<PAGE> 1
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 26, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission file number 0-14190
DREYER'S GRAND ICE CREAM, INC.
(Exact name of registrant as specified in its charter)
DELAWARE No. 94-2967523
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
5929 College Avenue, Oakland, California 94618
(Address of principal executive offices) (Zip Code)
(510) 652-8187
(Registrant's telephone number, including area code)
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 the number of shares outstanding of each of the issuer's classes of
common stock as of the latest practicable date.
<TABLE>
<CAPTION>
Shares Outstanding
November 6, 1998
------------------
<S> <C>
Common stock, $1.00 par value 27,312,336
</TABLE>
<PAGE> 2
DREYER'S GRAND ICE CREAM, INC.
PART I: FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
DREYER'S GRAND ICE CREAM, INC.
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
September 26, December 27,
($ in thousands, except per share amounts) 1998 1997
------------- -----------
(unaudited)
<S> <C> <C>
Assets
Current Assets:
Cash and cash equivalents $ 1,354 $ 3,626
Trade accounts receivable, net of
allowance for doubtful accounts of
$5,740 in 1998 and $710 in 1997 106,123 82,011
Other accounts receivable 26,091 16,527
Inventories 52,332 49,720
Prepaid expenses and other 8,647 14,416
-------- --------
Total current assets 194,547 166,300
Property, plant and equipment, net 240,392 232,826
Goodwill and distribution rights, net 83,160 89,932
Other assets 13,735 13,740
-------- --------
Total assets $531,834 $502,798
======== ========
</TABLE>
See accompanying Notes to Consolidated Financial Statements
2
<PAGE> 3
DREYER'S GRAND ICE CREAM, INC.
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
September 26, December 27,
($ in thousands, except per share amounts) 1998 1997
------------- ------------
(unaudited)
<S> <C> <C>
Liabilities and Stockholders' Equity
Current Liabilities:
Accounts payable and accrued liabilities $ 93,271 $ 57,037
Accrued payroll and employee benefits 15,603 22,323
Current portion of long-term debt 8,357 8,364
-------- --------
Total current liabilities 117,231 87,724
Long-term debt, less current portion 175,407 165,913
Deferred income taxes 36,011 40,591
-------- --------
Total liabilities 328,649 294,228
-------- --------
Commitments and contingencies
Redeemable convertible preferred stock, $1 par
value - 1,008,000 shares authorized; 1,008,000
shares issued and outstanding in 1998 and 1997 99,549 99,230
-------- --------
Stockholders' Equity:
Preferred stock, $1 par value -
8,992,000 shares authorized; no shares
issued or outstanding in 1998 and 1997
Common stock, $1 par value -
60,000,000 shares authorized; 27,312,000
shares and 27,020,000 shares issued and
outstanding in 1998 and 1997, respectively 27,312 27,020
Capital in excess of par 46,367 42,822
Retained earnings 29,957 39,498
-------- --------
Total stockholders' equity 103,636 109,340
-------- --------
Total liabilities and stockholders' equity $531,834 $502,798
======== ========
</TABLE>
See accompanying Notes to Consolidated Financial Statements
3
<PAGE> 4
DREYER'S GRAND ICE CREAM, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
(unaudited)
<TABLE>
<CAPTION>
Thirteen Weeks Ended Thirty-Nine Weeks Ended
----------------------------- -----------------------------
September 26, September 27, September 26, September 27,
(In thousands, except per share amounts) 1998 1997 1998 1997
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Revenues:
Net sales $ 302,972 $ 286,256 $ 798,327 $ 758,666
Other income 1,321 1,088 2,958 2,085
--------- --------- --------- ---------
304,293 287,344 801,285 760,751
--------- --------- --------- ---------
Costs and expenses:
Cost of goods sold 238,918 220,615 635,657 595,583
Selling, general and administrative 66,921 55,638 163,041 138,738
Impairment of goodwill and
distribution rights 4,657 4,657
Interest, net of interest capitalized 3,716 2,911 9,656 8,142
--------- --------- --------- ---------
314,212 279,164 813,011 742,463
--------- --------- --------- ---------
(Loss) income before income taxes (9,919) 8,180 (11,726) 18,288
Income tax (benefit) provision (3,938) 3,215 (4,655) 7,187
--------- --------- --------- ---------
Net (loss) income (5,981) 4,965 (7,071) 11,101
Accretion of preferred stock
to redemption value 106 106 318 318
Preferred stock dividends 174 1,144 522 3,431
--------- --------- --------- ---------
Net (loss) income applicable
to common stock $ (6,261) $ 3,715 $ (7,911) $ 7,352
========= ========= ========= =========
Net (loss) income per common
share:
Basic $ (.23) $ .14 $ (.29) $ .27
========= ========= ========= =========
Diluted $ (.23) $ .13 $ (.29) $ .26
========= ========= ========= =========
Dividends per common share $ .00 $ .03 $ .06 $ .09
========= ========= ========= =========
</TABLE>
See accompanying Notes to Consolidated Financial Statements
4
<PAGE> 5
DREYER'S GRAND ICE CREAM, INC.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
(unaudited)
<TABLE>
<CAPTION>
Common Stock
------------------------- Capital in Retained
(In thousands) Shares Amount Excess of Par Earnings Total
--------- --------- ------------- --------- ---------
<S> <C> <C> <C> <C> <C>
Balance at December 28, 1996 13,345 $ 13,345 $ 51,956 $ 38,762 $ 104,063
Net income 11,101 11,101
Accretion of preferred stock
to redemption value (318) (318)
Preferred stock dividends declared (3,431) (3,431)
Common stock dividends declared (2,420) (2,420)
Repurchases and retirements
of common stock (6) (6) (224) (230)
Employee stock plans 155 155 3,982 4,137
Common stock split 13,494 13,494 (13,494)
--------- --------- --------- --------- ---------
Balance at September 27, 1997 26,988 $ 26,988 $ 42,220 $ 43,694 $ 112,902
========= ========= ========= ========= =========
Balance at December 27, 1997 27,020 $ 27,020 $ 42,822 $ 39,498 $ 109,340
Net loss (7,071) (7,071)
Accretion of preferred stock
to redemption value (318) (318)
Preferred stock dividends declared (522) (522)
Common stock dividends declared (1,630) (1,630)
Repurchases and retirements
of common stock (5) (5) (132) (137)
Employee stock plans 297 297 3,677 3,974
--------- --------- --------- --------- ---------
Balance at September 26, 1998 27,312 $ 27,312 $ 46,367 $ 29,957 $ 103,636
========= ========= ========= ========= =========
</TABLE>
See accompanying Notes to Consolidated Financial Statements
5
<PAGE> 6
DREYER'S GRAND ICE CREAM, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(unaudited)
<TABLE>
<CAPTION>
Thirty-Nine Weeks Ended
------------------------------
($ in thousands) September 26, September 27,
1998 1997
------------- -------------
<S> <C> <C>
Cash flows from operating activities:
Net (loss) income $ (7,071) $ 11,101
Adjustments to reconcile net (loss) income to
cash flows from operations:
Depreciation and amortization 26,632 23,753
Reserve for independent distributor receivable 5,000
Impairment of distribution rights 4,657
Deferred income taxes (1,274) 2,580
Changes in assets and liabilities:
Trade accounts receivable (29,112) (28,457)
Other accounts receivable (9,564) (5,391)
Inventories (2,612) (12,441)
Prepaid expenses and other 2,463 3,027
Accounts payable and accrued liabilities 37,040 8,178
Accrued payroll and employee benefits (6,720) 763
-------- --------
19,439 3,113
-------- --------
Cash flows from investing activities:
Acquisition of property, plant and equipment (31,563) (25,159)
Retirement of property, plant and equipment 470 661
Increase in goodwill and distribution rights (311) (96)
Increase in other assets (674) (733)
-------- --------
(32,078) (25,327)
-------- --------
Cash flows from financing activities:
Proceeds from long-term debt 16,900 32,000
Reductions in long-term debt (7,413) (7,044)
Issuance of common stock under employee stock plans 3,974 4,137
Repurchases of common stock (137) (230)
Cash dividends paid (2,957) (5,842)
-------- --------
10,367 23,021
-------- --------
(Decrease) increase in cash and cash equivalents (2,272) 807
Cash and cash equivalents, beginning of period 3,626 4,134
-------- --------
Cash and cash equivalents, end of period $ 1,354 $ 4,941
======== ========
Supplemental Cash Flow Information
Cash paid (refunded) during the period for:
Interest (net of amounts capitalized) $ 8,768 $ 8,174
Income taxes (net of refunds) 177 345
</TABLE>
See accompanying Notes to Consolidated Financial Statements
6
<PAGE> 7
DREYER'S GRAND ICE CREAM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - General:
Dreyer's Grand Ice Cream, Inc. and its subsidiaries (the Company) is a single
segment industry company engaged in the business of manufacturing and
distributing premium ice cream and other frozen dessert products to grocery and
convenience stores, foodservice accounts and independent distributors in the
United States.
The consolidated financial statements for the thirteen and thirty-nine week
periods ended September 26, 1998 and September 27, 1997 have not been audited by
independent public accountants, but include all adjustments, such as normal
recurring accruals, which management considers necessary for a fair presentation
of the consolidated operating results for the periods. The statements have been
prepared by the Company pursuant to the rules and regulations of the Securities
and Exchange Commission. Accordingly, certain information and footnote
disclosure normally included in financial statements prepared in conformity with
generally accepted accounting principles have been condensed or omitted pursuant
to such rules and regulations. The operating results for interim periods are not
necessarily indicative of results to be expected for an entire year. The
aforementioned statements should be read in conjunction with the Consolidated
Financial Statements for the year ended December 27, 1997, appearing in the
Company's 1997 Annual Report to Stockholders.
NOTE 2 - Inventories:
Inventories are stated at the lower of cost (determined by the first-in,
first-out method) or market. Inventories at September 26, 1998 and December 27,
1997 consisted of the following:
<TABLE>
<CAPTION>
September 26, December 27,
(In thousands) 1998 1997
------------- ------------
(unaudited)
<S> <C> <C>
Raw materials $ 6,014 $ 7,411
Finished goods 46,318 42,309
------- -------
$52,332 $49,720
======= =======
</TABLE>
NOTE 3 - Preoperating Costs:
In April 1998, the Accounting Standards Executive Committee issued Statement
of Position 98-5, "Reporting on the Costs of Start-Up Activities" (SOP 98-5).
SOP 98-5 requires that the cost of start-up activities, including preoperating
costs, should be expensed as incurred. This new accounting standard is effective
for financial statements for periods beginning after December 15, 1998. The
Company currently capitalizes preoperating costs such as those incurred during
the construction and start-up of new manufacturing and distribution facilities
and introductory allowances paid to customers. These costs are amortized over
one to three years. Upon adoption of SOP 98-5, the Company will expense
unamortized preoperating costs in the first quarter of 1999 as a cumulative
effect of a change in accounting principle. The Company does not expect the
adoption of SOP 98-5 to have a material adverse effect on its financial
position.
7
<PAGE> 8
NOTE 4 - Net (Loss) Income Per Common Share:
Net (loss) income per common share is computed as follows:
<TABLE>
<CAPTION>
Thirteen Weeks Ended Thirty-Nine Weeks Ended
------------------------------ ------------------------------
September 26, September 27, September 26, September 27,
(In thousands, except per share amounts) 1998 1997 1998 1997
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Net (loss) income applicable
to common stock - basic and diluted $ (6,261) $ 3,715 $ (7,911) $ 7,352
-------- -------- -------- --------
Weighted average shares
outstanding - basic 27,247 26,919 27,149 26,828
Dilutive effect of options 1,481 942
Dilutive effect of warrants 536 372
-------- -------- -------- --------
Weighted average shares
outstanding - diluted 27,247 28,936 27,149 28,142
======== ======== ======== ========
Net (loss) income per common share:
Basic $ (.23) $ .14 $ (.29) $ .27
======== ======== ======== ========
Diluted $ (.23) $ .13 $ (.29) $ .26
======== ======== ======== ========
</TABLE>
The above calculations exclude the effect of certain options, warrants and
preferred stock that would be anti-dilutive when assumed converted into common
stock. For the thirteen and thirty-nine week periods ended September 26, 1998,
the Company had options for 4,403,000 common shares, warrants for 2,000,000
common shares, and preferred stock convertible into 5,800,000 common shares that
were anti-dilutive due to the Company's loss in those periods. For the thirteen
and thirty-nine week periods ended September 27, 1997, the Company had preferred
stock convertible into 5,800,000 common shares that were anti-dilutive because
the preferred dividend yield during those periods exceeded net income per common
share.
NOTE 5 - Line of Credit:
During the second quarter of 1998, the Company entered into an agreement
to extend the available borrowings under the Company's existing long-term line
of credit an additional $25,000,000 to $175,000,000. Additionally, the line of
credit agreement was extended an additional year and will expire December 31,
2000.
NOTE 6 - Settlement of Legal Claims:
During the third quarter of 1998, the Company settled various legal
issues and recorded a net settlement expense of $2,377,000. Of this total,
$1,400,000 was included in selling, general and administrative expenses and
$977,000 was included in cost of goods sold.
NOTE 7 - Termination of Ben & Jerry's Distribution Agreement:
On August 31, 1998, Ben & Jerry's Homemade, Inc. (Ben & Jerry's)
terminated its distribution agreement with the Company. The distribution
agreement authorized the Company to distribute Ben & Jerry's products in more
than half of the United States. The Company retains the rights to distribute Ben
& Jerry's products for twelve months, or until the end of August 1999. Ben &
Jerry's has recently asserted a right to terminate the contract effective April
15, 1999. The Company does not believe that this claim has merit and is taking
legal action as necessary to protect the Company's rights.
8
<PAGE> 9
In March 1989, the Company acquired a third party independent distributor which
had the exclusive rights to distribute Ben & Jerry's products in the New York
metropolitan area. In connection with this purchase, the Company recorded
$6,115,000 of goodwill and distribution rights. As a result of the termination
of the Ben & Jerry's distribution agreement under which the rights were granted,
the Company expensed $4,657,000 of unamortized goodwill and distribution rights
during the third quarter of 1998.
During the third quarter, Ben & Jerry's also indicated its intent to terminate
its separate distribution agreement with the Company's independent distributor
in Texas, in which the Company has a minority investment. In 1994, the Company
paid this distributor $10,970,000 for the exclusive right to have the Company's
products distributed in the state of Texas. However, this distributor retained
the right to distribute its existing product line, which included Ben & Jerry's
products. Ben & Jerry's action places at significant risk the recovery of the
Company's equity investment, distribution rights, and trade accounts receivable
relating to this distributor. Accordingly, the Company has recorded a $5,000,000
charge to selling, general and administrative expense during the third quarter
to establish a trade accounts receivable reserve. During the fourth quarter, the
Company will be completing a thorough review of its strategy in the Texas market
and the status of its independent distributor. At this time, the Company
anticipates recording an additional charge of up to $13,000,000 for the
impairment of its equity investment and its distribution rights in the fourth
quarter.
NOTE 8 - Subsequent Event - Restructuring Plan and Other Charges:
On October 16, 1998, the Company's Board of Directors approved a
restructuring plan to improve the Company's profitability. The restructuring
plan reassesses certain initiatives of the Company's long-term strategic plan in
order to increase focus on the core elements of the plan and to accelerate cost
reduction. In addition, the Company has evaluated certain assets in light of Ben
& Jerry's decision to terminate its distribution agreement with the Company, as
discussed in Note 7, and will take appropriate write-downs in the value of those
assets.
The Company currently estimates that the implementation of this restructuring
plan and charges will result in a pre-tax charge to earnings of approximately
$60,000,000 to $65,000,000 during the third and fourth quarters of 1998. Of this
amount, $10,590,000 was recorded during the third quarter.
The components of this restructuring plan and charges are:
- - The Company plans to sell the equipment manufacturing operations associated
with its Grand Soft ice cream unit. The Grand Soft unit consists of both ice
cream and equipment manufacturing operations. The Company intends to remain in
the profitable ice cream portion of this business, while exiting the
unprofitable equipment manufacturing side. The Company will take approximately
$11,000,000 in asset impairment charges and exit costs associated with the sale
of this manufacturing operation.
- - The Company will execute a program designed to reduce operating expenses in
manufacturing and distribution. Core pieces of this program include outsourcing
of certain non-strategic activities, consolidation of warehouse facilities, and
selected reductions in field sales and distribution staffing. Charges related to
these actions will total approximately $10,000,000. The Company recorded
severance costs of $933,000 during the third quarter related to staffing
reductions made prior to board approval of the full restructuring plan. These
charges were recorded as a part of cost of goods sold.
- - The Company, in carrying out its national expansion program, made certain
investments to support aggressive expansion in Texas. This strategy, while
building volumes, has delivered profitability below expectations. At this time,
the Company is modifying this expansion strategy in order to concentrate on more
profitable opportunities. The objective will be to preserve volumes while
seeking margin improvement. As a result, the Company will recognize
approximately $19,000,000 in write-down and impairment charges related to
retrenchment of operations at its Texas plant.
9
<PAGE> 10
- As mentioned in Note 7, Ben & Jerry's intent to terminate its separate
distribution agreement with the Company's independent distributor in Texas
places at significant risk the recovery of the Company's equity investment,
distribution rights, and trade accounts receivable relating to this distributor.
Accordingly, the Company has recorded a $5,000,000 charge to selling, general
and administrative expense in the third quarter to establish a trade accounts
receivable reserve. During the fourth quarter, the Company will be completing a
thorough review of its strategy in the Texas market and the status of its
independent distributor. At this time, the Company anticipates recording an
additional charge of up to $13,000,000 for the impairment of its equity
investment and its distribution rights in the fourth quarter.
- - As mentioned in Note 7, the Company wrote-off $4,657,000 of unamortized
goodwill and distribution rights during the third quarter due to the termination
of the distribution agreement with Ben & Jerry's.
The following table summarizes the estimated timing of these restructuring and
impairment charges:
<TABLE>
<CAPTION>
Third Quarter Fourth Quarter
------------- -------------- Estimated
($ in thousands) Actual Estimated Total
------ --------- ---------
<S> <C> <C> <C>
Equipment manufacturing unit $ -- $11,000 $11,000
Reduce operating expenses 933 9,067 10,000
Texas plant -- 19,000 19,000
Texas independent distributor 5,000 13,000 18,000
Ben & Jerry's goodwill and
distribution rights 4,657 -- 4,657
------- ------- -------
Total $10,590 $52,067 $62,657
======= ======= =======
</TABLE>
NOTE 9 - Subsequent Event - Common Dividend:
On September 28, 1998, the Board of Directors of the Company approved a
third quarter common dividend in the amount of $.03 per share to common
stockholders on October 9, 1998. This dividend was paid on October 21, 1998.
Because the approval was subsequent to the end of the third quarter, the Company
will record this transaction in the fourth quarter of 1998.
10
<PAGE> 11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following table sets forth for the periods indicated the percent which the
items in the Consolidated Statement of Operations bear to net sales and the
percentage change of such items compared to the indicated prior period:
<TABLE>
<CAPTION>
Period-to-Period
Percentage of Net Sales Increase (Decrease)
----------------------------------------------------------- ---------------------------
Thirteen Thirty-Nine
Weeks Weeks
Thirteen Weeks Ended Thirty-Nine Weeks Ended 1998 1998
------------ ------------- ------------ -------------
September 26, September 27, September 26, September 27, Compared Compared
1998 1997 1998 1997 to 1997 to 1997
------------ ------------- ------------ ------------- -------- ---------
<S> <C> <C> <C> <C> <C> <C>
Revenues:
Net sales 100.0% 100.0% 100.0% 100.0% 5.8% 5.2%
Other income 0.4 0.4 0.3 0.3 21.4 41.9
----- ----- ----- -----
Total revenues 100.4 100.4 100.3 100.3 5.9 5.3
----- ----- ----- -----
Costs and expenses:
Cost of goods sold 78.9 77.1 79.6 78.5 8.3 6.7
Selling, general and administrative 22.1 19.4 20.4 18.3 20.2 17.6
Impairment of goodwill and
distribution rights 1.5 0.6 NM NM
Interest, net of interest capitalized 1.2 1.0 1.2 1.1 27.7 18.6
----- ----- ----- -----
Total costs and expenses 103.7 97.5 101.8 97.9 12.6 9.5
----- ----- ----- -----
(Loss) income before income taxes (3.3) 2.9 (1.5) 2.4 (221.3) (164.1)
----- ----- ----- -----
Income tax (benefit) provision (1.3) 1.2 (0.6) 0.9 (222.5) (164.8)
----- ----- ----- -----
Net (loss) income (2.0) 1.7 (0.9) 1.5 (220.4) (163.7)
Accretion of preferred stock
to redemption value 0.0 0.0 0.0 0.0 00.0 00.0
Preferred stock dividends 0.1 0.4 0.1 0.5 (84.8) (84.8)
----- ----- ----- -----
Net (loss) income applicable to
common stock (2.1)% 1.3% (1.0)% 1.0% (268.5) (207.6)
===== ===== ===== =====
</TABLE>
11
<PAGE> 12
FORWARD LOOKING STATEMENTS
The Company may from time to time make written or oral forward-looking
statements. Written forward-looking statements may appear in documents filed
with the Securities and Exchange Commission, in press releases, and in reports
to stockholders. The Private Securities Litigation Reform Act of 1995 contains a
"safe harbor" for forward-looking statements upon which the Company relies in
making such disclosures. In accordance with this "safe harbor" provision, we
have identified that forward-looking statements are contained in this
Management's Discussion and Analysis of Consolidated Financial Condition and
Results of Operations. The Company undertakes no obligation to publicly revise
these forward-looking statements to reflect subsequent events or circumstances.
Also, in connection with this "safe harbor" provision, the Company identifies
important factors that could cause the Company's actual results to differ
materially from those contained in any forward-looking statement made by or on
behalf of the Company. Any such statement is qualified by reference to the
cautionary statements set forth below and in the Company's other filings with
the Securities and Exchange Commission.
RESULTS OF OPERATIONS
Strategic Plan
The Company embarked on a strategic plan (the Strategic Plan) during the
second quarter of 1994 to accelerate the sales of its brand throughout the
country. The key elements of this plan are: 1) to build a high margin brand with
a leading market share through effective consumer marketing activities, 2) to
expand the Company's direct-store-delivery distribution network to national
scale and enhance this capability with sophisticated information and logistics
systems, and 3) to introduce innovative new products. The potential benefits of
the Strategic Plan are increased market share and future earnings above those
levels that would be attained in the absence of the Strategic Plan.
The Company has made significant progress against key elements of the Strategic
Plan. This progress has yielded a leading market share in a consolidating
industry. The Company's direct-store-delivery system has now reached near
national scope and includes category management and demand management
capabilities. The Company has launched a wide range of new product initiatives
including the national roll-outs of Whole Fruit Sorbet, Starbucks(TM) Ice Cream
and Dreyer's and Edy's Homemade Ice Cream. However, the Company's profitability
has been impacted by extraordinarily high dairy prices that have eroded product
margins at a time when the Company was beginning to leverage profitability from
these strategic investments. The financial pressure created by these dairy
prices is likely to continue for the balance of 1998. The Company has raised
wholesale prices in response to the dairy cost increases. The impact of these
price increases on consumer demand is uncertain, and consequently the Company
cannot give assurances that they will provide coverage of the impact of higher
dairy costs. As a further response to the effect of the dairy cost increases and
the possible continued trend in decreased "better-for-you" product sales, the
Company has implemented reductions in other areas of its cost structure to
provide partial coverage. As more fully discussed below, the Company's Board of
Directors approved a restructuring plan to improve the Company's profitability.
The restructuring plan reassesses certain initiatives of the Company's Strategic
Plan in order to focus on the core elements of the plan and to accelerate cost
reduction.
The Company currently forecasts that the effect of the increase in dairy prices
from 1997 levels will be to reduce the Company's gross profit by approximately
$25,000,000 for the full year of 1998. The outlook for dairy prices for 1999
remains highly uncertain at this point, and changes in dairy prices could have a
material impact on the Company's profitability.
The Company believes that the benefits under the Strategic Plan will be realized
in future years, although dairy prices and competitive pressures may delay the
realization of those benefits. No assurance can be given that the expectations
relative to future market share and earnings benefits of the strategy will be
12
<PAGE> 13
achieved. The realization of the benefits will depend upon, among other things,
consumer purchase responsiveness to the Company's new products, the
effectiveness of the Company's marketing and promotion programs, competitors'
marketing and promotion responses, market conditions affecting the price of the
Company's products, commodity costs and efficiencies achieved in manufacturing
and distribution operations.
Termination of Ben & Jerry's Distribution Agreement
On August 31, 1998, Ben & Jerry's Homemade, Inc. (Ben & Jerry's) terminated
its distribution agreement with the Company. The distribution agreement
authorized the Company to distribute Ben & Jerry's products in more than half of
the United States. The Company retains the rights to distribute Ben & Jerry's
products for twelve months, or until the end of August 1999. Ben & Jerry's has
recently asserted a right to terminate the contract effective April 15, 1999.
The Company does not believe that this claim has merit, and is taking legal
action as necessary to protect the Company's rights. The Company anticipates
some transitional negative financial impact after the twelve month period, but
ultimately plans to recoup any lost distribution profits through the expansion
of its own, higher-margin branded products. Such transitional negative financial
impact may result from expenses relating to launching the Company's own new
products, combined with the timing of loss of distribution margin on Ben &
Jerry's products in some markets. However, no assurance can be given that the
Company's plan to recoup the lost distribution profits will be achieved. The
distribution margin on Ben & Jerry's products contributed slightly less than 10
percent of the Company's 1997 gross profit.
In March 1989, the Company acquired a third party independent distributor which
had the exclusive rights to distribute Ben & Jerry's products in the New York
metropolitan area. In connection with this purchase, the Company recorded
$6,115,000 of goodwill and distribution rights. As a result of the termination
of the Ben & Jerry's distribution agreement under which the rights were granted,
the Company expensed $4,657,000 of unamortized goodwill and distribution rights
during the third quarter of 1998.
During the third quarter, Ben & Jerry's also indicated its intent to terminate
its separate distribution agreement with the Company's independent distributor
in Texas, in which the Company has a minority investment. In 1994, the Company
paid this distributor $10,970,000 for the exclusive right to have the Company's
products distributed in the state of Texas. However, the distributor retained
the right to distribute its existing product line, which included Ben & Jerry's
products. Ben & Jerry's action places at significant risk the recovery of the
Company's equity investment, distribution rights, and trade accounts receivable
relating to this distributor. Accordingly, the Company has recorded a $5,000,000
charge to selling, general and administrative expense in the third quarter to
establish a trade accounts receivable reserve. During the fourth quarter, the
Company will be completing a thorough review of its strategy in the Texas market
and the status of its independent distributor. At this time, the Company
anticipates recording an additional charge of up to $13,000,000 for the
impairment of its equity investment and its distribution rights in the fourth
quarter.
Restructuring Plan and Other Charges
On October 16, 1998, the Company's Board of Directors approved a
restructuring plan to improve the Company's profitability. The restructuring
plan reassesses certain initiatives of the Company's long-term strategic plan in
order to increase focus on the core elements of the plan and to accelerate cost
reduction. In addition, the Company has evaluated certain assets in light of Ben
& Jerry's decision to terminate its distribution agreement with the Company, as
discussed above, and will take appropriate write-downs in the value of those
assets.
The Company currently estimates that the implementation of this restructuring
plan and charges will result in a pre-tax charge to earnings of approximately
$60,000,000 to $65,000,000 during the third and fourth quarters of 1998. Of this
amount, $10,590,000 was recorded during the third quarter.
13
<PAGE> 14
The components of this restructuring plan and charges are:
- - The Company plans to sell the equipment manufacturing operations associated
with its Grand Soft ice cream unit. The Grand Soft unit consists of both ice
cream and equipment manufacturing operations. The Company intends to remain in
the profitable ice cream portion of this business, while exiting the
unprofitable equipment manufacturing side. The Company will take approximately
$11,000,000 in asset impairment charges and exit costs associated with the sale
of this manufacturing operation.
- - The Company will execute a program designed to reduce operating expenses in
manufacturing and distribution. Core pieces of this program include outsourcing
of certain non-strategic activities, consolidation of warehouse facilities, and
selected reductions in field sales and distribution staffing. Charges related to
these actions will total approximately $10,000,000. The Company recorded
severance costs of $933,000 during the third quarter related to staffing
reductions made prior to board approval of the full restructuring plan. These
charges were recorded as a part of cost of goods sold.
- - The Company, in carrying out its national expansion program, had made certain
investments to support aggressive expansion in Texas. This strategy, while
building volumes, has delivered profitability below expectations. At this time,
the Company is modifying this expansion strategy in order to concentrate on more
profitable opportunities. The objective will be to preserve volumes while
seeking margin improvement. As a result, the Company will recognize
approximately $19,000,000 in write-down and impairment charges related to
retrenchment of operations at its Texas plant.
- - As discussed above, Ben & Jerry's intent to terminate its separate
distribution agreement with the Company's independent distributor in Texas
places at significant risk the recovery of the Company's equity investment,
distribution rights, and trade accounts receivable relating to this distributor.
Accordingly, the Company has recorded a $5,000,000 charge to selling, general
and administrative expense in the third quarter to establish a trade accounts
receivable reserve. During the fourth quarter, the Company will be completing a
thorough review of its strategy in the Texas market and the status of its
independent distributor. At this time, the Company anticipates recording an
additional charge of up to $13,000,000 for the impairment of its equity
investment and its distribution rights in the fourth quarter.
- - As discussed above, the Company wrote-off $4,657,000 of unamortized goodwill
and distribution rights during the third quarter due to the termination of the
distribution agreement with Ben & Jerry's.
The Company anticipates that these actions will improve operating results by
$14,000,000 in 1999 through lower depreciation and amortization charges and
reduced expenses. However, no assurance can be given that the above plan will
result in improved operating results.
The following table summarizes the estimated timing of these restructuring and
impairment charges:
<TABLE>
<CAPTION>
Third Quarter Fourth Quarter
------------- -------------- Estimated
($ in thousands) Actual Estimated Total
------ --------- ---------
<S> <C> <C> <C>
Equipment manufacturing unit $ -- $11,000 $11,000
Reduce operating expenses 933 9,067 10,000
Texas plant -- 19,000 19,000
Texas independent distributor 5,000 13,000 18,000
Ben & Jerry's goodwill and
distribution rights 4,657 -- 4,657
------- ------- -------
Total $10,590 $52,067 $62,657
======= ======= =======
</TABLE>
14
<PAGE> 15
Adoption of New Accounting Standard
The Company is required to adopt the Accounting Standards Executive
Committee's Statement of Position 98-5, "Reporting on the Costs of Start-Up
Activities" (SOP 98-5). SOP 98-5 requires that the cost of start-up activities,
including preoperating costs, should be expensed as incurred. This new
accounting standard is effective for financial statements for periods beginning
after December 15, 1998. The Company currently capitalizes preoperating costs
such as those incurred during the construction and start-up of new manufacturing
and distribution facilities and introductory allowances paid to customers. These
costs are amortized over one to three years. Upon adoption of SOP 98-5, the
Company will expense unamortized preoperating costs in the first quarter of 1999
as a cumulative effect of a change in accounting principle. The Company does not
expect the adoption of SOP 98-5 to have a material adverse effect on its
financial position.
Thirteen Weeks ended September 26, 1998 Compared with Thirteen Weeks Ended
September 27, 1997
Consolidated net sales for the third quarter of 1998 increased by
$16,716,000, or 6%, to $302,972,000 from $286,256,000 for the same period last
year. Sales of the Company's branded products increased 4%, or $6,382,000, as a
result of higher selling prices and increased gallon sales. Dreyer's and Edy's
Homemade Ice Cream and classic Dreyer's and Edy's Grand Ice Cream achieved
strong sales increases, offsetting significant sales declines in the Company's
"better-for-you" frozen yogurt, sugar free and fat free products. The effect of
wholesale price increases for the Company's branded products was approximately
2% between these periods, before the effect of increased trade promotion
expense. Sales of branded products purchased from other manufacturers (partner
brands) increased 10% due to increases in sales of Ben and Jerry's Homemade(R)
superpremium products. Sales of partner brands represented 39% of consolidated
net sales, an increase of 1 percentage point over the same period in the prior
year. The effect of price increases for partner brands was approximately 6%.
Other income increased $233,000, or 21%, over the third quarter of 1997, due to
higher earnings from a joint venture accounted for under the equity method.
Cost of goods sold increased $18,303,000, or 8%, over the third quarter of 1997,
while the overall gross margin decreased to 21.1% from 22.9%. The gross margin
decreased due to lower margins on company brands in 1998 caused by higher dairy
costs of $7,986,000 and a shift in the mix of products away from the higher
margin "better-for-you" products, partially offset by a decrease in distribution
costs as a percent of net sales and price increases.
Selling, general and administrative expenses in the third quarter of 1998 were
$11,283,000, or 20%, higher than in the same period of 1997. Part of this
increase related to the $5,000,000 reserve for trade receivables created during
the third quarter of 1998. The remainder of the increase related primarily to
higher trade promotion, legal settlement and information technology expenses in
the third quarter of 1998 compared with the same period in 1997. Selling,
general and administrative expenses increased to 22% of net sales in 1998 as
compared with 19% of net sales in 1997.
During the third quarter of 1998, the Company recorded a $4,657,000 impairment
charge relating to the write-off of the unamortized balance of goodwill and
distribution rights upon termination of these rights by Ben & Jerry's.
Interest expense increased $805,000, or 28%, over the third quarter of 1997, due
primarily to additional interest expense from higher average borrowings on the
Company's line of credit and less interest capitalized during the third quarter
of 1998 due to lower construction-in-progress balances.
The Company recorded an income tax benefit during the third quarter as a result
of its pre-tax loss. The effective tax rate increased to 39.7% for the third
quarter of 1998 from 39.3% for the third quarter of 1997. As a result of the
restructuring plan and other charges to be recorded in the fourth quarter of
1998, the Company's effective tax rate for 1998 is expected to be 37.3%. This
would result in the reversal of $238,000 of the tax benefit recorded during the
third quarter of 1998.
15
<PAGE> 16
Preferred stock dividends decreased due to the conversion in October 1997 of
redeemable convertible preferred stock from Series B to Series A. Series A
preferred stock earns dividends at a lower rate than Series B.
Thirty-Nine Weeks ended September 26, 1998 Compared with Thirty-Nine Weeks Ended
September 27, 1997
Consolidated net sales for the three quarters of 1998 increased by
$39,661,000, or 5%, to $798,327,000 from $758,666,000 for the same period last
year. Sales of the Company's branded products were 5%, or $23,044,000, higher
than the comparable period in 1997. Dreyer's and Edy's Homemade Ice Cream and
classic Dreyer's and Edy's Grand Ice Cream achieved strong sales increases,
offsetting significant declines in sales of the Company's "better-for-you"
frozen yogurt, sugar free and fat free products. Wholesale prices for the
Company's branded products increased 2% between these periods, before the effect
of increased trade promotion expense. Sales of branded products purchased from
other manufacturers (partner brands) increased 6% due to increases in sales of
Ben and Jerry's Homemade(R) superpremium products. Sales of partner brands
represented 37% of consolidated net sales in both periods. The effect of price
increases for partner brands was approximately 4% between these periods.
Other income increased $873,000, or 42%, over the first three quarters of 1997
due to higher earnings from a joint venture accounted for under the equity
method.
Cost of goods sold increased $40,074,000, or 7%, over the first nine months of
1997, while the overall gross margin decreased from 21.5% to 20.4%. The gross
margin decreased due to lower margins on company brands in 1998 caused by higher
dairy costs of $14,803,000 and a shift in the mix of products away from the
higher margin "better-for-you" products, partially offset by lower distribution
costs as a percent of net sales and price increases.
Selling, general and administrative expenses for the first nine months of 1998
were $24,303,000, or 18%, higher than in the same period of 1997. This increase
related primarily to higher trade promotion expenses compared with the same
period in 1997 and the $5,000,000 reserve for trade receivables created during
the third quarter of 1998. Selling, general and administrative expenses
increased to 20% of total sales for the first three quarters of 1998 as compared
to 18% of total sales for the same period in 1997.
During the third quarter of 1998, the Company recorded a $4,657,000 impairment
charge relating to the write-off of the unamortized balance of goodwill and
distribution rights upon termination of these rights by Ben & Jerry's.
Interest expense increased $1,514,000, or 19%, due primarily to additional
interest expense from higher average borrowings on the Company's line of credit.
The Company recorded an income tax benefit for the first three quarters of 1998
as a result of its pre-tax loss. The effective tax rate increased to 39.7% for
the first three quarters of 1998 from 39.3% for the first three quarters of
1997. As a result of the restructuring plan and other charges to be recorded in
the fourth quarter of 1998, the Company's effective tax rate for 1998 is
expected to be 37.3%. This would result in the reversal of $281,000 of the tax
benefit recorded year-to-date through the end of the third quarter of 1998.
Preferred stock dividends decreased due to the conversion in October 1997 of
redeemable convertible preferred stock from Series B to Series A. Series A
preferred stock earns dividends at a lower rate than Series B.
16
<PAGE> 17
LIQUIDITY AND CAPITAL RESOURCES
Working capital at September 26, 1998 decreased $1,260,000 from year-end 1997
due primarily to an increase in trade accounts payable partially offset by a
seasonal increase in trade accounts receivable and other accounts receivable.
The $37,040,000 increase in trade accounts payable is the result of seasonality
and a Company program to more effectively manage cash flow. Cash was provided
primarily from operations and borrowings on the Company's line of credit, and
was used to fund a $31,563,000 increase in property, plant and equipment.
At September 26, 1998, the Company had $1,354,000 in cash and cash equivalents,
and unused credit of $70,700,000 under its $175,000,000 line of credit. This
line of credit expires December 31, 2000. The Company believes that its credit
line, along with its liquid resources, internally generated cash and financing
capacity, are adequate to meet anticipated operating and capital requirements.
On September 28, 1998, the Board of Directors of the Company approved a third
quarter common dividend in the amount of $.03 per share to common stockholders
on October 9, 1998. This dividend was paid on October 21, 1998. Because the
approval was subsequent to the end of the third quarter, the Company will record
this transaction in the fourth quarter of 1998.
The Company has reviewed its restructuring plan with its various banks and
private lenders, and has secured any modifications to debt agreements required
as a result of the restructuring. These modifications will result in a higher
interest rate during 1999 which the Company believes will be more than offset by
lower borrowings.
The Company anticipates that the restructuring plan will enhance its cash flow,
both through short-term tax benefits, which will more than offset any pre-tax
cash outflows, and through longer-term savings in its cost structure. The
Company also has completed a phase of capital investment required to support
geographical expansion, and anticipates significant reductions in capital
spending through 1999.
The Company's Series A redeemable convertible preferred stock, par value
$100,752,000, is convertible at any time at the option of the holder into
5,800,000 newly issued shares of common shares of the Company. The holder may
instead redeem the issue for cash at par on June 30, 2001. The Company presently
anticipates that it would fund such a redemption from operating cash flow,
borrowings or other financing sources.
YEAR 2000 COMPLIANCE
The Company is in the process of addressing the Year 2000 problem. Critical
centralized information systems (software and hardware) are either being
upgraded or enhanced for Year 2000 compliance. Non-information technology, such
as embedded chip technology used in the Company's manufacturing systems, is also
being reviewed to determine if upgrades or enhancements are necessary. The
Company expects to complete this review process by mid-1999. The Company is also
surveying key customers and suppliers to determine the status of their Year 2000
compliance programs. The survey process is scheduled for completion by year-end
1998.
The Company believes the Year 2000 problem does not pose a significant
operational or financial risk. The Company has a broad base of customers with no
customer comprising more than 10% of net sales. The Company also has a broad
base of suppliers with multiple sourcing possibilities for all purchases.
Nevertheless, the Company is in the process of developing appropriate
contingency plans in an attempt to minimize the effect of any issues that may
arise from the failure of the Company, its suppliers or its customers to
complete Year 2000 compliance work. The Company believes that it will complete
the contingency plan development by mid-1999.
17
<PAGE> 18
The Company's assessment of the Year 2000 problem is based upon certain
assumptions that may later prove to be inaccurate. The greatest potential risks
relate to those situations beyond the Company's control, particularly the
inability of suppliers and customers to be Year 2000 compliant, causing
disruptions in the manufacturing and distribution network. Additionally,
customer's inability to pay in a timely manner and the disruption of electronic
invoicing and payment systems could cause financial risk and losses to the
Company. The Company expects to be able to more fully enumerate the operational
and financial risks from the Year 2000 problem upon completion of its review
process.
The total cost for the Company's Year 2000 initiatives is estimated to be
$6,000,000, of which $3,500,000 will be incurred during 1998 and $2,500,000 will
be incurred during 1999. The majority of these costs relate to the accelerated
replacement of capitalized hardware and software systems. The Company's cost
estimates do not include costs that may result from the failure of third parties
to be Year 2000 compliant or the costs to implement contingency plans. The
Company does not expect the cost of Year 2000 compliance to have a material
impact on the Company's financial position, results of operations or cash flows.
18
<PAGE> 19
PART II: OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On August 31, 1998, the Company filed an action against Ben & Jerry's
Homemade, Inc. (Ben & Jerry's) in the United States District Court,
Northern District of California, seeking among other things declaratory
and injunctive relief and damages. The Company believes that it has the
right to exclusively distribute Ben & Jerry's products through August
1999 under the terms of the distribution agreement between the Company
and Ben & Jerry's dated January 6, 1987, as amended (the Distribution
Agreement). Ben & Jerry's has asserted that the Company has rights to
exclusive distribution only until April 15, 1999. The Company intends to
vigorously defend its rights under the Distribution Agreement. While
management believes that the resolution of this action will not have a
material adverse effect on the Company's consolidated financial
statements, the ultimate outcome of this matter cannot be presently
determined.
ITEM 5. OTHER INFORMATION
Discretionary Proxy Voting Authority/Shareholder Proposals
Recently, the Securities and Exchange Commission adopted a new proxy
rule (Rule 14a-4(c)(i) under the Securities Exchange Act of 1934) which
specifies the circumstances in which a company's annual meeting proxies
executed by its shareholders may confer discretionary authority on the
persons named in the proxies to vote on shareholder proposals which may
be presented at the annual meeting. Under this new rule, such proxies
may confer discretionary authority to vote on shareholder proposals
presented at any annual meeting if: (i) the company did not have notice
of the shareholder proposal at least 45 days before the date on which
the company first mailed its proxy materials for the prior year's annual
meeting, and (ii) a specific statement to that effect is made in the
company's proxy statement or form of proxy.
The Company intends to avail itself of the provisions of Rule
14a-4(c)(i), and accordingly, with respect to the Company's 1999 annual
meeting, the Company proxies executed by shareholders will be deemed to
have granted discretionary authority to vote on any shareholder
proposals presented at the 1999 annual meeting of which the Company has
not received written notice (addressed to the Company at its principal
executive offices set forth on the cover of this Report, Attention:
Corporate Secretary) by February 19,1999.
The foregoing has no affect on the requirement (as set forth in the
Company's proxy statement for its May 6, 1998 Annual Meeting) that in
order to be eligible for inclusion in the Company's proxy statement
relating to its 1999 Annual Meeting, shareholder proposals must be
received by the Company not later than November 26, 1998.
19
<PAGE> 20
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a. No reports on Form 8-K were filed by the Company during the quarter
ended September 26, 1998.
b. Exhibits
<TABLE>
<CAPTION>
Exhibit No. Description
- ----------- -----------
<S> <C>
10.1 First Amendment to Amended and Restated Credit Agreement
dated as of November 3, 1998 and effective as of September
25, 1998, among Dreyer's Grand Ice Cream, Inc. and Bank of
America National Trust and Savings Association, as a Bank
and as Agent, ABN-AMRO N.V., San Francisco International
Branch as a Bank and as Co-Agent, Credit Suisse First
Boston and Union Bank of California, N.A. (collectively
the "Banks"), amending the Amended and Restated Credit
Agreement dated as of March 27, 1998 among Dreyer's Grand
Ice Cream, Inc. and the Banks.
27 Financial Data Schedule.
</TABLE>
20
<PAGE> 21
SIGNATURES
Pursuant to the requirements 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.
DREYER'S GRAND ICE CREAM, INC.
Dated: November 10, 1998 By: /s/ Timothy F. Kahn
------------------------------------
Timothy F. Kahn
Vice President - Finance and
Administration and Chief Financial
Officer
21
<PAGE> 22
EXHIBIT INDEX
-------------
<TABLE>
<CAPTION>
Exhibit No. Description
- ----------- -----------
<S> <C>
10.1 First Amendment to Amended and Restated Credit Agreement
dated as of November 3, 1998 and effective as of September
25, 1998, among Dreyer's Grand Ice Cream, Inc. and Bank of
America National Trust and Savings Association, as a Bank
and as Agent, ABN-AMRO N.V., San Francisco International
Branch as a Bank and as Co-Agent, Credit Suisse First
Boston and Union Bank of California, N.A. (collectively
the "Banks"), amending the Amended and Restated Credit
Agreement dated as of March 27, 1998 among Dreyer's Grand
Ice Cream, Inc. and the Banks.
27 Financial Data Schedule.
</TABLE>
22
<PAGE> 1
EXHIBIT 10.1
FIRST AMENDMENT TO
AMENDED AND RESTATED CREDIT AGREEMENT
THIS FIRST AMENDMENT TO AMENDED AND RESTATED CREDIT AGREEMENT (the
"Amendment"), dated as of November 3, 1998, is entered into by and among
Dreyer's Grand Ice Cream, Inc. (the "Company"), the several financial
institutions party to the Credit Agreement (collectively, the "Banks"), ABN-AMRO
Bank N.V., San Francisco International Branch as Co-Agent and Bank of America
National Trust and Savings Association, as agent for itself and the Banks (the
"Agent").
RECITALS
A. The Company, Banks, and Agent are parties to an Amended and
Restated Credit Agreement dated as of March 27, 1998, (the "Credit Agreement")
pursuant to which the Banks have extended certain credit facilities to the
Company.
B. The Company has requested that the Banks agree to certain
amendments of the Credit Agreement.
C. The Majority Banks are willing to amend the Credit Agreement
subject to the terms and conditions of this Amendment.
NOW, THEREFORE, for valuable consideration, the receipt and adequacy
of which are hereby acknowledged, the parties hereto hereby agree as follows:
1. Defined Terms. Unless otherwise defined herein, capitalized terms
used herein shall have the meanings, if any, assigned to them in the Credit
Agreement.
2. Amendments to Credit Agreement.
(a) Section 1.01 of the Credit Agreement is amended as follows:
(1) The following definition of "Adjusted EBITDA" is
inserted in the proper alphabetical place:
"Adjusted EBITDA" of the Company means the Company's EBITDA
computed on a rolling four quarter basis, adding back amounts related
to non-recurring charges taken in the third and fourth quarter of
1998, not to exceed $70,000,000 (collectively, the "Add-back
Charges"). An amount of $13,000,000 of Add-back Charges shall be added
back in the calculation of Adjusted EBITDA for the third quarter of
1998, an amount equal to the total Add-back Charges shall be added
back for the fourth quarter of 1998 and the first, second, and third
quarter of 1999 calculations of Adjusted EBITDA, with no amounts added
back for the fourth quarter of 1999 and thereafter. For the avoidance
of doubt, it is understood and agreed that in each calculation of
Adjusted EBITDA, the aggregate Add-back Charges added back for such
calculation shall not exceed an aggregate amount of $70,000,000.
1
<PAGE> 2
(2) The definition of "Applicable Margin" is revised in its
entirety to provide as follows:
"Applicable Margin" means for each period from the date which is
three Business Days after the date the Agent receives a Compliance
Certificate pursuant to Section 6.02(b) (the "Current Compliance
Certificate") through the date which is two Business Days after the
Agent receives the next such Compliance Certificate, and for each Loan
made, converted, or continued during such period, if the Compliance
Certificate shows the Company's Funded Debt/Adjusted EBITDA Ratio is:
<TABLE>
<CAPTION>
2.50 or above and 3.00 or above and 3.50 or above and
For Each Below 2.50 below 3.00 3.50 Below 4.00 Below
<S> <C> <C> <C> <C>
Offshore Rate Loan 0.750% 0.875% 1.000% 1.125%
Base Rate Loan 0.000% 0.000% 0.000% 0.000%
Same Day Rate Loan 0.500% 0.625% 0.750% 0.875%
</TABLE>
<TABLE>
<CAPTION>
4.00 or above and 4.25 or above and 5.00 or above and 5.50 or above
For Each below 4.25 below 5.00 below 5.50
<S> <C> <C> <C> <C>
Offshore Rate Loan 1.375% 2.000% 2.250 2.750%
Base Rate Loan 0.000% 0.000% 0.000% 0.000%
Same Day Rate Loan 1.000% 1.000% 1.000% 1.000%
</TABLE>
(3) The definition of "Arranger" is modified by replacing
"BancAmerica Robertson Stephens" with "NationsBank Montgomery Securities LLC".
(4) The definition of "Funded Debt/EBITDA Ratio is amended
in its entirety to provide as follows:
"Funded Debt/Adjusted EBITDA Ratio" of any Person means the ratio
of such Person's Funded debt to its Adjusted EBITDA.
(5) The definition of "Offshore Rate" is modified by
replacing "applicable Lending Office" with "main London branch".
(b) Section 2.09(c)(1)(B) of the Credit Agreement is amended as
follows:
(1) By replacing "Company's Funded Debt/EBITDA Ratio" with
"Company's Funded Debt/Adjusted EBITDA Ratio".
2
<PAGE> 3
(2) By replacing the table in this Section 2.09(c)(1)(B)
with the following table:
<TABLE>
<S> <C>
Below 3.00 0.250% per annum
3.00 or above but below 4.25 0.375% per annum
4.25 or above 0.500% per annum
</TABLE>
(c) Section 7.02 of the Credit Agreement is amended as follows:
(1) By re-lettering subsection (f) of this Section to (g);
and
(2) By adding the following as a new subsection (f):
(f) the sale, assignment, lease, conveyance, transfer, or other
disposition by the Company, of the following assets:
(1) any interest in the Company's Lindenhurst and
Gaithersburg Maryland facilities including, without limitation, all assets
related thereto; and
(2) any interests in the following Wholly-Owned
Subsidiaries: Grand Soft Equipment Company and Grand Soft Capital Company
including, without limitation, all assets related thereto.
(d) Section 7.13 of the Credit Agreement is amended in its
entirety to provide as follows:
7.13 Consolidated Net Worth. The Company shall not permit its
Consolidated Net Worth at any time during any fiscal quarter to be
less than the sum of:
(i) $140,000,000; plus
(ii) 75% of the Company's consolidated net income for each
calendar year beginning with the calendar year ending on December 31,
1999 (with no deduction for losses); plus
(iii) 75% of Net Issuance Proceeds of any stock offerings issued
or subordinated debt incurred since March 27, 1998.
(e) Section 7.14 of the Credit Agreement is amended in its
entirety to provide as follows:
7.14 Minimum Fixed Charge Coverage Ratio.
(a) The Company shall not permit its Fixed Charge Coverage Ratio:
3
<PAGE> 4
<TABLE>
<S> <C>
For the period consisting of the four consecutive
To be less than: fiscal quarters ending on the last day of its:
2.00 Third fiscal quarter of 1998
1.70 Fourth fiscal quarter of 1998 and first and second
fiscal quarters of 1999
2.25 Third fiscal quarter of 1999 and each fiscal
quarter thereafter
</TABLE>
(b) For purposes of this Section, Fixed Charge Coverage Ratio
means the ratio of "A" to "B" where:
"A" means the sum of Adjusted EBITDA plus current operating lease
expenses; and
"B" means interest expense plus current operating lease expenses;
in all cases computed on a consolidated basis and measured at the end
of the relevant fiscal quarter for the four successive fiscal quarters ending on
the last day of such fiscal quarter.
(f) Section 7.15 of the Credit Agreement is amended in its
entirety to provide as follows:
7.15 Funded Debt/Adjusted EBITDA Ratio.
(a) The Company shall not permit its Funded Debt/Adjusted EBITDA Ratio
to be greater than:
(1) 4.50 for its third fiscal quarter in 1998;
(2) 6.00 for its fourth fiscal quarter in 1998;
(3) 5.50 for its first fiscal quarter in 1999;
(4) 5.00 for its second fiscal quarter in 1999;
(5) 4.00 for its third and fourth fiscal quarters in 1999; and
(6) 3.50 for its first fiscal quarter in 2000 and each fiscal
quarter thereafter.
(g) Article VII of the Credit Agreement is amended by adding the
following as new Section 7.19:
7.19 Senior Notes. Prior to December 31, 2000, the Company shall not
amend any Senior Note or any indenture or other agreement pursuant to which any
Senior Note is issued or otherwise relating to the Senior Note if such amendment
changes (a) the final maturity date of such Senior Note and/or (b) the repayment
schedule of such Senior Note; provided that the Banks shall not unreasonably
withhold a waiver of this Section.
4
<PAGE> 5
(h) Schedule 2 to the Compliance Certificate is replaced with
Exhibit 1 to this Amendment.
3. Representations and Warranties. The Company hereby represents and
warrants to the Agent and the Banks as follows:
(a) No Default or Event of Default has occurred and is
continuing.
(b) The execution, delivery and performance by the Company of
this Amendment have been duly authorized by all necessary corporate and other
action and do not and will not require any registration with, consent or
approval of, notice to or action by, any Person (including any Governmental
Authority) in order to be effective and enforceable. The Credit Agreement as
amended by this Amendment constitutes the legal, valid and binding obligations
of the Company, enforceable against it in accordance with its respective terms[,
except as enforceability may be limited by applicable bankruptcy, insolvency, or
similar laws affecting the enforcement of creditors' rights generally or by
equitable principles relating to enforceability.
(c) All representations and warranties of the Company contained
in the Credit Agreement are true and correct on and as of the date hereof except
to the extent such representations and warranties expressly refer to an earlier
date, in which case they are true and correct as of such earlier date.
(d) The Company is entering into this Amendment on the basis of
its own investigation and for its own reasons, without reliance upon the Agent
and the Banks or any other Person.
4. Effective Date. This Amendment will become effective as of
September 25, 1998 provided that each of the following conditions precedent is
satisfied on or before November 3, 1998:
(a) The Agent has received from the Company and the Majority
Banks a duly executed original (or, if elected by the Agent, an executed
facsimile copy) of this Amendment.
(b) The Agent has received from the Company a copy of a
resolution passed by the board of directors of such corporation, certified by
the Secretary or an Assistant Secretary of such corporation as being in full
force and effect, authorizing the execution, delivery and performance of this
Amendment.
(c) The Agent and the Banks have received from the Company the
amount of One Hundred Seventy Five Thousand Dollars ($175,000), representing
payment in full of a non-refundable amendment fee, which amount the Company
hereby covenants to pay to the Agent on demand for the account of the Banks
consenting to this Amendment.
(d) The Agent has received from the Company for the sole account
of the Agent a non-refundable fee in the amount specified in a separate
agreement between the Agent and the company.
5
<PAGE> 6
5. Reservation of Rights. The Company acknowledges and agrees that the
execution and delivery by the Agent and the Banks of this Amendment shall not be
deemed to create a course of dealing or otherwise obligate the Agent or the
Banks to enter into amendments under the same, similar or any other
circumstances in the future.
6. Miscellaneous.
(a) Except as herein expressly amended, all terms, covenants and
provisions of the Credit Agreement are and shall remain in full force and effect
and all references therein and in the other Loan Documents to such Credit
Agreement shall henceforth refer to the Credit Agreement as amended by this
Amendment. This Amendment shall be deemed incorporated into, and a part of, the
Credit Agreement. This Amendment is a Loan Document.
(b) This Amendment shall be binding upon and inure to the benefit
of the parties hereto and to the Credit Agreement and their respective
successors and assigns. No third party beneficiaries are intended in connection
with this Amendment.
(c) This Amendment shall be governed by and construed in
accordance with the law of the State of California.
(d) This Amendment may be executed in any number of counterparts,
each of which shall be deemed an original, but all such counterparts together
shall constitute but one and the same instrument. Each of the parties hereto
understands and agrees that this document (and any other document required
herein) may be delivered by any party thereto either in the form of an executed
original or an executed original sent by facsimile transmission to be followed
promptly by mailing of a hard copy original, and that receipt by the Agent of a
facsimile transmitted document purportedly bearing the signature of a Bank or
the Company shall bind such Bank or the Company, respectively, with the same
force and effect as the delivery of a hard copy original. Any failure by the
Agent to receive the hard copy executed original of such document shall not
diminish the binding effect of receipt of the facsimile transmitted executed
original of such document of the party whose hard copy page was not received by
the Agent, and the Agent is hereby authorized to make sufficient photocopies
thereof to assemble complete counterparty documents.
(e) This Amendment supersedes all prior drafts and communications
with respect thereto. This Amendment may not be amended except in accordance
with the provisions of Section 10.01 of the Credit Agreement.
(f) If any term or provision of this Amendment shall be deemed
prohibited by or invalid under any applicable law, such provision shall be
invalidated without affecting the remaining provisions of this Amendment or the
Credit Agreement, respectively.
The rest of this page is deliberately left blank
6
<PAGE> 7
IN WITNESS WHEREOF, the parties hereto have executed and delivered
this Amendment as of the date first above written.
DREYER'S GRAND ICE CREAM, INC.
By:_________________________________
Name:_______________________________
Title:______________________________
By:_________________________________
Name:_______________________________
Title:______________________________
BANK OF AMERICA NATIONAL TRUST AND
SAVINGS ASSOCIATION, as Agent and as
a Bank
By:_________________________________
Name:_______________________________
Title:______________________________
ABN AMRO BANK N.V., as Co-Agent and
as a Bank
By:_________________________________
Name:_______________________________
Title:______________________________
By:_________________________________
Name:_______________________________
Title:______________________________
CREDIT SUISSE FIRST BOSTON
By:_________________________________
Name:_______________________________
Title:______________________________
By:_________________________________
Name:_______________________________
Title:______________________________
7
Signature page for
First Amendment to Amended and Restated Credit Agreement
Dreyer's Grand Ice Cream
November 3, 1998
<PAGE> 8
UNION BANK OF CALIFORNIA, N.A.
By:_________________________________
Name:_______________________________
Title:______________________________
8
Signature page for
First Amendment to Amended and Restated Credit Agreement
Dreyer's Grand Ice Cream
November 3, 1998
<PAGE> 9
Exhibit 1 to First Amendment to Amended and Restated Credit Agreement
Schedule 2 to the Compliance Certificate
Financial Covenant Analyses and Information
Date:_________________________
For the fiscal quarter ended:_________________________
Schedule 2
to the Compliance Certificate
Financial Covenant Analyses and Information
SECTION 7.01 - LIMITATION ON LIENS
1. Section 7.01(g) Aggregate amount of judgment or judicial attachment liens and
falling within this Section:
Permitted: $5,000,000 Actual: $_________
2. Section 7.01(i) Aggregate principal amount secured by Liens on assets of
corporations which became Subsidiaries after the date of the Credit Agreement
and falling within this Section:
Permitted: $10,000,000 Actual: $_________
3. Section 7.01(j) Principal amount of indebtedness secured by purchase money
security interests in property held by the Company and its Subsidiaries in the
ordinary course of business and falling within this Section:
Permitted: $10,000,000 Actual: $_________
SECTION 7.02 DISPOSITION OF ASSETS
Section 7.02(g) Dispositions falling within this Section:
Permitted: $5,000,000 Actual: $_________
SECTION 7.04 LOANS AND INVESTMENTS
1. Section 7.04(d)(1)(B) Investments made during the period from the date of
this Agreement through the last day of the fiscal quarter/year covered by this
Compliance Certificate:
Aggregate amount permitted for the term of this Agreement: $60,000,000
Actual: $_________
2. Section 7.04(d)(2) Investments falling within this clause:
Aggregate amount permitted for the term of this Agreement: $15,000,000
Actual: $_________
S-1
<PAGE> 10
3. Section 7.04(d)(3) Aggregate amount of investments under Section 7.04(d)(1)
plus aggregate amount of investments under Section 7.04(d)(2):
Permitted: $60,000,000 Actual: $_________
SECTION 7.05 LIMITATION ON INDEBTEDNESS
Section 7.05(e) Aggregate amount under Section 7.05(e) [indebtedness
secured by Liens permitted by subSection 7.01(i) and (j)]
Permitted: $20,000,000 Actual: $_________
SECTION 7.08 CONTINGENT OBLIGATIONS
1. Section 7.08(d) Aggregate amount of Contingent Obligations of Grand Soft
Capital Company and Grand Soft Equipment Company with respect to leases
sold or entered into pursuant to the Grand Soft Program:
Permitted: $10,000,000 Actual: $_________
Company's Guaranty Obligations with respect to such Contingent Obligations:
Permitted: $10,000,000 Actual: $_________
2. Section 7.08(e) Guaranty Obligations falling within this Section:
Permitted: $5,000,000 Actual: $_________
SECTION 7.10 LEASE OBLIGATIONS
1. Section 7.10(d). Aggregate amount of rent and other charges to be paid
under operating leases falling under Section 7.10(d) (without discounting
to present value and without regard to any options to extend):
Permitted: $10,000,000 Actual: $_________
2. Section 7.10(e). Aggregate amount of rent and other charges to be paid
under leases falling under Section 7.01(e) (without discounting to present
value and without regard to any options to extend):
Permitted: $5,000,000 Actual: $_________
3. Section 7.10(f). Capital leases falling under Section 7.10(f):
Permitted: $15,000,000 Actual: $_________
SECTION 7.11 RESTRICTED PAYMENTS
Dividend payments made in fiscal year ____:
Permitted: $_________ Actual: $_________
S-2
<PAGE> 11
SECTION 7.13 CONSOLIDATED NET WORTH
<TABLE>
<S> <C>
1. (a) Base amount $140,000,000
(b) 75% of the Company's consolidated net income for each
calendar year beginning with the calendar year ending on December
31, 1999 (with no deduction for losses) $___________
(c) 75% of Net Issuance Proceeds of any stock offerings
issued or subordinated debt incurred since March 27, 1998 $___________
2. Sum of 1(a), (b), and (c) or minimum required Consolidated
Net Worth $___________
3. Actual Consolidated Net Worth $___________
</TABLE>
SECTION 7.14 MINIMUM FIXED CHARGE COVERAGE RATIO
<TABLE>
<CAPTION>
Minimum Fixed
Charge Coverage Ratio For the period consisting of the four consecutive fiscal quarters
cannot be less than: ending on the last day of its:
<S> <C>
2.00 Third fiscal quarter of 1998
1.70 Fourth fiscal quarter of 1998 and first and second fiscal
quarters of 1999
2.25 Third fiscal quarter of 1999 and each fiscal quarter thereafter
</TABLE>
The following computations are to be made for the period consisting of four
consecutive fiscal quarters ending on the last day of the fiscal quarter first
above written on page 1 of this Schedule.
<TABLE>
<S> <C>
1. EBITDA $__________
2. Add-back Charges $__________
Add-back Charges cannot exceed $70,000,000 in
the aggregate. $13.000,000 in Add-back Charges shall be added for the
third quarter of 1998. Add-back Charges shall be added for the fourth
quarter of 1998 and for the first, second. and third quarters of 1999.
No Add-back Charges shall be entered for the fourth fiscal quarter of
1999 and any fiscal quarter thereafter.
3. Current operating lease expense $__________
4. Sum of 1 + 2 + 3 $__________
5. Interest expense $__________
6. Current operating lease expense $__________
7. Sum of 5 + 6 $__________
</TABLE>
S-3
<PAGE> 12
<TABLE>
<S> <C>
8. Ratio of 4 to 7 $__________
9. Allowed $__________
</TABLE>
SECTION 7.15 FUNDED DEBT/ADJUSTED EBITDA RATIO
Funded Debt/Adjusted EBITDA Ratio cannot be greater than:
(1) 4.50 for its third fiscal quarter in 1998;
(2) 6.00 for its fourth fiscal quarter in 1998;
(3) 5.50 for its first fiscal quarter in 1999;
(4) 5.00 for its second fiscal quarter in 1999;
(5) 4.00 for its third and fourth fiscal quarters in 1999; and
(6) 3.50 for its first fiscal quarter in 2000 and each fiscal
quarter thereafter.
<TABLE>
<S> <C>
1. Funded Debt (with adjustments permitted under definition of
Funded Debt) $__________
2. Adjusted EBITDA (the sum of item 1 plus item 2 in Section 7.14
calculations) $__________
3. Ratio of 1 to 2: __________
4. Permitted Ratio: __________
</TABLE>
S-4
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET AND THE CONSOLIDATED STATEMENT OF OPERATIONS AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-26-1998
<PERIOD-START> DEC-28-1997
<PERIOD-END> SEP-26-1998
<CASH> 1,354
<SECURITIES> 0
<RECEIVABLES> 111,863
<ALLOWANCES> (5,740)
<INVENTORY> 52,332
<CURRENT-ASSETS> 194,547
<PP&E> 374,386
<DEPRECIATION> (133,994)
<TOTAL-ASSETS> 531,834
<CURRENT-LIABILITIES> 117,231
<BONDS> 0
99,549
0
<COMMON> 27,312
<OTHER-SE> 76,324
<TOTAL-LIABILITY-AND-EQUITY> 531,834
<SALES> 798,327
<TOTAL-REVENUES> 801,285
<CGS> 635,657
<TOTAL-COSTS> 635,657
<OTHER-EXPENSES> 162,808
<LOSS-PROVISION> 5,618
<INTEREST-EXPENSE> 9,656
<INCOME-PRETAX> (11,726)
<INCOME-TAX> (4,655)
<INCOME-CONTINUING> (7,071)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (7,071)
<EPS-PRIMARY> (.29)<F1>
<EPS-DILUTED> (.29)
<FN>
<F1>FOR PURPOSES OF THIS EXHIBIT, PRIMARY MEANS BASIC.
</FN>
</TABLE>
