e10vkza

10-K/A 1 d06474a1e10vkza.htm AMENDMENT TO FORM 10-K e10vkza

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-K/A

For Annual and Transition Reports Pursuant to
Sections 13 or 15(d) of the Securities Exchange Act of 1934

(Mark One)
x		ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

		For The Fiscal Year Ended December 31, 2002

OR

o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

		For the Transition Period from to

Commission File Number 001-12755

Dean Foods Company

(Exact name of Registrant as specified in its charter)

(DEAN FOODS COMPANY LOGO)


Delaware (State or other jurisdiction of incorporation or organization)		75-2559681 (I.R.S. Employer Identification No.)

2515 McKinney Avenue
Suite 1200
Dallas, Texas 75201
(214) 303-3400
(Address, including zip code, and telephone number, including
area code, of Registrant’s principal executive offices)

Securities Registered Pursuant to Section 12(b) of the Act:


Title of Each Class		Name of Each Exchange on Which Registered

Common Stock, $.01 par value		New York Stock Exchange

Securities Registered Pursuant to Section 12(g) of the Act: None

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 o

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K: x

Indicate by check mark whether the Registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2). Yes x No o

The aggregate market value of the Registrant’s voting and non-voting common equity stock held by non-affiliates of the Registrant at June 30, 2002, based on the $37.16 per share closing price for the Registrant’s common stock on the New York Stock Exchange on June 30, 2002, was approximately $3.27 billion.

The number of shares of the Registrant’s common stock outstanding as of March 25, 2003 was 139,511,793.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Registrant’s definitive Proxy Statement for its Annual Meeting of Stockholders held on May 22, 2003 are incorporated by reference into Part III of this Form 10-K.

TABLE OF CONTENTS


INDEPENDENT AUDITOR’S REPORT
CONSOLIDATED STATEMENTS OF INCOME
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
CONSOLIDATED STATEMENTS OF CASH FLOWS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
PART IV
	Item 16. Exhibits, Financial Statement Schedules and Reports On Form 8-K
CERTIFICATION
INDEX TO EXHIBITS
EX-23 Independent Auditor's Consent
EX-99.1 Certification Pursuant to Section 906
EX-99.2 Certification Pursuant to Section 906

EXPLANATORY NOTE

Note 1 to our Consolidated Financial Statements for the year ended December 31, 2002 (our “2002 Financial Statements”) contains a subsection entitled “Employee Stock-Based Compensation” wherein we disclose what our pro forma net income (“Pro Forma Net Income”) and pro forma net income per common share (“Pro Forma Net Income Per Common Share”) would have been for the years 2002, 2001 and 2000 had compensation expense been determined for stock option grants using the fair value method provided for in SFAS No. 123, Accounting for Stock-Based Compensation. After filing our Annual Report on Form 10-K for the year ended December 31, 2002, we discovered a computational error in the calculation of Pro Forma Net Income and Pro Forma Net Income Per Common Share for each of 2002, 2001 and 2000. This error caused the amounts of Pro Forma Net Income and Pro Forma Net Income Per Common Share to be understated in 2002 and 2001, and overstated in 2000. We are filing this 10-K/A for the purpose of correcting this error.

Accordingly, we have amended Item 8 of our Annual Report on Form 10-K for the year ended December 31, 2002 as follows:

• We have included Deloitte & Touche LLP’s Independent Auditor’s Report, which replaces the report originally filed as part of our 2002 Annual Report on Form 10-K.

• We have restated in its entirety the subsection entitled “Employee Stock-Based Compensation” contained in Note 1 to our 2002 Financial Statements, and

• We have added Note 26 to our 2002 Financial Statements entitled “Restatement of Note 1” and amended the table of contents to our 2002 Financial Statements accordingly.

No other changes have been made to our Annual Report on Form 10-K for the year ended December 31, 2002.

Item 8. Consolidated Financial Statements

Our consolidated financial statements for 2002 are included in this report on the following pages.


			Page

Independent Auditor’s Report				F-1
Consolidated Balance Sheets as of December 31, 2002 and 2001				F-2
Consolidated Statements of Income for the years ended December 31, 2002, 2001 and 2000				F-3
Consolidated Statements of Stockholders’ Equity for the years ended December 31, 2002, 2001 and 2000				F-4
Consolidated Statements of Cash Flows for the years ended December 31, 2002, 2001 and 2000				F-5
Notes to Consolidated Financial Statements
	1.	Summary of Significant Accounting Policies		F-6
	2.	Acquisitions, Divestitures and Discontinued Operations		F-11
	3.	Extraordinary Gains and Losses		F-15
	4.	Investments in Unconsolidated Affiliates		F-15
	5.	Inventories		F-17
	6.	Property, Plant and Equipment		F-17
	7.	Intangible Assets		F-17
	8.	Accounts Payable and Accrued Expenses		F-20
	9.	Income Taxes		F-20
	10. Long-Term Debt			F-22
	11. Mandatorily Redeemable Trust Issued Preferred Securities			F-27
	12. Stockholders’ Equity			F-27
	13. Other Comprehensive Income			F-32
	14. Employee Retirement and Profit Sharing Plans			F-32
	15. Post-Retirement Benefits Other Than Pensions			F-36
	16. Plant Closing Costs			F-36
	17. Shipping and Handling Fees			F-38
	18. Other Operating (Income) Expense			F-39
	19. Supplemental Cash Flow Information			F-39
	20. Commitments and Contingencies			F-39
	21. Fair Value of Financial Instruments			F-42
	22. Segment and Geographic Information and Major Customers			F-42
	23. Quarterly Results of Operations (Unaudited)			F-45
	24. Subsequent Events			F-46
	25. Related Party Transactions			F-47
	26. Restatement of Note 1			F-47

INDEPENDENT AUDITOR’S REPORT

To the Board of Directors
Dean Foods Company
Dallas, Texas

We have audited the accompanying consolidated balance sheets of Dean Foods Company and subsidiaries (the “Company”) as of December 31, 2002 and 2001, and the related consolidated statements of income, stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2002. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Dean Foods Company and subsidiaries as of December 31, 2002 and 2001, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2002, in conformity with accounting principles generally accepted in the United States of America.

As discussed in Note 1 to the consolidated financial statements, the Company changed its method of accounting for goodwill and other intangible assets to conform to Statement of Financial Accounting Standards No. 142.

As discussed in Note 26, the pro forma net income and pro forma net income per common share included in the “Employee Stock-Based Compensation” portion of Note 1 have been restated.

DELOITTE & TOUCHE LLP

Dallas, Texas
March 24, 2003, (May 27, 2003 as to Note 26 and June 9, 2003 as to the effects of the stock split described in Note 24)

F-1

DEAN FOODS COMPANY

CONSOLIDATED BALANCE SHEETS



			December 31

			2002			2001


			(Dollars in thousands, except
			share data)
ASSETS
Current assets:
	Cash and cash equivalents		$	45,896		$	74,730
	Receivables, net of allowance for doubtful accounts of $34,317 and $28,151			656,938			752,503
	Inventories			400,347			425,913
	Deferred income taxes			158,337			127,215
	Prepaid expenses and other current assets			49,628			58,106

		Total current assets		1,311,146			1,438,467
Property, plant and equipment				1,628,424			1,611,358
Goodwill				3,035,417			2,860,984
Identifiable intangible and other assets				607,279			613,291
Assets of discontinued operations							167,797

		Total	$	6,582,266		$	6,691,897

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
	Accounts payable and accrued expenses		$	1,056,213		$	1,035,326
	Income taxes payable			38,488			32,635
	Current portion of long-term debt			173,442			96,972

		Total current liabilities		1,268,143			1,164,933
Long-term debt				2,554,482			2,971,525
Other long-term liabilities				236,915			196,189
Deferred income taxes				294,256			281,229
Liabilities of discontinued operations							17,536
Mandatorily redeemable convertible trust issued preferred securities (redemption value of $599,910 and $599,920 plus accrued dividends)				585,177			584,605
Commitments and contingencies (Note 20)
Stockholders’ equity:
	Preferred stock, none issued
	Common stock, 132,961,440 and 131,809,470 shares issued and outstanding, with a par value of $0.01 per share			1,330			1,318
	Additional paid-in capital			979,113			961,266
	Retained earnings			718,555			543,139
	Accumulated other comprehensive loss			(55,705	)		(29,843	)

		Total stockholders’ equity		1,643,293			1,475,880

		Total	$	6,582,266		$	6,691,897

See Notes to Consolidated Financial Statements.

F-2

DEAN FOODS COMPANY

CONSOLIDATED STATEMENTS OF INCOME



			Years Ended December 31

			2002			2001			2000


			(Dollars in thousands, except share data)
Net sales			$	8,991,464		$	5,974,555		$	5,499,712
Cost of sales				6,642,773			4,574,258			4,150,170

Gross profit				2,348,691			1,400,297			1,349,542
Operating costs and expenses:
	Selling and distribution			1,321,763			794,937			756,445
	General and administrative			337,496			176,642			174,353
	Amortization of intangibles			7,775			51,361			49,776
	Plant closing costs			19,050			9,550			2,747
	Other operating (income) expense						(17,306	)		7,500

		Total operating costs and expenses		1,686,084			1,015,184			990,821

Operating income				662,607			385,113			358,721
Other (income) expense:
	Interest expense, net			197,685			96,549			107,075
	Financing charges on trust issued preferred securities			33,578			33,581			33,595
	Equity in (earnings) loss of unconsolidated affiliates			7,899			23,620			(11,453	)
	Other (income) expense, net			2,660			4,817			(233	)

		Total other expense		241,822			158,567			128,984

Income from continuing operations before income taxes				420,785			226,546			229,737
Income taxes				152,988			83,114			89,711
Minority interest in earnings				46			31,431			29,911

Income from continuing operations				267,751			112,001			110,115
Loss on sale of discontinued operations, net of tax				(8,231	)
Income from discontinued operations, net of tax				879			3,592			3,636

Income before extraordinary gain (loss) and cumulative effect of accounting change				260,399			115,593			113,751
Extraordinary gain (loss)							(4,317	)		4,968
Cumulative effect of accounting change				(84,983	)		(1,446	)

Net income			$	175,416		$	109,830		$	118,719

Basic earnings per common share:
	Income from continuing operations		$	1.98		$	1.33		$	1.30
	Income (loss) from discontinued operations			(.05	)		.04			.04
	Extraordinary gain (loss)						(.05	)		.06
	Cumulative effect of accounting change			(.63	)		(.02	)

	Net income		$	1.30		$	1.30		$	1.40

Diluted earnings per common share:
	Income from continuing operations		$	1.77		$	1.21		$	1.19
	Income (loss) from discontinued operations			(.05	)		.03			.03
	Extraordinary gain (loss)						(.04	)		.05
	Cumulative effect of accounting change			(.51	)		(.01	)

	Net income		$	1.21		$	1.19		$	1.27

Average common shares — Basic				135,031,274			84,454,194			84,585,129

Average common shares — Diluted				163,163,904			110,676,222			110,013,792

See Notes to Consolidated Financial Statements.

F-3

DEAN FOODS COMPANY

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY


														Accumulated
			Common Stock											Other			Total
									Additional			Retained		Comprehensive			Stockholders’			Comprehensive
			Shares			Amount			Paid-In Capital			Earnings		Income (loss)			Equity			Income


			(Dollars in thousands)
Balance, December 31, 1999				87,862,674		$	879		$	274,941		$	314,590	$	(6,438	)	$	583,972
	Issuance of common stock			3,839,868			39			39,301								39,340
	Purchase and retirement of treasury stock			(9,845,595	)		(99	)		(148,427	)							(148,526	)
	Net income												118,719					118,719		$	118,719
	Other comprehensive income (Note 13):
		Cumulative translation adjustment													5,327			5,327			5,327

	Comprehensive income																			$	124,046

Balance, December 31, 2000				81,856,947			819			165,815			433,309		(1,111	)		598,832
	Issuance of common stock			3,943,941			39			62,603								62,642
	Purchase and retirement of treasury stock			(370,002	)		(4	)		(6,054	)							(6,058	)
	Net income												109,830					109,830		$	109,830
	Acquisition of Dean Foods Company			46,378,584			464			738,902								739,366
	Other comprehensive income (Note 13):
		Cumulative effect of accounting change													(6,403	)		(6,403	)		(6,403	)
		Change in fair value of derivative instruments													(9,438	)		(9,438	)		(9,438	)
		Reclassification of minority interest portion of derivative fair values													(10,033	)		(10,033	)		(10,033	)
		Cumulative translation adjustment													(2,232	)		(2,232	)		(2,232	)
		Minimum pension liability adjustment													(626	)		(626	)		(626	)

	Comprehensive income																			$	81,098

Balance, December 31, 2001				131,809,470			1,318			961,266			543,139		(29,843	)		1,475,880
	Issuance of common stock			5,278,170			53			88,578								88,631
	Reclassification of Old Dean stock option liability									30,461								30,461
	Purchase and retirement of treasury stock			(4,126,200	)		(41	)		(101,192	)							(101,233	)
	Net income												175,416					175,416		$	175,416
	Other comprehensive income (Note 13):
		Change in fair value of derivative instruments													(46,803	)		(46,803	)		(46,803	)
		Amounts reclassified to income statement related to derivatives													24,014			24,014			24,014
		Cumulative translation adjustment													8,408			8,408			8,408
		Minimum pension liability adjustment													(11,481	)		(11,481	)		(11,481	)

	Comprehensive income																			$	149,554

Balance, December 31, 2002				132,961,440		$	1,330		$	979,113		$	718,555	$	(55,705	)	$	1,643,293

See Notes to Consolidated Financial Statements.

F-4

DEAN FOODS COMPANY

CONSOLIDATED STATEMENTS OF CASH FLOWS



					Years Ended December 31

					2002			2001			2000


					(Dollars in thousands)
Cash flows from operating activities:
	Net income				$	175,416		$	109,830		$	118,719
	Income from discontinued operations					(879	)		(3,592	)		(3,636	)
	Adjustments to reconcile net income to net cash provided by operating activities:
		Depreciation and amortization				173,994			145,898			135,872
		(Gain) loss on disposition of assets				4,586			(46,270	)		879
		Minority interest				120			51,402			52,187
		Equity in (earnings) loss of unconsolidated affiliates				7,899			23,620			(11,453	)
		Loss on sale of discontinued operations				8,231
		Extraordinary (gain) loss							4,317			(4,968	)
		Cumulative effect of accounting change				84,983			1,446
		Write-down of impaired assets				11,253			6,812			394
		Deferred income taxes				75,605			44,454			50,973
		Other				2,719			2,402			1,265
		Changes in operating assets and liabilities, net of acquisitions:
			Receivables			99,775			(3,199	)		(40,360	)
			Inventories			18,167			(4,703	)		(16,227	)
			Prepaid expenses and other assets			(943	)		(17,137	)		3,433
			Accounts payable and accrued expenses			(51,193	)		(16,929	)		4,501
			Income taxes			32,884			6,875			(1,283	)

				Net cash provided by continuing operations		642,617			305,226			290,296
				Net cash provided by discontinued operations		13,147			2,701			10,680

				Net cash provided by operating activities		655,764			307,927			300,976
Cash flows from investing activities:
	Net additions to property, plant, and equipment					(241,982	)		(131,210	)		(124,526	)
	Cash outflows for acquisitions and investments					(222,149	)		(1,146,077	)		(335,956	)
	Net proceeds from divestitures					148,313						89,037
	Proceeds from sale of fixed assets					6,765			2,683			3,276

				Net cash used in continuing operations		(309,053	)		(1,274,604	)		(368,169	)
				Net cash used in discontinued operations		(5,138	)		(5,896	)		(12,084	)

				Net cash used in investing activities		(314,191	)		(1,280,500	)		(380,253	)
Cash flows from financing activities:
	Proceeds from issuance of debt					637,500			2,203,725			1,284,492
	Repayment of debt					(992,797	)		(1,173,335	)		(947,443	)
	Payments of deferred financing, debt restructuring and merger costs					(2,887	)		(47,125	)		(12,014	)
	Distributions to minority interest holders								(10,363	)		(16,438	)
	Issuance of common stock, net of expenses					74,988			50,599			28,514
	Redemption of common and preferred stock					(87,211	)		(6,058	)		(148,526	)
	Redemption of trust issued preferred securities											(100,055	)

				Net cash provided by (used in) financing activities		(370,407	)		1,017,443			88,530

Increase (decrease) in cash and cash equivalents						(28,834	)		44,870			9,253
Cash and cash equivalents, beginning of period						74,730			29,860			20,607

Cash and cash equivalents, end of period					$	45,896		$	74,730		$	29,860

See Notes to Consolidated Financial Statements.

F-5

DEAN FOODS COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Years Ended December 31, 2002, 2001 and 2000


1.	SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation — Our Consolidated Financial Statements include the accounts of our wholly-owned and majority-owned subsidiaries. All significant intercompany balances and transactions are eliminated in consolidation.

Use of Estimates — The preparation of our Consolidated Financial Statements in conformity with generally accepted accounting principles requires us to use our judgment to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the Consolidated Financial Statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates under different assumptions or conditions.

Cash Equivalents — We consider temporary cash investments with a remaining maturity of three months or less to be cash equivalents.

Inventories — Inventories are stated at the lower of cost or market. Dairy and certain specialty products are valued on the first-in, first-out (“FIFO”) method while our pickle inventories are valued using the last-in, first-out (“LIFO”) method. The costs of finished goods inventories include raw materials, direct labor and indirect production and overhead costs.

Property, Plant and Equipment — Property, plant and equipment are stated at acquisition cost, plus capitalized interest on borrowings during the actual construction period of major capital projects. Also included in property, plant and equipment are certain direct costs related to the implementation of computer software for internal use. Depreciation and amortization are calculated using the straight-line method over the estimated useful lives of the assets, as follows:


Asset		Useful Life

Buildings and improvements		Seven to 40 years
Machinery and equipment		Three to 20 years

Impairment tests are performed when circumstances indicate that the carrying value may not be recoverable. Capitalized leases are amortized over the shorter of their lease term or their estimated useful lives. Expenditures for repairs and maintenance which do not improve or extend the life of the assets are expensed as incurred.

Intangible and Other Assets — Prior to January 1, 2002, intangibles were amortized over their related estimated useful lives as follows:


Asset		Useful Life

Goodwill		Straight-line method over 25 to 40 years
Identifiable intangible assets:
	Customer lists	Straight-line method over seven to ten years
	Customer supply contracts	Straight-line method over the terms of the agreements
	Trademarks/trade names	Straight-line method over ten to 40 years
	Noncompetition agreements	Straight-line method over the terms of the agreements
	Patents	Straight-line method over fifteen years
Deferred financing costs		Interest method over the terms of the related debt

Effective January 1, 2002, in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 142, goodwill and other intangible assets determined to have indefinite useful lives are no longer amortized. Instead, we will now conduct annual impairment tests on our goodwill, trademarks and other intangible assets with indefinite lives. To determine whether an impairment exists, we use a present value technique. Upon adoption of SFAS No. 142, we conducted transitional impairment tests and recorded certain

F-6

DEAN FOODS COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

impairments. Impairment tests are performed when circumstances indicate that the carrying value may not be recoverable. See Note 7.

Foreign Currency Translation — The financial statements of our foreign subsidiaries are translated to U.S. dollars in accordance with the provisions of SFAS No. 52, “Foreign Currency Translation.” The functional currency of our foreign subsidiaries is generally the local currency of the country. Accordingly, assets and liabilities of the foreign subsidiaries are translated to U.S. dollars at year-end exchange rates. Income and expense items are translated at the average rates prevailing during the year. Changes in exchange rates, which affect cash flows and the related receivables or payables are recognized as transaction gains and losses in the determination of net income. The cumulative translation adjustment in stockholders’ equity reflects the unrealized adjustments resulting from translating the financial statements of our foreign subsidiaries.

Minority Interest in Subsidiaries — Minority interest in results of operations of consolidated subsidiaries represents the minority shareholders’ share of the income or loss of various consolidated subsidiaries. The minority interest in the consolidated balance sheet reflects the original investment by these minority shareholders in these consolidated subsidiaries, along with their proportional share of the earnings or losses of these subsidiaries less any cash distributions made. At December 31, 2002, there were no outstanding minority interests.

Employee Stock-Based Compensation — We measure compensation expense for our stock-based employee compensation plans using the intrinsic value method and provide the required pro forma disclosures of the effect on net income and earnings per share as if the fair value-based method had been applied in measuring compensation expense.

We have elected to follow Accounting Principles Board Opinion No. 25 and related interpretations in accounting for our stock options. All options granted to date have been to employees, officers or directors. Accordingly, no compensation expense has been recognized since stock options granted were at exercise prices which approximated or exceeded market value at the grant date. Had compensation expense been determined for stock option grants using fair value methods provided for in SFAS No. 123, Accounting for Stock-Based Compensation, our pro forma net income and net income per common share would have been the amounts indicated below:



		Year Ended December 31

		2002			2001			2000


		(In thousands, except share data)
Net income, as reported		$	175,416		$	109,830		$	118,719
Less: Stock based employee compensation, net of income tax expense			31,249			16,926			17,375

Pro forma net income		$	144,167		$	92,904		$	101,344

Net income per share:
Basic — as reported		$	1.30		$	1.30		$	1.40
— pro forma			1.07			1.10			1.20
Diluted — as reported			1.21			1.19			1.27
— pro forma		$	1.01		$	1.03		$	1.12
Stock option share data:
	Stock option granted during period		7,710,438			3,732,450			4,100,700
	Weighted average option fair value	$	9.99	(1)	$	7.43	(2)	$	6.86	(3)

F-7

DEAN FOODS COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(1) Calculated in accordance with the Black-Scholes option pricing model, using the following assumptions: expected volatility of 38%, expected dividend yield of 0%, expected option term of seven years and risk-free rates of return as of the date of grant ranging from 4.09% to 4.87% based on the yield of seven-year U.S. Treasury securities.

(2) Calculated in accordance with the Black-Scholes option pricing model, using the following assumptions: expected volatility of 40%, expected dividend yield of 0%, expected option term of seven years and risk-free rates of return as of the date of grant ranging from 4.51% to 5.19% based on the yield of seven-year U.S. Treasury securities.

(3) Calculated in accordance with the Black-Scholes option pricing model, using the following assumptions: expected volatility of 40%; expected dividend yield of 0%; expected option term of four to ten years and risk-free rates of return as of the date of grant ranging from 6.03% to 6.74% based on the yield of seven-year U.S. Treasury securities.

Revenue Recognition and Accounts Receivable — Revenue is recognized when persuasive evidence of an arrangement exists, the price is fixed or determinable, the product has been shipped to the customer and there is 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.

Income Taxes — All of our wholly-owned U.S. operating subsidiaries are included in our consolidated tax return. In addition, our proportional share of the operations of our former majority-owned subsidiaries and certain of our equity method affiliates, which are organized as limited liability companies or limited partnerships, are also included in our consolidated tax return. Our foreign subsidiaries are required to file separate income tax returns in their local jurisdictions. Certain distributions from these subsidiaries are subject to U.S. income taxes; however, available tax credits of these subsidiaries may reduce or eliminate these U.S. income tax liabilities.

Deferred income taxes are provided for temporary differences between amounts recorded in the Consolidated Financial Statements and tax bases of assets and liabilities using currently enacted current tax rates. Deferred tax assets, including the benefit of net operating loss carry-forwards, are evaluated based on the guidelines for realization and may be reduced by a valuation allowance if deemed necessary.

Advertising Expense — Advertising expense is comprised of media, agency and production expenses. Advertising expenses are charged to income during the period incurred, except for expenses related to the development of a major commercial or media campaign which are charged to income during the period in which the advertisement or campaign is first presented by the media. Advertising expenses charged to income totaled $91.1 million in 2002, $41.1 million in 2001 and $62.2 million in 2000. Additionally, prepaid advertising costs were $4.9 million and $2.1 million at December 31, 2002 and 2001, respectively.

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 external insurance brokers and actuaries.

Comprehensive Income — We consider all changes in equity from transactions and other events and circumstances, except those resulting from investments by owners and distributions to owners, to be comprehensive income.

F-8

DEAN FOODS COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

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. All of the share numbers in our Consolidated Financial Statements have been adjusted for all periods to reflect the stock split.

Recent Adoptions of New Accounting Pronouncements — The Emerging Issues Task Force’s (“EITF”) Issue No. 00-14, “Accounting for Certain Sales Incentives,” 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 historical practice for recording sales incentives within the scope of this Issue, which has been to record estimated coupon expense based on historical coupon redemption experience, is consistent with the requirements of this Issue. Therefore, our adoption of this Issue had no impact on our Consolidated Financial Statements.

We adopted EITF Issue No. 01-09, “Accounting for Consideration Given By a Vendor to a Customer” in the first quarter of 2002. 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 years ended December 31, 2001 and 2000 by $33.7 million and $29.9 million, respectively. There was no change, however, in reported net income.

In June 2001, FASB issued Statement of Financial Accounting Standards (“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, 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. See Note 7. SFAS No. 142 also requires that recognized intangible assets with finite lives be amortized over their respective estimated useful lives. As part of the adoption, we re-assessed the useful lives and residual values of all recognized intangible assets.

FASB issued SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets” in August 2001 and it became effective for us in the first quarter of 2002. SFAS No. 144, which supercedes SFAS No. 121, provides a single, comprehensive accounting model for impairment and disposal of long-lived assets and discontinued operations. Our adoption of this standard did not have a material impact on our Consolidated Financial Statements.

Recently Issued Accounting Pronouncements — In June 2001, FASB issued SFAS No. 143, “Accounting for Asset Retirement Obligations.” This statement requires that the fair value of a liability for an asset retirement obligation be recognized in the period in which the associated legal obligation for the liability is incurred if a reasonable estimate of fair value can be made. The associated asset retirement costs are capitalized as part of the carrying amount of the long-lived asset and amortized over the useful life of the asset. SFAS No. 143 became effective for us in 2003. We do not expect the adoption of this pronouncement to have a material impact on our Consolidated Financial Statements.

SFAS No. 145, “Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections,” was issued in April 2002 and is applicable to fiscal years beginning after May 15, 2002. One of the provisions of this technical statement is the rescission of SFAS No. 4, “Reporting Gains and Losses from Extinguishment of Debt,” whereby any gain or loss on the early extinguishment of debt that was classified as an extraordinary item in prior periods in accordance with SFAS No. 4, which does not

F-9

DEAN FOODS COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

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 as a component of “other expense”. For the year ended December 31, 2001, we recorded an extraordinary loss of $4.3 million, net of an income tax benefit of $3.0 million in connection with the early extinguishment of debt.

In June 2002, FASB issued SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities.” This statement addresses financial accounting and reporting for costs associated with exit or disposal activities and nullifies EITF Issue No. 94-3, “Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring).” The statement requires that a liability for a cost associated with an exit or disposal activity be recognized when the liability is incurred, and is effective for exit or disposal activities that are initiated after December 31, 2002. Our adoption of this standard will change the timing of the recognition of certain charges associated with exit and disposal activities.

On December 31, 2002 FASB issued SFAS No. 148, “Accounting for Stock-Based Compensation — Transition and Disclosure,” which amends SFAS No. 123, “Accounting for Stock-Based Compensation.” SFAS No. 148 which is effective for fiscal years ending after December 15, 2002 provides alternative methods of transition for a voluntary change to the fair value based method and requires more prominent and more frequent disclosures in the financial statements about the effects of stock-based compensation. At this time, we have elected not to adopt the voluntary expense recognition provisions of SFAS No. 123.

In November 2002, FASB issued FASB Interpretation (“FIN”) No. 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others.” FIN No. 45 clarifies the requirements of SFAS No. 5 “Accounting for Contingencies,” relating to the guarantor’s accounting for and disclosures of certain guarantees issued. FIN No. 45 requires disclosure of guarantees. It also requires liability recognition for the fair value of guarantees made after December 31, 2002. We will adopt the liability recognition requirements of FIN No. 45 effective January 1, 2003, and we do not expect the adoption to have a material effect on our Consolidated Financial Statements.

In January 2003, FASB issued FIN No. 46, “Consolidation of Variable Interest Entities.” FIN No. 46 clarifies the application of Accounting Research Bulletin No. 51, “Consolidated Financial Statements,” to certain entities in which equity investors do not have the characteristics of a controlling financial interest or in which equity investors do not bear the residual economic risks. The interpretation applies to variable interest entities (“VIEs”) created after January 31, 2003 and to VIEs in which an enterprise obtains an interest after that date. It applies in the fiscal or interim period beginning after June 15, 2003, to VIEs in which an enterprise holds a variable interest that was acquired before February 1, 2003. We currently utilize special purpose limited liability entities to facilitate our receivable-backed loan and our trust-issued preferred securities. Since their formations, these entities have been consolidated in our financial statements for financial reporting purposes. Therefore, FIN No. 46 will have no impact on our Consolidated Financial Statements.

Reclassifications — Certain reclassifications have been made to conform the prior years’ Consolidated Financial Statements to the current year classifications

F-10

DEAN FOODS COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

2. ACQUISITIONS, DIVESTITURES AND DISCONTINUED OPERATIONS

General — In total, we completed the acquisitions of 12 businesses during 2002, 2001 and 2000, which included the following acquisitions that were significant at the time of completion:


Date	Company		Purchase Price

			(In thousands)
December 2001		Dean Foods Company	$	1,740,589
January 2000		Southern Foods Group		435,606

These acquisitions and the other businesses acquired were funded with cash flows from operations, borrowings under our credit facility, and the issuance in 2001 of 46,378,584 shares of our common stock with a fair market value of $739.4 million.

All acquisitions were accounted for using the purchase method of accounting as of their respective acquisition dates, and accordingly, only the results of operations of the acquired companies subsequent to their respective acquisition dates are included in our Consolidated Financial Statements. At the acquisition date, the purchase price was allocated to assets acquired, including identifiable intangibles, and liabilities assumed based on their fair market values. The excess of the total purchase prices over the fair values of the net assets acquired represented goodwill. In connection with the acquisitions, assets were acquired and liabilities were assumed as follows:



			Year Ended December 31

			2002			2001			2000


			(In thousands)
Purchase prices:
	Cash paid, net of cash acquired		$	206,307	(1)	$	1,146,077		$	331,543
	Cash acquired in acquisitions			17,870			15,060			6,327
	Common stock issued						739,366
	Existing equity investment			67,292
	Subsidiary preferred and common securities issued and minority partnership interests									340,336
	Operations of 11 plants						287,989

		Total purchase prices	$	291,469			2,188,492			678,206
Fair values of net assets acquired:
	Assets acquired			214,942			2,283,882			473,648
	Liabilities assumed			(29,172	)		(1,511,436	)		(187,907	)

	Total fair value of net assets acquired			185,770			772,446			285,741

Goodwill			$	105,699		$	1,416,046		$	392,465

(1) An additional $15.8 million was paid in 2002 as part of the Old Dean acquisition.

Acquisition of White Wave — On May 9, 2002, we acquired the 64% equity interest in White Wave, Inc. that we did not already own. White Wave, based in Boulder, Colorado, is the maker of Silk® soymilk and other soy-based products, and had sales of approximately $125 million during the 12 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 64% equity interest for a total price of approximately $192.8 million. Existing management of White Wave has remained in place after the acquisition. We have agreed to pay White Wave’s management team an incentive bonus based on achieving certain sales growth

F-11

DEAN FOODS COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

targets by March 2004. The bonus amount will vary depending on the level of two-year cumulative sales White Wave achieves by the end of March 2004, and is anticipated to range between $35 million and $40 million. Amounts expected to be payable under the bonus plan are expensed each quarter based on White Wave’s performance during the quarter. See Note 20. For financial reporting purposes, White Wave’s financial results are aggregated with Morningstar Foods’ financial results.

Acquisition of Marie’s — On May 17, 2002, we bought the assets of Marie’s Quality Foods, Marie’s Dressings, Inc. and Marie’s Associates, makers of Marie’s® brand dips and dressings in the western United States, for an aggregate purchase price of approximately $23.5 million. Prior to the acquisition, we licensed the Marie’s brand to Marie’s Quality Foods and Marie’s Dressings, Inc. for use in connection with the manufacture and sale of dips and dressings in the western United States. As a result of this acquisition, our Morningstar/ White Wave segment is now the sole owner, manufacturer and marketer of Marie’s brand products nationwide.

Acquisition of Dean Foods Company — On December 21, 2001, we completed our acquisition of Dean Foods Company (“Old Dean”). Old Dean is now our wholly-owned subsidiary. Immediately upon completion of the transaction, Old Dean changed its name to Dean Holding Company and we changed our name to Dean Foods Company. As a result of the transaction, each share of common stock of Old Dean was converted into 1.287 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 and common stock valued at $739.4 million. The value of the approximately 46 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 merger 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 2.256 shares of our stock. As discussed below, 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.

We decided to acquire Old Dean for the above-described consideration after considering a number of factors, including:

• The acquisition would result in us becoming the first truly national dairy and specialty foods company with the geographic reach, management depth and product mix necessary to meet the needs of large customers, who can especially benefit from the added services, convenience and value that a national dairy company can provide;

• Combining our businesses would enable us to reduce our costs by pursuing economies of scale in purchasing, product development and manufacturing, and by eliminating duplicative costs; and

• Increasing our scale would provide us with greater resources to invest in marketing and innovation.

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, and (2) 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. Also in connection with the transaction, we delivered a contingent promissory note in the original principal amount of $40 million to secure our obligation to renew certain of our milk supply agreements with DFA until 2021, and we agreed to a liquidated damages provision which provides 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. See Note 20 for further discussion of these obligations. As a result of this transaction, we now own 100% of our Dairy Group.

F-12

DEAN FOODS COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

In connection with the merger, 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. See Note 10.

Old Dean’s operations and the acquisition of DFA’s minority interest are reflected in our Consolidated Financial Statements after December 21, 2001.

The following table summarizes the fair values of the assets acquired and liabilities assumed at the date of acquisition of Old Dean, and includes the effects of divesting four Old Dean plants.


		At December 21, 2001

		(In thousands)
Current assets		$	694,453
Property, plant, and equipment			725,258
Intangible assets			236,978
Goodwill			1,515,267
Other assets			79,945

	Total assets acquired		3,251,901
Current liabilities			540,458
Other liabilities			285,209
Long-term debt			685,645

	Total liabilities assumed		1,511,312

Net assets acquired		$	1,740,589

Of the approximately $237 million of acquired intangible assets, approximately $206.5 million was assigned to trademarks and trade names that are not subject to amortization and approximately $30.5 million was assigned to customer contracts that have a weighted-average useful life of approximately 17 years.

The approximately $1.52 billion of goodwill was assigned to Old Dean’s Dairy Group, NRP and Specialty segments in the amounts of $1.01 billion, $215 million and $290 million, respectively. None of the goodwill is expected to be deductible for tax purposes.

The final allocation of the purchase price to the fair values of assets and liabilities of Old Dean and the related business integration plans was completed in the fourth quarter of 2002. This final allocation process increased goodwill by approximately $55.4 million, primarily as a result of the final determination of the fair values of depreciable tangible assets and business integration plans.

The purchase price allocation of Old Dean included a liability for payment obligations to Old Dean employees related to Old Dean stock options as a result of the change in control of Old Dean. Under Old Dean’s stock option agreements, upon a change in control, employees had the right to surrender their stock options to us, in lieu of exercise, in exchange for a cash payment during the ninety day period following the change in control. The required cash payment varied depending on the type of stock option and the grant date with certain stock options requiring a cash payment equal to the difference between the exercise price and the highest closing price of our stock during the sixty day period beginning thirty days before and ending 30 days after the completion of the change in control transaction, and certain of the stock option agreements required a tax gross-up payment upon surrender. Cash payments of approximately $44.2 million were made. At the conclusion of the surrender period, the remaining liability of approximately $30.5 million was transferred to stockholders’ equity as the underlying stock options remained outstanding.

F-13

DEAN FOODS COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

We also incurred a change in control obligation of approximately $4.9 million for payments to 18 officers under Old Dean’s long-term incentive plan and transition bonuses to 5 officers of Old Dean, both of which became earned and payable upon consummation of the merger; and severance obligations of approximately $17.5 million related to the termination of certain employees and officers of Old Dean as a result of the decision to eliminate certain Old Dean administrative functions.

The unaudited results of operations on a pro forma basis for the year ended December 31, 2001 and 2000 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 2000 are as follows:



		Year Ended December 31

		2001		2000


		(In thousands,
		except per share data)
Net sales		$	10,058,288	$	9,239,049
Income from continuing operations before taxes			289,058		296,079
Net income from continuing operations			178,411		182,702
Earnings per share from continuing operations:
	Basic	$	1.38	$	1.40
	Diluted	$	1.28	$	1.31

Acquisition of Minority Interest in Spanish Operations — In August of 2001, we purchased the 25% minority interest in Leche Celta, our Spanish dairy processor, for approximately $12.6 million. We funded this purchase with cash flow from operations.

Other Acquisitions — In January 2002, we bought a milk plant in Fort Worth, Texas, and in December 2002, we completed the purchase of an ice cream plant in Denver, Colorado.

Divestitures — In order to more closely align both our assets and our management resources with our strategic direction, part of our strategy in 2002 has been to divest certain assets. During 2002, we completed the sale of three non-core businesses acquired as part of Old Dean’s Specialty Foods division. On January 4, 2002, we completed the sale of the stock of DFC Transportation Company, a contract hauler. On February 7, 2002, we completed the sale of the assets related to a boiled peanut business, and on October 11, 2002, we completed the sale of EBI Foods Limited, a U.K.-based manufacturer of powdered food coatings. Net proceeds from the sale of these three businesses totaled approximately $28.9 million.

Discontinued Operations — On December 30, 2002 we sold our operations in Puerto Rico for a net price of approximately $119.4 million. In accordance with generally accepted accounting principles, our financial statements have been restated to reflect our former Puerto Rico business as a discontinued operation.

Revenues and income before taxes generated by our Puerto Rico operations were as follows:



	Year Ended December 31

	2002		2001		2000


	(In thousands)
Net sales	$	221,908	$	220,451	$	226,661
Income before tax(1)		1,762		4,213		4,229

(1) Corporate interest expense of $5.5 million, $5.1 million and $5.9 million in 2002, 2001 and 2000, respectively, was allocated to our Puerto Rico operations based on the ratio of our investment in them to total debt and equity.

F-14

DEAN FOODS COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Major classes of assets and liabilities of our Puerto Rico operations included in Assets and Liabilities of Discontinued Operations at December 31, 2001 (in thousands) were as follows:


Current assets	$	43,718
Non-current assets		124,079
Current liabilities		9,082
Non-current liabilities		8,455

All intercompany revenues and expenses have been appropriately eliminated in the tables above.

In the first quarter of 2002 we recognized an impairment charge of $37.7 million related to the goodwill of our Puerto Rico operations in accordance with our implementation of SFAS No. 142 “Goodwill and Other Intangible Assets.” This loss is reflected as a cumulative change in accounting principle in our Consolidated Financial Statements.

3. EXTRAORDINARY GAINS AND LOSSES

On December 21, 2001, simultaneously with our acquisition of Old Dean, we replaced our former credit facilities with a new credit facility. As a result, we recognized a $4.3 million extraordinary loss, net of an income tax benefit of $3 million, for the write-off of deferred financing costs related to the early retirement of our former credit facilities.

During the first quarter of 2000, we recognized a $5 million extraordinary gain, net of income tax expense of $2.8 million, which included the following items related to the early extinguishment of our previous senior credit facility:

• A $6.5 million gain, net of income tax expense of $3.6 million, for interest rate derivatives which became unhedged and were marked to fair market value, and

• A $1.5 million loss, net of an income tax benefit of $0.8 million, for the write-off of deferred financing costs.

4. INVESTMENTS IN UNCONSOLIDATED AFFILIATES

Investment in Consolidated Container Company — We own a minority interest in Consolidated Container Company (“CCC”), one of the nation’s largest manufacturers of rigid plastic containers and our largest supplier of plastic bottles and bottle components. We have owned our minority interest since July 1999 when we sold our U.S. plastic packaging operations to CCC.

Since July 2, 1999, our investment in CCC has been accounted for under the equity method of accounting. During 2001, due to a variety of operational difficulties, CCC consistently reported operating results that were significantly weaker than expected, which resulted in significant losses in the third and fourth quarters. As a result, by late 2001, CCC had become unable to comply with the financial covenants contained in its credit facility. We concluded that our investment was impaired and that the impairment was not temporary, and wrote off our remaining investment during the fourth quarter of 2001. Accordingly, our investment in CCC was recorded at $0 at December 31, 2001.

In February 2002, CCC’s lenders agreed to restructure CCC’s credit agreement to modify the financial covenants, subject to the agreement of CCC’s primary shareholders to guarantee certain of CCC’s indebtedness. 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 guarantee of up to $10 million of CCC’s revolving credit indebtedness. By late 2002, CCC was again unable to comply with the terms of its credit agreement. CCC’s lenders agreed to again restructure CCC’s credit agreement, subject to the agreement of CCC’s primary shareholders to provide a total of $35 million of additional debt financing to CCC. In the fourth quarter of 2002, we agreed to

F-15

DEAN FOODS COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

loan CCC $10 million of the $35 million in additional financing, in exchange for cancellation of our pre-existing $10 million guaranty and the receipt of additional equity. Vestar Capital Partners, majority owner of CCC, loaned CCC the remaining $25 million. Our loan to CCC is due on December 31, 2007 (or upon the earlier payment in full of CCC’s senior debt) and is secured by a subordinate lien on certain of CCC’s assets. The loan is not scheduled to be repaid until after CCC’s senior debt has been paid. Therefore, our right to enforce payment of the loan is limited prior to payment in full of CCC’s senior debt. The loan bears interest at the prime rate plus 2.25%, or the eurodollar rate plus 3.25%, at CCC’s option. Upon maturity of the loan, we will be entitled to receive a $400,000 fee, plus an additional fee in respect of the unpaid principal amount of the loan from January 10, 2003 to the maturity date of the loan, computed at an annual rate of 11.3%. Because our participation in this transaction was not in proportion to our ownership interest in CCC, our ownership interest was diluted from approximately 43% to approximately 40%. On a fully-diluted basis, our interest is approximately 36%.

Because we made the $10 million loan to CCC, generally accepted accounting principles required us to recognize a portion of CCC’s 2002 losses, up to the amount of the loan. The loan was written off in its entirety in the fourth quarter of 2002. Accordingly, our investment in CCC was recorded at $0 at December 31, 2002. Our equity in earnings (loss) included in our consolidated statement of income for 2002, 2001 and 2000 was $(10.0) million, $(23.7) million and $11.3 million, respectively.

Approximately 5% of CCC is owned indirectly by Alan Bernon, a member of our Board of Directors, and his brother Peter Bernon. Pursuant to our agreements with Vestar, we control two of the seven seats on CCC’s Management Committee. We have long-term supply agreements with CCC to purchase certain of our requirements for plastic bottles and bottle components from CCC. In 2002, we spent approximately $128.7 million on products purchased from CCC.

Investment in Horizon Organic — As of December 31, 2002 and 2001 we had an approximately 13% interest in Horizon Organic Holding Company, one of America’s largest organic food companies. We account for this investment under the equity method of accounting. We believe that we have the ability to influence the operating policies of Horizon given the size of our investment and the fact that we control one seat on their Board. Horizon’s common stock is traded on the Nasdaq under the symbol “HCOW.” The quoted stock price ranged from $12.29 to $18.70 during 2002. The closing stock price on December 31, 2002 was $16.19 per share, resulting in a market value of our investment of $21.7 million. Our investment in Horizon at December 31, 2002, 2001 and 2000 was $16.4 million, $16.5 million and $16.4 million, respectively, and our equity in earnings included in our consolidated statement of income for 2002, 2001 and 2000 was a loss of $0.1 million, income of $0.1 million, and income of $0.2 million, respectively.

Investment in White Wave — From December 21, 2001 to May 9, 2002, we owned a 36% interest in White Wave, Inc., maker of Silk® and White Wave®. This investment was made by Old Dean prior to our acquisition of Old Dean. On May 9, 2002, we acquired the remaining equity interest in White Wave and began consolidating White Wave’s results with our financial results.

Investment in Momentx — As of December 31, 2002 and 2001 we had an approximately 16% interest in Momentx, Inc. Our investment in Momentx at both December 31, 2002 and 2001 was $1.2 million. Momentx is the owner and operator of dairy.com, an online vertical exchange dedicated to the dairy industry. We account for this investment under the cost method of accounting. During 2001, we recorded an impairment charge on this investment of $3.6 million in “Other (income) expense, net” to reflect the current value of our equity stake based on their latest financing.

F-16

DEAN FOODS COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

5. INVENTORIES



		December 31

		2002		2001


		(In thousands)
Raw materials and supplies		$	151,179	$	148,940
Finished goods			249,168		276,973

	Total	$	400,347	$	425,913

Approximately $97.3 million and $131.7 million of our inventory was accounted for under the last-in, first-out (LIFO) method of accounting at December 31, 2002 and 2001, respectively. There was no material excess of current cost over the stated value of last-in, first-out inventories at either date.

6. PROPERTY, PLANT AND EQUIPMENT



		December 31

		2002			2001


		(In thousands)
Land		$	145,978		$	140,612
Buildings and improvements			569,001			500,773
Machinery and equipment			1,391,114			1,297,829

			2,106,093			1,939,214
Less accumulated depreciation			(477,669	)		(327,856	)

	Total	$	1,628,424		$	1,611,358

For 2002 and 2001, we capitalized $1.5 million and $3.2 million in interest, respectively, related to borrowings during the actual construction period of major capital projects, which is included as part of the cost of the related asset.

7. INTANGIBLE ASSETS

On January 1, 2002 we adopted SFAS No. 142, which requires, among other things, that goodwill and other intangible assets with indefinite lives no longer be amortized, and that recognized intangible assets with finite lives be amortized over their respective useful lives. As required by SFAS No. 142, our results for the years ended December 31, 2001 and 2000 have not been restated. The following sets forth a reconciliation of

F-17

DEAN FOODS COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

net income and earnings per share information for the years ended December 31, 2002, 2001 and 2000 eliminating amortization of goodwill and intangible assets with indefinite lives.


		2002		2001		2000


		(In thousands, except per share data)
Reported income from continuing operations		$	267,751	$	112,001	$	110,115
Goodwill amortization, net of tax and minority interest					24,481		24,724
Trademark amortization, net of tax and minority interest					2,355		2,166

Adjusted income from continuing operations		$	267,751	$	138,837	$	137,005

Reported net income		$	175,416	$	109,830	$	118,719
Goodwill amortization, net of tax and minority interest					26,247		26,490
Trademark amortization, net of tax and minority interest					2,355		2,166

Adjusted net income		$	175,416	$	138,432	$	147,375

Basic earnings per share:
	Income from continuing operations	$	1.98	$	1.33	$	1.30
	Goodwill amortization				.28		.29
	Trademark amortization				.03		.03

	Adjusted income from continuing operations	$	1.98	$	1.64	$	1.62

	Reported net income	$	1.30	$	1.30	$	1.40
	Goodwill amortization				.31		.32
	Trademark amortization				.03		.02

	Adjusted net income	$	1.30	$	1.64	$	1.74

Diluted earnings per share:
	Income from continuing operations	$	1.77	$	1.21	$	1.19
	Goodwill amortization				.22		.23
	Trademark amortization				.02		.02

	Adjusted income from continuing operations	$	1.77	$	1.45	$	1.44

	Reported net income	$	1.21	$	1.19	$	1.27
	Goodwill amortization				.23		.24
	Trademark amortization				.02		.02

	Adjusted net income	$	1.21	$	1.44	$	1.53

The changes in the carrying amount of goodwill for the year ended December 31, 2002 are as follows:


			Morningstar/
	Dairy Group		White Wave		Specialty		Other		Total


	(In thousands)
Balance at December 31, 2001	$	2,123,702	$	389,572	$	290,000	$	57,710	$	2,860,984
Purchase accounting adjustments		21,710		19,358		14,290				55,358
Acquisitions		3,977		101,722						105,699
Currency changes and other								13,376		13,376

Balance at December 31, 2002	$	2,149,389	$	510,652	$	304,290	$	71,086	$	3,035,417

F-18

DEAN FOODS COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

In accordance with SFAS No. 142, we completed a goodwill impairment assessment on our goodwill balances during 2002. The results of this test indicated that the goodwill related to our Puerto Rico reporting unit was impaired at January 1, 2002. In the fourth quarter of 2002, we determined that the impairment that existed as of January 1, 2002 was $37.7 million. As required by SFAS No. 142, we recorded the impairment in our income statement as the cumulative effect of accounting change retroactive to the first quarter of 2002. See Note 2 for information related to the sale of our Puerto Rico operating unit. Other than our Puerto Rico operations, our annual impairment test, which was completed in the fourth quarter of 2002, indicated no goodwill impairment.

The gross carrying amount and accumulated amortization of our intangible assets other than goodwill as of December 31, 2002 and 2001 are as follows:



		December 31


		2002							2001

		Gross					Net		Gross					Net
		Carrying		Accumulated			Carrying		Carrying		Accumulated			Carrying
		Amount		Amortization			Amount		Amount		Amortization			Amount


		(In thousands)							(In thousands)
Intangible assets with indefinite lives:
	Trademarks	$	478,691	$	(14,274	)	$	464,417	$	391,662	$	(14,274	)	$	377,388
Intangible assets with finite lives:
	Customer-related		56,864		(13,270	)		43,594		56,707		(6,075	)		50,632

Total other intangibles		$	535,555	$	(27,544	)	$	508,011	$	448,369	$	(20,349	)	$	428,020

In accordance with SFAS No. 142, we completed an impairment assessment of our intangibles with an indefinite useful life, other than goodwill, at January 1, 2002 during the first quarter of 2002. We determined that an impairment of $47.3 million, net of income tax benefit of $29 million existed at January 1, 2002. The impairment related to certain trademarks in our Dairy Group and Morningstar/ White Wave segments, and was recorded in the first quarter as the cumulative effect of accounting change. The fair value of these trademarks was determined using a present value technique. Our annual impairment test was completed in the fourth quarter of 2002, and no additional impairment was identified.

Amortization expense on intangible assets for the years ended December 31, 2002, 2001 and 2000 was $7.8 million, $7.8 million and $7.1 million, respectively. Estimated aggregate intangible asset amortization expense for the next five years is as follows:


2003	$	4.9 million
2004	$	4.0 million
2005	$	3.2 million
2006	$	2.5 million
2007	$	1.8 million

F-19

DEAN FOODS COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

8. ACCOUNTS PAYABLE AND ACCRUED EXPENSES



	December 31

	2002		2001


	(In thousands)
Accounts payable	$	510,531	$	465,851
Payroll and benefits		150,679		234,415
Health insurance, workers’ compensation and other insurance costs		128,514		96,144
Other accrued liabilities		266,489		238,916

	$	1,056,213	$	1,035,326

9. INCOME TAXES

The following table presents the 2002, 2001 and 2000 provisions for income taxes.



			Year Ended December 31

			2002(1)		2001(2)		2000(3)


			(In thousands)
Current taxes payable:
	Federal		$	47,618	$	39,840	$	47,010
	State			7,829		6,516		8,668
	Foreign and other			3,238		3,319		1,559
Deferred income taxes				94,303		33,439		32,474

		Total	$	152,988	$	83,114	$	89,711

(1) Excludes a $0.9 million income tax expense related to discontinued operations and a $29.0 million income benefit related to a cumulative effect of accounting change.

(2) Excludes a $3.0 million income tax benefit related to an extraordinary loss, a $1.5 million income tax benefit related to a cumulative effect of accounting change and a $0.6 million income tax expense related to discontinued operations.

(3) Excludes a $0.6 million income tax expense related to discontinued operations and a $2.8 million income tax expense related to extraordinary gains.

The following is a reconciliation of income taxes computed at the U.S. federal statutory tax rate to the income taxes reported in the consolidated statements of income:



		Year Ended December 31

		2002			2001			2000


		(In thousands)
Tax expense at statutory rates		$	147,274		$	79,293		$	80,408
State income taxes			14,437			3,699			9,315
Tax effect of tax-exempt earnings						(2,387	)		(1,584	)
Nondeductible goodwill						5,527			4,229
Favorable tax settlement			(6,557	)
Other			(2,166	)		(3,018	)		(2,657	)

	Total	$	152,988		$	83,114		$	89,711

F-20

DEAN FOODS COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

The tax effects of temporary differences giving rise to deferred income tax assets and liabilities were:



			December 31

			2002			2001


			(In thousands)
Deferred income tax assets:
	Net operating loss carryforwards		$	11,990		$	17,675
	Asset valuation reserves			10,859			317
	Non-deductible accruals			130,753			129,449
	State and foreign tax credits			7,632			12,490
	Derivative instruments			27,433			14,624
	Other			8,860			8,133
	Valuation allowances			(6,064	)		(1,537	)

				191,463			181,151
Deferred income tax liabilities:
	Depreciation and amortization			(312,165	)		(300,092	)
	Tax credit basis differences						(7,854	)
	Basis differences in unconsolidated affiliates			(8,777	)		(7,515	)

				(320,942	)		(315,461	)

		Net deferred income tax liability	$	(129,479	)	$	(134,310	)

These net deferred income tax assets (liabilities) are classified in our consolidated balance sheets as follows:



		December 31

		2002			2001


		(In thousands)
Current assets		$	158,337		$	127,215
Noncurrent assets			6,440			19,704
Noncurrent liabilities			(294,256	)		(281,229	)

	Total	$	(129,479	)	$	(134,310	)

At December 31, 2002, we had approximately $13.1 million of net operating losses and approximately $3.9 million of tax credits available for carry-over to future years. The losses are subject to certain limitations and will expire beginning in 2007.

A valuation allowance of $6.1 million has been established because we believe it is “more likely than not” that all of the deferred tax assets relating to state net operating loss and credit carryovers, foreign tax credit carryovers and capital loss carryovers will not be realized prior to the date they are scheduled to expire.

F-21

DEAN FOODS COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)


10.	LONG-TERM DEBT



			December 31


			2002						2001

			Amount			Interest			Amount			Interest
			Outstanding			Rate			Outstanding			Rate


			(Dollars in thousands)
Senior credit facility			$	1,827,500			3.65	%	$	1,900,000			4.67	%
Subsidiary debt obligations:
	Senior notes			656,951			6.625-8.15			658,211			6.625-8.15
	Receivables-backed loan			145,000			2.28			400,000			2.29
	Foreign subsidiary term loan			35,739			4.69			35,172			6.25
	Other lines of credit			11,919			3.71-4.69			2,317			4.80
	Industrial development revenue bonds			21,000			1.65-2.00			28,001			1.02-6.63
	Capital lease obligations and other			29,815						44,796

				2,727,924						3,068,497
Less current portion				(173,442	)					(96,972	)

		Total	$	2,554,482					$	2,971,525

Senior Credit Facility — Simultaneously with the completion of our acquisition of Old Dean, we entered into a new $2.7 billion credit agreement with a syndicate of lenders, in replacement of our then existing credit facilities. Our new senior credit facility provides an $800 million revolving line of credit, a Tranche A $900 million term loan and a Tranche B $1 billion term loan. Upon completion of the Old Dean acquisition, we borrowed $1.9 billion under this facility’s term loans. At December 31, 2002 there were outstanding term loan borrowings of $1.83 billion under this facility. The revolving line of credit was undrawn, except for $71.8 million of issued but undrawn letters of credit. As of December 31, 2002, approximately $728.2 million was available for future borrowings under the revolving credit facility, subject to satisfaction of certain conditions contained in the loan agreement. We are currently in compliance with all covenants contained in our credit agreement.

Credit Facility Terms — Amounts outstanding under the revolving line of credit and the Tranche A term loan bear interest at a rate per annum equal to one of the following rates, at our option:

• a base rate equal to the higher of the Federal Funds rate plus 50 basis points or the prime rate, plus a margin that varies from 25 to 150 basis points, depending on our leverage ratio (which is the ratio of defined indebtedness to defined EBITDA), or

• the London Interbank Offering Rate (“LIBOR”) computed as LIBOR divided by the product of one minus the Eurodollar Reserve Percentage, plus a margin that varies from 150 to 275 basis points, depending on 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, to the following, at our option:

• a base rate equal to the higher of the Federal Funds rate plus 50 basis points or the prime rate, plus a margin that varies from 75 to 150 basis points, depending on our leverage ratio, or

• LIBOR divided by the product of one minus the Eurodollar Reserve Percentage, plus a margin that varies from 200 to 275 basis points, depending on our leverage ratio.

F-22

DEAN FOODS COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

The blended interest rate in effect on borrowings under the senior credit facility, including the applicable interest rate margin, was 3.65% at December 31, 2002. However, we had interest rate swap agreements in place that hedged $1.08 billion of our borrowings under this facility at December 31, 2002 at an average rate of 5.4%, plus the applicable interest rate margin. Interest is payable quarterly or at the end of the applicable interest period.

The agreement requires principal payments on the Tranche A term loan as follows:

• $16.87 million quarterly from March 31, 2002 through December 31, 2002;

• $33.75 million quarterly from March 31, 2003 through December 31, 2004;

• $39.38 million quarterly from March 31, 2005 through December 31, 2005;

• $45.0 million quarterly from March 31, 2006 through December 31, 2006;

• $56.25 million quarterly from March 31, 2007 through June 30, 2007; and

• A final payment of $112.5 million on July 15, 2007.

The agreement requires principal payments on the Tranche B term loan as follows:

• $1.25 million quarterly from March 31, 2002 through December 31, 2002;

• $2.5 million quarterly from March 31, 2003 through December 31, 2007;

• A payment of $472.5 million on March 31, 2008; and

• A final payment of $472.5 million on July 15, 2008.

No principal payments are due on the revolving line of credit until maturity on July 15, 2007.

The credit agreement also requires mandatory principal prepayments in certain circumstances including without limitation: (1) upon the occurrence of certain asset dispositions not in the ordinary course of business, (2) upon the occurrence of certain debt and equity issuances when our leverage ratio is greater than 3.75 to 1.0, and (3) beginning in 2003, annually when our leverage ratio is greater than 3.0 to 1.0. The credit agreement requires that we prepay 50% of defined excess cash flow for any fiscal year (beginning in 2003) in which our leverage ratio at year end is greater than 3.75 to 1.0. As of December 31, 2002, our leverage ratio was 3.3 to 1.0.

In consideration for the revolving commitments, we pay a commitment fee on unused amounts of the $800 million revolving credit facility that ranges from 37.5 to 50 basis points, depending on our leverage ratio.

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 defined EBITDA) and an interest coverage ratio (computed as the ratio of defined 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

F-23

DEAN FOODS COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

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 December 31, 2002, the minimum net worth requirement was $1.28 billion.

Our credit agreement permits us to complete acquisitions that meet the following conditions without obtaining prior approval: (1) the acquired company is involved in the manufacture, processing and distribution of food or packaging products or any other line of business in which we are currently engaged, (2) the total cash consideration is not greater than $300 million, (3) we acquire at least 51% of the acquired entity, and (4) the transaction is approved by the Board of Directors or shareholders, as appropriate, of the target. All other acquisitions must be approved in advance by the required lenders.

Our credit agreement also permits us to repurchase stock under our open market share repurchase program, provided that, if our leverage ratio is greater than 3.75 to 1.0, total Restricted Payments (as defined in the agreement, which definition includes stock repurchases) cannot exceed $50 million per year, plus the amount of payments required to be made on our outstanding convertible preferred securities during that year.

The facility also contains limitations on liens, investments and the incurrence of additional indebtedness, and prohibits certain dispositions of property and restricts certain payments, including dividends. The credit facility is secured by liens on substantially all of our domestic assets (including the assets of our subsidiaries, but excluding the capital stock of Old Dean’s subsidiaries and certain 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.

In December 2002, we executed an amendment to our credit facility to relax certain restrictions. We paid an aggregate of $2.1 million to the lenders who approved the amendment.

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:

• $96.8 million ($100 million face value), at 6.75% interest, maturing in 2005;

• $250.5 million ($250 million face value), at 8.15% interest, maturing in 2007;

• $184.3 million ($200 million face value), at 6.625% interest, maturing in 2009; and

• $125.3 million ($150 million face value), at 6.9% interest, maturing in 2017.

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 certain of their real property 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 million receivables securitization facility pursuant to which certain of our subsidiaries sell their accounts receivable to three wholly-owned special purpose entities intended to be bankruptcy-remote. The special purpose entities then transfer the receivables to third party asset-backed commercial paper conduits sponsored by major financial institutions. The assets and liabilities of these three special purpose entities are fully reflected on our balance sheet, and the securitization is treated as a borrowing for accounting purposes. During 2002, we made net payments of $255 million on this facility leaving an outstanding balance of $145 million at December 31, 2002. The

F-24

DEAN FOODS COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

receivables-backed loan bears interest at a variable rate based on the commercial paper yield as defined in the agreement. Our ability to re-borrow under this facility is subject to a standard “borrowing base” formula. At December 31, 2002, we could have re-borrowed an additional $180 million under this facility.

Foreign Subsidiary Term Loan — In connection with our acquisition of Leche Celta in February 2000, our Spanish subsidiary obtained a 42.1 million euro (as of December 31, 2002, approximately $44.1 million) non-recourse term loan from a syndicate of lenders, 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. At December 31, 2002, a total of $35.7 million was outstanding under this facility.

Other Lines of Credit — Leche Celta, our Spanish subsidiary, is our only subsidiary with its own lines of credit separate from the credit facilities described above. Leche Celta’s primary line of credit, which is in the principal amount of 15 million euros (as of December 31, 2002 approximately $15.7 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 and receivables factoring facilities. At December 31, 2002, a total of $11.9 million was outstanding on these facilities.

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.

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.

Letters of Credit — At December 31, 2002 there were $71.8 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, an additional $49 million of letters of credit were outstanding at December 31, 2002. The majority of 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.

F-25

DEAN FOODS COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

The following table summarizes our various interest rate agreements in effect as of December 31, 2002:


Fixed Interest Rates	Expiration Date		Notional Amounts


	(in millions)
6.23%		June 2003	$	50
4.29% to 4.69%		December 2003		275
4.01% to 6.69%		December 2004		275
5.20% to 6.74%		December 2005		400
6.78%		December 2006		75

The following table summarizes our various interest rate agreements in effect as of December 31, 2001:


Fixed Interest Rates	Expiration Date		Notional Amounts


	(in millions)
4.90% to 4.93%		December 2002	$	275
6.07% to 6.24%		December 2002		325
6.23%		June 2003		50
6.69%		December 2004		100
6.69% to 6.74%		December 2005		100
6.78%		December 2006		75

In January 2003, we entered into forward starting swaps that begin in March 2003 with a notional amount of $400 million. These swaps all expire in December 2003 and the fixed interest rates range between 1.47% to 1.48%. These swaps have been designated as hedges against interest rate exposure on loans under our senior credit facility.

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	9 million euros (approximately $9.4 million as of December 31, 2002 and $8 million as of December 31, 2001)
	5.60%		November 2004	12 million euros (approximately $12.6 million as of December 31, 2002 and $10.7 million as of December 31, 2001)

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 December 31, 2002 and 2001, our derivative liability totaled $80.4 million and $44.1 million on our consolidated balance sheet respectively. This balance includes approximately $42.8 million and $27.8 million recorded as a component of accounts payable and accrued expenses at December 31, 2002 and 2001, respectively and $37.6 million and $16.3 million recorded as a component of other long-term liabilities at December 31, 2002 and 2001, respectively. There was no hedge ineffectiveness, as determined in accordance with SFAS No. 133, for the years ended December 31, 2002 and 2001, respectively. Approximately $24 million and $6.9 million of losses (net of taxes) were reclassified to interest expense from other comprehensive income during the years ended December 31, 2002 and 2001, respectively. We estimate that approximately $27 million of net derivative losses (net of income taxes) included in other comprehensive

F-26

DEAN FOODS COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

income will be reclassified into earnings within the next 12 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.


11.	MANDATORILY REDEEMABLE TRUST ISSUED PREFERRED SECURITIES

On March 24, 1998, we issued $600 million of company-obligated 5.5% mandatorily redeemable convertible preferred securities of a Delaware business trust subsidiary in a private placement to “qualified institutional buyers” under Rule 144A under the Securities Act of 1933, as amended. 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 23 million shares of our common stock, subject to adjustment in certain circumstances, at a conversion price of $26.09. These preferred securities are also redeemable, at our option, at any time at specified premiums and are mandatorily redeemable at their liquidation preference amount of $50 per share at maturity or upon occurrence of certain specified events. See Note 24.


12.	STOCKHOLDERS’ EQUITY

Our authorized shares of capital stock include 1,000,000 shares of preferred stock and 500,000,000 shares of common stock with a par value of $.01 per share.

Stock Award Plans — We currently have two stock award plans with shares remaining available for issuance. These plans, including our 1997 Stock Option and Restricted Stock Plan and the 1989 Old Dean Stock Awards Plan (which we adopted upon completion of our acquisition of Old Dean), provide for grants of stock options, restricted stock and other stock-based awards to employees, officers, directors and, in some cases, consultants, up to a maximum of 37.5 million and approximately 5.7 million shares, respectively. Approximately 9.9 million and 1.2 million shares remained available for issuance under the 1997 and 1989 plans, respectively, as of March 25, 2003. Options and other stock-based awards vest in accordance with provisions set forth in the applicable award agreements.

F-27

DEAN FOODS COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

The following table summarizes the status of our stock-based compensation programs:


					Weighted Average
		Options			Exercise Price

Outstanding at December 31, 1999			13,791,753		$	11.56
	Granted		4,100,700			12.76
	Canceled		(620,103	)		14.07
	Exercised		(3,693,537	)		6.93

Outstanding at December 31, 2000			13,578,813		$	12.99
	Granted		3,732,450			14.56
	Options issued to Old Dean option holders(1)		8,055,336			15.39
	Canceled		(872,454	)		15.47
	Exercised		(3,398,355	)		12.99

Outstanding at December 31, 2001			21,095,790		$	14.11
	Granted		7,711,394			20.61
	Canceled(2)		(4,297,922	)		14.94
	Exercised		(4,950,732	)		13.79

Outstanding at December 31, 2002			19,558,530		$	16.55

Exercisable at December 31, 2000			7,202,559		$	12.83
Exercisable at December 31, 2001			14,553,276			14.38
Exercisable at December 31, 2002			8,997,099			14.42

(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 8.1 million shares of our common stock. Also, 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 2.4 million shares were surrendered. See Note 2 to our Consolidated Financial Statements.

(2) The acquisition of Old Dean triggered certain “change in control” rights contained in the Old Dean 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 2.3 million shares were surrendered.

The following table summarizes information about options outstanding and exercisable at December 31, 2002:



		Options Outstanding
								Options Exercisable
				Weighted-Average
Range of		Number		Remaining		Weighted-Average		Number		Weighted-Average
Exercise Prices		Outstanding		Contractual Life		Exercise Price		Exercisable		Exercise Price

$	0 to $6.75		292,326		3.00	$	4.27		292,326	$	4.27
	9.02 to 10.14		1,398,426		4.18	$	9.73		1,398,426	$	9.73
	10.87 to 14.55		7,396,370		7.18	$	13.37		4,103,984	$	13.05
	16.29 to 17.70		1,289,285		6.33	$	16.62		1,252,388	$	16.63
	18.75 to 20.35		8,276,228		8.35

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	•		We have included Deloitte & Touche LLP’s Independent Auditor’s Report, which replaces the report originally filed as part of our 2002 Annual Report on Form 10-K.

	•		We have restated in its entirety the subsection entitled “Employee Stock-Based Compensation” contained in Note 1 to our 2002 Financial Statements, and

	•		We have added Note 26 to our 2002 Financial Statements entitled “Restatement of Note 1” and amended the table of contents to our 2002 Financial Statements accordingly.


(1)	Calculated in accordance with the Black-Scholes option pricing model, using the following assumptions: expected volatility of 38%, expected dividend yield of 0%, expected option term of seven years and risk-free rates of return as of the date of grant ranging from 4.09% to 4.87% based on the yield of seven-year U.S. Treasury securities.

(2)	Calculated in accordance with the Black-Scholes option pricing model, using the following assumptions: expected volatility of 40%, expected dividend yield of 0%, expected option term of seven years and risk-free rates of return as of the date of grant ranging from 4.51% to 5.19% based on the yield of seven-year U.S. Treasury securities.

(3)	Calculated in accordance with the Black-Scholes option pricing model, using the following assumptions: expected volatility of 40%; expected dividend yield of 0%; expected option term of four to ten years and risk-free rates of return as of the date of grant ranging from 6.03% to 6.74% based on the yield of seven-year U.S. Treasury securities.


(1)	An additional $15.8 million was paid in 2002 as part of the Old Dean acquisition.


	•	The acquisition would result in us becoming the first truly national dairy and specialty foods company with the geographic reach, management depth and product mix necessary to meet the needs of large customers, who can especially benefit from the added services, convenience and value that a national dairy company can provide;

	•	Combining our businesses would enable us to reduce our costs by pursuing economies of scale in purchasing, product development and manufacturing, and by eliminating duplicative costs; and

	•	Increasing our scale would provide us with greater resources to invest in marketing and innovation.


(1)	Corporate interest expense of $5.5 million, $5.1 million and $5.9 million in 2002, 2001 and 2000, respectively, was allocated to our Puerto Rico operations based on the ratio of our investment in them to total debt and equity.


	•	A $6.5 million gain, net of income tax expense of $3.6 million, for interest rate derivatives which became unhedged and were marked to fair market value, and

	•	A $1.5 million loss, net of an income tax benefit of $0.8 million, for the write-off of deferred financing costs.


(1)	Excludes a $0.9 million income tax expense related to discontinued operations and a $29.0 million income benefit related to a cumulative effect of accounting change.

(2)	Excludes a $3.0 million income tax benefit related to an extraordinary loss, a $1.5 million income tax benefit related to a cumulative effect of accounting change and a $0.6 million income tax expense related to discontinued operations.

(3)	Excludes a $0.6 million income tax expense related to discontinued operations and a $2.8 million income tax expense related to extraordinary gains.


	•	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 defined EBITDA), or

	•	the London Interbank Offering Rate (“LIBOR”) computed as LIBOR divided by the product of one minus the Eurodollar Reserve Percentage, plus a margin that varies from 150 to 275 basis points, depending on our leverage ratio.


	•	a base rate equal to the higher of the Federal Funds rate plus 50 basis points or the prime rate, plus a margin that varies from 75 to 150 basis points, depending on our leverage ratio, or

	•	LIBOR divided by the product of one minus the Eurodollar Reserve Percentage, plus a margin that varies from 200 to 275 basis points, depending on our leverage ratio.


	•	$16.87 million quarterly from March 31, 2002 through December 31, 2002;

	•	$33.75 million quarterly from March 31, 2003 through December 31, 2004;

	•	$39.38 million quarterly from March 31, 2005 through December 31, 2005;

	•	$45.0 million quarterly from March 31, 2006 through December 31, 2006;

	•	$56.25 million quarterly from March 31, 2007 through June 30, 2007; and

	•	A final payment of $112.5 million on July 15, 2007.


	•	$1.25 million quarterly from March 31, 2002 through December 31, 2002;

	•	$2.5 million quarterly from March 31, 2003 through December 31, 2007;

	•	A payment of $472.5 million on March 31, 2008; and

	•	A final payment of $472.5 million on July 15, 2008.


	•	$96.8 million ($100 million face value), at 6.75% interest, maturing in 2005;

	•	$250.5 million ($250 million face value), at 8.15% interest, maturing in 2007;

	•	$184.3 million ($200 million face value), at 6.625% interest, maturing in 2009; and

	•	$125.3 million ($150 million face value), at 6.9% interest, maturing in 2017.


(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 8.1 million shares of our common stock. Also, 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 2.4 million shares were surrendered. See Note 2 to our Consolidated Financial Statements.

(2)	The acquisition of Old Dean triggered certain “change in control” rights contained in the Old Dean 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 2.3 million shares were surrendered.