FORM 10-Q
UNITED STATES
(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 29, 2001
OR28, 2002
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.
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.
Shares Outstanding | ||||
November 11, | ||||
Common stock, $1 par value |
PART I: FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
DREYER’S GRAND ICE CREAM, INC.
CONSOLIDATED BALANCE SHEET
Sept. 29, 2001 | Dec. 30, 2000 | |||||||||||||||||||
Sept. 28, 2002 | Dec. 29, 2001 | |||||||||||||||||||
(Unaudited) | ||||||||||||||||||||
($ in thousands, except per share amounts) | ($ in thousands, except per share amounts) | ($ in thousands, except per share amounts) | (Unaudited) | |||||||||||||||||
Assets | Assets | Assets | ||||||||||||||||||
Current Assets: | Current Assets: | Current Assets: | ||||||||||||||||||
Cash and cash equivalents | $ | 2,529 | $ | 2,721 | Cash and cash equivalents | $ | 1,859 | $ | 1,650 | |||||||||||
Trade accounts receivable, net of allowance for doubtful accounts of $1,278 in 2001 and $2,611 in 2000 | 129,551 | 77,310 | Trade accounts receivable, net of allowance for doubtful accounts of $1,584 in 2002 and $1,024 in 2001 | 116,640 | 89,721 | |||||||||||||||
Other accounts receivable | 19,659 | 17,702 | Other accounts receivable | 14,384 | 16,116 | |||||||||||||||
Inventories | 81,489 | 68,801 | Inventories | 85,533 | 81,298 | |||||||||||||||
Deferred income taxes | 3,614 | 4,584 | Deferred income taxes | 1,698 | 3,547 | |||||||||||||||
Prepaid expenses and other | 6,731 | 6,950 | Prepaid expenses and other | 17,253 | 8,849 | |||||||||||||||
Total current assets | 243,573 | 178,068 | Total current assets | 237,367 | 201,181 | |||||||||||||||
Property, plant and equipment, net | Property, plant and equipment, net | 195,387 | 190,833 | Property, plant and equipment, net | 210,665 | 198,565 | ||||||||||||||
Goodwill, distribution rights and other intangibles, net | 94,903 | 92,892 | ||||||||||||||||||
Goodwill | Goodwill | 84,701 | 39,114 | |||||||||||||||||
Other intangibles, net | Other intangibles, net | 1,849 | 55,354 | |||||||||||||||||
Other assets | Other assets | 5,842 | 6,658 | Other assets | 3,364 | 4,475 | ||||||||||||||
Total assets | Total assets | $ | 539,705 | $ | 468,451 | Total assets | $ | 537,946 | $ | 498,689 | ||||||||||
Liabilities and Stockholders’ Equity | Liabilities and Stockholders’ Equity | Liabilities and Stockholders’ Equity | ||||||||||||||||||
Current Liabilities: | Current Liabilities: | Current Liabilities: | ||||||||||||||||||
Accounts payable and accrued liabilities | $ | 123,832 | $ | 80,260 | Accounts payable and accrued liabilities | $ | 109,673 | $ | 91,794 | |||||||||||
Accrued payroll and employee benefits | 24,335 | 24,759 | Accrued payroll and employee benefits | 32,194 | 25,369 | |||||||||||||||
Current portion of long-term debt | 15,043 | Current portion of long-term debt | 2,143 | |||||||||||||||||
Total current liabilities | 148,167 | 120,062 | Total current liabilities | 144,010 | �� | 117,163 | ||||||||||||||
Long-term debt, less current portion | Long-term debt, less current portion | 156,771 | 121,214 | Long-term debt, less current portion | 146,429 | 148,671 | ||||||||||||||
Deferred income taxes | Deferred income taxes | 26,322 | 26,263 | Deferred income taxes | 14,468 | 24,490 | ||||||||||||||
Total liabilities | Total liabilities | 331,260 | 267,539 | Total liabilities | 304,907 | 290,324 | ||||||||||||||
Commitments and contingencies | Commitments and contingencies | Commitments and contingencies | ||||||||||||||||||
Redeemable convertible preferred stock, $1 par value - 1,008,000 shares authorized; no shares issued or outstanding in 2001; 1,008,000 shares issued and outstanding in 2000 | 100,540 | |||||||||||||||||||
Stockholders’ Equity: | Stockholders’ Equity: | Stockholders’ Equity: | ||||||||||||||||||
Preferred stock, $1 par value - 8,992,000 shares authorized; no shares issued or outstanding in 2001 and 2000 | Preferred stock, $1 par value - 10,000,000 shares authorized; no shares issued or outstanding in 2002 and 2001 | |||||||||||||||||||
Common stock, $1 par value - 60,000,000 shares authorized; 34,466,000 shares and 28,268,000 shares issued and outstanding in 2001 and 2000, respectively | 34,466 | 28,268 | Common stock, $1 par value - 60,000,000 shares authorized; 34,883,000 shares and 34,461,000 shares issued and outstanding in 2002 and 2001, respectively | 34,883 | 34,461 | |||||||||||||||
Capital in excess of par | 158,838 | 58,396 | Capital in excess of par | 166,962 | 160,103 | |||||||||||||||
Notes receivable from stockholders | (3,103 | ) | (2,284 | ) | Notes receivable from stockholders | (2,228 | ) | (2,546 | ) | |||||||||||
Retained earnings | 18,244 | 15,992 | Retained earnings | 33,422 | 16,347 | |||||||||||||||
Total stockholders’ equity | Total stockholders’ equity | 208,445 | 100,372 | Total stockholders’ equity | 233,039 | 208,365 | ||||||||||||||
Total liabilities and stockholders’ equity | Total liabilities and stockholders’ equity | $ | 539,705 | $ | 468,451 | Total liabilities and stockholders’ equity | $ | 537,946 | $ | 498,689 | ||||||||||
See accompanying Notes to Consolidated Financial Statements.
2
DREYER’S GRAND ICE CREAM, INC.
CONSOLIDATED STATEMENT OF INCOME
Thirteen Weeks Ended | Thirty-nine Weeks Ended | |||||||||||||||||||||||||||||||||||
Sept. 29, 2001 | Sept. 23, 2000 | Sept. 29, 2001 | Sept. 23, 2000 | Thirteen Weeks Ended | Thirty-nine Weeks Ended | |||||||||||||||||||||||||||||||
($ in thousands, except per share amounts) | ($ in thousands, except per share amounts) | ($ in thousands, except per share amounts) | Sept. 28, 2002 | Sept. 29, 2001 | Sept. 28, 2002 | Sept. 29, 2001 | ||||||||||||||||||||||||||||||
Revenues: | ||||||||||||||||||||||||||||||||||||
Sales | $ | 419,911 | $ | 345,017 | $ | 1,076,773 | $ | 909,256 | ||||||||||||||||||||||||||||
Other income | 1,029 | 531 | 2,198 | 3,660 | ||||||||||||||||||||||||||||||||
420,940 | 345,548 | 1,078,971 | 912,916 | |||||||||||||||||||||||||||||||||
Net sales | Net sales | $ | 383,598 | $ | 361,636 | $ | 1,050,823 | $ | 936,473 | |||||||||||||||||||||||||||
Costs and expenses: | Costs and expenses: | Costs and expenses: | ||||||||||||||||||||||||||||||||||
Cost of goods sold | 321,167 | 251,777 | 832,496 | 669,780 | Cost of goods sold | 327,624 | 321,020 | 912,650 | 831,136 | |||||||||||||||||||||||||||
Selling, general and administrative | 87,012 | 72,596 | 223,144 | 191,801 | Selling, general and administrative | 35,632 | 28,884 | 90,560 | 84,204 | |||||||||||||||||||||||||||
Interest, net of amounts capitalized | 2,814 | 3,420 | 9,092 | 9,053 | Interest, net of amounts capitalized | 1,947 | 2,814 | 5,835 | 9,092 | |||||||||||||||||||||||||||
Other income, net | (575 | ) | (1,029 | ) | (386 | ) | (2,198 | ) | ||||||||||||||||||||||||||||
410,993 | 327,793 | 1,064,732 | 870,634 | Merger transaction expenses | 2,823 | 5,711 | ||||||||||||||||||||||||||||||
367,451 | 351,689 | 1,014,370 | 922,234 | |||||||||||||||||||||||||||||||||
Income before income tax provision | Income before income tax provision | 9,947 | 17,755 | 14,239 | 42,282 | Income before income tax provision | 16,147 | 9,947 | 36,453 | 14,239 | ||||||||||||||||||||||||||
Income tax provision | Income tax provision | 3,899 | 6,765 | 5,582 | 16,110 | Income tax provision | 5,813 | 3,899 | 13,123 | 5,582 | ||||||||||||||||||||||||||
Net income | Net income | 6,048 | 10,990 | 8,657 | 26,172 | Net income | 10,334 | 6,048 | 23,330 | 8,657 | ||||||||||||||||||||||||||
Accretion of preferred stock to redemption value | Accretion of preferred stock to redemption value | 106 | 212 | 318 | Accretion of preferred stock to redemption value | 212 | ||||||||||||||||||||||||||||||
Preferred stock dividends | Preferred stock dividends | 174 | 348 | 522 | Preferred stock dividends | 348 | ||||||||||||||||||||||||||||||
Net income available to common stockholders | Net income available to common stockholders | $ | 6,048 | $ | 10,710 | $ | 8,097 | $ | 25,332 | Net income available to common stockholders | $ | 10,334 | $ | 6,048 | $ | 23,330 | $ | 8,097 | ||||||||||||||||||
Net income per common share: | Net income per common share: | Net income per common share: | ||||||||||||||||||||||||||||||||||
Basic | $ | .18 | $ | .38 | $ | .26 | $ | .90 | Basic | $ | .30 | $ | .18 | $ | .67 | $ | .26 | |||||||||||||||||||
Diluted | $ | .17 | $ | .31 | $ | .24 | $ | .75 | Diluted | $ | .27 | $ | .17 | $ | .62 | $ | .24 | |||||||||||||||||||
Dividends per common share | Dividends per common share | $ | .06 | $ | .03 | $ | .18 | $ | .09 | Dividends per common share | $ | .06 | $ | .06 | $ | .18 | $ | .18 | ||||||||||||||||||
See accompanying Notes to Consolidated Financial Statements.
3
DREYER’S GRAND ICE CREAM, INC.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY
Notes | Retained | |||||||||||||||||||||||||||||||||||||||||||||||||
Common Stock | Receivable | Earnings | ||||||||||||||||||||||||||||||||||||||||||||||||
Capital in | From | (Accumulated | Notes | |||||||||||||||||||||||||||||||||||||||||||||||
Shares | Amount | Excess of Par | Stockholders | Deficit) | Total | Common Stock | Receivable | |||||||||||||||||||||||||||||||||||||||||||
Capital in | From | Retained | ||||||||||||||||||||||||||||||||||||||||||||||||
(In thousands) | (In thousands) | (In thousands) | Shares | Amount | Excess of Par | Stockholders | Earnings | Total | ||||||||||||||||||||||||||||||||||||||||||
Balances at December 25, 1999 | 27,871 | $ | 27,871 | $ | 53,172 | $ | (2,501 | ) | $ | (4,848 | ) | $ | 73,694 | |||||||||||||||||||||||||||||||||||||
Net income | 26,172 | 26,172 | ||||||||||||||||||||||||||||||||||||||||||||||||
Accretion of preferred stock to redemption value | (318 | ) | (318 | ) | ||||||||||||||||||||||||||||||||||||||||||||||
Preferred stock dividends declared | (522 | ) | (522 | ) | ||||||||||||||||||||||||||||||||||||||||||||||
Common stock dividends declared | (2,533 | ) | (2,533 | ) | ||||||||||||||||||||||||||||||||||||||||||||||
Issuance of common stock under employee stock plans, net | 365 | 365 | 4,892 | (482 | ) | 4,775 | ||||||||||||||||||||||||||||||||||||||||||||
Repurchases and retirements of common stock | (15 | ) | (15 | ) | (328 | ) | 70 | (273 | ) | |||||||||||||||||||||||||||||||||||||||||
Balances at September 23, 2000 | 28,221 | $ | 28,221 | $ | 57,736 | $ | (2,913 | ) | $ | 17,951 | $ | 100,995 | ||||||||||||||||||||||||||||||||||||||
Balances at December 30, 2000 | Balances at December 30, 2000 | 28,268 | $ | 28,268 | $ | 58,396 | $ | (2,284 | ) | $ | 15,992 | $ | 100,372 | Balances at December 30, 2000 | 28,268 | $ | 28,268 | $ | 58,396 | $ | (2,284 | ) | $ | 15,992 | $ | 100,372 | ||||||||||||||||||||||||
Net income | 8,657 | 8,657 | Net income | 8,657 | 8,657 | |||||||||||||||||||||||||||||||||||||||||||||
Accretion of preferred stock to redemption value | (212 | ) | (212 | ) | Accretion of preferred stock to redemption value | (212 | ) | (212 | ) | |||||||||||||||||||||||||||||||||||||||||
Preferred stock dividends declared | (348 | ) | (348 | ) | Preferred stock dividends declared | (348 | ) | (348 | ) | |||||||||||||||||||||||||||||||||||||||||
Common stock dividends declared | (5,845 | ) | (5,845 | ) | Common stock dividends declared | (5,845 | ) | (5,845 | ) | |||||||||||||||||||||||||||||||||||||||||
Conversion of mandatorily redeemable convertible preferred stock to common stock | 5,800 | 5,800 | 94,952 | 100,752 | Conversion of mandatorily redeemable convertible preferred stock to common stock | 5,800 | 5,800 | 94,952 | 100,752 | |||||||||||||||||||||||||||||||||||||||||
Issuance of common stock under employee stock plans, net | 480 | 480 | 7,739 | (819 | ) | 7,400 | Issuance of common stock under employee stock plans, net | 480 | 480 | 7,739 | (819 | ) | 7,400 | |||||||||||||||||||||||||||||||||||||
Repurchases and retirements of common stock | (82 | ) | (82 | ) | (2,249 | ) | (2,331 | ) | Repurchases and retirements of common stock | (82 | ) | (82 | ) | (2,249 | ) | (2,331 | ) | |||||||||||||||||||||||||||||||||
Balances at September 29, 2001 | Balances at September 29, 2001 | 34,466 | $ | 34,466 | $ | 158,838 | $ | (3,103 | ) | $ | 18,244 | $ | 208,445 | Balances at September 29, 2001 | 34,466 | $ | 34,466 | $ | 158,838 | $ | (3,103 | ) | $ | 18,244 | $ | 208,445 | ||||||||||||||||||||||||
Balances at December 29, 2001 | Balances at December 29, 2001 | 34,461 | $ | 34,461 | $ | 160,103 | $ | (2,546 | ) | $ | 16,347 | $ | 208,365 | |||||||||||||||||||||||||||||||||||||
Net income | 23,330 | 23,330 | ||||||||||||||||||||||||||||||||||||||||||||||||
Common stock dividends declared | (6,255 | ) | (6,255 | ) | ||||||||||||||||||||||||||||||||||||||||||||||
Issuance of common stock under employee stock plans, net | 477 | 477 | 8,952 | (78 | ) | 9,351 | ||||||||||||||||||||||||||||||||||||||||||||
Repurchases and retirements of common stock | (55 | ) | (55 | ) | (2,093 | ) | 396 | (1,752 | ) | |||||||||||||||||||||||||||||||||||||||||
Balances at September 28, 2002 | Balances at September 28, 2002 | 34,883 | $ | 34,883 | $ | 166,962 | $ | (2,228 | ) | $ | 33,422 | $ | 233,039 | |||||||||||||||||||||||||||||||||||||
See accompanying Notes to Consolidated Financial Statements.
4
DREYER’S GRAND ICE CREAM, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
Thirty-nine Weeks Ended | Thirty-nine Weeks Ended | |||||||||||||||||||||
Sept. 29, 2001 | Sept. 23, 2000 | |||||||||||||||||||||
(In thousands) | ||||||||||||||||||||||
($ in thousands) | ($ in thousands) | Sept. 28, 2002 | Sept. 29, 2001 | |||||||||||||||||||
Cash flows from operating activities: | Cash flows from operating activities: | Cash flows from operating activities: | ||||||||||||||||||||
Net income | $ | 23,330 | $ | 8,657 | ||||||||||||||||||
Net income | $ | 8,657 | $ | 26,172 | Adjustments to reconcile net income to cash flows from operations: | |||||||||||||||||
Adjustments to reconcile net income to cash from operations: | Depreciation and amortization | 26,067 | 26,940 | |||||||||||||||||||
Depreciation and amortization | 26,940 | 28,078 | Deferred income taxes | 1,993 | 1,029 | |||||||||||||||||
Deferred income taxes | 1,029 | 5,799 | Impairment of investment in Momentx Corporation | 1,093 | ||||||||||||||||||
Changes in assets and liabilities, net of amounts acquired: | Changes in assets and liabilities, net of amounts acquired: | |||||||||||||||||||||
Trade accounts receivable | (52,241 | ) | (39,327 | ) | Trade accounts receivable | (26,919 | ) | (52,241 | ) | |||||||||||||
Other accounts receivable | (1,957 | ) | (13,802 | ) | Other accounts receivable | 1,732 | (1,957 | ) | ||||||||||||||
Inventories | (12,688 | ) | (16,182 | ) | Inventories | (4,235 | ) | (12,688 | ) | |||||||||||||
Prepaid expenses and other | 219 | 398 | Prepaid expenses and other | (8,404 | ) | 219 | ||||||||||||||||
Accounts payable and accrued liabilities | 42,353 | 26,175 | Accounts payable and accrued liabilities | 17,854 | 42,353 | |||||||||||||||||
Accrued payroll and employee benefits | (424 | ) | (12,750 | ) | Accrued payroll and employee benefits | 6,825 | (424 | ) | ||||||||||||||
11,888 | 4,561 | 39,336 | 11,888 | |||||||||||||||||||
Cash flows from investing activities: | Cash flows from investing activities: | Cash flows from investing activities: | ||||||||||||||||||||
Acquisition of property, plant and equipment | (29,218 | ) | (19,663 | ) | Acquisition of property, plant and equipment | (37,927 | ) | (29,218 | ) | |||||||||||||
Retirement of property, plant and equipment | 1,662 | 1,423 | Retirement of property, plant and equipment | 536 | 1,662 | |||||||||||||||||
Purchase of common stock of Cherokee Cream Company, Inc., net of cash acquired | (7,651 | ) | Purchase of independent distributors and other intangibles | (2,757 | ) | (5,646 | ) | |||||||||||||||
Increase in goodwill, distribution rights and other intangibles, net | (5,646 | ) | (1,385 | ) | Increase in other assets | (249 | ) | 513 | ||||||||||||||
Increase in other assets | 513 | (3,171 | ) | |||||||||||||||||||
(40,397 | ) | (32,689 | ) | |||||||||||||||||||
(32,689 | ) | (30,447 | ) | |||||||||||||||||||
Cash flows from financing activities: | Cash flows from financing activities: | Cash flows from financing activities: | ||||||||||||||||||||
Proceeds from long-term debt, net | 42,700 | 172,795 | Net (repayments of) proceeds from long-term debt | (99 | ) | 42,700 | ||||||||||||||||
Repayments of long-term debt | (22,186 | ) | (149,421 | ) | Repayments of long-term debt | (22,186 | ) | |||||||||||||||
Issuance of common stock under employee stock plans, net | 7,400 | 4,775 | Issuance of common stock under employee stock plans, net | 9,351 | 7,400 | |||||||||||||||||
Repurchases and retirements of common stock | (2,331 | ) | (273 | ) | Repurchases and retirements of common stock | (1,752 | ) | (2,331 | ) | |||||||||||||
Cash dividends paid | (4,974 | ) | (3,041 | ) | Cash dividends paid | (6,230 | ) | (4,974 | ) | |||||||||||||
20,609 | 24,835 | 1,270 | 20,609 | |||||||||||||||||||
Decrease in cash and cash equivalents | (192 | ) | (1,051 | ) | ||||||||||||||||||
Increase (decrease) in cash and cash equivalents | Increase (decrease) in cash and cash equivalents | 209 | (192 | ) | ||||||||||||||||||
Cash and cash equivalents, beginning of period | Cash and cash equivalents, beginning of period | 2,721 | 3,158 | Cash and cash equivalents, beginning of period | 1,650 | 2,721 | ||||||||||||||||
Cash and cash equivalents, end of period | Cash and cash equivalents, end of period | $ | 2,529 | $ | 2,107 | Cash and cash equivalents, end of period | $ | 1,859 | $ | 2,529 | ||||||||||||
Supplemental cash flow information: | Supplemental cash flow information: | Supplemental cash flow information: | ||||||||||||||||||||
Cash paid during the period for: | Cash paid during the period for: | |||||||||||||||||||||
Interest (net of amounts capitalized) | $ | 8,848 | $ | 8,615 | Interest (net of amounts capitalized) | $ | 5,511 | $ | 8,848 | |||||||||||||
Income taxes (net of refunds) | $ | 261 | $ | 5,726 | Income taxes (net of refunds) | $ | 6,653 | $ | 261 | |||||||||||||
Supplemental schedule of noncash investing and financing activities: | Supplemental schedule of noncash investing and financing activities: | Supplemental schedule of noncash investing and financing activities: | ||||||||||||||||||||
Conversion of redeemable convertible preferred stock to common stock | $ | 100,752 | Conversion of redeemable convertible preferred stock to common stock | $ | 100,752 | |||||||||||||||||
Fair value of assets acquired | $ | 19,052 | ||||||||||||||||||||
Cash paid for common stock | (7,855 | ) | ||||||||||||||||||||
Liabilities assumed | $ | 11,197 | ||||||||||||||||||||
See accompanying Notes to Consolidated Financial Statements.
5
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.
6
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:
Sept. 29, 2001 | Dec. 30, 2000 | |||||||||||||||
(In thousands) | (In thousands) | Sept. 28, 2002 | Dec. 29, 2001 | |||||||||||||
Raw materials | $ | 10,086 | $ | 8,368 | $ | 9,173 | $ | 9,099 | ||||||||
Finished goods | 71,403 | 60,433 | 76,360 | 72,199 | ||||||||||||
$ | 81,489 | $ | 68,801 | $ | 85,533 | $ | 81,298 | |||||||||
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:
(In thousands) | Sept. 28, 2002 | |||
Butter | $ | 3,501 | ||
Butter futures contracts | 155 | |||
$ | 3,656 | |||
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:
Thirteen Weeks Ended | Thirty-nine Weeks Ended | |||||||||||||||||||||||||||||||||
Sept. 29, 2001 | Sept. 23, 2000 | Sept. 29, 2001 | Sept. 23, 2000 | Thirteen Weeks Ended | Thirty-nine Weeks Ended | |||||||||||||||||||||||||||||
(In thousands, except per share amounts) | (In thousands, except per share amounts) | (In thousands, except per share amounts) | Sept. 28, 2002 | Sept. 29, 2001 | Sept. 28, 2002 | Sept. 29, 2001 | ||||||||||||||||||||||||||||
Net income available to common stockholders-basic | Net income available to common stockholders-basic | $ | 6,048 | $ | 10,710 | $ | 8,097 | $ | 25,332 | Net income available to common stockholders-basic | $ | 10,334 | $ | 6,048 | $ | 23,330 | $ | 8,097 | ||||||||||||||||
Add: preferred dividends and accretion | Add: preferred dividends and accretion | 280 | 560 | 840 | Add: preferred dividends and accretion | 560 | ||||||||||||||||||||||||||||
Net income available to common stockholders-diluted | Net income available to common stockholders-diluted | $ | 6,048 | $ | 10,990 | $ | 8,657 | $ | 26,172 | Net income available to common stockholders-diluted | $ | 10,334 | $ | 6,048 | $ | 23,330 | $ | 8,657 | ||||||||||||||||
Weighted-average shares-basic | Weighted-average shares-basic | 34,420 | 28,173 | 30,688 | 28,077 | Weighted-average shares-basic | 34,814 | 34,420 | 34,670 | 30,688 | ||||||||||||||||||||||||
Dilutive effect of options | Dilutive effect of options | 1,801 | 1,434 | 1,897 | 1,215 | Dilutive effect of options | 3,358 | 1,801 | 3,020 | 1,897 | ||||||||||||||||||||||||
Dilutive effect of preferred stock | Dilutive effect of preferred stock | 5,800 | 3,633 | 5,800 | Dilutive effect of preferred stock | 3,633 | ||||||||||||||||||||||||||||
Weighted-average shares-diluted | Weighted-average shares-diluted | 36,221 | 35,407 | 36,218 | 35,092 | Weighted-average shares-diluted | 38,172 | 36,221 | 37,690 | 36,218 | ||||||||||||||||||||||||
Net income per common share: | Net income per common share: | Net income per common share: | ||||||||||||||||||||||||||||||||
Basic | $ | .18 | $ | .38 | $ | .26 | $ | .90 | Basic | $ | .30 | $ | .18 | $ | .67 | $ | .26 | |||||||||||||||||
Diluted | $ | .17 | $ | .31 | $ | .24 | $ | .75 | Diluted | $ | .27 | $ | .17 | $ | .62 | $ | .24 | |||||||||||||||||
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:
Thirteen Weeks Ended | Thirty-nine Weeks Ended | ||||||||||||||||
(In thousands, except per share amounts) | Sept. 28, 2002 | Sept. 29, 2001 | Sept. 28, 2002 | Sept. 29, 2001 | |||||||||||||
As reported | $ | 10,334 | $ | 6,048 | $ | 23,330 | $ | 8,097 | |||||||||
Goodwill amortization, net of tax | 655 | 1,942 | |||||||||||||||
As adjusted | $ | 10,334 | $ | 6,703 | $ | 23,330 | $ | 10,039 | |||||||||
Per common share: | |||||||||||||||||
As reported-basic | $ | .30 | $ | .18 | $ | .67 | $ | .26 | |||||||||
Goodwill amortization, net of tax | .02 | .06 | |||||||||||||||
As adjusted-basic | $ | .30 | $ | .20 | $ | .67 | $ | .32 | |||||||||
As reported-diluted | $ | .27 | $ | .17 | $ | .62 | $ | .24 | |||||||||
Goodwill amortization, net of tax | .02 | .05 | |||||||||||||||
As adjusted-diluted | $ | .27 | $ | .19 | $ | .62 | $ | .29 | |||||||||
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.
810
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:
Percentage of Sales | Period-to-Period Variance Favorable (Unfavorable) | ||||||||||||||||||||||||||||||||
Thirteen Weeks Ended | Thirty-nine Weeks Ended | Thirteen Weeks Ended | Thirteen Weeks Ended | ||||||||||||||||||||||||||||||
2001 | 2001 | ||||||||||||||||||||||||||||||||
Sept. 29, | Sept. 23, | Sept. 29, | Sept. 23, | Compared | Compared | ||||||||||||||||||||||||||||
2001 | 2000 | 2001 | 2000 | To 2000 | To 2000 | ||||||||||||||||||||||||||||
Revenues: | |||||||||||||||||||||||||||||||||
Sales | 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | 21.7 | % | 18.4 | % | |||||||||||||||||||||
Other income | 0.2 | 0.2 | 0.2 | 0.4 | 93.8 | (40.0 | ) | ||||||||||||||||||||||||||
100.2 | 100.2 | 100.2 | 100.4 | 21.8 | 18.2 | ||||||||||||||||||||||||||||
Costs and expenses: | |||||||||||||||||||||||||||||||||
Cost of goods sold | 76.4 | 73.0 | 77.2 | 73.7 | (27.6 | ) | (24.3 | ) | |||||||||||||||||||||||||
Selling, general and administrative | 20.7 | 21.0 | 20.7 | 21.1 | (19.9 | ) | (16.3 | ) | |||||||||||||||||||||||||
Interest, net of amounts capitalized | 0.7 | 1.0 | 1.0 | 1.0 | (17.7 | ) | (0.4 | ) | |||||||||||||||||||||||||
97.8 | 95.0 | 98.9 | 95.8 | (25.4 | ) | (22.3 | ) | ||||||||||||||||||||||||||
Income before income tax provision | 2.4 | 5.2 | 1.3 | 4.6 | (44.0 | ) | (66.3 | ) | |||||||||||||||||||||||||
Income tax provision | 1.0 | 2.0 | 0.5 | 1.7 | 42.4 | 65.4 | |||||||||||||||||||||||||||
Net income | 1.4 | 3.2 | 0.8 | 2.9 | (45.0 | ) | (66.9 | ) | |||||||||||||||||||||||||
Accretion of preferred stock to redemption value | — | — | — | — | — | — | |||||||||||||||||||||||||||
Preferred stock dividends | — | 0.1 | — | 0.1 | — | — | |||||||||||||||||||||||||||
Net income available to common stockholders | 1.4 | % | 3.1 | % | 0.8 | % | 2.8 | % | (43.5 | ) | (68.0 | ) | |||||||||||||||||||||
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• | The Company assesses the recoverability of trade accounts receivable based on estimated losses resulting from the inability of customers to make required payments. The Company’s estimates are based on the aging of accounts receivable balances and historical write-off experience, net of recoveries. The Company reviews trade accounts receivable for recoverability regularly and whenever events or circumstances, such as deterioration in the financial condition of a customer, indicate that additional allowances might be required. Changes in the financial condition of the Company’s major customers could result in significant accounts receivable write-offs. | |
• | The Company records a valuation allowance related to deferred tax assets if, based on the weight of the available evidence, the Company concludes that it is more likely than not that some portion or all of the deferred tax assets will |
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Thirteen Weeksnot be realized. While the Company has considered future taxable income and prudent and feasible tax planning strategies in assessing the need for the valuation allowance, should the Company determine that it would not be able to realize all or part of its net deferred tax assets in the future, an adjustment to the carrying value of the deferred tax assets would be charged to income in the period in which such determination is made. • The Company has goodwill related to business acquisitions. The Company tests goodwill for impairment on 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 reporting unit below its carrying value. If the fair value of a reporting unit is less than its carrying value, then an impairment loss would be recognized equal to the excess of the carrying value of the reporting unit goodwill over the fair value of that goodwill. The fair value of goodwill is based on estimates that carry a degree of uncertainty. • The Company’s liabilities for self-insured health, workers compensation and vehicle plans are developed from actuarial valuations that rely on various key assumptions. Changes in key assumptions may occur in the future, which could result in changes to related self-insurance costs. • The Company’s liabilities for employee bonuses and profit-sharing plan contributions are based primarily on estimated full-year profitability at the end of each quarter. Changes in the performance of the business and in estimated full-year profitability could result in significant interim adjustments to the cost of these programs.
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.
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 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 29, 2001 Compared with Thirteen Weeks ended September 23, 2000
Consolidated sales for the third quarter of 2001 increased $74,894,000, or 22 percent, to $419,911,000 from $345,017,000 for the same quarter last year.28, 2002, respectively.
SalesIf the transactions contemplated by the Merger Agreement are completed, each non-Nestlé stockholder who holds shares of the Company’s branded products, including licensedcommon 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 joint venture products (company brands), increased $20,533,000,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 nine percent,all of their shares to $259,930,000 from $239,397,000New Dreyer’s for $83.00 per share during two periods, the same quarter last year.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 increase was led by sales of premium Dreyer’sclass B common shares are similar to the class A common shares, except that they lack the call and Edy’s Grand Ice Cream, salesput features. The shares of the Company’s superpremium portfolio, most notably Dreamery and Whole Fruit Sorbet, and Whole Fruit Bars. Company brands represented 62 percent of consolidated sales in 2001 compared with 69 percent incommon stock currently held by Nestlé will be converted into the same quarter last year. Gallon salesnumber 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 branded products, including novelties, increasedcommon stock on a diluted basis. If the transactions contemplated by the Merger Agreement are completed, Nestlé will own approximately 1,100,000 gallons, or four67 percent to approximately 32,100,000 gallons. The average price of the Company’s branded products increased five percent before the effectdiluted common stock of increased trade promotion expenses, which are presently classified as selling, general and administrative expenses.New Dreyer’s.
SalesEach outstanding option to purchase the Company’s common stock under the Company’s existing stock option plans will, at the completion of products distributed for other manufacturers (partner brands), including Ben & Jerry’s Homemade, Inc. (Ben & Jerry’s), increased $54,361,000, or 51 percent,the transactions, be converted into an option to $159,981,000 from $105,620,000 foracquire:
• | 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 quarter last year. This increase continuesterms and conditions applicable to be driven largely by the acquisition of independent distributors in 2000 along with increased sales of Ben & Jerry’s superpremium products. The Company began distributing Ben & Jerry’s productsoriginal options to a larger distribution territory in March 2001 and distributes Ben & Jerry’s products forpurchase the grocery channel in allCompany’s common stock immediately prior to the completion of the Company’s company-owned markets across the country. Sales of partner brands represented 38 percent of consolidated sales compared with 31 percent in the same quarter last year. Unit sales of partner brands increased by 39 percent over the same quarter last year. Average wholesale prices for partner brands increased approximately nine percent.transactions.
Cost of goods sold increased $69,390,000, or 28 percent, over the same quarter last year. The Company’s gross profit increased $5,504,000 to $98,744,000, representing a 24 percent gross margin for the third quarter of 2001 compared with a 27 percent gross margin for the third quarter of 2000. The cost of cream, the Company’s primary ingredient, continued to rise during the quarter. This increase in dairy raw material costs unfavorably impacted gross profit by approximately $12,000,000 as compared to the third quarter of 2000. Since the end of the third quarter, the price of butter, which determines the Company’s cream costs, has dropped, but there can be no assurance that this trend will continue.
Other income increased $498,000 primarily due to an increase in earnings from joint ventures accounted for under the equity method.
Selling, general and administrative expenses increased $14,416,000, or 20 percent, to $87,012,000 from $72,596,000. The increase primarily reflects increased trade promotion expenses for both new and existing products and increased administrative expenses. Selling, general and administrative expenses remained relatively unchanged at 21 percent of consolidated sales in 2001 and 2000.
Interest expense decreased $606,000, or 18 percent, to $2,814,000, primarily due to lower interest rates.
The effective income tax rate was 39.2 percent for the third quarter of 2001 and 38.1 percent for the same quarter last year.
Thirty-nine Weeks ended September 29, 2001 Compared with Thirty-nine Weeks ended September 23, 2000
Consolidated sales for the first thirty-nine weeks of 2001 increased $167,517,000, or 18 percent, to $1,076,773,000 from $909,256,000 for the same period last year.
Sales of the Company’s branded products, including licensed and joint venture products (company brands), increased $34,886,000, or five percent, to $676,889,000 from $642,003,000 for the same period last year. The increase was led by sales of premium Dreyer’s and Edy’s Grand Ice Cream, Whole Fruit Bars, and Whole Fruit Sorbet. Company brands represented 63 percent of consolidated sales in 2001 compared with 71 percent in the same period last year. Gallon sales of the Company’s branded products, including novelties, increased approximately 2,000,000 gallons, or two percent, to approximately 85,100,000 gallons. The average price of the Company’s branded products increased three percent before the effect of increased trade promotion expenses, which are presently classified as selling, general and administrative expenses.
Sales of products distributed for other manufacturers (partner brands), including Ben & Jerry’s Homemade, Inc. (Ben & Jerry’s), increased $132,631,000, or 50 percent, to $399,884,000 from $267,253,000 for the same period last year. This increase continues to be
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driven largely Certain regulatory requirements must be complied with before the transactions contemplated by the acquisition of independent distributors in 2000 along with increased sales of Ben & Jerry’s superpremium products.Merger Agreement are completed. The Company began distributing Ben & Jerry’s productsand Nestlé are not aware of any material governmental consents or approvals that are required prior to a larger distribution territory during March 2001 and distributes Ben & Jerry’s products for the grocery channel incompletion 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 Securities and Exchange Commission (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 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 company-owned markets acrossjoint venture partners and partner brand manufacturers have rights to terminate their arrangements with the country. SalesCompany 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 brands represented 37 percentbrand relationships, it can provide no assurance as to the potential actions of consolidated sales comparedits business partners. Should any of the Company’s significant partners or suppliers choose to exit these arrangements in accordance with 29 percenttheir rights to do so following the consummation, the Company may incur significant decreases in the same period last year. Unit sales of partner brands increased by 39 percent over the same period last year. Average wholesale prices for partner brands increased approximately eight percent.
Cost of goods sold increased $162,716,000, or 24 percent, over the same period last year. The Company's gross profit increased $4,801,000or be required to $244,277,000, representingwrite-off certain assets as a 23 percent gross margin for the first thirty-nine weeks of 2001 compared with a 26 percent gross margin for the same period of 2000. The cost of cream, the Company’s primary ingredient, continued to rise during the first thirty-nine weeks of 2001. This increase in dairy raw material costs unfavorably impacted gross profit by approximately $27,000,000 as compared to the same period of 2000. Since the endresult of the third quarter, the priceloss of butter, which determines the Company’s cream costs, has dropped, but there can be no assurance that this trend will continue. Gross margin was also unfavorably affected by integration and other costs associated with recent acquisitions, higher energy costs, and increased distribution expenses incurred in the ongoing rollout of additional distribution territories for Ben & Jerry’s products.these business partners.
Other income decreased $1,462,000 primarily due to a decrease in earnings from joint ventures accounted for under the equity method.
Selling, general and administrative expenses increased $31,343,000, or 16 percent, to $223,144,000 from $191,801,000. The increase primarily reflects increased trade promotion expenses for both new and existing products and, to a lesser extent, increased administrative expenses. Selling, general and administrative expenses remained relatively unchanged at 21 percent of consolidated sales in 2001 and 2000.
Interest expense remained relatively unchanged compared with the same period last year.
The effective income tax rate was 39.2 percent and 38.1 percent for the thirty-nine weeks ended 2001 and 2000, respectively.
LIQUIDITY AND CAPITAL RESOURCES
The Company’s cash flows provided by operating activities increased to $11,888,000 from $4,561,000 for the same period last year. This increase in operating cash flows was provided by improved working capital management, offset in part by a reduction in net income.
Cash flows used in investing activities totaled $32,689,000 and $30,447,000, in 2001 and 2000, respectively. Cash flows used in investing activities during the first thirty-nine weeks of 2001 consisted primarily of purchases of $29,218,000 in property, plant and equipment. Cash flows used in investing activities during the first thirty-nine weeks of 2000 consisted primarily of purchases of $19,663,000 of property, plant and equipment and the $7,651,000 payment for the purchase of the remaining 84 percent of the outstanding common stock of Cherokee Cream Company, Inc.
Cash flows from financing activities totaled $20,609,000 and $24,835,000, in 2001 and 2000, respectively. Cash flows from financing activities for the first thirty-nine weeks of 2001 primarily consisted of a net increase of $42,700,000 in the Company’s long-term debt, partially offset by repayments of long-term debt totaling $22,186,000. Cash flows from financing activities for the first thirty-nine weeks of 2000 primarily consisted of a net increase of $172,795,000 in long-term debt, partially offset by repayments of long-term debt totaling $149,421,000, reflecting the issuance of a new revolving line of credit and the repayment of the former revolver, respectively.
Working capital at September 29, 2001 increased $37,400,000 from year-end 2000. This increase was primarily caused by increases in trade accounts receivable and inventories, along with a decrease in the current portion of long-term debt, partially offset by increases in accounts payable and accrued liabilities (resulting from both seasonality and the additional Ben & Jerry’s business).
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.
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.
At September 29, 2001, the Company had $2,529,000 in cash and cash equivalents, and an unused credit line of $111,800,000. 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.
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New Accounting PronouncementsADOPTION 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, 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:
Thirteen Weeks Ended | Thirty-nine Weeks Ended | ||||||||||||||||
(In thousands, except per share amounts) | Sept. 28, 2002 | Sept. 29, 2001 | Sept. 28, 2002 | Sept. 29, 2001 | |||||||||||||
As reported | $ | 10,334 | $ | 6,048 | $ | 23,330 | $ | 8,097 | |||||||||
Goodwill amortization, net of tax | 655 | 1,942 | |||||||||||||||
As adjusted | $ | 10,334 | $ | 6,703 | $ | 23,330 | $ | 10,039 | |||||||||
Per common share: | |||||||||||||||||
As reported-basic | $ | .30 | $ | .18 | $ | .67 | $ | .26 | |||||||||
Goodwill amortization, net of tax | .02 | .06 | |||||||||||||||
As adjusted-basic | $ | .30 | $ | .20 | $ | .67 | $ | .32 | |||||||||
As reported-diluted | $ | .27 | $ | .17 | $ | .62 | $ | .24 | |||||||||
Goodwill amortization, net of tax | .02 | .05 | |||||||||||||||
As adjusted-diluted | $ | .27 | $ | .19 | $ | .62 | $ | .29 | |||||||||
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
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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. The adoption of SFAS No. 144 did not impact the Company’s financial position, results of operations or cash flows.
RESULTS OF OPERATIONS
The following table sets forth for the periods indicated the percent which the items in the Consolidated Statement of Income bear to net sales and the percentage change of such items compared to the indicated prior period:
Period-to-Period | |||||||||||||||||||||||||
Variance | |||||||||||||||||||||||||
Percentage of Sales | Favorable (Unfavorable) | ||||||||||||||||||||||||
Thirteen | Thirty-nine | ||||||||||||||||||||||||
Weeks | Weeks | ||||||||||||||||||||||||
Thirteen Weeks Ended | Thirty-nine Weeks Ended | Ended | Ended | ||||||||||||||||||||||
2002 | 2002 | ||||||||||||||||||||||||
Sept. 28, | Sept. 29, | Sept. 28, | Sept. 29, | Compared | Compared | ||||||||||||||||||||
2002 | 2001 | 2002 | 2001 | To 2001 | To 2001 | ||||||||||||||||||||
Net sales | 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | 6.1 | % | 12.2 | % | |||||||||||||
Costs and expenses: | |||||||||||||||||||||||||
Cost of goods sold | 85.4 | 88.7 | 86.9 | 88.8 | (2.1 | ) | (9.8 | ) | |||||||||||||||||
Selling, general and administrative | 9.3 | 8.0 | 8.6 | 9.0 | (23.4 | ) | (7.5 | ) | |||||||||||||||||
Interest, net of amounts capitalized | 0.5 | 0.8 | 0.5 | 1.0 | 30.8 | 35.8 | |||||||||||||||||||
Other expense (income) | (0.1 | ) | (0.3 | ) | — | (0.3 | ) | (44.1 | ) | (82.4 | ) | ||||||||||||||
Merger transaction expenses | 0.7 | 0.5 | NM | NM | |||||||||||||||||||||
95.8 | 97.2 | 96.5 | 98.5 | (4.5 | ) | (10.0 | ) | ||||||||||||||||||
Income before income tax provision | 4.2 | 2.8 | 3.5 | 1.5 | 62.3 | 156.0 | |||||||||||||||||||
Income tax provision | 1.5 | 1.1 | 1.3 | 0.6 | (49.1 | ) | (135.1 | ) | |||||||||||||||||
Net income | 2.7 | 1.7 | 2.2 | 0.9 | 70.9 | 169.5 | |||||||||||||||||||
Accretion of preferred stock to redemption value | — | NM | |||||||||||||||||||||||
Preferred stock dividends | — | NM | |||||||||||||||||||||||
Net income available to common stockholders | 2.7 | % | 1.7 | % | 2.2 | % | 0.9 | % | 70.9 | 188.1 | |||||||||||||||
Thirteen Weeks ended September 28, 2002 Compared with Thirteen Weeks ended September 29, 2001
Consolidated net sales for the third quarter of 2002 increased $21,962,000, or six percent, to $383,598,000 from $361,636,000 for the same quarter last year.
Net sales of the Company’s branded products, including licensed and joint venture products (company brands), increased $4,929,000, or two percent, to $209,739,000 from $204,810,000 for the same quarter last year. Company brands represented 55 percent of consolidated net sales in 2002 compared with 57 percent in the same quarter last year. The products that led this increase were Dreyer’s and Edy’s® Grand Ice Cream and Whole Fruit™ Bars. The average price of company brands, net of the effect of trade promotion expenses, increased by five percent. Gallon sales of
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company brands, including novelties, decreased approximately 600,000 gallons, or two percent, to approximately 31,400,000 gallons.
Net sales of products distributed for other manufacturers (partner brands), including Ben & Jerry’s Homemade, Inc. (Ben & Jerry’s), increased $17,033,000, or 11 percent, to $173,859,000 from $156,826,000 for the same quarter last year. This increase was driven primarily by increased sales of distributed novelty products (including a significant increase in sales of Silhouette Brands, Inc. (Silhouette) novelty products) and Ben & Jerry’s superpremium products. Sales of partner brands represented 45 percent of consolidated net sales compared with 43 percent in the same quarter last year. Average wholesale prices for partner brands increased approximately 14 percent. Unit sales of partner brands decreased by three percent over the same quarter last year.
Cost of goods sold increased $6,604,000, or two percent, to $327,624,000 from $321,020,000 for the same quarter last year. The Company’s gross profit increased by $15,358,000, or 38 percent, to $55,974,000 from $40,616,000, representing a 14.6 percent gross margin compared with an 11.2 percent gross margin for the same quarter last year. The improvement in gross profit was primarily attributable to lower dairy raw material costs and higher volume, partially offset by increases in distribution expenses. During the third quarter of 2002, the decrease in dairy raw material costs accounted for a $16,200,000 pre-tax benefit (excluding the results of butter trading activities, which are included in other income, net and discussed below) as compared to the same quarter last year.
Selling, general and administrative expenses increased $6,748,000, or 23 percent, to $35,632,000 from $28,884,000 for the same quarter last year. The increase in expenses from 2001 reflects higher marketing expenses and higher administrative expenses, partially offset by a $1,100,000 reduction in amortization of goodwill as a result of the adoption of SFAS No. 142. Selling, general and administrative expenses represented nine and eight percent of consolidated net sales in the third quarters of 2002 and does not expect2001, respectively.
Interest expense decreased $867,000, or 31 percent, to $1,947,000 from $2,814,000 for the same quarter last year, primarily due to lower interest rates.
Other income, net, decreased $454,000, or 44 percent, to $575,000 from $1,029,000 for the same quarter last year. Other income, net, includes $746,000 of losses from butter trading activities. Decreases in other income, net, were partially offset by an increase in earnings from joint ventures accounted for under the equity method.
Nestlé merger transaction expenses (discussed earlier) totaled $2,823,000 during the third quarter of 2002. The Company currently estimates that it will haveincur total merger transaction expenses, including costs to be incurred to close the transactions, in the range of $28,000,000 to $30,000,000.
The income tax provision increased $1,914,000, or 49 percent, to $5,813,000 from $3,899,000 for the same quarter last year. The effective tax rate decreased to 36.0 percent from 39.2 percent for the same quarter last year due primarily to the reversal of income taxes provided in prior periods, the elimination of certain permanent differences in connection with the adoption of SFAS No. 142 and the utilization of certain income tax credits.
Thirty-nine Weeks ended September 28, 2002 Compared with Thirty-nine Weeks ended September 29, 2001
Consolidated net sales for the first thirty-nine weeks of 2002 increased $114,350,000, or 12 percent, to $1,050,823,000 from $936,473,000 for the same period last year.
Net sales of the Company’s branded products, including licensed and joint venture products (company brands), increased $36,801,000, or seven percent, to $580,235,000 from $543,434,000 for the same period last year. Company brands represented 55 percent of consolidated net sales in 2002 compared with 58 percent in the same period last year. The products that led this increase were Dreyer’s and Edy’s® Grand Ice Cream, Whole Fruit™ Bars and the Company’s superpremium portfolio. The average price of company brands, net of the effect of trade promotion expenses, increased by three percent. Gallon sales of company brands, including novelties, increased approximately 3,500,000 gallons, or four percent, to approximately 88,600,000 gallons.
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Net sales of products distributed for other manufacturers (partner brands), including Ben & Jerry’s, increased $77,549,000, or 20 percent, to $470,588,000 from $393,039,000 for the same period last year. This increase was driven largely by increased sales of distributed novelty products (including a significant impact on its financial positionincrease in sales of Silhouette novelty products), Ben & Jerry’s superpremium products and Healthy Choice ice cream. Sales of partner brands represented 45 percent of consolidated net sales compared with 42 percent in the same period last year. Average wholesale prices for partner brands increased approximately 13 percent. Unit sales of partner brands increased by six percent over the same period last year.
Cost of goods sold increased $81,514,000, or ten percent, to $912,650,000 from $831,136,000 for the same period last year. The Company’s gross profit increased by $32,836,000, or 31 percent, to $138,173,000 from $105,337,000, representing a 13.1 percent gross margin compared with an 11.2 percent gross margin for the same period last year. The improvement in gross profit was primarily attributable to lower dairy raw material costs and higher volume, partially offset by increases in distribution expenses. During the first thirty-nine weeks of 2002, the decrease in dairy raw material costs accounted for a $29,500,000 pre-tax benefit (excluding the results of operations.butter trading activities, which are included in other income, net, and are discussed below) as compared to the same period last year.
Selling, general and administrative expenses increased $6,356,000, or eight percent, to $90,560,000 from $84,204,000 for the same period last year. The increase in expenses from 2001 reflects higher administrative expenses and higher marketing expenses, partially offset by a $3,193,000 reduction in amortization of goodwill as a result of the adoption of SFAS No. 142. Selling, general and administrative expenses represented nine percent of consolidated net sales in each of the first thirty-nine weeks of 2002 and 2001.
Interest expense decreased $3,257,000, or 36 percent, to $5,835,000 from $9,092,000 for the same period last year, primarily due to lower interest rates.
Other income, net, decreased $1,812,000, or 82 percent, to $386,000 from $2,198,000 for the same period last year. Other income, net, includes $2,065,000 of losses from butter trading activities and a $1,093,000 impairment of an investment in Momentx Corporation (Momentx), an e-market solution provider for the dairy, food and beverage industries. 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. Decreases in other income, net, were partially offset by an increase in earnings from joint ventures accounted for under the equity method.
Nestlé merger transaction expenses (discussed earlier) totaled $5,711,000 during the first thirty-nine weeks of 2002. The Company currently estimates that it will incur total merger transaction expenses, including costs to be incurred to close the transactions, in the range of $28,000,000 to $30,000,000.
The income tax provision increased $7,541,000, or 135 percent, to $13,123,000 from $5,582,000 for the same period last year. The effective tax rate decreased to 36.0 percent from 39.2 percent for the same period last year due primarily to the reversal of income taxes provided in prior periods, the elimination of certain permanent differences in connection with the adoption of SFAS No. 142 and the utilization of income tax credits.
LIQUIDITY AND CAPITAL RESOURCES
Working capital at September 28, 2002 increased $9,339,000 from year-end 2001. The Company’s cash flows from operating activities increased to $39,336,000 from $11,888,000 for the same period last year. Cash flows from operating activities for 2002 primarily consisted of net income of $23,330,000, depreciation and amortization of $26,067,000, and an increase in accounts payable and accrued liabilities of $17,854,000, partially offset by an increase in trade accounts receivable of $26,919,000. Cash flows from operating activities for 2001 primarily consisted of net income of $8,657,000, depreciation and amortization of $26,940,000, and an increase in accounts payable and accrued liabilities of $42,353,000, partially offset by an increase in trade accounts receivable of $52,241,000.
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Cash flows used in investing activities totaled $40,397,000 and $32,689,000, in 2002 and 2001, respectively. Cash flows used in investing activities primarily consisted of property, plant and equipment purchases of $37,927,000 and $29,218,000, in 2002 and 2001, respectively.
Cash flows from financing activities totaled $1,270,000 and $20,609,000, in 2002 and 2001, respectively. Cash flows from financing activities for 2002 primarily consisted of issuance of common stock of $9,351,000 partially offset by cash dividends paid of $6,230,000 and repurchases and retirements of common stock of $1,752,000. Cash flows from financing activities for 2001 primarily consisted of a net increase of $42,700,000 in the revolving line of credit, partially offset by repayments of debt totaling $22,186,000.
At September 28, 2002, the Company had $1,859,000 in cash and cash equivalents, and an unused credit line of $120,000,000. As discussed earlier, the Company currently estimates that it will incur total merger transaction expenses, including costs to be incurred to close the transactions, in the range of $28,000,000 to $30,000,000. 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, including the merger transaction expenses. In connection with the transactions contemplated by the Merger Agreement, the Company is currently in the process of negotiating modifications to its revolving line of credit agreement, including modifications relating to dividends permitted under such credit agreement.
ITEM 3. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK.
Since December 30, 2000, there have been no material changes This Item 3 should be read in conjunction with Item 7A of the Company’s 2001 Annual Report on Form 10-K and in conjunction with Item 2 above.
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 periodically purchases butter or butter futures contracts with the intent of reselling or settling its positions in order to lower its cream cost and overall exposure to the volatility of this market. The Company has elected to not treat its investment in butter as a hedge for accounting purposes. Consequently, it “marks to market” its investment at the end of each quarter and records any resulting gain or loss in Other income, net. During the thirteen and thirty-nine weeks ended September 28, 2002, the Company marked its butter investments to market risk exposure.and recorded losses of $746,000 and $2,065,000, respectively.
12 During the thirteen and thirty-nine weeks ended September 28, 2002, the decrease in dairy raw material costs accounted for a $16,200,000 pre-tax benefit and a $29,500,000 pre-tax benefit (excluding the results of butter trading activities), respectively, as compared to the thirteen and thirty-nine weeks ended September 29, 2001, respectively.
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ITEM 4. CONTROLS AND PROCEDURES.
(a) | Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of our disclosure controls and procedures, as such term is defined under Rule 13a-14(c) promulgated under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), within 90 days prior to the filing date of this report. Based on their evaluation, our principal executive officer and principal accounting officer concluded that our disclosure controls and procedures are effective. | |
(b) | There have been no significant changes (including corrective actions with regard to significant deficiencies or material weaknesses) in our internal controls or in other factors that could significantly affect these controls subsequent to the date of the evaluation referenced in paragraph (a) above. |
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PART II: OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) The following exhibit is filed herewith:
(a) | The following exhibits are filed herewith: |
Exhibit No. | Description | |
10.1 | Second Amendment dated | |
99.1 | Chief Executive Officer Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the | |
99.2 | Chief Financial Officer Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
(b) | A Report on Form | |
A Report on Form 8-K was filed on October 25, 2002, reporting an amendment to the Merger and Contribution Agreement dated June 16, 2002, to change the name of the holding company resulting from the transactions contemplated by the Merger and Contribution Agreement from “Dreyer’s Grand Ice Cream, Inc.” to “Dreyer’s Grand Ice Cream Holdings, Inc.” and to report the anticipated filing of the proxy statement/prospectus. | ||
A Report on Form 8-K was filed on November 5, 2002 which includes the information in Item 7-Management’s Discussion and Analysis of Financial Condition and Results of Operations and Item 8-Financial Statements and Supplementary Data appearing in the Company’s Form 10-K for the fiscal year ended December 29, 2001, giving effect to the adoption of the provisions of certain new accounting pronouncements. |
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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 | By: | /s/ Timothy F. Kahn | ||
Timothy F. Kahn | ||||
Vice President — Finance and Administration and Chief Financial Officer (Principal Financial Officer) |
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CERTIFICATIONS
CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER
I, T. Gary Rogers, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Dreyer’s Grand Ice Cream, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the Corporation as of, and for, the periods presented in this quarterly report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
(a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;
(b) evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and
(c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of the registrant’s board of directors:
(a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and
(b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls;
6. The registrant’s other certifying officer and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
/s/ T. Gary Rogers
T. Gary Rogers
Chairman of the Board of Directors and
Chief Executive Officer
Dated: November 12, 2002
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CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER
I, Timothy F. Kahn, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Dreyer’s Grand Ice Cream, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the Corporation as of, and for, the periods presented in this quarterly report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
(a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;
(b) evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and
(c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of the registrant’s board of directors:
(a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and
(b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls;
6. The registrant’s other certifying officer and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
/s/ Timothy F. Kahn
Timothy F. Kahn
Vice President — Finance and Administration and
Chief Financial Officer
Dated: November 12, 2002
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DREYER’S GRAND ICE CREAM, INC.
INDEX TOOF EXHIBITS
Exhibit No. | Description | |
10.1 | Second Amendment dated | |
99.1 | Chief Executive Officer Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the | |
99.2 | Chief Financial Officer Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
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