a U.K. based subsidiary of our Specialty Foods Group. We received
aggregate proceeds of approximately $29 million for our interest. No gain or
loss will be recognized on the sale as EBI Foods was recorded at fair value in
our acquisition by Dean Foods Company.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
We are a wholly-owned subsidiary of Dean Foods Company. Dean Foods Company
is the leading processor and distributor of fresh milk and other dairy products
in the United States, and a leader in the specialty foods industry. Our
operations consist of two segments: Dairy Group and Specialty Foods. Our Dairy
Group is part of the Dairy Group segment of Dean Foods Company and our Specialty
Foods segment comprises the entirety of Dean Foods Company's Specialty Foods
segment.
As permitted by General Instruction H to Form 10-Q, in lieu of providing the
information required by Item 7, we are providing only the information required
by General Instruction H(2)(a).
14
RESULTS OF OPERATIONS
The following table presents certain information concerning our results of
operations, including information presented as a percentage of net sales:
SUCCESSOR PREDECESSOR SUCCESSOR PREDECESSOR
------------------- ------------------- ------------------- -------------------
THREE MONTHS ENDED SEPTEMBER 30 NINE MONTHS ENDED SEPTEMBER 30
------------------------------------------ ------------------------------------------
2002 2001 2002 2001
------------------- ------------------- ------------------- -------------------
DOLLARS PERCENT DOLLARS PERCENT DOLLARS PERCENT DOLLARS PERCENT
-------- -------- -------- -------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS) (DOLLARS IN THOUSANDS)
Net sales ....................... $959,970 100.0% $1,042,645 100.0% $2,910,822 100.0% $3,083,666 100.0%
Cost of sales ................... 717,071 74.7 815,751 78.2 2,192,467 75.3 2,408,743 78.1
-------- -------- ---------- -------- ---------- -------- ---------- --------
Gross profit .................... 242,899 25.3 226,894 21.8 718,355 24.7 674,923 21.9
Operating expenses:
Selling and distribution ..... 127,952 13.3 136,305 13.1 394,043 13.5 425,503 13.8
General and administrative ... 34,478 3.6 45,070 4.4 103,625 3.6 137,973 4.5
Amortization of intangibles .. 1,555 0.2 5,617 0.5 4,573 0.2 16,968 0.5
-------- -------- ---------- -------- ---------- -------- ---------- --------
Total operating expenses ... 163,985 17.1 186,992 18.0 502,241 17.3 580,444 18.8
-------- -------- ---------- -------- ---------- -------- ---------- --------
Total operating income ..... $ 78,914 8.2% $ 39,902 3.8% $ 216,114 7.4% $ 94,479 3.1%
======== ======== ========== ======== ========== ======== ========== ========
Financial information for all periods has been restated to reflect the
results of our former NRP segment as a discontinued operation.
THREE MONTH PERIOD FROM JULY 1, 2002 TO SEPTEMBER 30, 2002 COMPARED TO
THREE MONTH PERIOD FROM JULY 1, 2001 TO SEPTEMBER 30, 2001
Net Sales -- Net sales decreased 7.9% to $960.0 million during the three
month period ended September 30, 2002 from $1.043 billion in the three month
period ended September 30, 2001. Dairy Group sales decreased 8.3% in the three
month period ended September 30, 2002 to $795.9 million from $868.1 million in
the three month period ended September 30, 2001. The decrease is due primarily
to a decrease in raw milk costs compared to the prior year three month period
and also due to lower ice cream volumes. In general, we change the prices that
we charge our customers for our products on a monthly basis as the costs of raw
materials fluctuate. Therefore, sales generally decrease as raw materials prices
decrease. Our ice cream products are sold under private labels and local brands
and we lost sales during the quarter to nationally branded products, which were
promoted more aggressively than our products and with the current raw material
environment are priced more competitively with private label ice cream.
Specialty Foods' net sales decreased 6.0% in the three month period ended
September 30, 2002 to $164.1 million from $174.6 million in the three month
period ended September 30, 2001. Excluding net sales from DFC Transportation,
Inc. and the boiled peanuts division, which were sold in January and February
2002 respectively, Specialty Foods' net sales for the three month period from
July 1, 2002 to September 30, 2002 decreased 0.9% from the same period last
year.
Cost of Sales -- Our cost of sales ratio was 74.7% for the three months
ended September 30, 2002 compared to 78.2% in the same period last year. The
cost of sales ratio for the Dairy Group decreased to 75.3% in the three months
ended September 30, 2002 from 78.6% in the same period 2001, due primarily to
lower raw milk costs. The cost of sales ratio for Specialty Foods' was 71.7% for
the three months ended September 30, 2002 compared to 76.3% in the same period
last year, due primarily to lower commodity prices and production synergies as
the result of closing two plants and shifting production lines.
Operating Costs and Expenses -- Our operating expense ratio was 17.1% in the
three month period ended September 30, 2002 compared to 18.0% in the three month
period ended September 30, 2001. These ratios were affected by:
o the implementation of SFAS No. 142 on January 1, 2002, which eliminated
the amortization of goodwill and certain other intangible assets, and
o realized synergies from our acquisition by Dean Foods Company.
The operating expense ratio in the Dairy Group was 16.4% in the three month
period ended September 30, 2002 compared to 16.7% in the three month period
ended September 30, 2001. The decrease is due to realized synergies from our
acquisition by Dean Foods Company, including a reduction of expenses as a result
of streamlining operations under new regional management. The operating expense
ratio in the Specialty Foods segment was 11.0% in the three month period ended
September 30, 2002 compared to 12.6% in the three month period ended September
30, 2001. The decrease is due primarily to realized synergies as a result of the
acquisition by Dean Foods Company which included closing 2 plants and realigning
certain production facilities.
Operating Income -- Operating income in the three month period ended
September 30, 2002 was $78.9 million, an increase of $39.0 million from the
three month period ended September 30, 2001 operating income of $39.9 million.
Corporate expenses decreased $4.9 million in the three month period ended
September 30, 2002 to $15.0 million from $19.9 million in the three month
15
period ended September 30, 2001, primarily due to realized synergies from our
acquisition by Dean Foods Company. Operating margins in the Dairy Group
increased to 8.2% in the three month period ended September 30, 2002 from 4.6%
in the three month period ended September 30, 2001. This improvement was
primarily due to lower raw milk costs, lower amortization expense during the
2002 period, and realized synergies from our acquisition by Dean Foods Company.
Operating margins in Specialty Foods increased to 17.3% in the three month
period ended September 30, 2002 from 11.1% in the three month period ended
September 30, 2001, due primarily to realized merger synergies and to lower
amortization expense.
Other (Income) Expense -- Total other expense in the three month period
ended September 30, 2002 decreased by $1.6 million from the same period last
year. For the three month period ended September 30, 2002 interest expense, net
of interest income, decreased $2.2 million to $13.9 million, primarily due to
the pay-off of our former revolving line of credit by Dean Foods Company upon
completion of our acquisition by Dean Foods Company.
Income Taxes -- Income tax expense was recorded at an effective rate of
37.4% for the three months ended September 30, 2002 compared to 38.3% for the
same period last year.
NINE MONTH PERIOD ENDED SEPTEMBER 30, 2002 COMPARED TO NINE MONTH
PERIOD ENDED SEPTEMBER 30, 2001
Net Sales -- Net sales decreased 5.6% to $2.911 billion during the nine
month period ended September 30, 2002 from $3.084 billion in the nine month
period ended September 30, 2001. Dairy Group sales decreased 5.1% in the nine
month period ended September 30, 2002 to $2.408 billion from $2.538 billion in
the nine month period ended September 30, 2001. The decrease was due to lower
raw milk costs in 2002 and to lower ice cream volumes. In general, we change the
price that we charge our customers for our products on a monthly basis as the
costs of our raw materials fluctuate. Therefore, sales generally decrease as raw
materials prices decrease. Our ice cream products are sold under private labels
and local brands, and we lost sales during 2002 to nationally branded products,
which were promoted more aggressively than our products and with the current raw
material environment, and are priced more competitively with private label ice
cream. Specialty Foods' net sales decreased 7.9% in the nine month period ended
September 30, 2002 to $502.7 million from $545.7 million in the nine month
period ended September 30, 2001. Excluding net sales from DFC Transportation,
Inc. and the boiled peanuts division, which were sold in January and February
2002 respectively, Specialty Foods' net sales for the nine month period from
January 1, 2002 to September 30, 2002 decreased 3.9% from the same period last
year, primarily due to softness in branded pickle sales and overall softness in
the food services industry.
Cost of Sales -- Our cost of sales ratio was 75.3% for the nine months ended
September 30, 2002 compared to 78.1% in the same period last year. The cost of
sales ratio in the Dairy Group decreased to 75.5% for the nine month period
ended September 30, 2002 from 78.2% in the same period 2001, due primarily to
lower raw milk costs. The cost of sales ratio for Specialty Foods was 73.9% in
the nine months ended September 30, 2002 compared to 77.6% in the same period
last year due primarily to lower commodity prices and production synergies as
the result of the closing 2 plants and shifting production lines.
Operating Costs and Expenses -- Our operating expense ratio was 17.3% in the
nine month period ended September 30, 2002 compared to 18.8% in the nine month
period ended September 30, 2001. These ratios were affected by:
o the implementation of SFAS No. 142 on January 1, 2002, which eliminated
the amortization of goodwill and certain other intangible assets, and
o realized synergies from our acquisition by Dean Foods Company.
The operating expense ratio in the Dairy Group was 16.6% in the nine month
period ended September 30, 2002 compared to 17.6% in the nine month period ended
September 30, 2001. The decrease is due primarily to realized synergies from our
acquisition by Dean Foods Company including a reduction of expenses as a result
of streamlining operations under new regional management. The operating expense
ratio in the Specialty Foods segment, was 11.3% in the nine month period ended
September 30, 2002 compared to 13.6% in the nine month period ended September
30, 2001 due to favorable variances in raw materials and synergies recognized
from our acquisition by Dean Foods Company.
Operating Income -- Operating income in the nine month period ended
September 30, 2002 was $216.1 million, an increase of 128.7% from the nine month
period ended September 30, 2001 operating income of $94.5 million. Corporate
expenses decreased $12.8 million in the nine month period ended September 30,
2002 to $47.9 million from $60.7 million in the nine month period ended
September 30, 2001, primarily because the prior year amount includes $32.0
million for merger-related costs. Excluding those costs, corporate expenses
increased by $19.2 million for the nine months ended September 30, 2002, which
is primarily the result of the management fee charged to us by Dean Foods
Company.
16
Operating margins in the Dairy Group increased to 7.9% in the nine month period
ended September 30, 2002 from 4.2% in the nine month period ended September 30,
2001. This improvement was primarily due to lower raw milk costs, lower
amortization expense during the 2002 period, and realized synergies from our
acquisition by Dean Foods Company. Operating margins in Specialty Foods
increased to 14.8% in the nine month period ended September 30, 2002 from 8.8%
in the nine month period ended September 30, 2001, due primarily to realized
merger synergies and to lower amortization expense.
Other (Income) Expense -- Total other expense in the nine month period ended
September 30, 2002 decreased by $8.8 million. For the nine month period ended
September 30, 2002 interest expense, net of interest income, decreased $9.3
million to $42.2 million primarily due to the pay-off of our former revolving
line of credit by Dean Foods Company upon completion of our acquisition by Dean
Foods Company.
Income Taxes -- Income tax expense was recorded at an effective rate of
38.1% for the nine months ended September 30, 2002 compared to 38.5% for the
same period last year.
ITEM 4. CONTROLS & PROCEDURES
Based on their evaluation, as of a date within 90 days of the filing of this
Form 10-Q, our Chief Executive Officer and Chief Financial Officer have
concluded that our disclosure controls and procedures (as defined in Rules
13a-14 and 15d-14 under the Securities Exchange Act of 1934) are effective.
There have been no significant changes in internal controls or in other factors
that could significantly affect these controls subsequent to the date of their
evaluation including any corrective actions with regard to significant
deficiencies and material weaknesses.
17
PART II OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
99.1 Certification of Chief Executive Officer pursuant to
18 U.S.C. Section 1350, as adopted pursuant to
section 906 of the Sarbanes-Oxley Act of 2002*
99.2 Certification of Chief Financial Officer pursuant to
18 U.S.C. Section 1350, as adopted pursuant to
section 906 of the Sarbanes-Oxley Act of 2002*
- -------
* This certification accompanies this Report pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 and shall not be deemed filed by the company for
purposes of Section 18 of the Securities Exchange Act of 1934, as amended,
except to the extent required by the Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K and 8-K/A
o None
18
SIGNATURES
Pursuant to the requirement of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
DEAN HOLDING COMPANY
/s/ Barry A. Fromberg
- -----------------------------------------
Barry A. Fromberg
Executive Vice President, Chief Financial
Officer (Principal Accounting Officer)
/s/ Gregg L. Engles
- -----------------------------------------
Gregg L. Engles
Chairman of the Board and
Chief Executive Officer
Date: November 14, 2002
19
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
I, Gregg Engles, Chief Executive Officer of Dean Holding Company, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Dean Holding
Company;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of Dean Holding Company as of, and for, the periods
presented in this quarterly report;
4. Dean Holding Company's other certifying officer and I are responsible
for establishing and maintaining disclosure controls and procedures
(as defined in Exchange Act Rules 13a-14 and 15d-14) for Dean Holding
Company and we have:
a. designed such disclosure controls and procedures to ensure that
material information relating to Dean Holding Company,
including its consolidated subsidiaries, is made known to us by
others within those entities, particularly during the period in
which this quarterly report is being prepared;
b. evaluated the effectiveness of Dean Holding Company's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date"); and
c. presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. Dean Holding Company's other certifying officer and I have disclosed,
based on our most recent evaluation, to Dean Holding Company's
auditors and the audit committee of Dean Holding Company's board of
directors (or persons performing the equivalent function):
a. all significant deficiencies in the design or operation of internal
controls which could adversely affect Dean Holding Company's
ability to record, process, summarize and report financial data and
have identified for Dean Holding Company's auditors any material
weaknesses in internal controls; and
b. any fraud, whether or not material, that involves management or
other employees who have a significant role in Dean Holding
Company's internal controls; and
6. Dean Holding Company's other certifying officer and I have indicated
in this quarterly report whether or not there were significant changes
in internal controls or in other factors that could significantly
affect internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
Date: November 14, 2002
/s/ Gregg L. Engles
Gregg L. Engles
Chief Executive Officer
20
CERTIFICATION OF CHIEF FINANCIAL OFFICER
I, Barry A. Fromberg, Executive Vice President and Chief Financial Officer of
Dean Holding Company, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Dean Holding
Company;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of Dean Holding Company as of, and for, the periods
presented in this quarterly report;
4. Dean Holding Company's other certifying officer and I are responsible
for establishing and maintaining disclosure controls and procedures
(as defined in Exchange Act Rules 13a-14 and 15d-14) for Dean Holding
Company and we have:
a. designed such disclosure controls and procedures to ensure that
material information relating to Dean Holding Company, including
its consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b. evaluated the effectiveness of Dean Holding Company's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date"); and
c. presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. Dean Holding Company's other certifying officer and I have disclosed,
based on our most recent evaluation, to Dean Holding Company's
auditors and the audit committee of Dean Holding Company's board of
directors (or persons performing the equivalent function):
a. all significant deficiencies in the design or operation of internal
controls which could adversely affect Dean Holding Company's
ability to record, process, summarize and report financial data and
have identified for Dean Holding Company's auditors any material
weaknesses in Dean Holding Company's internal controls; and
b. any fraud, whether or not material, that involves management or
other employees who have a significant role in Dean Holding
Company's internal controls; and
6. Dean Holding Company's other certifying officer and I have indicated
in this quarterly report whether or not there were significant changes
in internal controls or in other factors that could significantly
affect internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
Date: November 14, 2002
/s/ Barry A. Fromberg
Barry A. Fromberg
Executive Vice President and Chief Financial Officer
21
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
- ------- ------------
99.1 Certification of Chief Executive Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to section 906 of the
Sarbanes-Oxley Act of 2002
99.2 Certification of Chief Financial Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to section 906 of the
Sarbanes-Oxley Act of 2002.