-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, R6pg7uTWiQuRSPQRt8FuAJyKnBB7YQDGxJu9VZBqv+0/tsN5e85GGLSsv97Onss+ MZxHlbTCNKvgdOk0Op8MKA== 0000950134-02-005759.txt : 20020515 0000950134-02-005759.hdr.sgml : 20020515 20020515163126 ACCESSION NUMBER: 0000950134-02-005759 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 20020331 FILED AS OF DATE: 20020515 FILER: COMPANY DATA: COMPANY CONFORMED NAME: DEAN FOODS CO/ CENTRAL INDEX KEY: 0000931336 STANDARD INDUSTRIAL CLASSIFICATION: ICE CREAM & FROZEN DESSERTS [2024] IRS NUMBER: 752559681 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-12755 FILM NUMBER: 02652951 BUSINESS ADDRESS: STREET 1: 2515 MCKINNEY AVENUE LB 30 STREET 2: SUITE 1200 CITY: DALLAS STATE: TX ZIP: 75201 BUSINESS PHONE: 2143033400 MAIL ADDRESS: STREET 1: 3811 TURTLE CREEK BLVD STREET 2: SUITE 1300 CITY: DALLAS STATE: TX ZIP: 75219 FORMER COMPANY: FORMER CONFORMED NAME: SUIZA FOODS CORP DATE OF NAME CHANGE: 19941013 10-Q 1 d96946e10-q.txt FORM 10-Q FOR QUARTER ENDED MARCH 31, 2002 ================================================================================ 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 MARCH 31, 2002 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 OR THE TRANSITION PERIOD FROM _______________ TO ________________ COMMISSION FILE NUMBER 001-12755 DEAN FOODS COMPANY (Exact name of the registrant as specified in its charter) [DEAN FOODS LOGO] --------------- DELAWARE 75-2559681 (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 [ ] As of May 10, 2002 the number of shares outstanding of each class of common stock was: Common Stock, par value $.01 90,006,954 ================================================================================ 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................... 22 Item 3 - Quantitative and Qualitative Disclosures About Market Risk.............................................. 36 PART II - OTHER INFORMATION Item 6 - Exhibits and Reports on Form 8-K........................................................................ 38
2 PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS DEAN FOODS COMPANY CONDENSED CONSOLIDATED BALANCE SHEETS (Dollars in thousands)
MARCH 31, DECEMBER 31, 2002 2001 ------------ ------------- (unaudited) Assets Current assets: Cash and cash equivalents ...................................................................... $ 22,736 $ 78,260 Accounts receivable, net ....................................................................... 777,026 775,824 Inventories .................................................................................... 432,352 440,247 Refundable income taxes ........................................................................ 2,441 3,375 Deferred income taxes .......................................................................... 127,341 127,579 Prepaid expenses and other current assets ...................................................... 57,991 56,899 ----------- ----------- Total current assets ..................................................................... 1,419,887 1,482,184 Property, plant and equipment, net ................................................................ 1,648,512 1,668,592 Goodwill .......................................................................................... 2,978,081 2,967,778 Indentifiable intangibles and other assets ........................................................ 551,197 613,343 ----------- ----------- Total .................................................................................... $ 6,597,677 $ 6,731,897 =========== =========== Liabilities and Stockholders' Equity Current liabilities: Accounts payable and accrued expenses .......................................................... $ 993,133 $ 1,044,409 Income taxes payable ........................................................................... 4,640 33,582 Current portion of long-term debt and subsidiary lines of credit ............................... 120,229 96,972 ----------- ----------- Total current liabilities ................................................................ 1,118,002 1,174,963 Long-term debt .................................................................................... 2,808,417 2,971,525 Other long-term liabilities ....................................................................... 233,545 243,695 Deferred income taxes ............................................................................. 290,382 281,229 Mandatorily redeemable convertible trust issued preferred securities .............................. 584,750 584,605 Commitments and contingencies (See Note 10) Stockholders' equity: Common stock, 89,792,896 and 87,872,980 shares issued and outstanding (as adjusted for the stock split effected April 23, 2002) ............................................................. 898 879 Additional paid-in capital ..................................................................... 1,039,709 961,705 Retained earnings .............................................................................. 551,182 543,139 Accumulated other comprehensive income ......................................................... (29,208) (29,843) ----------- ----------- Total stockholders' equity ............................................................... 1,562,581 1,475,880 ----------- ----------- Total .................................................................................... $ 6,597,677 $ 6,731,897 =========== ===========
See notes to condensed consolidated financial statements. 3 DEAN FOODS COMPANY CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Dollars in thousands, except per share data)
THREE MONTHS ENDED MARCH 31, ------------------------------ 2002 2001 ------------- ------------- (unaudited) Net sales ............................................... $ 2,281,985 $ 1,465,072 Cost of sales ........................................... 1,725,697 1,117,837 ------------- ------------- Gross profit ............................................ 556,288 347,235 Operating costs and expenses: Selling and distribution ............................. 323,041 198,280 General and administrative ........................... 81,512 50,893 Amortization of intangibles .......................... 2,212 13,341 Plant closing costs .................................. 1,234 843 ------------- ------------- Total operating costs and expenses ............. 407,999 263,357 ------------- ------------- Operating income ........................................ 148,289 83,878 Other (income) expense: Interest expense, net ................................ 51,877 27,302 Financing charges on trust issued preferred securities 8,395 8,395 Equity in earnings of unconsolidated affiliates ...... (403) (1,673) Other (income) expense, net .......................... (286) 691 ------------- ------------- Total other (income) expense ................... 59,583 34,715 ------------- ------------- Income before income taxes and minority interest ........ 88,706 49,163 Income taxes ............................................ 33,338 18,667 Minority interest in earnings ........................... 9 6,979 ------------- ------------- Income before cumulative effect of accounting change .... 55,359 23,517 Cumulative effect of accounting change .................. (47,316) (1,446) ------------- ------------- Net income .............................................. $ 8,043 $ 22,071 ============= ============= Average common shares: Basic ............................ 88,876,210 54,710,440 Average common shares: Diluted .......................... 107,902,958 71,569,700 Basic earnings per common share: Income before cumulative effect of accounting change . $ 0.62 $ 0.43 Cumulative effect of accounting change ............... (0.53) (0.03) ------------- ------------- Net income ........................................... $ 0.09 $ 0.40 ============= ============= Diluted earnings per common share: Income before cumulative effect of accounting change . $ 0.56 $ 0.40 Cumulative effect of accounting change ............... (0.44) (0.02) ------------- ------------- Net income ........................................... $ 0.12 $ 0.38 ============= =============
See notes to condensed consolidated financial statements. 4 DEAN FOODS COMPANY CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Dollars in thousands)
THREE MONTHS ENDED MARCH 31, ---------------------------- 2002 2001 --------- --------- (unaudited) Cash flows from operating activities: Net income ...................................................................... $ 8,043 $ 22,071 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization ............................................... 47,914 37,829 (Gain) loss on disposition of assets ........................................ 986 (91) Minority interest ........................................................... 15 11,786 Equity in earnings of unconsolidated affiliates ............................. (403) (1,673) Cumulative effect of accounting change ...................................... 47,316 1,446 Deferred income taxes ....................................................... (2,906) 11,005 Other, net .................................................................. 1,354 89 Changes in operating assets and liabilities, net of acquisitions: Accounts receivable ...................................................... (4,515) 15,595 Inventories .............................................................. 7,895 (1,467) Prepaid expenses and other assets ........................................ (13,387) (7,369) Accounts payable, accrued expenses and other liabilities ................. (17,191) (25,617) Income taxes ............................................................. 7,758 884 --------- --------- Net cash provided by operating activities .............................. 82,879 64,488 Cash flows from investing activities: Net additions to property, plant and equipment ................................... (31,030) (19,732) Cash outflows for acquisitions ................................................... (15,901) Net proceeds from divestitures ................................................... 2,561 Other ............................................................................ 1,022 864 --------- --------- Net cash used in investing activities .................................. (43,348) (18,868) Cash flows from financing activities: Proceeds from issuance of debt ................................................... 33,755 32,938 Repayment of debt ................................................................ (169,619) (90,004) Distributions to minority interest holders ....................................... (1,384) Issuance of common stock, net of expenses ........................................ 40,809 8,865 Redemption of common stock ....................................................... (6,056) --------- --------- Net cash used in financing activities ................................. (95,055) (55,641) --------- --------- Decrease in cash and cash equivalents ............................................... (55,524) (10,021) Cash and cash equivalents, beginning of period ...................................... 78,260 31,110 --------- --------- Cash and cash equivalents, end of period ............................................ $ 22,736 $ 21,089 ========= =========
See notes to condensed consolidated financial statements. 5 DEAN FOODS COMPANY NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS MARCH 31, 2002 1. GENERAL Basis of Presentation -- The unaudited Condensed Consolidated Financial Statements contained in this report have been prepared on the same basis as the Consolidated Financial Statements in our Annual Report on Form 10-K for the year ended December 31, 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 reclassifications have been made to conform the prior year's consolidated financial statements to the current year classifications. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been omitted. Our results of operations for the period ended March 31, 2002 may not be indicative of our operating results for the full year. 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-K as filed with the Securities and Exchange Commission on April 1, 2002. On April 23, 2002, we effected a two-for-one split of our common stock. Pursuant to the split, all shareholders of record as of April 8, 2002 received one additional share of common stock for each share held on that date. All share numbers contained in our Condensed Consolidated Financial Statements, and in these notes, have been adjusted for all periods to reflect the stock split, as if it had already occurred. This Quarterly Report, including these notes, have 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 Foods Company and its subsidiaries, taken as a whole. Recently Issued Accounting Pronouncements -- The Emerging Issues Task Force (the "Task Force") 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 in the first quarter of 2002. 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. Our current accounting policy for recording sales incentives within the scope of this Issue is to record estimated coupon expense based on historical coupon redemption experience which is consistent with the requirements of this Issue. Therefore, our adoption of this Issue has had no impact on our consolidated financial statements. The Task Force has also reached a consensus on Issue No. 00-25, "Vendor Income Statement Characterization of Consideration Paid to a Reseller of the Vendor's Products." We adopted this Issue in the first quarter of 2002, as required. 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. Adoption of this Issue required us to reduce reported revenue and selling and distribution expense for the first quarter of 2001 by $9.3 million; however, there was no change in 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 entered into after June 30, 2001 are required to be accounted for by the purchase method. We have and will continue to apply the provisions of SFAS No. 141 to all business combinations completed after June 30, 2001. 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. SFAS No. 142 requires that goodwill no longer be 6 amortized, but instead requires a transitional goodwill impairment assessment and annual impairment tests thereafter. Any transitional impairment loss resulting from the adoption will be recognized as the effect of a change in accounting principle in our income statement. We are currently in the process of completing the transitional impairment assessment and calculating any impact on our financial statements. We must complete the first step of this test to determine if we have an impairment by June 30, 2002 and, if we have an impairment, we must complete the final step and record any impairment by December 31, 2002. SFAS No. 142 also requires that recognized intangible assets be amortized over their respective estimated useful lives. As part of the adoption, we have re-assessed the useful lives of all intangible assets. Any recognized intangible asset determined to have an indefinite useful life was not amortized, but instead tested for impairment in accordance with the standard. These impairment tests were completed during the first quarter of 2002, and resulted in a charge of $47.3 million, net of an income tax benefit of $29.0 million, which was recorded during the first quarter of 2002 as a change in accounting principle. The impairment is related to certain trademarks in our Dairy Group and Morningstar segments. The fair value of these trademarks was determined using a present value technique. 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 will become effective for us in fiscal year 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 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. SFAS No. 145, "Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections," was issued in April 2002 and is applicable to fiscal years beginning after May 15, 2002. One of the provisions of this technical statement is the rescission of SFAS No. 4, "Reporting Gains and Losses from Extinguishment of Debt," whereby any gain or loss on the early extinguishment of debt that was classified as an extraordinary item in prior periods in accordance with SFAS No. 4, which does not meet the criteria of an extraordinary item as defined by APB Opinion 30, must be reclassified. Adoption of this standard will require us to reclassify extraordinary losses previously reported from the early extinguishment of debt. 2. ACQUISITIONS AND DIVESTITURES Acquisition of Dean Foods Company -- On December 21, 2001, we completed our acquisition of Dean Foods Company ("Old Dean"). As a result of this transaction, Old Dean was merged with and into our wholly-owned subsidiary, Blackhawk Acquisition Corp. Blackhawk Acquisition Corp. survived the merger and immediately changed its name to Dean Holding Company. Immediately after completion of the merger, we changed our name to Dean Foods Company. As a result of the merger, each share of common stock of Old Dean was converted into 0.858 shares of our common stock and the right to receive $21.00 in cash. The aggregate purchase price recorded was $1.7 billion, including $756.8 million of cash paid to Old Dean stockholders, common stock valued at $739.4 million and estimated transaction costs of 7 $55.7 million. The value of the approximately 31 million common shares issued was determined based on the average market price of our common stock during the period from April 2 through April 10, 2001 (the acquisition was announced on April 5, 2001). In addition, each of the options to purchase Old Dean's common stock outstanding on December 21, 2001 was converted into an option to purchase 1.504 shares of our stock. As discussed in Note 6, the holders of these options had the right, during the ninety day period following the acquisition, to surrender their stock options to us, in lieu of exercise, in exchange for a cash payment. Also on December 21, 2001, in connection with our acquisition of Old Dean, we purchased Dairy Farmers of America's ("DFA") 33.8% stake in our Dairy Group for consideration consisting of: (1) approximately $145.4 million in cash, (2) a contingent promissory note in the original principal amount of $40 million, and (3) the operations of eleven plants (including seven of our plants and four of Old Dean's plants) located in nine states where we and Old Dean had overlapping operations. As additional consideration, we amended a milk supply agreement with DFA to provide that if we do not, within a specified period following the completion of our acquisition of Old Dean, offer DFA the right to supply raw milk to certain of the Old Dean dairy plants, we could be required to pay liquidated damages of up to $47.0 million. See Note 10 for further discussion of these contingent obligations. As a result of this transaction, we now own 100% of our Dairy Group. In connection with our acquisition of Old Dean, we entered into a new credit facility and expanded our receivables-backed loan facility. We used the proceeds from the credit facility and receivables-backed loan facility to fund the cash portion of the merger consideration and the acquisition of DFA's minority interest, to refinance certain indebtedness and to pay certain transaction costs. Old Dean's operations and the acquisition of DFA's minority interest (and related divestitures) are reflected in our consolidated financial statements after December 21, 2001. We have not completed a final allocation of the purchase price to the fair values of assets and liabilities of Old Dean and the related business integration plans. 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. The unaudited results of operations on a pro forma basis for the quarter ended March 31, 2001 as if the acquisition of Old Dean, and the purchase of DFA's minority interest (including the divestiture of the 11 plants transferred in partial consideration of that interest) had occurred as of the beginning of 2001 are as follows:
PRO FORMA -------------- QUARTER ENDED MARCH 31, 2001 -------------- (In thousands, except per share data) Net sales ....................................................... $2,370,223 Income before income taxes and minority interest ................ 51,677 Income before cumulative effect of accounting change ............ 31,884 Net income ...................................................... 30,438 Basic earnings per common share: Income before cumulative effect of accounting change ....... $ 0.37 Net income ................................................. $ 0.36 Diluted earnings per common share: Income before cumulative effect of accounting change ....... $ 0.36 Net income ................................................. $ 0.35
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 8 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. 3. INVENTORIES
AT MARCH 31, AT DECEMBER 31, 2002 2001 ------------ -------------- (In thousands) Raw materials and supplies ....... $ 165,608 $ 161,673 Finished goods ................... 267,128 278,574 Less: Excess of current cost over stated value of last-in, first-out inventories ...... (384) --------- --------- Total ....................... $ 432,352 $ 440,247 ========= =========
4. GOODWILL AND OTHER INTANGIBLE ASSETS On January 1, 2002, we adopted SFAS No. 142, as discussed 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 and earnings per share information for the three months ended March 31, 2002 and 2001 as if SFAS No. 142 had been adopted January 1, 2001.
THREE MONTHS ENDED MARCH 31, ------------------------------ 2002 2001 ------------- ------------- (In thousands, except per share amounts) Reported net earnings before cumulative effect of accounting change................ $ 55,359 $ 23,517 Reported net earnings.............................................................. 8,043 22,071 Goodwill amortization, net of tax and minority interest............................ 6,861 Trademark amortization, net of tax and minority interest........................... 613 Adjusted net earnings before cumulative effect of accounting change................ 55,359 30,991 Adjusted net earnings.............................................................. $ 8,043 $ 29,545 Basic earnings per share: Reported net earnings before cumulative effect of accounting change............ $ 0.62 $ 0.43 Adjusted net earnings.......................................................... $ 0.09 $ 0.54 Diluted earnings per share: Reported net earnings before cumulative effect of accounting change............ $ 0.56 $ 0.40 Adjusted net earnings.......................................................... $ 0.12 $ 0.49
The changes in the carrying amount of goodwill for the three months ended March 31, 2002 are as follows:
MORNINGSTAR SPECIALTY DAIRY GROUP FOODS FOODS OTHER TOTAL ----------- ----------- ---------- ---------- ---------- (In thousands) Balance at December 31, 2001 .. $2,163,702 $ 389,572 $ 290,000 $ 124,504 $2,967,778 Purchase accounting adjustments 1,496 110 8,437 260 10,303 ---------- ---------- ---------- ---------- ---------- Balance at March 31, 2002 ..... $2,165,198 $ 389,682 $ 298,437 $ 124,764 $2,978,081 ========== ========== ========== ========== ==========
9 The gross carrying amount and accumulated amortization of our intangible assets other than goodwill as of March 31, 2002 and December 31, 2001 are as follows:
MARCH 31, 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 ......................... $314,900 $(14,274) $300,626 $391,662 $(14,274) $377,388 Intangible assets with finite lives: Customer-related ................... 61,400 (12,399) 49,001 61,132 (10,496) 50,636 -------- -------- -------- -------- -------- -------- Total other intangibles ................ $376,300 $(26,673) $349,627 $452,794 $(24,770) $428,024 ======== ======== ======== ======== ======== ========
Amortization expense on intangible assets for the three months ended March 31, 2002 and 2001 was $1.9 million and $2.1 million respectively. Estimated aggregate intangible asset amortization expense for the next five years is as follows: 2003 $6.2 million 2004 4.1 million 2005 3.9 million 2006 3.5 million 2007 3.3 million 5. LONG-TERM DEBT
AT MARCH 31, AT DECEMBER 31, 2002 2001 ----------- --------------- (In thousands) Senior credit facility ................. $ 1,903,075 $ 1,900,000 Subsidiary debt obligations: Senior notes ....................... 654,108 658,211 Receivables-backed loan ............ 260,000 400,000 Foreign subsidiary term loan ....... 32,005 35,172 Other lines of credit .............. 15,430 2,317 Industrial development revenue bonds 28,001 28,001 Capital lease obligations and other 36,027 44,796 ----------- ----------- 2,928,646 3,068,497 Less current portion ............... (120,229) (96,972) ----------- ----------- Total .............................. $ 2,808,417 $ 2,971,525 =========== ===========
Senior Credit Facility -- Simultaneously with the completion of our acquisition of Old Dean, we obtained a $2.7 billion credit facility with a syndicate of lenders which replaced our then existing credit facilities. The senior credit facility provides an $800.0 million revolving line of credit, a Tranche A $900.0 million term loan and a Tranche B $1.0 billion term loan. At closing, we borrowed $1.9 billion under this facility's term loans. At March 31, 2002 there were outstanding borrowings of $1.903 billion under this facility, in addition to $35.5 million of issued but undrawn letters of credit. Credit Facility Terms -- Amounts outstanding under the revolver and the Tranche A term loan bear interest at a rate per annum equal to one of the following rates, at our 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 our leverage ratio (which is the ratio of defined indebtedness to EBITDA), or 10 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 our leverage ratio. On April 30, 2002, we entered into an amendment to our credit facility pursuant to which the interest rate for amounts outstanding under the Tranche B term loan was lowered by 50 basis points. Beginning May 1, 2002, borrowings under the Tranche B term loan will bear interest at a rate per annum equal to one of the following rates, at our 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 our 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 our leverage ratio. Prior to the effective date of the amendment, the margin for Tranche B base rate borrowings was a range of 125 to 200 basis points and the margin for Tranche B LIBOR borrowings was a range of 250 to 325 basis points. The blended interest rate in effect on borrowings under the senior credit facility, including the applicable interest rate margin, was 4.80% at March 31, 2002. We have interest rate swap agreements in place, however, that hedge $925.0 million of our 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 $900.0 million 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 $45.0 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 $1.0 billion 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. 11 No principal payments are due on the $800.0 million line of credit until maturity on July 15, 2007. The credit agreement also requires mandatory principal prepayments in certain circumstances including without limitation: (1) upon the occurrence of certain asset dispositions not in the ordinary course of business, (2) upon the occurrence of certain debt and equity issuances when our leverage ratio is greater than 3.0 to 1.0, and (3) after December 31, 2002, annually when our leverage ratio is greater than 3.0 to 1.0. As of March 31, 2002, our leverage ratio was 3.4 to 1.0. In consideration for the revolving commitments, we pay a commitment fee on unused amounts of the senior credit facility that ranges from 37.5 to 50 basis points, based on our leverage ratio. The senior credit facility contains various financial and other restrictive covenants and requirements that we 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 we maintain a minimum level of net worth (as defined by the agreement). Our 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
Our interest coverage ratio must be greater than or equal to 3.00 to 1.00. Our 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 our consolidated net income for the quarter, plus 75% of the amount by which stockholders' equity is increased by certain equity issuances. As of March 31, 2002, the minimum net worth requirement was $1.203 billion. The facility also contains limitations on liens, investments, the incurrence of additional indebtedness and acquisitions, 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 the assets of our subsidiaries, but excluding the capital stock of Old Dean's subsidiaries, and the real property owned by Old Dean and its 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 our other debt, a change in control and certain other material adverse changes in our business. The agreement does not contain any default triggers based on our debt rating. We are currently in compliance with all covenants contained in the credit agreement. Senior Notes -- Old Dean had certain senior notes outstanding at the time of the acquisition which remain outstanding. The notes carry the following interest rates and maturities: o $96.0 million ($100 million face value), at 6.75% interest, maturing in 2005; o $250.5 million ($250 million face value), at 8.15% interest, maturing in 2007; 12 o $182.8 million ($200 million face value), at 6.625% interest, maturing in 2009; and o $124.8 million ($150 million face value), at 6.9% interest, maturing in 2017. These notes were issued by Old Dean. The related indentures do not contain financial covenants but they do contain certain restrictions including a prohibition against Old Dean and its subsidiaries granting liens on their respective real estate interests and a prohibition against Old Dean granting liens on the stock of its subsidiaries. The indentures also place certain restrictions on Old Dean's ability to divest assets not in the ordinary course of business. Receivables-Backed Loan -- We have entered into a $400.0 million receivables securitization facility pursuant to which certain of our subsidiaries sell their accounts receivable to a wholly-owned special purpose limited liability company intended to be bankruptcy-remote. The special purpose limited liability company then transfers the receivables to a third party asset-backed commercial paper conduit sponsored by a major financial institution. However, the assets and liabilities of this special purpose entity are fully reflected on our balance sheet, and the securitization is treated as a borrowing for accounting purposes. During the first quarter of 2002, we repaid $140.0 million of this facility leaving an outstanding balance of $260.0 million at March 31, 2002. The receivables-backed loan bears interest at a variable rate based on the commercial paper yield as defined in the agreement. The average interest rate on the receivables-backed loan at March 31, 2002 was 2.13%. Foreign Subsidiary Term Loan -- In connection with our acquisition of Leche Celta in February 2000, our Spanish subsidiary obtained a 7 billion peseta (as of March 31, 2002, approximately $36.6 million) non-recourse term loan from a Spanish lender, all of which was borrowed at closing and used to finance a portion of the purchase price. The loan, which is secured by the stock of Leche Celta, will expire on February 21, 2007, bears interest at a variable rate based on the ratio of Leche Celta's debt to EBITDA (as defined in the corresponding loan agreement), and requires semi-annual principal payments. The interest rate in effect on this loan at March 31, 2002 was 5.13%. Other Lines of Credit -- Leche Celta, our Spanish subsidiary, is our only subsidiary with currently outstanding lines of credit separate from the credit facilities described above. Leche Celta's principal line of credit, which is in the principal amount of 2.5 billion pesetas (as of March 31, 2002 approximately $13.1 million), was obtained on July 12, 2000, bears interest at a variable interest rate based on the ratio of Leche Celta's debt to EBITDA (as defined in the corresponding loan agreement), is secured by our stock in Leche Celta and will expire in June 2007. Leche Celta also utilizes other local commercial lines of credit. At March 31, 2002, $15.4 million in total was drawn on these lines of credit at an average interest rate of 4.80%. Industrial Development Revenue Bonds -- Certain of our subsidiaries have revenue bonds outstanding, some of which require nominal 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 which, at March 31, 2002 ranged from 1.6% to 1.8%. Other Subsidiary Debt -- Other subsidiary debt includes 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. 13 Letters of Credit -- At March 31, 2002 there were $35.5 million of issued but undrawn letters of credit secured by our senior credit facility. In addition to the letters of credit secured by our credit facility, we had at March 31, 2002 approximately $71.0 million of letters of credit with three other banks that were issued but undrawn. These letters of credit were required by various utilities and government entities for performance and insurance guarantees. Interest Rate Agreements -- We have interest rate swap agreements in place that have been designated as cash flow hedges against variable interest rate exposure on a portion of our debt, with the objective of minimizing our interest rate risk and stabilizing cash flows. These swap agreements provide hedges for loans under our senior credit facility by limiting or fixing the LIBOR interest rates specified in the senior credit facility at the interest rates noted below until the indicated expiration dates of these interest rate swap agreements. The following table summarizes our various interest rate agreements as of March 31, 2002:
FIXED INTEREST RATES EXPIRATION DATE NOTIONAL AMOUNTS ----------------------- ------------------ ------------------- (In millions) 4.90% to 4.93%....... December 2002 $275.0 6.07% to 6.24%....... December 2002 325.0 6.23%................ June 2003 50.0 6.69%................ December 2004 100.0 6.69% to 6.74%....... December 2005 100.0 6.78%................ December 2006 75.0
We have also entered into interest rate swap agreements that provide hedges for loans under Leche Celta's term loan. The following table summarizes these agreements:
FIXED INTEREST RATES EXPIRATION DATE NOTIONAL AMOUNTS - ---------------------- ----------------- ------------------------------------------------------------- 5.54% November 2003 1,500,000,000 pesetas (approximately $7.9 million as of March 31, 2002) 5.6% November 2004 2,000,000,000 pesetas (approximately $10.5 million as of March 31, 2002
These swaps are required to be recorded as an asset or liability on our consolidated balance sheet at fair value, with an offset to other comprehensive income to the extent the hedge is effective. Derivative gains and losses included in other comprehensive income are reclassified into earnings as the underlying transaction occurs. Any ineffectiveness in our hedges is recorded as an adjustment to interest expense. As of March 31, 2002, our derivative liability totaled $42.2 million on our consolidated balance sheet including approximately $33.1 million recorded as a component of accounts payable and accrued expenses and $9.1 million recorded as a component of other long-term liabilities. There was no hedge ineffectiveness, as determined in accordance with SFAS No. 133, for the quarter ended March 31, 2002. Approximately $5.7 million of losses (net of taxes) were reclassified to interest expense from other comprehensive income during the quarter ended March 31, 2002. We estimate that approximately $19.6 million of net derivative losses (net of income taxes) included in other comprehensive income will be reclassified into earnings within the next twelve months. These losses will partially offset the lower interest payments recorded on our variable rate debt. We are exposed to market risk under these arrangements due to the possibility of interest rates on the credit facilities falling below the rates on our interest rate swap agreements. Credit risk under these arrangements is remote since the counterparties to our interest rate swap agreements are major financial institutions. 14 6. STOCKHOLDERS' EQUITY The following table summarizes activity during the first quarter of 2002 under our stock-based compensation programs:
Weighted Average Options Exercise Price ------------------ -------------------- Options outstanding at December 31, 2001 (1)....................... 14,063,860 $21.16 Options granted during quarter (2)............................ 4,826,170 30.53 Options canceled or surrendered during quarter (3)............ (1,644,002) 22.46 Options exercised during quarter.............................. (1,830,268) 20.80 Options outstanding at March 31, 2002.............................. 15,415,760 23.98
- ---------- (1) In connection with our acquisition of Old Dean, all options to purchase Old Dean stock outstanding at the time of the acquisition were automatically converted into options to purchase our stock. Upon conversion, those options represented options to purchase a total of approximately 5.4 million shares of our common stock. (2) Options vest as follows: one-third on the first anniversary of the grant date, one-third on the second anniversary of the grant date, and one-third on the third anniversary of the grant date. (3) The acquisition triggered certain "change in control" rights contained in the option agreements, which consisted of the right to surrender the options to us, in lieu of exercise, in exchange for cash, provided the options were surrendered prior to March 21, 2002. Options to purchase approximately 1.6 million shares were surrendered. We also issued 1,876 shares of restricted stock during the quarter to independent directors as compensation for services rendered during the fourth quarter of 2001. Shares of restricted stock vest one-third on grant, one-third on the first anniversary of grant and one-third on the second anniversary of grant. 7. COMPREHENSIVE INCOME Comprehensive income consists of net income plus all other changes in equity from non-owner sources. Consolidated comprehensive income was $8.7 million and $7.5 million for the three-month periods ending March 31, 2002 and 2001, respectively. The amounts of income tax (expense) benefit allocated to each component of other comprehensive income during the three months ended March 31, 2002 are included below.
PRE-TAX INCOME TAX BENEFIT (LOSS) (EXPENSE) NET AMOUNT -------------- ----------- ---------- (In thousands) Accumulated other comprehensive income, December 31, 2001 ......... $(51,021) $ 21,178 $(29,843) Cumulative translation adjustment arising during period ........... (1,402) 533 (869) Net change in fair value of derivative instruments ................ (7,177) 2,938 (4,239) Amounts reclassified to income statement related to derivatives.... 9,716 (3,973) 5,743 ------- ------- ------- Accumulated other comprehensive income, March 31, 2002 ............ $(49,884) $ 20,676 $(29,208) ======== ======== ========
8. PLANT CLOSING COSTS Plant Closing Costs -- As part of an overall integration and cost reduction program, we recorded plant closing costs during the first quarter of 2002 in the amount of $1.2 million related to the closing of our Port Huron, Michigan plant with consolidation of production into other plants. 15 The principal components of the cost reduction plans included within this program include the following: o Workforce reductions as a result of plant closings, plant rationalizations and consolidation of administrative functions. The program includes an overall reduction of 256 employees who were primarily plant employees associated with the plant closings and rationalization. The costs were charged to our earnings in the period that the plan was established in detail and employee severance and benefits had been appropriately communicated. All except four employees had been terminated as of March 31, 2002; o Shutdown costs, including those costs that are necessary to prepare the plant facilities for closure; o Costs incurred after shutdown such as lease obligations or termination costs, utilities and property taxes; and o Write-downs of property, plant and equipment and other assets, primarily for asset impairments as a result of facilities that are no longer used in operations. The impairments relate primarily to owned building, land and equipment at the facilities which are being sold and were written down to their estimated fair value. Activity with respect to plant closing costs during the first quarter of 2002 is summarized below:
BALANCE AT BALANCE AT DECEMBER 31, MARCH 31, 2001 CHARGES PAYMENTS 2002 ------------ ------- -------- ----------- (In thousands) Cash charges: Workforce reduction costs ...... $ 668 $ 639 $ (484) $ 823 Shutdown costs ................. 460 250 (243) 467 Lease obligations after shutdown 119 46 (9) 156 Other .......................... 253 299 (5) 547 ------ ------ ------ ------ Total ............................ $1,500 $1,234 $ (741) $1,993 ====== ====== ====== ======
There have not been significant adjustments to the plans and the majority of future cash requirements to reduce the liability at March 31, 2002 are expected to be completed within a year. Acquired Facility Closing Costs -- As part of our purchase price allocations, we accrue costs from time to time pursuant to plans to exit certain activities and operations of acquired businesses in order to rationalize production and reduce costs and inefficiencies. We have implemented plans to close several plants and the Franklin Park administrative offices in connection with our acquisition of Old Dean. We will continue to finalize and implement our initial integration and rationalization plans and expect to refine our estimate of amounts in our purchase price allocations associated with these plans. The principal components of the plans include the following: o Workforce reductions as a result of plant closings, plant rationalizations and consolidation of administrative functions and offices, resulting in an overall reduction of 557 plant and administrative personnel. The costs incurred are charged against our acquisition liabilities for these costs. As of March 31, 2002, 425 employees had not yet been terminated; o Shutdown costs, including those costs that are necessary to clean and prepare the plant facilities for closure; and 16 o 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 acquisition liabilities during the first quarter of 2002 is summarized below:
ACCRUED ACCRUED CHARGES AT CHARGES AT DECEMBER 31, MARCH 31, 2001 ACCRUALS PAYMENTS 2002 ------------ -------- -------- --------- (In thousands) Workforce reduction costs $ 20,029 $ (4,769) $ 15,260 Shutdown costs .......... 12,621 $ 2,365 (2,056) 12,930 -------- -------- -------- -------- Total ................... $ 32,650 $ 2,365 $ (6,825) $ 28,190 ======== ======== ======== ========
9. SHIPPING AND HANDLING FEES Our shipping and handling costs are included in both cost of sales and selling and distribution expense, depending on the nature of such costs. Shipping and handling costs included in cost of sales reflect the cost of shipping products to customers through third party carriers, inventory warehouse costs and product loading and handling costs. Shipping and handling costs included in selling and distribution expense consist primarily of route delivery costs for both company-owned delivery routes and independent distributor routes, to the extent that such independent distributors are paid a delivery fee. Shipping and handling costs that were recorded as a component of selling and distribution expense were approximately $237.6 million during the first quarter of 2002 and $160.6 million during the first quarter of 2001. 10. COMMITMENTS AND CONTINGENCIES Guaranty of Certain Indebtedness of Consolidated Container Company -- We own a 43.1% interest in Consolidated Container Company ("CCC"), the nation's largest manufacturer of rigid plastic containers and our primary supplier of plastic bottles and bottle components. During 2001, as a result of various operational difficulties, CCC became unable to comply with the financial covenants in its credit facility. In February 2002, CCC's lenders agreed to restructure the credit agreement to modify the financial covenants, subject to the agreement of CCC's primary shareholders to guarantee certain of CCC's debt. Because CCC is an important and valued supplier of ours, and in order to protect our interest in CCC, we agreed to provide a limited guaranty. The guaranty, which expires on January 5, 2003, is limited in amount to the lesser of (1) 49% of the principal, interest and fees of CCC's "Tranche 3" revolver, and (2) $10 million. CCC's "Tranche 3" revolver can only be drawn upon by CCC when its Tranche 1 and Tranche 2 revolvers are fully drawn. If CCC draws on the Tranche 3 revolver, no voluntary pre-payments may be made on the Tranche 1 and 2 revolvers until the Tranche 3 revolver is fully re-paid. Our guaranty cannot be drawn upon until the Tranche 3 loan is due and payable (whether at its January 5, 2003 maturity or by acceleration), and no more than one demand for payment may be made by the banks. We have entered into an agreement with Alan Bernon and Peter Bernon, who collectively own 6% of CCC, pursuant to which, collectively, they have agreed to reimburse us for 12% of any amounts paid by us under the guaranty. Contingent Obligations Related to Milk Supply Arrangements and Divested Operations -- On December 21, 2001, in connection with our acquisition of Old Dean, we purchased Dairy Farmers of America's ("DFA") 33.8% stake in our Dairy Group for consideration consisting of (1) approximately $145.4 million in cash, (2) a contingent promissory note in the original principal amount of $40.0 million, and (3) the operations of 11 plants located in nine states where we and Old Dean had overlapping operations (which plants were actually transferred to National Dairy Holdings, L.P., as assignee of DFA). 17 As additional consideration, we amended a milk supply agreement with DFA to provide that if we do not, within a certain period of time after the completion of the Old Dean acquisition, offer DFA the right to supply raw milk to certain of the Old Dean dairy plants, we could be required to pay liquidated damages of up to $47.0 million. Specifically, the liquidated damages to DFA provision provides that: o If we have not offered DFA the right to supply all of our raw milk requirements for certain of Old Dean's plants by either (i) the end of the 18th full month after December 21, 2001, or (ii) with respect to certain other plants, the end of the 6th full calendar month following the expiration of milk supply agreements in existence at those plants on December 21, 2001, or o If DFA is prohibited from supplying those plants because of an injunction, restraining order or otherwise as a result of or arising from a milk supply contract to which we are party, we must pay DFA liquidated damages determined and paid on a plant-by-plant basis, based generally on the amount of raw milk used by that plant. Liquidated damages would be payable in arrears in equal, quarterly installments over a 5-year period, without interest. If we are required to pay any such liquidated damages, the principal amount of the $40.0 million contingent promissory note will be reduced by an amount equal to 25% of the liquidated damages paid. The contingent promissory note is designed to ensure that DFA, one of our primary suppliers of raw milk, has the opportunity to retain our milk supply business for 20 years, or be paid for the loss of that business. The contingent promissory note has a 20-year term and bears interest based on the consumer price index. Interest will not be paid in cash. Instead, interest will be added to the principal amount of the note annually, up to a maximum principal amount of $96.0 million. We may prepay the note in whole or in part at any time, without penalty. The note will only become payable if we ever materially breach or terminate one of our milk supply agreements with DFA without renewal or replacement. Otherwise, the note will expire at the end of 20 years, without any obligation to pay any portion of the principal or interest. We retained certain liabilities of the businesses of the 11 plants divested to National Dairy Holdings, where those liabilities were deemed to be "non-ordinary course" liabilities. We also have the obligation to indemnify National Dairy Holdings for any damages incurred by it in connection with those retained liabilities, or in connection with any breach of the divestiture agreement. We do not expect any liability that we may have for these retained liabilities, or any indemnification liability, to be material. We believe we have created adequate reserves for any such potential liability. 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, 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. Contingent Obligations Related to White Wave Acquisition -- On May 9, 2002, we completed the acquisition of White Wave, Inc. In connection with the acquisition, we established a Performance Bonus Plan pursuant to which we agreed to pay performance bonuses to certain employees of White Wave if certain performance targets are achieved. Specifically, we agreed that if the cumulative net sales (as defined in the plan) of White Wave equal or exceed $382.5 million during the period beginning April 1, 2002 and ending March 31, 2004 (the "Incentive Period") and White Wave does not exceed the budgetary 18 restrictions set forth in the plan by more than $1 million during the Incentive Period, we will pay employee bonuses as follows: - If cumulative net sales during the Incentive Period are between $382.5 million and $450.0 million, the bonus paid will scale ratably (meaning $129,630 for each $1 million of net sales) between $26.25 million and $35.0 million; and - If cumulative net sales exceed $450.0 million during the Incentive Period, additional amounts will be paid as follows: - First $50 million above $450 million net sales: 10% of amount in excess of $450 million, plus - Second $50 million above $450 million net sales: 15% of amount in excess of $500 million, plus - In excess of $550 million net sales: 20% of amount in excess of $550 million. Key employees of White Wave are also entitled to receive certain payments if they are terminated without cause (or as a result of death or incapacity) during the Incentive Period. 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. 11. BUSINESS AND GEOGRAPHIC INFORMATION AND MAJOR CUSTOMERS We currently have three reportable segments: Dairy Group, Morningstar Foods 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, yogurt and dips, as well as fruit juices and other flavored drinks and bottled water. Our Morningstar Foods segment manufactures dairy and non-dairy coffee creamers, whipping cream and pre-whipped toppings, dips and dressings, cultured dairy products, specialty products such as lactose-reduced milk and extended shelf-life milks, soy milk and other soy products and other refrigerated and extended shelf-life products. We obtained Specialty Foods as part of our acquisition of Old Dean on December 21, 2001. Specialty Foods processes and markets pickles, powdered products such as non-dairy coffee creamers, and sauces and puddings. Our Puerto Rico and Spanish operations do not meet the definition of a segment and are reported in "Corporate/ Other." 19 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 2001 Consolidated Financial Statements contained in our 2001 Annual Report on Form 10-K. 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 segment 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 team:
THREE MONTHS ENDED MARCH 31, -------------------------- 2002 2001 ----------- ----------- (In thousands) Net sales from external customers: Dairy Group .................... $ 1,777,503 $ 1,200,675 Morningstar Foods .............. 238,580 166,688 Specialty Foods ................ 161,215 Corporate/Other ................ 104,687 97,709 ----------- ----------- Total .......................... $ 2,281,985 $ 1,465,072 =========== =========== Intersegment sales: Dairy Group .................... $ 6,077 $ 4,126 Morningstar Foods .............. 29,150 19,558 Specialty Foods ................ 3,876 Corporate/Other ----------- ----------- Total .......................... $ 39,103 $ 23,684 =========== =========== Operating income: Dairy Group(1) ................. $ 126,209 $ 66,631 Morningstar Foods .............. 23,105 21,517 Specialty Foods ................ 20,787 Corporate/Other ................ (21,812) (4,270) ----------- ----------- Total .......................... $ 148,289 $ 83,878 =========== =========== Assets: Dairy Group .................... $ 4,431,583 $ 2,887,492 Morningstar Foods .............. 894,997 427,754 Specialty Foods ................ 608,006 Corporate/Other ................ 663,091 428,481 ----------- ----------- Total ........................... $ 6,597,677 $ 3,743,727 =========== ===========
- ----------- (1) Operating income includes plant closing charges of $1.2 million and $0.8 million in 2002 and 2001, respectively. Geographic information for the three months ended March 31:
REVENUES LONG-LIVED ASSETS ----------------------- ----------------------- 2002 2001 2002 2001 ---------- ---------- ---------- ---------- (In thousands) United States ........ $2,173,117 $1,367,363 $4,903,509 $2,714,229 Puerto Rico .......... 55,766 55,687 123,000 126,287 Europe ............... 53,102 42,022 119,830 104,694 ---------- ---------- ---------- ---------- Total ........... $2,281,985 $1,465,072 $5,146,339 $2,945,210 ========== ========== ========== ==========
We have no single customer within any segment which represents greater than ten percent of our consolidated revenues. 20 12. SUBSEQUENT EVENTS Stock Split -- On February 21, 2002, our Board of Directors declared a two-for-one split of our common stock, which entitled shareholders of record on April 8, 2002 to receive one additional share of common stock for each share held on that date. The new shares were issued after the market closed on April 23, 2002. As a result of the split, the total number of shares of our common stock outstanding increased from approximately 44.96 million to approximately 89.93 million. All of the share numbers in this Quarterly Report on Form 10-Q have been adjusted for all periods to reflect the stock split, as if it had already occurred. White Wave Acquisition -- On May 9, 2002, we acquired the remaining equity interests in White Wave, Inc. White Wave, based in Boulder, Colorado, is the maker of Silk(R) soymilk and other soy-based products, and had sales of approximately $125 million during the twelve months ended March 31, 2002. Prior to May 9, we owned approximately 36.0% of White Wave, as a result of certain investments made by Old Dean beginning in 1999. We purchased the remaining equity interests for a total price of approximately $189 million. Existing management of White Wave will remain in place. We have agreed to pay White Wave's management team an incentive bonus based on achieving certain sales growth targets by March 2004. The bonus amount will vary depending on the level of two-year cumulative sales White Wave achieves, and is anticipated to range between $30 million and $40 million. For financial reporting purposes, White Wave's financial results will be aggregated with Morningstar Foods' financial results. Amendment to Senior Credit Facility -- Effective April 30, 2002, we entered into an amendment to our senior credit facility pursuant to which we reduced the interest rate on our Tranche B term loan by 50 basis points. 21 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS We are the leading processor and distributor of fresh milk and other dairy products in the United States and a leader in the specialty foods industry. We currently have three reportable segments: Dairy Group, Morningstar Foods 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, yogurt and dips, as well as fruit juices and other flavored drinks and bottled water. Our Morningstar Foods segment manufactures dairy and non-dairy coffee creamers, whipping cream and pre-whipped toppings, dips and dressings, cultured dairy products, specialty products such as lactose-reduced milks and extended shelf-life milks, soymilks and other soy products and certain other refrigerated and extended shelf-life products. Specialty Foods processes and markets pickles, powdered products such as non-dairy coffee creamers, and sauces and puddings. We also have operations in Puerto Rico and Spain that are aggregated in our segment discussions into the "Corporate/Other" category. RESULTS OF OPERATIONS The following table presents certain information concerning our results of operations, including information presented as a percentage of net sales.
THREE MONTHS ENDED MARCH 31, ----------------------------------------- 2002 2001 ------------------- ------------------- DOLLARS PERCENT DOLLARS PERCENT ---------- ------- ---------- ------- (Dollars in thousands) Net sales ....................... $2,281,985 100.0% $1,465,072 100.0% Cost of sales ................... 1,725,697 75.6 1,117,837 76.3 ---------- ----- ---------- ----- Gross profit .................... 556,288 24.4 347,235 23.7 Operating costs and expenses: Selling and distribution ...... 323,041 14.1 198,280 13.5 General and administrative .... 81,512 3.6 50,893 3.5 Amortization of intangibles ... 2,212 0.1 13,341 0.9 Plant closing costs ........... 1,234 0.1 843 0.1 ---------- ----- ---------- ----- Total operating expenses 407,999 17.9 263,357 18.0 ---------- ----- ---------- ----- Total operating income . $ 148,289 6.5% $ 83,878 5.7% ========== ===== ========== =====
FIRST QUARTER 2002 COMPARED TO FIRST QUARTER 2001 Note: We completed our acquisition of the former Dean Foods Company ("Old Dean") on December 21, 2001. We obtained our Specialty Foods segment as part of our acquisition of Old Dean. More complete segment data can be found in Note 11 to our Condensed Consolidated Financial Statements. Effective January 1, 2002 we implemented SFAS No. 142, "Goodwill and Other Intangible Assets", which eliminates the amortization of goodwill and certain other intangible assets. This has made comparisons with the first quarter of 2001 less meaningful than they would be otherwise. Where appropriate, we have provided comparisons as if SFAS 142 had been in effect during the first quarter of 2001. See Notes 1 and 4 to our Condensed Consolidated Financial Statements for more information regarding this change. Net Sales -- Net sales increased 55.8% to $2.28 billion during the first quarter of 2002 from $1.47 billion in the first quarter of 2001. The acquisition of Old Dean added approximately $0.98 billion in sales, which was partly offset by lower raw milk prices and a decrease in volumes at certain operations we owned prior to the Old Dean acquisition. Net sales for the Dairy Group increased 48.0%, or $576.8 22 million, in the first quarter of 2002, and net sales for Morningstar Foods increased 43.1%, or $71.9 million in the first quarter of 2002, compared to the year earlier period. The acquisition of Old Dean contributed $737.2 million and $86.4 million of these increases, respectively. Dairy Group net sales were negatively impacted by lower volumes at certain dairies owned prior to the acquisition of Old Dean, and a decrease in raw milk costs compared to the prior year first quarter. Morningstar Foods experienced a decline in volume due primarily to the planned phase-out of certain branded products, and incurred higher sales incentives which reduced net sales. Our Specialty Foods segment reported net sales of $161.2 million in the first quarter of 2002. Cost of Sales -- Our cost of sales ratio was 75.6% in the first quarter of 2002 compared to 76.3% in the same period of 2001. The cost of sales ratio for the Dairy Group decreased to 75.2% in the first quarter of 2002 from 76.7% in the first quarter of 2001 due primarily to lower raw milk costs. The cost of sales ratio for Morningstar Foods increased to 74.0% in the first quarter of 2002 from 69.8% in the same period of 2001. The increases at Morningstar Foods were due primarily to higher sales incentives and the addition of Old Dean's operations which have higher costs of sales. Specialty Foods cost of sales ratio was 75.9% in the first quarter of 2002. Operating Costs and Expenses -- Our operating expense ratio was 17.9% in the first quarter of 2002 compared to 18.0% in the first quarter of 2001. These ratios were affected by our implementation of FAS 142 on January 1, 2002. Excluding 2001 amortization that would have been eliminated had FAS 142 been in effect last year, our operating expense ratio would have been 17.1% in 2001. The increase in 2002 was partly caused by corporate office expenses, which increased approximately $14.7 million in the first quarter of 2002 compared to 2001 as a result of the integration of our corporate functions with those of Old Dean. Also: o The operating expense ratio at the Dairy Group was 17.7% in the first quarter of 2002 compared to 17.8% in the same period last year. Excluding approximately $9.8 million of amortization in the first quarter of 2001 that would have been eliminated had FAS 142 been in effect, the operating expense ratio would have been 17.0% in 2001. The increase in 2002 was due to higher selling and marketing expenses incurred in support of our regional brands; and o The operating expense ratio at Morningstar Foods was 16.3% in the first quarter of 2002 compared to 17.3% in the first quarter of 2001. Excluding approximately $1.8 million of amortization in the first quarter of 2001 that would have been eliminated had FAS 142 been in effect, the operating expense ratio would have been 16.3% in both years. The operating expense ratio for Specialty Foods was 11.2% in the first quarter of 2002. Specialty Foods has lower operating expenses than our other segments due to lower delivery costs. Operating Income -- Operating income in the first quarter of 2002 was $148.3 million, an increase of $64.4 million from 2001 operating income of $83.9 million. Our operating margin in the first quarter of 2002 was 6.5% compared to 5.7% in the same period of 2001. Excluding 2001 amortization that would have been eliminated had FAS 142 been in effect last year, our operating income would have increased $51.8 million in the first quarter of 2002 but our operating margin would have declined to 6.5% in 2002 from 6.6% in 2001. The Dairy Group's operating margin, after excluding amortization expense from the first quarter of 2001, increased to 7.1% in the first quarter of 2002 from 6.4% in the first quarter of 2001. This increase was primarily due to lower raw milk costs during 2002, partly offset by higher spending on regional brands. The operating margin for our Morningstar Foods segment, again excluding amortization expense from the first quarter of 2001, declined to 9.7% in the first quarter of 2002 from 14.0% in 2001. This decrease was due 23 to the planned phase-out of certain branded products and higher spending on sales incentives, as well as the addition of Old Dean operations that have higher costs of sales. Specialty Foods' operating margin was 12.9% in the first quarter of 2002. Lastly, higher spending at the corporate office reduced overall operating margins by 0.6%. Other (Income) Expense -- Total other expense increased by $24.9 million in the first quarter of 2002 compared to 2001. Interest expense increased to $51.9 million in the first quarter of 2002 from $27.3 million in 2001. This increase was the result of higher debt used to finance the acquisition of Old Dean. Financing charges on preferred securities were $8.4 million in both years. Income from investments in unconsolidated affiliates decreased to $0.4 million in the first quarter of 2002 from $1.7 million in the same period of 2001. The income in 2002 primarily related to our approximately 36.0% interest in White Wave, a maker of soymilks and other soy-based products. On May 9, 2002 we acquired the remaining equity interest in White Wave. Our income in 2001 related primarily to our 43.1% minority interest in Consolidated Container Company ("CCC"). In the fourth quarter of 2001 we concluded that our investment in CCC was impaired and that the impairment was not temporary, and as a result we wrote off our remaining investment in CCC. Income Taxes -- Income tax expense was recorded at an effective rate of 37.6% in the first quarter of 2002 compared to 38.0% in 2001. Our tax rate varies as the mix of earnings contributed by our various business units changes, and as tax savings initiatives are adopted. Minority Interest -- Minority interest in earnings decreased to $9,000 in the first quarter of 2002 from $7.0 million in the first quarter of 2001. The 2002 minority interest represents a nominal minority interest in a subsidiary of Specialty Foods. In 2001 our minority interest represented primarily the 33.8% ownership interest of Dairy Farmers of America in our Dairy Group. On December 21, 2001, in connection with our acquisition of Old Dean, we purchased the 33.8% stake that was owned by Dairy Farmers of America. See Note 2 to our Condensed Consolidated Financial Statements. Cumulative Effect of Accounting Change -- As part of our adoption of SFAS 142 on January 1, 2002 we wrote down the value of certain trademarks which our analysis indicated were impaired, and recorded a charge during the first quarter of 2002 of $47.3 million, net of an income tax benefit of $29.0 million. Effective January 1, 2001 we adopted Statement of Financial Accounting Standards (SFAS) No. 133, Accounting for Derivative Instruments and Hedging Activities (as amended). Our adoption of this accounting standard resulted in the recognition of $1.4 million, net of an income tax benefit of $1.5 million and minority interest benefit of $0.7 million, as a charge to earnings. RECENT DEVELOPMENTS STOCK SPLIT On February 21, 2002, our Board of Directors declared a two-for-one split of our common stock, which entitled shareholders of record on April 8, 2002 to receive one additional share of common stock for each share held on that date. The new shares were issued after the market closed on April 23, 2002. As a result of the split, the total number of shares of our common stock outstanding increased from approximately 44.96 million to approximately 89.93 million. All of the share numbers in this Quarterly Report on Form 10-Q have been adjusted for all periods to reflect the stock split, as if it had already occurred. 24 WHITE WAVE ACQUISITION On May 9, 2002, we acquired the remaining equity interests in White Wave, Inc. White Wave, based in Boulder, Colorado, is the maker of Silk(R) soymilk and other soy-based products, and had sales of approximately $125 million during the twelve months ended March 31, 2002. Prior to May 9, we owned approximately 36% of White Wave, as a result of certain investments made by Old Dean beginning in 1999. We purchased the remaining equity interests for a total price of approximately $189 million. Existing management of White Wave will remain in place. We have agreed to pay White Wave's management team an incentive bonus based on achieving certain sales growth targets by March 2004. The bonus amount will vary depending on the level of two-year cumulative sales White Wave achieves. See Note 10 to our Condensed Consolidated Financial Statements. We anticipate the bonus to range between $30 million and $40 million. For financial reporting purposes, White Wave's financial results will be aggregated with Morningstar Foods' financial results. INTEGRATION AND RATIONALIZATION ACTIVITIES As a result of our acquisition of Old Dean in December 2001, we expect to achieve annual cost-savings of at least $80 million in 2002, increasing to at least $120 million per year by the end of 2004. In early 2002, we began the process of implementing various planned cost savings initiatives necessary to achieve these savings. As part of these efforts, in February 2002, we announced the elimination of approximately 200 corporate staff positions at Old Dean. We have also closed, or announced the closure of, 5 plants since completion of the Old Dean acquisition and reduced (or intend to reduce) our workforce accordingly. We will continue to finalize and implement our initial integration and rationalization plans throughout 2002. Part of our strategy after the Old Dean acquisition will be to divest certain non-core assets. Since the completion of the Old Dean acquisition, we have sold two small non-core businesses that we acquired as part of Old Dean's Specialty Foods division, including a transportation business and Old Dean's boiled peanut business. AMENDMENT TO SENIOR CREDIT FACILITY Effective April 30, 2002, we entered into an amendment to our senior credit facility pursuant to which we reduced the interest rate on our Tranche B term loan by 50 basis points. See Note 5 to our Condensed Consolidated Financial Statements. RETIREMENT OF HOWARD DEAN, CHAIRMAN OF THE BOARD Howard Dean, who was named Chairman of our Board of Directors on December 21, 2001 in connection with our acquisition of Old Dean, retired from our Board of Directors effective April 12, 2002. Mr. Engles, who was Chairman of our Board prior to Mr. Dean's appointment on December 21, 2001, has re-assumed the role of Chairman of our Board of Directors. LAUNCH OF FOLGER'S(R) JAKADA(TM) In the first quarter of 2002, we launched Folger's Jakada, a new single-serve coffee and milk-based beverage. Pursuant to our licensing agreement with Procter & Gamble, we produce, promote and distribute Folgers Jakada and Procter & Gamble shares in revenue generated from all Folgers Jakada sales while retaining rights to the Folgers trademark. 25 ADOPTION OF CERTAIN RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS We adopted FASB Issue Nos. 00-14 and 00-25, as well as SFAS Nos. 142 and 144 in the first quarter of 2002. See Note 1 to our Condensed Consolidated Financial Statements. LIQUIDITY AND CAPITAL RESOURCES HISTORICAL CASH FLOW Cash flow provided by operating activities was $82.9 million in the first quarter of 2002 compared to $64.5 million in the first quarter of 2001. This increase was primarily due to higher earnings in 2002 after adjusting for the cumulative accounting change, which was non-cash. Net cash used in investing activities was $43.3 million in the first quarter of 2002 compared to $18.9 million in the first quarter of 2001. We spent $31.0 million during the first three months of 2002 for capital expenditures, which were funded using cash flow from operations. We also spent approximately $15.9 million in the first quarter of 2002 on stock option surrenders related to our acquisition of Old Dean. See Note 6 to our Condensed Consolidated Financial Statements. CURRENT DEBT OBLIGATIONS Effective December 21, 2001, in connection with our acquisition of Old Dean, we replaced our former credit facilities with a new $2.7 billion credit facility provided by a syndicate of lenders. This facility provides us with a revolving line of credit of up to $800.0 million and two term loans in the amounts of $900.0 million and $1.0 billion, respectively. Both term loans were fully funded upon closing of the Old Dean acquisition. The senior credit facility contains various financial and other restrictive covenants and requires that we 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 we maintain a minimum level of net worth (as defined by the agreement). 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 our other debt, a change in control and certain other material adverse changes in our business. The agreement does not contain any default triggers based on our debt rating. See Note 5 to our Condensed Consolidated Financial Statements for more detailed information regarding the terms of our credit agreement, including interest rates, principal payment schedules and mandatory prepayment provisions. At March 31, 2002 we had outstanding borrowings of $1.903 billion under our senior credit facility. In addition, $35.5 million of letters of credit secured by the credit facility were issued but undrawn. As of March 31, 2002, the revolver under our senior credit facility was undrawn, and approximately $743.3 million was available for future borrowings under the revolver, subject to satisfaction of certain conditions contained in the loan agreement. We are currently in compliance with all covenants contained in our credit agreement. We also have a $400.0 million receivables securitization facility. During the first quarter of 2002 we repaid $140.0 million of this facility and at March 31, 2002 had a balance of $260.0 million outstanding. See Note 5 to our Condensed Consolidated Financial Statements for more information about our receivables securitization facility. In addition, certain of Old Dean's indebtedness remains outstanding after the acquisition, including $700.0 million of outstanding indebtedness under certain senior notes, approximately $22.0 million of industrial development revenue bonds, and certain capital lease obligations. See Note 5 to our Condensed Consolidated Financial Statements. 26 In addition to the letters of credit secured by our credit facility, we had at March 31, 2002 approximately $71.0 million of letters of credit with three other banks that were issued but undrawn. These letters of credit were required by various utilities and government entities for performance and insurance guarantees. We do have certain other commitments and contingent obligations. Please see Note 10 to our Condensed Consolidated Financial Statements for a description of these commitments and contingent obligations. We do not have any ownership interests or relationships with any special-purpose entities (or "bankruptcy remote" entities), other than our ownership of the special purpose entities formed to facilitate our receivables securitization program and our mandatorily redeemable preferred securities. The assets and liabilities of those entities are fully reflected on our balance sheet. We have no other significant off-balance sheet arrangements, special purpose entities, financing partnerships or guaranties, nor any debt or equity triggers based on our stock price or credit rating. PREFERRED SECURITIES On March 24, 1998, we issued $600.0 million of company-obligated 5.5% mandatorily redeemable convertible preferred securities of a Delaware business trust in a private placement to "qualified institutional buyers" under Rule 144A under the Securities Act of 1933. The 5.5% preferred securities, which are recorded net of related fees and expenses, mature 30 years from the date of issue. Holders of these securities are entitled to receive preferential cumulative cash distributions at an annual rate of 5.5% of their liquidation preference of $50 each. These distributions are payable quarterly in arrears on January 1, April 1, July 1 and October 1 of each year. These trust issued preferred securities are convertible at the option of the holders into an aggregate of approximately 15.3 million shares of our common stock, subject to adjustment in certain circumstances, at a conversion price of $39.125. These preferred securities are also redeemable, at our option, at any time after April 2, 2001 at specified amounts and are mandatorily redeemable at their liquidation preference amount of $50 per share at maturity or upon occurrence of certain specified events. FUTURE CAPITAL REQUIREMENTS During 2002, we intend to invest a total of approximately $250.0 million in capital expenditures primarily for our existing manufacturing facilities and distribution capabilities. We intend to fund these expenditures using cash flow from operations. Of this amount, we intend to spend it as follows:
OPERATING DIVISION AMOUNT - ------------------ --------------------- (Dollars in millions) Dairy Group ................................................ $178.0 Morningstar Foods .......................................... 50.0 Specialty Foods ............................................ 12.0 Other ...................................................... 10.0 ------ $250.0 ======
We expect that cash flow from operations will be sufficient to meet our requirements for our existing businesses for the foreseeable future. On May 9, 2002 we acquired the remaining equity interest in White Wave, Inc. Prior to May 9, we owned approximately 36% of White Wave as a result of certain investments made beginning in 1999. We purchased the remaining equity interests for a total price of approximately $189 million, which was funded from cash flows from operations and borrowings under our credit facility. 27 In the future, we may pursue additional acquisitions that are compatible with our core business strategy. Any such acquisitions will be funded through cash flows from operations or borrowings under our credit facility. If necessary, we believe that we have the ability to secure additional financing for our future capital requirements. CRITICAL ACCOUNTING POLICIES "Critical accounting policies" are defined as those that are both most important to the portrayal of a company's financial condition and results, and that require management's most difficult, subjective or complex judgments. In many cases the accounting treatment of a particular transaction is specifically dictated by generally accepted accounting principles with no need for the application of our judgment. In certain circumstances, however, the preparation of our Condensed Consolidated Financial Statements in conformity with generally accepted accounting principles requires us to use our judgment to make certain estimates and assumptions. These estimates affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the Condensed Consolidated Financial Statements and the reported amounts of revenues and expenses during the reporting period. We have identified the policies described below as our critical accounting policies. For a detailed discussion of these and other accounting policies see Note 1 to our 2001 Consolidated Financial Statements contained in our Annual Report on Form 10-K, as filed with the Securities and Exchange Commission on April 1, 2002. 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 a reasonable assurance of collection of the sales 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. 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 these retained risks are calculated based upon loss development factors provided by our external insurance brokers and actuaries. The loss development factors are subject to change based upon actual history and expected trends in costs, among other factors. Valuation of Long-Lived and Intangible Assets and Goodwill -- We adopted SFAS 142 effective January 1, 2002 and as a result, goodwill is no longer amortized. In lieu of amortization, we are required to perform a transitional impairment assessment of our goodwill in 2002 and annual impairment tests thereafter. We are currently in the process of completing the transitional impairment assessment and reviewing any impact on our financial statements. We must complete the first step of this test to determine if we have an impairment by June 30, 2002 and, if we have an impairment, we must complete the final step and record any impairment by December 31, 2002. SFAS No. 142 also requires that recognized intangible assets be amortized over their respective estimated useful lives. As part of the adoption, we have reassessed the useful lives of all intangible assets. Any recognized intangible asset determined to have an indefinite useful life was not amortized, but instead tested for impairment in accordance with the standard. The impairment tests on identifiable intangibles were completed March 31, 2002 and resulted in a charge of $47.3 million, net of income tax, which was recorded as a change in 28 accounting principal. For more information regarding the values assigned to our intangible assets and to goodwill, see Note 4 to our Condensed Consolidated Financial Statements. Purchase Price Allocation -- We allocate the cost of acquisitions to the assets acquired and liabilities assumed. All identifiable assets acquired, including identifiable intangibles, and liabilities assumed are assigned a portion of the cost of the acquired company, normally equal to their fair values at the date of acquisition. The excess of the cost of the acquired company over the sum of the amounts assigned to identifiable assets acquired less liabilities assumed is recorded as goodwill. We record the initial purchase price allocation based on evaluation of information and estimates available at the date of the financial statements. As final information regarding fair value of assets acquired and liabilities assumed is evaluated and estimates are refined, appropriate adjustments are made to the purchase price allocation. To the extent that such adjustments indicate that the fair value of 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. The final purchase price allocation includes the consideration of a number of factors to determine the fair value of individual assets acquired and liabilities assumed including quoted market prices, forecast of expected cash flows, net realizable values, estimates of the present value of required payments and determination of remaining useful lives. For significant acquisitions, we utilize valuation specialists and appraisers to assist in the determination of the fair value of long-lived assets, including identifiable intangibles. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS The Emerging Issues Task Force (the "Task Force") of the Financial Accounting Standards Board has reached a consensus on Issue No. 00-14, "Accounting for Certain Sales Incentives," which became effective for us in the first quarter of 2002. 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. Our current accounting policy for recording sales incentives within the scope of this Issue is to record estimated coupon expense based on historical coupon redemption experience which is consistent with the requirements of this Issue. Therefore, our adoption of this Issue had no impact on our consolidated financial statements. 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." We adopted this Issue in the first quarter of 2002, as required. Under this Issue, certain consideration paid to our customers (such as slotting fees) was required to be classified as a reduction of revenue, rather than recorded as an expense. Adoption of this Issue required us to reduce reported revenue and selling and distribution expense for the first quarter of 2001 by $9.3 million; however, there was no change in reported net income. In June 2001, 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. We have applied the provisions of SFAS No. 141 to all business combinations completed after June 30, 2001, including the acquisition of Old Dean. SFAS No. 142 addresses financial accounting and reporting for acquired goodwill and other intangible assets. We adopted SFAS No. 142 on January 1, 2002. See Note 1 to our Condensed Consolidated Financial Statements. 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 will 29 become effective for us in fiscal year 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 did not have a material impact on our consolidated financial statements. SFAS No. 145, "Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections," was issued in April 2002 and is applicable to fiscal years beginning after May 15, 2002. One of the provisions of this technical statement is the rescission of SFAS No. 4, "Reporting Gains and Losses from Extinguishment of Debt," whereby any gain or loss on the early extinguishment of debt that was classified as an extraordinary item in prior periods in accordance with SFAS No. 4, which does not meet the criteria of an extraordinary item as defined by APB Opinion 30, must be reclassified. Adoption of this standard will require us to reclassify extraordinary losses previously reported from the early extinguishment of debt. KNOWN TRENDS AND UNCERTAINTIES ACQUISITIONS AND DIVESTITURES We have recently announced that we intend to continue to make acquisitions in our core businesses and, over the next several years, to divest non-core businesses. RAW MATERIAL PRICES The primary raw materials used in our operations are raw milk and butterfat. The prices we pay for these materials are regulated by the federal government, and in some cases by state and other regulatory agencies. Prices of raw milk and butterfat can be very volatile. In general, we change the prices that we charge our customers for our products on a monthly basis, as the costs of our raw materials fluctuate. However, there can be a lag between the time of a raw material cost increase or decrease and the effectiveness of a corresponding price change to our customers, and in some cases we are contractually restrained with respect to the means and timing of implementing price changes. Also, at some point price increases do erode our volumes. These factors can cause volatility in our earnings. Our sales and operating profit margin tend to fluctuate with the price of our raw materials. INTEREST RATES We have hedged a portion of our variable interest rate exposure by entering into interest rate swap agreements that have the effect of "converting" the hedged debt from variable rate debt to fixed rate debt. Approximately 40% of our variable rate debt is currently hedged. The percentage of our total debt that is hedged fluctuates as our debt level fluctuates. Moveover, we constantly monitor the prevailing interest rate environment, and may increase the percentage of our debt that is hedged if interest rates threaten to increase to substantially higher levels, or become more volatile. RATIONALIZATION ACTIVITIES As part of our overall integration and cost reduction strategy, we recorded plant closing and other non-recurring costs of $1.2 million during the first quarter of 2002 and $0.8 million in the first quarter of 2001. These charges included the following costs: o Workforce reductions as a result of plant closings, plant rationalizations and consolidation of administrative functions. The costs were charged to our earnings in the period that the plan was established in detail and employee severance and benefits had been appropriately communicated; o Shutdown costs, including those costs necessary to prepare the plant facilities for closure; 30 o Costs incurred after shutdown such as lease obligations or termination costs, utilities and property taxes; and o Write-downs of property, plant and equipment and other assets, primarily for asset impairments as a result of facilities no longer used in operations. The impairments related primarily to owned building, land and equipment at the facilities that were sold and written down to their estimated fair value. As part of our purchase price allocations, we accrue costs from time to time pursuant to plans to exit certain activities and operations of acquired businesses in order to rationalize production and reduce costs and inefficiencies. We accrued $2.4 million during the first quarter of 2002 and accrued $28.0 million during 2001 in connection with our acquisition of Old Dean, which was complete on December 21, 2001. We have plans to shut down certain plants and administrative offices in connection with our acquisition of Old Dean. We will continue to finalize and implement our initial integration and rationalization plans related to the Old Dean acquisition and we expect to refine our estimate of amounts in our purchase price allocations associated with these plans. The principal components of the plans will include the following: o Workforce reductions, to be charged against acquisition liabilities for these costs; o Shutdown costs, including those costs that are necessary to prepare facilities for closure; and o Costs incurred after shutdown such as lease obligations or termination costs, utilities and property taxes after shutdown. We do not expect any of these costs to have a material adverse impact on our results of operations. For more information on our restructuring and exit plans see Note 8 to our Condensed Consolidated Financial Statements. TAX RATE Our tax rate in the first quarter of 2002 was approximately 37.6%. We believe that our effective tax rate will range between approximately 37.0% to 38.0% over the next several years, as Old Dean's tax rate was higher than our tax rate prior to the Old Dean acquisition. See "-- Risk Factors" for a description of various other risks and uncertainties concerning our business. RISK FACTORS This report contains statements about our future that are not statements of historical fact. Most of these statements are found in this report under the following subheadings: "Liquidity and Capital Resources," "Known Trends and Uncertainties" and "Quantitative and Qualitative Disclosures About Market Risk." In some cases, you can identify these statements by terminology such as "may," "will," "should," "could," "expects," "seek to," "anticipates," "plans," "believes," "estimates," "intends," "predicts," "potential" or "continue" or the negative of such terms and other comparable terminology. These statements are only predictions, and in evaluating those statements, you should carefully consider the risks outlined below. Actual performance or results may differ materially and adversely. 31 WE MAY HAVE DIFFICULTIES MANAGING OUR GROWTH We have expanded our operations rapidly in recent years, particularly with the acquisition of Old Dean in December 2001. This rapid growth places a significant demand on our management and our financial and operational resources, which subjects us to various risks, including among others: o inability to successfully integrate or operate acquired businesses, o inability to retain key customers of acquired or existing businesses, and o inability to realize or delays in realizing expected benefits from our increased size. The integration of businesses we have acquired or may acquire in the future may also require us to invest more capital than we expected or require more time and effort by management than we expected. If we fail to effectively manage the integration of the businesses we have acquired, particularly Old Dean, our operations and financial results will be affected, both materially and adversely. OUR FAILURE TO SUCCESSFULLY COMPETE COULD ADVERSELY AFFECT OUR PROSPECTS AND FINANCIAL RESULTS Our business is subject to significant competition based on a number of factors. If we fail to successfully compete against our competitors, our business will be adversely affected. The consolidation trend is continuing in the retail grocery and foodservice industries. As our customer base continues to consolidate, we expect competition among us and our competitors to intensify as we compete for the business of fewer customers. As the consolidation continues, there can be no assurance that we will be able to keep our existing customers, or to gain new customers. Winning new customers is particularly important to our future growth, as demand tends to be relatively flat in our industry. Moreover, as our customers become larger, they will have greater purchasing leverage, and could force prices and margins, particularly for our Dairy Group, lower than current levels. We could also be adversely affected by any expansion of capacity by our existing competitors or by new entrants in our markets. OUR INNOVATION EFFORTS MAY NOT SUCCEED We have invested, and intend to continue to invest, significant resources in product innovation in an effort to increase our sales and profit margins as well as the overall consumption of dairy products. We believe that sales and profit growth through innovation is a significant source of growth for our business. The success of our innovation initiatives will depend on customer and consumer acceptance of our products, of which there can be no assurance. If our innovation efforts do not succeed, or if we do not have adequate resources to invest in innovation, we may not be able to continue to significantly increase sales or profit margins. CHANGES IN RAW MATERIAL AND OTHER INPUT COSTS CAN ADVERSELY AFFECT US The most important raw materials that we use in our operations are raw milk, butterfat and high density polyethylene resin. The prices of these materials increase and decrease depending on supply and demand and, in some cases, governmental regulation. Prices of raw milk, butterfat and certain other raw materials can fluctuate widely over short periods of time. In many cases we are able to adjust our pricing to reflect changes in raw material costs. Volatility in the cost of our raw materials can adversely affect our performance, however, as price changes often lag changes in costs. These lags tend to erode our profit margins. Extremely high raw material costs can also put downward pressure on our margins and our volumes. We were adversely affected in 2001 by raw material costs. Although raw material costs have returned to normal levels in 2002 to date, we cannot predict future changes in raw material costs. 32 Because we deliver a majority of our products directly to our customers through our "direct store delivery" system, we are a large consumer of gasoline. Increases in fuel prices can adversely affect our results of operations. Also, since we lost our energy supply agreement with Enron as a result of Enron's decision to reject our discounted-rate supply agreement in its bankruptcy, we will pay market prices for electricity in the foreseeable future. As we are a significant consumer of electricity, any significant increase in energy prices could adversely affect our financial performance. WE HAVE SUBSTANTIAL DEBT AND OTHER FINANCIAL OBLIGATIONS AND WE MAY INCUR EVEN MORE DEBT We have substantial debt and other financial obligations and significant unused borrowing capacity. See "-- Liquidity and Capital Resources." We have pledged substantially all of our assets (including the assets of our subsidiaries) to secure our indebtedness. Our high debt level and related debt service obligations: o require us to dedicate significant cash flow to the payment of principal and interest on our debt which reduces the funds we have available for other purposes, o may limit our flexibility in planning for or reacting to changes in our business and market conditions, o impose on us additional financial and operational restrictions, and o expose us to interest rate risk since a portion of our debt obligations are at variable rates. Our ability to make scheduled payments on our debt and other financial obligations depends on our financial and operating performance. Our financial and operating performance is subject to prevailing economic conditions and to financial, business and other factors, some of which are beyond our control. A significant increase in interest rates could adversely impact our financial results. If we do not comply with the financial and other restrictive covenants under our credit facilities (see Note 5 to our Condensed Consolidated Financial Statements), we may default under them. Upon default, our lenders could accelerate the indebtedness under the facilities, foreclose against their collateral or seek other remedies. LOSS OF RIGHTS TO ANY OF OUR LICENSED BRANDS COULD ADVERSELY AFFECT US We sell certain of our products under licensed brand names such as Hershey's(R), Borden(R), Pet(R), Folgers(R) Jakada(TM), Land-O-Lakes(R) and others. In some cases, we have invested, and intend to continue to invest, significant capital in product development and marketing and advertising related to these licensed brands. Should our rights to manufacture and sell products under any of these names be terminated for any reason, our financial performance and results of operations could be materially and adversely affected. NEGATIVE PUBLICITY AND/OR SHORTAGES OF MILK SUPPLY RELATED TO MAD COW DISEASE AND/OR FOOT AND MOUTH DISEASE COULD ADVERSELY AFFECT US Recent incidences of bovine spongiform encephalopathy ("BSE" or "mad cow disease") in some European countries have raised public concern about the safety of eating beef and using or ingesting certain other animal-derived products. The World Health Organization, the U.S. Food and Drug Administration and the United States Department of Agriculture have all affirmed that BSE is not transmitted to milk. However, we are still subject to risk as a result of public misperception that milk products may be affected by mad cow disease. To date, we have not seen any measurable impact on our 33 milk sales in Spain or the United States resulting from concerns about mad cow disease. However, should public concerns about the safety of milk or milk products escalate as a result of further occurrences of mad cow disease, we could suffer a loss of sales, which could have a material and adverse affect our financial results. Foot and Mouth Disease ("FMD") is a highly contagious disease of cattle, swine, sheep, goats, deer and other cloven-hooved animals. FMD causes severe losses in the production of meat and milk; however, FMD does not pose a health risk to humans. While there have been several recent occurrences of FMD in Europe, the United States has been free of FMD since 1929. To date, we have not seen a measurable impact on our supply of raw milk in Spain as a result of FMD. However, should FMD become widespread in Spain, a milk supply shortage could develop, which would affect our ability to obtain raw milk for our Spanish operations and the price that we are required to pay for raw milk in Spain. If we are unable to obtain a sufficient amount of raw milk to satisfy our Spanish customers' needs, and/or if we are forced to pay a significantly higher price for raw milk in Spain, our financial results in Spain could be materially and adversely affected. Likewise, if there is an outbreak of FMD in the United States, a shortage of raw milk could develop in the United States, which would affect our ability to obtain raw milk and the price that we are required to pay for raw milk in the United States. If we are unable to obtain a sufficient amount of raw milk to satisfy our U.S. customers' needs and/or if we are forced to pay a significantly higher price for raw milk in the United States, our consolidated financial results could be materially and adversely affected. WE COULD BE REQUIRED TO PAY SUBSTANTIAL LIQUIDATED DAMAGES TO DAIRY FARMERS OF AMERICA, IF WE FAIL TO OFFER THEM THE RIGHT TO SUPPLY RAW MILK TO CERTAIN OF OLD DEAN'S PLANTS In connection with our purchase of the minority interest in our Dairy Group, we entered into an agreement with Dairy Farmers of America ("DFA"), the nation's largest dairy farmers' cooperative and our primary supplier of raw milk, pursuant to which we have agreed to pay to DFA liquidated damages in an amount of up to $47.0 million if we fail to offer them the right, within a specified period of time after completion of the Old Dean acquisition, to supply raw milk to certain of Old Dean's plants. The amount of damages to be paid, if any, would be determined on a plant-by-plant basis for each Old Dean plant's milk supply that is not offered to DFA, based generally on the amount of raw milk used by the plant. We would be required to pay the liquidated damages even if we were prohibited from offering the business to DFA by an injunction, restraining order or contractual obligation. See Note 10 to our Condensed Consolidated Financial Statements for further information regarding this agreement. Old Dean currently has milk supply agreements with several raw milk suppliers other than DFA. If any such supplier believes that it has rights to continue to supply Old Dean's plants beyond the deadline dates contained in our agreement with DFA, and is successful in legally establishing any such rights, we may be prohibited from offering DFA the right to supply certain of the Old Dean plants and, therefore, be required to pay all or a portion of the liquidated damages to DFA. WE COULD BE REQUIRED TO SATISFY OUR PAYMENT OBLIGATIONS UNDER OUR GUARANTY OF CONSOLIDATED CONTAINER COMPANY'S DEBT In February 2002, we executed a limited guarantee of certain indebtedness of Consolidated Container Company ("CCC"), in which we own a 43.1% interest. See Note 10 to our Condensed Consolidated Financial Statements for information concerning the terms of the guaranty. CCC has experienced various operational difficulties over the past 6 to 9 months, which has adversely affected its financial performance. CCC's ability to repay the guaranteed indebtedness will depend on a variety of factors, including its ability to successfully implement its business plan, of which there can be no assurance. 34 WE MAY BE SUBJECT TO PRODUCT LIABILITY CLAIMS We sell food products for human consumption, which involves risks such as: o product contamination or spoilage, o product tampering, and o other adulteration of food products. Consumption of an adulterated, contaminated or spoiled product may result in personal illness or injury. We could be subject to claims or lawsuits relating to an actual or alleged illness or injury, and we could incur liabilities that are not insured or that exceed our insurance coverages. Although we maintain quality control programs designed to address food quality and safety issues, an actual or alleged problem with the quality, safety or integrity of our products at any of our facilities could result in: o product withdrawals, o product recalls, o negative publicity, o temporary plant closings, and o substantial costs of compliance or remediation. Any of these events could have a material and adverse effect on our financial condition, results of operations or cash flows. POOR WEATHER CAN ADVERSELY AFFECT OUR SPECIALTY FOODS SEGMENT Our Specialty Foods segment purchases cucumbers under seasonal grower contracts with a variety of growers located near our plants. Bad weather in one of the growing areas can damage or destroy the crop in that area. If we are not able to buy cucumbers from one of our local growers due to bad weather, we are forced to purchase cucumbers from non-local sources at substantially higher prices, which can have an adverse affect on Specialty Foods' results of operations. LOSS OF OR INABILITY TO ATTRACT KEY PERSONNEL COULD ADVERSELY AFFECT OUR BUSINESS Our success depends to a large extent on the skills, experience and performance of our key personnel. The loss of one or more of these persons could hurt our business. We do not maintain key man life insurance on any of our executive officers, directors or other employees. If we are unable to attract and retain key personnel, our business will be adversely affected. CERTAIN PROVISIONS OF OUR CERTIFICATE OF INCORPORATION, BYLAWS AND DELAWARE LAW COULD DETER TAKEOVER ATTEMPTS Some provisions in our certificate of incorporation and bylaws could delay, prevent or make more difficult a merger, tender offer, proxy contest or change of control. Our stockholders might view any such transaction as being in their best interests since the transaction could result in a higher stock price than the 35 current market price for our common stock. Among other things, our certificate of incorporation and bylaws: o authorize our board of directors to issue preferred stock in series with the terms of each series to be fixed by our board of directors, o divide our board of directors into three classes so that only approximately one-third of the total number of directors is elected each year, o permit directors to be removed only for cause, and o specify advance notice requirements for stockholder proposals and director nominations. In addition, with certain exceptions, the Delaware General Corporation Law restricts mergers and other business combinations between us and any stockholder that acquires 15% or more of our voting stock. We also have a stockholder rights plan. Under this plan, after the occurrence of specified events, our stockholders will be able to buy stock from us or our successor at reduced prices. These rights do not extend, however, to persons participating in takeover attempts without the consent of our board of directors. Accordingly, this plan could delay, defer, make more difficult or prevent a change of control. WE ARE SUBJECT TO ENVIRONMENTAL REGULATIONS We, like others in similar businesses, are subject to a variety of federal, foreign, state and local environmental laws and regulations including, but not limited to, those regulating waste water and storm water, air emissions, storage tanks and hazardous materials. We believe that we are in material compliance with these laws and regulations. Future developments, including increasingly stringent regulations, could require us to make currently unforeseen environmental expenditures. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK INTEREST RATE FLUCTUATIONS In order to reduce the volatility of earnings that arises from changes in interest rates, we manage interest rate risk through the use of interest rate swap agreements. These swaps have been designated as hedges against variable interest rate exposure on loans under our senior credit facility. The following table summarizes our various interest rate swap agreements at March 31, 2002:
FIXED INTEREST RATES EXPIRATION DATE NOTIONAL AMOUNTS --------------------------- ---------------------- ------------------- (In millions) 4.90% to 4.93%.......... December 2002 $275.0 6.07% to 6.24%.......... December 2002 325.0 6.23%................... June 2003 50.0 6.69%................... December 2004 100.0 6.69% to 6.74%.......... December 2005 100.0 6.78%................... December 2006 75.0
36 These swap agreements provide hedges for loans under our credit facility by limiting or fixing the LIBOR interest rates specified in the credit facility at the interest rates noted above until the indicated expiration dates of these interest rate derivative agreements. These derivative agreements were previously designated as hedges for borrowings under our terminated Suiza Dairy Group credit facility, but were redesignated upon completion of the Old Dean acquisition. We have also entered into interest rate swap agreements that provide hedges for loans under Leche Celta's term loan. See Note 5 to our Condensed Consolidated Financial Statements. The following table summarizes these agreements:
FIXED INTEREST RATES EXPIRATION DATE NOTIONAL AMOUNTS - -------------------------- -------------------- -------------------------------------------------------- 5.54% November 2003 1,500,000,000 pesetas (approximately $7.9 million as of March 31, 2002) 5.6% November 2004 2,000,000,000 pesetas (approximately $10.5 million as of March 31, 2002)
We are exposed to market risk under these arrangements due to the possibility of interest rates on our credit facilities falling below the rates on our interest rate derivative agreements. We incurred $5.7 million of additional interest expense, net of income taxes, during the first quarter of 2002 as a result of interest rates on our variable rate debt falling below the agreed-upon interest rate on our existing swap agreements. Credit risk under these arrangements is remote since the counterparties to our interest rate derivative agreements are major financial institutions. A majority of our debt obligations are currently at variable rates. We have performed a sensitivity analysis assuming a hypothetical 10% adverse movement in interest rates. As of March 31, 2002, the analysis indicated that such interest rate movement would not have a material effect on our financial position, results of operations or cash flows. However, actual gains and losses in the future may differ materially from that analysis based on changes in the timing and amount of interest rate movement and our actual exposure and hedges. FOREIGN CURRENCY We are exposed to foreign currency risk due to operating cash flows and various financial instruments that are denominated in foreign currencies. Our most significant foreign currency exposures relate to the British pound and the euro. At this time, we believe that potential losses due to foreign currency fluctuations would not have a material impact on our consolidated financial position, results of operations or operating cash flow. 37 PART II - OTHER INFORMATION ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits *10.1 Performance Bonus Plan for Steve Demos and certain other employees of White Wave, Inc. (filed herewith) 10.2 Amendment No. 2 to Senior Credit Facility (filed herewith) 11 Statement re computation of per share earnings (filed herewith) - --------- * Management compensation plan (b) Form 8-K's o Form 8-K dated January 7, 2002 o Form 8-K/A dated March 6, 2002 o Form 8-K dated April 17, 2002 38 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 FOODS COMPANY /s/ Barry A. Fromberg --------------------------------------------- Barry A. Fromberg Executive Vice President, Chief Financial Officer (Principal Accounting Officer) Date: May 15, 2002 39 INDEX TO EXHIBITS
EXHIBIT NUMBER DESCRIPTION - ------- ----------- *10.1 Performance Bonus Plan for Steve Demos and certain other employees of White Wave, Inc. 10.2 Amendment No. 2 to Senior Credit Facility 11 Statement re computation of per share earnings
EX-10.1 3 d96946ex10-1.txt PERFORMANCE BONUS PLAN EXHIBIT 10.1 PERFORMANCE BONUS PLAN THIS PERFORMANCE BONUS PLAN (this "PLAN") is hereby entered into among White Wave, Inc., a Colorado corporation (the "COMPANY"), Dean Foods Company, a Delaware corporation ("DEAN"), each of the employees of the Company listed on the signature page hereto (the "KEY EMPLOYEES") and Steven A. Demos (the "KEY EMPLOYEE REPRESENTATIVE"), acting by virtue of this Plan as the attorney-in-fact and representative of the Key Employees this 9th day of May, 2002 ("EFFECTIVE DATE"). WHEREAS, White Wave, Dean and Surf Acquisition Corp., a Delaware corporation and wholly owned subsidiary of Dean ("ACQUISITION SUB"), have entered into an Agreement and Plan of Merger dated April 23, 2002, as amended, pursuant to which Merger Sub will merge (the "MERGER") with and into White Wave, with White Wave as the surviving corporation in such Merger (the "SURVIVING COMPANY"); WHEREAS, it is a condition of the Merger that the Company, Dean and the Key Employee Representative enter into this Plan; and WHEREAS, any capitalized terms that are used but not defined herein shall have the meaning given to them in the Merger Agreement. NOW THEREFORE, in consideration of the mutual covenants and promises contained in this Plan, and other good and valuable consideration, the receipt and sufficiency of which are acknowledged by the parties, the parties agree as follows: ARTICLE I PERFORMANCE BONUS PLAN SECTION 1.1 PERFORMANCE BONUS. (a) Performance Bonus; Key Employee Bonus. Pursuant to the terms of this ARTICLE I and the other provisions of this Plan, if Net Sales of the Surviving Company equal or exceed $382,500,000, and the Surviving Company does not exceed the budgetary restrictions for the line items (accounted for consistently with the Company's past practices and the Operating Plan) contemplated by SECTIONS 1.3(a)(i) and (a)(ii) by more than $1,000,000 in the aggregate, during the period commencing on April 1, 2002 and ending on March 31, 2004 (the "INCENTIVE PERIOD"), Dean shall deliver, or shall cause the Surviving Company to deliver, to certain employees of the Surviving Company, including the Key Employees, a bonus (the "PERFORMANCE BONUS") based on the amount of Net Sales achieved during the Incentive Period as provided and in the amounts set forth in SCHEDULE 1.1(a-1). In such event, Dean shall pay and deliver, or shall cause the Surviving Company to pay and deliver, to the Key Employees an aggregate of 68.56% of the Performance Bonus payable (the "KEY EMPLOYEE BONUS"), as may be adjusted as provided in this ARTICLE I, and the remaining 31.44% of the Performance Bonus (or such smaller or greater percentage as is allocated to the Discretionary Pool Employees pursuant to SECTION 1.2(b)) shall be paid and delivered to the Discretionary Pool Employees as discretionary bonuses (the "DISCRETIONARY BONUS"). Pursuant to the terms of SECTION 1.4, Dean shall, or shall cause the Surviving Company to, pay and deliver to (i) each of the Key Employees except as otherwise expressly provided in this ARTICLE I an amount (each, a Key Employee's "PRO RATA SHARE") equal to the Performance Bonus payable multiplied by the percentage set forth opposite such Key Employee's name on SCHEDULE 1.1(a-2) and (ii) each of the Discretionary Pool Employees the amount of the Discretionary Bonus allocated to such Discretionary Pool Employee on the Pool Allocation Schedule in effect at the time of such payment. (b) Discretionary Bonus. The Discretionary Bonus, if any, shall be payable to certain employees of the Company (the "DISCRETIONARY POOL EMPLOYEES") pursuant to the terms and conditions contained herein and in the incentive plan attached hereto as Exhibit A (the "DISCRETIONARY INCENTIVE PLAN"). The Discretionary Pool Employees eligible to participate in the Discretionary Bonus and the allocation of the Discretionary Bonus to such Discretionary Pool Employees shall be determined by Steven Demos, or Patricia Calhoun if Steven Demos is no longer the President of the Surviving Company, or, if Patricia Calhoun is no longer employed by the Surviving Company, the President of the Surviving Company (such person shall be referred to as the "COMPANY OFFICER") acting in a commercially reasonable manner, and a schedule listing the names and positions of the Discretionary Pool Employees and their respective allocations of the Discretionary Bonus shall be provided to Dean on or prior to December 31, 2002 (the "POOL ALLOCATION SCHEDULE"). If a Discretionary Pool Employee's employment is terminated for any reason, such Discretionary Pool Employee's portion of the Discretionary Bonus shall be available for allocation to any employee of the Surviving Company, including any new employee hired during the Incentive Period, at the discretion of the Company Officer, acting in a commercially reasonable manner. Within 60 days of such a Discretionary Pool Employee's termination of employment, a revised Pool Allocation Schedule will be delivered to Dean. SECTION 1.2 TERMINATION OF EMPLOYMENT OF KEY EMPLOYEES DURING INCENTIVE PERIOD. (a) Notwithstanding the foregoing, in the event a Key Employee is terminated during the Incentive Period: (i) by Dean without Cause or upon a Constructive Termination, such terminated Key Employee will be entitled to receive as soon as practicable following the Determination Date his or her Pro Rata Share as if the Surviving Company achieved $450 million in Net Sales during the Incentive Period (the "BASE TARGET AMOUNT"), plus his or her Pro Rata Share of any additional Performance Bonus payable if actual Net Sales exceed $450 million during the Incentive Period; (ii) upon his or her death or Incapacity, such terminated Key Employee, or his or her estate, will be entitled to receive as soon as practicable following the Determination Date his or her Pro Rata Share of the Performance Bonus payable based on the amount of Net Sales actually achieved during the Incentive Period; or (iii) by Dean for Cause or by such Key Employee without there having been a Constructive Termination, such terminated Key Employee will not be entitled to receive any Key Employee Bonus. (b) In the case of a termination described in SECTION 1.2(a)(iii) of the employment of (i) James Terman, Sheryl Lamb or Chris Appel, the Pro Rata Share (if any) they would have been entitled to receive had their employment not been terminated shall be available for allocation to any employee of the Surviving Company (other than Steven Demos or Patricia Calhoun), including any new employee hired during the Incentive Period, by the Company Officer, in consultation with the Chief Executive Officer of Dean, with each acting in a commercially reasonable manner; and (ii) Steven Demos or Patricia Calhoun, the Pro Rata Share they would have been entitled to receive had their employment not been terminated shall be forfeited and shall not be payable to any other employee of the Surviving Company. To the extent the Company Officer and the Chief Executive Officer of Dean are unable to agree on the 2 allocation of all or any portion of a terminated Key Employee's Pro Rata Share as provided in subparagraph (i), the amount of the Pro Rata Share in dispute shall be allocated to the Discretionary Bonus and shall be payable to the Discretionary Pool Employees as provided in SECTION 1.1. Notwithstanding anything to the contrary herein, the amount of the Performance Bonus, if any, allocable to the Discretionary Incentive Plan shall be reduced by $76,713, of which $_______ shall be paid to _______________, and $__________ shall be paid to _______________, in reimbursement for the investment banking fees previously paid by them and incurred in connection with the creation of the Discretionary Incentive Plan. Such reimbursement shall be paid pursuant to the preceding sentence irrespective of whether ___________ or ___________ remain in the employment of the Company. SECTION 1.3 OPERATION DURING INCENTIVE PERIOD. (a) During the Incentive Period, Dean will not take or cause to be taken any action that materially and adversely affects the ability of the Company Officer to exercise commercially reasonable discretion, recognizing the Company's past practices with respect to new product development and introduction, in the prudent management of the following line items as such line items are reported in the Company's five-year operational plan dated March 13, 2002 and attached hereto as SCHEDULE 1.3 (the "OPERATING PLAN"): (i) Sales, Marketing, Research and Development, and General and Administrative expenses, subject to the limitation that the aggregate of such line item amounts shall not exceed, in the aggregate on an annual basis, the greater of (A) the dollar amount specified in the Operating Plan or (B) the amount determined by multiplying actual Net Sales by the percentage of Net Sales specified in the Operating Plan for such line items; and (ii) capital expenditures in the amounts set forth in the Operating Plan line items Silk Asset Replacement and Tofu/Baked Asset Replacement, subject to the limitation that the aggregate of such line item amounts shall not exceed, in the aggregate on an annual basis, the greater of (A) the dollar amount specified in the Operating Plan or (B) the amount determined by multiplying actual Net Sales by the percentage of Net Sales specified in the Operating Plan for such line items, plus in either case up to $1.4 million in the fiscal year ending March 31, 2003 to be used for the purchase and installation of a bean extraction system. (b) During the Incentive Period, Dean will permit the Company Officer (i) to cause the Surviving Company to build a new extraction and processing plant within the $18 million of capital expenditures budgeted in the Operating Plan for the Company's fiscal year ending March 31, 2004 in the event that Dean does not commit by December 1, 2002 to supply or make alternative arrangements to supply production capacity to the Surviving Company sufficient to support Net Sales as projected in the Operating Plan, and (ii) for reasons of technology, geography, capacity or strategic competitive advantage, to jointly determine with the Chief Executive Officer of Dean, with each acting in a commercially reasonable manner, to contract with third parties for periods of not more than three years for production facilities if Dean cannot or chooses not to provide the capacity needed to achieve the Net Sales set forth in the Operating Plan. (c) If during the Incentive Period Dean takes any actions prohibited in SECTION 1.3(a), or fails to allow action permitted by SECTION 1.3(b), in a manner, as reasonably determined by Steven Demos, that materially and adversely affects the Surviving Company's ability to achieve the Net Sales targets, then Steven Demos may elect to voluntarily terminate his employment upon 60 days prior 3 written notice to Dean and receive as soon as practicable following the Determination Date (i) his Pro Rata Share as if the Base Target Amount had been achieved, and (ii) if such termination occurs after the first anniversary of the Closing Date, his Pro Rata Share of any additional Key Employee Bonus payable if actual Net Sales exceed $450 million during the Incentive Period. If Steven Demos so elects to voluntarily terminate his employment, each of the other Key Employees may also elect, within 30 days of Steven Demos' notice of election to terminate his employment, to voluntarily terminate his or her employment upon 60 days prior written notice to Dean and receive as soon as practicable following the Determination Date (A) his or her Pro Rata Share as if the Base Target Amount had been achieved, and (B) if such termination occurs after the first anniversary of the Closing Date, his or her Pro Rata Share of any additional Key Employee Bonus payable if actual Net Sales exceed $450 million during the Incentive Period. (d) (i) From the date hereof until the end of the Incentive Period, Dean shall cause or permit the Surviving Company to: (A) maintain its corporate existence in good standing; and (B) give the Company Officer discretion, acting in a commercially reasonable manner, to determine the titles and responsibilities of the operating officers and employees of the Company. (ii) From the date hereof until the end of the Incentive Period, Dean shall not: (A) require that the Surviving Company add additional officers of the Surviving Company, provided, however, that Dean may add additional officers to the Surviving Company if the salaries, benefits and other expenses related to the employment of such officers is paid directly by Dean; (B) change or require the change of any of the following unless required by any Law or any judgment, writ, order or decree of any court, judge, justice or magistrate or any Governmental Entity: (w) the name of the Surviving Company; (x) the names of any products of the Surviving Company; (y) the trademarks, trade dress and logos of the Surviving Company; or (z) the advertising and sponsorships of the Surviving Company (subject to the budgetary restrictions contemplated by SECTIONS 1.3(a)(i) and (a)(ii)); (C) take any action which has as its primary purpose the avoidance of the payment of the Performance Bonus; or (D) use the Trade Secrets, trademarks, trade dress or logos of the Surviving Company on any Soy Products sold by Dean or its Affiliates (other than the Surviving Company) that compete with the products of the Surviving Company or enter into any new agreements to provide contract packaging or manufacturing services for Soy Products that compete with the products of the Surviving Company with any Person that is not an Affiliate of Dean (other than the Surviving Company). "SOY PRODUCTS" shall mean (x) tofu; (y) soy-based and wheat-gluten based meat substitutes and (z) any of the following products having soy as their largest percentage component source of protein: (1) any liquid beverage marketed as a milk substitute and (2) yogurt. 4 SECTION 1.4 DELIVERY OF PERFORMANCE BONUS. (a) As soon as practicable following expiration of the Incentive Period, but in no event later than 60 days following expiration of the Incentive Period, Dean shall determine in accordance with the terms herein whether the Surviving Company has achieved Net Sales in an amount sufficient to result in payment of all or a portion of the Performance Bonus and whether the Surviving Company has not exceeded the budgetary restrictions contemplated by SECTIONS 1.3(a)(i) and (a)(II) by more than $1,000,000 in the aggregate, excluding the impact of compensation granted under the Shareholder Stock Compensation Agreement effective as of the date hereof (the date of such determination shall be referred to as the "DETERMINATION DATE"), and Dean shall deliver to the Key Employee Representative a certificate (the "PERFORMANCE BONUS CERTIFICATE") executed by Dean's Chief Financial Officer, or such other officer authorized by Dean, setting forth Dean's determination of the amount of Performance Bonus, if any, payable pursuant to this ARTICLE I. The Performance Bonus Certificate shall be delivered even if no Performance Bonus is payable. Within 30 days (the "RESPONSE PERIOD") following the receipt of the Performance Bonus Certificate, the Key Employee Representative shall notify Dean of any dispute regarding the Performance Bonus Certificate, which notice shall set forth in reasonable detail the basis for such dispute to the extent such detail can be specified based on the information set forth in the Performance Bonus Certificate. If the Key Employee Representative fails to notify Dean of any such dispute during the Response Period, the Performance Bonus Certificate and the amount of Performance Bonus payable shall be deemed to be accepted by the Key Employee Representative and Dean shall pay the Performance Bonus within three Business Days after the expiration of the Response Period. (b) In the event that the Key Employee Representative notifies Dean of a dispute during the Response Period, Dean and the Key Employee Representative shall cooperate in good faith to resolve the dispute as promptly as possible. If Dean and the Key Employee Representative are able to resolve the dispute within 15 Business Days of the Key Employee Representative's delivery of the notice of dispute, Dean shall deliver within three Business Days after resolution of the dispute the amount of Performance Bonus agreed to by Dean and the Key Employee Representative. If Dean and the Key Employee Representative are unable to resolve the dispute within 15 Business Days of the Key Employee Representative's delivery of the notice of dispute, then the dispute will be submitted to an accounting firm not then retained by Dean and acceptable to Dean and the Key Employee Representative (the "INDEPENDENT ACCOUNTING FIRM"). Each of Dean and the Key Employee Representative agrees to execute a reasonable engagement letter if requested by the Independent Accounting Firm. All fees and expenses relating to the work, if any, to be performed by the Independent Accounting Firm shall be borne by the substantially non-prevailing party. Dean shall pay all such fees and expenses, and shall then, in the event that the Key Employee Representative is the substantially non-prevailing party, reduce the Performance Bonus by an amount equal to the amount of such fees and expenses. In the event the Independent Accounting Firm determines that no Performance Bonus is payable, the Key Employee Representative, on behalf of the Key Employees and the Discretionary Pool Employees, shall reimburse Dean for all such fees and expenses relating to the work performed by the Independent Accounting Firm. The Key Employee Representative shall be the substantially non-prevailing party for purposes of the payment of such fees and expenses if the difference between the Net Sales set forth in the Performance Bonus Certificate and the amount of Net Sales determined by the Independent Accounting Firm is less than or equal to one percent of the amount of Net Sales set forth in the Performance Bonus Certificate; provided, however, that if such difference does not exceed one percent and the determination of the Independent Accounting Firm results in a payment of any amount of Performance Bonus and the Performance Bonus Certificate indicated no Performance Bonus was payable, then Dean shall be deemed the substantially non-prevailing party. The Independent Accounting Firm shall act as an arbitrator to determine only those issues still in dispute (provided that any such determination by the Independent Accounting Firm shall only be for purposes of this Plan) and shall have access to and be entitled to review 5 the underlying records and compilations relating to any such disputed issues. Dean and the Key Employee Representative shall use their commercially reasonable efforts to cause the Independent Accounting Firm to issue its determination within 30 days of its engagement. This determination shall be set forth in a written statement delivered to Dean and the Key Employee Representative and shall be final, binding and conclusive. If the determination indicates that additional Performance Bonus should be distributed, Dean shall make such distribution within ten Business Days of receipt of the determination. No downward adjustment in the amount of the Performance Bonus shall be made. ARTICLE II APPOINTMENT OF KEY EMPLOYEE REPRESENTATIVE SECTION 2.1. APPOINTMENT OF KEY EMPLOYEE REPRESENTATIVE. As of the Effective Date and without any further action by the Key Employees, Steven A. Demos will be appointed as agent and attorney-in-fact (the "KEY EMPLOYEE REPRESENTATIVE") for each Key Employee receiving a portion of the Key Employee Bonus, for and on behalf of the Key Employee. The Key Employee Representative shall have full power and authority to represent all of the Key Employees and their successors with respect to all matters arising under this Plan and all actions taken by the Key Employee Representative hereunder and thereunder shall be binding upon all such Key Employees and their successors as if expressly confirmed and ratified in writing by each of them. The Key Employee Representative shall take any and all actions which he believes are necessary or appropriate under this Plan for and on behalf of the Key Employees, as fully as if the Key Employees were acting on their own behalf, including, without limitation, conducting negotiations with Dean and its agents under this Plan with respect to all matters arising under this Plan, taking any and all other actions specified in or contemplated by this Plan, and engaging counsel, accountants or other representatives in connection with the foregoing matters. Without limiting the generality of the foregoing, the Key Employee Representative shall have full power and authority to interpret all the terms and provisions of this Plan and to consent to any amendment hereof or thereof on behalf of all such Key Employees and such successors. Upon the death, resignation or removal of Steven Demos for any reason as Key Employee Representative, Patricia Calhoun shall become the Key Employee Representative. SECTION 2.2. INDEMNIFICATION OF KEY EMPLOYEE REPRESENTATIVE. The Key Employee Representative may act upon any instrument or other writing believed by the Key Employee Representative in good faith to be genuine and to be signed or presented by the proper person and shall not be liable in connection with the performance by him or her of his or her duties pursuant to the provisions of this Plan, except for his or her own willful default or gross negligence. The Key Employee Representative shall be, and hereby is, indemnified and held harmless by the Key Employees from all losses, costs and expenses (including attorneys' fees) that may be incurred by the Key Employee Representative as a result of the Key Employee Representative's performance of his or her duties under this Plan, provided, that the Key Employee Representative shall not be entitled to indemnification for losses, costs or expenses that result from any action taken or omitted by the Key Employee Representative as a result of his willful default or gross negligence and provided, further, that each Key Employee's obligation to indemnify the Key Employee Representative under this Plan shall be limited to, and payable only from, each Key Employee's pro rata portion of the Key Employee Bonus payable to him or her hereunder. The Key Employee Representative's costs and expenses shall be paid out of the amount of Key Employee Bonus payable hereunder, to the extent required by this SECTION 2.2. 6 SECTION 2.3. ACCESS TO INFORMATION. The Key Employee Representative shall have reasonable access to information of and concerning any dispute with respect to the Performance Bonus Certificate and which is in the possession, custody or control of the Company and the reasonable assistance of the Company's officers and employees for purposes of performing his or her duties under this Plan and exercising his or her rights under this Plan, including for the purpose of evaluating any amount set forth in the Performance Bonus Certificate; provided, that, the Key Employee Representative shall treat confidentially and not disclose any nonpublic information received by him or her hereunder to anyone (except to the Key Employee Representative's attorneys, accountants or other advisers, to Key Employees, to the arbitrators appointed to resolve disputes pursuant to this Agreement, and, on a need-to-know basis, to other individuals who agree to keep such information confidential). SECTION 2.4. REASONABLE RELIANCE. In the performance of his duties hereunder, the Key Employee Representative shall be entitled to rely upon any document or instrument reasonably believed by him to be genuine, accurate as to content and signed by any Key Employee or Dean. The Key Employee Representative may assume that any person purporting to give any notice in accordance with the provisions hereof has been duly authorized to do so. SECTION 2.5. ATTORNEY-IN-FACT. (i) The Key Employee Representative is hereby appointed and constituted the true and lawful attorney-in-fact of each Key Employee, with full power in his or her name and on his or her behalf to act according to the terms of this Plan in the absolute discretion of the Key Employee Representative; and in general to do all things and to perform all acts including, without limitation, executing and delivering any agreements, certificates, receipts, instructions, notices or instruments contemplated by or deemed advisable in connection with this Plan. (ii) This power of attorney and all authority hereby conferred is granted and shall be irrevocable and shall not be terminated by any act of any Key Employee, by operation of law, whether by such Key Employee's death, disability protective supervision or any other event. Without limitation to the foregoing, this power of attorney is to ensure the performance of a special obligation and, accordingly, each Key Employee hereby renounces his or her right to renounce this power of attorney unilaterally any time before the end of the Incentive Period. (iii) Each Key Employee hereby waives any and all defenses that may be available to contest, negate or disaffirm the action of the Key Employee Representative taken in good faith under this Plan. (iv) Notwithstanding the power of attorney granted in this SECTION 2.5, no agreement, instrument, acknowledgement or other act or document shall be ineffective by reason only of the Key Employees having signed or given such agreement, instrument, acknowledgement, or other act or document directly instead of the Key Employee Representative. 7 SECTION 2.6. LIABILITY. If the Key Employee Representative is required by the terms of this Plan to determine the occurrence of any event or contingency, the Key Employee Representative shall, in making such determination, be liable to the Key Employees only for his or her proven bad faith as determined in light of all the circumstances, including the time and facilities available to him or her in the ordinary conduct of business. In determining the occurrence of any such event or contingency, the Key Employee Representative may request from any of the Key Employees or any other person such reasonable additional evidence as the Key Employee Representative in his sole discretion may deem necessary to determine any fact relating to the occurrence of such event or contingency, and may at any time inquire of and consult with others, including any of the Key Employees, and the Key Employee Representative shall not be liable to any Key Employee for any damages resulting from his delay in acting hereunder pending his receipt and examination of additional evidence requested by him. SECTION 2.7. ORDERS. The Key Employee Representative is authorized, in his sole discretion, to comply with final, nonappealable orders or decisions issued or process entered by any court of competent jurisdiction or arbitrator with respect to the Key Employee Bonus. If any portion of the Key Employee Bonus is disbursed to the Key Employee Representative and is at any time attached, garnished or levied upon under any court order, or in case the payment, assignment, transfer, conveyance or delivery of any such property shall be stayed or enjoined by any court order, or in case any order, judgment or decree shall be made or entered by any court affecting such property or any part thereof, then and in any such event, the Key Employee Representative is authorized, in his sole discretion, but in good faith, to rely upon and comply with any such order, writ, judgment or decree which he or she is advised by legal counsel selected by him is binding upon him or her without the need for appeal or other action; and if the Key Employee Representative complies with any such order, writ, judgment or decree, he shall not be liable to any Key Employee or to any other person by reason of such compliance even though such order, writ, judgment or decree may be subsequently reversed, modified, annulled, set aside or vacated. SECTION 2.8. REMOVAL OF KEY EMPLOYEE REPRESENTATIVE; AUTHORITY OF SUCCESSOR KEY EMPLOYEE REPRESENTATIVE. Key Employees who in the aggregate hold at least a majority of the Key Employees' interest in the Key Employee Bonus shall have the right at any time during the Incentive Period to remove a then-acting Key Employee Representative and to appoint a successor Key Employee Representative upon such removal, or upon his or her death, disability or resignation; provided, however, that neither such removal of such then acting Key Employee Representative nor such appointment of a successor Key Employee Representative shall be effective until the delivery to Dean of executed counterparts of a writing signed by each such Key Employee with respect to such removal and appointment, together with an acknowledgment signed by the successor Key Employee Representative appointed in such writing that he or she accepts the responsibility of successor Key Employee Representative and agrees to perform and be bound by all of the provisions of this Plan applicable to the Key Employee Representative. Each successor Key Employee Representative shall have all of the power, authority, rights and privileges conferred by this Plan upon the original Key Employee Representative, and the term "Key Employee Representative" as used herein shall be deemed to include any interim or successor Key Employee Representative. 8 ARTICLE III MISCELLANEOUS SECTION 3.1 DEFINITIONS. As used herein the terms set forth below shall have the following meanings: "CAUSE" means a Key Employee's (i) willful and intentional material breach of the employment agreement between the Surviving Company and such Key Employee, (ii) willful and intentional misconduct or gross negligence in the performance of, or willful neglect of, such Key Employee's duties, which has caused material injury (monetary or otherwise) to the Surviving Company, or (iii) conviction of, or plea of nolo contendere to, a felony; provided, however, that no act or omission shall constitute "Cause" for purposes of this Plan unless the board of directors or the Chairman of the board of directors of the Surviving Company provides to the Key Employee (y) written notice clearly and fully describing the particular acts or omissions which the board of directors or the Chairman of the board of directors of the Surviving Company reasonably believes in good faith constitutes "Cause" and (z) an opportunity, within 30 days following his or her receipt of such notice, to meet in person with the board of directors or the Chairman of the board of directors of the Surviving Company to explain or defend the alleged acts or omissions relied upon by the board of directors or the Chairman of the board of directors of the Surviving Company and, to the extent practicable, to cure such acts or omissions. Further, no act or omission shall be considered as "willful" or "intentional" if the Key Employee reasonably believed such acts or omissions were in the best interests of the Surviving Company. "CONSTRUCTIVE TERMINATION" shall mean a material change in position, title or function, a failure to pay, in any material respect, to a Key Employee the base salary owed to such Key Employee under the terms of the employment agreement between such Key Employee and the Surviving Company, or a requirement (other than by Steven Demos or Patricia Calhoun) to relocate outside of the Boulder, Colorado metropolitan area, or, with respect to Steven Demos only, a change in his reporting relationship to a position other than the Chief Executive Officer of Dean. "INCAPACITY" means, as determined by a physician selected by the employee with the consent of Dean (which consent shall not be unreasonably withheld), the inability to perform the essential duties of an employee's position by reason of a physical or mental impairment which is potentially permanent in character or which can be expected to last for a continuous period of not less than six months. "NET SALES" means net sales accounted for consistently with the Company's past practices and the Operating Plan. SECTION 3.2 NOTICES Any notice, request, demand, waiver, consent, approval, or other communication which is required or permitted to be given to any party hereunder shall be in writing and shall be deemed given only if delivered to the party personally or sent to the party by facsimile transmission (promptly followed by a hard-copy delivered in accordance with this SECTION 3.2) or by registered or certified mail (return receipt requested), with postage and registration or certification fees thereon prepaid, addressed to the party at its address set forth below: 9 If to Dean: Dean Foods Company 2515 McKinney Avenue Dallas, Texas 75201 Attention: General Counsel with a copy to (which shall not be deemed notice): Hogan & Hartson L.L.P. 1470 Walnut, Suite 200 Boulder, Colorado 80302 Attention: William R. Roberts If to the Company: White Wave, Inc. 1890 N. 57th Ct. Boulder, Colorado 80301 Attention: Steven Demos with a copy to (which shall not be deemed notice): Gibson, Dunn & Crutcher LLP 1801 California Street, Suite 4100 Denver, Colorado 80202 Attention: Richard M. Russo If to the Key Employee Representative: Steven Demos c/o White Wave, Inc. 1890 N. 57th Ct. Boulder, Colorado 80301 with a copy to (which shall not be deemed notice): Gibson, Dunn & Crutcher LLP 1801 California Street, Suite 4100 Denver, Colorado 80202 Attention: Richard M. Russo or to such other address or Person as any party may have specified in a notice duly given to the other party as provided herein. Such notice, request, demand, waiver, consent, approval or other communication will be deemed to have been given as of the date so delivered, on the next business day following the date sent by facsimile and on the third business day after it is mailed. SECTION 3.3. AMENDMENT. Any amendment, modification or revision of this Plan and any waiver of compliance or consent with respect hereto shall be effective only if in a written instrument executed by the parties hereto. 10 SECTION 3.4. GOVERNING LAW. This Plan shall be governed by, and this Plan and any disputes or controversies related hereto shall be construed, interpreted and enforced in accordance with the laws of the State of Colorado, without regard to the conflicts-of-law rules thereof that would apply the laws of any other jurisdiction. SECTION 3.5. NO BENEFIT TO OTHERS. The representations, warranties, covenants and agreements contained in this Plan are for the sole benefit of the parties hereto, the Key Employees and the Discretionary Pool Employees, and they shall not be construed as conferring, and are not intended to confer, any rights on any other Person. SECTION 3.6. SEVERABILITY. If any term or other provision of this Plan is determined to be invalid, illegal or incapable of being enforced by any rule of law or public policy, all other terms and provisions of this Plan shall remain in full force and effect. Upon such determination, the parties hereto shall negotiate in good faith to modify this Plan so as to give effect to the original intent of the parties to the fullest extent permitted by applicable law. SECTION 3.7. SECTION HEADINGS. All section headings are for convenience only and shall in no way modify or restrict any of the terms or provisions hereof. SECTION 3.8. SCHEDULES AND EXHIBITS. All Schedules and Exhibits referred to herein are intended to be and hereby are specifically made a part of this Plan. SECTION 3.9. EXTENSIONS. At any time prior to the Effective Time, Dean, on the one hand, and the Company on the other may by corporate action, extend the time for compliance by or waive performance of any representation, warranty, condition or obligation of the other party. SECTION 3.10. COUNTERPARTS. This Plan may be executed in two or more counterparts, each of which shall be deemed an original, and the Company and Dean may become a party hereto by executing a counterpart hereof. This Plan and any counterpart so executed shall be deemed to be one and the same instrument. REMAINDER OF PAGE INTENTIONALLY LEFT BLANK 11 IN WITNESS WHEREOF, the parties hereto, intending to be legally bound hereby, have duly executed this PERFORMANCE BONUS PLAN as of the date first above written. DEAN FOODS COMPANY By: ----------------------------------------- Michelle P. Goolsby Executive Vice President, Chief Administrative Officer and General Counsel WHITE WAVE, INC. By: ----------------------------------------- Steven A. Demos President and Chief Executive Officer KEY EMPLOYEES: -------------------------------------- Steven A. Demos -------------------------------------- Patricia Calhoun -------------------------------------- Sheryl Lamb -------------------------------------- James Terman -------------------------------------- Chris Appel KEY EMPLOYEE REPRESENTATIVE -------------------------------------- Steven A. Demos EXHIBIT A TO PERFORMANCE BONUS PLAN DISCRETIONARY INCENTIVE PLAN (see attached) SCHEDULE 1.1(a-1) TO PERFORMANCE BONUS PLAN PERFORMANCE BONUS o If combined, cumulative Net Sales during the Incentive Period are below $382.5 million, no Performance Bonus will be paid. o If combined, cumulative Net Sales during the Incentive Period are between $382.5 million and $450 million, the Performance Bonus paid will scale ratably (meaning $129,630 for each $1,000,000 of Net Sales) between $26.25 million and $35.0 million as set forth in the table below. o If combined, cumulative Net Sales during the Incentive Period are greater than $450 million, additional amounts of the Performance Bonus will be paid as follows and as set forth in the table below: - First $50 million above $450 million Net Sales: 10% of amount in excess of $450 million, plus - Second $50 million above $450 million Net Sales: 15% of amount in excess of $500 million, plus - In excess of $550 million: 20% of amount in excess of $550 million Any Performance Bonus shall be allocated between the Key Employee Bonus and the Discretionary Bonus as set forth in the table below.(1)
Combined, Aggregate Key Employee Discretionary Cumulative Performance Bonus Bonus Net Sales Bonus Allocation(2) Allocation(1,2) ($ in millions) ($ in millions) ($ in millions) ($ in millions) - --------------- --------------- --------------- --------------- $382.5 $26.250 $17.997 $8.253 $390 $27.222 $18.664 $8.559 $400 $28.519 $19.552 $8.966 $405 $29.167 $19.997 $9.170 $410 $29.815 $20.441 $9.374 $420 $31.111 $21.330 $9.781 $430 $32.407 $22.219 $10.189 $440 $33.704 $23.107 $10.596 $450 $35.000 $23.996 $11.004 $475 $37.500 $25.710 $11.790 $500 $40.000 $27.424 $12.576 $525 $43.750 $29.995 $13.755 $550 $47.500 $32.566 $14.934 $575 $52.500 $35.994 $16.506 $600 $57.500 $39.422 $18.078 $625 $62.500 $42.850 $19.650
- ---------- (1) The amount funded into the Discretionary Bonus will be reduced by $76,713 to account for investment banking fees incurred in connection with the establishment of the Discretionary Incentive Plan and previously paid by ________ and _______________. (2) Subject to adjustment as provided in Sections 1.1(b) and 1.2(b) herein. -1- SCHEDULE 1.1(a-2) TO PERFORMANCE BONUS PLAN KEY EMPLOYEES' PRO RATA SHARE OF PERFORMANCE BONUS
Key Employee Pro Rata Share ------------ -------------- Steven Demos 28.57% Patricia Calhoun 17.14% James Terman 8.57% Sheryl Lamb 8.57% Chris Appel 5.71%
-1- SCHEDULE 1.3 TO PERFORMANCE BONUS PLAN The Operating Plan (see attached) -2- EX-10.2 4 d96946ex10-2.txt AMENDMENT NO. 2 TO SENIOR CREDIT FACILITY EXHIBIT 10.2 SECOND AMENDMENT TO CREDIT AGREEMENT AND CONSENT THIS SECOND AMENDMENT TO CREDIT AGREEMENT AND CONSENT (this "Second Amendment") is entered into as of April __, 2002 by and among DEAN FOODS COMPANY (formerly known as Suiza Foods Corporation), a Delaware corporation (the "Borrower"), those certain subsidiaries of the Borrower party to the Credit Agreement defined below (the "Guarantors"), WACHOVIA BANK, NATIONAL ASSOCIATION (successor to First Union National Bank), as Administrative Agent (the "Administrative Agent") for the lenders party to the Credit Agreement defined below (the "Lenders"), BANK ONE, NA, as Syndication Agent for the Lenders (the "Syndication Agent"), FLEET NATIONAL BANK, HARRIS TRUST AND SAVINGS BANK and SUNTRUST BANK, as Co-Documentation Agents (the "Documentation Agents"), the Required Lenders, and the Tranche B Term Loan Lenders. RECITALS WHEREAS, the Borrower, the Guarantors, the Administrative Agent, the Syndication Agent, the Documentation Agents and the Lenders are parties to that certain Credit Agreement dated as of July 31, 2001 (as amended, prior to the date hereof, the "Credit Agreement"), which provides for the making of revolving loans, term loans and other financial accommodations to the Borrower; WHEREAS, the Credit Parties have requested that (i) the Required Lenders and the Lenders providing Tranche B Term Loans agree to a modification to the Credit Agreement to change the pricing of the Tranche B Term Loan, (ii) the Required Lenders agree to amend the definition of "Equity Issuance" to exclude the issuance of Capital Stock to directors, officers, employees, former employees and their personal representatives, heirs and beneficiaries pursuant to the exercise of options and (iii) the Required Lenders consent to the acquisition by the Borrower of all or substantially all of the outstanding Capital Stock of White Wave, Inc. (the "White Wave Acquisition"), and, in connection therewith, agree that the White Wave Acquisition is a Permitted Acquisition under the Credit Agreement; and WHEREAS, the Required Lenders and the Lenders providing Tranche B Term Loans, as applicable, have agreed to amend the Credit Agreement on the terms and subject to the conditions set forth in this Second Amendment and the Required Lenders have agreed to consent to the White Wave Acquisition subject to the terms and conditions set forth herein. NOW, THEREFORE, the parties hereto hereby agree as follows: SECTION 1. DEFINITIONS. Except as otherwise defined in this Second Amendment, terms defined in the Credit Agreement are used herein as defined therein. SECTION 2. AMENDMENT TO THE DEFINITION OF APPLICABLE PERCENTAGE IN THE CREDIT AGREEMENT. Subject to the satisfaction of the conditions precedent set forth in Section 6 hereof, the Required Lenders and the Lenders providing Tranche B Term Loans hereby agree that Section 1.1 of the Credit Agreement shall be amended effective as of the date hereof by deleting the definition of the term "Applicable Percentage" set forth therein in its entirety and replacing it with the following: "Applicable Percentage" shall mean, for any day, the rate per annum set forth below opposite the applicable level (the "Level") then in effect, it being understood that the Applicable Percentage for (i) Revolving Loans and Tranche A Term Loans which are Alternate Base Rate Loans shall be the percentage set forth under the column "Alternate Base Rate Margin for Revolving Loans and Tranche A Term Loans", (ii) Revolving Loans and Tranche A Term Loans which are LIBOR Rate Loans shall be the percentage set forth under the column "LIBOR Rate Margin for Revolving Loans, Tranche A Term Loans and the Letter of Credit Fee", (iii) Tranche B Term Loans which are Alternate Base Rate Loans shall be the percentage set forth under the column "Alternate Base Rate Margin for Tranche B Term Loan," (iv) Tranche B Term Loans which are LIBOR Rate Loans shall be the percentage set forth under the column "LIBOR Rate Margin for Tranche B Term Loans", (v) the Letter of Credit Fee shall be the percentage set forth under the column "LIBOR Rate Margin for Revolving Loans, Tranche A Term Loans and Letter of Credit Fee" and (vi) the Commitment Fee shall be the percentage set forth under the column "Commitment Fee":
LIBOR Rate Alternate Margin for Base Rate Revolving Loans, Alternate Margin for Tranche A Base Rate LIBOR Rate Revolving Loans Term Loans Margin for Margin for Leverage and Tranche A and Letter of Tranche B Tranche B Level Ratio Term Loans Credit Fee Term Loans Term Loans Commitment Fee - ---------------- ---------------------- ----------------- ----------------- --------------- --------------- ----------------- I > or = to 4.00 to 1.0 1.50% 2.75% 1.50% 2.75% 0.50% II < 4.00 to 1.0 1.25% 2.50% 1.25% 2.50% 0.50% but > or = to 3.50 to 1.0 III < 3.50 to 1.0 1.00% 2.25% 1.00% 2.25% 0.50% but > or = to 3.00 to 1.0 IV < 3.00 to 1.0 0.75% 2.00% 1.00% 2.25% 0.50% but > or = to 2.50 to 1.0 V < 2.50 to 1.0 0.50% 1.75% .75% 2.00% 0.375% but > or = to 2.00 to 1.0 VI < 2.00 to 1.0 0.25% 1.50% .75% 2.00% 0.375%
2 The Applicable Percentage shall, in each case, be determined and adjusted quarterly on the date (each an "Interest Determination Date") three (3) Business Days after the earlier of the date on which the Borrower provides or is required to provide to the Administrative Agent the annual or quarterly financial information and certifications in accordance with the provisions of Sections 5.1(a), 5.1(b) and 5.2(c). Such Applicable Percentage shall be effective from such Interest Determination Date until the next such Interest Determination Date. The initial Applicable Percentages on the Funding Date shall be based on Level II (or Level I, if applicable) until June 21, 2002. After the Funding Date, if the Borrower shall fail to provide the annual or quarterly financial information and certifications in accordance with the provisions of Sections 5.1(a), 5.1(b) and 5.2(c), the Applicable Percentage from such Interest Determination Date shall, on the date five (5) Business Days after the date by which the Borrower was so required to provide such financial information and certifications to the Administrative Agent and the Lenders, be based on Level I until such time as the date which is three (3) Business Days after the date such information and certifications are provided, whereupon the Level shall be determined by the then current Leverage Ratio. SECTION 3. AMENDMENT TO THE DEFINITION OF EQUITY ISSUANCE IN THE CREDIT AGREEMENT. Subject to the satisfaction of the conditions precedent set forth in Section 6 hereof, the Required Lenders hereby agree that Section 1.1 of the Credit Agreement shall be amended effective as of January 1, 2002, by deleting the definition of the term "Equity Issuance" set forth therein in its entirety and replacing it with the following: "Equity Issuance" shall mean any issuance by the Borrower or any of its Restricted Subsidiaries to any Person which is not a Credit Party of (a) shares of its Capital Stock, (b) any shares of its Capital Stock pursuant to the exercise of options (excluding for purposes hereof the issuance of Capital Stock pursuant to the exercise of stock options held by directors, officers or other employees or former employees of the Credit Parties or personal representatives or heirs or beneficiaries of any of them) or warrants or (C) any shares of its Capital Stock pursuant to the conversion of any debt securities to equity. SECTION 4. CONSENT. The Required Lenders hereby (a) consent to the White Wave Acquisition provided that such acquisition shall not exceed $220,000,000 in the aggregate in total cash consideration and (b) agree that the White Wave Acquisition constitutes a Permitted Acquisition under the Credit Agreement. SECTION 5. REPRESENTATIONS AND WARRANTIES. Each of the Credit Parties represents and warrants as follows: (a) It has taken all necessary action to authorize the execution, delivery and performance of this Second Amendment. 3 (b) This Second Amendment has been duly executed and delivered by such Person and constitutes such Person's legal, valid and binding obligations, enforceable in accordance with its terms, except as such enforceability may be subject to (i) bankruptcy, insolvency, reorganization, fraudulent conveyance or transfer, moratorium or similar laws affecting creditors' rights generally and (ii) general principles of equity (regardless of whether such enforceability is considered in a proceeding at law or in equity). (c) No consent, approval, authorization or order of, or filing, registration or qualification with, any court or governmental authority or third party is required in connection with the execution, delivery or performance by such Person of this Second Amendment. (d) After giving effect to this Second Amendment, the representations and warranties set forth in Article III of the Credit Agreement are, subject to the limitations set forth therein, true and correct in all respects as of the date hereof (except for those which expressly relate to an earlier date). SECTION 6. CONDITION PRECEDENT. The amendments to the Credit Agreement set forth in Section 2 shall become effective on the date hereof upon receipt by the Administrative Agent of executed counterparts to this Second Amendment from the Borrower, the Guarantors, the Required Lenders and each Lender providing Tranche B Term Loans. SECTION 7. ACKNOWLEDGEMENT OF GUARANTORS. The Guarantors acknowledge and consent to all of the terms of this Second Amendment and agree that this Second Amendment and all documents executed in connection herewith do not operate to reduce or discharge the Guarantors' obligations under the Credit Agreement. SECTION 8. MISCELLANEOUS. Except as expressly provided herein, the Credit Agreement shall remain unmodified and in full force and effect. References in the Credit Agreement (including references to such Credit Agreement as amended hereby) to "this Agreement" (and indirect references such as "hereunder", "hereby", "herein", and "hereof") and in any Credit Document to the Credit Agreement shall be deemed to be references to the Credit Agreement as amended hereby. This Second Amendment may be executed in any number of counterparts, all of which taken together shall constitute one and the same instrument and any of the parties hereto may execute this Second Amendment by signing any such counterpart. This Second Amendment shall be governed by, and construed in accordance with, the law of the State of North Carolina. 4 IN WITNESS WHEREOF, each of the parties hereto have caused this Second Amendment to be duly executed and delivered by its proper and duly authorized officers as of the day and year first above written. BORROWER: DEAN FOODS COMPANY, a Delaware corporation By: ------------------------------------------------ Name: ---------------------------------------------- Title: --------------------------------------------- GUARANTORS: -------------------------------------------------- -------------------------------------------------- -------------------------------------------------- -------------------------------------------------- -------------------------------------------------- -------------------------------------------------- AGENTS AND LENDERS: WACHOVIA BANK, NATIONAL ASSOCIATION, in its capacity as Administrative Agent and individually in its capacity as a Lender By: ----------------------------------------- Name: Title: [signature pages continue] LENDERS: -------------------------------------------------- [Lender] By: ----------------------------------------- Name: Title: EX-11 5 d96946ex11.txt STATEMENT RE: COMPUTATION OF PER SHARE EARNINGS EXHIBIT 11 - Statement re computation of per share earnings DEAN FOODS COMPANY (In thousands, except share and per-share amounts)
THREE MONTHS ENDED MARCH 31, ------------ ------------ Basic EPS computation: 2002 2001 ------------ ------------ Numerator: Income before cumulative effect of accounting change $ 55,359 $ 23,517 ------------ ------------ Income applicable to common stock $ 55,359 $ 23,517 ============ ============ Denominator: Average common shares 88,876,210 54,710,440 ============ ============ Basic EPS before cumulative effect of accounting change $ 0.62 $ 0.43 ============ ============ Diluted EPS calculation: Numerator: Income before cumulative effect of accounting change $ 55,359 $ 23,517 Net effect on earnings from conversion of mandatorily redeemable convertible preferred securities 5,331 5,331 ------------ ------------ Income applicable to common stock $ 60,690 $ 28,848 ============ ============ Denominator: Average common shares - basic 88,876,210 54,710,440 Stock option conversion 3,693,320 1,525,596 Dilutive effect of conversion of manditorily redeemable convertible preferred securities 15,333,428 15,333,664 ------------ ------------ Average common shares - diluted 107,902,958 71,569,700 ============ ============ Diluted EPS before cumulative effect of accounting change $ 0.56 $ 0.40 ============ ============
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