-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, WZsaRzASJqbc32lfqSOH/c5kYnWBQUgq4SjPh0mpt+V5ReSaL6ZUEE9yeog2C6or qWDJRxOi73TxHrM0yWkZvQ== 0000950149-99-001927.txt : 19991110 0000950149-99-001927.hdr.sgml : 19991110 ACCESSION NUMBER: 0000950149-99-001927 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990925 FILED AS OF DATE: 19991109 FILER: COMPANY DATA: COMPANY CONFORMED NAME: DREYERS GRAND ICE CREAM INC CENTRAL INDEX KEY: 0000352305 STANDARD INDUSTRIAL CLASSIFICATION: ICE CREAM & FROZEN DESSERTS [2024] IRS NUMBER: 942967523 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-14190 FILM NUMBER: 99744558 BUSINESS ADDRESS: STREET 1: 5929 COLLEGE AVE CITY: OAKLAND STATE: CA ZIP: 94618 BUSINESS PHONE: 5106528187 10-Q 1 FORM 10-Q FOR PERIOD ENDING 9-25-99 1 FORM 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 25, 1999 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission file number 0-14190 DREYER'S GRAND ICE CREAM, INC. (Exact name of registrant as specified in its charter) Delaware No. 94-2967523 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 5929 College Avenue, Oakland, California 94618 (Address of principal executive offices) (Zip Code) (510) 652-8187 (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate the number of shares outstanding of each of the issuer's classes of common stock as of the latest practicable date.
Shares Outstanding November 4, 1999 ---------------- Common stock 27,706,000
2 PART I: FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS DREYER'S GRAND ICE CREAM, INC. CONSOLIDATED BALANCE SHEET
Sept. 25, 1999 Dec. 26, 1998 -------------- ------------- (Unaudited) ($ in thousands, except per share amounts) Assets Current Assets: Cash and cash equivalents $ 2,347 $ 1,171 Trade accounts receivable, net of allowance for doubtful accounts of $5,863 in 1999 and $5,710 in 1998 111,267 83,053 Other accounts receivable 16,434 29,165 Inventories 55,271 49,472 Prepaid expenses and other 18,542 13,271 --------- --------- Total current assets 203,861 176,132 Property, plant and equipment, net 199,423 207,772 Goodwill and distribution rights, net 66,332 67,226 Other assets 10,874 12,050 --------- --------- Total assets $ 480,490 $ 463,180 ========= ========= Liabilities and Stockholders' Equity Current Liabilities: Accounts payable and accrued liabilities $ 114,049 $ 87,273 Accrued payroll and employee benefits 22,056 19,545 Current portion of long-term debt 20,081 8,255 --------- --------- Total current liabilities 156,186 115,073 Long-term debt, less current portion 125,457 169,781 Deferred income taxes 21,933 16,039 --------- --------- Total liabilities 303,576 300,893 --------- --------- 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 99,972 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; 27,704,000 shares and 27,312,000 shares issued and outstanding in 1999 and 1998, respectively 27,704 27,312 Capital in excess of par 50,925 46,722 Accumulated deficit (1,687) (11,401) --------- --------- Total stockholders' equity 76,942 62,633 --------- --------- Total liabilities and stockholders' equity $ 480,490 $ 463,180 ========= =========
See accompanying Notes to Consolidated Financial Statements. 2 3 DREYER'S GRAND ICE CREAM, INC. CONSOLIDATED STATEMENT OF OPERATIONS (Unaudited)
Thirteen Weeks Ended Thirty-nine Weeks Ended --------------------------- --------------------------- Sept. 25, Sept. 26, Sept. 25, Sept. 26, 1999 1998 1999 1998 ---------- --------- --------- ---------- ($ in thousands, except per share amounts) Revenues: Sales $322,410 $ 302,972 $857,657 $ 798,327 Other income 1,034 1,321 1,875 2,958 -------- --------- -------- --------- 323,444 304,293 859,532 801,285 -------- --------- -------- --------- Costs and expenses: Cost of goods sold 236,444 238,918 654,721 635,657 Selling, general and administrative 70,051 66,921 173,577 163,041 Impairment of long-lived assets 4,657 4,657 Interest, net of amounts capitalized 2,604 3,716 8,851 9,656 -------- --------- -------- --------- 309,099 314,212 837,149 813,011 -------- --------- -------- --------- Income (loss) before income tax provision (benefit) and cumulative effect of change in accounting principle 14,345 (9,919) 22,383 (11,726) Income tax provision (benefit) 5,609 (3,938) 8,752 (4,655) -------- --------- -------- --------- Income (loss) before cumulative effect of change in accounting principle 8,736 (5,981) 13,631 (7,071) Cumulative effect of change in accounting principle 595 -------- --------- -------- --------- Net income (loss) 8,736 (5,981) 13,036 (7,071) Accretion of preferred stock to redemption value 106 106 318 318 Preferred stock dividends 174 174 522 522 -------- --------- -------- --------- Net income (loss) available to common stockholders $ 8,456 $ (6,261) $ 12,196 $ (7,911) ======== ========= ======== ========= Per common share-basic: Income (loss) available to common stockholders before cumulative effect of change in accounting principle $ .31 $ (.23) $ .46 $ (.29) Cumulative effect of change in accounting principle .02 -------- --------- -------- --------- Net income (loss) available to common stockholders $ .31 $ (.23) $ .44 $ (.29) ======== ========= ======== ========= Per common share-diluted: Income (loss) available to common stockholders before cumulative effect of change in accounting principle $ .26 $ (.23) $ .41 $ (.29) Cumulative effect of change in accounting principle .02 -------- --------- -------- --------- Net income (loss) available to common stockholders $ .26 $ (.23) $ .39 $ (.29) ======== ========= ======== ========= Dividends per common share $ .03 $ .00 $ .09 $ .06 ======== ========= ======== =========
See accompanying Notes to Consolidated Financial Statements. 3 4 DREYER'S GRAND ICE CREAM, INC. CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (Unaudited)
Retained Common Stock Earnings --------------------- Capital In (Accumulated Shares Amount Excess of Par Deficit) Total ------- -------- ------------ ------------ -------- (In thousands) Balances at December 27, 1997 27,020 $ 27,020 $ 42,822 $ 39,498 $109,340 Net loss (7,071) (7,071) Accretion of preferred stock to redemption value (318) (318) Preferred stock dividends declared (522) (522) Common stock dividends declared (1,630) (1,630) Repurchases and retirements of common stock (5) (5) (132) (137) Issuance of common stock under employee stock plans 297 297 3,677 3,974 ------- -------- -------- -------- -------- Balances at September 26, 1998 27,312 $ 27,312 $ 46,367 $ 29,957 $103,636 ======= ======== ======== ======== ======== Balances at December 26, 1998 27,312 $ 27,312 $ 46,722 $(11,401) $ 62,633 Net income 13,036 13,036 Accretion of preferred stock to redemption value (318) (318) Preferred stock dividends declared (522) (522) Common stock dividends declared (2,482) (2,482) Repurchases and retirements of common stock (19) (19) (216) (235) Issuance of common stock under employee stock plans 411 411 4,419 4,830 ------- -------- -------- -------- -------- Balances at September 25, 1999 27,704 $ 27,704 $ 50,925 $ (1,687) $ 76,942 ======= ======== ======== ======== ========
See accompanying Notes to Consolidated Financial Statements. 4 5 DREYER'S GRAND ICE CREAM, INC. CONSOLIDATED STATEMENT OF CASH FLOWS (Unaudited)
Thirty-nine Weeks Ended ------------------------------------------- Sept. 25, 1999 Sept. 26, 1998 ------------------ ---------------- (In thousands) Cash flows from operating activities: Net income (loss) $ 13,036 $ (7,071) Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation and amortization 26,457 26,632 Reserve for independent distributor receivable 5,000 Impairment of long-lived assets 4,657 Deferred income taxes 5,894 (1,274) Cumulative effect of change in accounting principle 595 Changes in assets and liabilities, net of amounts acquired: Trade accounts receivable (28,214) (29,112) Other accounts receivable 12,731 (9,564) Inventories (5,799) (2,612) Prepaid expenses and other (5,826) 2,463 Accounts payable and accrued liabilities 26,762 37,040 Accrued payroll and employee benefits 2,511 (6,720) --------- -------- 48,147 19,439 --------- -------- Cash flows from investing activities: Acquisition of property, plant and equipment (16,069) (31,563) Retirement of property, plant and equipment 915 470 Increase in goodwill and distribution rights (1,000) (311) Increase in other assets 76 (674) --------- -------- (16,078) (32,078) --------- -------- Cash flows from financing activities: Proceeds from long-term debt 16,900 Repayments of long-term debt (32,498) (7,413) Issuance of common stock under employee stock plans 4,830 3,974 Repurchases and retirements of common stock (235) (137) Cash dividends paid (2,990) (2,957) --------- -------- (30,893) 10,367 --------- -------- Increase (decrease) in cash and cash equivalents 1,176 (2,272) Cash and cash equivalents, beginning of period 1,171 3,626 --------- -------- Cash and cash equivalents, end of period $ 2,347 $ 1,354 ========= ======== Supplemental Cash Flow Information Cash paid during the period for: Interest, net of amounts capitalized $ 8,183 $ 8,768 ========= ======== Income taxes, net of refunds $ 2,478 $ 177 ========= ========
See accompanying Notes to Consolidated Financial Statements. 5 6 DREYER'S GRAND ICE CREAM, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) NOTE 1 - General Dreyer's Grand Ice Cream, Inc. and its subsidiaries (the Company) is a single segment industry company engaged in manufacturing and distributing premium ice cream and other frozen dessert products to grocery and convenience stores, foodservice accounts and independent distributors in the United States. The Company accounts for its operations geographically for management reporting purposes. These geographic segments have been aggregated for financial reporting purposes due to similarities in the economic characteristics of the geographic segments and the nature of the products, production processes, customer types and distribution methods throughout the United States. The consolidated financial statements for each of the 13-week and 39-week periods ended September 25, 1999 and September 26, 1998 have not been audited by independent public accountants, but include all adjustments, such as normal recurring accruals, which management considers necessary for a fair presentation of the consolidated operating results for the interim periods. The statements have been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission. Accordingly, certain information and footnote disclosure normally included in financial statements prepared in conformity with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations. The operating results for interim periods are not necessarily indicative of results to be expected for an entire year. The aforementioned statements should be read in conjunction with the Consolidated Financial Statements for the year ended December 26, 1998, appearing in the Company's 1998 Annual Report to Stockholders. NOTE 2 - Preoperating Costs 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. NOTE 3 - Net Income (Loss) Per Common Share Under Statement of Financial Accounting Standards No. 128, "Earnings per Share", the numerator for basic net income (loss) per share is net income (loss) available to common stockholders. The denominator for basic net income (loss) per share is the weighted average number of common shares outstanding. The numerator for diluted net income (loss) per share includes net income (loss) available to common stockholders, plus the effect of assumed conversions that are dilutive. The denominator for diluted net income (loss) per share includes the weighted average number of shares outstanding, plus the effect of potentially dilutive securities which include stock options, stock warrants and redeemable convertible preferred stock. 6 7 Net income (loss) per common share is computed as follows:
Thirteen Weeks Ended Thirty-nine Weeks Ended ----------------------------- ----------------------------- Sept. 25,1999 Sept. 26 ,1998 Sept. 25, 1999 Sept. 26, 1998 ------------- -------------- -------------- -------------- (In thousands, except per share amounts) Net income (loss) available to common stockholders - basic $ 8,456 $(6,261) $12,196 $(7,911) Add: preferred dividends and accretion 280 840 ------- ------- ------- ------- Net income (loss) available to common stockholders - diluted $ 8,736 $(6,261) $13,036 $(7,911) ======= ======= ======= ======= Weighted-average shares-basic 27,622 27,247 27,506 27,149 Dilutive effect of options 703 330 Dilutive effect of preferred stock 5,800 5,800 ------- ------- ------- ------- Weighted-average shares-diluted 34,125 27,247 33,636 27,149 ======= ======= ======= ======= Net income (loss) per common share: Basic $ .31 $ (.23) $ .44 $ (.29) ======= ======= ======= ======= Diluted $ .26 $ (.23) $ .39 $ (.29) ======= ======= ======= =======
Anti-dilutive securities 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:
Thirteen Weeks Ended Thirty-nine Weeks Ended ----------------------------------- ----------------------------------- Sept. 25, 1999 Sept. 26, 1998 Sept. 25, 1999 Sept. 26, 1998 -------------- -------------- -------------- -------------- (In thousands) Stock options 681 4,403 2,297 4,403 Stock warrants 2,000 2,000 2,000 Preferred stock 5,800 5,800
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 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. In May 1999, stockholders approved an amendment to the Company's Stock Option Plan (1993) to increase the number of shares reserved for issuance thereunder from 4,400,000 to 6,400,000. NOTE 4 - Status of Restructuring and Other Actions During 1998, as a result of higher dairy raw material costs, a decline in "better for you" volumes, and a reduction in future sales of Ben & Jerry's products, the Company implemented certain restructuring and other actions designed to improve profitability and accelerate cost reductions by increasing focus on the core elements of the Company's Strategic Plan. The restructuring and other actions are substantially complete except for the withdrawal from the Grand Soft equipment manufacturing business and paying the remaining severance benefits. The Company has been pursuing various proposals relating to the withdrawal from the equipment manufacturing business of its Grand Soft unit. 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 will be outsourcing its equipment production to an independent sub-manufacturer. The Company expects to complete this transition by year-end 1999. 7 8 In 1998, the Company recorded a restructuring charge and related accrual of $2,258,000 for anticipated Grand Soft closing costs. No payments were made during 1998 relating to this Grand Soft accrual resulting in an unchanged balance of $2,258,000 at December 26, 1998. The Company paid $779,000 of costs related to the withdrawal from the manufacturing business in the first thirty-nine weeks of 1999. The $779,000 was comprised of $595,000 of transition payroll and legal and related transaction costs along with $184,000 in severance payments for seven employees who were terminated during the first thirty-nine weeks of 1999. These payments resulted in an accrual balance of $1,479,000 at September 25, 1999. In addition, during 1998, the Company recorded a restructuring charge and related accrual of $1,042,000 for severance and related charges for 38 sales and distribution employees. During 1998, 16 employees were terminated and paid $153,000 in severance benefits resulting in an accrual balance of $889,000 at December 26, 1998. During 1999, an additional 18 employees were terminated and paid $584,000 in severance benefits resulting in an accrual balance of $305,000 at September 25, 1999. Remaining severance benefits totaling $305,000 will be paid by the end of 1999. In 1998, the Company also recorded a charge to cost of goods sold of $933,000 for severance actions begun in advance of board approval of the remaining restructuring actions. During 1998, the Company paid $514,000 in benefits related to these actions resulting in an accrual balance of $419,000 at December 26, 1998. During 1999, the Company paid $360,000 in benefits related to these actions resulting in an accrual balance of $59,000 at September 25, 1999. The following table summarizes the 1999 year-to-date activity in the restructuring and other accruals included in accounts payable and accrued liabilities in the Consolidated Balance Sheet:
Dec. 26, 1998 Additions Payments Sept. 25, 1999 -------------- ---------- -------- -------------- (In thousands) Restructuring accruals: Grand Soft $2,258 $ $ (779) $ 1,479 Sales and distribution severance 889 (584) 305 ------ ------ ------- ------- 3,147 (1,363) 1,784 ------ ------ ------- ------- Other accruals: Sales and distribution severance 419 (360) 59 ------ ------ ------- ------- $3,566 $ $(1,723) $ 1,843 ====== ====== ======= =======
NOTE 5 - Inventories Inventories are stated at the lower of cost (determined by the first-in, first-out method) or market. Inventories at September 25, 1999 and December 26, 1998 consisted of the following:
Sept. 25, Dec. 26, 1999 1998 ----------- ----------- (In thousands) Raw materials $ 6,393 $ 4,840 Finished goods 48,878 44,632 ---------- -------- $ 55,271 $ 49,472 ========== ========
NOTE 6 - Stockholders' Equity Common stock dividends declared for the thirty-nine weeks ended September 25, 1999 and September 26, 1998 were $2,482,000 and $1,630,000, respectively. On September 9, 1999, the Board of Directors of the Company approved a third quarter common stock dividend in the amount of $.03 per share to common stockholders of record on September 24, 1999. This dividend was paid on October 6, 1999. On September 28, 1998, the Board of Directors of the Company approved a third quarter common dividend in the amount of $.03 per share to common stockholders of record on October 9, 1998. This dividend was paid on October 21, 1998. Because the approval was subsequent to the end of the third quarter, the Company recorded this transaction in the fourth quarter of 1998. 8 9 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Unaudited) The following table sets forth the percent which the items in the Consolidated Statement of Operations bear to sales and the percentage change of such items compared to the indicated prior period:
Period-to-Period Variance Percentage of Sales Favorable (Unfavorable) ---------------------------------------------- ---------------------- Thirteen Thirty-nine Weeks Weeks Thirteen Weeks Ended Thirty-nine Weeks Ended Ended Ended -------------------- ----------------------- 1999 1999 Sept. 25, Sept. 26, Sept. 25, Sept. 26, Compared Compared 1999 1998 1999 1998 To 1998 To 1998 --------- ---------- ----------- ----------- ---------- --------- Revenues: Sales 100.0% 100.0% 100.0% 100.0% 6.4% 7.4% Other income 0.3 0.4 0.2 0.3 (21.7) (36.6) ------- ------- ------- ------- 100.3 100.4 100.2 100.3 6.3 7.3 ------- ------- ------- ------- Costs and expenses: Cost of goods sold 73.4 78.9 76.4 79.6 1.0 (3.0) Selling, general and administrative 21.7 22.1 20.2 20.4 (4.7) (6.5) Impairment of long-lived assets 1.5 0.6 Interest, net of amounts capitalized 0.8 1.2 1.0 1.2 29.9 8.3 ------- ------- ------- ------- 95.9 103.7 97.6 101.8 1.6 (3.0) ------- ------- ------- ------- Income (loss) before income tax provision (benefit) and cumulative effect of change in accounting principle 4.4 (3.3) 2.6 (1.5) 244.6 290.9 Income tax provision (benefit) 1.7 (1.3) 1.0 (0.6) (242.4) (288.0) ------- ------- ------- ------- Income (loss) before cumulative effect of change in accounting principle 2.7 (2.0) 1.6 (0.9) 246.1 292.8 Cumulative effect of change in accounting principle 0.1 NM ------- ------- ------- ------- Net income (loss) 2.7 (2.0) 1.5 (0.9) 246.1 284.4 Accretion of preferred stock to redemption value Preferred stock dividends 0.1 0.1 0.1 0.1 ------- ------- ------- ------- Net income (loss) available to common stockholders 2.6% (2.1)% 1.4% (1.0)% 235.1 254.2 ======= ======= ======= =======
9 10 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 Management's Discussion and Analysis of Consolidated Financial Condition and Results of Operations. The Company undertakes no obligation to publicly revise these forward-looking statements to reflect subsequent events or circumstances. Also, in connection with this "safe harbor" provision, the Company identifies important factors that could cause the Company's actual results to differ materially from those contained in any forward-looking statement made by or on behalf of the Company. Any such statement is qualified by reference to the cautionary statements set forth below and in the Company's other filings with the Securities and Exchange Commission. Background In 1994, the Company adopted a strategic plan to accelerate the sales of its brand throughout the country (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. In 1998, the cost of dairy raw materials peaked at an amount 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. 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. Finally, in August 1998, Ben & Jerry's Homemade, Inc. (Ben & Jerry's) informed the Company of its intention to terminate its distribution contract. 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 is 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. 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 either had in the past, or may continue to have in the future, a negative effect on the Company's gross margin 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 will continue to distribute Ben & Jerry's products in a smaller geographic area, it will have no further restrictions on competing in the superpremium segment with its own pint products. In the 10 11 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 will be 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 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 actual results to differ from expectations include, but are not limited to, the following: the Company's ability to achieve the cost reductions anticipated from its restructuring actions and 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 promotional expenses. These or other factors may be difficult to forecast and could have a material adverse effect on the Company's business, operating results, and financial condition. Status of Restructuring and Other Actions During 1998, as a result of higher dairy raw material costs, a decline in "better for you" volumes, and a reduction in future sales of Ben & Jerry's products, the Company implemented certain restructuring and other actions designed to improve profitability and accelerate cost reductions by increasing focus on the core elements of the Company's Strategic Plan. The restructuring and other actions are substantially complete except for the withdrawal from the Grand Soft equipment manufacturing business and paying the remaining severance benefits. The Company has been pursuing various proposals relating to the withdrawal from the equipment manufacturing business of its Grand Soft unit. 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 will be outsourcing its equipment production to an independent sub-manufacturer. The Company expects to complete this transition by year-end 1999. In 1998, the Company recorded a restructuring charge and related accrual of $2,258,000 for anticipated Grand Soft closing costs. No payments were made during 1998 related to the Grand Soft accrual resulting in an unchanged balance of $2,258,000 at December 26, 1998. The Company paid $779,000 of costs related to the withdrawal from the manufacturing business in the first thirty-nine weeks of 1999. The $779,000 was comprised of $595,000 of transition payroll and legal and related transaction costs along with $184,000 in severance payments for seven employees who were terminated during the first thirty-nine weeks of 1999. These payments resulted in an accrual balance of $1,479,000 at September 25, 1999. In addition, during 1998, the Company recorded a restructuring charge and related accrual of $1,042,000 for severance and related charges for 38 sales and distribution employees. During 1998, 16 employees were terminated and paid $153,000 in severance benefits resulting in an accrual balance of $889,000 at December 26, 1998. During 1999, an additional 18 employees were terminated and paid $584,000 in severance benefits resulting in an accrual balance of $305,000 at September 25, 1999. Remaining severance benefits totaling $305,000 will be paid by the end of 1999. In 1998, the Company also recorded a charge to cost of goods sold of $933,000 for severance actions begun in advance of board approval of the remaining restructuring actions. During 1998, the Company paid $514,000 in benefits related to these actions resulting in an accrual balance of $419,000 at December 26, 1998. During 1999, the Company paid $360,000 in benefits related to these actions resulting in an accrual balance of $59,000 at September 25, 1999. The following table summarizes the 1999 year-to-date activity in the restructuring and other accruals included in accounts payable and accrued liabilities in the Consolidated Balance Sheet:
Dec. 26, 1998 Additions Payments Sept. 25, 1999 -------------- ---------- -------- -------------- (In thousands) Restructuring accruals: Grand Soft $2,258 $ $ (779) $ 1,479 Sales and distribution severance 889 (584) 305 ------ ------ ------- ------- 3,147 (1,363) 1,784 ------ ------ ------- ------- Other accruals: Sales and distribution severance 419 (360) 59 ------ ------ ------- ------- $3,566 $ $(1,723) $ 1,843 ====== ====== ======= =======
Thirteen Weeks ended September 25, 1999 Compared with Thirteen Weeks ended September 26, 1998 Consolidated sales for the third quarter of 1999 increased $19,438,000, or six percent, to $322,410,000 from $302,972,000 for the same quarter last year. Sales of the Company's branded products increased $26,740,000, or 14 percent, to $212,899,000 from $186,159,000 for the same quarter last year. Company brands represented 66 percent of consolidated sales compared with 61 percent in the same quarter last year. The increase in sales of the Company's branded products related primarily to an increase in unit sales and generally higher average wholesale prices. The products that led this increase were Classic Dreyer's and Edy's Grand Ice Cream, Godiva(R) Ice Cream, and the Dreamery(TM) line. As a result of wholesale price increases and changes in mix, the average price of 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 1,870,000 gallons, or seven percent, to 28,270,000 gallons. Sales of products distributed for other manufacturers (partner brands), including Ben & Jerry's Homemade, Inc., decreased $7,302,000, or six percent, to $109,511,000. Sales of partner brands represented 34 percent of consolidated sales compared with 39 percent in the same quarter last year. As previously disclosed, the Company began distributing Ben & Jerry's products in a smaller geographic area during September, 1999. This change was the primary cause of the lower partner brand sales for the quarter. Average wholesale prices for partner brands increased approximately five percent, while unit sales decreased eleven percent over the same quarter last year. Cost of goods sold decreased $2,474,000, or one percent, over the third quarter of 1998, while the overall gross margin increased to 27 percent from 21 percent. Cost of goods sold for the third quarter of 1998 included approximately $977,000 of expenses related to the settlement of various legal issues and approximately $933,000 in severance costs relating to staffing reductions made prior to board approval of the restructuring actions. Excluding the effect of the 1998 settlement and severance expenses, cost of goods sold decreased $564,000 or less than one percent, over the same quarter of 1998, while the overall gross margin increased to 27 percent from 22 percent. This gross margin improvement was primarily the result of comparatively lower dairy raw material costs, higher average wholesale costs and changes in mix. The impact of the change in dairy raw material costs for the quarter was a $7,300,000 benefit as compared to the same quarter last year. Selling, general and administrative expenses in the third quarter of 1999 were $3,130,000, or five percent, higher than in the same quarter of 1998 and represented 22 percent of consolidated sales in both periods. Selling, general, and administrative expenses for the third quarter of 1998 included a $5,000,000 reserve for an independent distributor receivable and approximately $1,400,000 of expenses related to the settlement of various legal issues. Excluding the effect of the receivable reserve and settlement charges, selling, general and administrative expenses would have increased by $9,530,000, or 16%, over the same quarter last year. This increase related primarily to significantly higher trade promotion and marketing expenses associated with the launch of new products. 11 12 During the third quarter of 1998, the Company recorded a $4,657,000 impairment charge relating to the write-off of the unamortized balance of distribution rights upon termination of these rights by Ben & Jerry's. Interest expense decreased $1,112,000, or 30 percent, over the same quarter of 1998, primarily attributable to lower average borrowings. The income tax provision increased due to a correspondingly higher pre-tax income in 1999. The effective tax rate decreased to 39.1 percent for the third quarter of 1999 from 39.7 percent for the same quarter of 1998. Thirty-nine Weeks ended September 25, 1999 Compared with Thirty-nine Weeks ended September 26, 1998 Consolidated sales for the first thirty-nine weeks of 1999 increased $59,330,000, or seven percent, to $857,657,000 from $798,327,000 for the same period last year. Sales of the Company's branded products increased $51,737,000, or 10 percent, to $551,235,000, from $499,498,000 for the same period last year. Company brands represented 64 percent of consolidated sales compared with 63 percent in the same period last year. The increase in sales of the Company's branded products related primarily to wholesale price increases and changes in mix. The products that led this increase were Classic Dreyer's and Edy's Grand Ice Cream, Godiva(R) Ice Cream, and the Dreamery(TM) line. Average wholesale prices for the Company's branded products increased approximately six percent, before the effect of increased trade promotion expenses. Gallon sales of the Company's branded products increased 3,532,000 gallons, or five percent, to 75,117,000 gallons. Sales of partner brands increased $7,593,000, or three percent, to $306,422,000. Sales of Nestle' Ice Cream Company products accounted for most of the increase. Sales of partner brands represented 36% of consolidated sales in both periods. Average wholesale prices for partner brands increased approximately four percent, while unit sales decreased one percent. Cost of goods sold increased $19,064,000, or three percent, over the first thirty-nine weeks of 1998, while the overall gross margin increased to 24 percent from 20 percent. Cost of goods sold for the first thirty-nine weeks of 1998 included approximately $977,000 of expenses related to the settlement of various legal issues and approximately $933,000 in severance costs relating to staffing reductions made prior to board approval of the restructuring actions. Excluding the effect of the 1998 settlement and severance expenses, cost of goods sold increased $20,974,000 or three percent, over the comparable 1998 period, while the overall gross margin increased to 24 percent from 21 percent. This gross margin improvement was primarily the result of comparatively lower dairy raw material costs, higher average wholesale prices, and changes in mix. The impact of the change in dairy raw material costs was a $7,100,000 benefit compared to the same period last year. Selling, general and administrative expenses in the first thirty-nine weeks of 1999 were $10,536,000, or six percent, higher than in the same period of 1998 and represented 20 percent of consolidated sales in both periods. Selling, general, and administrative expenses for the first thirty-nine weeks of 1998 included a $5,000,000 reserve for an independent distributor receivable and approximately $1,400,000 of expenses related to the settlement of various legal issues. Excluding the effect of the receivable reserve and settlement charges, selling, general and administrative expenses would have increased by $16,936,000, or 11%, over the same period last year. This increase related primarily to significantly higher marketing expenses and trade promotion expenses associated with the launch of new products. During the third quarter of 1998, the Company recorded a $4,657,000 impairment charge relating to the write-off of the unamortized balance of distribution rights upon termination of these rights by Ben & Jerry's. Interest expense decreased $805,000, or eight percent, over the comparable 1998 period, primarily attributable to lower average borrowings. The income tax provision increased due to a correspondingly higher pre-tax income in 1999. The effective tax rate decreased to 39.1 percent for the first thirty-nine weeks of 1999 from 39.7 percent for the first thirty-nine weeks of 1998. 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. LIQUIDITY AND CAPITAL RESOURCES Working capital at September 25, 1999 decreased $13,384,000 from year-end 1998 due primarily to the seasonal increase in accounts payable and accrued liabilities, partially offset by an increase in trade accounts receivable. The Company's operations provided cash of $48,147,000 that was primarily used to fund a $16,069,000 increase in property, plant and equipment and repayments of $32,498,000 of long-term debt. 12 13 At September 25, 1999, the Company had $2,347,000 in cash and cash equivalents, and an unused credit line of $100,300,000. The total available under the Company's revolving line of credit decreases from $175,000,000 to $149,286,000 on December 31, 1999 and the line expires on December 31, 2000. The Company intends to either refinance the line or extend its maturity date. The Company believes it will be successful in either obtaining new financing from available sources or extending the maturity date of the existing line. 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. The Company believes that its credit line, along with its liquid resources, internally-generated cash and financing capacity, are adequate to meet both short-term and long-term operating and capital requirements. YEAR 2000 COMPLIANCE The Company continues to address its Year 2000 compliance. Critical centralized information systems (software and hardware) are either being upgraded, enhanced, or replaced for Year 2000 compliance. The Company completed upgrading and enhancing all critical centralized systems and expects to complete enterprise-wide testing during the remainder of 1999. The review of embedded chip technology used in the Company's manufacturing systems determined that only minor upgrades or enhancements will be necessary. The Company expects to complete the embedded chip upgrade and enhancement process during the remainder of 1999. The Company is also surveying key customers and suppliers to determine the risk associated with their Year 2000 compliance programs. During the remainder of 1999, the Company will continue to evaluate and reevaluate the risk associated with Year 2000 compliance programs of key customers and suppliers. The Company believes the Year 2000 issue does not pose significant operational or financial risks. The Company has a broad base of customers and had only one customer accounting for ten percent of total sales in 1998. The Company also has a broad base of suppliers with multiple sourcing possibilities for all purchases. The Company has always had contingency plans in place for non-Year 2000 related risks. Nevertheless, the Company is in the process of strengthening its existing contingency plans and developing additional contingency plans in an attempt to minimize the effect of any issues that may arise from the failure of the Company, its customers or its suppliers to complete Year 2000 compliance work. The Company will complete the contingency plan development for Year 2000 issues during the remainder of 1999. The Company's assessment of the Year 2000 issue is based upon certain assumptions that may later prove to be inaccurate. The greatest potential risks relate to those situations beyond the Company's control, particularly the inability of suppliers and customers to be Year 2000 compliant, which may cause disruptions in the manufacturing and distribution operations. Additionally, a customer's inability to pay in a timely manner and the disruption of electronic invoicing and payment systems could cause financial risk and losses to the Company. The Company expects to complete probability studies and risk analyses as part of the contingency plan during the remainder of 1999. The total cost for the Company's Year 2000 initiatives are estimated to be $6,000,000, of which $3,500,000 was incurred during 1998 and $2,500,000 is being incurred during 1999. The majority of these costs relate to the accelerated replacement of capitalized hardware and software systems. Of the $6,000,000, approximately $4,500,000 will be capitalized and approximately $1,500,000, relating to the costs of modifying computer software for the Year 2000, will be expensed as incurred. The Company's cost estimates do not include costs that may result from the failure of third parties to be Year 2000 compliant or the costs to invoke contingency plans should an unforeseen failure occur. The Company does not expect the costs of Year 2000 compliance to have a material impact on the Company's financial position, results of operations or cash flows. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Since December 26, 1998, there have been no material changes in the Company's market risk exposure. 13 14 PART II: OTHER INFORMATION ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) The following exhibit is filed herewith:
Exhibit No. Description ----------- ----------- 27.1 Financial Data Schedule.
(b) No reports on Form 8-K were filed by the Company during the quarter ended September 25, 1999. 14 15 SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. DREYER'S GRAND ICE CREAM, INC. Dated: November 9, 1999 By: /s/ Timothy F. Kahn --------------------------------- Timothy F. Kahn Vice President - Finance and Administration and Chief Financial Officer (Principal Financial Officer) 15 16 DREYER'S GRAND ICE CREAM, INC. INDEX OF EXHIBITS
Exhibit No. Description - ----------- ----------- 27.1 Financial Data Schedule.
16 EX-27.1 2 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED BALANCE SHEET AND THE CONSOLIDATED STATEMENT OF OPERATIONS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 9-MOS DEC-25-1999 DEC-27-1998 SEP-25-1999 2,347 0 117,130 5,863 55,271 203,861 336,593 137,170 480,490 156,186 125,457 99,972 0 27,704 49,238 480,490 857,657 859,532 654,721 654,721 0 643 8,851 22,383 8,752 13,631 0 0 595 13,036 0.44 0.39 EXCLUDES SELLING, GENERAL AND ADMINISTRATIVE EXPENSES AS THESE ARE PART OF 5-03(b)(4).
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