DEAN FOODS CO/ - 10-Q Quarterly Report

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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

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FORM 10-Q

(MARK ONE)
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND
EXCHANGE ACT OF 1934

FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2002

OR

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

FOR THE TRANSITION PERIOD FROM TO

COMMISSION FILE NUMBER 001-12755

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DEAN FOODS COMPANY
(Exact name of the registrant as specified in its charter)

[DEAN FOODS(TM) LOGO]

DELAWARE 75-2559681
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification no.)

2515 McKINNEY AVENUE, SUITE 1200
DALLAS, TEXAS 75201
(214) 303-3400
(Address, including zip code, and telephone number, including area
code, of the registrant's principal executive offices)

Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]

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

As of November 11, 2002 the number of shares outstanding of each class
of common stock was:

Common Stock, par value $.01, 91,266,570

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TABLE OF CONTENTS

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PART I--FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

DEAN FOODS COMPANY

CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)

See notes to condensed consolidated financial statements.

DEAN FOODS COMPANY

CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)

See notes to condensed consolidated financial statements.

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DEAN FOODS COMPANY

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)

See notes to condensed consolidated financial statements.

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DEAN FOODS COMPANY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2002
(unaudited)

1. GENERAL

Basis of Presentation -- The unaudited condensed consolidated financial
statements contained in this report have been prepared on the same basis as the
consolidated financial statements in our Annual Report on Form 10-K for the year
ended December 31, 2001. In our opinion, we have made all necessary adjustments
(which include only normal recurring adjustments) in order to present fairly, in
all material respects, our consolidated financial position, results of
operations and cash flows as of the dates and for the periods presented. Certain
information and footnote disclosures normally included in financial statements
prepared in accordance with generally accepted accounting principles have been
omitted. The consolidated financial statements contained in this report should
be read in conjunction with our 2001 consolidated financial statements contained
in our Annual Report on Form 10-K as filed with the Securities and Exchange
Commission on April 1, 2002.

On April 23, 2002, we effected a two-for-one split of our common stock.
Pursuant to the split, all shareholders of record as of April 8, 2002 received
one additional share of common stock for each share held on that date. All share
numbers contained in our condensed consolidated financial statements and in
these notes have been adjusted for all periods to reflect the stock split as if
it had already occurred.

This Quarterly Report, including these notes, has been written in
accordance with the Securities and Exchange Commission's "Plain English"
guidelines. Unless otherwise indicated, references in this report to "we," "us"
or "our" refer to Dean Foods Company and its subsidiaries, taken as a whole.

Recently Issued Accounting Standards -- The Emerging Issues Task Force
(the "Task Force") of the Financial Accounting Standards Board ("FASB") has
reached a consensus on Issue No. 00-14, "Accounting for Certain Sales
Incentives," which became effective for us in the first quarter of 2002. This
Issue addresses the recognition, measurement and income statement classification
of sales incentives that have the effect of reducing the price of a product or
service to a customer at the point of sale. Our historical practice for
recording sales incentives within the scope of this Issue, which has been to
record estimated coupon expense based on historical coupon redemption
experience, is consistent with the requirements of this Issue. Therefore, our
adoption of this Issue has no impact on our consolidated financial statements.

The Task Force has also reached a consensus on Issue No. 00-25, "Vendor
Income Statement Characterization of Consideration Paid to a Reseller of the
Vendor's Products." We adopted this Issue in the first quarter of 2002. Under
this Issue, certain consideration paid to our customers (such as slotting fees)
is required to be classified as a reduction of revenue, rather than recorded as
an expense. Adoption of this Issue required us to reduce reported revenue and
selling and distribution expense for the third quarter and for the first nine
months of 2001 by $7.9 million and $26.8 million, respectively. There was no
change, however, in reported net income.

In June 2001, FASB issued Statement of Financial Accounting Standards
("SFAS") No. 141, "Business Combinations", and SFAS No. 142, "Goodwill and Other
Intangible Assets." SFAS No. 141 addresses financial accounting and reporting
for business combinations. Under the new standard, all business combinations
entered into after June 30, 2001 are required to be accounted for by the
purchase method. We have applied, and will continue to apply, the provisions of
SFAS No. 141 to all business combinations completed after June 30, 2001. SFAS
No. 142 addresses financial accounting and reporting for acquired goodwill and
other intangible assets. We adopted SFAS No. 142 in the first quarter of 2002.
SFAS No. 142 requires that goodwill no longer be amortized, but instead requires
a transitional goodwill impairment assessment and annual impairment tests
thereafter. Effective June 30, 2002, we completed the first phase of the
transitional goodwill impairment assessment, which indicated that the goodwill
related to our Puerto Rico reporting unit is impaired. In the fourth quarter of
2002, we will determine the amount of impairment that existed as of January 1,
2002, and record the impairment in our income statement as the cumulative effect
of a change in accounting principle retroactive to the first quarter of 2002. As
of January 1, 2002, we had approximately $67 million recorded as goodwill
related to our Puerto Rico reporting unit. See Note 12 for information related
to our fourth quarter agreement to sell our Puerto Rico operating unit. Our
annual impairment tests will be completed in the fourth quarter of 2002. SFAS
No. 142 also requires that recognized intangible assets be amortized over their
respective estimated useful lives. As part of the adoption, we have re-assessed
the useful lives and residual values of all recognized intangible assets. Any
recognized intangible asset determined to have an indefinite useful life was
tested for impairment in accordance with the standard. These impairment tests
were completed during the first quarter of 2002, and resulted in a charge of
$47.3 million, net of an income tax benefit of $29 million, which was

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recorded during the first quarter of 2002 as a change in accounting principle.
The impairment related to certain trademarks in our Dairy Group and
Morningstar/White Wave segments. The fair value of these trademarks was
determined using a present value technique.

In June 2001, FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations." This statement requires that the fair value of a
liability for an asset retirement obligation be recognized in the period in
which the associated legal obligation for the liability is incurred if a
reasonable estimate of fair value can be made. The associated asset retirement
costs are capitalized as part of the carrying amount of the long-lived asset and
amortized over the useful life of the asset. SFAS No. 143 will become effective
for us in 2003. We are currently evaluating the impact of adopting this
pronouncement on our consolidated financial statements.

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

SFAS No. 145, "Rescission of FASB Statements No. 4, 44 and 64,
Amendment of FASB Statement No. 13, and Technical Corrections," was issued in
April 2002 and is applicable to fiscal years beginning after May 15, 2002. One
of the provisions of this technical statement is the rescission of SFAS No. 4,
"Reporting Gains and Losses from Extinguishment of Debt," whereby any gain or
loss on the early extinguishment of debt that was classified as an extraordinary
item in prior periods in accordance with SFAS No. 4, which does not meet the
criteria of an extraordinary item as defined by APB Opinion 30, must be
reclassified. Adoption of this standard will require us to reclassify
extraordinary losses previously reported from the early extinguishment of debt
as a component of "other expense". For the year ended December 31, 2001, we
recorded an extraordinary loss of $4.3 million, net of an income tax benefit of
$3.0 million in connection with the early extinguishment of debt.

In June 2002, FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities." This statement addresses financial
accounting and reporting for costs associated with exit or disposal activities
and nullifies EITF Issue No. 94-3, "Liability Recognition for Certain Employee
Termination Benefits and Other Costs to Exit an Activity (including Certain
Costs Incurred in a Restructuring)." The statement requires that a liability for
a cost associated with an exit or disposal activity be recognized when the
liability is incurred, and is effective for exit or disposal activities that are
initiated after December 31, 2002. We are currently evaluating the impact of
adopting this pronouncement on our consolidated financial statements.

2. ACQUISITIONS AND DIVESTITURES

Acquisition of Dean Foods Company -- On December 21, 2001, we completed
our acquisition of Dean Foods Company ("Old Dean"). As a result of this
transaction, Old Dean was merged with and into our wholly-owned subsidiary,
Blackhawk Acquisition Corp. Blackhawk Acquisition Corp. survived the merger and
immediately changed its name to Dean Holding Company. Immediately after
completion of the merger, we changed our name to Dean Foods Company. As a result
of the merger, each share of common stock of Old Dean was converted into 0.858
shares of our common stock and the right to receive $21.00 in cash. The
aggregate purchase price recorded was $1.7 billion, including $756.8 million of
cash paid to Old Dean stockholders and common stock valued at $739.4 million.
The value of the approximately 31 million common shares issued was determined
based on the average market price of our common stock during the period from
April 2 through April 10, 2001 (the acquisition was announced on April 5, 2001).
In addition, each of the options to purchase Old Dean's common stock outstanding
on December 21, 2001 was converted into an option to purchase 1.504 shares of
our stock. As discussed in Note 6, the holders of these options had the right,
during the ninety day period following the acquisition, to surrender their stock
options to us, in lieu of exercise, in exchange for a cash payment. We paid
approximately $17.7 million to Old Dean's option holders as a result of such
surrenders.
We decided to acquire Old Dean for the above-described consideration
after considering a number of factors, including:

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

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

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

Also on December 21, 2001, in connection with our acquisition of Old
Dean, we purchased Dairy Farmers of America's ("DFA") 33.8% stake in our Dairy
Group for consideration consisting of: (1) approximately $145.4 million in cash,
(2) a contingent promissory note in the original principal amount of $40
million, and (3) the operations of eleven plants (including seven of our plants
and four of Old Dean's plants) located in nine states where we and Old Dean had
overlapping operations. As additional consideration, we amended a milk supply
agreement with DFA to provide that if we do not, within a specified period
following the completion of our acquisition of Old Dean, offer DFA the right to
supply raw milk to certain of the Old Dean dairy plants, we could be required to
pay liquidated damages of up to $47 million. See Note 10 for further discussion
of these contingent obligations. As a result of this transaction, we now own
100% of our Dairy Group.

In connection with our acquisition of Old Dean, we entered into a new
credit facility and expanded our receivables-backed loan facility. See Note 5.
We used the proceeds from the credit facility and receivables-backed loan
facility to fund the cash portion of the merger consideration and the
acquisition of DFA's minority interest, to refinance certain indebtedness and to
pay certain transaction costs.

Old Dean's operations and the acquisition of DFA's minority interest
(and related divestitures) are reflected in our consolidated financial
statements after December 21, 2001.

The final allocation of the purchase price to the fair values of assets
and liabilities of Old Dean and the related business integration plans will be
completed during the fourth quarter of 2002. We expect that the ultimate
purchase price allocation may include additional adjustments to the fair values
of depreciable tangible assets, identifiable intangible assets (some of which
will have indefinite lives) and the carrying values of certain liabilities.
Accordingly, to the extent that such assessments indicate that the fair value of
the assets and liabilities differ from their preliminary purchase price
allocations, such difference would adjust the amounts allocated to those assets
and liabilities and would change the amounts allocated to goodwill.

The unaudited results of operations on a pro forma basis for the
three-month and nine-month periods ended September 30, 2001 as if the
acquisition of Old Dean, and the purchase of DFA's minority interest (including
the divestiture of the 11 plants transferred in partial consideration of that
interest) had occurred as of the beginning of 2001 are as follows:

Acquisition of White Wave -- On May 9, 2002, we acquired the 64% equity
interest in White Wave, Inc. that we did not already own. White Wave, based in
Boulder, Colorado, is the maker of Silk(R) soymilk and other soy-based products,
and had sales of approximately $125 million during the 12 months ended March 31,
2002. Prior to May 9, we owned approximately 36% of White Wave, as a result of
certain investments made by Old Dean beginning in 1999. We purchased the
remaining 64% equity interest for a total price of approximately $189 million.
Existing management of White Wave has remained in place after the acquisition.
We have agreed to pay White Wave's management team an incentive bonus based on
achieving certain sales growth targets by March 2004. The bonus amount will vary
depending on the level of two-year cumulative sales White Wave achieves by the
end of

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March 2004, and is anticipated to range between $30 million and $40 million.
Amounts expected to be payable under the bonus plan are expensed each quarter
based on White Wave's performance during the quarter. See Note 10. For financial
reporting purposes, White Wave's financial results are aggregated with
Morningstar Foods' financial results.

Acquisition of Marie's -- On May 17, 2002, we bought the assets of
Marie's Quality Foods, Marie's Dressings, Inc. and Marie's Associates, makers of
Marie's(R) brand dips and dressings in the western United States, for an
aggregate purchase price of approximately $23 million. Prior to the acquisition,
we licensed the Marie's brand to Marie's Quality Foods and Marie's Dressings,
Inc. for use in connection with the manufacture and sale of dips and dressings
in the western United States. As a result of this acquisition, our
Morningstar/White Wave segment is now the sole owner, manufacturer and marketer
of Marie's brand products nationwide.

Divestitures of Non-Core Businesses -- During the first nine months of
2002, we completed the sale of two non-core businesses acquired as part of Old
Dean. On January 4, 2002, we completed the sale of the stock of DFC
Transportation Company, a contract hauler that was part of Old Dean's Specialty
Foods segment. On February 7, 2002, we completed the sale of the assets related
to the boiled peanut business of Dean Specialty Foods Company, also a part of
the Specialty Foods segment.

3. INVENTORIES

Approximately $112.8 million and $131.7 million of our inventory was
accounted for under the last-in, first-out (LIFO) method of accounting at
September 30, 2002 and December 31, 2001, respectively. There was no material
excess of current cost over the stated value of last-in, first-out inventories
at either date.

4. GOODWILL AND OTHER INTANGIBLE ASSETS

On January 1, 2002, we adopted SFAS No. 142, which requires, among
other things, that goodwill no longer be amortized, and that recognized
intangible assets with finite lives be amortized over their respective useful
lives. As required by SFAS No. 142, our results for the third quarter and first
nine months of 2001 have not been restated. The following sets forth a
reconciliation of net income and earnings per share information for the
three-month and nine-month periods ended September 30, 2002 and 2001,
eliminating goodwill amortization and amortizing recognized intangible assets
with finite useful lives. We expect to complete our goodwill impairment analysis
by December 31, 2002. See Note 1.

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The changes in the carrying amount of goodwill for the nine months
ended September 30, 2002 are as follows:

The gross carrying amount and accumulated amortization of our
intangible assets other than goodwill as of September 30, 2002 and December 31,
2001 are as follows:

Amortization expense on intangible assets for the three months ended
September 30, 2002 and 2001 was $2.8 million and $1.7 million respectively, and
$5.8 million and $5.8 million for the nine months ended September 30, 2002 and
2001, respectively. Estimated aggregate intangible asset amortization expense
for the next five years is as follows:

2003 ................ $5.2 million
2004 ................ $4.2 million
2005 ................ $3.2 million
2006 ................ $2.4 million
2007 ................ $1.8 million

5. LONG-TERM DEBT

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Senior Credit Facility -- Simultaneously with the completion of our
acquisition of Old Dean, we entered into a new $2.7 billion credit agreement
with a syndicate of lenders, in replacement of our then existing credit
facilities. Our new senior credit facility provides an $800 million revolving
line of credit, a Tranche A $900 million term loan and a Tranche B $1 billion
term loan. Upon completion of the Old Dean acquisition, we borrowed $1.9 billion
under this facility's term loans. At September 30, 2002 there were outstanding
borrowings of $1.88 billion under this facility, in addition to $65.4 million of
issued but undrawn letters of credit. As of September 30, 2002, approximately
$699.4 million was available for future borrowings under the revolving credit
facility, subject to satisfaction of certain conditions contained in the loan
agreement. We are currently in compliance with all covenants contained in our
credit agreement.

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

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

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

On April 30, 2002, we entered into an amendment to our credit facility
pursuant to which the interest rate for amounts outstanding under the Tranche B
term loan was lowered by 50 basis points, to the following, at our option:

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

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

The blended interest rate in effect on borrowings under the senior
credit facility, including the applicable interest rate margin, was 4.05% at
September 30, 2002. However, we have interest rate swap agreements in place that
hedge $925 million of our borrowings under this facility at an average rate of
5.95%, plus the applicable interest rate margin. Interest is payable quarterly
or at the end of the applicable interest period.

Scheduled principal payments on the Tranche A term loan are due in the
following installments:

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

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

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

o $45.00 million quarterly from March 31, 2006 through December 31,
2006;

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

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

Scheduled principal payments on the Tranche B term loan are due in the
following installments:

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

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

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

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

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

The credit agreement also requires mandatory principal prepayments in
certain circumstances including without limitation: (1) upon the occurrence of
certain asset dispositions not in the ordinary course of business,

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(2) upon the occurrence of certain debt and equity issuances when our leverage
ratio is greater than 3.0 to 1.0, and (3) beginning in 2003, annually when our
leverage ratio is greater than 3.0 to 1.0. The credit agreement requires that we
prepay 50% of defined excess cash flow for any fiscal year (beginning in 2003)
in which our leverage ratio at year end is greater than 3.0 to 1.0. As of
September 30, 2002, our leverage ratio was 3.4 to 1.0.

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

The senior credit facility contains various financial and other
restrictive covenants and requires that we maintain certain financial ratios,
including a leverage ratio (computed as the ratio of the aggregate outstanding
principal amount of defined indebtedness to EBITDA) and an interest coverage
ratio (computed as the ratio of EBITDA to interest expense). In addition, this
facility requires that we maintain a minimum level of net worth (as defined by
the agreement).

Our leverage ratio must be less than or equal to:

Our interest coverage ratio must be greater than or equal to 3.0 to
1.0.

Our consolidated net worth must be greater than or equal to $1.2
billion, as increased each quarter (beginning with the quarter ended March 31,
2002) by an amount equal to 50% of our consolidated net income for the quarter,
plus 75% of the amount by which stockholders' equity is increased by certain
equity issuances. As of September 30, 2002, the minimum net worth requirement
was $1.27 billion.

Our credit agreement permits us to complete acquisitions that meet the
following conditions without obtaining prior approval: (1) the acquired company
is involved in the manufacture, processing and distribution of food or packaging
products or any other line of business in which we are currently engaged, (2)
the total cash consideration is not greater than $100 million (which amount will
be increased to $300 million when our leverage ratio is less than 3.0 to 1.0),
(3) we acquire at least 51% of the acquired entity, and (4) the transaction is
approved by the Board of Directors or shareholders, as appropriate, of the
target. All other acquisitions must be approved in advance by the required
lenders.

Our credit agreement also permits us to repurchase stock under our open
market share repurchase program, provided that, until our leverage ratio is less
than 3.0 to 1.0, total Restricted Payments (as defined in the agreement, which
definition includes stock repurchases) cannot exceed $50 million per year, plus
the amount of payments required to be made on our outstanding convertible
preferred securities during that year.

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

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

Senior Notes -- Old Dean had certain senior notes outstanding at the
time of the acquisition which remain outstanding. The notes carry the following
interest rates and maturities:

o $96.5 million ($100 million face value), at 6.75% interest,
maturing in 2005;

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

o $183.9 million ($200 million face value), at 6.625% interest,
maturing in 2009; and

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o $125.1 million ($150 million face value), at 6.9% interest,
maturing in 2017.

The related indentures do not contain financial covenants but they do
contain certain restrictions including a prohibition against Old Dean and its
subsidiaries granting liens on their respective real estate interests and a
prohibition against Old Dean granting liens on the stock of its subsidiaries.
The indentures also place certain restrictions on Old Dean's ability to divest
assets not in the ordinary course of business.

Receivables-Backed Loan -- We have entered into a receivables
securitization facility pursuant to which certain of our subsidiaries sell their
accounts receivable to three wholly-owned special purpose entities intended to
be bankruptcy-remote. The special purpose entities then transfer the receivables
to third party asset-backed commercial paper conduits sponsored by major
financial institutions. The assets and liabilities of these three special
purpose entities are fully reflected on our balance sheet, and the
securitization is treated as a borrowing for accounting purposes. During the
first nine months of 2002, we made net payments of $142 million on this
facility leaving an outstanding balance of $258 million at September 30, 2002.
The receivables-backed loan bears interest at a variable rate based on
the commercial paper yield as defined in the agreement.

Foreign Subsidiary Term Loan -- In connection with our acquisition of
Leche Celta in February 2000, our Spanish subsidiary obtained a 42.1 million
euro (as of September 30, 2002, approximately $41.6 million) non-recourse term
loan from a Spanish lender, all of which was borrowed at closing and used to
finance a portion of the purchase price. The loan, which is secured by the stock
of Leche Celta, will expire on February 21, 2007, bears interest at a variable
rate based on the ratio of Leche Celta's debt to EBITDA (as defined in the
corresponding loan agreement), and requires semi-annual principal payments. At
September 30, 2002, a total of $33.6 million was outstanding under this
facility.

Other Lines of Credit -- Leche Celta, our Spanish subsidiary, is our
only subsidiary with its own lines of credit separate from the credit facilities
described above. Leche Celta's primary line of credit, which is in the principal
amount of 15 million euros (as of September 30, 2002 approximately $14.8
million), was obtained on July 12, 2000, bears interest at a variable interest
rate based on the ratio of Leche Celta's debt to EBITDA (as defined in the
corresponding loan agreement), is secured by our stock in Leche Celta and will
expire in June 2007. Leche Celta also utilizes other local commercial lines of
credit. At September 30, 2002, a total of $19.9 million was drawn on these lines
of credit.

Industrial Development Revenue Bonds -- Certain of our subsidiaries
have revenue bonds outstanding, some of which require nominal annual sinking
fund redemptions. Typically, these bonds are secured by irrevocable letters of
credit issued by financial institutions, along with first mortgages on the
related real property and equipment. Interest on these bonds is due semiannually
at interest rates that vary based on market conditions.

Other Subsidiary Debt -- Other subsidiary debt includes various
promissory notes for the purchase of property, plant and equipment and capital
lease obligations. The various promissory notes payable provide for interest at
varying rates and are payable in monthly installments of principal and interest
until maturity, when the remaining principal balances are due. Capital lease
obligations represent machinery and equipment financing obligations which are
payable in monthly installments of principal and interest and are collateralized
by the related assets financed.

Letters of Credit -- At September 30, 2002 there were $65.4 million of
issued but undrawn letters of credit secured by our senior credit facility. In
addition to the letters of credit secured by our credit facility, an additional
$38 million of letters of credit were outstanding at September 30, 2002. These
letters of credit were required by various utilities and government entities for
performance and insurance guarantees.

Interest Rate Agreements -- We have interest rate swap agreements in
place that have been designated as cash flow hedges against variable interest
rate exposure on a portion of our debt, with the objective of minimizing our
interest rate risk and stabilizing cash flows. These swap agreements provide
hedges for loans under our senior credit facility by limiting or fixing the
LIBOR interest rates specified in the senior credit facility at the interest
rates noted below until the indicated expiration dates of these interest rate
swap agreements.

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The following table summarizes our various interest rate agreements in
effect as of September 30, 2002 and December 31, 2001:

In March and June of 2002, we entered into forward-starting swaps that
begin in December 2002 with a notional amount of $750 million and fixed interest
rates of 4.005% to 5.315%. These swaps have been designated as hedges against
interest rate exposure on loans under our senior credit facility and under one
of our subsidiary's term loans.

We have also entered into interest rate swap agreements that provide
hedges for loans under Leche Celta's term loan. The following table summarizes
these agreements:

These swaps are required to be recorded as an asset or liability on our
consolidated balance sheet at fair value, with an offset to other comprehensive
income to the extent the hedge is effective. Derivative gains and losses
included in other comprehensive income are reclassified into earnings as the
underlying transaction occurs. Any ineffectiveness in our hedges is recorded as
an adjustment to interest expense.

As of September 30, 2002, our derivative liability totaled $53.8
million on our consolidated balance sheet including approximately $28.9 million
recorded as a component of accounts payable and accrued expenses and $24.9
million recorded as a component of other long-term liabilities. There was no
hedge ineffectiveness, as determined in accordance with SFAS No. 133, for the
quarter or the nine months ended September 30, 2002. Approximately $6.2 million
and $17.7 million of losses (net of taxes) were reclassified to interest expense
from other comprehensive income during the quarter and the nine months ended
September 30, 2002, respectively. We estimate that approximately $18.2 million
of net derivative losses (net of income taxes) included in other comprehensive
income will be reclassified into earnings within the next 12 months. These
losses will partially offset the lower interest payments recorded on our
variable rate debt.

We are exposed to market risk under these arrangements due to the
possibility of interest rates on the credit facilities falling below the rates
on our interest rate swap agreements. Credit risk under these arrangements is
remote since the counterparties to our interest rate swap agreements are major
financial institutions.

6. STOCKHOLDERS' EQUITY

Stock Options - The following table summarizes activity during the
first three quarters of 2002 under our stock-based compensation programs:

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(1) Options granted vest as follows: one-third on the first anniversary of
the grant date, one-third on the second anniversary of the grant date,
and one-third on the third anniversary of the grant date.

(2) The acquisition of Old Dean triggered certain "change in control"
rights contained in the Old Dean option agreements, which consisted of
the right to surrender the options to us, in lieu of exercise, in
exchange for cash, provided the options were surrendered prior to March
21, 2002. Options to purchase approximately 1.6 million shares were
surrendered.

During the first 9 months of 2002, we issued the following shares of
restricted stock, all of which were granted to independent members of our Board
of Directors as compensation for services rendered as directors during the
immediately preceding quarter. Directors' shares of restricted stock vest
one-third on grant, one-third on the first anniversary of grant and one-third on
the second anniversary of grant.

Earnings Per Share - Basic earnings per share is based on the weighted
average number of common shares outstanding during each period. Diluted earnings
per share is based on the weighted average number of common shares outstanding
and the effect of all dilutive common stock equivalents during each period. The
following table reconciles the numerators and denominators used in the
computations of both basic and diluted earnings per share ("EPS"):

13

7. COMPREHENSIVE INCOME

Comprehensive income consists of net income plus all other changes in
equity from non-owner sources. Consolidated comprehensive income was $65.9
million and $150.1 million for the three-month and nine-month periods ended
September 30, 2002. The amounts of income tax (expense) benefit allocated to
each component of other comprehensive income during the nine months ended
September 30, 2002 are included below.

8. PLANT CLOSING COSTS

Plant Closing Costs -- As part of our overall integration and cost
reduction program, we recorded plant closing costs during the first quarter of
2002 in the amount of $1.2 million related to the closing of our Port Huron,
Michigan, Dairy Group plant during the fourth quarter of 2001.

During the second quarter of 2002, we recorded plant closing costs in
the amount of $6.7 million related to the closing of one plant in Puerto Rico,
one Dairy Group plant in Bennington, Vermont, and one Dairy Group distribution
facility in Winchester, Virginia.

During the third quarter of 2002, we recorded plant closing costs in
the amount of $4.9 million related to the closing of a Morningstar plant in
Tempe, Arizona.

The principal components of the cost reduction plans included within
this program include the following:

o Workforce reductions as a result of plant closings, plant
rationalizations and consolidation of administrative functions.
To date, we have identified 422 employees, who were primarily
plant employees associated with the plant closings and
rationalization, for termination pursuant to the plans. Costs
are charged to our earnings in the period that the plan is
established in detail and employee severance and benefits are
appropriately communicated. As of September 30, 2002, 336
employees had been terminated under the program;

o Shutdown costs, including those costs that are necessary to
prepare plant facilities for re-sale or closure;

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

o Write-downs of property, plant and equipment and other assets,
primarily for asset impairments as a result of facilities that
are no longer used in operations. The impairments relate
primarily to owned building, land and equipment at the
facilities which are being sold and were written down to their
estimated fair value. The effects of suspending depreciation on
the buildings and equipment related to the closed facilities
were not significant. The carrying value of closed facilities
held for sale at September 30, 2002 was approximately $8.0
million. We are marketing these properties for sale.
Divestitures of closed facilities has not resulted in
significant modifications to the estimate of fair value.

14

Activity with respect to plant closing costs for 2002 to date is
summarized below:

There have not been significant adjustments to any plan included within
our integration and cost reduction program, and the majority of future cash
requirements to reduce the liabilities under the plans are expected to be
completed within one year.

Acquired Facility Closing Costs -- As part of our purchase price
allocations, we accrue costs from time to time pursuant to plans to exit certain
activities and operations of acquired businesses in order to rationalize
production and reduce costs and inefficiencies.

During the first nine months of 2002, we closed four Old Dean plants,
and we are currently evaluating whether to close others. In addition, we have
restructured Old Dean's administrative offices. We will finalize and implement
our initial integration and rationalization plan, and refine our estimate of
amounts in our purchase price allocations associated with this plan, during the
fourth quarter of 2002.

The principal components of the plan include the following:

o Workforce reductions as a result of plant closings, plant
rationalizations and consolidation of administrative functions and
offices, resulting in an overall reduction of 704 plant and
administrative personnel which have been terminated or identified
for termination. The costs incurred are charged against our
acquisition liabilities for these costs. As of September 30, 2002,
55 employees identified for termination had not yet been
terminated;

o Shutdown costs, including those costs that are necessary to clean
and prepare the plant facilities for re-sale or closure; and

o Costs incurred after shutdown such as lease obligations or
termination costs, utilities and property taxes after shutdown of
the plant or administrative office.

Activity with respect to these acquisition liabilities during the first
nine months of 2002 is summarized below:

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9. SHIPPING AND HANDLING FEES

Our shipping and handling costs are included in both cost of sales and
selling and distribution expense, depending on the nature of such costs.
Shipping and handling costs reflected in cost of sales include inventory
warehouse costs and product loading and handling costs. Shipping and handling
costs included in selling and distribution expense are related to shipping
products to customers, and consist primarily of (i) delivery costs for
company-owned delivery routes, (ii) independent distributor routes (to the
extent that such independent distributors are paid a delivery fee), and (iii)
third party carrier expenses. Shipping and handling costs that were recorded as
a component of selling and distribution expense were approximately $244.8
million and $722.4 million during the third quarter and first nine months of
2002, respectively, compared to $164 million and $486.6 million during the third
quarter and first nine months, respectively, of 2001.

10. COMMITMENTS AND CONTINGENCIES

Guaranty of Certain Indebtedness of Consolidated Container Company --
We own a 43.1% interest in Consolidated Container Company ("CCC"), the nation's
largest manufacturer of rigid plastic containers and our primary supplier of
plastic bottles and bottle components. During 2001, as a result of various
operational difficulties, CCC became unable to comply with the financial
covenants in its credit facility. In February 2002, CCC's lenders agreed to
restructure the credit agreement to modify the financial covenants, subject to
the agreement of CCC's primary shareholders to guarantee certain of CCC's debt.
Because CCC is an important and valued supplier of ours, and in order to protect
our interest in CCC, we agreed to provide a limited guaranty. The guaranty,
which expires on January 5, 2003, is limited in amount to the lesser of (1) 49%
of the principal, interest and fees of CCC's "Tranche 3" revolver, and (2) $10
million. CCC's "Tranche 3" revolver can only be drawn upon by CCC when its
Tranche 1 and Tranche 2 revolvers are fully drawn. As of September 30, 2002,
Tranche 1 was partially drawn, Tranche 2 had been converted to a term loan, and
nothing was borrowed under Tranche 3. If CCC draws on the Tranche 3 revolver, no
voluntary pre-payments may be made on the Tranche 1 and 2 revolvers until the
Tranche 3 revolver is fully re-paid. Our guaranty cannot be drawn upon until the
Tranche 3 loan is due and payable (whether at its January 5, 2003 maturity or by
acceleration), and no more than one demand for payment may be made by the banks.
We have entered into an agreement with Alan Bernon (who is a member of our Board
of Directors) and his brother, Peter Bernon, who collectively own 6% of CCC,
pursuant to which, collectively, they have agreed to reimburse us for 12% of any
amounts paid by us under the guaranty.

Contingent Obligations Related to Milk Supply Arrangements -- On
December 21, 2001, in connection with our acquisition of Old Dean, we purchased
Dairy Farmers of America's ("DFA") 33.8% stake in our Dairy Group for
consideration consisting of (1) approximately $145.4 million in cash, (2) a
contingent promissory note in the original principal amount of $40 million, and
(3) the operations of 11 plants located in nine states where we and Old Dean had
overlapping operations (which plants were actually transferred to National Dairy
Holdings, L.P., as assignee of DFA). As additional consideration, we amended a
milk supply agreement with DFA to provide that if we do not, within a certain
period of time after the completion of the Old Dean acquisition, offer DFA the
right to supply raw milk to certain of the Old Dean dairy plants, we could be
required to pay liquidated damages of up to $47 million. Specifically, the
liquidated damages to DFA provision provides that:

o If we have not offered DFA the right to supply all of our raw milk
requirements for certain of Old Dean's plants by either (i) the
end of the 18th full month after December 21, 2001, or (ii) with
respect to certain other plants, the end of the 6th full calendar
month following the expiration of milk supply agreements in
existence at those plants on December 21, 2001, or

o If DFA is prohibited from supplying those plants because of an
injunction, restraining order or otherwise as a result of or
arising from a milk supply contract to which we are party,

we must pay DFA liquidated damages determined and paid on a plant-by-plant
basis, based generally on the amount of raw milk used by that plant. Liquidated
damages would be payable in arrears in equal, quarterly installments over a
5-year period, without interest. If we are required to pay any such liquidated
damages, the principal amount of the $40 million contingent promissory note will
be reduced by an amount equal to 25% of the liquidated damages paid.

The contingent promissory note is designed to ensure that DFA, one of
our primary suppliers of raw milk, has the opportunity to continue to supply raw
milk to certain of our plants until 2021, or be paid for the loss of that
business. The contingent promissory note has a 20-year term and bears interest
based on the consumer price index. Interest will not be paid in cash. Instead,
interest will be added to the principal amount of the note annually, up to a
maximum principal amount of $96 million. We may prepay the note in whole or in
part at any time, without penalty. The note will only become payable if we ever
materially breach or terminate one of our milk supply agreements

16

with DFA without renewal or replacement. Otherwise, the note will expire at the
end of 20 years, without any obligation to pay any portion of the principal or
interest.

Contingent Obligations Related to Divested Operations -- We retained
certain liabilities of the businesses of the 11 plants divested to National
Dairy Holdings, where those liabilities were deemed to be "non-ordinary course"
liabilities. We also have the obligation to indemnify National Dairy Holdings
for any damages incurred by it in connection with those retained liabilities, or
in connection with any breach of the divestiture agreement. We do not expect any
liability that we may have for these retained liabilities, or any
indemnification liability, to be material. We believe we have adequate reserves
for any such potential liability.

Enron -- In 1999, we entered into an Energy Program Agreement with
Enron Energy Services pursuant to which we contracted to purchase electricity
for certain of our plants at a discounted rate for a ten-year period. Under the
agreement, Enron (i) supplied (or arranged for the supply of) utilities to our
facilities and paid the costs of such utilities directly to the utility
suppliers, and (ii) made certain capital improvements at certain of our
facilities in an effort to reduce our utility consumption, all in exchange for
one monthly payment from us. In November 2001, Enron stopped performing under
the agreement and in December 2001, Enron filed for bankruptcy protection.
Shortly thereafter, Enron formally terminated our contract. In order to
compensate us for our lost savings, the Energy Program Agreement provided for
formula-based liquidated damages in the event of termination of the agreement as
a result of Enron's breach. We have filed a claim in Enron's bankruptcy for our
damages. On September 30, 2002, we received a letter from Enron demanding
payment of certain amounts that Enron alleges we owe under the agreement. We
have disputed the validity of Enron's claim and are in the process of attempting
to negotiate an agreement with Enron for the settlement of our claims against
each other. We cannot estimate the amount that we may be required to pay Enron
pursuant to a settlement, if any. However, we do not expect the settlement to
have a material adverse impact on our financial position, results of operations
or cash flows.

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 (including airplanes), 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, hours used or units produced.

Contingent Obligations Related to White Wave Acquisition -- On May 9,
2002, we completed the acquisition of White Wave, Inc. In connection with the
acquisition, we established a Performance Bonus Plan pursuant to which we have
agreed to pay performance bonuses to certain employees of White Wave if certain
performance targets are achieved. Specifically, we agreed that if the cumulative
net sales (as defined in the plan) of White Wave equal or exceed $382.5 million
during the period beginning April 1, 2002 and ending March 31, 2004 (the
"Incentive Period") and White Wave does not exceed the budgetary restrictions
set forth in the plan by more than $1 million during the Incentive Period, we
will pay employee bonuses as follows:

o If cumulative net sales during the Incentive Period are between
$382.5 million and $450 million, the bonus paid will scale ratably
(meaning $129,630 for each $1 million of net sales) between
$26.025 million and $35.0 million; and

o If cumulative net sales exceed $450 million during the Incentive
Period, additional amounts will be paid as follows:

- First $50 million above $450 million net sales: 10% of amount
in excess of $450 million, plus

- Second $50 million above $450 million net sales: 15% of
amount in excess of $500 million, plus

- In excess of $550 million net sales: 20% of amount in excess
of $550 million.

Key employees of White Wave are also entitled to receive certain
payments if they are terminated without cause (or as a result of death or
incapacity) during the Incentive Period.

Litigation, Investigations and Audits -- We and our subsidiaries are
parties, in the ordinary course of business, to certain other claims,
litigation, audits and investigations. We believe we have adequate reserves
for any liability we may incur in connection with any such currently
pending or threatened matter. In our opinion, the settlement of any such
currently pending or threatened matter is not expected to have a material
adverse impact on our financial position, results of operations or cash flows.

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11. BUSINESS AND GEOGRAPHIC INFORMATION AND MAJOR CUSTOMERS

We currently have three reportable segments: Dairy Group, Morningstar/White
Wave and Specialty Foods. Our Dairy Group segment manufactures and distributes
fluid milk, ice cream and novelties, half-and-half, whipping cream, sour cream,
cottage cheese, yogurt and dips, as well as fruit juices, flavored drinks and
bottled water. Our Morningstar/White Wave segment manufactures dairy and
non-dairy coffee creamers, whipping cream and pre-whipped toppings, dips and
dressings, cultured dairy products, and specialty products such as
lactose-reduced milk and extended shelf-life flavored milks and milk-based
beverages, soymilk and other soy products.

We obtained Specialty Foods as part of our acquisition of Old Dean on
December 21, 2001. Specialty Foods processes and markets pickles, powdered
products such as non-dairy coffee creamers, and sauces and puddings.

Neither our Puerto Rico nor our Spanish operations meet the definition of a
reportable segment. Therefore, they are both reported in the "Corporate/Other"
line.

The accounting policies of our segments are the same as those described in
the summary of significant accounting policies set forth in Note 1 to our 2001
consolidated financial statements contained in our 2001 Annual Report on Form
10-K. We evaluate performance based on operating profit not including
non-recurring gains and losses and foreign exchange gains and losses.

We do not allocate income taxes, management fees or unusual items to
segments. In addition, there are no significant non-cash items other than
depreciation and amortization in reported segment income.

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(1) Operating income includes plant closing costs of $6.5 million and $0.8
million in the first nine months of 2002 and 2001, respectively.

(2) Operating income includes plant closing costs of $4.9 million in the
third quarter and first nine months of 2002.

(3) Operating income includes plant closing costs of $1.4 million in the
first nine months of 2002.

Geographic information for the three-month and nine-month periods ended
September 30:

We have no single customer within any segment which represents greater
than ten percent of our consolidated revenues.

12. SUBSEQUENT EVENTS

In order to more closely align both our assets and our management
resources with our strategic direction, part of our strategy in 2002 has been to
divest certain assets. Accordingly, on November 8, 2002, we entered into an
agreement to sell our operations in Puerto Rico for a cash purchase price equal
to approximately $122 million. Completion of the transaction is subject to the
receipt of certain regulatory approvals, the buyer's ability to obtain financing
for the transaction and certain other customary closing conditions. We expect
the transaction to be completed on or before December 31, 2002. As of September
30, 2002, our Puerto Rico reporting unit had current assets of $45.8 million,
long-term assets of $121.9 million, current liabilities of $11.8 million and
long-term liabilities of $7.5 million.

On October 11, 2002, we completed the sale of our 94% interest in EBI
Foods, a U.K.-based subsidiary of our Specialty Foods Group. We received
aggregate proceeds of approximately $29 million for our interest. No gain or
loss will be recognized, as EBI was acquired in the acquisition of Old Dean.

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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS

We are the leading processor and distributor of fresh dairy products in the
United States and a leader in the specialty foods industry.

We currently have three reportable segments: Dairy Group, Morningstar/White
Wave and Specialty Foods. Our Dairy Group segment manufactures and sells fluid
milk, ice cream and novelties, half-and-half, whipping cream, sour cream,
cottage cheese, yogurt and dips, as well as fruit juices, flavored drinks and
bottled water. Our Morningstar/White Wave segment consists of our Morningstar
Foods division and, as of May 9, 2002, our White Wave, Inc. subsidiary. It
manufactures and sells dairy and non-dairy coffee creamers, whipping cream and
pre-whipped toppings, dips and dressings, cultured dairy products, specialty
products such as lactose-reduced milks and extended shelf-life milks and
milk-based beverages, soymilks and other soy products. Specialty Foods
manufactures and sells pickles, powdered products such as non-dairy coffee
creamers, and sauces and puddings. We also have operations in Puerto Rico and
Spain that are aggregated in our segment discussions into the "Corporate/Other"
category.

RESULTS OF OPERATIONS

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

Note: We completed our acquisition of the former Dean Foods Company ("Old Dean")
on December 21, 2001. We obtained our Specialty Foods segment as part of our
acquisition of Old Dean. More complete segment data can be found in Note 11 to
our condensed consolidated financial statements. Effective January 1, 2002, we
adopted SFAS No. 142, "Goodwill and Other Intangible Assets," which eliminates
the amortization of goodwill and certain other intangible assets. As a result of
the acquisition of Old Dean and the adoption of SFAS No. 142, comparisons with
the first three quarters of 2001 are less meaningful than they would be
otherwise. Where appropriate, we have provided comparisons eliminating the
amortization of goodwill and amortizing our recognized intangible assets with a
finite useful life. See Notes 1 and 4 to our condensed consolidated financial
statements for more information regarding SFAS 142.

Third Quarter 2002 Compared to Third Quarter 2001

Net Sales -- Net sales increased $738.3 million, or 48%, to $2.29 billion
during the third quarter of 2002, from $1.55 billion in the third quarter of
2001.

Net sales for the Dairy Group increased $494 million, or 39%, in the third
quarter of 2002. The acquisition of Old Dean (net of the plants divested as part
of the transaction) contributed approximately $620 million to the Dairy Group's
third quarter sales. That increase was partly offset by the effects of decreased
raw milk and cream costs compared to the prior year third quarter, and also by
lower ice cream volumes. In general, we change the prices that we charge our
customers for our products on a monthly basis, as the costs of our raw materials
fluctuate. Therefore, sales generally decrease as raw material prices decrease.
The average monthly federal order minimum prices for raw skim milk and cream for
the third quarter of 2002 compared to the third quarter of 2001 are set forth
below:

* Prices noted in this table are the federal government's minimum prices,
which do not necessarily reflect our actual raw milk and butterfat
costs. Please see "- Known Trends and Uncertainties - Raw Material
Prices" for a more complete description of raw milk and butterfat
pricing.
(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, ice cream and sour cream.

20

On a pro forma basis as if Old Dean had been acquired on January 1, 2001 (net of
the plants divested as part of the transaction), the Dairy Group's fluid milk
volumes during the third quarter of 2002 were relatively flat compared to the
third quarter of 2001, while ice cream volumes during the third quarter of 2002
were down approximately 6% compared to the third quarter of 2001. Our ice cream
products are sold under private labels and local brands, and we lost sales
during the quarter to nationally branded products, which were promoted more
aggressively than our products.

Net sales for Morningstar/White Wave increased $82.2 million or 46%, in the
third quarter of 2002, compared to the year earlier period. We estimate that the
acquisition of Old Dean added approximately $64 million of sales at our
Morningstar/White Wave segment during the third quarter of 2002. Precise
measurement of the impact of the Old Dean acquisition on Morningstar/White
Wave's sales is no longer possible because Old Dean's NRP group has now been
fully integrated into Morningstar, and is no longer accounted for separately.
The acquisition of White Wave contributed approximately $43 million in the third
quarter of 2002. These gains were offset by (i) lower raw milk and butterfat
prices, (ii) lower cultured dairy product volumes, and (iii) the
previously-announced phase-out of the Lactaid(R), Nestle Quik(R) and Nestle
Coffeemate(R) co-packing businesses. Sales of Morningstar/White Wave's strategic
brands, which include Hershey's(R) flavored milks, International Delight(R)
coffee creamers, Silk(R) soy products, SunSoy(R) soymilk, Folger's Jakada(R)
milk and coffee beverage, Land O'Lakes(R) Dairy Ease(R) lactose-free milk and
Marie's(R) dips and dressings and Dean's(R) dips, totaled approximately $135
million during the third quarter of 2002. Strategic brand volumes were up
approximately 25% in the third quarter of 2002 compared to the third quarter of
2001 (including the effect of brands acquired in both periods).

Our Specialty Foods segment reported net sales of $164.1 million in the
third quarter of 2002.

Cost of Sales -- Our cost of sales ratio was 73.5% in the third quarter of
2002 compared to 77.2% in the same period of 2001. The cost of sales ratio for
the Dairy Group decreased to 74.1% in the third quarter of 2002 from 77.6% in
the third quarter of 2001 due primarily to lower raw milk costs and also to
realized merger synergies. The cost of sales ratio for Morningstar/White Wave
decreased to 68.5% in the third quarter of 2002 from 72.2% in the same period of
2001, due primarily to lower butterfat costs in the third quarter of 2002
compared to the year earlier period and also to realized merger synergies.
Specialty Foods' cost of sales ratio was 71.7% in the third quarter of 2002.

Operating Costs and Expenses -- Our operating expense ratio was 19.1% in
the third quarter of 2002 compared to 16.4% in the third quarter of 2001. These
ratios were affected by our adoption of SFAS 142 on January 1, 2002. Excluding
2001 amortization, our operating expense ratio would have been 15.6% in 2001, as
compared to 19.1% in 2002.

The operating expense ratio at the Dairy Group was 18.3% in the third
quarter of 2002 compared to 16.4% in the same period last year. Excluding
approximately $9.9 million of amortization in the third quarter of 2001, the
Dairy Group's operating expense ratio would have been 15.7% in 2001, compared to
18.3% in 2002. In 2001, the Dairy Group eliminated certain discretionary
expenses as a result of the difficult operating environment. Operating expenses
have returned to more normal levels in 2002. The increase in the operating
expense ratio was primarily due to the effect of lower raw material prices in
2002. Lower raw material prices caused our sales, measured in dollars on a pro
forma basis as if Old Dean had been acquired on January 1, 2001, to decline,
which negatively affected the Dairy Group's