UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q


(Mark One)
þ		Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the Quarterly Period Ended June 30, 2006
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 a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer o Accelerated filer o Non-accelerated filer þ

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

Dean Holding Company is a wholly-owned subsidiary of Dean Foods Company.

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		13
	Item 4 — Controls and Procedures		16
Part II — Other Information			18
	Item 1 — Legal Proceedings		18
	Item 1A — Risk Factors		18
	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

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Part I — Financial Information


Item 1.	Financial Statements

DEAN HOLDING COMPANY

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands)


			June 30,			December 31,
			2006			2005

			(unaudited)
Assets
Current assets:
	Cash and cash equivalents		$	17,501		$	16,056
	Receivables, net			241,544			283,905
	Inventories			100,015			104,488
	Deferred income taxes			33,576			37,071
	Prepaid expenses and other current assets			13,895			11,157

		Total current assets		406,531			452,677
Property, plant and equipment, net				503,882			508,963
Goodwill				1,080,529			1,080,529
Identifiable intangible and other assets				196,718			195,704

		Total	$	2,187,660		$	2,237,873


Liabilities and Parent’s Net Investment
Current liabilities:
	Accounts payable and accrued expenses		$	265,156		$	292,163
	Income taxes payable			3,234			5,492
	Current portion of long-term debt			29			28

		Total current liabilities		268,419			297,683
Long-term debt				746,440			757,743
Deferred income taxes				152,085			148,396
Other long-term liabilities				68,322			71,079
Commitments and contingencies (Note 9)
Parent’s net investment:
	Parent’s net investment			952,844			963,546
	Accumulated other comprehensive loss			(450	)		(574	)

		Total parent’s net investment		952,394			962,972

		Total	$	2,187,660		$	2,237,873

See Notes to Condensed Consolidated Financial Statements.

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DEAN HOLDING COMPANY

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(In thousands)


			Three Months Ended					Six Months Ended
			June 30					June 30

			2006			2005		2006			2005

			(unaudited)
Net sales			$	893,952		$	917,427	$	1,806,565		$	1,823,567
Cost of sales				651,037			686,305		1,336,208			1,372,502

Gross profit				242,915			231,122		470,357			451,065
Operating costs and expenses:
	Selling and distribution			145,869			137,390		288,414			272,381
	General and administrative			30,229			26,056		59,583			57,779
	Amortization of intangibles			212			327		411			647
	Facility closing and reorganization costs			143			597		320			2,120

		Total operating costs and expenses		176,453			164,370		348,728			332,927

Operating income				66,462			66,752		121,629			118,138
Other (income) expense:
	Interest expense			11,842			13,473		23,635			27,216
	Other (income) expense, net			(34	)		97		(66	)		(54	)

		Total other expense		11,808			13,570		23,569			27,162

Income from continuing operations before income taxes				54,654			53,182		98,060			90,976
Income taxes				18,433			20,289		36,304			34,899

Income from continuing operations				36,221			32,893		61,756			56,077
Income from discontinued operations, net of tax				—			2,934		—			13,446

Net income			$	36,221		$	35,827	$	61,756		$	69,523

See Notes to Condensed Consolidated Financial Statements.

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DEAN HOLDING COMPANY

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)


				Six Months Ended
				June 30

				2006			2005

				(unaudited)
Cash flows from operating activities:
	Net income			$	61,756		$	69,523
	Income from discontinued operations				—			(13,446	)
	Adjustments to reconcile net income to net cash provided by operating activities:
		Depreciation and amortization			38,769			35,818
		Share-based compensation expense			1,208			1,476
		Gain on disposition of assets			(201	)		(82	)
		Deferred income taxes			7,184			5,492
		Other			(657	)		2,138
	Changes in operating assets and liabilities, net of acquisitions:
		Receivables			42,361			12,619
		Inventories			4,473			(5,580	)
		Prepaid expenses and other assets			(1,437	)		10,126
		Accounts payable and accrued expenses			(29,877	)		(22,487	)
		Income taxes payable			(2,258	)		(542	)

			Net cash provided by continuing operations		121,321			95,055
			Net cash provided by discontinued operations		—			32,076

			Net cash provided by operating activities		121,321			127,131
Cash flows from investing activities:
	Additions to property, plant and equipment				(32,966	)		(25,130	)
	Proceeds from sale of fixed assets				806			670

			Net cash used in continuing operations		(32,160	)		(24,460	)
			Net cash used in discontinued operations		—			(7,631	)

			Net cash used in investing activities		(32,160	)		(32,091	)
Cash flows from financing activities:
	Repayment of debt				(13,019	)		(114,520	)
	Distribution to parent				(74,697	)		5,499

			Net cash used in continuing operations		(87,716	)		(109,021	)
			Net cash provided by discontinued operations		—			11,153

			Net cash used in financing activities		(87,716	)		(97,868	)

	Increase (decrease) in cash and cash equivalents				1,445			(2,828	)
	Cash and cash equivalents, beginning of period				16,056			12,490

	Cash and cash equivalents, end of period			$	17,501		$	9,662

See Notes to Condensed Consolidated Financial Statements.

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DEAN HOLDING COMPANY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2006

(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, 2005. In our opinion, we have made all necessary adjustments (which include only normal recurring adjustments) in order to present fairly, in all material respects, our consolidated financial position, results of operations and cash flows as of the dates and for the periods presented. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been omitted. Our results of operations for the period ended June 30, 2006 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 2005 Consolidated Financial Statements contained in our Annual Report on Form 10-K (filed with the Securities and Exchange Commission on March 28, 2006).

Certain reclassifications have been made to conform the prior year’s condensed Consolidated Financial Statements to the current year’s classifications. During the six months ended June 30, 2006, we reclassified the presentation of expense recognition for reusable packaging utilized in our distribution process to distribution expense. The reclassification reduced cost of sales and increased distribution expense by $4.9 million and $9.4 million for the three and six months ended June 30, 2005 respectively. The reclassification had no impact on net income.

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 $7.4 million for the three months ended June 30, 2006 and 2005, respectively, and $17.7 million and $17.8 million for the six months ended June 30, 2006 and 2005, respectively. The management fee is classified within general and administrative expenses in the Consolidated Statements of Income. 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 Consolidated Balance Sheets.

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. Our Condensed Consolidated Financial Statements for the periods ended June 30, 2005 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

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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 $121.2 million and $109.6 million in the second quarter of 2006 and 2005, respectively, and $240.0 million and $220.4 million during the six months ended June 30, 2006 and 2005, respectively.

Share-Based Compensation — Certain of our employees participate in employee share-based compensation plans sponsored by Dean Foods Company. Dean Foods Company adopted Statement of Financial Accounting Standards (“SFAS”) No. 123(R), “Share-Based Payment” effective January 1, 2006. It requires 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. As permitted under the Statement, Dean Foods Company elected to adopt SFAS No. 123(R) using the modified retrospective approach. Using this transition method, the results for prior periods have been revised to recognize the non-cash compensation expense in our Consolidated Statements of Income.

As a result of Dean Foods Company’s adopting SFAS No. 123(R), our income before taxes and net income were lower than if Dean Foods Company had continued to account for share-based compensation under APB Opinion No 25 as follows:


		Three Months				Six Months
		Ended				Ended
		June 30				June 30

		2006		2005		2006		2005

		(In thousands)
Decrease in:
	Income before taxes	$	655	$	727	$	1,208	$	1,476
	Net income		413		562		623		1,139

Recently Adopted Accounting Pronouncements — Effective January 1, 2006, we adopted SFAS No. 151, “Inventory Costs — an Amendment of ARB No. 43, Chapter 4.” This statement 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. The adoption of this statement did not have a material impact on our Consolidated Financial Statements.

Effective January 1, 2006, we adopted SFAS No. 153, “Exchanges of Nonmonetary Assets, an amendment of APB Opinion No. 29.” 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. The adoption of this statement did not have a material impact on our Consolidated Financial Statements.

Recently Issued Accounting Pronouncements — The Financial Accounting Standards Board (“FASB”) issued Financial Interpretation No. (“FIN”) 48, “Accounting for Uncertainty in Income Taxes” in June 2006. This interpretation clarifies the accounting for income taxes recognized in an enterprise’s financial statements in accordance with FASB Statement No. 109, “Accounting for Income Taxes.” This interpretation prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. We are currently evaluating the impact of FIN No. 48, which will become effective for us in the first quarter of 2007, 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

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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 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:


	Three Months		Six Months
	Ended		Ended
	June 30, 2005		June 30, 2005

	(In thousands)
Net sales	$	175,142	$	332,299
Income before taxes		7,959		24,692

Prior to the Spin-off, we transferred the obligation for pension and other postretirement benefit plans of transferred employees and retirees to TreeHouse. In 2005, we transferred a portion of the related plan assets. In 2006, we transferred the remaining plan assets related to such obligations.


3.	Inventories


		June 30,		December 31,
		2006		2005

		(In thousands)
Raw materials and supplies		$	30,047	$	34,530
Finished goods			69,968		69,958

	Total	$	100,015	$	104,488


4.	Intangible Assets

The carrying amount of goodwill was $1,080,529 as of June 30, 2006 and December 31, 2005. The gross carrying amount and accumulated amortization of our intangible assets (other than goodwill) as of June 30, 2006 and December 31, 2005 are as follows:


		June 30, 2006							December 31, 2005

		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		20,904		(9,156	)		11,748		19,929		(8,015	)		11,914

Total		$	200,214	$	(9,156	)	$	191,058	$	199,239	$	(8,015	)	$	191,224

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Amortization expense on intangible assets for the three months ended June 30, 2006 and 2005 was approximately $600,000 and $500,000, respectively, and $1.1 million and $1.0 million for the six months ended June 30, 2006 and 2005, respectively. Estimated aggregate intangible asset amortization expense for the next five years is as follows:


2006	$	2.4 million
2007		2.4 million
2008		2.4 million
2009		2.4 million
2010		2.3 million


5.	Long-Term Debt


			June 30, 2006						December 31, 2005

			Amount			Interest			Amount			Interest
			Outstanding			Rate			Outstanding			Rate

			(In thousands)
$250 million senior notes maturing in August 2007			$	250,141			8.150	%	$	250,198			8.150	%
$200 million senior notes maturing in May 2009				191,432			6.625			190,192			6.625
$150 million senior notes maturing in October 2017				128,638			6.900			128,103			6.900
Receivables-backed facility				176,162			5.500			189,168			4.600
Other				96						110

				746,469						757,771
	Less current portion			(29	)					(28	)

		Total	$	746,440					$	757,743

Senior Notes — We had $600 million (face value) of senior notes outstanding at June 30, 2006. 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 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 Consolidated Balance Sheets, 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. No principal payments are due on the receivables-backed facility until maturity in November 2008. 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.

Letters of Credit — At June 30, 2006, $3.6 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.

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6.	Comprehensive Income (Loss)

The components of comprehensive income (loss) are summarized below.


		Three Months					Six Months
		Ended					Ended
		June 30					June 30

		2006			2005		2006			2005

		(In thousands)
Net income		$	36,221		$	35,827	$	61,756		$	69,523
Other comprehensive income (loss):
	Cumulative translation adjustment		(150	)		132		(281	)		150
	Transfer to parent		—			—		(31	)		—
	Change in fair value of derivative instruments, net of tax		187			—		436			—
	Minimum pension liability adjustment, net of tax		—			108		—			(738	)

			37			240		124			(588	)

Comprehensive income		$	36,258		$	36,067	$	61,880		$	68,935


7.	Employee Postretirement Benefits

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


		Three Months				Six Months
		Ended				Ended
		June 30				June 30

		2006		2005		2006		2005

		(In thousands)
Components of net period cost:
	Service cost	$	219	$	238	$	504	$	476
	Interest cost		292		209		543		418
Amortizations:
	Unrecognized net loss		404		64		493		128

Net periodic benefit cost		$	915	$	511	$	1,540	$	1,022

We expect to contribute $1.9 million to our postretirement health plans during 2006.


8.	Facility Closing and Reorganization Costs

Facility Closing and Reorganization Costs — We recorded net facility closing and reorganization costs of $143,000 and $597,000 during the second quarter of 2006 and 2005, respectively, and $320,000 and $2.1 million during the first six months of 2006 and 2005, respectively.

The charges recorded during 2006 are primarily related to previously announced plans including the closing of a manufacturing facility in Albuquerque, New Mexico and the consolidation of certain administrative functions.

We expect to incur additional charges related to these restructuring plans of approximately $1.7 million, primarily related to shutdown and other costs. All of these charges are expected to be incurred by December 2006.

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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 at June 30, 2006 was approximately $1.7 million. 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 six months of 2006 is summarized below:


		Accrued								Accrued
		Charges at								Charges at
		December 31,		Charges						June 30,
		2005		(Reversals)			Payments			2006

		(In thousands)
Cash charges:
	Workforce reduction costs	$	449	$	(138	)	$	(288	)	$	23
	Shutdown costs		—		276			(276	)		—
	Lease obligations and other		58		182			(190	)		50

	Total	$	507	$	320		$	(754	)	$	73


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 June 30, 2006 there were outstanding term loan borrowings of $1.5 billion under the senior credit facility, and $299.3 million outstanding under the revolving credit facility. Letters of credit in the aggregate amount of $128.2 million were issued but undrawn. At June 30, 2006 approximately $1.07 billion was available for future borrowings under Dean Foods Company’s revolving credit facility.

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


	•	$56.3 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.

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 maximum leverage and minimum 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.

Guaranty of Dean Foods Company’s Obligations Under Its Senior Notes — Certain of Dean Foods Company’s subsidiaries, including us, are required to guarantee Dean Foods Company’s indebtedness under its senior notes. Dean Foods Company issued $500 million aggregate principal amount of 7.000% senior unsecured notes on May 17, 2006. No principal payments are due on these senior notes until maturity on June 1, 2016.

The indenture under which Dean Foods Company issued the senior notes does not contain financial covenants but does contain covenants that, among other things, limit Dean Foods Company and its guarantor subsidiaries ability to incur secured indebtedness, enter into sale-leaseback transactions and engage in mergers, consolidations and sales of all or substantially all of Dean Foods Company or its guarantor subsidiaries assets.

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 $2.0 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 operating lease agreements. Such leases are primarily for machinery, equipment and vehicles. 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.

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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 net sales in the first six months of 2006. Approximately 18.7% of our net sales were to this customer.


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.


			Quarter Ended June 30										Six Months Ended June 30

			2006					2005					2006					2005

			Dollars		Percent			Dollars		Percent			Dollars		Percent			Dollars		Percent

			(Dollars in millions)
Net sales			$	894.0		100.0	%	$	917.4		100.0	%	$	1,806.6		100.0	%	$	1,823.6		100.0	%
Cost of sales				651.0		72.8			686.3		74.8			1,336.2		74.0			1,372.5		75.3

Gross profit				243.0		27.2			231.1		25.2			470.4		26.0			451.1		24.7
Operating costs and expenses:
	Selling and distribution			145.9		16.4			137.4		15.0			288.5		16.0			272.4		14.9
	General and administrative			30.2		3.4			26.0		2.8			59.6		3.3			57.8		3.2
	Amortization of intangibles			0.2		—			0.3		—			0.4		—			0.7		—
	Facility closing and reorganization costs			0.2		—			0.6		0.1			0.3		—			2.1		0.1

		Total operating costs and expenses		176.5		19.8			164.3		17.9			348.8		19.3			333.0		18.2

Operating income			$	66.5		7.4	%	$	66.8		7.3	%	$	121.6		6.7	%	$	118.1		6.5	%

Quarter Ended June 30, 2006 Compared to Quarter Ended June 30, 2005

Net Sales — Net sales decreased approximately 2.6% to $894.0 million during the second quarter of 2006 from $917.4 million during the second quarter of 2005.

The change in net sales from the second quarter of 2005 to the second quarter of 2006 was due to the following:


		Dollars			Percent

		(Dollars in millions)
2005 Net sales		$	917.4
	Volume		23.3			2.5	%
	Pricing and product mix		(46.7	)		(5.1	)

2006 Net sales		$	894.0			(2.6	)%

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Net sales decreased primarily due to the effects of lower selling prices resulting from the pass-through of lower Class I raw skim milk and butterfat costs. 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 21% lower in the second quarter of 2006 compared to the second quarter of 2005. The following table sets forth the average monthly component prices of the Class I “mover” and average monthly Class II minimum prices for raw skim milk and butterfat for the second quarter of 2006 compared to the second quarter of 2005:


	Quarter Ended June 30*

	2006			2005			% Change

Class I raw skim milk mover(3)	$	6.83	(1)	$	8.69	(1)		(21	)%
Class I butterfat mover(3)		1.26	(2)		1.66	(2)		(24	)
Class II raw skim milk minimum(4)		7.03	(1)		7.63	(1)		(8	)
Class II butterfat minimum(4)		1.25	(2)		1.62	(2)		(23	)


*	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 partly offset by higher fresh milk, dips and ice cream volumes. Fresh milk volumes (which represented approximately 72% of our sales volume during the quarter) increased 1.9%. 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 as a percentage of net sales decreased to 72.8% in the second quarter of 2006 from 74.8% in the second quarter of 2005 primarily due to decreased raw milk costs compared to the prior year. This decrease was partly offset by higher resin costs during the second quarter of 2006 compared to the second quarter of 2005. Resin is the primary component used in our plastic bottles.

Operating Costs and Expenses — Our operating expenses increased approximately $12.2 million during the second quarter of 2006 as compared to the same period in the prior year. Our operating expense as a percentage of net sales was 19.8% in the second quarter of 2006 compared to 17.9% during the second quarter of 2005. Operating expenses increased primarily due to an increase in distribution costs of $11.5 million as a result of increased deliveries in our “direct store delivery” or “DSD” system due to the addition of certain customers and higher fuel costs. In addition, there was a $1.5 million increase in the management fee paid to Dean Foods Company.

Operating Income — Operating income during the second quarter of 2006 was $66.5 million, a decrease of $300,000 from the second quarter of 2005 operating income of $66.8 million. Our operating margin in the second quarter of 2006 was 7.4% compared to 7.3% in the second quarter of 2005. Our operating margin increased primarily as a result of lower raw milk costs, partly offset by higher distribution costs.

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Other (Income) Expense — Total other expense decreased to $11.8 million in the second quarter of 2006 compared to $13.6 million in the second quarter of 2005 due to lower interest expense. Interest expense decreased as one of our senior notes ($100 million face value at 6.75% interest) matured and was repaid in June 2005.

Income Taxes — Income tax expense was recorded at an effective rate of 33.7% in the second quarter of 2006 compared to 38.2% in the second quarter of 2005 due to the release of valuation allowances in the second quarter of 2006 related to certain state net operating losses. Our tax rate varies as the mix of earnings contributed by our various business units changes.

Six Months Ended June 30, 2006 Compared to Six Months Ended June 30, 2005

Net Sales — Net sales decreased approximately 0.9% to $1.81 billion during the first six months of 2006 from $1.82 billion during the first six months of 2005.

The change in net sales from the first six months of 2005 to the first six months of 2006 was due to the following:


		Dollars			Percent

		(Dollars in millions)
2005 Net sales		$	1,823.6
	Volume		55.3			3.0	%
	Pricing and product mix		(72.3	)		(3.9	)

2006 Net sales		$	1,806.6			(0.9	)%

Net sales decreased primarily due to the effects of lower selling prices resulting from the pass-through of lower Class I raw skim milk and butterfat costs. 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 15% lower in the first six months of 2006 compared to the first six months of 2005. The following table sets forth the average monthly component prices of the Class I “mover” and average monthly Class II minimum prices for raw skim milk and butterfat for the first six months of 2006 compared to the first six months of 2005:


	Six Months Ended June 30*

	2006			2005			% Change

Class I raw skim milk mover(3)	$	7.56	(1)	$	8.89	(1)		(15	)%
Class I butterfat mover(3)		1.35	(2)		1.76	(2)		(23	)
Class II raw skim milk minimum(4)		7.53	(1)		7.48	(1)		1
Class II butterfat minimum(4)		1.31	(2)		1.69	(2)		(22	)


*	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 partly offset by higher fresh milk and dips volumes. Fresh milk volumes (which represented approximately 73% of our sales volume during the first six months of 2006) increased 2.4% during the first six months of 2006. 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.

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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 as a percentage of net sales decreased to 74.0% in the first six months of 2006 compared to 75.3% in the first six months of 2005 due primarily to the decline in raw milk prices. Cost of sales dollars decreased $36.3 million primarily due to lower raw milk costs in the first six months of 2006. This decrease was offset somewhat by higher volumes compared to the prior year. In addition, increased resin costs negatively impacted cost of goods sold. Resin is the primary component used in our plastic bottles.

Operating Costs and Expenses — Our operating expenses increased approximately $15.8 million during the first six months of 2006 as compared to the same period in the prior year. Our operating expense as a percentage of net sales was 19.3% in the first six months of 2006 compared to 18.2% during the first six months of 2005. Operating expenses increased primarily due to an increase in distribution costs of $19.6 million as a result of increased deliveries in our “direct store delivery” of “DSD” system due to the addition of certain customers and higher fuel costs. This increase was offset somewhat by lower bad debt expense.

Operating Income — Operating income during the first six months of 2006 was $121.6 million, an increase of $3.5 million from the first six months of 2005 operating income of $118.1 million. Our operating margin in the first six months of 2006 was 6.7% compared to 6.5% in the same period in the prior year.

Other (Income) Expense — Total other expense decreased to $23.6 million in the first six months of 2006 compared to $27.2 million in the first six months of 2005 due to lower interest expense. Interest expense decreased as one of our senior notes ($100 million face value at 6.75% interest) matured and was repaid in June 2005.

Income Taxes — Income tax expense was recorded at an effective rate of 37.0% in the first six months of 2006 compared to 38.4% in the first six months of 2005 due to the release of valuation allowances in the second quarter of 2006 related to certain state net operating losses. 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

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the reliability of our financial reporting and the preparation of financial statements in accordance with United States 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 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 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 at the reasonable assurance level. In the first six months of 2006, 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.

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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 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.

Item 1A. Risk Factors

This report contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act. Statements that are not historical in nature are forward-looking statements about our future that are not statements of historical fact. Most of these statements are found in this report within “Management’s Discussion and Analysis of Financial Condition and Results of Operations”. In some cases, you can identify these statements by terminology such as “may,” “should,” “could,” “expects,” “seek to,” “anticipates,” “plans,” “believes,” “estimates,” “intends,” “predicts,” “projects,” “potential” or “continue” or the negative of such terms and other comparable terminology. These statements are only predictions, and in evaluating them, you should carefully consider the information above, as well as the risks outlined below. Actual performance or results may differ materially and adversely.

Changes in Laws, Regulations and Accounting Standards Could Have an Adverse Effect on Our Financial Results

We are subject to federal, state, local and foreign governmental laws and regulations, including those promulgated by the United States Food and Drug Administration, the United States Department of Agriculture, the Sarbanes-Oxley Act of 2002 and numerous related regulations promulgated by the Securities and Exchange Commission, the Public Company Accounting Oversight Board and the Financial Accounting Standards Board. Changes in federal, state or local laws, or the interpretations of such laws and regulations may negatively impact our financial results or our ability to market our products.

Changes in Raw Milk and Other Input Costs Can Adversely Affect Us

The primary raw material we use is raw milk. We purchase our raw milk primarily from farmers’ cooperatives, typically pursuant to requirements contracts (with no minimum purchase obligation). Raw milk is generally readily available. The minimum price of raw milk is regulated in most parts of the country by the federal government. Several states also regulate raw milk pricing through their own programs. In many cases we are able to adjust our pricing to reflect changes in raw milk costs. Volatility in the cost of our raw milk can adversely affect our performance as price changes may lag changes in costs. These lags tend to erode our profit margins. Furthermore, cost increases may exceed the price increases we are able to pass along to our customers. Extremely high raw milk costs can also put downward pressure on our margins and our volumes. Although we cannot predict future changes in raw milk costs, we do expect raw milk prices to increase in the second half of 2006.

Because we deliver the majority of our products directly to customers through our “direct store delivery” system, we are a large consumer of fuel. We also utilize a significant amount of resin, which is the primary component used in our plastic bottles. Recently, the prices of resin and fuel have increased dramatically and resin supplies have from time to time been insufficient to meet demand. Increases in fuel and resin prices can adversely affect our results of operations. In addition, a disruption in our ability to secure an adequate resin supply could adversely affect our operations.

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Loss of Rights to Any of Our Licensed Brands Could Adversely Affect Our Sales and Profits

We sell certain of our products under licensed brand names such as LAND O’LAKES and others. In some cases, we have invested significant capital in product development and marketing and advertising related to these licensed brands. Should our rights to manufacture and sell products under any of these names be terminated for any reason, our financial performance and results of operations could be materially and adversely affected.

Decisions Made by Dean Foods Company Could Affect Our Performance

We are a wholly-owned subsidiary of Dean Foods Company. Our operations are part of the larger Dairy Group segment of Dean Foods Company. Dean Foods Company’s management makes decisions regarding allocation of capital resources, facility closings and reorganizations, customer contracts, purchases of new business and sales of our assets.

Dean Foods Company has Substantial Debt and Other Financial Obligations that We Guarantee

Certain of Dean Foods Company’s subsidiaries, including us, guarantee Dean Foods Company’s indebtedness under its senior credit facility and its $500 million 7.000% senior notes issued in May 2006. 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 under Dean Foods Company’s senior credit facility. Dean Foods Company’s senior credit facility provides for a $1.5 billion revolving credit facility and a $1.5 billion term loan. Dean Foods Company’s $500 million senior notes are senior unsecured obligations. We may provide additional guarantees of financial obligations in the future.

Dean Foods Company’s ability to make scheduled payments on its debt and other financial obligations depends on its financial and operating performance. Dean Foods Company’s financial and operating performance is subject to prevailing economic conditions and to financial, business and other factors, some of which are beyond its control. If Dean Foods Company does not comply with the financial and other restrictive covenants under its senior credit facility or senior notes, it may default under such facility or notes. Upon default, Dean Foods Company’s lenders could accelerate the indebtedness under the facility or notes, foreclose against its collateral or seek other remedies, which would jeopardize our ability to continue our current operations.


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

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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

August 14, 2006

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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

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DEAN HOLDING CO 10-Q