1
Exhibit 13
CONSOLIDATED STATEMENT OF INCOME
Dreyer's Grand Ice Cream, Inc.
1996 Annual Report
Year Ended
-----------------------------------------------
($ in thousands, except per share amounts) Dec. 28, 1996 Dec. 30, 1995 Dec. 31, 1994
- -------------------------------------------------------------------------------------------------------
REVENUES:
Net sales $791,841 $ 678,797 $564,372
Other income 4,354 2,255 2,230
- -------------------------------------------------------------------------------------------------------
796,195 681,052 566,602
- -------------------------------------------------------------------------------------------------------
COSTS AND EXPENSES:
Cost of goods sold 619,574 530,561 428,779
Selling, general and administrative 155,714 143,090 126,945
Interest, net of interest capitalized 9,548 9,912 9,243
- -------------------------------------------------------------------------------------------------------
784,836 683,563 564,967
- -------------------------------------------------------------------------------------------------------
Income (loss) before income taxes 11,359 (2,511) 1,635
Income tax provision (benefit) 4,362 (987) 634
- -------------------------------------------------------------------------------------------------------
Net income (loss) 6,997 (1,524) 1,001
- -------------------------------------------------------------------------------------------------------
Accretion of preferred stock to redemption value 424 168
Preferred stock dividends 4,573 1,804
- -------------------------------------------------------------------------------------------------------
Net income (loss) applicable to common stock $ 2,000 $ (3,496) $ 1,001
=======================================================================================================
Net income (loss) per common share $ .15 $ (.26) $ .07
=======================================================================================================
See accompanying Notes to Consolidated Financial Statements
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 income, 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 28, 1996 and
December 30, 1995, and the results of their operations and their cash flows for
each of the three years in the period ended December 28, 1996, in conformity
with generally accepted accounting principles. 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 generally accepted auditing
standards which require that we plan and perform the audit 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.
Price Waterhouse LLP
San Francisco, California
March 12, 1997
16
2
CONSOLIDATED BALANCE SHEET
Dreyer's Grand Ice Cream, Inc.
1996 Annual Report
($ in thousands, except per share amounts) Dec. 28, 1996 Dec. 30, 1995
- -------------------------------------------------------------------------------------------------------------
Assets
CURRENT ASSETS:
Cash and cash equivalents $ 4,134 $ 3,051
Trade accounts receivable, net of allowance for doubtful accounts
of $755 in 1996 and $698 in 1995 73,053 59,298
Other accounts receivable 13,638 19,072
Inventories 40,760 33,201
Prepaid expenses and other 13,652 12,487
- ---------------------------------------------------------------------------------------------------------
TOTAL CURRENT ASSETS 145,237 127,109
Property, plant and equipment, net 225,038 182,757
Goodwill and distribution rights, net of accumulated amortization
of $16,616 in 1996 and $13,414 in 1995 92,010 86,812
Other assets 16,622 17,427
- ---------------------------------------------------------------------------------------------------------
TOTAL ASSETS $478,907 $414,105
=========================================================================================================
Liabilities and Stockholders' Equity
CURRENT LIABILITIES:
Accounts payable and accrued liabilities $ 48,391 $ 35,514
Accrued payroll and employee benefits 18,198 18,634
Current portion of long-term debt 8,512 3,600
- ---------------------------------------------------------------------------------------------------------
TOTAL CURRENT LIABILITIES 75,101 57,748
Long-term debt, less current portion 163,135 134,000
Deferred income taxes 37,802 31,712
- ---------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES 276,038 223,460
- ---------------------------------------------------------------------------------------------------------
Commitments and contingencies
Redeemable convertible Series B preferred stock, $1 par value - 1,008,000 shares
authorized; 1,008,000 shares issued
and outstanding in 1996 and 1995 98,806 98,382
- ---------------------------------------------------------------------------------------------------------
STOCKHOLDERS' EQUITY:
Preferred stock, $1 par value - 8,992,000 shares authorized; no shares issued
or outstanding in 1996 and 1995
Common stock, $1 par value - 30,000,000 shares authorized; 13,345,000 shares
and 12,929,000 shares issued and
outstanding in 1996 and 1995, respectively 13,345 12,929
Capital in excess of par 51,956 39,370
Retained earnings 38,762 39,964
- ---------------------------------------------------------------------------------------------------------
TOTAL STOCKHOLDERS' EQUITY 104,063 92,263
- ---------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $478,907 $414,105
========================================================================================================
See accompanying Notes to Consolidated Financial Statements
17
3
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
Dreyer's Grand Ice Cream, Inc.
1996 Annual Report
Capital
Common Stock in Excess Retained
(In thousands) Shares Amount of Par Earnings Total
- --------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 25, 1993 14,671 $ 14,671 $ 59,145 $ 49,218 $123,034
Net income for 1994 1,001 1,001
Common stock dividends declared (3,619) (3,619)
Common stock and warrants
issued to an affiliate of
Nestle USA, Inc. 3,000 3,000 99,487 102,487
Repurchases and retirements
of common stock (3,753) (3,753) (85,608) (89,361)
Employee stock plans and other 146 146 2,233 2,379
- --------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1994 14,064 14,064 75,257 46,600 135,921
Net loss for 1995 (1,524) (1,524)
Accretion of preferred stock to
redemption value (168) (168)
Preferred stock dividends declared (1,804) (1,804)
Common stock dividends declared (3,140) (3,140)
Repurchases and retirements
of common stock (1,319) (1,319) (39,202) (40,521)
Employee stock plans and other 184 184 3,315 3,499
- --------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 30, 1995 12,929 12,929 39,370 39,964 92,263
Net income for 1996 6,997 6,997
Accretion of preferred stock to
redemption value (424) (424)
Preferred stock dividends declared (4,573) (4,573)
Common stock dividends declared (3,202) (3,202)
Common stock issued in acquisition
of M-K-D Distributors, Inc. 320 320 10,480 10,800
Repurchases and retirements
of common stock (9) (9) (253) (262)
Employee stock plans and other 105 105 2,359 2,464
- --------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 28, 1996 13,345 $ 13,345 $ 51,956 $ 38,762 $104,063
==============================================================================================================
See accompanying Notes to Consolidated Financial Statements
18
4
CONSOLIDATED STATEMENT OF CASH FLOWS
Dreyer's Grand Ice Cream, Inc.
1996 Annual Report
Year Ended
-------------------------------------------
($ in thousands) Dec. 28, 1996 Dec. 30, 1995 Dec. 31, 1994
- -------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 6,997 $ (1,524) $ 1,001
Adjustments to reconcile net income (loss) to cash flows
from operations:
Depreciation and amortization 27,549 20,568 18,986
Deferred income taxes 2,364 2,058 (420)
Changes in assets and liabilities, net of amounts acquired:
Trade accounts receivable (7,664) (11,779) (711)
Other accounts receivable 809 (12,829) (917)
Inventories (5,389) (4,120) (684)
Prepaid expenses and other 3,116 (1,998) 1,237
Accounts payable and accrued liabilities 6,555 5,470 882
Accrued payroll and employee benefits (1,077) 2,833 6,547
- -------------------------------------------------------------------------------------------------------------------
33,260 (1,321) 25,921
- -------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of property, plant and equipment (58,470) (39,437) (31,568)
Retirement of property, plant and equipment 2,152 590 547
Increase in goodwill and distribution rights (772) (1,959) (556)
Purchase of distribution rights of Sunbelt Distributors, Inc. (11,321)
Increase in other assets (3,600) (6,104) (1,128)
- -------------------------------------------------------------------------------------------------------------------
(60,690) (46,910) (44,026)
- -------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from long-term debt 76,000 91,500 20,200
Reductions in long-term debt (43,858) (4,500) (10,160)
Net proceeds from issuance of common stock and warrants
to an affiliate of Nestle USA, Inc. 102,487
Issuance of common stock under employee stock plans 2,464 3,499 2,379
Repurchases of common stock (262) (40,521) (89,361)
Cash dividends paid (5,831) (5,030) (3,638)
- -------------------------------------------------------------------------------------------------------------------
28,513 44,948 21,907
- -------------------------------------------------------------------------------------------------------------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 1,083 (3,283) 3,802
Cash and cash equivalents, beginning of year 3,051 6,334 2,532
- -------------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 4,134 $ 3,051 $ 6,334
===================================================================================================================
Supplemental Cash Flow Information
Cash paid (refunded) during the year for:
Interest (net of amounts capitalized) $ 8,856 $ 9,738 $ 10,810
Income taxes (net of refunds) 398 2,172 (2,264)
Non-cash transactions:
Acquisition of M-K-D Distributors, Inc. 10,800
Conversion of convertible subordinated debentures
into redeemable convertible Series B preferred stock 100,752
- -------------------------------------------------------------------------------------------------------------------
See accompanying Notes to Consolidated Financial Statements
19
5
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Dreyer's Grand Ice Cream, Inc.
1996 Annual Report
NOTE 1 OPERATIONS
Dreyer's Grand Ice Cream, Inc. and its subsidiaries (the Company) is a single
segment industry company engaged primarily in the business of manufacturing and
selling premium ice cream and other frozen dessert products to grocery and
convenience stores, foodservice accounts and independent distributors in the
United States.
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 fifty-two or fifty-three week period ending on
the last Saturday in December. Fiscal years 1996 and 1995 each consisted of
fifty-two weeks and fiscal year 1994 consisted of fifty-three 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.
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 are capitalized, while
maintenance and minor repairs are charged to expense as incurred. Depreciation
of fixed assets is computed using the straight-line method over the assets'
estimated useful lives, generally ranging from three to thirty-five years.
Interest costs relating to capital assets under construction are capitalized.
GOODWILL AND DISTRIBUTION RIGHTS
Goodwill and distribution rights are amortized using the straight-line method
over thirty to thirty-six years.
PREOPERATING COSTS
Preoperating costs incurred during the construction and start-up of new
manufacturing and distribution facilities are capitalized and amortized over
three years. During 1996, the Company capitalized $2,710,000 of preoperating
costs associated with the start-up of its Houston, Texas manufacturing facility.
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 would be recorded measured by the
amount of the difference between the carrying value of the asset and the fair
value of the asset.
20
6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Dreyer's Grand Ice Cream, Inc.
1996 Annual Report
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 in the period incurred. Advertising expense, including
consumer promotion spending, was $28,770,000, $39,971,000 and $40,287,000 in
1996, 1995 and 1994, respectively.
INCOME TAXES
Income taxes are accounted for using the liability method. Under this method,
deferred tax liabilities and assets are recognized for the tax consequences of
temporary differences between the financial reporting and tax basis of assets
and liabilities.
ACCOUNTING FOR STOCK-BASED COMPENSATION
The Company measures compensation cost for employee stock options and similar
equity instruments using the intrinsic value-based method of accounting
prescribed by Accounting Principles Board Opinion No. 25, "Accounting for Stock
Issued to Employees" (APB No. 25).
NET INCOME (LOSS) PER COMMON SHARE
Net income (loss) per common share is computed using the weighted average number
of shares of common stock outstanding during the period which were 13,248,000,
13,285,000 and 14,731,000, in 1996, 1995 and 1994, respectively. The potentially
dilutive effect of the Company's redeemable convertible preferred stock,
convertible subordinated debentures, and other common stock equivalents was
anti-dilutive for each fiscal year. Accordingly, fully diluted earnings per
share for 1996, 1995 and 1994 are not presented.
NOTE 3 INVENTORIES
Inventories at December 28, 1996 and December 30, 1995 consisted of the
following:
(In thousands) 1996 1995
- -----------------------------------------
Raw materials $ 5,361 $ 3,291
Finished goods 35,399 29,910
- -----------------------------------------
$40,760 $33,201
=========================================
NOTE 4 PROPERTY, PLANT AND EQUIPMENT
The cost and accumulated depreciation of property, plant and equipment at
December 28, 1996 and December 30, 1995 were as follows:
(In thousands) 1996 1995
- ----------------------------------------------------------
Buildings and improvements $ 84,732 $ 67,626
Machinery and equipment 185,880 145,023
Office furniture and fixtures 7,778 5,629
- ----------------------------------------------------------
278,390 218,278
Accumulated depreciation (88,342) (77,453)
- ----------------------------------------------------------
190,048 140,825
Land 12,190 11,019
Construction in progress 22,800 30,913
- ----------------------------------------------------------
$225,038 $182,757
==========================================================
At December 28, 1996, property, plant and equipment included assets under
capital leases of $17,463,000. Amortization expense and accumulated amortization
related to capital lease assets was $2,260,000 in 1996.
Interest capitalized was $2,627,000, $2,288,000 and $1,788,000 in 1996, 1995
and 1994, respectively.
Depreciation expense for property, plant and equipment was $21,250,000,
$16,412,000 and $13,194,000, in 1996, 1995 and 1994, respectively.
Construction in progress at December 30, 1995 included $19,046,000 of costs
associated with the enhancement of management information systems.
NOTE 5 GOODWILL AND DISTRIBUTION RIGHTS
DISTRIBUTION RIGHTS
On January 4, 1994, the Company entered into a long-term distribution agreement
with Sunbelt Distributors, Inc. (Sunbelt), the leading independent
direct-store-delivery ice cream distributor in Texas. Under the agreement, the
Company paid Sunbelt $10,970,000 in cash to secure the long-term exclusive right
to have its products distributed by Sunbelt in Texas and certain parts of
Louisiana and Arkansas. In conjunction with this transaction, the Company
recorded $11,321,000 in distribution rights, including $351,000 in transaction
costs.
21
7
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Dreyer's Grand Ice Cream, Inc.
1996 Annual Report
ACQUISITIONS
On March 27, 1996, the Company acquired the remaining 50.3% of the outstanding
common stock of M-K-D Distributors, Inc. (M-K-D) for 320,000 newly issued
shares of the Company's common stock having a value of $10,800,000. The
acquisition was accounted for as a purchase and the amount by which the purchase
price exceeded the fair value of the net identifiable assets acquired of
$7,892,000 has been recorded as goodwill and distribution rights. The Company
has consolidated the results of operations of M-K-D since the beginning of
fiscal 1996. That portion of M-K-D's 1996 pre-acquisition earnings before
income taxes which was attributable to the former shareholders' interest,
approximately $148,000, was recorded as a charge to selling, general and
administrative expenses.
Prior to 1996, the Company accounted for its 49.7% ownership of M-K-D using
the equity method. The investment, included in other assets, was stated at cost,
adjusted for the Company's equity in undistributed earnings, and was $5,517,000
at December 30, 1995. The Company's equity in the earnings of M-K-D was $779,000
and $1,063,000 in 1995 and 1994, respectively. The Company's sales of its
branded products to M-K-D were $25,174,000 and $22,583,000, in 1995 and 1994,
respectively.
Summarized financial information for M-K-D follows:
(In thousands) Dec. 30, 1995
- -----------------------------------------
Current assets $ 7,756
Non-current assets 9,688
- -----------------------------------------
$17,444
=========================================
Current liabilities $ 3,960
Non-current liabilities 2,084
Stockholders' equity 11,400
- -----------------------------------------
$17,444
=========================================
(In thousands) 1995 1994
- --------------------------------------------
Net sales $74,219 $62,817
Gross profit 15,316 14,492
Net income 1,687 2,146
NOTE 6 INCOME TAXES
The provision (benefit) for federal and state income taxes consisted of the
following:
(In thousands) 1996 1995 1994
- ----------------------------------------
Current:
Federal $1,683 $(3,045) $ 890
State 315 164
- ----------------------------------------
1,998 (3,045) 1,054
- ----------------------------------------
Deferred:
Federal 2,003 2,127 (422)
State 361 (69) 2
- ----------------------------------------
2,364 2,058 (420)
- ----------------------------------------
$4,362 $ (987) $ 634
========================================
The deferred income tax liability of December 28, 1996 and December 30, 1995
consisted of the following:
(In thousands) 1996 1995
- -------------------------------------------------------------
Intangible assets and related
amortization $16,124 $12,855
Depreciation 16,897 14,671
Deferred costs 3,401 2,621
Other 1,380 1,565
- -------------------------------------------------------------
$37,802 $31,712
=============================================================
The federal statutory income tax rate is reconciled to the Company's effective
income tax rate as follows:
1996 1995 1994
- ---------------------------------------------------------
Federal statutory income
tax rate 35.0% (35.0)% 35.0%
State income taxes, net of
federal tax benefit 3.9 (1.7) 6.6
Reversal of income taxes
provided in prior periods (3.7) (5.8)
Other 3.2 3.2 (2.8)
- ---------------------------------------------------------
38.4% (39.3)% 38.8%
=========================================================
22
8
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Dreyer's Grand Ice Cream, Inc.
1996 Annual Report
NOTE 7 LONG-TERM DEBT
Long-term debt at December 28, 1996 and December 30, 1995 consisted of the
following:
(In thousands) 1996 1995
- ------------------------------------------------------------------
Revolving line of credit with banks
due 1999 with interest payable
at three different rate options $ 75,700 $111,700
Senior notes with principal due
through 2008 and interest
payable semiannually at
three different interest rates 50,000
Capital lease obligation with
payments due through 2000
and interest payable quarterly
at a floating rate 23,563
Senior notes with principal due
through 2001 and interest
payable semiannually at 9.3% 17,800 21,400
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
Other 84
- -------------------------------------------------------------------
171,647 137,600
Less - current portion 8,512 3,600
- -------------------------------------------------------------------
$163,135 $134,000
===================================================================
The aggregate annual maturities of long-term debt, including capital lease
obligation, as of December 28, 1996 are as follows:
(In thousands)
- -----------------------------------------
Year ending:
1997 $ 8,512
1998 8,522
1999 84,175
2000 19,680
2001 15,043
Later years 35,715
- -----------------------------------------
Total $171,647
=========================================
LINE OF CREDIT
During 1995, the Company entered into a new credit agreement with certain banks
for a total revolving line of credit of $175,000,000. This agreement replaced
the Company's previous revolving line of credit agreement. The total available
line of credit decreases by $25,000,000 on December 31, 1997 and December 31,
1998, and expires on December 31, 1999. 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 6.13% at December 28, 1996. At
December 28, 1996, there was $75,700,000 outstanding under the line.
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 and to fund capital expenditures.
Interest on the notes ranges from 7.68% to 8.34% and is payable semi-annually.
LEASE TRANSACTION
On March 29, 1996, the Company entered into a lease transaction involving a
large majority of its direct-store-delivery truck fleet. The $26,000,000
proceeds received by the Company from the lease transaction were used to repay a
portion of existing bank borrowings and to fund capital expenditures. The
interest rate on the capital lease obligation was 6.52% at December 28, 1996.
The four-year lease has been classified as a capital lease and the related
assets are recorded in property, plant and equipment.
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.
FAIR VALUE OF FINANCIAL INSTRUMENTS
As of December 28, 1996 and December 30, 1995, the fair value of the Company's
long-term debt was determined to
23
9
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Dreyer's Grand Ice Cream, Inc.
1996 Annual Report
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 Series B preferred
stock due to the unique terms and conditions of these securities.
The Company is subject to the requirements of various financial covenants,
including dividend restrictions, under its long-term debt obligations and the
redeemable convertible Series B preferred stock.
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 expire over a period of twenty-six years including renewal options.
Certain of these leases include non-bargain purchase options.
The minimum rental payments required under non-cancelable leases at December
28, 1996 are as follows:
(In thousands) OPERATING CAPITAL
- -----------------------------------------------------
Year ending:
1997 $ 4,078 $ 6,217
1998 2,995 5,888
1999 2,190 5,560
2000 1,520 9,068
2001 1,079 -
Later years 4,465 -
- ----------------------------------------------------
$16,327 26,733
=======
Less - amounts representing interest 3,170
- -----------------------------------------------------
Present value of minimum lease payments 23,563
Less - current portion 4,875
- -----------------------------------------------------
$ 18,688
=====================================================
Rental expense for operating leases was $11,665,000, $12,824,000 and
$11,474,000 in 1996, 1995 and 1994, respectively.
NOTE 9 REDEEMABLE CONVERTIBLE SERIES B PREFERRED STOCK
On August 8, 1995, the Company converted $100,752,000 of 6.25% convertible
subordinated debentures into 1,008,000 shares of redeemable convertible Series B
preferred stock (Series B), redeemable on June 30, 2001. On the conversion date,
$2,538,000 of unamortized debenture issuance costs were charged against the
carrying value of the debentures to arrive at the carrying value of $98,214,000
for this preferred stock. The Company is recording accretion to increase the
carrying value to the redemption value of $100,752,000 by June 30, 2001, the
redemption date.
The Series B preferred stock is convertible, under certain conditions, into a
total of 1,008,000 shares of Series A Convertible Preferred Stock (Series A),
redeemable on June 30, 2001. Additionally, both the Series A preferred stock and
Series B preferred stock are convertible, under certain conditions, at an
initial conversion price of $34.74 into a total of 2,900,000 shares of common
stock. Series B preferred stock can be called by the Company for early
redemption, subject to certain limitations.
In preference to shares of common stock, shares of both the Series A preferred
stock and the Series B preferred stock are entitled to receive cumulative cash
dividends, payable quarterly in arrears. The Company pays dividends for the
Series B preferred stock of approximately $1,143,000 per quarter. 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.
NOTE 10 COMMON STOCK
The Company paid a regular quarterly dividend of $.06 per share for each quarter
of 1996, 1995 and 1994.
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.
24
10
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Dreyer's Grand Ice Cream, Inc.
1996 Annual Report
NESTLE EQUITY ISSUANCE
On June 14, 1994, the Company completed a transaction (the "Nestle Agreement")
with an affiliate of Nestle USA, Inc. ("Nestle"), whereby Nestle purchased
3,000,000 newly issued shares of common stock of the Company for $32 per share
and warrants to purchase an additional 2,000,000 shares at an exercise price of
$32 per share. Warrants for 1,000,000 shares will expire on June 14, 1997 and
warrants for the other 1,000,000 shares will expire on June 14, 1999. Nestle
paid an aggregate of $10,000,000 for the 2,000,000 warrants. Total proceeds from
the issuance of the initial 3,000,000 shares and the 2,000,000 warrants were
$106,000,000. In connection with the Nestle Agreement, the Company incurred
transaction costs of $3,513,000 which were recorded as a charge against capital
in excess of par.
The Company has the right to cause Nestle to exercise the warrants at $24 per
share subject to certain conditions at any time before June 14, 1997. The
Company also has the right to cause Nestle to exercise the warrants at any time
through the warrant expiration dates at $32 per share if the average trading
price of the common stock exceeds $60 during a 130 trading day period preceding
the exercise, subject to certain conditions. Furthermore, if the average trading
price of the common stock equals or exceeds $60 during a 130 trading day period
before June 14, 1999, Nestle will be required to pay an additional $2 for each
share purchased and each share purchased upon exercise of the warrants.
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.
COMMON STOCK REPURCHASES
During 1994, the Company implemented a plan to repurchase up to 5,000,000 shares
of common stock through open market purchases and negotiated transactions (the
Stock Repurchase Plan). This plan was completed during 1995.
During 1995, the Company repurchased and retired 1,291,000 shares of its
common stock at prices ranging from $25.38 to $34.25 under the Stock Repurchase
Plan. In addition, the Company repurchased and retired 28,000 shares of its
common stock at prices ranging from $24.50 to $38.50 from employees who
previously acquired shares under employee stock plans.
During 1994, the Company repurchased and retired 3,709,000 shares of its
common stock at prices ranging from $21.38 to $25.75 per share under the Stock
Repurchase Plan. In addition, the Company repurchased and retired 44,000 shares
of its common stock at prices ranging from $22.00 to $28.69 per share from
employees who previously acquired shares under employee stock plans.
NOTE 11 EMPLOYEE BENEFIT PLANS
The Company maintains a defined contribution retirement plan for employees
not covered by collective bargaining agreements. The plan provides retirement
and other benefits based upon the assets of the plan held by the trustee. The
Company contributes 7% of the eligible participants' annual compensation to the
plan. The Company also maintains a salary deferral plan under which it may make
a matching contribution of a percentage of each participant's deferred salary
amount.
Pension expense and matching contributions under these plans were
approximately $7,683,000, $7,202,000 and $5,776,000, in 1996, 1995 and 1994,
respectively. The Company's liability for accrued pension contributions and
salary deferrals was $6,242,000 and $7,186,000 at December 28, 1996 and December
30, 1995, respectively.
Pension expense for employees covered by multi-employer retirement plans under
collective bargaining agreements was $956,000, $848,000 and $677,000, in 1996,
1995 and 1994, respectively.
25
11
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Dreyer's Grand Ice Cream, Inc.
1996 Annual Report
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% 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 a new stock
option plan (the 1993 Plan) under which granted options may be either incentive
stock options or non-qualified stock options. 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, composed of certain members of the
Company's Board of Directors.
As prescribed by APB No. 25, 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 consistent with Statement
of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" (SFAS No. 123), the Company's net income (loss) applicable to
common stock and net income (loss) per common share on a pro forma basis would
be as follows:
(In thousands, except per share amounts) 1996 1995
- ------------------------------------------------------------------------
Net income (loss) applicable
to common stock $249 $(4,111)
Net income (loss) per
common share .02 (.31)
- ------------------------------------------------------------------------
The activity in the three stock option plans for each of the three years in the
period ended December 28, 1996 is summarized below.
Weighted
Options Average
Available Options Price
(In thousands, except per share amounts) for Grant Outstanding Per Share
- -------------------------------------------------------------------------------------------
BALANCE, DECEMBER 25, 1993 66 778 $21.39
Authorized 1,200
Granted (387) 387 24.28
Exercised (99) 9.97
Canceled 12 (12)
- -------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1994 891 1,054 $23.49
Authorized
Granted (446) 446 25.95
Exercised (120) 14.27
Canceled 15 (15)
- -------------------------------------------------------------------------------------------
BALANCE, DECEMBER 30, 1995 460 1,365 $25.10
Authorized 1,000
Granted (451) 451 31.50
Exercised (53) 17.73
Canceled 53 (53)
- -------------------------------------------------------------------------------------------
BALANCE, DECEMBER 28, 1996 1,062 1,710 $26.97
===========================================================================================
26
12
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Dreyer's Grand Ice Cream, Inc.
1996 Annual Report
The weighted-average fair market value of options granted in 1996 and 1995 was
$12.34 and $11.20 per share, respectively. The fair market value of each option
granted was estimated on the date of grant using the Black-Scholes option
pricing model with the following weighted-average assumptions for 1996 and 1995,
respectively: risk-free interest rate of 5.96% and 7.01%; dividend yield of
0.75% and 0.85%; volatility of 33.62% and 34.24%; and expected term of 4.5 and
4.9 years.
Stock options exercisable were 618,000, 391,000 and 305,000 at year-end 1996,
1995 and 1994, respectively. These stock options were exercisable at a weighted
average option price of $26.12, $24.70 and $20.17 for 1996, 1995, and 1994,
respectively.
Significant option groups outstanding at December 28, 1996 and related
weighted average price per share and life information follows:
(In thousands, except per share amounts)
- ------------------------------------------------------------------------------------------------------------------------
Options Outstanding Options Exercisable
----------------------- -------------------------
Weighted Weighted
Average Average Exercise
Grant Options Exercise Options Exercise Price Remaining
Plan Year Outstanding Price Exercisable Price Range Life (Years)
- ------------------------------------------------------------------------------------------------------------------------
1982 PLAN 1991 29 $27.59 29 $27.59 $27.50-29.50 0.25
1992 75 19.99 60 19.99 19.50-24.13 1.25
1993 81 26.04 49 26.04 24.75-30.13 2.25
1992 PLAN 1992 43 26.21 35 26.21 19.50-29.25 NA
1993 242 27.67 145 27.67 24.75-29.38 NA
1993 PLAN 1994 371 24.30 209 24.66 21.75-29.38 7.25
1995 426 25.95 14 25.95 25.95 8.25
1996 443 31.50 77 31.50 31.50 9.25
- ------------------------------------------------------------------------------------------------------------------------
Total 1,710 618
- ------------------------------------------------------------------------------------------------------------------------
SECTION 423 EMPLOYEE STOCK PURCHASE PLAN
Under the section 423 employee stock purchase plan, employees may authorize
payroll deductions up to 10% of their compensation for the purpose of acquiring
shares at 85% of the market price determined at the beginning of a specified
twelve month period. Under this plan, employees purchased 24,000 shares at
prices ranging from $22.00 to $32.94 per share in 1996, 40,000 shares at prices
ranging from $20.29 to $21.67 per share in 1995 and 20,000 shares at prices
ranging from $20.61 to $23.16 per share in 1994. Compensation cost based on the
fair value of the employees' purchase rights under SFAS No. 123 was not material
in 1996 and 1995.
EMPLOYEE SECURED STOCK PURCHASE PLAN
Under the employee secured stock purchase plan (the Secured Plan), on
specified dates, employees may purchase shares at fair market value by paying
20% of the purchase price in cash and the remaining 80% of the purchase price in
the form of a non-recourse promissory note with a term of 30 years. Under this
plan, employees purchased 28,000 shares at prices ranging from $28.50 to $31.75
per share in 1996, 23,000 shares at prices ranging from $25.28 to $39.50 per
share in 1995 and 27,000 shares at prices ranging from $24.25 to $25.13 per
share in 1994. The Secured Plan is not considered compensatory under SFAS No.
123.
27
13
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Dreyer's Grand Ice Cream, Inc.
1996 Annual Report
NOTE 13 SIGNIFICANT CUSTOMERS
For fiscal 1996, 1995 and 1994, no customer accounted for more than 10% of
consolidated net sales.
NOTE 14 INSURANCE SETTLEMENT AND TRADEMARK SALE
In March 1996, the Company settled an insurance claim relating to the
malfunction of a refrigeration system at one of its plants. The malfunction
caused the accidental release of ammonia (refrigerant) into the plant which
contaminated the finished goods inventory. In accordance with the settlement,
the Company received the value of the finished goods inventory at its normal
selling price, plus expenses incurred recovering from the accident. This
resulted in a gain of $2,100,000, which was recorded as a reduction in cost of
goods sold in 1996.
In December 1996, the Company sold trademark rights for the People's Republic
of China, Hong Kong and Macau to its third-party independent distributor for
$2,600,000. Separately, the Company sold approximately a three to five month
supply of its products to this distributor on a volume discount basis for
$3,390,000.
These transactions had the effect of increasing net income by $3,538,000, or
$0.27 per common share.
NOTE 15 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.
NOTE 16 SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
Per Share
------------------------------------
Net Net
Income (Loss) Income (Loss)
(In thousands, except Net Gross Applicable to Applicable to Price Range
per share amounts) Sales Margin Common Stock Common Stock(1) (NASDAQ)
- ---------------------------------------------------------------------------------------------
1996
1st Quarter $166,970 $ 34,438 $ 434 $ .03 $27.88 - 37.75
2nd Quarter 211,568 49,282 3,771 .28 31.50 - 37.00
3rd Quarter 234,644 54,416 2,055 .15 25.00 - 32.25
4th Quarter 178,659 34,131 (4,260) (.32) 24.00 - 30.25
- -------------------------------------------------------
$791,841 $172,267 $ 2,000 .15(2)
=======================================================
1995
1st Quarter $141,255 $ 29,025 $ 322 $ .02 $24.25 - 28.25
2nd Quarter 188,083 43,045 3,664 .27 25.50 - 37.50
3rd Quarter 205,226 50,453 893 .07 36.00 - 40.00
4th Quarter 144,233 25,713 (8,375) (.65) 30.00 - 39.00
- -------------------------------------------------------
$678,797 $148,236 $(3,496) (.26)(2)
=======================================================
(1) Fully diluted net income (loss) per share for each quarter of 1996 and
1995 is equivalent to primary net income (loss) per share since the potentially
dilutive effect of the redeemable convertible Series B preferred stock,
convertible subordinated debentures and other common stock equivalents was
anti-dilutive.
(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 or 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.
28
14
FIVE YEAR SUMMARY OF SIGNIFICANT FINANCIAL DATA
Dreyer's Grand Ice Cream, Inc.
1996 Annual Report
Fiscal Year Ended December
-------------------------------------------------------------
(In thousands, except per share amounts) 1996 1995 1994 1993 1992
- ------------------------------------------------------------------------------------------------------------------
OPERATIONS:
Net sales and other income $796,195 $ 681,052 $566,602 $471,790 $407,946
Income (loss) before cumulative
effect of change in accounting principle 6,997 (1,524) 1,001 16,789 13,973
Net income (loss) 6,997 (1,524) 1,001 16,789 15,694(2)
Net income (loss) applicable to common stock 2,000 (3,496) 1,001 16,789 15,694(2)
PER COMMON SHARE:
Income (loss) before cumulative effect of
change in accounting principle .15 (.26) .07 1.15 .94
Net income (loss)(1) .15 (.26) .07 1.15 1.05(2)
Dividends declared .24 .24 .24 .24 .24
BALANCE SHEET:
Total assets 478,907 414,105 362,026 322,275 289,051
Working capital 70,136 69,361 48,403 57,397 25,768
Long-term debt, including convertible
subordinated debentures 163,135 134,000 146,852 139,627 102,160
Redeemable convertible Series B preferred stock 98,806 98,382
Stockholders' equity 104,063 92,263 135,921 123,034 107,569
==================================================================================================================
(1) Fully diluted net income (loss) per share is equivalent to primary net
income (loss) per share. In 1996 and 1995 the potentially dilutive effect of the
redeemable convertible Series B preferred stock and other common stock
equivalents was anti-dilutive, in 1994 the potentially dilutive effect of the
convertible subordinated debentures and other common stock equivalents was
anti-dilutive, in 1993 the potentially dilutive effect of the convertible
subordinated debentures was anti-dilutive and in 1992 no potentially dilutive
securities were outstanding.
(2) Includes the cumulative effect of change in method of accounting for
income taxes of $1,721,000, or $.11 per share.
29
15
MANAGEMENT'S DISCUSSION AND ANALYSIS
RESULTS OF OPERATIONS
FISCAL 1996 COMPARED WITH FISCAL 1995
The Company embarked on a five year plan (the Strategic Plan, also referred
to as the Grand Plan) during the second quarter of 1994 to accelerate the sales
of its brand throughout the country. The key elements of this plan are: 1) to
build a high margin brand with a leading market share through effective consumer
marketing activities, 2) to expand the Company's direct-store-delivery
distribution network to a 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. As originally announced, the Company anticipated
that the cost of implementing the Strategic Plan would materially reduce
earnings during the fiscal years of 1994 and 1995. For fiscal 1996, earnings
improved to a net income of $6,997,000, or $0.15 per common share, from a net
loss in 1995 of $(1,524,000), or $(0.26) per common share. This improvement is
partially attributable to benefits accruing from the investments made under the
Strategic Plan during the past two and a half years.
Consolidated net sales for fiscal 1996 increased 17% to $791,841,000 from
$678,797,000 achieved in 1995. This increase includes the effect of the
acquisition of M-K-D Distributors, Inc. (M-K-D) discussed below and occurred
despite total U.S. gallon consumption decreasing in 1996. The decline in
industry gallonage growth is primarily attributable to lower sales of ice cream
products in the "better for you" segments. Dreyer's continues to be the market
share leader in this segment despite the decline. Sales of the Company's branded
products increased 11%, led by sales of Dreyer's and Edy's Grand Ice Cream and
the recently introduced Starbucks(TM) Ice Cream, developed in a joint venture
with the Starbucks Coffee Company. Market share of the Company's Dreyer's and
Edy's branded products was 13.8% at the end of 1996. Sales of branded products
purchased from other companies (partner brands) grew 28% during the year, with
Healthy Choice(R) low fat ice cream from ConAgra, Inc. providing the greatest
sales growth. Sales of partner brands represented 38% of consolidated net sales
in 1996 compared with 34% in 1995. Prices for both Company and partner brands
increased an average of 3% between 1995 and 1996.
Cost of goods sold for 1996 increased $89,013,000, or 17%, over the prior
year, while the Company's overall gross margin remained relatively unchanged at
21.8%. The benefit of distribution cost efficiencies resulting from the
implementation of new information systems, and logistics and supply chain
initiatives was offset by an $8,140,000 increase in dairy raw materials costs
and an increase in the proportion of partner brand sales, which yield a lower
gross margin.
Selling, general and administrative costs for 1996 were $12,624,000, or 9%,
higher than 1995. Accordingly, selling, general and administrative costs
decreased as a percent of sales to 20% in 1996 from 21% in 1995 due to
efficiencies resulting from investments made under the Strategic Plan. The
Company incurred $28,770,000 in advertising and consumer promotion expenses
during 1996 as compared with $39,971,000 in 1995. The approximate $11,000,000
decrease was largely offset by an increase in trade promotion expense. The
Company regularly adjusts its levels of advertising and promotion spending in an
effort to enhance long-term profitability.
Interest expense was $364,000, or 4%, lower than in 1995 due to conversion
of the convertible subordinated debentures into redeemable convertible Series B
preferred stock during the third quarter of 1995. This decrease was partially
offset by interest expenses from the issuance of senior notes, the completion of
a lease transaction and higher average borrowings on the Company's line of
credit during 1996. (See Note 7 of Notes to Consolidated Financial Statements.)
During 1996, the Company acquired the remaining 50.3% of the outstanding
common stock of M-K-D. During 1996, M-K-D's sales, cost of sales and selling,
general and administrative expenses after eliminating intercompany transactions
were $45,294,000, $26,514,000 and $15,736,000, respectively. These results have
been consolidated for the year in the Company's financial statements. (See Note
5 of Notes to Consolidated Financial Statements.)
The Company recorded certain transactions during the year which had the
effect of increasing net income by $3,538,000, or $0.27 per common share. (See
Note 14 of Notes to Consolidated Financial Statements.) These sources of income
are largely non-recurring and as such may not be available in future periods.
Furthermore, one of these transactions, the volume discount sale, will have the
effect of reducing sales and operating results in the first half of 1997.
30
16
MANAGEMENT'S DISCUSSION AND ANALYSIS
The Company anticipates that the earnings benefits expected under the
Strategic Plan will be achieved in 1997 and future years. However, no assurance
can be given that these expectations relative to future market share and
earnings benefits of the strategy will be achieved. The success of the strategy
will depend upon, among other things, consumer purchase responsiveness to the
increased marketing expenditures, competitors' marketing responses, market
conditions affecting the price of the Company's products, commodity costs and
efficiencies achieved in manufacturing and distribution operations.
FISCAL 1995 COMPARED WITH FISCAL 1994
In response to the Strategic Plan, dollar market share grew from 11.7% at the
end of 1994 to 13.4% for the fourth quarter of 1995. Consolidated net sales for
fiscal 1995 increased 20% (net sales increased 23% when adjusting for 52 weeks
in fiscal 1995 and 53 weeks in 1994) to $678,797,000 from the $564,372,000
achieved in 1994. Sales of the Company's branded products increased 20%. This
growth was led by Dreyer's and Edy's Fat Free Ice Cream and Grand Ice Cream as
well as the new products of Low Fat Ice Cream and the revitalized Sherbet line
introduced in 1995. Sales of partner brands increased 22%, led by sales of
frozen novelty and ice cream products from Nestle Ice Cream Company introduced
in 1995. Sales of partner brands represented 34% of consolidated net sales in
both 1995 and 1994. The effect of price increases was not significant in 1995.
During 1995, the Company expanded its direct-store-delivery system into 16
new markets. The expenses associated with this expansion effort were the primary
cause of a decrease in gross margin from 24.0% in 1994 to 21.8% for 1995,
resulting in a 24%, or $101,782,000, increase in cost of goods sold over 1994.
The gross margin was affected to a lesser extent by the Company's continued
development of its Grand Soft business, including significantly enhanced
manufacturing, equipment service and financing capabilities.
Advertising and consumer promotion spending continued at the annual rate of
approximately $40,000,000 during 1995. The Company increased its level of trade
promotion spending during 1995 by approximately $14,000,000 due principally to
the initial introduction of the Company's products in new markets. This increase
in promotion spending was the primary factor in the $16,145,000 growth in
selling, general and administrative expenses between 1994 and 1995. Interest
expense increased $669,000, or 7%, principally due to higher borrowings under
the Company's revolving line of credit.
FISCAL 1994 COMPARED WITH FISCAL 1993
In the first partial year of the implementation of the Strategic Plan, the
Company's consolidated net sales for 1994 increased 20% (net sales increased 18%
when adjusting for 53 weeks in fiscal 1994 and 52 weeks in 1993) to
$564,372,000, compared with $470,665,000 in 1993. Driven by substantially higher
advertising and consumer promotion spending under the Strategic Plan, sales of
the Company's branded products increased 22%. Dreyer's and Edy's Frozen Yogurt
and Grand Ice Cream led this increase followed by the contribution from the
Company's novelty products. The increase in sales of Healthy Choice(R) low fat
ice cream from ConAgra, Inc. was the primary factor in the partner brand sales
increase of 12% over the prior year. Partner brands represented 34% of
consolidated net sales as compared to 36% in 1993. The effect of price increases
was not significant in 1994.
Cost of goods sold increased $72,542,000, or 20%, over 1993. Gross margin,
however, decreased slightly from 24.3% to 24.0% primarily due to the additional
expenses associated with introducing the Company's product line and expansion of
the distribution system in the Texas and New England markets as well as in
several markets in the southern United States. The effect of these expenses on
gross margin was partially offset by a higher proportion of Company products,
which carry a higher margin than partner brands.
The implementation of the Strategic Plan required an increase in overall
marketing expenses of $40,501,000, leading to a 59%, or $47,166,000, increase in
selling, general and administrative expenses over those incurred in 1993.
Interest expense was $1,440,000, or 18%, higher than in 1993 due primarily to
the issuance of the convertible subordinated debentures in the second quarter of
1993.
As anticipated and announced, the implementation of the Strategic Plan
described above resulted in a net income of $1,001,000 for 1994 as compared
with $16,789,000 for 1993.
TAX PROVISIONS
The Company's income tax provisions differ from tax provisions calculated at the
federal statutory tax rate primarily due to state income taxes and the reversal
of income taxes provided in prior periods. (See Note 6 of Notes to Consolidated
Financial Statements.)
31
17
MANAGEMENT'S DISCUSSION AND ANALYSIS
SEASONALITY
The Company experiences more demand for its products during the spring and
summer than during the fall and winter. (See Note 16 of Notes to Consolidated
Financial Statements.)
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. During 1996, unusually
high dairy raw materials costs negatively impacted gross profit by $8,140,000.
However, these costs were offset by price increases and productivity gains.
Other cost increases such as labor and general and administrative costs have
also been offset by productivity gains and other operating efficiencies.
LIQUIDITY AND CAPITAL RESOURCES
The Company's operations provided cash flow of $33,260,000 during 1996 compared
with $(1,321,000) cash used in 1995 and $25,921,000 cash provided by operations
during 1994. Working capital of the Company increased to $70,136,000 compared
with $69,361,000 and $48,403,000 during 1995 and 1994, respectively.
Refer to the Consolidated Statement of Cash Flows for the components of
increases and decreases in cash and cash equivalents for the three year period
ended December 28, 1996.
The Company continued to expand its manufacturing capacity and
direct-store-delivery distribution system through investments of $58,470,000 in
property, plant and equipment during 1996 compared with $39,437,000 and
$31,568,000 during 1995 and 1994, respectively. The Company plans to spend
approximately $30,000,000 during 1997 on property, plant and equipment primarily
for further expansion of its manufacturing capacity and construction of
distribution facilities. It is anticipated that these additions will be largely
financed through internally generated funds and borrowings.
During 1996, the Company acquired the remaining 50.3% of the outstanding
common stock of M-K-D for 320,000 newly issued shares of the Company's common
stock having a value of $10,800,000. (See Note 5 of Notes to Consolidated
Financial Statements.) During 1994, the Company entered into a long-term
distribution agreement with Sunbelt Distributors, Inc., the leading independent
direct-store-delivery ice cream distributor in Texas. (See Note 5 of Notes to
Consolidated Financial Statements.)
The Company's inventory is maintained at the same general level relative to
sales throughout the year by changing production and purchasing schedules to
meet demand. The ratio of inventory to sales typically does not vary
significantly from year to year.
The Company's cash flows from financing activities were $28,513,000 during
1996 compared with $44,948,000 and $21,907,000 during 1995 and 1994,
respectively. Proceeds from the issuance of senior notes and the completion of a
lease transaction involving a large majority of its direct-store-delivery truck
fleet for $26,000,000 provided cash used for investments in property, plant and
equipment and to reduce borrowing on the Company's long-term line of credit
during 1996. (See Note 7 of Notes to Consolidated Financial Statements.) During
1995, the Company converted $100,752,000 of convertible subordinated debentures
into 1,008,000 shares of redeemable convertible Series B preferred stock,
redeemable on June 30, 2001. (See Note 9 of Notes to Consolidated Financial
Statements.) During 1994, the Company completed a transaction with an affiliate
of Nestle USA, Inc. (Nestle), whereby Nestle purchased 3,000,000 newly issued
shares of common stock of the Company for $32 per share and warrants to purchase
an additional 2,000,000 shares at an exercise price of $32 per share. Total
proceeds from the issuance of the shares and warrants was $106,000,000. (See
Note 10 of Notes to Consolidated Financial Statements.)
During 1994, the Company implemented a plan to repurchase up to 5,000,000
shares of common stock through open market purchases and negotiated transactions
(the Stock Repurchase Plan). This plan was completed during 1995. The Company
repurchased and retired 1,291,000 and 3,709,000 of its common stock under the
Stock Repurchase Plan during 1995 and 1994, respectively.
As of year-end 1996, the Company had $4,134,000 in cash and cash
equivalents, and an unused credit line of $99,300,000. The Company believes that
its credit line, along with its liquid resources, internally generated cash and
financing capacity are adequate to meet anticipated operating and capital
requirements.
32