Dean Holding 10-Q 2005 Q3 Quarterly report

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTIONS 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

(Mark One)
þ	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
	For the Quarterly Period Ended September 30, 2005
or
o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File Number 1-08262

Dean Holding Company

(Exact name of Registrant as specified in its charter)

Delaware	75-2932967
(State or other jurisdiction of incorporation or organization)	(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)

     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 þ          No o

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

      Indicate by check mark whether the registrant is a Shell Company (as defined in Exchange Act Rule 12b-2).     Yes o          No þ

      The registrant meets the conditions specified in General Instruction H(1)(a) and (b) of Form 10-Q and, therefore, is filing this form with the reduced disclosure format permitted by General Instruction H(2) to Form 10-Q.

Table of Contents

	Page
Part I — Financial Information
Item 1 — Financial Statements		3
Item 2 — Management’s Discussion and Analysis of Financial Condition and Results of Operations		15
Item 4 — Controls and Procedures		18
Part II — Other Information
Item 1 — Legal Proceedings		19
Item 6 — Exhibits		19
Certification of CEO Pursuant to Section 302
Certification of CFO Pursuant to Section 302
Certification of CEO Pursuant to Section 906
Certification of CFO Pursuant to Section 906

2

Part I — Financial Information

Item 1. Financial Statements

DEAN HOLDING COMPANY

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except share data)

			September 30,			December 31,
			2005			2004
			(unaudited)
ASSETS
Current assets:
	Cash and cash equivalents		$	17,983		$	12,490
	Receivables, net			262,153			261,184
	Inventories			104,020			101,265
	Deferred income taxes			42,769			48,187
	Prepaid expenses and other current assets			10,482			18,754
		Total current assets		437,407			441,880
Property, plant and equipment				507,757			510,513
Goodwill				1,116,057			1,118,775
Identifiable intangible and other assets				203,666			204,265
Assets of discontinued operations				—			613,240
		Total	$	2,264,887		$	2,888,673
LIABILITIES AND PARENT’S NET INVESTMENT
Current liabilities:
	Accounts payable and accrued expenses		$	296,813		$	288,684
	Income taxes payable			4,424			4,897
	Current portion of long-term debt			27			99,334
		Total current liabilities		301,264			392,915
Long-term debt				741,119			754,683
Deferred income taxes				190,042			183,265
Other long-term liabilities				109,910			136,095
Liabilities of discontinued operations				—			120,900
Commitments and contingencies (Note 9)
Parent’s net investment				938,651			1,316,319
Accumulated other comprehensive income (loss)				(16,099	)		(15,504	)
		Total parent’s net investment		922,552			1,300,815
		Total	$	2,264,887		$	2,888,673

See Notes to Condensed Consolidated Financial Statements.

3

DEAN HOLDING COMPANY

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(In thousands)

			Three Months Ended						Nine Months Ended
			September 30,						September 30,
			2005			2004			2005			2004
			(unaudited)
Net sales			$	940,276		$	940,932		$	2,763,843		$	2,720,265
Cost of sales				711,386			729,121			2,093,162			2,088,606
Gross profit				228,890			211,811			670,681			631,659
Operating costs and expenses:
	Selling and distribution			135,624			130,152			398,421			381,629
	General and administrative			30,245			27,480			86,858			88,588
	Amortization of intangibles			217			339			864			928
	Facility closing and reorganization costs			406			1,091			2,526			3,773
		Total operating costs and expenses		166,492			159,062			488,669			474,918
Operating income				62,398			52,749			182,012			156,741
Other (income) expense:
	Interest expense			11,798			13,991			39,014			41,569
	Other income, net			(15	)		(75	)		(69	)		(1,657	)
		Total other expense		11,783			13,916			38,945			39,912
Income from continuing operations before income taxes				50,615			38,833			143,067			116,829
Income taxes				19,064			15,089			54,300			45,150
Income from continuing operations				31,551			23,744			88,767			71,679
Income (loss) from discontinued operations, net of tax				(580	)		(678	)		12,866			23,694
Net income			$	30,971		$	23,066		$	101,633		$	95,373

See Notes to Condensed Consolidated Financial Statements.

4

DEAN HOLDING COMPANY

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

					Nine Months Ended
					September 30,
					2005			2004
					(unaudited)
Cash flows from operating activities:
	Net income				$	101,633		$	95,373
	Income from discontinued operations					(12,866	)		(23,694	)
	Adjustments to reconcile net income to net cash provided by operating activities:
		Depreciation and amortization				54,632			50,702
		Loss (gain) on disposition of assets				83			(1,738	)
		Write-down of impaired assets				37			1,877
		Deferred income taxes				12,713			19,465
		Other				2,181			170
		Changes in operating assets and liabilities, net of acquisitions:
			Receivables			5,847			(9,890	)
			Inventories			(2,775	)		(10,929	)
			Prepaid expenses and other assets			11,991			(1,496	)
			Accounts payable and accrued expenses			(20,121	)		(45,062	)
			Income taxes payable			(473	)		(16,268	)
				Net cash provided by continuing operations		152,882			58,510
				Net cash provided by discontinued operations		31,496			51,296
				Net cash provided by operating activities		184,378			109,806
Cash flows from investing activities:
	Additions to property, plant and equipment					(42,944	)		(42,609	)
	Cash outflows for acquisitions					—			(26,472	)
	Proceeds from sale of fixed assets					718			3,591
				Net cash used in continuing operations		(42,226	)		(65,490	)
				Net cash used in discontinued operations		(7,631	)		(16,249	)
				Net cash used in investing activities		(49,857	)		(81,739	)
Cash flows from financing activities:
	Proceeds from issuance of debt					—			55,736
	Repayment of debt					(115,968	)		—
	Additional investment from parent					—			22,520
	Distribution to parent					(24,213	)		(119,770	)
				Net cash used in continuing operations		(140,181	)		(41,514	)
				Net cash provided by (used in) discontinued operations		11,153			(3,615	)
				Net cash used in financing activities		(129,028	)		(45,129	)
	Increase (decrease) in cash and cash equivalents					5,493			(17,062	)
	Cash and cash equivalents, beginning of period					12,490			22,857
	Cash and cash equivalents, end of period				$	17,983		$	5,795

See Notes to Condensed Consolidated Financial Statements.

5

DEAN HOLDING COMPANY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2005

(unaudited)

1. General

     Basis of Presentation — The unaudited Condensed Consolidated Financial Statements contained in this Quarterly Report have been prepared on the same basis as the Consolidated Financial Statements in our Annual Report on Form 10-K for the year ended December 31, 2004. In our opinion, we have made all necessary adjustments (which include only normal recurring adjustments) in order to present fairly, in all material respects, our consolidated financial position, results of operations and cash flows as of the dates and for the periods presented. Certain reclassifications have been made to conform the prior year’s Consolidated Financial Statements to the current year’s classifications. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been omitted. Our results of operations for the period ended September 30, 2005 may not be indicative of our operating results for the full year. The Condensed Consolidated Financial Statements contained in this Quarterly Report should be read in conjunction with our 2004 Consolidated Financial Statements contained in our Annual Report on Form 10-K (filed with the Securities and Exchange Commission on March 17, 2005).

      We are a wholly-owned subsidiary of Dean Foods Company. Dean Foods Company provides us with management support in return for a management fee. The management fee is based on budgeted annual expenses for Dean Foods Company’s corporate headquarters, a portion of which is then allocated to us. Dean Foods Company charged us management fees of $8.9 million and $10.0 million for the three months ended September 30, 2005 and 2004, respectively and $26.7 million and $30.0 million for the nine months ended September 30, 2005 and 2004 respectively. Our cash is available for use by, and is regularly transferred to, Dean Foods Company at its discretion. Cash that has been transferred to Dean Foods Company is included in “parent’s net investment” on our balance sheet.

      On June 27, 2005, Dean Foods Company completed the spin-off (“Spin-off”) of our majority-owned subsidiary TreeHouse Foods, Inc. (“TreeHouse”). Immediately prior to the Spin-off, we transferred to TreeHouse the businesses previously conducted by our Specialty Foods Group segment and Dean Foods Company transferred to TreeHouse certain businesses previously conducted by other segments of Dean Foods Company not consolidated with us. On June 24, 2005, immediately after Dean Foods Company transferred these businesses to TreeHouse, we distributed the common stock of TreeHouse to Dean Foods Company as a dividend. As a result of these transactions, we no longer have a Specialty Foods Group segment and our Dairy Group is our only remaining reportable segment. The Condensed Financial Statements as of December 31, 2004 and for the three-month and nine-month periods ended September 30, 2004 have been reclassified to give effect to the businesses previously conducted by our Specialty Foods Group segment as discontinued operations.

      Unless otherwise indicated, references in this report to “we,” “us” or “our” refer to Dean Holding Company and its subsidiaries, taken as a whole.

     Shipping and Handling Fees — Our shipping and handling costs are included in both cost of sales and selling and distribution expense, depending on the nature of such costs. Shipping and handling costs included in cost of sales reflect inventory warehouse costs, product loading and handling costs and costs associated with transporting finished products from our manufacturing facilities to our own distribution warehouses. Shipping and handling costs included in selling and distribution expense consist primarily of route delivery costs for both company-owned delivery routes and independent distributor routes, to the extent that such independent distributors are paid a delivery fee, and the cost of shipping products to customers through third party carriers. Shipping and handling costs recorded as a component of selling and distribution expense were approximately $111.3 million and $105.3 million in the third quarter of 2005 and 2004, respectively and $322.3 million and $307.3 million during the nine months ended September 30, 2005 and 2004 respectively.

6

DEAN HOLDING COMPANY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

     Stock-Based Compensation — Certain of our employees participate in employee stock-based compensation plans sponsored by Dean Foods Company. Dean Foods Company has elected to follow Accounting Principles Board Opinion (“APB”) No. 25, “Accounting for Stock Issued to Employees,” and related interpretations in accounting for stock options. No compensation expense has been recognized as the stock options were granted at exercise prices that were at or above market value at the grant date. Dean Foods Company also grants stock units to certain of our employees. Each stock unit represents the right to receive one share of Dean Foods Company’s common stock in the future. Dean Foods Company has not allocated any compensation expense to us for grants of stock units.

     Recently Issued Accounting Pronouncements — The Financial Accounting Standards Board (“FASB”) issued Financial Interpretation No. (“FIN”) 47, “Accounting for Conditional Asset Retirement Obligations” in March 2005. This Interpretation clarifies the term “conditional asset retirement obligation” as used in FASB Statement of Financial Accounting Standards (“SFAS”) No. 143 “Accounting for Asset Retirement Obligations”, and also clarifies when an entity should have sufficient information to reasonably estimate the fair value of an asset retirement obligation. We are currently evaluating the impact of FIN No. 47, which will become effective for us in the fourth quarter of 2005, on our Consolidated Financial Statements.

      The FASB issued SFAS No. 123(R), “Share-Based Payment” in December 2004. It will require the cost of employee compensation paid with equity instruments to be measured based on grant-date fair values. That cost will be recognized over the vesting period. SFAS No. 123(R) will become effective for Dean Foods Company in the first quarter of 2006. Dean Foods Company is currently evaluating the impact of SFAS No. 123(R) on the consolidated operations of Dean Foods Company and how the cost resulting under SFAS No. 123(R) will be allocated to its subsidiaries.

      In November 2004, the FASB issued SFAS No. 151, “Inventory Costs — an Amendment of ARB No. 43, Chapter 4.” SFAS No. 151, which is effective for inventory costs incurred during years beginning after June 15, 2005, clarifies the accounting for abnormal amounts of idle facility expense, freight, handling costs, and wasted material, requiring that those items be recognized as current-period charges. In addition, SFAS No. 151 requires that allocation of fixed production overheads be based on the normal capacity of the production facilities. We do not believe the adoption of this standard will have a material impact on our Consolidated Financial Statements.

      In December 2004, FASB issued SFAS No. 153, “Exchanges of Nonmonetary Assets, an amendment of APB Opinion No. 29.” SFAS No. 153 is effective for nonmonetary exchanges occurring in fiscal years beginning after June 15, 2005. SFAS No. 153 eliminates the rule in APB No. 29 which excluded from fair value measurement exchanges of similar productive assets. Instead SFAS No. 153 excludes from fair value measurement exchanges of nonmonetary assets that do not have commercial substance. We do not believe the adoption of this standard will have a material impact on our Consolidated Financial Statements.

2. Discontinued Operations

      On January 25, 2005, Dean Foods Company formed TreeHouse. At that time, TreeHouse sold shares of common stock to certain members of a newly retained management team, who purchased approximately 1.67% of the outstanding common stock of TreeHouse, for an aggregate purchase price of $10 million. The proceeds from this transaction were distributed to us as a dividend and are reflected within “parent’s net investment” in our Condensed Consolidated Balance Sheet.

      On June 27, 2005, Dean Foods Company completed the Spin-off of our majority owned subsidiary TreeHouse. Immediately prior to the Spin-off, we transferred to TreeHouse the businesses previously conducted by our Specialty Foods Group segment and Dean Foods Company transferred to TreeHouse certain businesses previously conducted by other segments of Dean Foods Company not consolidated with us. On June 24, 2005, immediately after Dean Foods Company transferred these businesses to TreeHouse, we

7

DEAN HOLDING COMPANY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

distributed the common stock of TreeHouse to Dean Foods Company as a dividend. As a result of these transactions, we no longer have a Specialty Foods Group segment and our Dairy Group is our only remaining reportable segment.

      Net sales and income before taxes generated by our Specialty Foods Group segment were as follows:

					Nine Months
	Three Months Ended				Ended
	September 30				September 30
	2005		2004		2005		2004
	(In thousands)
Net sales	$	—	$	162,788	$	332,299	$	502,439
Income before taxes		—		743		24,692		39,218

      Major classes of assets and liabilities of our transferred business included in our balance sheet at December 31, 2004 (in thousands) were as follows:

Current assets	$	158,964
Goodwill		306,473
Other non-current assets		147,803
Current liabilities		56,252
Non-current liabilities		64,648

      Prior to the Spin-off, we transferred the obligation for pension and other postretirement benefit plans of transferred employees and retirees to TreeHouse, net of estimated related plan assets. During the fourth quarter of 2005, we will finalize the preliminary computation and transfer the plan assets related to such obligations.

3. Inventories

		September 30,		December 31,
		2005		2004
		(In thousands)
Raw materials and supplies		$	31,336	$	33,175
Finished goods			72,684		68,090
	Total	$	104,020	$	101,265

4. Intangible Assets

      Changes in the carrying amount of goodwill for the nine months ended September 30, 2005 are as follows (in thousands):

Balance at December 31, 2004	$	1,118,775
Acquisitions		1,263
Purchasing accounting adjustments		(3,981	)
Balance at September 30, 2005	$	1,116,057

8

DEAN HOLDING COMPANY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

      The gross carrying amount and accumulated amortization of our intangible assets (other than goodwill) as of September 30, 2005 and December 31, 2004 are as follows:

		September 30, 2005							December 31, 2004
		Gross					Net		Gross					Net
		Carrying		Accumulated			Carrying		Carrying		Accumulated			Carrying
		Amount		Amortization			Amount		Amount		Amortization			Amount
		(In thousands)
Intangible assets with indefinite lives:
	Trademarks	$	179,310	$	—		$	179,310	$	179,310	$	—		$	179,310
Intangible assets with finite lives:
	Customer-related		19,929		(7,452	)		12,477		18,089		(5,929	)		12,160
Total		$	199,239	$	(7,452	)	$	191,787	$	197,399	$	(5,929	)	$	191,470

      Amortization expense on intangible assets for the three months ended September 30, 2005 and 2004 was approximately $521,000 and $484,000, respectively, and $1.5 million and $1.4 million for the nine months ended September 30, 2005 and 2004, respectively. Estimated aggregate intangible asset amortization expense for the next five years is as follows:

2006	$	2.2 million
2007		2.2 million
2008		2.2 million
2009		2.2 million
2010		2.2 million

5. Long-Term Debt

			September 30, 2005						December 31, 2004
			Amount			Interest			Amount			Interest
			Outstanding			Rate			Outstanding			Rate
			(In thousands)
$250 million senior notes maturing in 2007			$	250,224			8.150	%	$	250,304			8.150	%
$200 million senior notes maturing in 2009				189,575			6.625			187,982			6.625
$150 million senior notes maturing in 2017				127,844			6.900			127,102			6.900
$100 million senior notes maturing in 2005				—			—			99,308			6.750
Receivables-backed facility				173,385			4.180			189,185			2.830
Capital lease obligations and other				118						136
				741,146						854,017
	Less current portion			(27	)					(99,334	)
		Total	$	741,119					$	754,683

     Senior Notes — We had $600 million (face value) of senior notes outstanding at September 30, 2005. One note ($100 million face value at 6.75% interest) matured and was repaid in June 2005. The related indentures do not contain financial covenants but they do contain certain restrictions including a prohibition against us and our subsidiaries granting liens on our real property interests and a prohibition against granting liens on the stock of our subsidiaries. At the date of our acquisition by Dean Foods Company, our long-term

9

DEAN HOLDING COMPANY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

debt was re-valued to its current market value. The adjustment to fair value is reflected as a discount on senior notes in our Consolidated Financial Statements.

     Receivables-Backed Facility — We participate in Dean Foods Company’s $600 million receivables securitization facility pursuant to which certain of our subsidiaries sell their accounts receivable to a wholly-owned special purpose entity intended to be bankruptcy-remote. This special purpose entity then transfers the receivables to third-party asset-backed commercial paper conduits sponsored by major financial institutions. The assets and liabilities of these special purpose entities are fully reflected on our balance sheet, and the securitization is treated as a borrowing for accounting purposes. The receivables-backed facility bears interest at a variable rate based on the commercial paper yield, as defined in the agreement. Dean Foods Company does not allocate interest related to the receivables-backed facility to us. Therefore, no interest costs related to this facility have been reflected on our income statements.

     Capital Lease Obligations and Other — Capital lease obligations and 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 September 30, 2005, $7.3 million of letters of credit were outstanding. The majority of letters of credit were required by various utilities and government entities for performance and insurance guarantees.

6. Comprehensive Income (Loss)

      Comprehensive income (loss) consists of net income plus all other changes in equity from non-owner sources. Consolidated comprehensive income was $31.0 million and $101.0 million for the three and nine months ended September 30, 2005, respectively. The amounts of income tax (expense) benefit allocated to each component of other comprehensive income during the nine months ended September 30, 2005 are included below.

	Pre-Tax
	Income			Tax		Net
	(Loss)			Benefit		Amount
	(In thousands)
Accumulated other comprehensive income (loss), December 31, 2004	$	(24,516	)	$	9,012	$	(15,504	)
Cumulative translation adjustment arising during period		143			—		143
Minimum pension liability adjustment		(1,256	)		518		(738	)
Accumulated other comprehensive income (loss), September 30, 2005	$	(25,629	)	$	9,530	$	(16,099	)

10

DEAN HOLDING COMPANY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

7. Employee Retirement and Postretirement Benefits

     Defined Benefit Plans — The benefits under our defined benefit plans are based on years of service and employee compensation.

		Three Months Ended						Nine Months Ended
		September 30						September 30
		2005			2004			2005			2004
		(In thousands)
Components of net period cost:
	Service cost	$	241		$	192		$	723		$	576
	Interest cost		2,257			2,296			6,771			6,888
	Expected return on plan assets		(1,543	)		(1,425	)		(4,629	)		(4,275	)
Amortizations:
	Prior service cost		104			106			312			318
	Unrecognized net loss		96			72			288			216
	Effect of settlement		188			193			564			579
Net periodic benefit cost		$	1,343		$	1,434		$	4,029		$	4,302

      We expect to contribute $25.6 million to our pension plans during 2005.

     Postretirement Benefits — Certain of our subsidiaries provide health care benefits to certain retirees who are covered under specific group contracts.

		Three Months				Nine Months
		Ended				Ended
		September 30				September 30
		2005		2004		2005		2004
		(In thousands)
Components of net period cost:
	Service cost	$	207	$	190	$	621	$	570
	Interest cost		207		212		621		636
Amortizations:
	Unrecognized net loss		52		59		156		177
Net periodic benefit cost		$	466	$	461	$	1,398	$	1,383

      We expect to contribute $1.2 million to our postretirement health plans during 2005.

8. Facility Closing and Reorganization Costs

     Facility Closing and Reorganization Costs — We recorded net facility closing and reorganization costs of $406,000 and $1.1 million during the third quarter of 2005 and 2004, respectively, and $2.5 million and $3.8 million during the first nine months of 2005 and 2004, respectively.

      The charges recorded during 2005 are primarily related to the following:

•  The closing of a Dairy Group manufacturing facility in Albuquerque, New Mexico;

•  Consolidation of certain administrative functions in the Midwest and Southwest regions of our Dairy Group; and

•  Previously announced plans including closing a Dairy Group manufacturing facility in South Gate, California.

11

DEAN HOLDING COMPANY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

      We expect to incur additional charges related to these restructuring plans of approximately $2.5 million, primarily related to shutdown and other costs. Approximately $2.0 million and $500,000 of these additional charges are expected to be completed by December 2005 and December 2006, respectively.

      The principal components of our continued reorganization and cost reduction efforts include the following:

•  Workforce reductions as a result of facility closings, facility reorganizations and consolidation of administrative functions;

•  Shutdown costs, including those costs necessary to prepare abandoned facilities for closure;

•  Costs incurred after shutdown such as lease obligations or termination costs, utilities and property taxes; and

•  Write-downs of property, plant and equipment and other assets, primarily for asset impairments as a result of facilities that are no longer used in operations. The impairments relate primarily to owned buildings, land and equipment at the facilities, which are written down to their estimated fair value and held for sale. The effect of suspending depreciation on the buildings and equipment related to the closed facilities was not significant. The carrying value of closed facilities and related equipment at September 30, 2005 was approximately $629,000. We are marketing these properties for sale.

      We consider several factors when evaluating a potential facility closure, including, among other things, the impact of such a closure on our customers, the impact on production, distribution and overhead costs, the investment required to complete any such closure, and the impact on future investment decisions. Some facility closures are pursued to improve our operating cost structure, while others enable us to avoid unnecessary capital expenditures, allowing us to more prudently invest our capital expenditure dollars in our production facilities and better serve our customers.

      Activity for the first nine months of 2005 is summarized below:

		Accrued							Accrued
		Charges at							Charges at
		December 31,							September 30,
		2004		Charges		Payments			2005
		(In thousands)
Cash charges:
	Workforce reduction costs	$	266	$	1,476	$	(988	)	$	754
	Shutdown costs		—		150		(150	)		—
	Lease obligations after shutdown		75		267		(276	)		66
	Other		—		596		(596	)		—
	Subtotal	$	341		2,489	$	(2,010	)	$	820
Non-cash charges:
	Write-down of assets				37
	Total			$	2,526

     Transaction Closing Costs — As part of our acquisition by Dean Foods Company, we accrued costs in 2002 pursuant to a plan to exit certain activities and businesses in order to rationalize production and reduce costs and inefficiencies. As part of this plan we closed one Dairy Group facility in Escondido, California. We also eliminated our administrative offices, closed Dairy Group distribution depots in Parker Ford, Pennsylvania and Camp Hill, Pennsylvania, and relocated production between plants as part of our overall integration and efficiency efforts. During the second quarter of 2005 we reduced the liabilities related to the

12

DEAN HOLDING COMPANY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

elimination of our former administrative offices by approximately $1.9 million. This adjustment reduced goodwill.

      The principal components of the plans include the following:

•  Workforce reductions as a result of facility closings, facility rationalizations and consolidation of administrative functions and offices;

•  Shutdown costs, including those costs necessary to clean and prepare the abandoned facilities for closure; and

•  Costs incurred after shutdown such as lease obligations or termination costs, utilities and property taxes after shutdown of the facility.

      Activity with respect to these liabilities for the first nine months of 2005 is summarized below:

	Accrued								Accrued
	Charges at								Charges at
	December 31,								September 30,
	2004		Payments			Adjustments			2005
	(In thousands)
Workforce reduction costs	$	1,439	$	(134	)	$	(1,305	)	$	—
Shutdown costs		651		(21	)		(630	)		—
Total	$	2,090	$	(155	)	$	(1,935	)	$	—

9. Commitments and Contingencies

     Contingent Obligations Related to Divested Operations — We have divested several businesses in recent years. In each case, we have retained certain known contingent obligations related to those businesses and/or assumed an obligation to indemnify the purchasers of the businesses for certain unknown contingent liabilities, including environmental liabilities. We believe we have established adequate reserves for any potential liability related to our divested businesses. Moreover, we do not expect any liability that we may have for these retained liabilities, or any indemnification liability, to be material.

     Guaranty of Dean Foods Company’s Obligations Under Its Senior Credit Facility — Certain of Dean Foods Company’s subsidiaries, including us, are required to guarantee Dean Foods Company’s indebtedness under its senior credit facility. We have pledged substantially all of our assets (other than our real property and our ownership interests in our subsidiaries) as security for our guaranty. Dean Foods Company’s senior credit facility provides for a $1.5 billion revolving credit facility and a $1.5 billion term loan. At September 30, 2005 there were outstanding term loan borrowings of $1.5 billion under the senior credit facility, and $455 million outstanding under the revolving line of credit. Letters of credit in the aggregate amount of $103.7 million were issued but undrawn. At September 30, 2005 approximately $941.3 million was available for future borrowings under Dean Foods Company’s revolving credit facility.

      Principal payments are required on Dean Foods Company’s term loan as follows:

•  $56.25 million quarterly beginning on December 31, 2006 through September 30, 2008;

•  $262.5 million quarterly beginning on December 31, 2008 through June 30, 2009; and

•  A final payment of $262.5 million on the maturity date of August 13, 2009.

      No principal payments are due on the $1.5 billion revolving credit facility until maturity on August 13, 2009.

13

DEAN HOLDING COMPANY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

      Dean Foods Company’s credit agreement also requires mandatory principal prepayments upon the occurrence of certain asset dispositions or recovery events.

      The senior credit facility contains various financial and other restrictive covenants and requires that Dean Foods Company maintain certain financial ratios, including a leverage and interest coverage ratio. Dean Foods Company is currently in compliance with all covenants contained in its credit agreement.

      The credit facility is secured by liens on substantially all of Dean Foods Company’s domestic assets (including ours and those of our subsidiaries, but excluding the capital stock of our subsidiaries and the real property owned by us and our subsidiaries).

      The credit agreement contains standard default triggers including without limitation: failure to maintain compliance with the financial and other covenants contained in the credit agreement, default on certain of Dean Foods Company’s other debt, a change in control and certain other material adverse changes in its business. The credit agreement does not contain any default triggers based on Dean Foods Company’s credit rating.

     Insurance — 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. These deductibles range from $350,000 for medical claims to $2 million for casualty claims. We believe we have established adequate reserves to cover these claims.

     Leases — We lease certain property, plant and equipment used in our operations under both capital and operating lease agreements. Such leases, which are primarily for machinery, equipment and vehicles, have lease terms ranging from 1 to 20 years. Certain of the operating lease agreements require the payment of additional rentals for maintenance, along with additional rentals based on miles driven or units produced. Certain leases require us to guarantee a minimum value of the leased asset at the end of the lease. Our maximum exposure under those guarantees is not a material amount.

     Litigation, Investigations and Audits — We are parties from time to time to certain claims, litigation, audits and investigations. We believe that we have established adequate reserves to satisfy any probable liability we may have under all such claims, litigations, audits and investigations that are currently pending. In our opinion, the settlement of any such currently pending or threatened matter is not expected to have a material adverse impact on our financial position, results of operations or cash flows.

10. Geographic Information and Major Customers

     Geographic Information — Substantially all of our business is within the United States.

     Significant Customers — We have a single customer that represented greater than 10% of our sales in the first nine months of 2005. Approximately 15% of our sales were to this customer.

14

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

      We are a wholly-owned subsidiary of Dean Foods Company. Our operations are part of the Dairy Group segment of Dean Foods Company.

      As permitted by General Instruction H to Form 10-Q, in lieu of providing the information required by Item 2, we are providing only the information required by General Instruction H(2)(a).

Results of Operations

      The following table presents certain information concerning our results of operations, including information presented as a percentage of net sales.

			Three Months Ended September 30										Nine Months Ended September 30
			2005					2004					2005					2004
			Dollars		Percent			Dollars		Percent			Dollars		Percent			Dollars		Percent
			(Dollars in millions)
Net sales			$	940.3		100.0	%	$	940.9		100.0	%	$	2,763.8		100.0	%	$	2,720.3		100.0	%
Cost of sales				711.4		75.7			729.1		77.5			2,093.1		75.7			2,088.6		76.8
Gross profit				228.9		24.3			211.8		22.5			670.7		24.3			631.7		23.2
Operating costs and expenses:
	Selling and distribution			135.6		14.4			130.2		13.9			398.4		14.4			381.6		14.0
	General and administrative			30.3		3.2			27.5		2.9			86.9		3.2			88.6		3.3
	Amortization expense			0.2		—			0.3		—			0.9		—			1.0		—
	Facility closing and reorganization costs			0.4		0.1			1.1		0.1			2.5		0.1			3.8		0.1
		Total operating costs and expenses		166.5		17.7			159.1		16.9			488.7		17.7			475.0		17.4
Total operating income			$	62.4		6.6	%	$	52.7		5.6	%	$	182.0		6.6	%	$	156.7		5.8	%

Quarter Ended September 30, 2005 Compared to Quarter Ended September 30, 2004

     Net Sales — Net sales decreased slightly to $940.3 million during the third quarter of 2005 from $940.9 million during the third quarter of 2004.

      The change in net sales from the third quarter of 2004 to the third quarter of 2005 was due to the following:

		Dollars			Percent
		(Dollars in millions)
2004 Net sales		$	940.9
	Volume		20.9			2.2	%
	Pricing and product mix		(21.5	)		(2.3	)
2005 Net sales		$	940.3			(0.1	)%

15

      Net sales decreased slightly as a result of price decreases due to lower raw milk costs, our primary raw material. In general, we change the prices that we charge our customers for fluid dairy products on a monthly basis, as the costs of our raw materials fluctuate. Class I raw skim milk prices were approximately 7% lower in the third quarter of 2005 compared to the third quarter of 2004. The following table sets forth the average monthly Class I “mover” and average monthly Class II minimum prices for raw skim milk and butterfat for the third quarter of 2005 compared to the third quarter of 2004:

	Quarter Ended September 30*
	2005			2004			% Change
Class I raw skim milk mover(3)	$	8.24	(1)	$	8.82	(1)		(7	)%
Class I butterfat mover(3)		1.73	(2)		2.00	(2)		(14	)
Class II raw skim milk minimum(4)		7.85	(1)		7.07	(1)		11
Class II butterfat minimum(4)		1.84	(2)		1.93	(2)		(5	)

* The prices noted in this table are not the prices that we actually pay. The federal order minimum prices at any given location for Class I raw skim milk or Class I butterfat are based on the Class I mover prices plus a location differential. Class II prices noted in the table are federal minimum prices, applicable at all locations. Our actual cost also includes producer premiums, procurement costs and other related charges that vary by location and vendor.

(1)	Prices are per hundredweight.
(2)	Prices are per pound.
(3)	We process Class I raw skim milk and butterfat into fluid milk products.
(4)	We process Class II raw skim milk and butterfat into products such as cottage cheese, creams and creamers, ice cream and sour cream.

      These price decreases were largely offset by fluid milk volume increases during the third quarter of 2005. Fluid milk volumes (which represented approximately 72% of our sales volume during the third quarter of 2005) increased 2.4%. We believe the increase in volume is a result of the superior value and service that we are able to offer our customers as part of the largest dairy processor in the nation.

     Cost of Sales — All expenses incurred to bring a product to completion are included in cost of sales, such as raw material, ingredient and packaging costs; labor costs; plant and equipment costs, including costs to operate and maintain our coolers and freezers; and costs associated with transporting our finished products from our manufacturing facilities to our own distribution facilities. Our cost of sales ratio was 75.7% in the third quarter of 2005 compared to 77.5% in the third quarter of 2004, primarily due to the effect of increased volumes and the decrease in raw milk costs compared to the prior year. This decrease was partly offset by higher resin costs of approximately $1.3 million during the third quarter of 2005 compared to the third quarter of 2004. Resin is the primary component used in our plastic bottles.

     Operating Costs and Expenses — Our operating expense ratio increased to 17.7% in the third quarter of 2005 compared to 16.9% in the third quarter of 2004. Our operating expenses increased approximately $7.4 million to $166.5 million during the third quarter of 2005 compared to $159.1 million in the third quarter of 2004, primarily due to a $6.0 million increase in distribution costs. Distribution costs increased as a result of higher fuel prices of approximately $3.3 million and increased sales volumes.

     Operating Income — Operating income during the third quarter of 2005 was $62.4 million, an increase of $9.7 million from the third quarter of 2004 operating income of $52.7 million. Our operating margin in the third quarter of 2005 was 6.6% compared to 5.6% in the third quarter of 2004. Our operating margin increased primarily as a result of lower raw milk costs and the effect of increased sales volumes.

     Other (Income) Expense — Interest expense decreased to $11.8 million in the third quarter of 2005 from $14.0 million in the third quarter of 2004. In June 2005, we repaid our $100 million senior note, which lowered interest expense for the quarter by approximately $1.7 million compared to 2004.

     Income Taxes — Income tax expense was recorded at an effective rate of 37.7% in the third quarter of 2005 compared to 38.9% in the third quarter of 2004. In the third quarter of 2005, we recorded the anticipated

16

benefits of new tax legislation. Our tax rate varies as the mix of earnings contributed by our various business units changes.

Nine Months Ended September 30, 2005 Compared to Nine Months Ended September 30, 2004

     Net Sales — Net sales increased approximately 1.6% to $2.76 billion during the first nine months of 2005 from $2.72 billion during the first nine months of 2004.

      The change in net sales from the first nine months of 2004 to the first nine months of 2005 was due to the following:

		Dollars		Percent
		(Dollars in millions)
2004 Net sales		$	2,720.3
	Volume		22.7		0.8	%
	Pricing and product mix		20.8		0.8
2005 Net sales		$	2,763.8		1.6	%

      Net sales increased approximately $43.5 million during the first nine months of 2005 compared to the same period in the prior year due to increased volumes and the pass-through of increased raw milk and other commodity costs in the first nine months of 2005. In addition, our net sales increased due to increased pricing and product mix changes. In general, we change the prices that we charge our customers for fluid dairy products on a monthly basis, as the costs of our raw materials fluctuate. Class I raw skim milk prices were approximately 2% higher in the first nine months of 2005 compared to the first nine months of 2004. The following table sets forth the average monthly Class I “mover” and average monthly Class II minimum prices for raw skim milk and butterfat for the first nine months of 2005 compared to the first nine months of 2004:

	Nine Months Ended
	September 30*
	2005			2004			% Change
Class I raw skim milk mover(3)	$	8.67	(1)	$	8.54	(1)		2	%
Class I butterfat mover(3)		1.75	(2)		1.97	(2)		(11	)
Class II raw skim milk minimum(4)		7.60	(1)		6.83	(1)		11
Class II butterfat minimum(4)		1.74	(2)		2.08	(2)		(16	)

* The prices noted in this table are not the prices that we actually pay. The federal order minimum prices at any given location for Class I raw skim milk or Class I butterfat are based on the Class I mover prices plus a location differential. Class II prices noted in the table are federal minimum prices, applicable at all locations. Our actual cost also includes producer premiums, procurement costs and other related charges that vary by location and vendor.

(1)	Prices are per hundredweight.
(2)	Prices are per pound.
(3)	We process Class I raw skim milk and butterfat into fluid milk products.
(4)	We process Class II raw skim milk and butterfat into products such as cottage cheese, creams and creamers, ice cream and sour cream.

      Fluid milk volumes (which represented approximately 73% of our sales volume during the first nine months of 2005) increased 1.6% during the first nine months of 2005. We believe the increase in volumes is a result of the superior value and service that we are able to offer our customers as part of the largest dairy processor in the nation. This volume increase was offset by a decline in other products, primarily fresh cream, ice cream, ice cream mix and ice cream novelties, resulting in an increase of 0.8% during the first nine months of 2005 compared to the same period in the prior year. We lost ice cream and ice cream novelties volumes as a result of a regional realignment by Dean Foods Company that moved some ice cream and ice cream novelties volumes in our Midwest region into other facilities owned by Dean Foods Company but not owned by us.

     Cost of Sales — All expenses incurred to bring a product to completion are included in cost of sales, such as raw material, ingredient and packaging costs; labor costs; plant and equipment costs, including costs to

17

operate and maintain our coolers and freezers; and costs associated with transporting our finished products from our manufacturing facilities to our own distribution facilities. Our cost of sales ratio decreased to 75.7% in the first nine months of 2005 compared to 76.8% in the first nine months of 2004 primarily due to the impact of higher volumes and the impact of efficiencies gained through our facility rationalization activities. Cost of sales dollars increased $4.5 million primarily due to an increase in volumes and other production costs including higher raw milk costs and increased resin costs, which negatively impacted cost of goods sold by approximately $12 million. Resin is the primary component used in our plastic bottles.

     Operating Costs and Expenses — Our operating expense ratio increased to 17.7% in the first nine months of 2005 from 17.4% in the first nine months of 2004. Our operating expenses increased approximately $13.7 million during the first nine months of 2005 as compared to the first nine months of 2004, primarily due to an increase in distribution costs. Total distribution costs increased $15 million due largely to increased fuel prices, which impacted distribution costs by approximately $10.8 million.

     Operating Income — Operating income during the first nine months of 2005 was $182 million, an increase of $25.3 million from the first nine months of 2004 operating income of $156.7 million. Our operating margin in the first nine months of 2005 was 6.6% compared to 5.8% in the same period in the prior year. Operating income increased primarily due to the effect of higher sales volumes and the pass-through of higher raw material costs.

     Other (Income) Expense — Interest expense decreased to $39.0 million in the first nine months of 2005 from $41.6 million in the first nine months of 2004. In June 2005, we paid off our $100 million senior note, which lowered interest expense for the first nine months of 2005 by approximately $2.0 million compared to prior year.

     Income Taxes — Income tax expense was recorded at an effective rate of 38% in the first nine months of 2005 compared to 38.6% in the first nine months of 2004. Our tax rate varies as the mix of earnings contributed by our various business units changes.

Item 4. Controls and Procedures

Quarterly Controls Evaluation and Related CEO and CFO Certifications

      We conducted an evaluation of the effectiveness of the design and operation of our “disclosure controls and procedures” (Disclosure Controls) as of the end of the period covered by this quarterly report. The controls evaluation was done under the supervision and with the participation of management, including our Chief Executive Officer (CEO) and Chief Financial Officer (CFO).

      Attached as exhibits to this quarterly report are certifications of the CEO and the CFO, which are required in accordance with Rule 13a-14 of the Exchange Act. This Controls and Procedures section includes the information concerning the controls evaluation referred to in the certifications and it should be read in conjunction with the certifications for a more complete understanding of the topics presented.

Definition of Disclosure Controls

      Disclosure Controls are controls and procedures designed to reasonably assure that information required to be disclosed in our reports filed with the Securities and Exchange Commission (the “SEC”) is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Disclosure Controls are also designed to reasonably assure that such information is accumulated and communicated to our management, including the CEO and CFO, as appropriate to allow timely decisions regarding required disclosure. Our Disclosure Controls include components of our internal control over financial reporting, which consists of control processes designed to provide reasonable assurance regarding the reliability of our financial reporting and the preparation of financial statements in accordance with US generally accepted accounting principles.

Limitations on the Effectiveness of Controls

      We do not expect that our Disclosure Controls or our internal controls over financial reporting will prevent all error and all fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control system’s objectives will be met. Further, the design of a

18

control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Controls can also be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the controls. The design of any system of controls is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Over time, controls may become inadequate because of changes in conditions or deterioration in the degree of compliance with policies or procedures. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.

Scope of the Controls Evaluation

      Our evaluations of our Disclosure Controls include reviews of the controls’ objectives and design, our implementation of the controls and the effect of the controls on the information generated for use in our SEC filings. In the course of our controls evaluations, we seek to identify data errors, controls problems or acts of fraud and confirm that appropriate corrective actions, including process improvements, are undertaken. Many of the components of our Disclosure Controls are evaluated on an ongoing basis by Dean Foods Company’s Audit Services department. The overall goals of these various evaluation activities are to monitor our Disclosure Controls, and to modify them as necessary. Our intent is to maintain the Disclosure Controls as dynamic systems that change as conditions warrant.

Conclusions

      Based upon our most recent controls evaluation, our CEO and CFO have concluded that, as of the end of the period covered by this quarterly report, our Disclosure Controls were effective to provide reasonable assurance that material information is made known to management, particularly during the period when our periodic reports are being prepared. In the first nine months of 2005, there was no change in our internal control over financial reporting that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

Part II — Other Information

Item 1. Legal Proceedings

      We are not party to, nor are our properties the subject of, any material pending legal proceedings. However, we are parties from time to time to certain claims, litigation, audits and investigations. We believe that we have established adequate reserves to satisfy any potential liability we may have under all such claims, litigations, audits and investigation that are currently pending. In our opinion, the settlement of any such currently pending or threatened matter is not expected to have a material adverse impact on our financial position, results of operations or cash flows.

Item 6. Exhibits

      (a) Exhibits

31	.1	Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31	.2	Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32	.1	Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32	.2	Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

19

SIGNATURES

      Pursuant to the requirement of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

DEAN HOLDING COMPANY

/s/ RONALD L. MCCRUMMEN

Ronald L. McCrummen

Senior Vice President and Chief Accounting Officer

November 14, 2005

20

EXHIBIT INDEX

Exhibit
Number	Description
31.1	Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2	Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1	Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2	Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

20