ITEM 1. BUSINESS
Explanatory Note: As permitted by General Instruction I(2)(d) to Form 10-K, in lieu of the information required by Item 1 of Form 10-K, we are providing only the information required by General Instruction I(2)(d). For more information, this report should be read in conjunction with the 2002 Annual Report on Form 10-K of our parent, Dean Foods Company, as filed with the Securities and Exchange Commission on March 26, 2003.
GENERAL
We are a wholly-owned subsidiary of Dean Foods Company (formerly known as Suiza Foods Corporation). Dean Foods Company is the leading processor and distributor of milk and other dairy products in the United States and a leading manufacturer of specialty food products. We have two reportable 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.
DEVELOPMENTS SINCE JANUARY 1, 2002
INTEGRATION AND RATIONALIZATION ACTIVITIES
On December 21, 2001, we were acquired by Dean Foods Company (formerly known as Suiza Foods Corporation). During 2002, our Dairy Group was integrated into Dean Food Company's Dairy Group, our former National Refrigerated Products ("NRP") group was integrated into Dean Foods Company's Morningstar Foods subsidiary and our former corporate headquarters were eliminated. As a result we no longer have an NRP segment. As part of the integration activities, certain of our facilities have been closed and our workforce accordingly reduced. Facilities that have been closed include: our Cairo, Georgia Specialty Foods plant, our Atkins, Arkansas Specialty Foods plant, our Escondido, California Dairy Group plant, our Parker Ford, Pennsylvania Dairy Group plant and our Camp Hill, Pennsylvania Dairy Group depot. We have also announced the closure of two of our Specialty Foods tank yard facilities in Plymouth, Indiana and Green Bay, Wisconsin.
DIVESTITURES
Part of Dean Foods Company's strategy is to analyze its portfolio of assets and make divestitures where appropriate in order to ensure that its financial and management resources are closely aligned with its strategic direction. During 2002, we sold three small non-core businesses that were part of our Specialty Foods segment, including a contract hauling business, a boiled peanut business and a powdered food-coating business, for a combined net purchase price of approximately $30 million.
BUSINESS SEGMENTS
DAIRY GROUP
Our Dairy Group, which is part of Dean Foods Company's Dairy Group, manufactures and sells:
- fluid milk (including flavored milks and buttermilk), - cream (including half-and-half and whipping cream), - ice cream, ice cream novelties and ice cream mix, - cultured products (including cottage cheese, sour cream and yogurt), - juice, fruit flavored drinks and water, - coffee creamers, - dips, and - condensed milk.
Dean Foods Company's Dairy Group is operated in a generally decentralized manner and is organized into four geographic regions, including the Northeast region, the Southeast region, the Southwest region and the Midwest region. Our plants are located in all of Dean Foods Company's geographic regions. Our Dairy Group currently manufactures its products in 35 plants in 17 states. For more information about plants in our Dairy Group, see "-- Item 2.
ITEM 2. PROPERTIES
Explanatory Note: As permitted by General Instruction I to Form 10-K, in lieu of the information required by Item 2 of Form 10-K, we are providing only the information required by General Instruction I.
Our Dairy Group currently conducts its manufacturing operations from the following plants:
Each of the Dairy Group's manufacturing plants also serves as a distribution facility. In addition, our Dairy Group has numerous distribution branches across the country, some of which are owned, but most of which are leased. The Dairy Group's headquarters are located in Dallas, Texas in leased premises.
Specialty Foods currently conducts its manufacturing operations from plants in the following locations:
- La Junta, Colorado - New Hampton, Iowa - Chicago, Illinois - Dixon, Illinois - Pecatonica, Illinois - Plymouth, Indiana - Benton Harbor, Michigan - Wayland, Michigan - Faison, North Carolina - Portland, Oregon - Green Bay, Wisconsin
Specialty Food's headquarters are located at its plant in Green Bay, Wisconsin.
PART II
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Explanatory Note: As permitted by General Instruction I(2)(a) to Form 10-K, in lieu of the information required by Item 7, we are providing only the information required by General Instruction I(2)(a).
RESULTS OF OPERATIONS
The table set forth below presents certain information concerning our results of operations, including information presented as a percentage of net sales. In the table:
- Financial information for all periods has been restated to reflect the results of our former NRP segment as a discontinued operation.
- We have used a date of December 31, 2001 as a "date of convenience" for recording the effects of our acquisition by Dean Foods Company.
- 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".
- In order to allow users of our financial statements to make a meaningful comparative assessment of our financial performance, we have provided a comparison of our 2002 full year results with our results for the 12-month period ended December 31, 2001. (We have also provided full year comparative information in the textual analysis of our results of operations set forth below). Prior to our acquisition by Dean Foods Company, our fiscal year ended on the last Sunday in May. Immediately upon being acquired, we changed our fiscal year end to December 31, in order to conform to the fiscal year end of Dean Foods Company.
YEAR ENDED DECEMBER 31, 2002 COMPARED TO YEAR ENDED DECEMBER 31, 2001
Net Sales -- Net sales decreased 6.2% to $3.9 billion during 2002 from $4.1 billion in 2001. Dairy Group sales decreased 5.9% in 2002 to $3.2 billion from $3.4 billion in 2001. The decrease is due primarily to a decrease in raw milk costs compared to the prior year 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 year to nationally branded
products, which were promoted more aggressively than our products. Dairy Group volumes were essentially unchanged between the two periods. Specialty Foods' sales decreased 7.6% in 2002 to $673.6 million from $729.1 million in 2001 primarily as a result of the divestitures of DFC Transportation, Inc. in January, our boiled peanuts division in February and EBI Foods, Ltd. in October 2002. Absent the impact of those divestitures, Specialty Foods' net sales for 2002 would have decreased 2.9% from the prior year, primarily due to continued softness in the food services industry as a result of the overall economic downturn.
Cost of Sales -- Our cost of sales ratio was 75.1% for 2002 compared to 78.0% for 2001. The cost of sales ratio for the Dairy Group decreased to 75.2% in 2002 from 78.1% in 2001, primarily due to lower raw milk costs. The cost of sales ratio for Specialty Foods decreased to 73.9% in 2002 from 77.3% in 2001, 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 17.2% in 2002 compared to 19.0% in 2001. These ratios were affected by:
- the implementation of SFAS No. 142 on January 1, 2002, which eliminated the amortization of goodwill and certain other intangible assets, and
- realized synergies from our acquisition by Dean Foods Company.
The operating expense ratio in the Dairy Group was 16.8% in 2002 compared to 17.6% in 2001. The decrease is due primarily to realized synergies from our acquisition by Dean Foods Company including a reduction of expense as a result of streamlining operations under new regional management. The operating expense ratio at Specialty Foods was 11.4% in 2002 compared to 13.2% in 2001. The decrease is due primary to realized synergies as a result of the acquisition by Dean Foods Company which included closing two plants and realigning certain production facilities.
Operating Income -- Operating income in 2002 was $297.1 million, an increase of 143.0% from 2001 operating income of $122.3 million. Operating margins in the Dairy Group increased to 8.0% in 2002 from 4.3% in 2001. This increase 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. Before plant closure charges of $0.4 million, operating margins in Specialty Foods increased to 14.7% in 2002 from 9.5% in 2001. This improvement was due primarily to realized merger synergies and to lower amortization expense. Corporate expenses decreased $40.0 million in 2002 to $52.2 million from $92.2 million in 2001. The decrease is primarily the result of $30.0 million of transaction related costs associated with our acquisition by Dean Foods Company in 2001. Excluding the transaction related costs, corporate expenses decreased slightly from 2001 due primarily to lower corporate overhead as the result of closing our former corporate office and realized synergies from our acquisition by Dean Foods Company.
Other (Income) Expense -- Total other expense in 2002 decreased by $16.2 million. In 2002 interest expense, net of interest income, decreased $10.9 million to $56.3 million primarily due to lower short-term interest rates and to the pay-off of our former revolving line of credit upon completion of our acquisition by Dean Foods Company.
Other (income) expense in 2002 contained no loss on the write-off or sale of fixed assets as compared to a loss on the write-off of fixed assets of $6.4 million in 2001.
Income Taxes -- Our 2002 effective tax rate was 38.0%, which was flat compared to 2001.
FISCAL YEAR ENDED MAY 2001 COMPARED TO FISCAL YEAR ENDED MAY 2000
Net Sales -- Net sales increased 6.1% to $3.98 billion during fiscal year 2001 from $3.75 billion in fiscal year 2000. Dairy Group sales increased 6.1% in fiscal year 2001 to $3.25 billion from $3.06 billion in fiscal year 2000 and volume increased 2.5% over fiscal year 2000. The increases in sales and volume are primarily the result of the Land O' Lakes acquisition, which was completed in July 2000. Absent the impact of the fiscal year 2001 acquisition, volume in fiscal year 2001 declined slightly in comparison to fiscal year 2000, due to declines in fluid milk volumes, primarily in California. Specialty Foods' sales increased 6.1% in fiscal year
2001 to $736.2 million from $694.2 million in fiscal year 2000, primarily as the result of the acquisition of the Nalley's pickle business in July 2000. Absent the Nalley's acquisition, sales declined slightly from fiscal year 2000.
Cost of Sales -- Our cost of sales ratio was 77.2% in fiscal year 2001 compared to 77.4% in fiscal year 2000. The cost of sales ratio for the Dairy Group decreased to 77.4% in fiscal year 2001 from 78.0% in fiscal year 2000. The cost of sales ratio for Specialty Foods increased to 76.5% in fiscal year 2001 from 74.8% in fiscal year 2000. This ratio increased due to increased commodity costs for powdered products and increased promotional spending related to pickles.
Operating Costs and Expenses -- Our operating expense ratio was 18.7% in fiscal year 2001 compared to 17.7% in fiscal year 2000. The operating expense ratio in the Dairy Group was 17.9% in fiscal year 2001 compared to 17.4% in fiscal year 2000. The operating expense ratio in Specialty Foods was 13.9% in fiscal year 2001 compared to 13.7% in fiscal year 2000.
Operating Income -- Operating income in fiscal year 2001 was $164.5 million, a decrease of 9.9% from fiscal year 2000 operating income of $182.7 million. Included in fiscal year 2000 operating costs are plant closure charges of $6.1 million. Before plant closure charges, operating margins in the Dairy Group decreased to 4.7% in fiscal year 2001 from 4.8% in fiscal year 2000. Before plant closure charges, operating margins in Specialty Foods decreased to 9.6% in fiscal year 2001 from 11.6% in fiscal year 2000. Corporate expenses increased $21.5 million in fiscal year 2001 to $59.5 million from $38.0 million in fiscal year 2000. The increase is primarily the result of $22.2 million of transaction related costs associated with our acquisition by Dean Foods Company. Excluding the transaction related costs, corporate expenses declined slightly from fiscal year 2000 due primarily to lower incentive compensation expense.
Other (Income) Expense -- Total other expense increased in fiscal year 2001 by $7.1 million. Fiscal year 2001 interest expense, net of interest income, increased $21.3 million to $70.7 million. The increase is the result of higher debt balances used to fund acquisitions and fiscal year 2000 share repurchases as well as higher short-term interest rates in fiscal 2001.
In December 2000, we sold for $10.0 million, a $30.0 million subordinated note which was received as part of the proceeds from the sale of our vegetable business to Agrilink Foods, Inc. in fiscal year 1999. Due to the uncertainty of the realizability of the $30.0 million subordinated note, the note was originally valued at a nominal amount. As a result of the sale, we reversed $10.0 million of the original reserve against the note, resulting in the recognition of a $10.0 million gain in the second quarter of fiscal year 2001.
Income Taxes -- Our fiscal year 2001 effective tax rate was 38.0% compared with 38.8% in fiscal 2000.
ITEM 8.
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS
Our Consolidated Financial Statements are included in this report on the following pages.
INDEPENDENT AUDITORS' REPORT
To the Board of Directors Dean Holding Company Dallas, Texas
We have audited the accompanying consolidated balance sheets of Dean Holding Company and subsidiaries (the "Company") (formerly known as Dean Foods Company) as of December 31, 2002 and 2001 (reflecting the new basis of accounting as a result of the purchase business combination discussed in Note 2). We have also audited the consolidated statements of income, stockholders' equity and cash flows for the year ended December 31, 2002 and the period from May 28, 2001 to December 31, 2001. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards 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. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of the Company as of December 31, 2002 and 2001, and the results of operations and cash flows of the Company for the year ended December 31, 2002 and the period from May 28, 2001 to December 31, 2001 in conformity with accounting principles generally accepted in the United States of America.
As discussed in Note 1 to the consolidated financial statements, the Company changed its method of accounting for goodwill and other intangible assets to conform to Statement of Financial Accounting Standards No. 142.
DELOITTE & TOUCHE LLP
Dallas, Texas March 24, 2003
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholder of Dean Holding Company
In our opinion, the consolidated balance sheet as of May 27, 2001 and the related consolidated statements of income, stockholders' equity and cash flows for each of the two years in the period ended May 27, 2001 present fairly, in all material respects, the financial position, results of operations and cash flows of Dean Holding Company and its subsidiaries (formerly Dean Foods Company, the "Predecessor Company") at May 27, 2001 and for each of the two years in the period ended May 27, 2001, in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of Dean Holding 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 auditing standards generally accepted in the United States of America, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
PricewaterhouseCoopers LLP June 26, 2001, except as to Notes 2 and 4, which are as of December 21, 2001 Chicago, Illinois
DEAN HOLDING COMPANY
CONSOLIDATED BALANCE SHEETS
See Notes to Consolidated Financial Statements.
DEAN HOLDING COMPANY
CONSOLIDATED STATEMENTS OF INCOME
See Notes to Consolidated Financial Statements.
DEAN HOLDING COMPANY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
See Notes to Consolidated Financial Statements.
DEAN HOLDING COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
See Notes to Consolidated Financial Statements.
DEAN HOLDING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEAR ENDED DECEMBER 31, 2002, PERIOD FROM MAY 28, 2001 TO DECEMBER 31, 2001, AND FISCAL YEARS ENDED MAY 2001 AND 2000
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Change in Fiscal Year -- Effective December 31, 2001, we changed our fiscal year end to December 31, rather than on the last Sunday in May.
Basis of Presentation -- Our Consolidated Financial Statements include the accounts of our wholly-owned and majority-owned subsidiaries. All significant intercompany balances and transactions are eliminated in consolidation.
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 merger 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 balance sheet reflects the preliminary purchase price allocation related to the acquisition by Dean Foods Company. The effects of this "push down" accounting will affect the comparability of our balance sheets at December 31, 2002 and 2001 with our prior balance sheets.
Use of Estimates -- The preparation of our Consolidated Financial Statements in conformity with generally accepted accounting principles requires us to use our judgment to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates under different assumptions or conditions.
Cash Equivalents -- We consider temporary cash investments with a remaining maturity of three months or less to be cash equivalents.
Inventories -- Inventories are stated at the lower of cost or market. Dairy and certain specialty products inventories are valued on the first-in, first-out ("FIFO") method, while our pickle inventories are valued on the last-in, first-out ("LIFO") method. The costs of finished goods inventories include raw materials, direct labor and indirect production and overhead costs.
Property, Plant and Equipment -- Property, plant and equipment are stated at acquisition cost, plus capitalized interest on borrowings during the actual construction period of major capital projects. Depreciation and amortization are calculated using the straight-line method over the estimated useful lives of the assets as follows:
Impairment tests are performed when circumstances indicate the value may not be recoverable. Predecessor depreciation and amortization were provided using the straight-line method over the estimated useful lives of the assets, as follows:
DEAN HOLDING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Capitalized leases are amortized over the shorter of their lease term or their estimated useful lives. Expenditures for repairs and maintenance which do not improve or extend the life of the assets are expensed as incurred.
Intangible and Other Assets -- Prior to January 1, 2002, we amortized the excess of cost over fair value of net identifiable assets of acquired companies and other intangible assets over periods of up to forty years.
Effective January 1, 2002, in accordance with Statement of Financial Accounting Standards ("SFAS") No. 142, goodwill and other intangible assets determined to have indefinite lives are no longer amortized. Instead we will now conduct annual impairment tests on our goodwill, trademarks and other intangible assets with indefinite lives. Impairment tests are also performed when circumstances indicate that the carrying value may not be recoverable. To determine whether an impairment exists, we use a present value technique.
Computer Software -- We expense or capitalize computer software developed or obtained for internal use in accordance with AICPA Statement of Position 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use." Capitalized costs are amortized over a period of five years, beginning when the capitalized software is ready for its intended use.
Foreign Currency Translation -- The financial statements of our foreign subsidiaries are translated to U.S. dollars in accordance with the provisions of SFAS No. 52, "Foreign Currency Translation." The functional currency of our foreign subsidiaries is generally the local currency of the country. Accordingly, assets and liabilities of the foreign subsidiaries are translated to U.S. dollars at year-end exchange rates. Income and expense items are translated at the average rates prevailing during the year. Changes in exchange rates, which affect cash flows and the related receivables or payables are recognized as transaction gains and losses in the determination of net income. The cumulative translation adjustment in stockholder's equity reflects the unrealized adjustments resulting from translating the financial statements of our foreign subsidiaries.
Employee Stock Options -- Prior to our acquisition by Dean Foods Company, we measured compensation expense for our stock-based employee compensation plans using the intrinsic value method and provided the required pro forma disclosures of the effect on net income and earnings per share as if the fair value-based method had been applied in measuring compensation expense. As a result of our acquisition by Dean Foods Company, unexercised stock options at the transaction date that had been granted under our plans were automatically converted into options to acquire Dean Foods Company shares. The estimated fair value assigned to such options as of the transaction date was accounted for by Dean Foods Company as part of the cost of the acquisition. We have no options outstanding at December 31, 2002 and 2001.
We followed Accounting Principles Board Opinion No. 25 and related interpretations in accounting for our stock options. All options granted were to employees, officers or directors. Stock options were granted under these plans at exercise prices which approximated or exceeded market value at the grant date. Compensation expense was recognized for certain option grants under plans that were modified, thereby requiring variable plan accounting. Had compensation expense been determined for stock option grants using
DEAN HOLDING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
fair value methods provided for in SFAS No. 123, Accounting for Stock-Based Compensation, our pro forma net income and net income per common share would have been the amounts indicated below:
- ---------------
(a) Calculated in accordance with the Black-Scholes option pricing model, using the following assumptions: expected volatility of 26.8%; expected dividend yield of 2.0%; expected option term of eight years and risk-free rates of return as of the date of grant of 6.4% based on the yield of seven-year U.S. Treasury securities.
(b) Calculated in accordance with the Black-Scholes option pricing model, using the following assumptions: expected volatility of 23.1%; expected dividend yield of 2.5%; expected option term of eight years and risk-free rates of return as of the date of grant of 6.0% based on the yield of ten-year U.S. Treasury securities.
Revenue Recognition and Accounts Receivable -- Revenue is recognized when persuasive evidence of an arrangement exists, the price is fixed or determinable, the product has been shipped to the customer and there is reasonable assurance of collection of the sale proceeds. Revenue is reduced by sales incentives that are recorded by estimating expense based on our historical experience. We provide credit terms to customers generally ranging up to 30 days, perform ongoing credit evaluation of our customers and maintain allowances for potential credit losses based on historical experience.
Income Taxes -- We (including all of our wholly-owned U.S. operating subsidiaries) are included in Dean Foods Company's consolidated tax return. Our income taxes are determined as if we were filing a separate tax return. Our foreign subsidiaries are required to file separate income tax returns in their local jurisdictions. Certain distributions from those subsidiaries are subject to United States income taxes; however, available tax credits of the subsidiaries may reduce or eliminate these United States tax liabilities.
Deferred income taxes are provided for temporary differences between amounts recorded in the consolidated financial statements and tax bases of assets and liabilities using currently enacted tax rates. Deferred tax assets, including the benefit of net operating loss carry-forwards, are evaluated based on the guidelines for realization and may be reduced by a valuation allowance if deemed necessary.
Advertising Expense -- Advertising expense is comprised of media, agency and production expenses. Advertising expenses are charged to income during the period incurred, except for expenses related to the development of a major commercial or media campaign, which are charged to income during the period in which the advertisement or campaign is first presented by the media. Advertising expenses charged to income totaled $25.4 million for the year ended December 31, 2002, $18.4 million for the period from May 28, 2001 to December 31, 2001, $39.4 million in 2001, and $33.9 million in 2000. Additionally, prepaid advertising costs for media advertising not yet released were $1.7 million, $1.6 million and $0 at December 31, 2002 and 2001 and May 27, 2001, respectively.
DEAN HOLDING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Insurance Accruals -- We retain selected levels of property and casualty risks, primarily related to employee health care, workers' compensation claims and other casualty losses. Many of these potential losses are covered under conventional insurance programs with third party carriers with high deductible limits. In other areas we are self-insured with stop-loss coverages. Accrued liabilities for incurred but not reported losses related to the retained risks are calculated based upon loss development factors provided by external insurance brokers and actuaries. Some of our self-insured programs are administered by Dean Foods Company.
Comprehensive Income -- We consider all changes in equity from transactions and other events and circumstances, except those resulting from investments by owners and distributions to owners, to be comprehensive income.
Adoption of New Accounting Pronouncements -- In June 2001, Financial Accounting Standard Board ("FASB") issued 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 entered into after June 30, 2001 are required to be accounted for by the purchase method. In connection with our 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. SFAS No. 142 addresses financial accounting and reporting for acquired goodwill and other intangible assets. We adopted SFAS No. 142 in the first quarter of 2002. See Note 8. SFAS No. 142 also requires that recognized intangible assets with finite lives be amortized over their respective estimated useful lives.
FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" in August 2001 and it became effective for us in the first quarter of 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 did not have a material impact on our Consolidated Financial Statements.
Recently Issued Accounting Pronouncements -- 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 it is incurred if a reasonable estimate of fair value can be made. The associated asset retirement costs are capitalized as part of the carrying amount of the long-lived asset. SFAS No. 143 became effective for us January 1, 2003. We do not expect the adoption of this pronouncement to 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 Emerging Issues Task Force ("EITF") Issue No. 94-3, "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in Restructuring)." The statement requires that a liability for a cost associated with an exit or disposal activity be recognized when the liability is incurred and is effective for exit or disposal activities that are initiated after December 31, 2002. Adoption of this standard will change the timing of the recognition of certain charges associated with exit and disposal activities.
DEAN HOLDING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
On December 31, 2002 FASB issued SFAS No. 148, "Accounting for Stock-Based Compensation -- Transition and Disclosure," which amends SFAS No. 123, "Accounting for Stock-Based Compensation." SFAS No. 148, which is effective for years beginning after December 15, 2002, provides alternative methods of transition for a voluntary change to the fair value based method and requires more prominent and more frequent disclosure in the financial statements about the effects of stock-based compensation. We do not grant stock options; therefore, the adoption of this pronouncement will not affect us.
In November 2002, FASB issued FASB Interpretation ("FIN") No. 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others." FIN No. 45 clarifies the requirements of SFAS No. 5 "Accounting for Contingencies," relating to the guarantor's accounting for and disclosures of certain guarantees issued. FIN No. 45 requires disclosure of guarantees. It also requires liability recognition for the fair value of guarantees made after December 31, 2002. We will adopt the liability recognition requirements of FIN No. 45 effective January 1, 2003, and we do not expect the adoption to have a material effect on our Consolidated Financial Statements.
In January 2003, FASB issued FIN No. 46, "Consolidation of Variable Interest Entities." FIN No. 46 clarifies the application of Accounting Research Bulletin No. 51, "Consolidated Financial Statements," to certain entities in which equity investors do not have the characteristics of a controlling financial interest or in which equity investors do not bear the residual economic risks. The interpretation applies to variable interest entities ("VIEs") created after January 31, 2003 and to VIEs in which an enterprise obtains an interest after that date. It applies in the fiscal or interim period beginning after June 15, 2003, to VIEs in which an enterprise holds a variable interest that was acquired before February 1, 2003. We currently utilize a special purpose limited liability entity to facilitate our receivable-backed loan. Since its formation, this entity has been consolidated in our financial statements for financial reporting purposes. Therefore, FIN No. 46 will have no impact on our Consolidated Financial Statements.
Reclassifications -- Certain reclassifications have been made to conform the prior year's Consolidated Financial Statements to the current year classifications.
2. ACQUISITION BY DEAN FOODS COMPANY
General -- On December 21, 2001, we were acquired by Dean Foods Company (formerly known as Suiza Foods Corporation). Immediately upon completion of the transaction, we changed our name to Dean Holding Company and the acquiror took our former name. As a result of the transaction, we are now a wholly-owned subsidiary of Dean Foods Company.
As a result of the transaction, each share of our common stock was converted into 0.858 shares (on a split adjusted basis) 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 purchase accounting adjustments, including goodwill, have been "pushed down" and are reflected in our December 31, 2002 and 2001 balance sheets.
Dean Foods Company provides 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 corporate headquarters, which is then allocated among the segments of Dean Foods Company. Management fees for the year ended December 31, 2002 amounted to $24.3 million. 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."
DEAN HOLDING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Transaction related costs -- We recorded transaction related costs of $30.0 million and $22.2 million in the period from May 28, 2001 to December 31, 2001 and fiscal year 2001, respectively, related to our acquisition by Dean Foods Company. These costs include $14.2 million and $15.0 million in the period from May 28, 2001 to December 31, 2001 and fiscal year 2001, respectively, for a lease commitment for new corporate headquarters on office space that we elected not to take possession of after we agreed to be acquired by Dean Foods Company. The charges related to the lease commitment reflect the rental payments over the term of the lease and other termination costs reduced by estimated sublease income. The incremental charge we recorded in the period from May 28, 2001 to December 31, 2001 reflects a change in our estimate based on updated assumptions. We also recorded other transaction related costs including professional fees of $11.4 million and $4.5 million and severance and employee "stay bonus" costs of $4.3 million and $2.7 million in the period from May 28, 2001 to December 31, 2001 and fiscal year 2001, respectively.
Divestiture of Plants -- In order to obtain regulatory approval for the transaction, certain plants located in areas where our operations overlapped with the operations of the acquiror 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 acquisition by Dean Foods Company, 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 the transaction, 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 transaction, we exchanged the operations of our former National Refrigerated Products (or "NRP") group for the operations of Dean SoCal, a subsidiary of Dean Foods Company 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 (see Note 4). We have accounted for this exchange as a dividend in our Consolidated Financial Statements. Dean SoCal operates 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, 2002 and 2001. Dean SoCal's operating results are included in our Consolidated Financial Statements for the year ended December 31, 2002. Our financial statements for all periods prior to the transaction have been restated to reflect NRP as a discontinued operation. As a result of the exchange, our balance sheets at December 31, 2002 and 2001 are prepared on a different basis of accounting from our prior balance sheets.
Divestitures of DFC Transportation, Boiled Peanuts Business and EBI Foods, Limited -- During 2002 we completed the sale of three non-core businesses that were part of our Specialty Foods segment. On January 4, 2002, we completed the sale of DFC Transportation Company, a contract hauler. On February 7, 2002, we completed the sale of a boiled peanuts business, and on October 11, 2002 we completed the sale of our 94% interest in EBI Foods, Limited, a U.K. based manufacturer of powdered food coatings. The combined proceeds from these sales were approximately $30 million. Prior periods have not been restated to reflect the divestitures.
Change in Fiscal Year -- Immediately after we were acquired by Dean Foods Company, our Board of Directors voted to change our fiscal year to conform to Dean Foods Company's fiscal year.
DEAN HOLDING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following table presents our comparative results of operations for years ended December 31, 2002 and 2001:
- ---------------
Note: The comparability of the results in the table above is affected by the implementation of SFAS No. 142 "Goodwill and Other Intangible Assets", the exchange of NRP for Dean SoCal, the divestiture of four dairies and changes in amortization and depreciation amounts as a result of our acquisition by Dean Foods Company and the corresponding re-valuing of our assets and re-assessing their remaining useful lives.
Allocation of Purchase Price -- The following table summarizes the preliminary fair values of the assets acquired by Dean Foods Company and liabilities assumed by Dean Foods Company as a result of the transaction, and includes the effects of divesting four of our plants. The table does not include the effects of the NRP/Dean SoCal exchange.
The purchase price disclosed above differs from that reported by Dean Foods Company due to the timing effects of the sale of certain of our subsidiaries' accounts receivable into Dean Foods Company asset securitization facility and a distribution made to Dean Foods Company not reflected in its purchase price due to our accounting for the acquisition as of December 31, 2001, the date of convenience.
Of the $237.0 million of acquired intangible assets, approximately $206.5 million was assigned to trademarks and trade names that are not subject to amortization and approximately $30.5 million was assigned to customer contracts that have a weighted-average economic life of approximately 17 years.
DEAN HOLDING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The approximately $1.5 billion of goodwill was assigned to our Dairy Group, NRP and Specialty segments in the amounts of $1.01 billion, $215.0 million and $290.0 million, respectively. None of the goodwill is expected to be deductible for tax purposes.
The final allocation of the purchase price to the fair values of our assets and liabilities and the related business integration plans were completed in the fourth quarter of 2002. The final allocation process increased goodwill by approximately $67.1 million, primarily as a result of the final determination of the fair values of depreciable tangible assets and business integration plans.
The unaudited results of operations on a pro forma basis for the period from May 28, 2001 to December 31, 2001 and the fiscal year ended May 27, 2001 as if the acquisition by Dean Foods Company including the effects of the NRP/Dean SoCal exchange had occurred as of the beginning of fiscal year 2001 are as follows:
3. ACQUISITIONS
During fiscal year 2001, we completed the following two acquisitions:
Each of the fiscal year 2001 acquisitions was an asset purchase for cash consideration. We also assumed certain liabilities in addition to cash consideration paid. On a pro forma basis, which assumes the above acquisitions occurred at the beginning of each period presented, sales and net income were not materially impacted. During fiscal year 2001, we made an additional equity investment in White Wave, Inc., a processor of soy based products. The acquisitions and equity investments were made for cash consideration totaling $220.3 million, net of cash acquired.
During fiscal year 2000, we completed the following two acquisitions:
Each of the fiscal year 2000 acquisitions was an asset purchase for cash consideration. We also assumed certain liabilities in addition to cash consideration paid. On a pro forma basis, which assumes the above acquisitions occurred at the beginning of each period presented, sales and net income were not materially impacted. On August 23, 1999, we made an initial equity investment in White Wave, Inc. The acquisitions and equity investment were made for cash consideration totaling $38.2 million, net of cash acquired.
DEAN HOLDING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
All of the acquisitions were accounted for using the purchase method of accounting as of their respective acquisition dates and, accordingly, the operating results of the acquired companies subsequent to their respective acquisition dates are included in our Consolidated Financial Statements. Goodwill arising from the acquisitions was recorded at $124.5 million and $22.2 million for each of the fiscal years 2001 and 2000; however, the goodwill was revalued as a purchase accounting adjustment as part of the acquisition by Dean Foods Company.
4. DISCONTINUED OPERATIONS
In December 2001, in connection with our acquisition by Dean Foods Company, we exchanged the operations of NRP for the operations of Dean SoCal. Accordingly, NRP is presented as a discontinued operation.
The following table presents selected activity related to the discontinued operations:
5. GAIN ON SALE OF NOTE
On December 1, 2000, we sold, for $10.0 million cash, a $30.0 million subordinated note which we received as part of the proceeds from the sale of our former Vegetables segment to Agrilink Foods, Inc. in fiscal year 1999. Due to the uncertainty of the realizability of the $30.0 million subordinated note, the note was originally valued at a nominal amount. When we sold the note, we reversed $10.0 million of the original reserve against the note, resulting in the recognition of a $10.0 million gain in the second quarter of fiscal year 2001.
6. INVENTORIES
The percentage of inventories determined on the basis of last-in, first-out cost approximated 44.6%, 54.2% and 36.9% for December 31, 2002 and 2001 and May 27, 2001.
DEAN HOLDING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
7. PROPERTY, PLANT AND EQUIPMENT
8. INTANGIBLE ASSETS
On January 1, 2002, we adopted SFAS No. 142, which requires, among other things, that goodwill and other intangible assets with indefinite lives no longer be amortized, and that recognized intangible assets with finite lives be amortized over their respective useful lives. As required by SFAS No. 142, our results for the period from May 28, 2001 to December 31, 2001 and fiscal years 2001 and 2000 have not been restated. The following sets forth a reconciliation of net income for the year ended December 31, 2002 and the period from May 28, 2001 to December 31, 2001 and the fiscal years 2001 and 2000, eliminating amortization on goodwill and intangible assets with indefinite lives.
DEAN HOLDING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The changes in the carrying amount of goodwill for the year ended December 31, 2002 are as follows:
The gross carrying amount and accumulated amortization of our intangible assets other than goodwill as of December 31, 2002 and 2001 and May 27, 2001 are as follows:
Amortization expense on intangible assets, excluding goodwill, for year ended December 31, 2002, the period from May 28, 2001 to December 31, 2001 and the fiscal years ended May 2001 and 2000 was $5.4 million and $3.6 million and $5.9 million and $5.3 million respectively. Estimated aggregate intangible asset amortization expense for the next five years is as follows:
9. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
DEAN HOLDING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
10. INCOME TAXES
The following table presents the year ended December 31, 2002, the period from May 28, 2001 to December 31, 2001 and fiscal years ended May 2001 and 2000 provisions for income taxes.
The following is a reconciliation of income taxes computed at the U.S. federal statutory tax rate to the income taxes reported in the consolidated statements of income:
The tax effects of temporary differences giving rise to deferred income tax assets and liabilities were:
DEAN HOLDING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
These net deferred income tax liabilities are classified in our consolidated balance sheets as follows:
At December 31, 2002, we had no net operating losses and approximately $1.0 million of tax credits available for carry-over to future years. These losses are subject to certain limitation and will expire beginning in 2007.
At December 31, 2002, a valuation allowance of $2.4 million has been established because we believe it is "more likely than not" that all of the deferred tax assets relating to state net operating losses and foreign credit carry-overs will not be realized prior to the date they are scheduled to expire.
11. LONG-TERM DEBT
Senior Notes -- We had $700 million (face value) of senior notes outstanding. The net proceeds were used to fund acquisitions and to repay commercial paper. The related indentures do not contain financial covenants but they do contain certain restrictions including a prohibition against us and our subsidiaries granting liens on our material real estate interests and a prohibition against granting liens on the stock of our subsidiaries. The indentures also place certain restrictions on our ability to divest assets not in the ordinary course of business. At the date of our acquisition by Dean Foods Company, our long-term debt was re-valued
DEAN HOLDING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
to its current market value. The adjustment to fair value is reflected as a discount on senior notes in our consolidated financial statements.
Receivables-Backed Loan -- 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 $400 million receivables securitization facility. Certain of our subsidiaries sell their accounts receivable to a wholly-owned special purpose entity intended to be bankruptcy-remote. The special entity then transfers the receivables to third-party asset-backed commercial paper conduits sponsored by major financial institutions. The assets and liabilities of this entity are fully reflected on our balance sheet, and the securitization is treated as a borrowing for accounting purposes. The receivables-backed loan bears interest at a variable rate based on the commercial paper yield, as defined in the agreement.
Terminated Revolving Credit Agreement -- Prior to our acquisition by Dean Foods Company, we had an unsecured $500 million revolving credit facility maturing in 2003. Borrowings under the credit facility bore interest, at our option, at either fixed or variable rates linked to our public debt credit rating. During fiscal year 2001, the maximum credit facility balance was $250 million and the average credit facility balance during the year was $38.4 million at a weighted average interest rate of 6.47%. When we were acquired by Dean Foods Company, revolving credit borrowings of $201.2 million were paid off with funds advanced by Dean Foods Company. At May 27, 2001, we had $209 million outstanding under the credit facility.
Industrial Development Revenue Bonds -- We have certain revenue bonds outstanding, one of which requires annual sinking fund redemptions. Typically, these bonds are secured by irrevocable letters of credit issued by financial institutions, along with first mortgages on the related real property and equipment. Interest on these bonds is due semiannually at interest rates that vary based on market conditions.
Other Obligations -- Other obligations include various promissory notes for the purchase of property, plant, and equipment and capital lease obligations. The various promissory notes payable provide for interest at varying rates and are payable in monthly installments of principal and interest until maturity, when the remaining principal balances are due. Capital lease obligations represent machinery and equipment financing obligations which are payable in monthly installments of principal and interest and are collateralized by the related assets financed.
Letters of Credit -- At December 31, 2002, $49.5 million of letters of credit were outstanding. The majority of letters of credit were required by various utilities and government entities for performance and insurance guarantees.
Scheduled Maturities -- The scheduled maturities of long-term debt, at December 31, 2002, were as follows (in thousands):
Interest Rate Agreements -- SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities" (as amended) became effective for us as of May 29, 2001. We do not currently have any derivative
DEAN HOLDING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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, as required by SFAS No. 133. Any ineffectiveness in cash flow hedges or fair value hedges was recorded as an adjustment to earnings.
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.
12. STOCKHOLDERS' EQUITY
We have 1,000 shares of common stock with a par value of $0.01 per share currently authorized and issued to Dean Foods Company.
Stock Option and Restricted Stock Plans -- Upon our acquisition by Dean Foods Company, outstanding options to purchase our common stock were automatically converted into options to purchase shares of Dean Foods Company. Upon consummation of our acquisition by Dean Foods Company our stock option holders had the right to surrender their options to Dean Foods Company, in lieu of exercise, in exchange for cash, provided the options were surrendered prior to March 21, 2002. At December 31, 2001 we had a liability recorded for these stock option surrenders. Cash payments of approximately $44.2 million were made related to the cash provisions of our stock option surrenders. At the conclusion of the surrender period, the remaining liability of approximately $30.5 million was transferred to stockholder's equity as the underlying stock options remained outstanding.
Prior to our acquisition by Dean Foods Company, we had stock option plans for certain key employees and directors. Options were typically granted at fair market value at the date of grant. We no longer award options.
DEAN HOLDING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following table summarizes the status of our stock-based compensation programs as of the dates shown:
13. OTHER COMPREHENSIVE INCOME
Comprehensive income comprises net income plus all other changes in equity from non-owner sources. The amount of income tax (expense) benefit allocated to each component of other comprehensive income for the year ended December 31, 2002, during the period from May 28, 2001 to December 31, 2001 and the fiscal years ended May 2001 and 2000 are included below.
DEAN HOLDING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
14. EMPLOYEE RETIREMENT AND PROFIT SHARING PLANS
We sponsor various defined benefit and defined contribution retirement plans, and contribute to various multi-employer pension plans on behalf of our employees. Benefits are based on years of service and comprehensive or stated amounts for each year of service. The pension and post retirement liabilities at December 31, 2002 and 2001 include the allocation of purchase price to record these liabilities at fair value based on our acquisition by Dean Foods Company. For the year ended December 31, 2002, the period from May 28, 2001 to December 31, 2001 and the fiscal year ended May 2001 and 2000, our retirement and profit sharing plan expenses were as follows:
Defined Benefit Plans -- The benefits under our defined benefit plans are based on years of service and employee compensation. Our funding policy is to contribute annually not less than the minimum amount required under ERISA regulations and no more than the maximum amount that can be deducted for federal income tax purposes.
The following table sets forth the funded status of our defined benefit plans and the amounts recognized in our consolidated balance sheets:
DEAN HOLDING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Included in the above pension benefits table is an unfunded supplemental retirement plan with a liability of $7.3 million, $22.4 million and $7.1 million at December 31, 2002 and 2001 and May 27, 2001, respectively.
DEAN HOLDING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Defined Contribution Plans -- Certain of our non-union personnel may elect to participate in savings and profit sharing plans sponsored by us. These plans generally provide for salary reduction contributions to the plans on behalf of the participants between 1.0% and 17.0% of a participant's annual compensation and provide for employer matching and profit sharing contributions as determined by the Dean Foods Company Board of Directors.
Multi-Employer Pension Plans -- Certain of our subsidiaries contribute to various multi-employer union pension plans, which are administered jointly by management and union representatives and cover substantially all full-time and certain part-time union employees who are not covered by our other plans. The Multi-Employer Pension Plan Amendments Act of 1980 amended ERISA to establish funding requirements and obligations for employers participating in multi-employer plans, principally related to employer withdrawal from or termination of such plans. We could, under certain circumstances, be liable for unfunded vested benefits or other expenses of jointly administered union/management plans. At this time, we have not established any liabilities because withdrawal from these plans is not probable or reasonably possible.
15. POST-RETIREMENT BENEFITS OTHER THAN PENSIONS
We provided health care and life insurance benefits to certain retired employees and their eligible dependents. Employees are eligible for such benefits subject to minimum age and service requirements. Eligible employees that retire before normal retirement age, along with their dependents, are entitled to benefits on a shared contribution basis. Substantially all benefits terminate at age sixty-five. We retain the right to modify or eliminate these benefits.
DEAN HOLDING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following table sets forth the funded status of these plans and the amounts recognized in our consolidated balance sheets:
DEAN HOLDING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Assumed health care cost trend rates have a significant effect on the amounts reported for the health care plans. A one-percent change in assumed health care cost trend rates would have the following effects:
We retained the earned pension and other post-retirement benefits liabilities related to NRP for liabilities through the date of acquisition by Dean Foods Company. Accordingly the information disclosed in the tables above includes continuing and discontinued operations. The corresponding liabilities for Dean SoCal are retained by the parent through the date of acquisition.
16. PLANT CLOSING COSTS
Facilities Closed in Connection with Acquisition by Dean Foods Company -- We accrued costs in 2002 and 2001 pursuant to plans to exit certain activities and operations of businesses in order to rationalize production and reduce costs and inefficiencies. Several plants were closed in connection with our acquisition by Dean Foods Company. Plants in Atkins, Arkansas and Cairo, Georgia in the Specialty Foods segment and a plant in Escondido, California in the Dairy Group were closed. We have also eliminated our administrative offices, closed Dairy Group distribution depots in Parker Ford, Pennsylvania and Camp Hill, Pennsylvania, shut down two pickle tank yards and relocated production between plants as part of our overall integration and efficiency efforts.
The principal components of the plans include the following:
- Workforce reductions as a result of plant closings, plant rationalizations and consolidation of administrative functions and offices, resulting in an overall reduction of 717 plant and administrative personnel. The costs incurred were charged against our acquisition liabilities for these costs. As of December 31, 2002, 64 employees had not yet been terminated;
- Shutdown costs, including those costs that are necessary to clean and prepare the plant facilities for closure; and
- Costs incurred after shutdown such as lease obligations or termination costs, utilities and property taxes after shutdown of the plant or administrative office.
Activity with respect to these liabilities for 2002 is summarized below:
These liabilities were established on December 31, 2001 in connection with our acquisition by Dean Foods Company. No other significant charges were accrued for transaction related closings.
The carrying value of closed facilities and other assets held for sale at December 31, 2002 was approximately $10.4 million. We are marketing these properties for sale. Divestitures of the closed facilities has not resulted in significant modifications to the estimate of fair value.
DEAN HOLDING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Plant Closing Costs -- In fiscal year 2001 and 2000 as part of an overall integration and cost reduction strategy, we recorded plant closing and other non-recurring costs of $6.1 million related to the closing of our Sacramento, California and Mobile, Alabama fluid milk plants during fiscal year 2000.
The principal components of the plan included the following:
- Workforce reductions as a result of plant closings, plant rationalizations and consolidation of administrative functions and offices. The fiscal year 2000 plan included an overall reduction of 118 people, primarily plant employees associated with plant closing and rationalization fiscal year 2000 plant closings were completed by the end of the second quarter of fiscal year 2001.
- Shutdown costs, including those costs that were necessary to clean and prepare the plant facilities for resale or closure; and
- Costs incurred after shutdown such as lease obligations or termination costs, utilities and property taxes after shutdown at the plant or administrative office. Total charges related to work force reductions, shut down costs, and costs incurred after shut down totaled $1.9 million.
- Write-downs of property, plant and equipment and other assets of $4.2 million, primarily for asset impairments as a result of facilities that are no longer used in operation. The impairments related primarily to owned buildings, land and equipment at the facilities which were being sold and were written down to their estimated fair value. The effect of suspending depreciation on the buildings and equipment related to the closed facilities was not significant.
We recorded plant closing costs of $0.4 million during the period from May 28, 2001 to December 31, 2001 to close one Specialty Foods plant.
17. SUPPLEMENTAL CASH FLOW INFORMATION
18. SHIPPING AND HANDLING FEES
In September 2000, the EITF 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
DEAN HOLDING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
a result of our adoption of Issue No. 00-10 in the fourth quarter of fiscal 2001, our shipping and handling costs are now included either in cost of products sold or delivery, selling and administrative expenses, depending on the nature of such costs. Accordingly, prior years' shipping and handling costs were reclassified from net sales to cost of products sold and delivery, selling and administrative expenses. Those amounts totaled $30.2 million and $23.1 million in fiscal years 2001 and 2000. Shipping and handling costs in costs 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. These shipping and handling costs that were recorded as a component of selling and distribution expense were approximately $375.0 million, $252.0 million, $393.1 million and $352.6 million during the year ended December 31, 2002, the period from May 28, 2001 to December 31, 2001 and fiscal years 2001 and 2000, respectively.
19. COMMITMENTS AND CONTINGENCIES
Leases -- We lease certain property, plant and equipment used in our operations under operating lease agreements. Such leases, which are primarily for machinery, equipment and vehicles, have lease terms ranging from 1 to 20 years. Certain of the operating lease agreements require the payment of additional rentals for maintenance, along with additional rentals based on miles driven or units produced. Rent expense, including additional rent, was $40.9 million, $33.6 million, $55.8 million and $50.9 million for the year ended December 31, 2002 and the period from May 28, 2001 to December 31, 2001 and fiscal years ended May 2001 and 2000, respectively.
We had no capital leases at December 31, 2002. Future minimum payments at December 31, 2002, under operating leases with terms in excess of one year are summarized below:
Guaranty of Dean Foods Company Obligations Under Its Senior Credit Facility -- Certain of Dean Foods Company's subsidiaries, including us, are required to guarantee Dean Foods Company's indebtedness under its $2.7 billion credit facility. We have pledged substantially all of our assets (other than our real property and our ownership interests in our subsidiaries) as security for our guaranty. The senior credit facility provides Dean Foods Company with an $800 million revolving line of credit, a Tranche A $900 million term loan and a Tranche B $1 billion term loan. Upon completion of our acquisition, Dean Foods Company borrowed $1.9 billion under this facility's term loans. At December 31, 2002 there were outstanding term loan borrowings of $1.83 billion under this facility. Dean Foods Company's revolving line of credit was undrawn, except for $71.8 million of issued but undrawn letters of credit. As of December 31, 2002 approximately $728.2 million was available for future borrowings under Dean Foods Company's revolving credit facility.
DEAN HOLDING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Amounts outstanding under Dean Foods Company's revolving line of credit and Dean Foods Company's Tranche A term loan bear interest at a rate per annum equal to one of the following rates, at Dean Foods Company's option:
- a base rate equal to the higher of the Federal Funds rate plus 50 basis points or the prime rate, plus a margin that varies from 25 to 150 basis points depending on Dean Foods Company's leverage ratio (which is the ratio of defined indebtedness to EBITDA), or
- the London Interbank Offering Rate ("LIBOR") computed as LIBOR divided by the product of one minus the Eurodollar Reserve Percentage, plus a margin that varies from 150 to 275 basis points depending on Dean Foods Company's leverage ratio.
On April 30, 2002, Dean Foods Company entered into an amendment to their 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:
- 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 our leverage ratio, or
- LIBOR divided by the product of one minus the Eurodollar Reserve Percentage, plus a margin that varies from 200 to 275 basis points, depending on our leverage ratio.
The blended interest rate in effect on borrowings under the senior credit facility, including the applicable interest rate margin, was 3.65% at December 31, 2002. However, Dean Foods Company had interest rate swap agreements in place that hedged $1.08 billion of their borrowings under this facility at December 31, 2002 at an average rate of 5.40%, plus the applicable interest rate margin. Interest is payable quarterly or at the end of the applicable interest period.
The agreement requires principal payments on the Tranche A term loan as follows:
- $16.87 million quarterly from March 31, 2002 through December 31, 2002;
- $33.75 million quarterly from March 31, 2003 through December 31, 2004;
- $39.38 million quarterly from March 31, 2005 through December 31, 2005;
- $45.0 million quarterly from March 31, 2006 through December 31, 2006;
- $56.25 million quarterly from March 31, 2007 through June 30, 2007; and
- A final payment of $112.5 million on July 15, 2007.
The agreement requires principal payments on the Tranche B term loan as follows:
- $1.25 million quarterly from March 31, 2002 through December 31, 2002;
- $2.5 million quarterly from March 31, 2003 through December 31, 2007;
- A payment of $472.5 million on March 31, 2008; and
- A final payment of $472.5 million on July 15, 2008.
No principal payments are due on the 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 3.75 to 1.0, and (3) beginning in 2003, annually when Dean Foods Company's leverage ratio is greater than 3.0 to 1.0. The credit agreement requires that Dean Foods Company prepay 50% of defined excess
DEAN HOLDING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
cash flow for any fiscal year (beginning in 2003) in which their leverage ratio at year end is greater than 3.75 to 1.0. As of December 31, 2002, Dean Foods Company's leverage ratio was 3.3 to 1.0.
The senior credit facility contains various financial and other restrictive covenants and requirements that Dean Foods Company maintain certain financial ratios, including a leverage ratio (computed as the ratio of the aggregate outstanding principal amount of defined indebtedness to EBITDA) and an interest coverage ratio (computed as the ratio of EBITDA to interest expense). In addition, this facility requires that Dean Foods Company maintain a minimum level of net worth (as defined by the agreement).
Dean Foods Company's leverage ratio must be less than or equal to:
Dean Foods Company's interest coverage ratio must be greater than or equal to 3.00 to 1.00.
Dean Foods Company's consolidated net worth must be greater than or equal to $1.2 billion, as increased each quarter (beginning with the quarter ended March 31, 2002) by an amount equal to 50% of their consolidated net income for the quarter, plus 75% of the amount by which stockholders' equity is increased by certain equity issuances. As of December 31, 2002, the minimum net worth requirement was $1.28 billion.
The facility also contains limitations on liens, investments and the incurrence of additional indebtedness, and prohibits certain dispositions of property and restricts certain payments, including dividends. The credit facility is secured by liens on substantially all of our domestic assets (including us and our subsidiaries, but excluding the capital stock of our subsidiaries and the real property owned by us and our subsidiaries).
The agreement contains standard default triggers including without limitation: failure to maintain compliance with the financial and other covenants contained in the agreement, default on certain of Dean Foods Company's other debt, a change in control and certain other material adverse changes in their business. The agreement does not contain any default triggers based on Dean Foods Company's debt rating.
Dean Foods Company is currently in compliance with all of the requirements contained in its credit facility.
Litigation, Investigations and Audits -- We and our subsidiaries are parties, in the ordinary course of business, to certain other claims, litigation, audits and investigations. We believe we have created adequate reserves for any liability we may incur in connection with any such currently pending or threatened matter. In our opinion, the settlement of any such currently pending or threatened matter is not expected to have a material adverse impact on our financial position, results of operations or cash flows.
20. FAIR VALUE OF FINANCIAL INSTRUMENTS
Pursuant to SFAS No. 107, "Disclosure About Fair Value of Financial Instruments," we are required to disclose an estimate of the fair value of our financial instruments as of December 31, 2002 and 2001 and for the fiscal years ended May 2001. SFAS No. 107 defines the fair value of financial instruments as the amount at which the instrument could be exchanged in a current transaction between willing parties.
Due to their near-term maturities, the carrying amounts of accounts receivable and accounts payable are considered equivalent to fair value.
DEAN HOLDING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The fair value of our long-term debt was determined using valuation techniques that considered cash flows discounted at current market rates and our best estimate for instruments without quoted market prices. At May 27, 2001 the fair value of long-term debt was estimated to be $873.4 million. At the date of our acquisition by Dean Foods Company our long-term debt was revalued to its current market value. At December 31, 2001 this value approximated the fair value of long-term debt. At December 31, 2002 the fair value of senior notes was estimated at $702.8 million. All other long term debt was reported at fair value in our Consolidated Financial Statements.
21. SEGMENT AND GEOGRAPHIC INFORMATION AND MAJOR CUSTOMERS
Segment Information -- We currently have two reportable segments: Dairy Group and Specialty Foods. Our Dairy Group segment manufactures and distributes 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 aseptic sauces, puddings and nutritional beverages.
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 2, 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. We evaluate performance based on operating profit not including non-recurring gains and losses and foreign exchange gains and losses.
We do not allocate income taxes, management fees or unusual items to segments. In addition, there are no significant non-cash items reported in segments profit or loss other than depreciation and amortization. The amounts in the following tables are the amounts obtained from reports used by our executive management
DEAN HOLDING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
team for the year ended December 31, 2002, the period from May 28, 2001 through December 31, 2001 and fiscal years ended May 2001 and 2000:
DEAN HOLDING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Substantially all of our business is within the United States. Intersegment sales are not material.
Major Customers -- The largest customer of our Dairy Group and Specialty Foods segments represented $404.8 million or 11.1% of Dairy Group sales and 10.3% of consolidated sales. Our second-largest customer represented $365.6 million or 11.0% of Dairy Group sales and 9.3% of consolidated sales.
22. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The following is a summary of the unaudited quarterly results of operations for the year ended December 31, 2002, the period from May 28, 2001 to December 31, 2001 and fiscal year 2001 (in thousands). Financial information for all periods has been restated to reflect NRP as a discontinued operation.
- ---------------
(1) The results of operations for the month of December 2001 are as follows: net sales $393,545, gross profit $89,385 and net loss $4,169.
(2) Net sales and gross profit have been restated to reflect the results of NRP as discontinued operations. The effect on this restatement was to decrease net sales by $102,259 and $109,007 in the first and second quarter of the period from May 28 to December 31, 2001, and to decrease net sales by $85,963, $103,898, $103,007 and $106,706 in the first, second, third and fourth quarter of fiscal year 2001. In addition, the effect of the restatement decreased gross profit by $21,461 and $28,500 in the first and second quarters of the period from May 28, 2001 to December 31, 2001, and decreased gross profit by $22,839, $19,863, $22,065 and $21,735 in the first, second, third and fourth quarter of fiscal year 2001.
(3) Includes charges of $3,718, $9,821, and $16,461 for transaction related costs for the first quarter, second quarter and month of December of the period from May 28, 2001 to December 31, 2001, respectively. The month of December also includes a charge of $366 for a plant closure.
(4) Includes a gain of $10,000 related to sale of a note associated with the divestiture of our vegetables business in fiscal 1999.
(5) Includes a charge of $22,151 for transaction related costs.
INDEPENDENT AUDITORS' REPORT
To the Board of Directors Dean Holding Company Dallas, Texas
We have audited the consolidated financial statements of Dean Holding Company and subsidiaries (the "Company") (formerly known as Dean Foods Company) as of December 31, 2002 and 2001 and for the year ended December 31, 2002 and for the period from May 28, 2001 to December 31, 2001, and have issued our report thereon dated March 24, 2003; such report is included elsewhere in this Form 10-K. Our audits also included the consolidated financial statement schedule of the Company listed in Item 15. This consolidated financial statement schedule is the responsibility of the Company's management. Our responsibility is to express an opinion based on our audits. In our opinion, such consolidated financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein.
DELOITTE & TOUCHE LLP
Dallas, Texas March 24, 2003
REPORT OF INDEPENDENT ACCOUNTANTS ON FINANCIAL STATEMENT SCHEDULE
To the Board of Directors and Shareholder of Dean Holding Company:
Our audits of the consolidated financial statements referred to in our report dated June 26, 2001, except as to Notes 2 and 4, which are as of December 21, 2001, appearing in this Annual Report on Form 10-K for year ended December 31, 2002 also included an audit of the financial statement schedule for each of the two years in the period ended May 27, 2001 listed in Item 15 of this Form 10-K. In our opinion, the financial statement schedule for each of the two years in the period ended May 27, 2001 presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements.
PricewaterhouseCoopers LLP June 26, 2001, except as to Notes 2 and 4, which are as of December 21, 2001 Chicago, Illinois
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
As a result of our acquisition by Dean Foods Company on December 21, 2001, we notified PricewaterhouseCoopers, LLP on January 3, 2002, of our decision to replace PricewaterhouseCoopers, LLP as independent auditor with Dean Foods Company's auditor, Deloitte & Touche, LLP, effective immediately. PricewaterhouseCoopers, LLP's reports on our Consolidated Financial Statements for the two fiscal years ended May 28, 2000 and May 27, 2001, respectively, did not contain an adverse opinion or disclaimer of opinion, nor were such reports qualified or modified as to uncertainty, audit scope or accounting principles. During our two fiscal years ended May 27, 2001 and through the dismissal date, (i) there were no disagreements with PricewaterhouseCoopers, LLP on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure, which disagreement(s), if not resolved to the satisfaction of PricewaterhouseCoopers, LLP, would have caused it to make reference to the subject matter of the disagreement(s) in connection with its reports covering such periods, and (ii) there were no "Reportable Events" (meaning any of the items listed in paragraphs (a)(1)(v)(A)-(D) of Item 304 Regulation S-K) requiring disclosure. Other than that, during our two most recent fiscal years, no independent accountant who was engaged as the principal accountant to audit our financial statements, nor any independent who was engaged to audit a significant subsidiary and on whom our principal accountant expressed reliance in its report, has resigned or been dismissed.
PART III
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS
Omitted as permitted by General Instruction I(2)(c) to Form 10-K.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
Omitted as permitted by General Instruction I(2)(c) to Form 10-K.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Omitted as permitted by General Instruction I(2)(c) to Form 10-K.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Omitted as permitted by General Instruction I(2)(c) to Form 10-K.
ITEM 14.
ITEM 14. CONTROLS AND PROCEDURES
Based on their evaluation, as of a date within 90 days of the filing of this Form 10-K, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures (as defined in Rules 13a- 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.
PART IV
ITEM 15.
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
Financial Statements
The following consolidated financial statements are filed as part of this report or are incorporated herein as indicated:
Financial Statement Schedules
Independent Auditors' Report
Report of Independent Accountants on Financial Statement Schedule
Schedule II -- Valuation and Qualifying Accounts
Exhibits
See Index to Exhibits.
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
By: /s/ BARRY A. FROMBERG -------------------------------------- Barry A. Fromberg Executive Vice President and Chief Financial Officer
Dated March 26, 2003
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
CERTIFICATION
I, Gregg Engles, certify that:
1. I have reviewed this annual report on Form 10-K of Dean Holding Company;
2. Based on my knowledge, this annual 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 annual report;
3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
(a) Designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared;
(b) Evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and
(c) Presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions):
(a) All significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weakness in internal controls; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this annual report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
/s/ GREGG ENGLES -------------------------------------- Gregg Engles Chief Executive Officer
Date: March 26, 2003
C-1
CERTIFICATION
I, Barry A. Fromberg, certify that:
1. I have reviewed this annual report on Form 10-K of Dean Holding Company;
2. Based on my knowledge, this annual 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 annual report;
3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
(a) Designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared;
(b) Evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and
(c) Presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions):
(a) All significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weakness in internal controls; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this annual report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
/s/ BARRY A. FROMBERG -------------------------------------- Barry A. Fromberg Chief Financial Officer
Date: March 26, 2003
C-2
SCHEDULE II
DEAN HOLDING COMPANY
VALUATION AND QUALIFYING ACCOUNTS YEAR ENDED DECEMBER 31, 2002, THE PERIOD FROM MAY 28, 2001 TO DECEMBER 31, 2001 AND FISCAL YEARS ENDED MAY 2001 AND 2000
Allowance for doubtful accounts deducted from accounts receivable:
INDEX TO EXHIBITS
Explanatory Note: References in this Index to "Old Dean" are references to the registrant, Dean Holding Company.