<PAGE> 1
FORM 10-Q
UNITED STATES
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 25, 1999
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 4, 1999
----------------
<S> <C>
Common stock 27,706,000
</TABLE>
<PAGE> 2
PART I: FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
DREYER'S GRAND ICE CREAM, INC.
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
Sept. 25, 1999 Dec. 26, 1998
-------------- -------------
(Unaudited)
<S> <C> <C>
($ in thousands, except per share amounts)
Assets
Current Assets:
Cash and cash equivalents $ 2,347 $ 1,171
Trade accounts receivable, net of allowance for doubtful
accounts of $5,863 in 1999 and $5,710 in 1998 111,267 83,053
Other accounts receivable 16,434 29,165
Inventories 55,271 49,472
Prepaid expenses and other 18,542 13,271
--------- ---------
Total current assets 203,861 176,132
Property, plant and equipment, net 199,423 207,772
Goodwill and distribution rights, net 66,332 67,226
Other assets 10,874 12,050
--------- ---------
Total assets $ 480,490 $ 463,180
========= =========
Liabilities and Stockholders' Equity
Current Liabilities:
Accounts payable and accrued liabilities $ 114,049 $ 87,273
Accrued payroll and employee benefits 22,056 19,545
Current portion of long-term debt 20,081 8,255
--------- ---------
Total current liabilities 156,186 115,073
Long-term debt, less current portion 125,457 169,781
Deferred income taxes 21,933 16,039
--------- ---------
Total liabilities 303,576 300,893
--------- ---------
Commitments and contingencies
Redeemable convertible preferred stock, $1 par
value - 1,008,000 shares authorized; 1,008,000
shares issued and outstanding in 1999 and 1998 99,972 99,654
--------- ---------
Stockholders' Equity:
Preferred stock, $1 par value - 8,992,000 shares authorized; no shares
issued or outstanding in 1999 and 1998
Common stock, $1 par value - 60,000,000 shares authorized; 27,704,000
shares and 27,312,000 shares issued and outstanding in
1999 and 1998, respectively 27,704 27,312
Capital in excess of par 50,925 46,722
Accumulated deficit (1,687) (11,401)
--------- ---------
Total stockholders' equity 76,942 62,633
--------- ---------
Total liabilities and stockholders' equity $ 480,490 $ 463,180
========= =========
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
2
<PAGE> 3
DREYER'S GRAND ICE CREAM, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Thirteen Weeks Ended Thirty-nine Weeks Ended
--------------------------- ---------------------------
Sept. 25, Sept. 26, Sept. 25, Sept. 26,
1999 1998 1999 1998
---------- --------- --------- ----------
($ in thousands, except per share amounts)
<S> <C> <C> <C> <C>
Revenues:
Sales $322,410 $ 302,972 $857,657 $ 798,327
Other income 1,034 1,321 1,875 2,958
-------- --------- -------- ---------
323,444 304,293 859,532 801,285
-------- --------- -------- ---------
Costs and expenses:
Cost of goods sold 236,444 238,918 654,721 635,657
Selling, general and administrative 70,051 66,921 173,577 163,041
Impairment of long-lived assets 4,657 4,657
Interest, net of amounts capitalized 2,604 3,716 8,851 9,656
-------- --------- -------- ---------
309,099 314,212 837,149 813,011
-------- --------- -------- ---------
Income (loss) before income tax provision
(benefit) and cumulative effect of change in
accounting principle 14,345 (9,919) 22,383 (11,726)
Income tax provision (benefit) 5,609 (3,938) 8,752 (4,655)
-------- --------- -------- ---------
Income (loss) before cumulative effect of
change in accounting principle 8,736 (5,981) 13,631 (7,071)
Cumulative effect of change in
accounting principle 595
-------- --------- -------- ---------
Net income (loss) 8,736 (5,981) 13,036 (7,071)
Accretion of preferred stock to redemption value 106 106 318 318
Preferred stock dividends 174 174 522 522
-------- --------- -------- ---------
Net income (loss) available to common stockholders $ 8,456 $ (6,261) $ 12,196 $ (7,911)
======== ========= ======== =========
Per common share-basic:
Income (loss) available to common stockholders
before cumulative effect of change in
accounting principle $ .31 $ (.23) $ .46 $ (.29)
Cumulative effect of change in accounting principle .02
-------- --------- -------- ---------
Net income (loss) available to common stockholders $ .31 $ (.23) $ .44 $ (.29)
======== ========= ======== =========
Per common share-diluted:
Income (loss) available to common stockholders
before cumulative effect of change in
accounting principle $ .26 $ (.23) $ .41 $ (.29)
Cumulative effect of change in accounting principle .02
-------- --------- -------- ---------
Net income (loss) available to common stockholders $ .26 $ (.23) $ .39 $ (.29)
======== ========= ======== =========
Dividends per common share $ .03 $ .00 $ .09 $ .06
======== ========= ======== =========
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
3
<PAGE> 4
DREYER'S GRAND ICE CREAM, INC.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
(Unaudited)
<TABLE>
<CAPTION>
Retained
Common Stock Earnings
--------------------- Capital In (Accumulated
Shares Amount Excess of Par Deficit) Total
------- -------- ------------ ------------ --------
(In thousands)
<S> <C> <C> <C> <C> <C>
Balances 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)
Issuance of common stock under employee stock plans 297 297 3,677 3,974
------- -------- -------- -------- --------
Balances at September 26, 1998 27,312 $ 27,312 $ 46,367 $ 29,957 $103,636
======= ======== ======== ======== ========
Balances at December 26, 1998 27,312 $ 27,312 $ 46,722 $(11,401) $ 62,633
Net income 13,036 13,036
Accretion of preferred stock to redemption value (318) (318)
Preferred stock dividends declared (522) (522)
Common stock dividends declared (2,482) (2,482)
Repurchases and retirements of common stock (19) (19) (216) (235)
Issuance of common stock under employee stock plans 411 411 4,419 4,830
------- -------- -------- -------- --------
Balances at September 25, 1999 27,704 $ 27,704 $ 50,925 $ (1,687) $ 76,942
======= ======== ======== ======== ========
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
4
<PAGE> 5
DREYER'S GRAND ICE CREAM, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Thirty-nine Weeks Ended
-------------------------------------------
Sept. 25, 1999 Sept. 26, 1998
------------------ ----------------
(In thousands)
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 13,036 $ (7,071)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization 26,457 26,632
Reserve for independent distributor receivable 5,000
Impairment of long-lived assets 4,657
Deferred income taxes 5,894 (1,274)
Cumulative effect of change in accounting principle 595
Changes in assets and liabilities, net of amounts acquired:
Trade accounts receivable (28,214) (29,112)
Other accounts receivable 12,731 (9,564)
Inventories (5,799) (2,612)
Prepaid expenses and other (5,826) 2,463
Accounts payable and accrued liabilities 26,762 37,040
Accrued payroll and employee benefits 2,511 (6,720)
--------- --------
48,147 19,439
--------- --------
Cash flows from investing activities:
Acquisition of property, plant and equipment (16,069) (31,563)
Retirement of property, plant and equipment 915 470
Increase in goodwill and distribution rights (1,000) (311)
Increase in other assets 76 (674)
--------- --------
(16,078) (32,078)
--------- --------
Cash flows from financing activities:
Proceeds from long-term debt 16,900
Repayments of long-term debt (32,498) (7,413)
Issuance of common stock under employee stock plans 4,830 3,974
Repurchases and retirements of common stock (235) (137)
Cash dividends paid (2,990) (2,957)
--------- --------
(30,893) 10,367
--------- --------
Increase (decrease) in cash and cash equivalents 1,176 (2,272)
Cash and cash equivalents, beginning of period 1,171 3,626
--------- --------
Cash and cash equivalents, end of period $ 2,347 $ 1,354
========= ========
Supplemental Cash Flow Information
Cash paid during the period for:
Interest, net of amounts capitalized $ 8,183 $ 8,768
========= ========
Income taxes, net of refunds $ 2,478 $ 177
========= ========
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
5
<PAGE> 6
DREYER'S GRAND ICE CREAM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1 - General
Dreyer's Grand Ice Cream, Inc. and its subsidiaries (the Company) is a single
segment industry company engaged in 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 Company accounts for its operations geographically for management
reporting purposes. These geographic segments have been aggregated for financial
reporting purposes due to similarities in the economic characteristics of the
geographic segments and the nature of the products, production processes,
customer types and distribution methods throughout the United States.
The consolidated financial statements for each of the 13-week and 39-week
periods ended September 25, 1999 and September 26, 1998 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 interim 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 26, 1998,
appearing in the Company's 1998 Annual Report to Stockholders.
NOTE 2 - Preoperating Costs
In the first quarter of 1999, the Company adopted Statement of Position 98-5,
"Reporting on the Costs of Start-Up Activities" (SOP 98-5). SOP 98-5 requires
that the costs of start-up activities, including preoperating costs, be expensed
as incurred and that previously unamortized preoperating costs be written off
and treated as a cumulative effect of a change in accounting principle. As a
result of adopting SOP 98-5, the Company recorded an after-tax charge of
$595,000, or $.02 per common share, in the first quarter of 1999.
NOTE 3 - Net Income (Loss) Per Common Share
Under Statement of Financial Accounting Standards No. 128, "Earnings per Share",
the numerator for basic net income (loss) per share is net income (loss)
available to common stockholders. The denominator for basic net income (loss)
per share is the weighted average number of common shares outstanding. The
numerator for diluted net income (loss) per share includes net income (loss)
available to common stockholders, plus the effect of assumed conversions that
are dilutive. The denominator for diluted net income (loss) per share includes
the weighted average number of shares outstanding, plus the effect of
potentially dilutive securities which include stock options, stock warrants and
redeemable convertible preferred stock.
6
<PAGE> 7
Net income (loss) per common share is computed as follows:
<TABLE>
<CAPTION>
Thirteen Weeks Ended Thirty-nine Weeks Ended
----------------------------- -----------------------------
Sept. 25,1999 Sept. 26 ,1998 Sept. 25, 1999 Sept. 26, 1998
------------- -------------- -------------- --------------
(In thousands, except per share amounts)
<S> <C> <C> <C> <C>
Net income (loss) available to common
stockholders - basic $ 8,456 $(6,261) $12,196 $(7,911)
Add: preferred dividends and accretion 280 840
------- ------- ------- -------
Net income (loss) available to common
stockholders - diluted $ 8,736 $(6,261) $13,036 $(7,911)
======= ======= ======= =======
Weighted-average shares-basic 27,622 27,247 27,506 27,149
Dilutive effect of options 703 330
Dilutive effect of preferred stock 5,800 5,800
------- ------- ------- -------
Weighted-average shares-diluted 34,125 27,247 33,636 27,149
======= ======= ======= =======
Net income (loss) per common share:
Basic $ .31 $ (.23) $ .44 $ (.29)
======= ======= ======= =======
Diluted $ .26 $ (.23) $ .39 $ (.29)
======= ======= ======= =======
</TABLE>
Anti-dilutive securities
Potentially dilutive securities are excluded from the calculations of diluted
net income (loss) per common share if their inclusion would have an
anti-dilutive effect. These anti-dilutive securities, stated in equivalent
shares of common stock, consisted of the following:
<TABLE>
<CAPTION>
Thirteen Weeks Ended Thirty-nine Weeks Ended
----------------------------------- -----------------------------------
Sept. 25, 1999 Sept. 26, 1998 Sept. 25, 1999 Sept. 26, 1998
-------------- -------------- -------------- --------------
(In thousands)
<S> <C> <C> <C> <C>
Stock options 681 4,403 2,297 4,403
Stock warrants 2,000 2,000 2,000
Preferred stock 5,800 5,800
</TABLE>
Pursuant to a 1994 equity transaction, an affiliate of Nestle' USA, Inc.
purchased 6,000,000 newly issued shares of common stock, and warrants to
purchase 4,000,000 shares at an exercise price of $16 per share. Warrants for
2,000,000 shares expired unexercised on June 14, 1997. Warrants for the
remaining 2,000,000 shares expired unexercised on June 14, 1999.
In May 1999, stockholders approved an amendment to the Company's Stock Option
Plan (1993) to increase the number of shares reserved for issuance thereunder
from 4,400,000 to 6,400,000.
NOTE 4 - Status of Restructuring and Other Actions
During 1998, as a result of higher dairy raw material costs, a decline in
"better for you" volumes, and a reduction in future sales of Ben & Jerry's
products, the Company implemented certain restructuring and other actions
designed to improve profitability and accelerate cost reductions by increasing
focus on the core elements of the Company's Strategic Plan. The restructuring
and other actions are substantially complete except for the withdrawal from the
Grand Soft equipment manufacturing business and paying the remaining severance
benefits.
The Company has been pursuing various proposals relating to the withdrawal
from the equipment manufacturing business of its Grand Soft unit. An analysis of
purchase offers received on this business concluded that an outright sale was
not economically feasible. As an alternative, the Company's Grand Soft unit will
be outsourcing its equipment production to an independent sub-manufacturer. The
Company expects to complete this transition by year-end 1999.
7
<PAGE> 8
In 1998, the Company recorded a restructuring charge and related accrual of
$2,258,000 for anticipated Grand Soft closing costs. No payments were made
during 1998 relating to this Grand Soft accrual resulting in an unchanged
balance of $2,258,000 at December 26, 1998. The Company paid $779,000 of costs
related to the withdrawal from the manufacturing business in the first
thirty-nine weeks of 1999. The $779,000 was comprised of $595,000 of transition
payroll and legal and related transaction costs along with $184,000 in severance
payments for seven employees who were terminated during the first thirty-nine
weeks of 1999. These payments resulted in an accrual balance of $1,479,000 at
September 25, 1999.
In addition, during 1998, the Company recorded a restructuring charge and
related accrual of $1,042,000 for severance and related charges for 38 sales and
distribution employees. During 1998, 16 employees were terminated and paid
$153,000 in severance benefits resulting in an accrual balance of $889,000 at
December 26, 1998. During 1999, an additional 18 employees were terminated and
paid $584,000 in severance benefits resulting in an accrual balance of $305,000
at September 25, 1999. Remaining severance benefits totaling $305,000 will be
paid by the end of 1999.
In 1998, the Company also recorded a charge to cost of goods sold of
$933,000 for severance actions begun in advance of board approval of the
remaining restructuring actions. During 1998, the Company paid $514,000 in
benefits related to these actions resulting in an accrual balance of $419,000 at
December 26, 1998. During 1999, the Company paid $360,000 in benefits related to
these actions resulting in an accrual balance of $59,000 at September 25, 1999.
The following table summarizes the 1999 year-to-date activity in the
restructuring and other accruals included in accounts payable and accrued
liabilities in the Consolidated Balance Sheet:
<TABLE>
<CAPTION>
Dec. 26, 1998 Additions Payments Sept. 25, 1999
-------------- ---------- -------- --------------
(In thousands)
<S> <C> <C> <C> <C>
Restructuring accruals:
Grand Soft $2,258 $ $ (779) $ 1,479
Sales and distribution severance 889 (584) 305
------ ------ ------- -------
3,147 (1,363) 1,784
------ ------ ------- -------
Other accruals:
Sales and distribution severance 419 (360) 59
------ ------ ------- -------
$3,566 $ $(1,723) $ 1,843
====== ====== ======= =======
</TABLE>
NOTE 5 - Inventories
Inventories are stated at the lower of cost (determined by the first-in,
first-out method) or market. Inventories at September 25, 1999 and December 26,
1998 consisted of the following:
<TABLE>
<CAPTION>
Sept. 25, Dec. 26,
1999 1998
----------- -----------
(In thousands)
<S> <C> <C>
Raw materials $ 6,393 $ 4,840
Finished goods 48,878 44,632
---------- --------
$ 55,271 $ 49,472
========== ========
</TABLE>
NOTE 6 - Stockholders' Equity
Common stock dividends declared for the thirty-nine weeks ended September
25, 1999 and September 26, 1998 were $2,482,000 and $1,630,000, respectively. On
September 9, 1999, the Board of Directors of the Company approved a third
quarter common stock dividend in the amount of $.03 per share to common
stockholders of record on September 24, 1999. This dividend was paid on October
6, 1999. 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 of record 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 recorded this transaction in the fourth quarter of 1998.
8
<PAGE> 9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (Unaudited)
The following table sets forth the percent which the items in the Consolidated
Statement of Operations bear to sales and the percentage change of such items
compared to the indicated prior period:
<TABLE>
<CAPTION>
Period-to-Period
Variance
Percentage of Sales Favorable (Unfavorable)
---------------------------------------------- ----------------------
Thirteen Thirty-nine
Weeks Weeks
Thirteen Weeks Ended Thirty-nine Weeks Ended Ended Ended
-------------------- ----------------------- 1999 1999
Sept. 25, Sept. 26, Sept. 25, Sept. 26, Compared Compared
1999 1998 1999 1998 To 1998 To 1998
--------- ---------- ----------- ----------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C>
Revenues:
Sales 100.0% 100.0% 100.0% 100.0% 6.4% 7.4%
Other income 0.3 0.4 0.2 0.3 (21.7) (36.6)
------- ------- ------- -------
100.3 100.4 100.2 100.3 6.3 7.3
------- ------- ------- -------
Costs and expenses:
Cost of goods sold 73.4 78.9 76.4 79.6 1.0 (3.0)
Selling, general and administrative 21.7 22.1 20.2 20.4 (4.7) (6.5)
Impairment of long-lived assets 1.5 0.6
Interest, net of amounts capitalized 0.8 1.2 1.0 1.2 29.9 8.3
------- ------- ------- -------
95.9 103.7 97.6 101.8 1.6 (3.0)
------- ------- ------- -------
Income (loss) before income tax
provision (benefit) and cumulative
effect of change in accounting principle 4.4 (3.3) 2.6 (1.5) 244.6 290.9
Income tax provision (benefit) 1.7 (1.3) 1.0 (0.6) (242.4) (288.0)
------- ------- ------- -------
Income (loss) before cumulative effect of change in
accounting principle 2.7 (2.0) 1.6 (0.9) 246.1 292.8
Cumulative effect of change in accounting principle 0.1 NM
------- ------- ------- -------
Net income (loss) 2.7 (2.0) 1.5 (0.9) 246.1 284.4
Accretion of preferred stock to redemption value
Preferred stock dividends 0.1 0.1 0.1 0.1
------- ------- ------- -------
Net income (loss) available to common stockholders 2.6% (2.1)% 1.4% (1.0)% 235.1 254.2
======= ======= ======= =======
</TABLE>
9
<PAGE> 10
RESULTS OF OPERATIONS
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.
Background
In 1994, the Company adopted a strategic plan to accelerate the sales of its
brand throughout the country (the Strategic Plan). The key elements of this plan
are: 1) to build high margin brands with leading market shares 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.
In accordance with the Strategic Plan, the Company embarked on an aggressive
national expansion. This expansion involved the entry into 34 new markets, which
included the opening of a major manufacturing and distribution center in Texas,
a significant increase in marketing spending and the introduction of several new
products. At the same time, the Company invested in its soft-serve equipment
manufacturing business, Grand Soft. The investments which were required to fund
the brand-building actions and national expansion and to support the Grand Soft
business substantially increased the Company's cost structure.
In 1998, the cost of dairy raw materials peaked at an amount more than
double of that experienced in 1997. This increase reduced the Company's 1998
gross profit by approximately $22,000,000 when compared with 1997. During this
same period, sales volumes of the Company's "better for you" products continued
the significant decline that began in 1997, consistent with an industry-wide
trend. Finally, in August 1998, Ben & Jerry's Homemade, Inc. (Ben & Jerry's)
informed the Company of its intention to terminate its distribution contract.
Subsequent negotiations with Ben & Jerry's revised the original contract terms
to allow the Company to distribute Ben & Jerry's products in a smaller
geographic area. Starting September 1, 1999, this is estimated to reduce the
Company's distribution gross profit of Ben & Jerry's products by approximately
54 percent. The Company estimates that the distribution gross profit in the
markets where it stopped distributing Ben & Jerry's products represented
approximately six percent, or $13,000,000, of its gross profit in 1998.
The above factors: the higher dairy raw material costs; the decline in
"better for you" volumes; and the reduction in future Ben & Jerry's sales either
had in the past, or may continue to have in the future, a negative effect on the
Company's gross margin and its ability to successfully implement the Strategic
Plan. The Company, therefore, concluded that a thorough reassessment of its cost
structure and strategy was necessary. This reassessment yielded restructuring
actions designed to improve profitability and accelerate cost reductions by
increasing focus on the core elements of the Strategic Plan. On October 16,
1998, the board of directors approved the restructuring actions.
The Company continues to make progress towards the key elements of the
Strategic Plan. This progress has yielded an increased market share in a
consolidating industry. For example, the Company has had significant success in
the superpremium segment in recent years with the introductions of Whole Fruit
Sorbet, Starbucks(R) Ice Cream, and Godiva(R) Ice Cream. In order to build on
this success in the high-margin superpremium segment, the Company introduced a
new line of superpremium ice cream under the brand name Dreyer's and Edy's
Dreamery(TM) Ice Cream in September, 1999. While the Company will continue to
distribute Ben & Jerry's products in a smaller geographic area, it will have no
further restrictions on competing in the superpremium segment with its own pint
products. In the
10
<PAGE> 11
premium segment, the Company announced during the third quarter of 1999 the
formation of a long-term partnership with M&M/Mars to market a new line of ice
cream products featuring M&M/Mars leading candy brands. These products will be
manufactured and distributed by the Company under the terms of the joint
venture agreement. This relationship is consistent with the Company's strategy
to expand its portfolio of brands and products to reach consumers across the
entire ice cream category.
The Company believes that the benefits under the Strategic Plan will be
realized in future years, although no assurance can be given that the
expectations relative to future market share and earnings benefits of the
strategy will be achieved. Specific factors that might cause actual results to
differ from expectations include, but are not limited to, the following: the
Company's ability to achieve the cost reductions anticipated from its
restructuring actions and efficiencies in its manufacturing and distribution
operations without negatively affecting sales, the cost of dairy raw materials
and other commodities used in the Company's products, competitors' marketing and
promotion responses, market conditions affecting the price of the Company's
products, the Company's ability to increase sales of its own branded products,
and responsiveness of the trade and consumers to the Company's new products, and
increased marketing and promotional expenses. These or other factors may be
difficult to forecast and could have a material adverse effect on the Company's
business, operating results, and financial condition.
Status of Restructuring and Other Actions
During 1998, as a result of higher dairy raw material costs, a decline in
"better for you" volumes, and a reduction in future sales of Ben & Jerry's
products, the Company implemented certain restructuring and other actions
designed to improve profitability and accelerate cost reductions by increasing
focus on the core elements of the Company's Strategic Plan. The restructuring
and other actions are substantially complete except for the withdrawal from the
Grand Soft equipment manufacturing business and paying the remaining severance
benefits.
The Company has been pursuing various proposals relating to the withdrawal
from the equipment manufacturing business of its Grand Soft unit. An analysis of
purchase offers received on this business concluded that an outright sale was
not economically feasible. As an alternative, the Company's Grand Soft unit will
be outsourcing its equipment production to an independent sub-manufacturer. The
Company expects to complete this transition by year-end 1999.
In 1998, the Company recorded a restructuring charge and related accrual of
$2,258,000 for anticipated Grand Soft closing costs. No payments were made
during 1998 related to the Grand Soft accrual resulting in an unchanged balance
of $2,258,000 at December 26, 1998. The Company paid $779,000 of costs related
to the withdrawal from the manufacturing business in the first thirty-nine weeks
of 1999. The $779,000 was comprised of $595,000 of transition payroll and legal
and related transaction costs along with $184,000 in severance payments for
seven employees who were terminated during the first thirty-nine weeks of 1999.
These payments resulted in an accrual balance of $1,479,000 at September 25,
1999.
In addition, during 1998, the Company recorded a restructuring charge and
related accrual of $1,042,000 for severance and related charges for 38 sales and
distribution employees. During 1998, 16 employees were terminated and paid
$153,000 in severance benefits resulting in an accrual balance of $889,000 at
December 26, 1998. During 1999, an additional 18 employees were terminated and
paid $584,000 in severance benefits resulting in an accrual balance of $305,000
at September 25, 1999. Remaining severance benefits totaling $305,000 will be
paid by the end of 1999.
In 1998, the Company also recorded a charge to cost of goods sold of
$933,000 for severance actions begun in advance of board approval of the
remaining restructuring actions. During 1998, the Company paid $514,000 in
benefits related to these actions resulting in an accrual balance of $419,000 at
December 26, 1998. During 1999, the Company paid $360,000 in benefits related to
these actions resulting in an accrual balance of $59,000 at September 25, 1999.
The following table summarizes the 1999 year-to-date activity in the
restructuring and other accruals included in accounts payable and accrued
liabilities in the Consolidated Balance Sheet:
<TABLE>
<CAPTION>
Dec. 26, 1998 Additions Payments Sept. 25, 1999
-------------- ---------- -------- --------------
(In thousands)
<S> <C> <C> <C> <C>
Restructuring accruals:
Grand Soft $2,258 $ $ (779) $ 1,479
Sales and distribution severance 889 (584) 305
------ ------ ------- -------
3,147 (1,363) 1,784
------ ------ ------- -------
Other accruals:
Sales and distribution severance 419 (360) 59
------ ------ ------- -------
$3,566 $ $(1,723) $ 1,843
====== ====== ======= =======
</TABLE>
Thirteen Weeks ended September 25, 1999 Compared with Thirteen Weeks ended
September 26, 1998
Consolidated sales for the third quarter of 1999 increased $19,438,000, or six
percent, to $322,410,000 from $302,972,000 for the same quarter last year.
Sales of the Company's branded products increased $26,740,000, or 14
percent, to $212,899,000 from $186,159,000 for the same quarter last year.
Company brands represented 66 percent of consolidated sales compared with 61
percent in the same quarter last year. The increase in sales of the Company's
branded products related primarily to an increase in unit sales and generally
higher average wholesale prices. The products that led this increase were
Classic Dreyer's and Edy's Grand Ice Cream, Godiva(R) Ice Cream, and the
Dreamery(TM) line. As a result of wholesale price increases and changes in mix,
the average price of the Company's branded products increased approximately
seven percent, before the effect of increased trade promotion expenses. Gallon
sales of the Company's branded products increased 1,870,000 gallons, or seven
percent, to 28,270,000 gallons.
Sales of products distributed for other manufacturers (partner brands),
including Ben & Jerry's Homemade, Inc., decreased $7,302,000, or six percent, to
$109,511,000. Sales of partner brands represented 34 percent of consolidated
sales compared with 39 percent in the same quarter last year. As previously
disclosed, the Company began distributing Ben & Jerry's products in a smaller
geographic area during September, 1999. This change was the primary cause of the
lower partner brand sales for the quarter. Average wholesale prices for partner
brands increased approximately five percent, while unit sales decreased eleven
percent over the same quarter last year.
Cost of goods sold decreased $2,474,000, or one percent, over the third
quarter of 1998, while the overall gross margin increased to 27 percent from 21
percent. Cost of goods sold for the third quarter of 1998 included approximately
$977,000 of expenses related to the settlement of various legal issues and
approximately $933,000 in severance costs relating to staffing reductions made
prior to board approval of the restructuring actions. Excluding the effect of
the 1998 settlement and severance expenses, cost of goods sold decreased
$564,000 or less than one percent, over the same quarter of 1998, while the
overall gross margin increased to 27 percent from 22 percent. This gross margin
improvement was primarily the result of comparatively lower dairy raw material
costs, higher average wholesale costs and changes in mix. The impact of the
change in dairy raw material costs for the quarter was a $7,300,000 benefit as
compared to the same quarter last year.
Selling, general and administrative expenses in the third quarter of 1999
were $3,130,000, or five percent, higher than in the same quarter of 1998 and
represented 22 percent of consolidated sales in both periods. Selling, general,
and administrative expenses for the third quarter of 1998 included a $5,000,000
reserve for an independent distributor receivable and approximately $1,400,000
of expenses related to the settlement of various legal issues. Excluding the
effect of the receivable reserve and settlement charges, selling, general and
administrative expenses would have increased by $9,530,000, or 16%, over the
same quarter last year. This increase related primarily to significantly higher
trade promotion and marketing expenses associated with the launch of new
products.
11
<PAGE> 12
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
distribution rights upon termination of these rights by Ben & Jerry's.
Interest expense decreased $1,112,000, or 30 percent, over the same quarter
of 1998, primarily attributable to lower average borrowings.
The income tax provision increased due to a correspondingly higher pre-tax
income in 1999. The effective tax rate decreased to 39.1 percent for the third
quarter of 1999 from 39.7 percent for the same quarter of 1998.
Thirty-nine Weeks ended September 25, 1999 Compared with Thirty-nine Weeks ended
September 26, 1998
Consolidated sales for the first thirty-nine weeks of 1999 increased
$59,330,000, or seven percent, to $857,657,000 from $798,327,000 for the same
period last year.
Sales of the Company's branded products increased $51,737,000, or 10
percent, to $551,235,000, from $499,498,000 for the same period last year.
Company brands represented 64 percent of consolidated sales compared with 63
percent in the same period last year. The increase in sales of the Company's
branded products related primarily to wholesale price increases and changes in
mix. The products that led this increase were Classic Dreyer's and Edy's Grand
Ice Cream, Godiva(R) Ice Cream, and the Dreamery(TM) line. Average wholesale
prices for the Company's branded products increased approximately six percent,
before the effect of increased trade promotion expenses. Gallon sales of the
Company's branded products increased 3,532,000 gallons, or five percent, to
75,117,000 gallons.
Sales of partner brands increased $7,593,000, or three percent, to
$306,422,000. Sales of Nestle' Ice Cream Company products accounted for most of
the increase. Sales of partner brands represented 36% of consolidated sales in
both periods. Average wholesale prices for partner brands increased
approximately four percent, while unit sales decreased one percent.
Cost of goods sold increased $19,064,000, or three percent, over the first
thirty-nine weeks of 1998, while the overall gross margin increased to 24
percent from 20 percent. Cost of goods sold for the first thirty-nine weeks of
1998 included approximately $977,000 of expenses related to the settlement of
various legal issues and approximately $933,000 in severance costs relating to
staffing reductions made prior to board approval of the restructuring actions.
Excluding the effect of the 1998 settlement and severance expenses, cost of
goods sold increased $20,974,000 or three percent, over the comparable 1998
period, while the overall gross margin increased to 24 percent from 21 percent.
This gross margin improvement was primarily the result of comparatively lower
dairy raw material costs, higher average wholesale prices, and changes in mix.
The impact of the change in dairy raw material costs was a $7,100,000 benefit
compared to the same period last year.
Selling, general and administrative expenses in the first thirty-nine weeks
of 1999 were $10,536,000, or six percent, higher than in the same period of 1998
and represented 20 percent of consolidated sales in both periods. Selling,
general, and administrative expenses for the first thirty-nine weeks of 1998
included a $5,000,000 reserve for an independent distributor receivable and
approximately $1,400,000 of expenses related to the settlement of various legal
issues. Excluding the effect of the receivable reserve and settlement charges,
selling, general and administrative expenses would have increased by
$16,936,000, or 11%, over the same period last year. This increase related
primarily to significantly higher marketing expenses and trade promotion
expenses associated with the launch of new products.
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
distribution rights upon termination of these rights by Ben & Jerry's.
Interest expense decreased $805,000, or eight percent, over the comparable
1998 period, primarily attributable to lower average borrowings.
The income tax provision increased due to a correspondingly higher pre-tax
income in 1999. The effective tax rate decreased to 39.1 percent for the first
thirty-nine weeks of 1999 from 39.7 percent for the first thirty-nine weeks of
1998.
In the first quarter of 1999, the Company adopted Statement of Position
98-5, "Reporting on the Costs of Start-Up Activities" (SOP 98-5). SOP 98-5
requires that the costs of start-up activities, including preoperating costs, be
expensed as incurred and that previously unamortized preoperating costs be
written off and treated as a cumulative effect of a change in accounting
principle. As a result of adopting SOP 98-5, the Company recorded an after-tax
charge of $595,000, or $.02 per common share, in the first quarter of 1999.
LIQUIDITY AND CAPITAL RESOURCES
Working capital at September 25, 1999 decreased $13,384,000 from year-end 1998
due primarily to the seasonal increase in accounts payable and accrued
liabilities, partially offset by an increase in trade accounts receivable. The
Company's operations provided cash of $48,147,000 that was primarily used to
fund a $16,069,000 increase in property, plant and equipment and repayments of
$32,498,000 of long-term debt.
12
<PAGE> 13
At September 25, 1999, the Company had $2,347,000 in cash and cash
equivalents, and an unused credit line of $100,300,000. The total available
under the Company's revolving line of credit decreases from $175,000,000 to
$149,286,000 on December 31, 1999 and the line expires on December 31, 2000. The
Company intends to either refinance the line or extend its maturity date. The
Company believes it will be successful in either obtaining new financing from
available sources or extending the maturity date of the existing line.
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 stock of the Company. The holder may
instead redeem the issue for cash at par value on June 30, 2001. The Company
presently anticipates that it would fund such a redemption from operating cash
flows, borrowings or other financing sources. The Company believes that its
credit line, along with its liquid resources, internally-generated cash and
financing capacity, are adequate to meet both short-term and long-term operating
and capital requirements.
YEAR 2000 COMPLIANCE
The Company continues to address its Year 2000 compliance. Critical centralized
information systems (software and hardware) are either being upgraded, enhanced,
or replaced for Year 2000 compliance. The Company completed upgrading and
enhancing all critical centralized systems and expects to complete
enterprise-wide testing during the remainder of 1999. The review of embedded
chip technology used in the Company's manufacturing systems determined that only
minor upgrades or enhancements will be necessary. The Company expects to
complete the embedded chip upgrade and enhancement process during the remainder
of 1999. The Company is also surveying key customers and suppliers to determine
the risk associated with their Year 2000 compliance programs. During the
remainder of 1999, the Company will continue to evaluate and reevaluate the risk
associated with Year 2000 compliance programs of key customers and suppliers.
The Company believes the Year 2000 issue does not pose significant
operational or financial risks. The Company has a broad base of customers and
had only one customer accounting for ten percent of total sales in 1998. The
Company also has a broad base of suppliers with multiple sourcing possibilities
for all purchases. The Company has always had contingency plans in place for
non-Year 2000 related risks. Nevertheless, the Company is in the process of
strengthening its existing contingency plans and developing additional
contingency plans in an attempt to minimize the effect of any issues that may
arise from the failure of the Company, its customers or its suppliers to
complete Year 2000 compliance work. The Company will complete the contingency
plan development for Year 2000 issues during the remainder of 1999.
The Company's assessment of the Year 2000 issue 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, which may cause
disruptions in the manufacturing and distribution operations. Additionally, a
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 complete probability studies and risk analyses
as part of the contingency plan during the remainder of 1999.
The total cost for the Company's Year 2000 initiatives are estimated to be
$6,000,000, of which $3,500,000 was incurred during 1998 and $2,500,000 is being
incurred during 1999. The majority of these costs relate to the accelerated
replacement of capitalized hardware and software systems. Of the $6,000,000,
approximately $4,500,000 will be capitalized and approximately $1,500,000,
relating to the costs of modifying computer software for the Year 2000, will be
expensed as incurred. 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 invoke contingency plans should an unforeseen failure occur. The Company does
not expect the costs of Year 2000 compliance to have a material impact on the
Company's financial position, results of operations or cash flows.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Since December 26, 1998, there have been no material changes in the Company's
market risk exposure.
13
<PAGE> 14
PART II: OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) The following exhibit is filed herewith:
<TABLE>
<CAPTION>
Exhibit No. Description
----------- -----------
<S> <C>
27.1 Financial Data Schedule.
</TABLE>
(b) No reports on Form 8-K were filed by the Company during the quarter ended
September 25, 1999.
14
<PAGE> 15
SIGNATURE
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 9, 1999 By: /s/ Timothy F. Kahn
---------------------------------
Timothy F. Kahn
Vice President - Finance and
Administration and Chief Financial
Officer (Principal Financial Officer)
15
<PAGE> 16
DREYER'S GRAND ICE CREAM, INC.
INDEX OF EXHIBITS
<TABLE>
<CAPTION>
Exhibit No. Description
- ----------- -----------
<S> <C>
27.1 Financial Data Schedule.
</TABLE>
16
<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>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-25-1999
<PERIOD-START> DEC-27-1998
<PERIOD-END> SEP-25-1999
<CASH> 2,347
<SECURITIES> 0
<RECEIVABLES> 117,130
<ALLOWANCES> 5,863
<INVENTORY> 55,271
<CURRENT-ASSETS> 203,861
<PP&E> 336,593
<DEPRECIATION> 137,170
<TOTAL-ASSETS> 480,490
<CURRENT-LIABILITIES> 156,186
<BONDS> 125,457
99,972
0
<COMMON> 27,704
<OTHER-SE> 49,238
<TOTAL-LIABILITY-AND-EQUITY> 480,490
<SALES> 857,657
<TOTAL-REVENUES> 859,532
<CGS> 654,721
<TOTAL-COSTS> 654,721
<OTHER-EXPENSES> 0<F1>
<LOSS-PROVISION> 643
<INTEREST-EXPENSE> 8,851
<INCOME-PRETAX> 22,383
<INCOME-TAX> 8,752
<INCOME-CONTINUING> 13,631
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 595
<NET-INCOME> 13,036
<EPS-BASIC> 0.44
<EPS-DILUTED> 0.39
<FN>
<F1>EXCLUDES SELLING, GENERAL AND ADMINISTRATIVE EXPENSES AS THESE ARE PART OF
5-03(b)(4).
</FN>
</TABLE>
