FORM 10-Q

UNITED STATES

For the quarterly period ended September 29, 2001

OR28, 2002

Commission file number 0-14190

DREYER’S GRAND ICE CREAM, INC.

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.

         Indicate the number of shares outstanding of each of the issuer’s classes of common stock as of the latest practicable date.

PART I: FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS.

DREYER’S GRAND ICE CREAM, INC.

CONSOLIDATED BALANCE SHEET

See accompanying Notes to Consolidated Financial Statements.

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DREYER’S GRAND ICE CREAM, INC.

CONSOLIDATED STATEMENT OF INCOME

See accompanying Notes to Consolidated Financial Statements.

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DREYER’S GRAND ICE CREAM, INC.

CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY

See accompanying Notes to Consolidated Financial Statements.

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DREYER’S GRAND ICE CREAM, INC.

CONSOLIDATED STATEMENT OF CASH FLOWS

See accompanying Notes to Consolidated Financial Statements.

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DREYER’S GRAND ICE CREAM, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 — Operations and Financial Statement Presentation

Dreyer’s Grand Ice Cream, Inc. and its subsidiaries (the Company) are engaged primarily in the business of manufacturing and distributing premium and superpremium 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 the thirteen and thirty-nine weeks ended September 29, 200128, 2002 and September 23, 200029, 2001 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.Commission (SEC). Accordingly, certain information and footnote disclosuredisclosures normally included in financial statements prepared in conformity with accounting principles generally accepted accounting principlesin the United States of America 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 30, 2000,29, 2001, appearing in the Company’s 2000 Annual Report to Stockholders.on Form 8-K filed on November 5, 2002. Certain reclassifications have been made to prior years’ financial statements to conform to the current year presentation.

NOTE 2 — Significant Accounting Assumptions and Estimates

         The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions. These estimates include assessing the recoverability of accounts receivable; the adequacy of the valuation allowance for deferred tax assets; the recoverability of goodwill; the adequacy of the Company’s liabilities for self-insured health, workers compensation and vehicle plans; and the adequacy of the Company’s liabilities for employee bonuses and profit-sharing plan contributions, among others. These estimates and assumptions affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates.

NOTE 3 — Merger and Contribution Agreement

         On June 16, 2002, the Company entered into an Agreement and Plan of Merger and Contribution (the Merger Agreement) with New December, Inc. (New Dreyer’s), December Merger Sub, Inc., Nestlé Holdings, Inc. (Nestlé) and NICC Holdings, Inc. (NICC Holdings), a wholly-owned subsidiary of Nestlé, to combine the Company with Nestlé’s United States frozen dessert business. The combination will result in both the Company and Nestlé Ice Cream Company, LLC (NICC), which holds Nestlé’s United States frozen dessert business, becoming wholly-owned subsidiaries of New Dreyer’s, a newly formed Delaware corporation. This transaction will be recorded under the purchase method of accounting and will be treated as a reverse acquisition. Under reverse acquisition accounting, NICC will be deemed to be the acquirer for accounting purposes only, and the Company will be treated as the acquiree. As a result, the Company is expensing all merger transaction expenses as incurred. These expenses totaled $2,823,000 and $5,711,000 for the thirteen and thirty-nine weeks ended September 28, 2002, respectively.

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         If the transactions contemplated by the Merger Agreement are completed, each non-Nestlé stockholder who holds shares of the Company’s common stock at the effective time of the merger will receive one share of class A callable puttable common stock of New Dreyer’s. Under the amended and restated certificate of incorporation of New Dreyer’s, subject to the terms set forth therein, the holders of New Dreyer’s class A callable puttable stock will be permitted to sell (put) some or all of their shares to New Dreyer’s for $83.00 per share during two periods, the first beginning on December 1, 2005 and ending on January 13, 2006, and the second beginning on April 3, 2006 and ending on May 12, 2006. New Dreyer’s class A callable puttable common stock will also be subject to redemption (call) by New Dreyer’s at the request of Nestlé at $88.00 per share during a six-month period beginning on January 1, 2007. For the contribution of its ownership interest of NICC Holdings, Nestlé will receive approximately 55 million shares of class B common stock of New Dreyer’s. The class B common shares are similar to the class A common shares, except that they lack the call and put features. The shares of the Company’s common stock currently held by Nestlé will be converted into the same number of shares of class B common stock of New Dreyer’s. As of September 28, 2002, Nestlé owned approximately 23 percent of the Company’s common stock on a diluted basis. If the transactions contemplated by the Merger Agreement are completed, Nestlé will own approximately 67 percent of the diluted common stock of New Dreyer’s.

         Each outstanding option to purchase the Company’s common stock under the Company’s existing stock option plans will, at the completion of the transactions, be converted into an option to acquire:

•		prior to the date New Dreyer’s class A callable puttable common stock is redeemed under the call right, that number of shares of New Dreyer’s class A callable puttable common stock equal to the number of shares of the Company’s common stock subject to options immediately prior to the completion of the transactions, at the price or prices per share in effect immediately prior to the completion of the transactions; and
•		at or after the date New Dreyer’s class A callable puttable common stock is redeemed under the call right or to the consummation of a short-form merger of New Dreyer’s with Nestlé or an affiliate of Nestlé S.A., pursuant to the terms of the governance agreement in the form attached as an exhibit to the Merger Agreement, the same consideration which the holder of the options would have received had he or she exercised such option prior to such redemption and received consideration pursuant to the redemption at the price or prices in effect at that time.

The options will otherwise be subject to the same terms and conditions applicable to the original options to purchase the Company’s common stock immediately prior to the completion of the transactions.

         Certain regulatory requirements must be complied with before the transactions contemplated by the Merger Agreement are completed. The Company and Nestlé are not aware of any material governmental consents or approvals that are required prior to the completion of the transactions other than those described below:

•		Under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the HSR Act), and the rules promulgated thereunder by the United States Federal Trade Commission (the FTC), the transactions cannot be completed until notifications have been given and information has been furnished to the FTC and the Antitrust Division of the United States Department of Justice, and the specified waiting periods have expired or have been terminated. The Company and Nestlé filed notification and report forms under the HSR Act with the FTC and the Antitrust Division on July 3, 2002. On August 2, 2002, the FTC made a request for additional information and documentary material, thereby extending the statutory waiting period until 30 days after the Company and Nestlé each substantially comply with this request, unless the waiting period is terminated earlier or extended with the consent of the Company and Nestlé. The Company and Nestlé are continuing to work closely with the FTC staff on its request.
•		On November 6, 2002, New Dreyer’s filed with the SEC a Registration Statement on Form S-4 which included a proxy statement/prospectus pertaining to the transactions contemplated by the Merger Agreement. The SEC may choose to review the filing, and if it does so, it will typically provide comments within 30 days.
•		If the registration statement is declared effective by the SEC, and if the transactions contemplated by the Merger Agreement are completed, then all shares of New Dreyer’s class A callable puttable common stock received by the Company’s stockholders in the merger will be freely transferable, except that shares of New Dreyer’s class A callable

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puttable common stock received by persons who are deemed to be “affiliates” of the Company under the Securities Act of 1933, as amended (the 1933 Act), at the time of the special meeting of the Company’s stockholders, may be resold by such affiliates only in transactions permitted by Rule 145 under the 1933 Act or as otherwise permitted under the 1933 Act. Persons who may be deemed to be affiliates of the Company for such purposes generally include individuals or entities that control, are controlled by or are under common control with the Company and include the members of the Company’s board of directors.

         Several of the Company’s joint venture partners and partner brand manufacturers have rights to terminate their arrangements with the Company upon consummation of the transactions contemplated by the Merger Agreement, subject to various other terms and conditions. While the Company intends to continue in these ventures and partner brand relationships, it can provide no assurance as to the potential actions of its business partners. Should any of the Company’s significant partners or suppliers choose to exit these arrangements in accordance with their rights to do so following the consummation, the Company may incur significant decreases in gross profit or be required to write-off certain assets as a result of the loss of these business partners.

NOTE 4 — Inventories

Inventories are stated at the lower of cost (determined by the first-in, first-out method) or market. Inventories at September 29, 200128, 2002 and December 30, 200029, 2001 consisted of the following:

NOTE 35 — Goodwill, Distribution Rights and Other Intangibles, netButter Investments

On October 25, 2000,         Under current federal and state regulations and industry practice, the price of cream, a primary ingredient in ice cream, is linked to the price of butter. In an effort to mitigate the effects of butter price volatility, the Company announced that it signed a new, long-term distribution agreementperiodically purchases butter or butter futures contracts with Ben & Jerry’s Homemade, Inc. (Ben & Jerry’s), a subsidiarythe intent of Unilever United States, Inc. Underreselling or settling its positions in order to lower its cream cost and overall exposure to the volatility of this agreement, the Company became the distributor of Ben & Jerry’s products for the grocery channel in all of its company-operated markets across the country as of the effective date of March 5, 2001.market. The Company and Ben & Jerry’s are expanding the Company’s rolehas elected to not treat its investment in butter as a Ben & Jerry’s distributor in other non-grocery channels, such as convenience stores. The agreement has a term of five years and automatically renewshedge for two additional five-year terms unless terminated by either partyaccounting purposes. Consequently, it “marks to market” its investment at the end of each five-year term.quarter and records any resulting gain or loss in other income, net. The Company typically holds its butter investments for periods of up to four months.

6         Investments in butter, included in prepaid expenses and other at September 28, 2002 consisted of the following:

         During the thirteen and thirty-nine weeks ended September 28, 2002, the Company recorded losses of $746,000 and $2,065,000, respectively. During 2001, the Company made no investments in butter.

NOTE 4 — Redeemable Convertible Preferred Stock

The Company’s Series A redeemable convertible preferred stock, redemption value $100,752,000, was converted by the holder into 5,800,000 shares of common stock in June 2001.

NOTE 56 — Net Income Per Common Share

The denominator for basic net income per share includes the number of weighted-average common shares outstanding. The denominator for diluted net income per share includes the number of weighted-average shares outstanding plus the effect

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effects of potentially dilutive securities which include stock options and redeemable convertible preferred stock. The following table reconciles the numerators and denominators of the basic and diluted net income per common share calculations:

         Each outstanding and unvested option to purchase the Company’s common stock under the Company’s existing stock option plans became fully vested on June 14, 2002, the date that the Company’s board of directors approved the Merger Agreement and the transactions contemplated by the Merger Agreement (Note 3). In connection with the execution of the Merger Agreement, certain executive officers waived their rights to accelerated vesting of their unvested stock options in conjunction with entering into Employment Agreements with New Dreyer’s. The employment agreements are effective if and when the transactions contemplated by the Merger Agreement are completed. Under the Merger Agreement, the Company can have no more than 41,393,348 outstanding or issuable shares of common stock if and when the transactions contemplated by the Merger Agreement are completed. This total includes shares issuable upon exercise of options, whether vested or unvested.

Anti-dilutive Securitiessecurities

         Potentially dilutive securities are excluded from the calculations of diluted net income per common share when their inclusion would have an anti-dilutive effect. TheseThere were no potentially dilutive securities to be excluded during the thirteen and thirty-nine weeks ended September 28, 2002. Potentially dilutive securities, stated in absolute equivalent shares of common stock, consisted of 753,000 and 75,000 stock options during the thirteen weeks ended September 29, 2001 and September 23, 2000, respectively, and 753,000 and 693,000 stock options during the thirty-nine weeks ended September 29, 2001 and September 23, 2000, respectively.

Dividends per Common Share

     On February 14, 2001, the Board of Directors, subject to compliance with applicable law, contractual provisions, and future review of the condition of the Company, declared its intention to increase the regular quarterly dividend from $.03 per common share to $.06 per common share starting with the first quarter of 2001.

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NOTE 6 —7 – Adoption of New Accounting Pronouncements

Accounting for Certain Sales Incentives andConsideration Given by a Vendor Considerationto a Customer (Including a Reseller of the Vendor’s Products)

In July 2000,November 2001, the Emerging Issues Task Force of the Financial Accounting Standards Board (EITF), issued EITF 00-14,01-9, “Accounting for Certain Sales Incentives”Consideration Given by a Vendor to a Customer (Including a Reseller of the Vendor’s Products)” (EITF 00-14)01-9). This pronouncement requires that discounts (off-invoice promotion and other sales incentives be recorded as a reduction of revenue at the date of sale. At the present time, the Company classifies these incentives (including variable trade promotion expenses and coupon redemption costs) as selling, general and administrative expenses.

     In April 2001, the EITF issued EITF 00-25, “Vendor Income Statement Characterization of Consideration from a Vendor to a Retailer” (EITF 00-25). This pronouncement requires that fees paid to retailers to obtain space for their products on the retailers’ store shelves (slotting fees) andcoupons), amounts paid to retailers to advertise a company’s products (fixed trade promotion expenses)promotion) and fees paid to retailers to obtain shelf space (slotting fees) be recorded as a reduction of revenue. At the present time, the Company classifies these costs as selling, general and administrative expenses.

         The expenses defined inCompany adopted EITF 00-1401-9 at the beginning of fiscal 2002. For the thirteen and EITF 00-25 totaled approximately $58,400,000 and $45,900,000, for the thirteenthirty-nine weeks ended September 29, 200128, 2002, the Company presented the expenses described above of $65,881,000 and September 23, 2000, respectively.$176,589,000, respectively, as a reduction of net sales in accordance with this pronouncement. For the thirteen and thirty-nine weeks ended September 29, 2001, the Company retroactively reclassified expenses of $58,274,000 and September 23, 2000, these expenses totaled approximately $139,900,000 and $112,300,000, $140,300,000,

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respectively. The retroactive reclassification of these expenses will resultresulted in a decrease in total sales, company brand sales and gross profit, along with a corresponding decrease in selling, general and administrative expenses, and will, therefore, havewith no effect on net income (loss) as previously reported. The Company will implement EITF 00-14 and EITF 00-25 in the first quarter of 2002. Reclassification of prior period financial statements is required.

Accounting for Business Combinations

     In June 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 141, “Business Combinations” (SFAS No. 141). This statement requires that all business combinations initiated after June 30, 2001 be accounted for under the purchase method of accounting. Use of the pooling-of-interests method is no longer permitted.

Accounting for Goodwill and Other Intangible Assets

         In June 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 142, “Goodwill and Other Intangible Assets” (SFAS No. 142). This pronouncement continues to requirerequires recognition of goodwill and other unidentifiable intangible assets with indeterminate lives (“these assets”) as assets, but amortizationlong-term assets. Amortization as currentlypreviously required by APBAccounting Principles Board Opinion No. 17, “Intangible Assets”, is no longer permitted. In lieu of amortization, these assets must beare now tested for impairment usingon an annual basis and between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of a fair value-based approach.reporting unit below its carrying amount. The Company is currently assessingadopted SFAS No. 142 at the impact that this new pronouncement will have onbeginning of fiscal 2002 and completed its transitional impairment test during the first quarter of 2002; the Company has not recorded any impairment charges under SFAS No. 142.

         The following table reconciles reported net income available to common stockholders and the related per common share amounts to the corresponding adjusted net income and related per common share amounts. Adjusted net income and net income per common share amounts reflecting the exclusion of these assets. Amortizationgoodwill amortization of these assets totaled approximately $1,100,000$655,000 ($1,100,000 net of tax of $445,000) and $800,000,$1,942,000 ($3,193,000 net of tax of $1,251,000), respectively, for the thirteen weeks ended September 29, 2001 and September 23, 2000, respectively, and approximately $3,200,000 and $2,700,000, for the thirty-nine weeks ended September 29, 2001, and September 23, 2000, respectively. The Company will implementrespectively, follow:

         In accordance with SFAS No. 142, the Company reclassified the long-term deferred income tax liability associated with nondeductible goodwill, resulting in a noncash reduction in goodwill and a corresponding reduction in the deferred income tax liability of $10,166,000. Also in accordance with SFAS No. 142, the Company now presents goodwill separately from other intangibles in the Consolidated Balance Sheet. In addition, the Company reclassified $52,997,000 of acquisition-related intangibles with indefinite lives to goodwill at the beginning of the first quarter of 2002. In accordance with this pronouncement, the corresponding prior year amounts were not retroactively reclassified. The remaining change in goodwill since December 29, 2001 consists of acquisition goodwill.

Accounting for the Impairment or Disposal of Long-Lived Assets

         In AugustOctober 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting StandardsSFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets” (SFAS No. 144). This pronouncement clarifies certain issues related to SFAS No. 121, “Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of” and develops a single accounting model for long-lived assets to be disposed of. The Company will implementadopted SFAS No. 144 in the first quarter of 2002 and does2002. The adoption of SFAS No. 144 did not expect that it will have a significant impact on itsthe Company’s financial position, or results of operations.operations or cash flows.

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NOTE 8-Investment in Momentx Corporation

         At December 29, 2001, the Company had a $1,093,000 investment in Momentx Corporation (Momentx), included in long-term Other Assets. Momentx is an e-market solution provider for the dairy, food and beverage industries. The Company followed the cost method in accounting for this investment since its ownership interest was less than three percent. During the second quarter of 2002, the Company determined that Momentx’s shortfalls to its business plan, which plan called for a substantial acceleration of its sales growth which did not occur, negatively impacted the recovery of the Company’s investment and recognized a $1,093,000 loss which is included as a component of Other income, net, in the Consolidated Statement of Income.

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ITEM 2.    MANAGEMENT’S DISCUSSION AND ANALYSIS OF CONSOLIDATED FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
                  OPERATIONS (Unaudited).

Forward-Looking StatementsFORWARD-LOOKING STATEMENTS

The Company may from time to time make written or oral forward-looking statements. Written         This report contains forward-looking statements may appear in documents filed withwithin the Securities and Exchange Commission, and in press releases, conference calls, webcasts, and annual reports to stockholders. Themeaning of the Private Securities Litigation Reform Act of 1995, which 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 determined thatThese forward-looking statements are contained in this Management’s Discussionbased on the Company’s current expectations and Analysis of Consolidated Financial Condition and Results of Operations. The Company undertakes no obligation to publicly revise theseprojections about future events. These forward-looking statements are subject to reflect subsequent events or circumstances.

     Also, in connection with this “safe harbor” provision,risks, uncertainties and assumptions about the Company, identifies importantincluding, but not limited to:

	•		uncertainty regarding the Company’s future operating results;
	•		the Company’s ability to achieve efficiencies in its manufacturing and distribution operations without negatively affecting sales;
	•		the cost of energy used in manufacturing and distribution;
	•		the cost of dairy raw materials and other commodities used in the Company’s products;
	•		competitors’ marketing and promotion responses;
	•		market conditions affecting the prices of the Company’s products;
	•		the Company’s ability to increase sales of its own branded products;
	•		responsiveness of both the trade and consumers to the Company’s new products and marketing and promotional programs; and
	•		uncertainty regarding the completion and effect of the proposed transactions described under “MERGER AND CONTRIBUTION AGREEMENT” below.

         Other 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 forthexpectations are discussed in this and other filings with the Securities and Exchange Commission.

     This“Item 2 – Management’s Discussion and Analysis of Financial Condition and Results of OperationsOperations” and “Item 3 – Qualitative and Quantitative Disclosures About Market Risk” below. The Company’s actual results could differ substantially from those anticipated in these forward-looking statements. The Company undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information or future events.

         The following discussion should be read together with the Company’s consolidated financial statements and related notes thereto included elsewhere in conjunction withthis document and in “Item 5 – Management’s Discussion and Analysis for the year ended December 30, 2000,of Financial Condition and Results of Operations” appearing in the Company’s 2000Report on Form 8-K filed on November 5, 2002 and in “Item 7A – Qualitative and Quantitative Disclosures About Market Risk” appearing in the Company’s 2001 Annual Report on Form 10-K.

APPLICATION OF CRITICAL ACCOUNTING POLICIES

         The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to Stockholders.

RESULTS OF OPERATIONS

make estimates and assumptions. The Company believes that the following table sets forth for the periods indicated the percentcritical accounting policies, which the itemsCompany’s senior management has discussed with the audit committee of the board of directors, represent the most significant judgments and estimates used in the Consolidated Statementpreparation of Income bear to sales and the percentage change of such items compared to the indicated prior period: