1
EXHIBIT 13
Financial Table of Contents
Consolidated Statement of Operations 18
Consolidated Balance Sheet 19
Consolidated Statement of Changes in Stockholders' Equity 20
Consolidated Statement of Cash Flows 21
Notes to Consolidated Financial Statements 22
Report of Independent Accountants 36
Five-Year Summary of Significant Financial Data 37
Management's Discussion and Analysis 38
2
CONSOLIDATED STATEMENT OF OPERATIONS
Year Ended
-----------------------------------------------
($ in thousands, except per share amounts) Dec. 25, 1999 Dec. 26, 1998 Dec. 27, 1997
------------- ------------- -------------
Revenues:
Sales $1,099,817 $1,022,335 $970,097
Other income 2,090 3,653 2,994
---------- ---------- --------
1,101,907 1,025,988 973,091
---------- ---------- --------
Costs and expenses:
Cost of goods sold 837,907 827,862 764,551
Selling, general and administrative 235,146 212,151 183,390
Impairment of long-lived assets 44,564
(Reversal of) provision for restructuring
charges (1,315) 3,300
Interest, net of amounts capitalized 11,450 13,006 10,695
---------- ---------- --------
1,083,188 1,100,883 958,636
---------- ---------- --------
Income (loss) before income tax provision
(benefit) and cumulative effect of change
in accounting principle 18,719 (74,895) 14,455
Income tax provision (benefit) 7,132 (28,385) 5,681
---------- ---------- --------
Income (loss) before cumulative effect of change
in accounting principle 11,587 (46,510) 8,774
Cumulative effect of change in accounting principle 595 746
---------- ---------- --------
Net income (loss) 10,992 (46,510) 8,028
Accretion of preferred stock to redemption value 424 424 424
Preferred stock dividends 696 696 3,636
---------- ---------- --------
Net income (loss) available to common stockholders $ 9,872 $ (47,630) $ 3,968
========== ========== ========
Per common share-basic:
Income (loss) available to common stockholders
before cumulative effect of change in
accounting principle $ .38 $ (1.75) $ .18
Cumulative effect of change in accounting principle .02 .03
---------- ---------- --------
Net income (loss) available to common stockholders $ .36 $ (1.75) $ .15
========== ========== ========
Per common share-diluted:
Income (loss) available to common stockholders
before cumulative effect of change in
accounting principle $ .35 $ (1.75) $ .17
Cumulative effect of change in accounting principle .02 .03
---------- ---------- --------
Net income (loss) available to common stockholders $ .33 $ (1.75) $ .14
========== ========== ========
See accompanying Notes to Consolidated Financial Statements.
3
CONSOLIDATED BALANCE SHEET
($ in thousands, except per share amounts) Dec. 25, 1999 Dec. 26, 1998
------------- -------------
Assets
Current Assets:
Cash and cash equivalents $ 3,158 $ 1,171
Trade accounts receivable, net of allowance for doubtful
accounts of $5,715 in 1999 and $5,710 in 1998 79,251 83,053
Other accounts receivable 13,528 29,165
Inventories 54,669 49,472
Deferred income taxes 11,586 7,843
Prepaid expenses and other 6,621 5,428
-------- --------
Total current assets 168,813 176,132
Property, plant and equipment, net 197,392 207,772
Goodwill and distribution rights, net 65,692 67,226
Other assets 7,347 10,591
-------- --------
Total assets $439,244 $461,721
======== ========
Liabilities and Stockholders' Equity
Current Liabilities:
Accounts payable and accrued liabilities $ 88,845 $ 87,273
Accrued payroll and employee benefits 29,913 19,545
Current portion of long-term debt 18,721 8,255
-------- --------
Total current liabilities 137,479 115,073
Long-term debt, less current portion 104,257 169,781
Deferred income taxes 23,736 16,039
-------- --------
Total liabilities 265,472 300,893
-------- --------
Commitments and contingencies
Redeemable convertible preferred stock, $1 par value -
1,008,000 shares authorized; 1,008,000 shares issued
and outstanding in 1999 and 1998 100,078 99,654
-------- --------
Stockholders' Equity:
Preferred stock, $1 par value - 8,992,000 shares
authorized; no shares issued or outstanding
in 1999 and 1998
Common stock, $1 par value - 60,000,000 shares authorized;
27,871,000 shares and 27,312,000 shares issued and
outstanding in 1999 and 1998, respectively 27,871 27,312
Capital in excess of par 53,172 46,722
Notes receivable from stockholders (2,501) (1,459)
Accumulated deficit (4,848) (11,401)
-------- --------
Total stockholders' equity 73,694 61,174
-------- --------
Total liabilities and stockholders' equity $439,244 $461,721
======== ========
See accompanying Notes to Consolidated Financial Statements.
4
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
Notes (Accumulated
Common Stock Capital Receivable Deficit)
------------------- in Excess from Retained
(In thousands) Shares Amount of Par Stockholders Earnings Total
------ ------- --------- ------------ ------------ --------
Balances at December 28, 1996 13,345 $13,345 $ 51,956 $(1,144) $ 38,762 $102,919
Net income for 1997 8,028 8,028
Accretion of preferred stock to
redemption value (424) (424)
Preferred stock dividends
declared (3,636) (3,636)
Common stock dividends declared (3,232) (3,232)
Issuance of common stock under
employee stock plans, net 177 177 4,639 492 5,308
Repurchases and retirements of
common stock (7) (7) (268) (275)
Common stock split 13,505 13,505 (13,505)
------ ------- -------- ------- -------- --------
Balances at December 27, 1997 27,020 27,020 42,822 (652) 39,498 108,688
Net loss for 1998 (46,510) (46,510)
Accretion of preferred stock to
redemption value (424) (424)
Preferred stock dividends
declared (696) (696)
Common stock dividends declared (3,269) (3,269)
Issuance of common stock under
employee stock plans, net 298 298 4,038 (807) 3,529
Repurchases and retirements of
common stock (6) (6) (138) (144)
------ ------- -------- ------- -------- --------
Balances at December 26, 1998 27,312 27,312 46,722 (1,459) (11,401) 61,174
Net income for 1999 10,992 10,992
Accretion of preferred stock to
redemption value (424) (424)
Preferred stock dividends
declared (696) (696)
Common stock dividends declared (3,319) (3,319)
Issuance of common stock under
employee stock plans, net 579 579 6,671 (1,042) 6,208
Repurchases and retirements of
common stock (20) (20) (221) (241)
------ ------- -------- ------- -------- --------
Balances at December 25, 1999 27,871 $27,871 $ 53,172 $(2,501) $ (4,848) $ 73,694
====== ======= ======== ======= ======== ========
See accompanying Notes to Consolidated Financial Statements.
5
CONSOLIDATED STATEMENT OF CASH FLOWS
Year Ended
--------------------------------------------
($ in thousands) Dec. 25, 1999 Dec. 26, 1998 Dec. 27, 1997
------------- ------------- -------------
Cash flows from operating activities:
Net income (loss) $ 10,992 $(46,510) $ 8,028
Adjustments to reconcile net income (loss) to cash flows
from operations:
Depreciation and amortization 35,515 36,176 31,946
Deferred income taxes 4,305 (26,612) 1,846
Impairment of long-lived assets 44,564
Loss on disposal of property, plant and equipment 1,803 5,317
Provision for independent distributor receivable 5,000
(Reversal of) provision for restructuring charges (1,315) 3,147
Cumulative effect of change in accounting principle 595 746
Changes in assets and liabilities, net of amounts acquired:
Trade accounts receivable 3,802 (6,042) (8,958)
Other accounts receivable 15,637 (12,783) (2,889)
Inventories (5,197) (1,137) (8,960)
Prepaid expenses and other (2,113) 3,192 3,545
Accounts payable and accrued liabilities 2,910 27,662 9,611
Accrued payroll and employee benefits 10,368 (2,778) 4,125
-------- -------- --------
77,302 29,196 39,040
-------- -------- --------
Cash flows from investing activities:
Acquisition of property, plant and equipment (23,756) (35,078) (38,470)
Retirement of property, plant and equipment 726 284 677
Increase in goodwill and distribution rights (1,000) (311) (146)
Decrease (increase) in other assets 1,803 260 (1,439)
-------- -------- --------
(22,227) (34,845) (39,378)
-------- -------- --------
Cash flows from financing activities:
Proceeds from long-term debt 12,400 11,700
Repayments of long-term debt (55,058) (8,641) (9,070)
Issuance of common stock under employee stock plans, (net) 6,208 3,529 5,308
Repurchases and retirements of common stock (241) (144) (275)
Cash dividends paid (3,997) (3,950) (7,833)
-------- -------- --------
(53,088) 3,194 (170)
-------- -------- --------
Increase (decrease) in cash and cash equivalents 1,987 (2,455) (508)
Cash and cash equivalents, beginning of year 1,171 3,626 4,134
-------- -------- --------
Cash and cash equivalents, end of year $ 3,158 $ 1,171 $ 3,626
======== ======== ========
Supplemental Cash Flow Information:
Cash paid during the year for:
Interest (net of amounts capitalized) $ 11,566 $ 12,785 $ 10,634
======== ======== ========
Income taxes (net of refunds) $ 843 $ 881 $ 1,070
======== ======== ========
See accompanying Notes to Consolidated Financial Statements.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 Operations
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 Company's products are also segregated between sales of company
branded products, including our licensed and joint venture products (company
brands), and sales of products distributed for other manufacturers (partner
brands) for management reporting purposes. Sales of company brands were
$729,520,000, $647,745,000 and $618,401,000, in 1999, 1998 and 1997,
respectively. Sales of partner brands were $370,297,000, $374,590,000 and
$351,696,000, in 1999, 1998 and 1997, respectively.
Three customers each accounted for ten percent or more of 1999 sales.
Sales to each of these three customers were approximately $127,573,000
$126,075,000 and $114,843,000, respectively. Sales to one customer accounted for
ten percent or more of 1998 sales and were approximately $106,703,000. In 1997,
no customer accounted for ten percent or more of sales.
NOTE 2 Summary of Significant Accounting Policies
Consolidation
The consolidated financial statements include the accounts of Dreyer's Grand Ice
Cream, Inc. and its subsidiaries. All intercompany transactions have been
eliminated.
Fiscal Year
The Company's fiscal year is a 52-week or 53-week period ending on the last
Saturday in December. Fiscal years 1999, 1998 and 1997 each consisted of 52
weeks.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions.
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 those estimates.
Financial Statement Presentation
Certain reclassifications have been made to prior years' financial statements to
conform to the current year presentation.
Cash Equivalents
The Company classifies financial instruments as cash equivalents if the original
maturity of such investments is three months or less.
Inventories
Inventories are stated at the lower of cost (determined by the first-in,
first-out method) or market. Cost includes materials, labor and manufacturing
overhead.
Property, Plant and Equipment
The cost of additions and major improvements and repairs to property, plant and
equipment are capitalized, while maintenance and minor repairs to property,
plant and equipment are charged to expense as incurred. Property, plant and
equipment is depreciated using the straight-line method over the assets'
estimated useful lives, generally ranging from two to 35 years. Interest costs
relating to capital assets under construction are capitalized.
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Goodwill and Distribution Rights
Goodwill and distribution rights are amortized using the straight-line method
over their estimated useful lives, generally ranging from 30 to 36 years.
Accumulated amortization was $32,746,000 and $30,212,000 at December 25, 1999
and December 26, 1998, respectively.
Impairment of Long-Lived Assets
The Company reviews long-lived assets and certain identifiable intangibles,
including goodwill and distribution rights, for impairment whenever events or
changes in circumstances indicate that the carrying amount of an asset may not
be recoverable. The assessment of impairment is based on the estimated
undiscounted future cash flows from operating activities compared with the
carrying value of the assets. If the undiscounted future cash flows of an asset
are less than the carrying value, a write-down will be recorded, measured by the
amount of the difference between the carrying value and the fair value of the
asset. Assets to be disposed of are recorded at the lower of carrying value or
fair value less costs to sell. Such assets are not depreciated while held for
sale.
Notes Receivable from Stockholders
As discussed in Note 12, purchases of the Company's stock under the Employee
Secured Stock Purchase Plan are financed, in part, through a promissory note
over a term of 30 years. These notes receivable from stockholders are reported
as a reduction of stockholders' equity.
Advertising Costs
The Company defers production costs for media advertising and expenses these
costs in the period the advertisement is first run. All other advertising costs
are expensed as incurred. Advertising expense, including consumer promotion
spending, was $23,955,000, $22,188,000 and $28,849,000 in 1999, 1998 and 1997,
respectively.
Trade Promotion Costs
Trade promotion costs, including sales discounts and associated retail
advertising, are expensed as incurred and are classified as selling, general and
administrative expenses.
Income Taxes
Income taxes are accounted for using the liability method. Under this method,
deferred tax assets and liabilities are recognized for the tax consequences of
temporary differences between the financial reporting basis and tax basis of
assets and liabilities.
Accounting for Stock-Based Compensation
The Company follows Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees" and related interpretations in accounting for its
employee stock options and stock purchase plans. Pro forma information regarding
net income and net income per share is disclosed as required by Statement of
Financial Accounting Standards Statement No. 123, "Accounting for Stock-Based
Compensation", which also requires that the information be determined as if the
Company accounted for its stock-based compensation subsequent to December 30,
1995 under the fair value method of that Statement (See Note 12).
Cumulative Effects of Changes in Accounting Principle
In the first quarter of 1999, the Company adopted Statement of Position 98-5,
"Reporting on the Costs of Start-Up Activities" (SOP 98-5). SOP 98-5 requires
that the costs of start-up activities, including preoperating costs, be expensed
as incurred and that previously unamortized preoperating costs be written off
and treated as a cumulative effect of a change in accounting principle. As a
result of adopting SOP 98-5, the Company recorded an after-tax charge of
$595,000, or $.02 per common share, in the first quarter of 1999.
On November 20, 1997, the Financial Accounting Standards Board's
Emerging Issues Task Force issued a pronouncement (EITF 97-13) requiring that
reengineering costs be expensed as incurred. Furthermore, EITF 97-13 required
that all previously unamortized capitalized reengineering costs be written off
and treated as a cumulative effect of a change in accounting principle as of the
beginning of the quarter including November 20, 1997. As a result of adopting
EITF 97-13, the Company recorded an after-tax charge of $746,000, or $.03 per
common share, in the fourth quarter of 1997.
Net Income (Loss) Per Common Share
Basic net income (loss) per common share is computed using the weighted-average
number of shares of common stock outstanding during the period. Diluted net
income (loss) per common share reflects the additional dilutive effect of the
Company's potentially dilutive securities, which include stock options, stock
warrants and redeemable convertible preferred stock.
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Net income (loss) per common share is computed as follows:
(In thousands, except per share amounts) Dec. 25, 1999 Dec. 26, 1998 Dec. 27, 1997
------------- ------------- -------------
Net income (loss) available to common
stockholders - basic $ 9,872 $(47,630) $ 3,968
Add: Dilutive preferred dividends and accretion 1,120
------- -------- -------
Net income (loss) available to common
stockholders - diluted $10,992 $(47,630) $ 3,968
======= ======== =======
Weighted-average shares-basic 27,559 27,189 26,872
Dilutive effect of options 397 1,096
Dilutive effect of warrants 500
Dilutive effect of preferred stock 5,800
------- -------- -------
Weighted-average shares-diluted 33,756 27,189 28,468
======= ======== =======
Net income (loss) per common share:
Basic $ .36 $ (1.75) $ .15
======= ======== =======
Diluted $ .33 $ (1.75) $ .14
======= ======== =======
Potentially dilutive securities are excluded from the calculations of
diluted net income (loss) per common share if their inclusion would have an
anti-dilutive effect. These anti-dilutive securities, stated in equivalent
shares of common stock, consisted of the following:
(In thousands) 1999 1998 1997
----- ----- -----
Stock options 1,507 4,361
Stock warrants 2,000 2,000
Preferred stock 5,800 5,800
The Company's potentially dilutive securities were anti-dilutive during
1998 due to the Company's net loss. Accordingly, 1998 basic and diluted net loss
per common share are computed using the same denominator of 27,189,000 shares.
Pursuant to a 1994 equity transaction (See Note 10), an affiliate of
Nestle USA, Inc. purchased 6,000,000 newly issued shares of common stock, and
warrants to purchase 4,000,000 shares at an exercise price of $16.00 per share.
Warrants for 2,000,000 shares expired unexercised on June 14, 1997. Warrants for
the remaining 2,000,000 shares expired unexercised on June 14, 1999.
NOTE 3 Restructuring Program and Other Actions
Background
In 1994, the Company adopted a strategic plan to accelerate the sales of its
brand throughout the country (the Grand Plan or the Strategic Plan). The key
elements of this plan are: 1) to build high-margin brands with leading market
shares through effective consumer marketing activities, 2) to expand the
Company's direct-store-delivery distribution network to national scale and
enhance this capability with sophisticated information and logistics systems and
3) to introduce innovative new products.
In accordance with the Strategic Plan, the Company embarked on an
aggressive national expansion. This expansion involved the entry into 34 new
markets, which included the opening of a major manufacturing and distribution
center in Texas, a significant increase in marketing spending and the
introduction of several new products. At the same time, the Company invested in
its soft-serve equipment manufacturing business, Grand Soft. The investments
which were required to fund the brand-building actions and national expansion
and to support the Grand Soft business substantially increased the Company's
cost structure.
Beginning in late 1997 and continuing into 1998, the cost of dairy raw
materials, the primary ingredient in ice cream, increased significantly. These
costs peaked in 1998 at a rate more than double of that experienced in 1997.
This increase reduced the Company's 1998 gross profit by approximately
$22,000,000 when compared with 1997. Aggressive discounting by the Company's
competitors made it difficult to raise prices by an amount sufficient to
compensate for these higher dairy raw material costs. During this same period,
sales volumes of the Company's "better for you" products continued the
significant decline that began in 1997, consistent with an industry-wide trend.
Since these "better for you" products enjoy higher margins than the Company's
classic ice cream, the volume decline had a significant impact on the Company's
profitability in 1998.
9
Finally, in August 1998, Ben & Jerry's Homemade, Inc. (Ben & Jerry's) informed
the Company of its intention to terminate its distribution agreement. Subsequent
negotiations with Ben & Jerry's revised the original contract terms to allow the
Company to distribute Ben & Jerry's products in a smaller geographic area.
Starting September 1, 1999, this was estimated to reduce the Company's
distribution gross profit of Ben & Jerry's products by approximately 54 percent.
The Company estimated that the distribution gross profit in the markets where it
stopped distributing Ben & Jerry's products represented approximately six
percent, or $13,000,000, of its gross profit in 1998.
The above factors: the higher dairy raw material costs; the decline in
"better for you" volumes; and the reduction in future Ben & Jerry's sales had in
the past, and may continue to have in the future, a negative effect on the
Company's gross profit and its ability to successfully implement the Strategic
Plan. The Company, therefore, concluded that a thorough reassessment of its cost
structure and strategy was necessary. This reassessment yielded restructuring
actions designed to improve profitability and accelerate cost reductions by
increasing focus on the core elements of the Strategic Plan. The reassessment
also addressed the need to review the valuation of certain assets unfavorably
impacted by Ben & Jerry's decision to change its distribution agreement with the
Company. On October 16, 1998, the board of directors approved the restructuring
actions.
Revision of Ben & Jerry's Distribution Agreement
During the third quarter of 1998, Ben & Jerry's notified the Company of its
intention to terminate the distribution agreement between the Company and Ben &
Jerry's. The Company subsequently entered into negotiations with Ben & Jerry's
to resolve issues associated with the pending termination. In the first quarter
of 1999, the companies reached a resolution regarding these termination issues
by amending the existing distribution agreement and entering into a new
distribution agreement. The Company retained the rights to distribute Ben &
Jerry's products in all existing markets, except the New York metropolitan area
(discussion follows in Restructuring Program and Other Actions of this Note 3),
and on terms and conditions different in some respects from those in place prior
to the amendment. The Company stopped distributing Ben & Jerry's products in New
York on April 1, 1999. After August 1999, the Company continued to distribute
Ben & Jerry's in these selected markets covering a smaller geographic area under
the terms of the new distribution agreement. The Company received a reduced
margin for distributing Ben & Jerry's in selected markets in 1999, but has been
allowed to compete directly with Ben & Jerry's in the superpremium ice cream
category in all markets after August 1999. In addition to notifying the Company
of its intention to terminate the distribution agreement above, Ben & Jerry's
notified the Company of its intention to terminate its separate distribution
agreement with the Company's independent distributor in Texas (discussion
follows in Restructuring Program and Other Actions of this Note 3).
The distribution gross profit on Ben & Jerry's products contributed just
over 11 percent of the Company's gross profit in 1998. The Company estimates
that the distribution margin received in the markets where the Company stopped
distributing Ben & Jerry's products in 1999 contributed approximately six
percent, or $13,000,000, of its total gross profit in 1998.
Restructuring Program and Other Actions
The implementation of the restructuring program and other actions resulted in a
pre-tax charge to earnings of $59,114,000 in 1998. This included $10,590,000
recorded in the third quarter which related primarily to Ben & Jerry's actions
that occurred in September 1998 and to a severance program, which management had
already begun in advance of board approval of the remainder of the restructuring
program. The remainder of the charges, $48,524,000, was recorded in the fourth
quarter of 1998.
The five key elements of the restructuring program and other actions
follow:
(1) In 1998, the Company decided to exit the equipment manufacturing
business associated with its Grand Soft ice cream unit. The Grand Soft business
consists of both ice cream sales and equipment manufacturing operations. The
Company has remained in the profitable ice cream portion of this business, but
has exited the unprofitable equipment manufacturing operations.
In the fourth quarter of 1998, the Company recorded $8,696,000 in asset
impairment charges and $2,258,000 in estimated closing costs associated with the
withdrawal from this business. The $8,696,000 charge is included in impairment
of long-lived assets in the 1998 Consolidated Statement of Operations and is
comprised of $5,714,000 of goodwill, $1,956,000 of property, plant and equipment
and $1,026,000 of inventory and other assets. The remaining assets of Grand Soft
totaled $1,762,000 at December 26, 1998 and consisted primarily of trade
accounts receivable, which were fully recoverable. The assets were written down
to net realizable value based on an estimate of what an independent third party
would pay for the assets of the business.
The charge of $2,258,000 for closing costs is included in the provision
for restructuring charges in the 1998 Consolidated Statement of Operations and a
$2,258,000 liability was included in accounts payable and accrued liabilities in
the 1998 Consolidated Balance Sheet, as no closing costs were paid in 1998. The
closing costs were based on estimates of legal fees, employee separation
payments and expected settlements. The closing costs estimate included $576,000
of severance-related costs for the 23 employees, from all areas of
responsibility, who were notified of their pending terminations prior to
December 26, 1998. During 1999, the Company paid $811,000 of closing costs,
which included $444,000 of severance-related costs.
During 1999, an analysis of purchase offers received on the Grand Soft
equipment manufacturing business concluded that an outright sale was not
economically feasible. As an alternative, the Company's Grand Soft unit
outsourced its equipment
10
production to an independent sub-manufacturer. As a result, the Company
completed the withdrawal from the equipment manufacturing business at a cost
less than originally estimated and recorded a $1,315,000 reversal of the excess
for restructuring accrual in the 1999 Consolidated Statement of Operations. The
accrued liability of $132,000 in severance-related costs at December 25, 1999
will be paid during 2000.
The Grand Soft manufacturing operations generated revenues of $3,093,000
and $3,346,000, and incurred pre-tax operating losses of $(2,335,000) and
$(2,274,000) in 1998 and 1997, respectively.
(2) The Company implemented a program designed to reduce operating
expenses in manufacturing, sales and distribution, and administration. Core
pieces of this program included outsourcing of certain non-strategic activities,
consolidation of warehouse facilities and selected reductions in sales and
distribution staffing. These actions were completed in the fourth quarter of
1998.
As part of this program, the Company reviewed operations at all of its
manufacturing facilities in order to identify and dispose of under-utilized
assets. As a result of this review, the Company recorded a charge to cost of
goods sold of $5,317,000 in the fourth quarter of 1998, related primarily to the
write-down of manufacturing assets.
In connection with reducing operating expenses for sales and
distribution, the Company recorded $1,042,000 of severance and related charges
in the fourth quarter of 1998 that are included in the provision for
restructuring charges in the 1998 Consolidated Statement of Operations. A total
of 38 sales and distribution employees were to be terminated under this program.
Of this total, 16 were terminated in 1998 and paid $153,000 in severance
benefits. The remaining 22 employees were notified of their pending terminations
prior to December 26, 1998. An accrual for severance benefits of $889,000 was
outstanding at December 26, 1998. During 1999, the Company paid $632,000 in
severance benefits. The accrued liability of $257,000 at December 25, 1999 will
be paid in 2000.
The Company also recorded a $933,000 charge to cost of goods sold in the
third quarter of 1998 for severance actions begun in advance of board approval
of the remainder of the restructuring program. The Company paid $514,000 of
these severance benefits in 1998, leaving a liability of $419,000, which is
included in accounts payable and accrued liabilities in the 1998 Consolidated
Balance Sheet. During 1999, the Company paid the remaining severance benefits
totaling $419,000. Accordingly, there is no liability remaining for these
severance benefits at December 25, 1999.
In addition, in 1998, the Company charged to expense $4,478,000 of
previously capitalized costs classified as property, plant and equipment
associated with the expansion of its headquarters, as the expansion plan was
canceled in an effort to reduce future administration costs. The $4,478,000
charge was based on a third-party independent appraisal of the fair market value
of the related real property and is included in impairment of long-lived assets
in the 1998 Consolidated Statement of Operations.
(3) The Company, in carrying out its national expansion program, made
significant investments to support an aggressive expansion in Texas. These
investments, while building sales volume, delivered results below expectations.
The Company modified this expansion strategy in order to concentrate on more
profitable opportunities. The objective in Texas has been to preserve volumes
while seeking margin improvement. As a result of this change in strategy, the
Company is expected to realize substantially lower production volumes over the
remaining useful life of its Texas manufacturing plant than originally
contemplated. The Company therefore concluded that its investment in the Texas
plant was non-recoverable and recorded an impairment charge of $16,200,000 in
the fourth quarter of 1998 to reduce the net book value of the plant to its
estimated fair market value. The $16,200,000 impairment charge was based on a
third-party independent appraisal and is included in impairment of long-lived
assets in the 1998 Consolidated Statement of Operations.
(4) As previously mentioned, Ben & Jerry's indicated its intention to
terminate its separate distribution agreement with the Company's independent
distributor in Texas, Sunbelt Distributors, Inc. (Sunbelt), in which the Company
had a 16 percent minority equity interest. Ben & Jerry's action placed at
significant risk the recoverability of the Company's equity investment,
distribution rights, and trade receivables relating to this distributor. In the
third quarter of 1998, the Company recorded a bad debt provision of $5,000,000
relating to the trade receivables, when originally notified of the Ben & Jerry's
decision. The $5,000,000 bad debt provision is included in selling, general and
administrative expenses in the 1998 Consolidated Statement of Operations. In
light of Ben & Jerry's plans to terminate its relationship with Sunbelt and the
previously noted change in the Company's Texas strategy, the Company evaluated
the recoverability of all assets associated with Sunbelt. Accordingly, in
addition to the bad debt allowance recorded in the third quarter of 1998, the
Company recorded additional charges of $10,533,000 in the fourth quarter of 1998
related to the impairments of its minority equity investment and distribution
rights associated with the Company's contract with Sunbelt. The Company
concluded that these assets were unrecoverable due to the substantially-reduced
profits and cash flow resulting from Ben & Jerry's decision to terminate
Sunbelt's distribution agreement. The $10,533,000 charge, which is comprised of
$9,449,000 of the unamortized portion of the distribution rights and $1,084,000
representing the cost of the equity investment, is included in impairment of
long-lived assets in the 1998 Consolidated Statement of Operations.
As discussed in Note 15, the Company purchased the remaining 84 percent
of the outstanding common stock of Cherokee Cream Company, Inc. (the parent of
Sunbelt) on February 9, 2000, for $7,800,000.
(5) Due to the notice of termination from Ben & Jerry's, the Company
charged to expense $4,657,000 of the unamortized portion of distribution rights
related to the acquisition of the Ben & Jerry's New York distributor. The
Company acquired this
11
business in 1989 as part of the development of its long-standing relationship
with Ben & Jerry's. The other tangible assets of this business were merged with
the Company's New York operations and are fully recoverable. This impairment
charge was recorded in the third quarter of 1998 and is included in impairment
of long-lived assets in the 1998 Consolidated Statement of Operations.
The following table summarizes the classification of the charges
(reversals) in the 1999 Consolidated Statement of Operations and the 1998
Consolidated Statement of Operations related to the restructuring program and
other actions:
1998 1999
------------------------------------------------- ---------
(In thousands) Third Quarter Fourth Quarter Full Year Full Year
------------- -------------- --------- ---------
Provision for (reversal of)
restructuring charges:
Grand Soft $ $ 2,258 $ 2,258 $(1,315)
Sales and distribution severance 1,042 1,042
------- ------- ------- -------
3,300 3,300 (1,315)
------- ------- ------- -------
Impairment of long-lived assets:
Grand Soft 8,696 8,696
Texas plant 16,200 16,200
Texas independent distributor 10,533 10,533
Ben & Jerry's revision 4,657 4,657
Headquarters' expansion 4,478 4,478
------- ------- ------- -------
4,657 39,907 44,564
------- ------- ------- -------
Other charges:
Texas independent distributor 5,000 5,000
Sales and distribution severance 933 933
Asset disposals 5,317 5,317
------- ------- ------- -------
5,933 5,317 11,250
------- ------- ------- -------
$10,590 $48,524 $59,114 $(1,315)
======= ======= ======= =======
12
During 1999, the restructuring program and other actions were completed
with the exception of the payment of $389,000 of remaining severance and
related benefits. The following table summarizes the 1999 and 1998 activity in
the restructuring and other accruals included in accounts payable and accrued
liabilities in the Consolidated Balance Sheet:
Other
Restructuring Accruals Accruals
--------------------------------------------- ------------
Sales and Sales and
Distribution Distribution
(In thousands) Grand Soft Severance Subtotal Severance Total
---------- ------------ -------- ------------ -------
Balances at December 27, 1997 $ $ $ $ $
Additions 2,258 1,042 3,300 933 4,233
Payments (153) (153) (514) (667)
Reversals
------- ------- ------- ----- -------
Balances at December 26, 1998 2,258 889 3,147 419 3,566
Additions
Payments (811) (632) (1,443) (419) (1,862)
Reversals (1,315) (1,315) (1,315)
------- ------- ------- ----- -------
Balances at December 25, 1999 $ 132 $ 257 $ 389 $ $ 389
======= ======= ======= ===== =======
NOTE 4 Inventories
Inventories at December 25, 1999 and December 26, 1998 consisted of the
following:
(In thousands) 1999 1998
------- -------
Raw materials $ 6,174 $ 4,840
Finished goods 48,495 44,632
------- -------
$54,669 $49,472
======= =======
NOTE 5 Property, Plant and Equipment
Property, plant and equipment at December 25, 1999 and December 26, 1998
consisted of the following:
(In thousands) 1999 1998
-------- --------
Machinery and equipment $197,635 $198,122
Buildings and improvements 90,030 92,287
Capital leased assets 12,216 16,836
Office furniture and fixtures 6,481 6,672
-------- --------
306,362 313,917
Less: Accumulated depreciation and amortization 134,778 129,782
-------- --------
171,584 184,135
Land 15,436 15,436
Construction in progress 10,372 8,201
-------- --------
$197,392 $207,772
======== ========
Accumulated amortization for the capital leased assets was $7,748,000
and $8,118,000 at December 25, 1999 and December 26, 1998, respectively.
Interest capitalized was $256,000, $1,244,000, and $2,254,000 in 1999,
1998 and 1997, respectively.
Depreciation expense for property, plant and equipment, including
amortization expense for capital leased assets, was $31,607,000, $32,375,000,
and $27,799,000 in 1999, 1998 and 1997, respectively.
13
Construction in progress at December 25, 1999 and December 26, 1998
included $2,185,000 and $3,513,000, respectively, of costs associated with the
upgrade of the Company's computer systems.
NOTE 6 Income Tax Provision (Benefit)
The income tax provision (benefit) consisted of the following:
(In thousands) 1999 1998 1997
------ --------- ------
Current:
Federal $2,601 $ (2,147) $3,644
State 226 374 191
------ -------- ------
2,827 (1,773) 3,835
------ -------- ------
Deferred:
Federal 3,762 (24,218) 1,267
State 543 (2,394) 579
------ -------- ------
4,305 (26,612) 1,846
------ -------- ------
$7,132 $(28,385) $5,681
====== ======== ======
The 1999 and 1997 cumulative effects of changes in accounting principle
of $595,000 and $746,000, respectively, are net of income tax benefits of
$392,000 and $484,000, respectively. These income tax benefits are comprised of
federal and state income taxes and are not reflected in the above table.
The net deferred income tax liability as of December 25, 1999 and
December 26, 1998 consisted of the following:
(In thousands) 1999 1998
-------- --------
Deferred tax assets:
Net operating loss carryforwards $ 168 $ 1,770
Marketing-related expenses 1,191 1,240
Accrued employee benefits 1,662 3,349
Tax credit carryforwards 7,449 6,732
Other 5,178 6,259
-------- --------
15,648 19,350
-------- --------
Deferred tax liabilities:
Intangible assets and related amortization (10,781) (10,249)
Depreciation (10,132) (9,248)
Deferred costs (4,819) (4,657)
Other (2,066) (3,392)
-------- --------
(27,798) (27,546)
-------- --------
$(12,150) $ (8,196)
======== ========
The federal statutory income tax rate is reconciled to the Company's effective
income tax rate as follows:
1999 1998 1997
----- ------- -----
Federal statutory income tax rate 35.0% (35.0)% 35.0%
Tax credits (1.6) (1.9)
State income taxes, net of federal tax benefit 2.7 (1.8) 3.5
Other 2.0 0.8 0.8
---- ----- ----
38.1% (37.9)% 39.3%
==== ====== ====
As of December 25, 1999, the Company had deferred tax assets relating to
alternative minimum tax and other tax credit carryforwards. The alternative
minimum tax carryforwards of $4,976,000 can be carried forward indefinitely, as
they do not expire. The other tax credit carryforwards of $2,151,000 expire
between 2012 and 2019. Utilization of these carryforwards may be limited in the
event of a change in ownership of the Company. No valuation allowance for these
assets has been recorded because the Company believes that it is more likely
than not that these carryforwards will be used in future years to offset taxable
income.
14
NOTE 7 Long-Term Debt
Long-term debt at December 25, 1999 and December 26, 1998 consisted of the
following:
(In thousands) 1999 1998
-------- --------
Revolving line of credit with banks, due 2000 with interest payable at three
different interest rate options $ 53,500 $ 99,800
Senior notes, with principal due through 2008 and interest payable semiannually
at rates ranging from 7.68 percent to 8.34 percent 50,000 50,000
Capital lease obligation, with payments due through 2000 and interest payable
quarterly at a floating rate 7,978 13,136
Senior notes, with principal due through 2001 and interest payable semiannually
at 9.30 percent 7,000 10,600
Industrial revenue bonds, with principal due through 2001 and interest payable
quarterly at a floating rate based upon a tax-exempt note index 4,500 4,500
-------- --------
122,978 178,036
Less: Current portion 18,721 8,255
-------- --------
$104,257 $169,781
======== ========
The aggregate annual maturities of long-term debt, including the capital
lease obligation, as of December 25, 1999 are as follows:
(In thousands)
Year ending:
2000 $ 18,721
2001 68,543
2002 7,143
2003 2,143
2004 2,143
Later years 24,285
--------
$122,978
========
Line of Credit
The Company has a credit agreement with certain banks for a total revolving line
of credit of $175,000,000 at December 25, 1999. The total available under the
line decreased to $149,286,000 on December 31, 1999. The Company intends to
either refinance the line, which expires on December 31, 2000, or negotiate to
extend its maturity date. This line is available at three different interest
rate options which are defined as the agent bank's offshore rate, same day
funding rate, plus an applicable margin, or the bank's reference rate. The
interest rate on the line of credit was 6.33 percent at December 25, 1999. The
unused portion of the $175,000,000 line of credit at December 25, 1999 was
$121,500,000.
Senior Notes
On June 6, 1996, the Company completed a private placement of $50,000,000 of
senior notes, due 2000 through 2008. Proceeds from the senior notes were used to
repay a portion of existing bank borrowings under the Company's line of credit
and to fund capital expenditures.
Lease Transaction
On March 29, 1996, the Company entered into a capital lease transaction
involving a majority of its direct-store-delivery truck fleet. The $26,000,000
of proceeds received by the Company from the lease transaction were used to both
repay a portion of existing borrowings under the Company's line of credit and to
fund capital expenditures. The interest rate on the capital lease obligation was
6.83 percent at December 25, 1999. The four-year lease has been classified as a
capital lease and the related assets are recorded in property, plant and
equipment. The lease expires in 2000.
The excess of the lease transaction proceeds over the carrying value of
the fleet of approximately $9,095,000 was deferred and netted against the
carrying value of the capital leased assets. This deferred gain is being
credited to income in proportion to the amortization of the capital leased
assets.
15
Fair Value of Financial Instruments
As of December 25, 1999 and December 26, 1998, the fair value of the Company's
long-term debt was determined to approximate the carrying amount. The fair value
was based on quoted market prices for the same or similar issues or on the
current rates offered to the Company for a term equal to the same remaining
maturities. It is not practicable to estimate the fair value of the redeemable
convertible preferred stock due to the unique terms and conditions of these
securities.
Under its long-term debt obligations, the Company is subject to various
financial covenant requirements, including dividend restrictions.
NOTE 8 Leasing Arrangements
The Company conducts certain of its operations from leased facilities, which
include land and buildings, production equipment, and certain vehicles. All of
these leases, except one that has 88 years remaining, including renewal options,
expire within a period of 23 years. Certain of these leases include non-bargain
purchase options.
Future minimum rental payments required under noncancelable leases with
terms in excess of one year at December 25, 1999 are as follows:
(In thousands) Capital Operating
------- ---------
Year ending:
2000 $8,624 $ 8,796
2001 3,940
2002 3,148
2003 2,308
2004 2,253
Later years 3,382
------ -------
Total minimum payments required $8,624 $23,827
=======
Less: Amounts representing interest 646
------
Present value of minimum lease payments 7,978
Less: Current portion 7,978
------
$
======
Rental expense for operating leases was $12,030,000, $12,447,000 and
$13,994,000, in 1999, 1998 and 1997, respectively.
NOTE 9 Redeemable Convertible Preferred Stock
On October 3, 1997, the Series B preferred stock was converted into a
total of 1,008,000 shares of redeemable convertible Series A preferred stock
(Series A), redeemable on June 30, 2001. The Series A preferred stock is
convertible, under certain conditions, at an initial conversion price of $17.37
into a total of 5,800,000 shares of common stock.
Dividends on the Series A preferred stock are payable at a dividend rate
equal to the amount they would receive as if the shares were converted into
comparable shares of common stock. Series A preferred stockholders have common
stock voting rights equal to the number of common shares into which their
preferred stock is convertible. The Company is recording accretion to increase
the carrying value to the redemption value of $100,752,000 by June 30, 2001.
NOTE 10 Common Stock
The Company paid a regular quarterly dividend of $.03 per share of common stock
for each quarter of 1999, 1998 and 1997.
During 1987, the Board of Directors declared a dividend of one Preferred
Stock Purchase Right (the Rights) for each outstanding share of common stock.
Under certain conditions, the Rights become exercisable for the purchase of the
Company's preferred or common stock.
16
Common Stock Split
On November 18, 1997, the Company issued shares of common stock to holders of
record on October 30, 1997 to effect a two-for-one common stock split. An amount
equal to the par value of the common stock issued was transferred from capital
in excess of par to common stock to reflect this split.
The number of shares, stock price per share, and earnings and dividends
per share information appearing in these consolidated financial statements and
notes have been restated to reflect this stock split on a retroactive basis
unless otherwise indicated.
Nestle Equity Issuance
Pursuant to a 1994 equity transaction (the Nestle Agreement) an affiliate of
Nestle USA, Inc. purchased 6,000,000 newly issued shares of common stock and
warrants to purchase an additional 4,000,000 shares at an exercise price of $16
per share. Warrants for 2,000,000 shares expired unexercised on June 14, 1997
and warrants for the remaining 2,000,000 shares expired unexercised on June 14,
1999. In connection with the Nestle Agreement, the Company entered into a
distribution agreement with Nestle Ice Cream Company to distribute Nestle's
frozen novelty and ice cream products in certain markets.
NOTE 11 Employee Benefit Plans
The Company maintains a defined contribution retirement plan (pension plan) for
employees not covered by collective bargaining agreements. The pension plan
provides retirement and other benefits based upon the assets of the plan held by
the trustee. The Company contributed five percent of the eligible participants'
annual compensation to the plan during 1999 and 1998, and seven percent during
1997. The Company also maintains a salary deferral plan (401(k) plan) under
which it may make a matching contribution of a percentage of each participant's
annual deferred salary amount.
Pension expense and 401(k) matching contributions under these plans were
approximately $6,045,000, $5,411,000 and $7,500,000 in 1999, 1998 and 1997,
respectively. The Company's liability for accrued pension contributions and
401(k) matching contributions was $6,323,000 and $5,648,000, at December 25,
1999 and December 26, 1998, respectively.
Pension expense for employees covered by multi-employer retirement plans
under collective bargaining agreements was $1,015,000, $981,000 and $1,056,000
in 1999, 1998 and 1997, respectively.
NOTE 12 Employee Stock Plans
The Company offers to certain employees various stock option plans, a Section
423 employee stock purchase plan and an employee secured stock purchase plan.
Stock Option Plans
The Company has three stock option plans under which options may be granted for
the purchase of the Company's common stock at a price not less than 100 percent
of the fair market value at the date of grant. The incentive stock option plan
(the 1982 Plan) provides that options are not exercisable until after two years
from the date of grant and generally expire six years from the date of grant.
The non-qualified stock option plan (the 1992 Plan) provides that options are
not exercisable until after two years from the date of grant and expire upon
death or termination of employment. In 1994, the stockholders approved an
additional stock option plan (the 1993 Plan) under which granted options may be
either incentive stock options or non-qualified stock options. In May 1999,
stockholders approved an amendment to the 1993 Plan to increase the number of
shares reserved for issuance thereunder from 4,400,000 to 6,400,000. This plan
provides that options expire no later than ten years from the date of grant.
This plan also provides that most of the terms of the options, such as vesting,
are within the discretion of the compensation committee, comprised of certain
members of the Company's Board of Directors.
No compensation cost has been recognized for these stock option plans.
If compensation cost for these plans had been determined based on the fair value
at the grant dates, the Company's net income (loss) available to common
stockholders and net income (loss) per common share on a pro forma basis would
have been as follows:
(In thousands, except per share amounts) 1999 1998 1997
------ --------- ------
Net income (loss) available to common $6,314 $(50,530) $1,757
stockholders
Net income (loss) per common share:
Basic .23 (1.86) .07
Diluted .22 (1.86) .06
17
The Company used the Black-Scholes option pricing model to estimate the
fair value of options granted during 1999, 1998 and 1997. The assumptions used
to compute compensation expense in the above pro forma presentation and to
estimate the weighted-average fair market value of options granted are as
follows:
1999 1998 1997
------ ------- --------
Risk-free interest rate 5.23% 5.74% 6.59%
Dividend yield .96% .53% .78%
Volatility 39.58% 32.29% 31.51%
Expected term (years) 5.90 5.90 5.70
Weighted average fair market value $ 5.32 $ 9.10 $ 6.07
Stock options exercisable were 2,466,000, 2,196,000 and 1,719,000 at
year-end 1999, 1998 and 1997, respectively. These stock options were exercisable
at weighted-average prices per share of $13.98, $13.69 and $13.15 in 1999, 1998
and 1997, respectively.
The activity in the three stock option plans for each of the three years
in the period ended December 25, 1999 follows:
Options Weighted-
Available Options Average Price
(In thousands, except per share amounts) for Grant Outstanding Per Share
--------- ----------- -------------
Balance, December 28, 1996 2,124 3,420 $13.49
Granted (932) 932 15.35
Exercised (243) 12.58
Canceled 143 (143) 14.32
------ -----
Balance, December 27, 1997 1,335 3,966 13.97
Granted (714) 714 22.72
Exercised (181) 11.99
Canceled 138 (138) 16.42
------ -----
Balance, December 26, 1998 759 4,361 15.41
Authorized 2,000
Granted (1,171) 1,171 12.47
Exercised (334) 13.18
Canceled 125 (125) 14.31
------ -----
Balance, December 25, 1999 1,713 5,073 14.91
====== =====
18
Significant option groups outstanding at December 25, 1999 and related
weighted-average exercise price per share and life information follows:
(In thousands, except years and per share amounts)
Options
Options Outstanding Exercisable
------------------------------------------------ --------------
Exercise Weighted- Average Weighted-
Range Options Weighted-Average Remaining Options Average
Price Outstanding Exercise Price Life (Years) Exercisable Exercise Price
-------- ----------- ---------------- ------------- ----------- --------------
$ 9.75-13.75 2,593 $12.47 6.5 1,348 $12.52
14.09-19.75 1,827 15.49 6.5 1,087 15.47
22.88-25.38 653 22.96 8.2 31 24.57
----- -----
5,073 2,466
===== =====
Section 423 Employee Stock Purchase Plan
Under the Section 423 employee stock purchase plan, employees may authorize
payroll deductions up to ten percent of their compensation for the purpose of
acquiring shares of the Company's common stock at 85 percent of the market price
determined at the beginning of a specified 12-month period. Under this plan,
employees purchased 67,000 shares at prices ranging from $9.30 to $19.23 per
share in 1999, 34,000 shares at prices ranging from $13.15 to $19.87 per share
in 1998, and 30,000 shares(*) at prices ranging from $24.65 to $25.93(*) per
share in 1997. Compensation cost based on the fair value of the employees'
purchase rights was not material in 1999, 1998 and 1997.
Employee Secured Stock Purchase Plan
Under the employee secured stock purchase plan, on specified dates employees may
purchase shares of the Company's common stock at fair market value by paying 20
percent of the purchase price in cash and the remaining 80 percent of the
purchase price in the form of a non-recourse promissory note with a term of 30
years. Under this plan, employees purchased 179,000 shares at prices ranging
from $11.88 to $18.38 per share in 1999, 83,000 shares at prices ranging from
$13.38 to $20.13 per share in 1998, and 20,000 shares(*) at prices ranging from
$30.25 to $48.25 per share(*) in 1997.
(*) The share information is presented before the effect of the 1997 common
stock split (See Note 10).
NOTE 13 Insurance Settlements
During 1998 and 1997, the Company recorded several gains relating to claims
filed under its insurance policies. These claims resulted from accidents that
contaminated certain finished goods inventories. Under the Company's insurance
policies, the Company is entitled to receive the value of the affected finished
goods inventories at its normal selling price, plus expenses incurred in
recovering from these accidents. The claims resulted in gains of $1,300,000 and
$2,355,000 in 1998 and 1997, respectively, which were recorded as reductions in
cost of goods sold.
During 1999, the effect of insurance claims on net income and net income
per diluted common share was not material. In 1998, insurance claims reduced net
loss by $807,000, or $.03 per diluted common share. In 1997, insurance claims
increased net income by $1,430,000, or $.05 per diluted common share.
NOTE 14 Contingencies
The Company is engaged in various legal actions as both plaintiff and defendant.
Management believes that the outcome of these actions, either individually or in
the aggregate, will not have a material adverse effect on the Company's
financial position, results of operations or cash flows.
19
NOTE 15 Subsequent Event
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, the leading independent direct-store-delivery ice cream distributor
in Texas. The Company paid $7,800,000 in cash in this transaction which is to be
accounted for as a purchase.
As more fully discussed in Note 3, during 1998, the Company recorded
charges of $10,533,000 related to the impairments of its minority equity
investment in Cherokee and its distribution rights associated with the Company's
long-term distribution agreement with Sunbelt. In addition, during 1998, the
Company recorded a bad debt provision of $5,000,000 relating to trade accounts
receivable from Sunbelt. These charges resulted primarily from Ben & Jerry's
decision to terminate its distribution agreement with Sunbelt. Ben & Jerry's
action placed at significant risk the recoverability of the Company's equity
investment, distribution rights and trade receivables relating to Cherokee and
Sunbelt.
During the first quarter of 2000, the Company determined that the
outlook for Sunbelt's business was likely to improve, due to new distribution
agreements with other frozen food manufacturers, and due to the prospective
impact of the Company's new products. Therefore, in order to further stabilize
its business in Texas, the Company made the decision to acquire full ownership
of Cherokee and its wholly-owned subsidiary, Sunbelt. However, because the
potential business improvements in Sunbelt are prospective, and because Sunbelt
had not significantly reduced its past-due receivable balances with the Company,
the Company made the determination that it was not appropriate to reverse any of
the bad debt allowance previously established relating to Sunbelt's trade
accounts receivable.
20
NOTE 16 Selected Quarterly Financial Data (Unaudited)
Income (Loss)
Before Net
Cumulative Cumulative Income
Effect Effect (Loss) Price Range
(In thousands, of Change in of Change in Available Per Common
except per share Gross Accounting Accounting to Common Share
amounts) Sales Profit Principle(1) Principle Stockholders (NASDAQ)
---------- -------- ------------- ------------ ------------ ------------
1999
1st Quarter $ 228,386 $ 40,465 $ (3,615) $595 $ (4,210) $11.75-15.88
2nd Quarter 306,861 76,505 7,950 7,950 11.50-17.13
3rd Quarter 322,410 85,966 8,456 8,456 15.13-19.69
4th Quarter 242,160 58,974 (2,324) (2,324) 15.13-18.28
---------- -------- -------- ---- --------
$1,099,817 $261,910 $ 10,467 $595 $ 9,872
========== ======== ======== ==== ========
1998
1st Quarter $ 215,082 $ 36,114 $ (5,905) $ (5,905) $20.00-25.38
2nd Quarter 280,273 62,502 4,255 4,255 19.38-26.75
3rd Quarter 302,972 64,054 (6,261) (6,261) 9.44-21.50
4th Quarter 224,008 31,803 (39,719) (39,719) 9.00-17.38
---------- -------- -------- ---- --------
$1,022,335 $194,473 $(47,630) $(47,630)
========== ======== ======== ==== ========
Basic Net Income (Loss) Per Common Share Diluted Net Income (Loss) Per Common Share
---------------------------------------- ------------------------------------------
Income (Loss) Income (Loss)
Before Before
Cumulative Cumulative Cumulative Cumulative
Effect of Effect of Effect of Effect of
Change Change in Net Change in Change in
in Accounting Accounting Income Accounting Accounting Net Income
Principle(2) Principle (Loss)(2) Principle(2) Principle (Loss)(2)
------------- ---------- --------- ------------- ---------- ----------
1999
1st Quarter $ (.13) $(.02) $ (.15) $ (.13) $ (.02) $ (.15)
2nd Quarter .29 .29 .24 .24
3rd Quarter .31 .31 .26 .26
4th Quarter (.08) (.08) (.08) (.08)
1998
1st Quarter $ (.22) $ (.22) $ (.22) $ (.22)
2nd Quarter .16 .16 .13 .13
3rd Quarter (.23) (.23) (.23) (.23)
4th Quarter (1.45) (1.45) (1.45) (1.45)
(1) Income (loss) has been reduced by preferred stock dividends and accretion of
preferred stock to redemption value.
(2) The number of weighted-average shares outstanding used in the computation of
net income (loss) per common share increases and decreases as shares are
issued and repurchased during the year. For this reason, the sum of net
income (loss) per common share for the quarters may not be the same as the
net income (loss) per common share for the year.
21
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
Dreyer's Grand Ice Cream, Inc.
In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of operations, of changes in stockholders' equity and of
cash flows present fairly, in all material respects, the financial position of
Dreyer's Grand Ice Cream, Inc. and its subsidiaries at December 25, 1999 and
December 26, 1998, and the results of their operations and their cash flows for
each of the three years in the period ended December 25, 1999 in conformity with
accounting principles generally accepted in the United States. These financial
statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
auditing standards generally accepted in the United States which require that we
plan and perform the audits to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for the opinion expressed above.
As discussed in Note 2 of Notes to the Consolidated Financial
Statements, the Company changed its method of accounting for start-up costs in
the first quarter of 1999 and its method of accounting for reengineering costs
in the fourth quarter of 1997.
/s/PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
San Francisco, California
February 15, 2000
22
FIVE-YEAR SUMMARY OF SIGNIFICANT FINANCIAL DATA
Year Ended December
----------------------------------------------------------------------
(In thousands, except per share amounts) 1999 1998 1997 1996 1995
---------- ----------- -------- -------- --------
Operations:
Sales and other income $1,101,907 $1,025,988 $ 973,091 $ 796,195 $ 681,052
Income (loss) before cumulative effect of
change in accounting principle 11,587 (46,510) 8,774 6,997 (1,524)
Net income (loss) 10,992 (46,510) 8,028 6,997 (1,524)
Net income (loss) available to common
stockholders 9,872 (47,630) 3,968 2,000 (3,496)
Per Common Share:
Basic:
Income (loss) before cumulative effect of
change in accounting principle(1) .38 (1.75) .18 .08 (.13)
Net income (loss)(1) .36 (1.75) .15 .08 (.13)
Diluted:
Income (loss) before cumulative effect of
change in accounting principle(1) .35 (1.75) .17 .07 (.13)
Net income (loss)(1) .33 (1.75) .14 .07 (.13)
Dividends declared(1) .12 .12 .12 .12 .12
Balance Sheet:
Total assets 439,244 461,721 502,146 477,763 413,505
Working capital 31,334 61,059 78,576 70,136 69,361
Long-term debt 104,257 169,781 165,913 163,135 134,000
Redeemable convertible preferred stock 100,078 99,654 99,230 98,806 98,382
Stockholders' equity 73,694 61,174 108,688 102,919 91,663
(1) Retroactively restated to reflect the effects of the common stock split in
1997.
23
MANAGEMENT'S DISCUSSION AND ANALYSIS
RESULTS OF OPERATIONS
Forward-Looking Statements
The Company may from time to time make written or oral forward-looking
statements. Written forward-looking statements may appear in documents filed
with the Securities and Exchange Commission, in press releases, and in reports
to stockholders. The Private Securities Litigation Reform Act of 1995 contains a
"safe harbor" for forward-looking statements upon which the Company relies in
making such disclosures. In accordance with this "safe harbor" provision, we
have identified that forward-looking statements are contained in this Annual
Report. 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. Those factors include but are not limited to those
discussed in the Risks and Uncertainties section of this Management's Discussion
and Analysis. 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.
Financial Summary
The Company recorded net income available to common stockholders of $9,872,000,
or $.33 per diluted common share, for 1999. These results represent a
substantial improvement over the net loss available to common stockholders of
$(47,630,000), or $(1.75) per diluted common share, for 1998. The results for
1998 included a $59,114,000 charge related to the Company's previously announced
restructuring program and other actions. Consolidated sales increased eight
percent over 1998 to $1,099,817,000. The results for 1999 reflect the effects of
increased sales of new, higher-margin products comparatively, lower dairy raw
material costs, higher average wholesale prices, and higher unit sales of the
Company's established brands. These improvements were partially offset by
reduced sales of products manufactured by Ben & Jerry's Homemade, Inc. (Ben &
Jerry's) as a result of changes in the distribution agreement.
The Strategic Plan and Restructuring Program
In 1994, the Company adopted a strategic plan to accelerate the sales of its
brand throughout the country (the Grand Plan or the Strategic Plan). The key
elements of this plan are: 1) to build high-margin brands with leading market
shares through effective consumer marketing activities, 2) to expand the
Company's direct-store-delivery distribution network to national scale and
enhance this capability with sophisticated information and logistics systems and
3) to introduce innovative new products. The potential benefits of the Strategic
Plan are increased market share and future earnings above those levels that
would be attained in the absence of the Strategic Plan.
In accordance with the Strategic Plan, the Company embarked on an
aggressive national expansion. This expansion involved the entry into 34 new
markets, which included the opening of a major manufacturing and distribution
center in Texas, a significant increase in marketing spending and the
introduction of several new products. At the same time, the Company invested in
its soft-serve equipment manufacturing business, Grand Soft. The investments
which were required to fund the brand-building actions and national expansion
and to support the Grand Soft business substantially increased the Company's
cost structure.
Beginning in late 1997 and continuing into 1998, the cost of dairy raw
materials, the primary ingredient in ice cream, increased significantly. These
costs peaked in 1998 at a rate more than double of that experienced in 1997.
This increase reduced the Company's 1998 gross profit by approximately
$22,000,000 when compared with 1997. Aggressive discounting by the Company's
competitors made it difficult to raise prices by an amount sufficient to raise
prices by an amount sufficient to compensate for these higher dairy raw material
costs. During this same period, sales volumes of the Company's "better for you"
products continued the significant decline that began in 1997, consistent with
an industry-wide trend. Since these "better for you" products enjoy higher
margins than the Company's classic ice cream, the volume decline had a
significant impact on the Company's profitability in 1998. Finally, in August
1998, Ben & Jerry's informed the Company of its intention to terminate its
distribution agreement. Subsequent negotiations with Ben & Jerry's revised the
original contract terms to allow the Company to distribute Ben & Jerry's
products in a smaller geographic area. Starting September 1, 1999, this was
estimated to reduce the Company's distribution gross profit of Ben & Jerry's
products by approximately 54 percent. The Company estimates that the
distribution gross profit in the markets where it stopped distributing Ben &
Jerry's products represented approximately six percent, or $13,000,000, of its
gross profit in 1998.
24
The above factors: the higher dairy raw material costs; the decline in
"better for you" volumes; and the reduction in future Ben & Jerry's sales had in
the past, and may continue to have in the future, a negative effect on the
Company's gross profit and its ability to successfully implement the Strategic
Plan. The Company, therefore, concluded that a thorough reassessment of its cost
structure and strategy was necessary. This reassessment yielded restructuring
actions designed to improve profitability and accelerate cost reductions by
increasing focus on the core elements of the Strategic Plan. On October 16,
1998, the board of directors approved the restructuring actions.
The Company continues to make progress towards the key elements of the
Strategic Plan. This progress has yielded an increased market share in a
consolidating industry. For example, the Company has had significant success in
the superpremium segment in recent years with the introductions of Whole Fruit
Sorbet, Starbucks(R) Ice Cream, and Godiva(R) Ice Cream. In order to build on
this success in the high-margin superpremium segment, the Company introduced a
new line of superpremium ice cream under the brand name Dreyer's and Edy's
Dreamery(TM) Ice Cream in September 1999. While the Company continues to
distribute Ben & Jerry's products in a smaller geographic area, it has no
further restrictions on competing in the superpremium segment with its own pint
products. In the premium segment, the Company announced during the third quarter
of 1999 the formation of a long-term partnership with M&M/Mars to market a new
line of ice cream products featuring M&M/Mars leading candy brands. These
products are being manufactured and distributed by the Company under the terms
of the joint venture agreement. This relationship is consistent with the
Company's strategy to expand its portfolio of brands and products to reach
consumers across the entire ice cream category.
The Company intends to continue to pursue the benefits of the Grand Plan
through four long-term initiatives. These initiatives are as follows: 1) growth
in share and sales in the premium ice cream business; 2) expansion of the
Company's new, higher-margin superpremium ice cream brands; 3) accelerated
development of the Company's business in a wider number of retail channels,
especially mass-merchandisers, convenience stores, and foodservice outlets; and
4) a focus on improved productivity through a reduction in Total Delivered
Costs, meaning the per-unit costs of manufacturing, selling and distribution,
and support activities.
Revision of Ben & Jerry's Distribution Agreement
During the third quarter of 1998, Ben & Jerry's notified the Company of its
intention to terminate the distribution agreement between the Company and Ben &
Jerry's. The Company subsequently entered into negotiations with Ben & Jerry's
to resolve issues associated with the pending termination. In the first quarter
of 1999, the companies reached a resolution regarding these termination issues
by amending the existing distribution agreement and entering into a new
distribution agreement. The Company retained the rights to distribute Ben &
Jerry's products in all existing markets, except the New York metropolitan area
(discussion follows in Restructuring Program and Other Actions of this
Management's Discussion and Analysis), and on terms and conditions different in
some respects from those in place prior to the amendment. The Company stopped
distributing Ben & Jerry's products in New York on April 1, 1999. After August
1999, the Company continued to distribute Ben & Jerry's in selected markets
covering a smaller geographic area under the terms of the new distribution
agreement. The Company received a reduced margin for distributing Ben & Jerry's
in these selected markets in 1999, but has been allowed to compete directly with
Ben & Jerry's in the superpremium ice cream category in all markets after August
1999. In addition to notifying the Company of its intention to terminate the
distribution agreement above, Ben & Jerry's notified the Company of its
intention to terminate its separate distribution agreement with the Company's
independent distributor in Texas (discussion follows in Restructuring Program
and Other Actions of this Management's Discussion and Analysis).
The distribution gross profit on Ben & Jerry's products contributed just
over 11 percent of the Company's gross profit in 1998. The Company estimates
that the distribution margin received in the markets where the Company stopped
distributing Ben & Jerry's products in 1999 contributed approximately six
percent, or $13,000,000, of its total gross profit in 1998.
Restructuring Program and Other Actions
The implementation of the restructuring program and other actions resulted in a
pre-tax charge to earnings of $59,114,000 in 1998. This included $10,590,000
recorded in the third quarter which related primarily to Ben & Jerry's actions
that occurred in September 1998 and to a severance program, which management had
already begun in advance of board approval of the remainder of the restructuring
program. The remainder of the charges, $48,524,000, was recorded in the fourth
quarter of 1998.
The five key elements of the restructuring program and other actions follow:
(1) In 1998, the Company decided to exit the equipment manufacturing business
associated with its Grand Soft ice cream unit. The Grand Soft business consists
of both ice cream sales and equipment manufacturing operations. The Company has
remained in the profitable ice cream portion of this business, but has exited
the unprofitable equipment manufacturing operations.
In the fourth quarter of 1998, the Company recorded $8,696,000 in asset
impairment charges and $2,258,000 in estimated closing costs associated with the
withdrawal from this business. The $8,696,000 charge is included in impairment
of long-lived assets in the 1998 Consolidated Statement of Operations and is
comprised of $5,714,000 of goodwill, $1,956,000 of property,
25
plant and equipment and $1,026,000 of inventory and other assets. The remaining
assets of Grand Soft totaled $1,762,000 at December 26, 1998 and consisted
primarily of trade accounts receivable, which were fully recoverable. The assets
were written down to net realizable value based on an estimate of what an
independent third party would pay for the assets of the business.
The charge of $2,258,000 for closing costs is included in the provision
for restructuring charges in the 1998 Consolidated Statement of Operations and a
$2,258,000 liability was included in accounts payable and accrued liabilities in
the 1998 Consolidated Balance Sheet, as no closing costs were paid in 1998. The
closing costs were based on estimates of legal fees, employee separation
payments and expected settlements. The closing costs estimate included $576,000
of severance-related costs for the 23 employees, from all areas of
responsibility, who were notified of their pending terminations prior to
December 26, 1998. During 1999, the Company paid $811,000 of closing costs,
which included $444,000 of severance-related costs.
During 1999, an analysis of purchase offers received on the Grand Soft
equipment manufacturing business concluded that an outright sale was not
economically feasible. As an alternative, the Company's Grand Soft unit
outsourced its equipment production to an independent sub-manufacturer. As a
result, the Company completed the withdrawal from the equipment manufacturing
business at a cost less than originally estimated and recorded a $1,315,000
reversal of the excess restructuring accrual in the 1999 Consolidated Statement
of Operations. The accrued liability of $132,000 in severance-related costs at
December 25, 1999 will be paid during 2000.
The Grand Soft manufacturing operations generated revenues of $3,093,000
and $3,346,000, and incurred pre-tax operating losses of $(2,335,000) and
$(2,274,000) in 1998 and 1997, respectively.
(2) The Company implemented a program designed to reduce operating
expenses in manufacturing, sales and distribution, and administration. Core
pieces of this program included outsourcing of certain non-strategic activities,
consolidation of warehouse facilities and selected reductions in sales and
distribution staffing. These actions were completed in the fourth quarter of
1998.
As part of this program, the Company reviewed operations at all of its
manufacturing facilities in order to identify and dispose of under-utilized
assets. As a result of this review, the Company recorded a charge to cost of
goods sold of $5,317,000 in the fourth quarter of 1998, related primarily to the
write-down of manufacturing assets.
In connection with reducing operating expenses for sales and
distribution, the Company recorded $1,042,000 of severance and related charges
in the fourth quarter of 1998 that are included in the provision for
restructuring charges in the 1998 Consolidated Statement of Operations. A total
of 38 sales and distribution employees were to be terminated under this program.
Of this total, 16 were terminated in 1998 and paid $153,000 in severance
benefits. The remaining 22 employees were notified of their pending terminations
prior to December 26, 1998. An accrual for severance benefits of $889,000 was
outstanding at December 26, 1998. During 1999, the Company paid $632,000 in
severance benefits. The accrued liability of $257,000 at December 25, 1999 will
be paid in 2000.
The Company also recorded a $933,000 charge to cost of goods sold in the
third quarter of 1998 for severance actions begun in advance of board approval
of the remainder of the restructuring program. The Company paid $514,000 of
these severance benefits in 1998, leaving a liability of $419,000, which is
included in accounts payable and accrued liabilities in the 1998 Consolidated
Balance Sheet. During 1999, the Company paid the remaining severance benefits
totaling $419,000. Accordingly, there is no liability remaining for these
severance benefits at December 25, 1999.
In addition, in 1998, the Company charged to expense $4,478,000 of
previously capitalized costs classified as property, plant and equipment
associated with the expansion of its headquarters, as the expansion plan was
canceled in an effort to reduce future administration costs. The $4,478,000
charge was based on a third-party independent appraisal of the fair market value
of the related real property and is included in impairment of long-lived assets
in the 1998 Consolidated Statement of Operations.
(3) The Company, in carrying out its national expansion program, made
significant investments to support an aggressive expansion in Texas. These
investments, while building sales volume, delivered results below expectations.
The Company modified this expansion strategy in order to concentrate on more
profitable opportunities. The objective in Texas has been to preserve volumes
while seeking margin improvement. As a result of this change in strategy, the
Company is expected to realize substantially lower production volumes over the
remaining useful life of its Texas manufacturing plant than originally
contemplated. The Company therefore concluded that its investment in the Texas
plant was non-recoverable and recorded an impairment charge of $16,200,000 in
the fourth quarter of 1998 to reduce the net book value of the plant to its
estimated fair market value. The $16,200,000 impairment charge was based on a
third-party independent appraisal and is included in impairment of long-lived
assets in the 1998 Consolidated Statement of Operations.
The Company anticipates that the production levels at the Texas
manufacturing plant may increase for the next two or three years pending the
addition of more manufacturing capacity in the eastern half of the United
States. Despite these short-term increases, the Company projects that production
at the Texas manufacturing plant will remain below the volume originally
contemplated.
(4) As previously mentioned, Ben & Jerry's indicated its intention to
terminate its separate distribution agreement with the Company's independent
distributor in Texas, Sunbelt Distributors, Inc. (Sunbelt), in which the Company
had a 16 percent minority equity interest. Ben & Jerry's action placed at
significant risk the recoverability of the Company's equity investment,
distribution rights, and trade accounts receivable relating to this distributor.
In the third quarter of 1998, the Company recorded a bad debt provision of
$5,000,000 relating to the trade accounts receivable, when originally notified
of the Ben & Jerry's decision. The $5,000,000 bad debt provision is included in
selling, general and administrative expenses in the 1998 Consolidated Statement
of Operations. In light of Ben & Jerry's plans to terminate its relationship
with Sunbelt and the previously noted change in the Company's Texas strategy,
the Company evaluated the recoverability of all assets associated with Sunbelt.
Accordingly, in
26
addition to the bad debt allowance recorded in the third quarter of 1998, the
Company recorded additional charges of $10,533,000 in the fourth quarter of 1998
related to the impairment of its minority equity investment and distribution
rights associated with the Company's agreement with Sunbelt. The Company
concluded that these assets were unrecoverable due to the substantially-reduced
profits and cash flow resulting from Ben & Jerry's decision to terminate
Sunbelt's distribution agreement. The $10,533,000 charge, which is comprised of
$9,449,000 of the unamortized portion of the distribution rights and $1,084,000
representing the cost of the equity investment, is included in impairment of
long-lived assets in the 1998 Consolidated Statement of Operations.
During the first quarter of 2000, the Company determined that the
outlook for Sunbelt's business was likely to improve, due to new distribution
agreements with other frozen food manufacturers, and due to the prospective
impact of the Company's new products. Therefore, in order to further stabilize
its business in Texas, the Company made the decision to acquire full ownership
of Cherokee Cream Company, Inc. (Cherokee) and its wholly-owned subsidiary,
Sunbelt. The Company purchased the remaining 84 percent of the outstanding
common stock of Cherokee on February 9, 2000, for $7,800,000. However, because
the potential business improvements in Sunbelt are prospective, and because
Sunbelt had not significantly reduced its past-due receivable balances with the
Company, the Company made the determination that it was not appropriate to
reverse any of the bad debt allowance previously established relating to
Sunbelt's trade accounts receivable.
(5) Due to the notice of termination from Ben & Jerry's, the Company charged to
expense $4,657,000 of the unamortized portion of distribution rights related to
the acquisition of the Ben & Jerry's New York distributor. The Company acquired
this business in 1989 as part of the development of its long-standing
relationship with Ben & Jerry's. The other tangible assets of this business were
merged with the Company's New York operations and are fully recoverable. This
charge was recorded in the third quarter of 1998 and is included in impairment
of long-lived assets in the 1998 Consolidated Statement of Operations.
The following table summarizes the classification of the
charges (reversals) in the 1999 and 1998 Consolidated Statement of Operations
related to the restructuring program and other actions:
1998 1999
------------------------------------------------ ---------
(In thousands) Third Quarter Fourth Quarter Full Year Full Year
------------- -------------- --------- ---------
(Reversal of) provision for
restructuring charges:
Grand Soft $ $ 2,258 $2,258 $(1,315)
Sales and distribution severance 1,042 1,042
------- ------- ------- -------
3,300 3,300 (1,315)
------- ------- ------- -------
Impairment of long-lived assets:
Grand Soft 8,696 8,696
Texas plant 16,200 16,200
Texas independent distributor 10,533 10,533
Ben & Jerry's revision 4,657 4,657
Headquarters' expansion 4,478 4,478
------- ------- ------- -------
4,657 39,907 44,564
------- ------- ------- -------
Other charges:
Texas independent distributor 5,000 5,000
Sales and distribution severance 933 933
Asset disposals 5,317 5,317
------- ------- ------- -------
5,933 5,317 11,250
------- ------- ------- -------
$10,590 $48,524 $59,114 $(1,315)
======= ======= ======= =======
27
During 1999, the restructuring program and other actions were completed
with the exception of the payment of $389,000 of remaining severance and related
benefits. The following table summarizes the 1999 and 1998 activity in the
restructuring and other accruals included in accounts payable and accrued
liabilities in the Consolidated Balance Sheet:
Other
Restructuring Accruals Accruals
---------------------------------- ------------
Sales and Sales and
Distribution Distribution
(In thousands) Grand Soft Severance Subtotal Severance Total
---------- ------------ -------- ------------ -------
Balances at December 27, 1997 $ $ $ $ $
Additions 2,258 1,042 3,300 933 4,233
Payments (153) (153) (514) (667)
Reversals
------- ------ ------- ----- -------
Balances at December 26, 1998 2,258 889 3,147 419 3,566
Additions
Payments (811) (632) (1,443) (419) (1,862)
Reversals (1,315) (1,315) (1,315)
------- ------ ------- ----- -------
Balances at December 25, 1999 $ 132 $ 257 $ 389 $ $ 389
======= ====== ======= ===== =======
Risks and Uncertainties
Certain statements contained in this Annual Report are forward-looking
statements made pursuant to the Private Securities Litigation Reform Act of
1995. Such forward-looking statements involve known and unknown risks and
uncertainties, which may cause the Company's actual actions or results to differ
materially from those contained in the forward-looking statements.
The Company believes that the benefits under the Strategic Plan will be
realized in future years, although no assurance can be given that the
expectations relative to future market share and earnings benefits of the
strategy will be achieved. Specific factors that might cause such a difference
include, but are not limited to, the Company's ability to achieve the cost
reductions anticipated from its restructuring program and to achieve
efficiencies in its manufacturing and distribution operations without negatively
affecting sales, the cost of dairy raw materials and other commodities used in
the Company's products, competitors' marketing and promotion responses, market
conditions affecting the price of the Company's products, the Company's ability
to increase sales of its own branded products, and responsiveness of the trade
and consumers to the Company's new products and increased marketing and trade
promotion expenses.
1999 Compared with 1998
Consolidated sales for 1999 increased $77,482,000, or eight percent, to
$1,099,817,000 from $1,022,335,000 for 1998.
Sales of the Company's branded products, including our licensed and
joint venture products (company brands), increased $81,775,000, or 13 percent,
to $729,520,000, from $647,745,000 for 1998. Company brands represented 66
percent of consolidated sales in 1999 compared with 63 percent in 1998. The
increase in sales of the Company's branded products resulted from the
introduction of new, higher-margin products, increased average wholesale prices
and higher unit sales of the Company's established brands. The products that
led this increase in sales were Dreyer's and Edy's Grand Ice Cream, the
recently introduced Dreamery(TM) Ice Cream and Godiva(R) Ice Cream. Despite the
fact that sales of the Company's "better for you" products continued their
decline, although at a slower rate, the Company's market share increased. The
increase was due to the fact that the Company's "better for you" product sales
declined at a slower rate than the industry as a whole. Average wholesale
prices for the Company's branded products increased approximately seven
percent, before the effect of increased trade promotion expenses. Gallon sales
of the Company's branded products increased approximately 7,000,000 gallons, or
eight percent, to approximately 100,000,000 gallons. The average national
dollar market share of the Company's Dreyer's and Edy's branded premium
packaged products was 14.5 percent in 1999 compared to 14.8 percent in 1998.
The same statistic for superpremium packaged products was 19.3 percent in 1999
compared to 10.8 percent in 1998.
Sales of products distributed for other manufacturers (partner brands)
decreased $4,293,000, or one percent, to $370,297,000 from $374,590,000 for
1998. Sales of partner brands represented 34 percent of consolidated sales in
1999 compared with 37 percent in 1998. 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 decrease in partner
brand sales for 1999. Average wholesale prices for partner brands increased
approximately three percent, while unit sales decreased five percent.
Cost of goods sold increased $10,045,000, or one percent, over 1998,
while the gross margin increased to 24 percent from 19 percent. This gross
margin improvement was primarily the result of increased sales of new,
higher-margin products, comparatively lower dairy raw material costs, higher
average wholesale prices, and higher unit sales of the Company's
28
established brands. These improvements were partially offset by reduced sales of
Ben & Jerry's products. The impact of the decrease in dairy raw material costs
favorably impacted gross profit in 1999 by approximately $15,000,000 as compared
to 1998.
Other income decreased $1,563,000, or 43 percent, to $2,090,000 from
$3,653,000 for 1998 due to a decline in earnings from a joint venture accounted
for under the equity method.
Selling, general and administrative expenses increased $22,995,000, or
11 percent, to $235,146,000 from $212,151,000 for 1998. Selling, general and
administrative expenses represented 21 percent of consolidated sales in 1999 and
1998. Selling, general, and administrative expenses in 1998 included a
$5,000,000 bad debt provision for an independent distributor's trade accounts
receivable. Excluding the effect of the bad debt provision, selling, general and
administrative expenses would have increased by $27,995,000, or 14 percent, over
1998. This increase related primarily to significantly higher trade promotion
and marketing expenses associated with the launch of new products.
As discussed in The Strategic Plan and Restructuring Program of this
Management's Discussion and Analysis, the Company implemented a restructuring
program and other actions during 1998. As a part of this restructuring program,
the Company pursued various proposals relating to the withdrawal from the
equipment manufacturing business of its Grand Soft unit during 1999. An analysis
of purchase offers received on this business concluded that an outright sale was
not economically feasible. As an alternative, the Company's Grand Soft unit
outsourced its equipment production to an independent sub-manufacturer. As a
result, the Company completed the withdrawal from the equipment manufacturing
business at a cost less than originally estimated and recorded a $1,315,000
reversal of the excess restructuring accrual in the 1999 Consolidated Statement
of Operations.
Interest expense decreased $1,556,000, or 12 percent, over 1998,
primarily due to lower average borrowings.
The income tax provision increased due to a correspondingly higher
pre-tax income in 1999. The effective tax rate increased to 38.1 percent from
37.9 percent for 1998. The Company's income tax provisions differ from tax
provisions calculated at the federal statutory tax rate primarily due to tax
credits and state income taxes.
In the first quarter of 1999, the Company adopted Statement of Position
98-5, "Reporting on the Costs of Start-Up Activities" (SOP 98-5). SOP 98-5
requires that the costs of start-up activities, including preoperating costs, be
expensed as incurred and that previously unamortized preoperating costs be
written off and treated as a cumulative effect of a change in accounting
principle. As a result of adopting SOP 98-5, the Company recorded an after-tax
charge of $595,000, or $.02 per common share, in the first quarter of 1999.
1998 Compared with 1997
Consolidated sales for 1998 increased $52,238,000, or five percent, to
$1,022,335,000 from $970,097,000 for 1997.
Sales of the Company's branded products increased $29,344,000, or five
percent, to $647,745,000, from $618,401,000 for 1997. Company brands represented
63 percent of consolidated sales in 1998 compared with 64 percent in 1997. The
increase in sales of the Company's branded products was a result of increased
unit sales and increased selling prices. The products that led this increase
were Dreyer's and Edy's Homemade Ice Cream and Dreyer's and Edy's Grand Ice
Cream, offset by significant declines in the Company's "better for you" frozen
yogurt, sugar free, reduced fat, and fat free products. Average wholesale prices
for the Company's branded products increased approximately two percent, before
the effect of increased trade promotion expenses. Gallon sales of the Company's
branded products increased approximately 3,000,000 gallons, or three percent,
to approximately 93,000,000 gallons. The average national dollar market share of
the Company's Dreyer's and Edy's branded premium packaged products was 14.8
percent in 1998 compared to 14.7 percent in 1997.
Sales of products distributed for other manufacturers (partner brands)
increased $22,894,000, or seven percent, to $374,590,000 from $351,696,000 in
1997. Sales of partner brands represented 37 percent of consolidated sales in
1998 compared with 36 percent in 1997. Ben & Jerry's Homemade superpremium
products led this increase. Average wholesale prices for partner brands
increased approximately four percent.
Cost of goods sold increased $63,311,000, or eight percent, over 1997,
while the gross margin decreased to 19 percent from 21 percent. Cost of goods
sold for 1998 included approximately $5,317,000 of write-downs related primarily
to manufacturing assets, $977,000 in expenses related to the settlement of
various legal claims, and $933,000 in severance costs relating to staffing
reductions made prior to board approval of the restructuring actions. Excluding
the effects of these items, cost of goods sold increased $56,084,000, or seven
percent, over 1997, while the gross margin decreased to 20 percent from 21
percent. The impact of the increase in dairy raw material costs negatively
impacted gross profit in 1998 by approximately $22,000,000 as compared to 1997.
Other income increased $659,000, or 22 percent, to $3,653,000 from
$2,994,000 for 1997, due to an increase in earnings from a joint venture
accounted for under the equity method.
Selling, general and administrative expenses increased $28,761,000, or
16 percent, to $212,151,000 from $183,390,000 for 1997. Selling, general and
administrative expenses represented 21 percent of consolidated sales in 1998
compared with 19 percent in 1997. Selling, general, and administrative expenses
in 1998 included a $5,000,000 bad debt provision for an independent distributor
receivable. Excluding the effect of the bad debt provision, selling, general and
administrative expenses would have increased by $23,761,000, or 13 percent, over
1997. This increase related primarily to significantly higher trade promotion
and marketing expenses associated with the launch of new products.
29
As discussed in the Strategic Plan and Restructuring Program of this
Management's Discussion and Analysis, the Company recorded a $44,564,000
impairment charge and a $3,300,000 restructuring charge in 1998.
Interest expense increased $2,311,000, or 22 percent, as compared to
1997, primarily due to higher average borrowings on the Company's line of
credit.
The Company recorded an income tax benefit of $(28,385,000) in 1998
compared to an income tax provision of $5,681,000 in 1997. The benefit was the
result of a $(74,895,000) pre-tax loss recorded in 1998. No valuation allowance
was recorded against the income tax benefit since the Company believes that it
is more likely than not that the carryforwards created by the pre-tax loss will
be used in future years. The effective tax rate decreased to 37.9 percent from
39.3 percent for 1997. The Company's income tax provisions differ from tax
provisions calculated at the federal statutory tax rate primarily due to tax
credits and state income taxes.
Seasonality
The Company experiences more demand for its products during the spring
and summer than during the fall and winter. The Company's inventory is
maintained at the same general level relative to sales throughout the year by
adjusting production and purchasing schedules to meet demand. The ratio of
inventory to sales typically does not vary significantly from year to year.
Effects of Inflation and Changing Prices
The largest component of the Company's cost of production is raw materials,
principally dairy products and sugar. Historically, the Company has been able to
compensate for increases in the price level of these commodities through
manufacturing and distribution operating efficiencies. However, during 1998,
unusually high dairy raw material costs negatively impacted gross profit by
approximately $22,000,000 as compared to 1997. During 1999, dairy raw material
costs declined which favorably impacted gross profit by approximately
$15,000,000 as compared to 1998.
Other cost increases such as labor and general administrative costs have
been offset by productivity gains and other operating efficiencies.
Market Risk
The Company has long-term debt with both fixed and variable interest rates. As a
result Company is exposed to market risk caused by fluctuations in interest
rates. The following summarizes interest rates on the Company's long-term debt
at December 25, 1999:
($ in thousands) Long-Term Debt Interest Rates
-------------- --------------
Fixed Interest Rates:
Senior notes $ 50,000 7.68 - 8.34%
Senior notes 7,000 9.30%
Variable Interest Rates:
Revolving line of credit 53,500 6.33%
Capital lease obligation 7,978 6.83%
Industrial revenue bonds 4,500 4.88%
--------
$122,978
========
If interest rates increased ten percent, the Company's interest expense
would increase approximately $415,000.
The Company does not have short-term or long-term investments.
Additionally, the Company does not transact business in foreign currencies. As
such, the Company is not at risk due to fluctuations in foreign exchange rates.
Financial Condition
Liquidity and Capital Resources
The Company's cash flows from operating activities provided cash of $77,302,000;
$29,196,000; and $39,040,000, in 1999, 1998, and 1997, respectively. Cash flows
from operating activities for 1999 of $77,302,000 were primarily used to fund
acquisitions of $23,756,000 in property, plant and equipment and repayments of
$55,058,000 of long-term debt. The increase in cash flows from operating
activities during 1999 is due to improved profitability and more effective
working capital management.
The Company's cash flows used in investing activities totaled
$22,227,000; $34,845,000; and $39,378,000 in 1999, 1998 and 1997, respectively.
The decline in capital expenditure from 1998 to 1999 reflects the completion of
a phase of capital investment required to support geographical expansion. The
1998 and 1997 capital expenditure reflects the Company's
30
expansion of its manufacturing capacity and direct-store-delivery distribution
system. The Company plans to invest approximately $24,000,000 during 2000 on
capital expenditures. It is anticipated that these additions will be largely
financed through internally-generated funds and borrowings.
The Company's cash flows from financing activities provided cash of
$3,194,000 during 1998 compared with cash used of $53,088,000 and $170,000
during 1999 and 1997, respectively. Cash used in financing activities during
1999 primarily reflected repayments of long-term debt. During 1998, borrowings
of $12,400,000 on the Company's line of credit and cash flows from operations
were used to make $8,641,000 of payments on the Company's other debt and to pay
$3,950,000 in cash dividends to common and preferred stockholders. During 1997,
borrowings of $11,700,000 on the Company's line of credit and cash flows from
operations were used to make $9,070,000 of payments on the Company's other debt
and $7,833,000 in cash dividends to common and preferred stockholders.
Working capital decreased by $29,725,000 from 1998 to 1999 primarily due
to a decrease in other accounts receivable and an increase in the current
portion of long-term debt. The decrease in other accounts receivable is
primarily attributable to collection of receivables related to the settlement of
insurance claims for accidents that contaminated finished goods inventories in
prior years.
The Company reviewed its restructuring program and other actions with
its various banks and private lenders, and secured any modifications to debt
agreements required as a result of the restructuring. These modifications
resulted in higher interest rates on certain debt securities during 1999, which
were more than offset by lower average borrowings. The Company anticipates that
the restructuring plan will continue to enhance its cash flow, both through
short-term tax benefits, which will more than offset any pre-tax cash outflows,
and through longer-term savings in its cost structure.
At December 25, 1999, the Company had $3,158,000 in cash and cash
equivalents, and an unused credit line of $121,500,000. The total available
under the Company's revolving line of credit decreased from $175,000,000 to
$149,286,000 on December 31, 1999. The Company presently anticipates that it
will either refinance the line, which expires December 31, 2000, or negotiate to
extend its maturity date.
On February 9, 2000, the Company acquired the remaining 84 percent of
the outstanding common stock of an independent distributor in Texas for
$7,800,000.
The Company's Series A redeemable convertible preferred stock, par value
$100,752,000, is convertible at any time at the option of the holder into
5,800,000 newly issued shares of common stock of the Company. The holder may
instead redeem the issue for cash at par value on June 30, 2001. The Company
presently anticipates that it would fund such a redemption from operating cash
flows, borrowings or other financing sources.
On November 18, 1997, the Company issued shares of common stock to
holders of record on October 30, 1997 to effect a two-for-one common stock
split.
Pursuant to a 1994 equity transaction, an affiliate of Nestle USA, Inc.
purchased 6,000,000 newly issued shares of common stock, and warrants to
purchase 4,000,000 shares at an exercise price of $16.00 per share. Warrants for
2,000,000 shares expired unexercised on June 14, 1997. Warrants for the
remaining 2,000,000 shares expired unexercised on June 14, 1999.
The Company believes that its credit line, along with its liquid
resources, internally-generated cash, and financing capacity, will be adequate
to meet both short-term and long-term operating and capital requirements.
YEAR 2000 COMPLIANCE
The Company completed all upgrades, enhancements, testing and contingency
planning for all critical centralized systems, desktop applications and embedded
chip technology by the end of 1999. The Company also completed surveying key
customers and suppliers to determine the risks associated with their Year 2000
compliance programs.
The Company did not experience any significant issues related to Year
2000 compliance. No issues were reported from vendors, customers or other
business partners. No contingency plans were invoked during the critical
rollover period around January 1, 2000. At this point, no significant expenses
have been incurred as a result of the Year 2000 issue.
The total cost for the Company's Year 2000 initiatives was $5,500,000,
of which $3,500,000 was incurred during 1998 and $2,000,000 was incurred during
1999. The majority of these costs relate to the accelerated replacement of
capitalized hardware and software systems. Of the $5,500,000 spent,
approximately $4,500,000 was capitalized and approximately $1,000,000 relating
to the costs of modifying computer software for the Year 2000, was charged to
expense.