FORM 10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 23, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
Commission file number 0-14190
DREYER'S GRAND ICE CREAM, INC.
(Exact name of registrant as specified in its charter)
Delaware No. 94-2967523
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
5929 College Avenue, Oakland, California 94618
(Address of principal executive offices) (Zip Code)
(510) 652-8187
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [_]
Indicate the number of shares outstanding of each of the issuer's classes
of common stock as of the latest practicable date.
Shares Outstanding
November 1, 2000
Common stock, $1 par value 28,224,000
1
PART I: FINANCIAL INFORMATION
- ------------------------------
ITEM 1. FINANCIAL STATEMENTS
DREYER'S GRAND ICE CREAM, INC.
CONSOLIDATED BALANCE SHEET
Sept. 23, 2000 Dec. 25, 1999
-------------- -------------
($ in thousands, except per share amounts) (Unaudited)
Assets
Current Assets:
Cash and cash equivalents $ 2,107 $ 3,158
Trade accounts receivable, net of allowance for doubtful accounts of
$1,094 in 2000 and $5,715 in 1999 119,919 79,251
Other accounts receivable 27,541 13,528
Inventories 71,446 54,669
Deferred income taxes 6,147 11,586
Prepaid expenses and other 6,330 6,621
--------- ---------
Total current assets 233,490 168,813
Property, plant and equipment, net 194,470 197,392
Goodwill, distribution rights and other intangibles, net 77,816 67,125
Other assets 3,420 5,914
--------- ---------
Total assets $ 509,196 $ 439,244
========= =========
Liabilities and Stockholders' Equity
Current Liabilities:
Accounts payable and accrued liabilities $ 117,564 $ 88,845
Accrued payroll and employee benefits 17,188 29,913
Current portion of long-term debt 10,543 18,721
--------- ---------
Total current liabilities 145,295 137,479
Long-term debt, less current portion 138,414 104,257
Deferred income taxes 24,096 23,736
--------- ---------
Total liabilities 307,805 265,472
--------- ---------
Commitments and contingencies
Redeemable convertible preferred stock, $1 par
value - 1,008,000 shares authorized; 1,008,000
shares issued and outstanding in 2000 and 1999 100,396 100,078
--------- ---------
Stockholders' Equity:
Preferred stock, $1 par value - 8,992,000 shares authorized; no shares
issued or outstanding in 2000 and 1999
Common stock, $1 par value - 60,000,000 shares authorized; 28,221,000
shares and 27,871,000 shares issued and outstanding in
2000 and 1999, respectively 28,221 27,871
Capital in excess of par 57,736 53,172
Notes receivable from stockholders (2,913) (2,501)
Retained earnings (Accumulated deficit) 17,951 (4,848)
--------- ---------
Total stockholders' equity 100,995 73,694
--------- ---------
Total liabilities and stockholders' equity $ 509,196 $ 439,244
========= =========
See accompanying Notes to Consolidated Financial Statements.
2
DREYER'S GRAND ICE CREAM, INC.
CONSOLIDATED STATEMENT OF INCOME
(Unaudited)
Thirteen Weeks Ended Thirty-nine Weeks Ended
------------------------------- -------------------------------
Sept. 23, 2000 Sept. 25, 1999 Sept. 23, 2000 Sept. 25, 1999
-------------- -------------- -------------- --------------
($ in thousands, except per share amounts)
Revenues:
Sales $ 345,017 $ 322,410 $ 909,256 $ 857,657
Other income 531 1,034 3,660 1,875
--------- --------- --------- ---------
345,548 323,444 912,916 859,532
--------- --------- --------- ---------
Costs and expenses:
Cost of goods sold 251,777 236,444 669,780 654,721
Selling, general and administrative 72,596 70,051 191,801 173,577
Interest, net of amounts capitalized 3,420 2,604 9,053 8,851
--------- --------- --------- ---------
327,793 309,099 870,634 837,149
--------- --------- --------- ---------
Income before income tax provision and cumulative effect
of change in accounting principle 17,755 14,345 42,282 22,383
Income tax provision 6,765 5,609 16,110 8,752
--------- --------- --------- ---------
Income before cumulative effect of change in accounting
principle 10,990 8,736 26,172 13,631
Cumulative effect of change in accounting principle 595
--------- --------- --------- ---------
Net income 10,990 8,736 26,172 13,036
Accretion of preferred stock to redemption value 106 106 318 318
Preferred stock dividends 174 174 522 522
--------- --------- --------- ---------
Net income available to common stockholders $ 10,710 $ 8,456 $ 25,332 $ 12,196
========= ========= ========= =========
Per common share-basic:
Income available to common stockholders before
cumulative effect of change in accounting principle $ .38 $ .31 $ .90 $ .46
Cumulative effect of change in accounting principle (.02)
--------- --------- --------- ---------
Net income available to common stockholders $ .38 $ .31 $ .90 $ .44
========= ========= ========= =========
Per common share-diluted:
Income available to common stockholders before
cumulative effect of change in accounting principle $ .31 $ .26 $ .75 $ .41
Cumulative effect of change in accounting principle (.02)
--------- --------- --------- ---------
Net income available to common stockholders $ .31 $ .26 $ .75 $ .39
========= ========= ========= =========
Dividends per common share $ .03 $ .03 $ .09 $ .09
========= ========= ========= =========
See accompanying Notes to Consolidated Financial Statements.
3
DREYER'S GRAND ICE CREAM, INC.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
(Unaudited)
Notes Retained
Common Stock Receivable Earnings
----------------------- Capital in From (Accumulated
(In thousands) Shares Amount Excess of Par Stockholders Deficit) Total
------------------------------------------------------------------------------
Balances at December 26, 1998 27,312 $ 27,312 $ 46,722 $ (1,459) $(11,401) $ 61,174
Net income 13,036 13,036
Accretion of preferred stock to
redemption value (318) (318)
Preferred stock dividends declared (522) (522)
Common stock dividends declared (2,482) (2,482)
Repurchases and retirements of
common stock (19) (19) (216) (235)
Issuance of common stock under
employee stock plans, net 411 411 4,419 (1,214) 3,616
-------- -------- -------- -------- -------- --------
Balances at September 25, 1999 27,704 $ 27,704 $ 50,925 $ (2,673) $ (1,687) $ 74,269
======== ======== ======== ======== ======== ========
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)
Repurchases and retirements of
common stock (15) (15) (328) 70 (273)
Issuance of common stock under
employee stock plans, net 365 365 4,892 (482) 4,775
-------- -------- -------- -------- -------- --------
Balances at September 23, 2000 28,221 $ 28,221 $ 57,736 $ (2,913) $ 17,951 $100,995
======== ======== ======== ======== ======== ========
See accompanying Notes to Consolidated Financial Statements.
4
DREYER'S GRAND ICE CREAM, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
Thirty-nine Weeks Ended
--------------------------------
(In thousands) Sept. 23, 2000 Sept. 25, 1999
-------------- --------------
Cash flows from operating activities:
Net income $ 26,172 $ 13,036
Adjustments to reconcile net income to cash from operations:
Depreciation and amortization 28,078 26,457
Deferred income taxes 5,799 2,495
Cumulative effect of change in accounting principle 595
Changes in assets and liabilities, net of amounts acquired:
Trade accounts receivable (39,327) (28,214)
Other accounts receivable (13,802) 12,731
Inventories (16,182) (5,799)
Prepaid expenses and other 398 (2,427)
Accounts payable and accrued liabilities 26,175 26,762
Accrued payroll and employee benefits (12,750) 2,511
--------- ---------
4,561 48,147
--------- ---------
Cash flows from investing activities:
Acquisition of property, plant and equipment (19,663) (16,069)
Retirement of property, plant and equipment 1,423 915
Purchase of common stock of Cherokee Cream Company, Inc., net of cash acquired (7,651)
Increase in goodwill, distribution rights and other intangibles, net (1,385) (1,000)
(Increase) decrease in other assets (3,171) 1,290
--------- ---------
(30,447) (14,864)
--------- ---------
Cash flows from financing activities:
Proceeds from long-term debt, net 154,074
Repayments of long-term debt (130,700) (32,498)
Issuance of common stock under employee stock plans, net 4,775 3,616
Repurchases and retirements of common stock (273) (235)
Cash dividends paid (3,041) (2,990)
--------- ---------
24,835 (32,107)
--------- ---------
(Decrease) increase in cash and cash equivalents (1,051) 1,176
Cash and cash equivalents, beginning of period 3,158 1,171
--------- ---------
Cash and cash equivalents, end of period $ 2,107 $ 2,347
========= =========
Supplemental cash flow information:
Cash paid during the period for:
Interest (net of amounts capitalized) $ 8,218 $ 8,183
========= =========
Income taxes (net of refunds) $ 5,726 $ 2,478
========= =========
Supplemental acquisition information:
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
(Unaudited)
NOTE 1 - Operations and Financial Statement Presentation
Dreyer's Grand Ice Cream, Inc. and its subsidiaries (the Company) are engaged
primarily in 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 each of the thirteen- and
thirty-nine-week periods ended September 23, 2000 and September 25, 1999 have
not been audited by independent public accountants, but include all adjustments,
such as normal recurring accruals, which management considers necessary for a
fair presentation of the consolidated operating results for the interim periods.
The statements have been prepared by the Company pursuant to the rules and
regulations of the Securities and Exchange Commission. Accordingly, certain
information and footnote disclosure normally included in financial statements
prepared in conformity with generally accepted accounting principles have been
condensed or omitted pursuant to such rules and regulations. The operating
results for interim periods are not necessarily indicative of results to be
expected for an entire year. The aforementioned statements should be read in
conjunction with the Consolidated Financial Statements for the year ended
December 25, 1999, appearing in the Company's 1999 Annual Report to
Stockholders. Certain reclassifications have been made to prior years' financial
statements to conform to the current year presentation.
NOTE 2 - Inventories
Inventories are stated at the lower of cost (determined by the first-in,
first-out method) or market. Inventories at September 23, 2000 and December 25,
1999 consisted of the following:
(In thousands) Sept. 23, 2000 Dec. 25, 1999
-------------- -------------
Raw materials $ 10,011 $ 6,174
Finished goods 61,435 48,495
-------- --------
$ 71,446 $ 54,669
======== ========
NOTE 3 - Acquisition of Cherokee Cream Company, Inc.
On February 9, 2000, the Company acquired the remaining 84 percent of the
outstanding common stock of Cherokee Cream Company, Inc. (Cherokee), the parent
of Sunbelt Distributors, Inc., the leading independent direct-store-delivery ice
cream distributor in Texas. The Company paid $7,855,000 in cash in this
transaction which has been accounted for as a purchase. The results of Cherokee
are included in the Company's Consolidated Statement of Income from the date of
acquisition. In connection with this transaction, the Company recorded
$12,853,000 of goodwill, distribution rights and other intangibles.
NOTE 4 - The 1998 Restructuring and Other Actions
During 1999, the 1998 restructuring and other actions were completed with the
exception of the payment of $389,000 of remaining severance and related
benefits. During 2000, the Company made payments totaling $286,000 which
consisted of $132,000 for Grand Soft and $154,000 for sales and distribution
severance. The Company completed the restructuring
6
at a cost less than estimated and recorded a $103,000 reversal of the excess
restructuring accrual as other income in the Consolidated Statement of Income.
NOTE 5 - Long-term Debt
On July 25, 2000, the Company entered into a new credit agreement with various
banks for a revolving line of credit of $240,000,000 with an expiration date of
July 25, 2005. Borrowings under the line bear interest at LIBOR plus a margin
ranging from 0.75 to 1.875 percent.
NOTE 6 - Redeemable Convertible Preferred Stock
The Company's Series A redeemable convertible preferred stock, redemption value
$100,752,000, is convertible, at the option of the holder, into 5,800,000 shares
of common stock on or before June 30, 2001. If the holder does not convert, the
Company will redeem the issue by paying $100,752,000 on June 30, 2001. The
Company anticipates that it would fund such a redemption from operating cash
flows, borrowings and/or other financing sources.
NOTE 7 - 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 of potentially dilutive securities which include stock options, stock
warrants and redeemable convertible preferred stock.
Net income per common share is computed as follows:
Thirteen Weeks Ended Thirty-nine Weeks Ended
--------------------------------- --------------------------------
(In thousands, except per share amounts) Sept. 23, 2000 Sept. 25, 1999 Sept. 23, 2000 Sept. 25, 1999
-------------- -------------- -------------- --------------
Net income available to common
stockholders - basic $10,710 $ 8,456 $25,332 $12,196
Add: preferred dividends and accretion 280 280 840 840
------- ------- ------- -------
Net income available to common
stockholders - diluted $10,990 $ 8,736 $26,172 $13,036
======= ======= ======= =======
Weighted-average shares-basic 28,173 27,622 28,077 27,506
Dilutive effect of options 1,434 703 1,215 330
Dilutive effect of preferred stock 5,800 5,800 5,800 5,800
------- ------- ------- -------
Weighted-average shares-diluted 35,407 34,125 35,092 33,636
======= ======= ======= =======
Net income per common share:
Basic $ .38 $ .31 $ .90 $ .44
======= ======= ======= =======
Diluted $ .31 $ .26 $ .75 $ .39
======= ======= ======= =======
Anti-dilutive securities
Potentially dilutive securities are excluded from the calculations of
diluted net income per common share when their inclusion would have an
anti-dilutive effect. These securities, stated in equivalent shares of common
stock, consisted of the following:
Thirteen Weeks Ended Thirty-nine Weeks Ended
--------------------------------- --------------------------------
Sept. 23, 2000 Sept. 25, 1999 Sept. 23, 2000 Sept. 25, 1999
(In thousands) -------------- -------------- -------------- --------------
Stock options 75 681 693 2,297
Stock warrants 2,000
7
NOTE 8 - New Accounting Pronouncement
At its July 19-20, 2000 meeting, the Emerging Issues Task Force of the Financial
Accounting Standards Board (EITF), reached a consensus on EITF 00-14,
"Accounting for Certain Sales Incentives" (EITF 00-14). This new pronouncement
requires that discounts and other sales incentives be recorded as a reduction in
revenue at the date of sale. At the present time, the Company classifies these
incentives (including certain trade promotion expenses and coupon redemption
costs) as a selling, general and administrative expense. For the thirteen-weeks
ended September 23, 2000 and September 25, 1999, these incentives totaled
$39,751,000 and $29,752,000, respectively. For the thirty-nine weeks ended
September 23, 2000 and September 25, 1999, these incentives totaled $94,234,000
and $71,374,000, respectively. The change in classification required under EITF
00-14 will have no effect on net income (loss) as previously reported. The
Company will implement EITF 00-14 in the fourth quarter of 2000.
Reclassification of prior period financial statements is required.
NOTE 9 - Subsequent Events
Acquisition of Specialty Frozen Products, L.P.
On September 29, 2000, the Company acquired the assets of Specialty Frozen
Products, L.P., the leading independent direct-store-delivery ice cream
distributor in the Pacific Northwest. The total cost of this acquisition, which
will be accounted for as a purchase, was $20,226,000 in cash. The $20,226,000
was comprised of a payment of $15,550,000 for the purchase of the business, and
a total of $4,676,000 in other costs and payments, which included payments for
the purchase of certain current assets, along with legal and other closing
costs. In connection with this transaction, the Company expects to record
approximately $12,562,000 of goodwill, distribution rights and other
intangibles.
Ben & Jerry's Distribution Agreement
On October 25, 2000, the Company announced that it signed a new, long-term
distribution agreement with Ben & Jerry's Homemade, Inc., a Unilever subsidiary.
Under this agreement, Dreyer's will become the exclusive distributor of Ben &
Jerry's products for the grocery channel in all of Dreyer's company-operated
markets across the country. Dreyer's and Ben & Jerry's will expand the Company's
existing role as a Ben & Jerry's distributor in other non-grocery channels, such
as convenience stores. Dreyer's currently distributes Ben & Jerry's products in
the Midwest and Northwest. The agreement will take effect on February 28, 2001,
has a term of five years, and is renewable for two additional five-year periods.
8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (Unaudited)
Forward-Looking Statements
The Company may from time to time make written or oral forward-looking
statements. Written forward-looking statements may appear in documents filed
with the Securities and Exchange Commission, in press releases, and in reports
to stockholders. The Private Securities Litigation Reform Act of 1995 contains a
"safe harbor" for forward-looking statements upon which the Company relies in
making such disclosures. In accordance with this "safe harbor" provision, we
have identified that forward-looking statements are contained in this
Management's Discussion and Analysis of Consolidated Financial Condition and
Results of Operations. The Company undertakes no obligation to publicly revise
these forward-looking statements to reflect subsequent events or circumstances.
Also, in connection with this "safe harbor" provision, the Company
identifies important factors that could cause the Company's actual results to
differ materially from those contained in any forward-looking statement made by
or on behalf of the Company. Any such statement is qualified by reference to the
cautionary statements set forth below and in the Company's other filings with
the Securities and Exchange Commission.
This Management's Discussion and Analysis of Financial Condition and
Results of Operations should be read in conjunction with Management's Discussion
and Analysis for the year ended December 25, 1999, appearing in the Company's
1999 Annual Report to Stockholders.
9
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 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
--------------------- ----------------------- 2000 2000
Sept. 23, Sept. 25, Sept. 23, Sept. 25, Compared Compared
2000 1999 2000 1999 To 1999 To 1999
----- ----- ----- ----- ------- -------
Revenues:
Sales 100.0% 100.0% 100.0% 100.0% 7.0% 6.0%
Other income 0.2 0.3 0.4 0.2 (48.7) 95.2
----- ----- ----- -----
100.2 100.3 100.4 100.2 6.8 6.2
----- ----- ----- -----
Costs and expenses:
Cost of goods sold 73.0 73.4 73.7 76.4 (6.5) (2.3)
Selling, general and administrative 21.0 21.7 21.1 20.2 (3.6) (10.5)
Interest, net of amounts capitalized 1.0 0.8 1.0 1.0 (31.3) (2.3)
----- ----- ----- -----
95.0 95.9 95.8 97.6 (6.0) (4.0)
----- ----- ----- -----
Income before income tax provision and cumulative
effect of change in accounting principle 5.2 4.4 4.6 2.6 23.8 88.9
Income tax provision 2.0 1.7 1.7 1.0 (20.6) (84.1)
----- ----- ----- -----
Income before cumulative effect of change in
accounting principle 3.2 2.7 2.9 1.6 25.8 92.0
Cumulative effect of change in accounting principle -- -- -- 0.1 -- NM
----- ----- ----- -----
Net income 3.2 2.7 2.9 1.5 25.8 100.8
Accretion of preferred stock to redemption value -- -- -- -- -- --
Preferred stock dividends 0.1 0.1 0.1 0.1 -- --
----- ----- ----- -----
Net income available to common stockholders 3.1% 2.6% 2.8% 1.4% 26.7 107.7
===== ===== ===== =====
Thirteen Weeks ended September 23, 2000 Compared with Thirteen Weeks ended
September 25, 1999
Consolidated sales for the third quarter of 2000 increased $22,607,000 or seven
percent, to $345,017,000 from $322,410,000 for the same quarter last year.
Sales of the Company's branded products, including licensed and joint
venture products (company brands), increased $26,498,000 or 12 percent, to
$239,397,000 from $212,899,000 for the same quarter last year. Company brands
represented 69 percent of consolidated sales in 2000 compared with 66 percent in
the same quarter last year. Gallon sales of the Company's branded products,
including novelties, increased approximately 2,300,000 gallons, or eight
percent, to approximately 31,000,000 gallons. The products that led this
increase were the co-branded M&M/Mars line, superpremium Dreamery(TM) Ice Cream,
and premium Dreyer's and Edy's Grand Ice Cream and Whole Fruit Bars. As a result
of changes in mix and wholesale price increases, the average price of the
Company's branded products increased approximately four percent, before the
effect of increased trade promotion expenses which are presently classified as
selling, general and administrative expenses (see "New Accounting
Pronouncement").
10
Sales of products distributed for other manufacturers (partner brands),
including Ben & Jerry's Homemade, Inc., decreased $3,891,000, or four percent,
to $105,620,000 from $109,511,000 for the same quarter last year. Sales of
partner brands represented 31 percent of consolidated sales compared with 34
percent in the same quarter last year. Unit sales of partner brands decreased by
two percent over the same quarter last year. As previously disclosed, the
Company began distributing Ben & Jerry's products in a smaller geographic area
during September, 1999. This change was the primary cause of the lower partner
brand sales for the quarter. The effect of price changes for partner brands,
including changes in mix, was approximately two percent. The Company recently
signed a new agreement with Ben & Jerry's to expand national distribution of
their superpremium product line to the grocery channel and to expand Dreyer's
distribution of Ben & Jerry's products in non-grocery channels (see "Ben &
Jerry's Distribution Agreement").
Cost of goods sold increased $15,333,000, or six percent, over the same
quarter last year. While the overall gross margin remained at 27 percent, the
Company's gross profit increased by $7,274,000 to $93,240,000. The products that
led this increase were superpremium Dreamery(TM) Ice Cream, premium Dreyer's &
Edy's Grand Ice Cream and the co-branded M&M/Mars line. The effect of these
positive factors more than offset the loss of distribution gross profit from
lower Ben & Jerry's sales. The impact of the change in dairy raw material costs
for the quarter was a $900,000 benefit as compared to the same quarter last
year.
Other income decreased $503,000 primarily due to a decrease in earnings
from joint ventures accounted for under the equity method, offset in part by an
increase in brokerage income.
Selling, general and administrative expenses increased $2,545,000, or four
percent, to $72,596,000 from $70,051,000. Selling, general and administrative
expenses represented 21 percent of consolidated sales in 2000 compared with 22
percent in the same quarter last year. The increase primarily reflects marketing
spending, including trade promotion expenses (see "New Accounting
Pronouncement"), related to the ongoing support of the Dreamery(TM) line,
Godiva(R) Ice Cream and the Dreyer's and Edy's premium portfolio and, to a
lesser extent, increases in administrative expenses.
Interest expense increased $816,000, or 31 percent, to $3,420,000,
primarily attributable to higher average borrowings.
The income tax provision increased due to a correspondingly higher pre-tax
income in 2000. This increase was offset in part by a decrease in the effective
tax rate from 39.1 percent for the same quarter last year to 38.1 percent for
this quarter.
Thirty-nine Weeks ended September 23, 2000 Compared with Thirty-nine Weeks ended
September 25, 1999
Consolidated sales for the first thirty-nine weeks of 2000 increased
$51,599,000, or six percent, to $909,256,000 from $857,657,000 for the same
period last year.
Sales of the Company's branded products, including licensed and joint
venture products (company brands), increased $90,768,000, or 16 percent, to
$642,003,000 from $551,235,000 for the same period last year. Company brands
represented 71 percent of consolidated sales in 2000 compared with 64 percent in
the same period last year. Gallon sales of the Company's branded products,
including novelties, increased approximately 7,000,000 gallons, or nine percent,
to approximately 83,100,000 gallons. The products that led this increase were
the superpremium Dreamery(TM) line, the premium M&M/Mars line, premium Dreyer's
and Edy's Grand Ice Cream, and Whole Fruit Bars. As a result of changes in mix
and wholesale price increases, the average price of the Company's branded
products increased approximately seven percent, before the effect of increased
trade promotion expenses which are presently classified as selling, general and
administrative expenses (see "New Accounting Pronouncement").
Sales of products distributed for other manufacturers (partner brands),
including Ben & Jerry's Homemade, Inc., decreased $39,169,000, or 13 percent, to
$267,253,000 from $306,422,000 for the same period last year. Sales of partner
brands represented 29 percent of consolidated sales compared with 36 percent in
the same period last year. Unit sales of partner brands decreased by 13 percent
over the same period last year. As previously disclosed, the Company began
distributing Ben & Jerry's products in a smaller geographic area during
September, 1999. This change was the primary cause of the lower partner brand
sales for the first thirty-nine weeks of 2000. The effect of price changes for
partner brands, including changes in mix, was not significant. The Company
recently signed a new agreement with Ben & Jerry's to expand national
distribution of their superpremium product line to the grocery channel and to
expand Dreyer's distribution of Ben & Jerry's products in non-grocery channels
(see "Ben & Jerry's Distribution Agreement").
Cost of goods sold increased $15,059,000, or two percent, to $669,780,000,
from $654,721,000 for the same period last year, while the overall gross margin
increased to 26 percent from 24 percent. The improvement was primarily the
result of increased sales of higher-margin premium and superpremium products,
comparatively lower dairy raw material costs and higher wholesale prices. The
effect of these positive factors more than offset the lost distribution gross
profit
11
from lower Ben & Jerry's sales. The impact of the change in dairy raw material
costs for the period was a $9,400,000 benefit as compared to the same period
last year.
Other income increased $1,785,000 primarily due to an increase in brokerage
income.
Selling, general and administrative expenses increased $18,224,000, or 11
percent, to $191,801,000 from $173,577,000. Selling, general and administrative
expenses represented 21 percent of consolidated sales in 2000 compared with 20
percent in the same period last year. The increase primarily reflects marketing
spending, including trade promotion expenses (see "New Accounting
Pronouncement"), related to the ongoing support of the Dreamery(TM) line,
Godiva(R) Ice Cream and the Dreyer's and Edy's premium portfolio and, to a
lesser extent, increases in administrative expenses.
Interest expense increased $202,000, or two percent, to $9,053,000,
primarily attributable to higher average borrowings.
The income tax provision increased due to a correspondingly higher pre-tax
income in 2000. This increase was offset in part by a decrease in the effective
tax rate from 39.1 percent for the first thirty-nine weeks of 1999 to 38.1
percent for the first thirty-nine weeks of 2000.
FINANCIAL CONDITION-LIQUIDITY AND CAPITAL RESOURCES
Working capital at September 23, 2000 increased $56,861,000 from year-end 1999
due primarily to the seasonal increases in accounts receivable and inventories,
offset in part by seasonal increases in accounts payable and accrued
liabilities. A $7,978,000 capital lease obligation classified as a current
liability was repaid during the second quarter of 2000 through a long-term debt
borrowing under the Company's line of credit. The Company's cash flow from
operating activities decreased to $4,561,000 from $48,147,000 for the same
period last year. This decrease was caused by increases in receivables and
inventories which more than offset the cash flows generated from higher net
income, depreciation and amortization and deferred income taxes.
Cash used in investing activities of $30,447,000 consists primarily of
purchases of $19,663,000 in property, plant and equipment and the acquisition of
the remaining 84 percent of the outstanding common stock of Cherokee Cream
Company, Inc. for $7,651,000.
Cash flows from financing activities totaling $24,835,000 primarily
consisted of an increase of $154,074,000 in outstanding debt offset by
repayments of $130,700,000 under the former revolving line of credit. On July
25, 2000, the Company entered into a new credit agreement with various banks for
a revolving line of credit of $240,000,000 with an expiration date of July 25,
2005. Borrowings under the line bear interest at LIBOR plus a margin ranging
from 0.75 to 1.875 percent.
The Company's Series A redeemable convertible preferred stock, redemption
value $100,752,000, is convertible, at the option of the holder, into 5,800,000
shares of common stock on or before June 30, 2001. If the holder does not
convert, the Company will redeem the issue by paying $100,752,000 on June 30,
2001. The Company anticipates that it would fund such a redemption from
operating cash flows, borrowings and/or other financing sources.
At September 23, 2000, the Company had $2,107,000 in cash and cash
equivalents, and an unused credit line of $141,800,000. 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.
SUBSEQUENT EVENTS
Acquisition of Specialty Frozen Products, L.P.
On September 29, 2000, the Company acquired the assets of Specialty Frozen
Products, L.P., the leading independent direct-store-delivery ice cream
distributor in the Pacific Northwest. The total cost of this acquisition, which
will be accounted for as a purchase, was $20,226,000 in cash. The $20,226,000
was comprised of a payment of $15,550,000 for the purchase of the business, and
a total of $4,676,000 in other costs and payments, which included payments for
the purchase of certain current assets, along with legal and other closing
costs. In connection with this transaction, the Company expects to record
approximately $12,562,000 of goodwill, distribution rights and other
intangibles.
12
Ben & Jerry's Distribution Agreement
On October 25, 2000, the Company announced that it signed a new, long-term
distribution agreement with Ben & Jerry's Homemade, Inc., a Unilever subsidiary.
Under this agreement, Dreyer's will become the exclusive distributor of Ben &
Jerry's products for the grocery channel in all of Dreyer's company-operated
markets across the country. Dreyer's and Ben & Jerry's will expand the Company's
existing role as a Ben & Jerry's distributor in other non-grocery channels, such
as convenience stores. Dreyer's currently distributes Ben & Jerry's products in
the Midwest and Northwest. The agreement will take effect on February 28, 2001,
has a term of five years, and is renewable for two additional five-year periods.
NEW ACCOUNTING PRONOUNCEMENT
At its July 19-20, 2000 meeting, the Emerging Issues Task Force of the Financial
Accounting Standards Board (EITF), reached a consensus on EITF 00-14,
"Accounting for Certain Sales Incentives" (EITF 00-14). This new pronouncement
requires that discounts and other sales incentives be recorded as a reduction in
revenue at the date of sale. At the present time, the Company classifies these
incentives (including certain trade promotion expenses and coupon redemption
costs) as a selling, general and administrative expense. For the thirteen-weeks
ended September 23, 2000 and September 25, 1999, these incentives totaled
$39,751,000 and $29,752,000, respectively. For the thirty-nine weeks ended
September 23, 2000 and September 25, 1999 these incentives totaled $94,234,000
and $71,374,000, respectively. The change in classification required under EITF
00-14 will have no effect on net income (loss) as previously reported. The
Company will implement EITF 00-14 in the fourth quarter of 2000.
Reclassification of prior period financial statements is required.
13
PART II: OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) The following exhibits are filed herewith:
Exhibit No. Description
----------- -----------
10.1 Credit Agreement dated as of July 25, 2000 among
Dreyer's Grand Ice Cream, Inc., the banks party to
this agreement, Bank of America, N.A. as Agent for
the Banks, as Swing Line Bank and as Letter of Credit
Issuing Bank; Union Bank of California, N.A. as
Syndication Agent and Banc of America Securities
LLC as Lead Arranger and Book Manager.
27.1 Financial Data Schedule.
(b) No reports on Form 8-K were filed by the Company during the quarter ended
September 23, 2000.
14
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 7, 2000 By: /s/ Timothy F. Kahn
---------------------------------------
Timothy F. Kahn
Vice President - Finance and
Administration and Chief Financial
Officer (Principal Financial Officer)
15
DREYER'S GRAND ICE CREAM, INC.
INDEX OF EXHIBITS
Exhibit No. Description
- ----------- -----------
10.1 Credit Agreement dated as of July 25, 2000 among Dreyer's
Grand Ice Cream, Inc., the banks party to this agreement,
Bank of America, N.A. as Agent for the Banks, as Swing Line
Bank and as Letter of Credit Issuing Bank; Union Bank of
California, N.A. as Syndication Agent and Banc of America
Securities LLC as Lead Arranger and Book Manager.
27.1 Financial Data Schedule.