-----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, AojbRwkDr/9J6I4dk/3Znu8z+Woigt9nw8OcOCEXe42z3m9uDXniYFgxBEa/5Q4M xStZQcRH8Oiqd2SwUWdVzw== 0000950149-98-000524.txt : 19980330 0000950149-98-000524.hdr.sgml : 19980330 ACCESSION NUMBER: 0000950149-98-000524 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19971227 FILED AS OF DATE: 19980327 SROS: NASD 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-K SEC ACT: SEC FILE NUMBER: 000-14190 FILM NUMBER: 98576082 BUSINESS ADDRESS: STREET 1: 5929 COLLEGE AVE CITY: OAKLAND STATE: CA ZIP: 94618 BUSINESS PHONE: 5106528187 10-K 1 FORM 10-K FOR THE PERIOD ENDED 12/27/97 1 ================================================================================ SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ FORM 10-K (MARK ONE) [X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (FEE REQUIRED) FOR THE FISCAL YEAR ENDED DECEMBER 27, 1997 OR [ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED) FOR THE TRANSITION PERIOD FROM ------------------ TO ------------------. 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) REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (510) 652-8187 SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: None
NAME OF EACH EXCHANGE TITLE OF EACH CLASS ON WHICH REGISTERED ------------------- --------------------- Not applicable Not applicable
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: Common Stock, $1.00 Par Value Preferred Stock Purchase Rights 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 by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] The aggregate market value (based on the average of the high and low sales prices on March 19, 1998, as reported by NASDAQ) of the Common Stock held by non-affiliates was approximately $466,172,928. (Such amount excludes the aggregate market value of shares beneficially owned by the executive officers and members of the Board of Directors of the registrant.) As of March 19, 1998, the latest practicable date, 27,087,949 shares of Common Stock were outstanding. DOCUMENTS INCORPORATED BY REFERENCE Portions of the Dreyer's Grand Ice Cream, Inc. Annual Report to Stockholders for the fiscal year ended December 27, 1997, filed as Exhibit 13 to this Annual Report on Form 10-K, are incorporated by reference into Part IV of the Annual Report on Form 10-K. With the exception of those portions which are specifically incorporated by reference in this Annual Report on Form 10-K, the Dreyer's Grand Ice Cream, Inc. Annual Report to Stockholders for the fiscal year ended December 27, 1997 is not to be deemed filed as part of this Report. Portions of the Dreyer's Grand Ice Cream, Inc. Proxy Statement for the 1998 Annual Meeting of Stockholders to be filed with the Commission on or before April 26, 1998 are incorporated by reference into Part III of this Annual Report on Form 10-K. With the exception of those portions which are specifically incorporated by reference in this Annual Report on Form 10-K, the Dreyer's Grand Ice Cream, Inc. Proxy Statement for the 1998 Annual Meeting of Stockholders is not to be deemed filed as part of this Report. ================================================================================ 2 PART I ITEM 1. BUSINESS GENERAL Dreyer's Grand Ice Cream, Inc. and its consolidated subsidiaries are, unless the context otherwise requires, sometimes referred to herein as "Dreyer's" or the "Company." The Company, successor to the original Dreyer's Grand Ice Cream business, was originally incorporated in California on February 23, 1977 and reincorporated in Delaware on December 28, 1985. Dreyer's manufactures and distributes premium ice cream and other frozen dessert products. Since 1977, Dreyer's has developed from a specialty ice cream sold principally in selected San Francisco Bay Area grocery and ice cream stores to a broad line of frozen dairy and other frozen desserts sold under the Dreyer's and Edy's brand names in retail outlets serving more than 86% of the households in the United States. The Dreyer's line of products are available in the thirteen western states, Texas and certain markets in the Far East. The Company's products are sold under the Edy's brand name generally throughout the remaining regions of the United States. The Dreyer's and Edy's line of products are distributed through a direct-store-delivery system further described below under the caption "Marketing, Sales and Distribution." The Company also distributes and, in certain instances, manufactures branded ice cream and frozen dessert products of other companies. The Dreyer's and Edy's line of ice cream and related products is relatively expensive and is sold by the Company and its independent distributors to grocery stores, convenience stores, club stores, ice cream parlors, restaurants, hotels and certain other accounts. The Dreyer's and Edy's brands enjoy strong consumer recognition and loyalty. MARKETS Ice cream was traditionally supplied by dairies as an adjunct to their basic milk business. Accordingly, ice cream was marketed like milk, as a fungible commodity, and manufacturers competed primarily on the basis of price. This price competition motivated ice cream producers to seek economies in their formulations. The resulting trend to lower quality ice cream created an opportunity for the Company and other producers of premium ice creams, whose products can be differentiated on the basis of quality, technological sophistication and brand image, rather than price. Moreover, the market for all packaged ice creams was influenced by the steady increase in market share of "private label" ice cream products owned by the major grocery chains and the purchase or construction by the chains of their own milk and ice cream plants. The resulting reduction in the market for milk and the "regular" ice cream brands produced by the independent dairies has caused many such dairies to withdraw from the market. Manufacturing and formulation complexities, broader flavor requirements, consumer preference and brand identity, however, make it more difficult for the chains' private label brands to compete effectively in the premium market segment. As a result, independent premium brands such as the Company's are normally stocked by major grocery chains. While many foodservice operators, including hotels, schools, hospitals and other institutions, buy ice cream primarily on the basis of price, there are also those in the foodservice industry who purchase ice cream based on its quality. Operators of ice cream shops wanting to feature a quality brand, restaurants that include an ice cream brand on their menu and clubs or chefs concerned with the quality of their fare are often willing to pay for Dreyer's quality, image and brand identity. PRODUCTS The Company and its predecessors have always been innovators of flavor, package development and formulation. William A. Dreyer, the creator of Dreyer's Grand Ice Cream, is credited with inventing many popular flavors including Rocky Road. Dreyer's was among the first ice creams in the West packaged in round containers with window lids that allow consumers to see the actual product they are buying. The Company was also the first to produce an ice cream lower in calories. The Company's Grand Light(R) formulation was a precursor to the reduced fat, reduced sugar and low cholesterol products in the Company's current product line. 1 3 The Company uses only the highest quality ingredients in its products. The Company's management philosophy is to resist changes in its formulations or production processes that compromise quality for cost even though the industry in general may adopt such new formulation or process compromises. Dreyer's and Edy's Grand Ice Cream is the Company's flagship product which utilizes traditional formulations with all natural flavorings and is characterized by premium quality taste and texture, and diverse flavor selection. The flagship product is complimented by the Company's successful reduced fat, low cholesterol products such as Frozen Yogurt; Grand Light; No Sugar Added and Fat Free ice creams; and the Company's Sherbet and Whole Fruit Sorbet products. The Company believes these products are well positioned in the segments of the market where products are characterized by lower levels of fat, sugar and cholesterol than those of regular ice cream. During 1997, the Company introduced Homemade Ice Cream on a nationwide basis. The Company produces Portofino(R) brand Italian style ice cream which is distributed in selected western markets, and manufactures and distributes Starbucks(R) Ice Cream products for its joint venture with Starbucks Coffee Company. The Company also produces a premium soft serve product, Grand Soft(R), which is available as ice cream or frozen yogurt. The Company's novelty line features Dreyer's and Edy's Ice Cream Bars, Fruit Bars, and Sundae Cones. The Company redesigned its 1997 packaging for the novelty products to reposition these products to target the family segment of the market. The Company also distributes and, in some instances, manufactures selected branded frozen dessert products of other companies. The Company's product lines now include over 100 flavors that are selected both on the basis of general popularity and on the intensity of consumer response. Some flavors are seasonal and are produced only as a featured flavor during particular months. The Company operates a continuous flavor development and evaluation program. The Company holds registered trademarks on many of its products. Dreyer's believes that consumers associate the Company's trademarks, distinctive packaging and trade dress with its high quality products. The Company does not own any patents that are material to its business. Research and development expenses are not a significant expense of the Company, nor have they been a significant expense historically. MARKETING, SALES AND DISTRIBUTION The Company's marketing strategy is based upon management's belief that a significant number of people prefer a quality product and quality image in ice cream just as they do in other product categories. A quality image is communicated in many ways -- taste, packaging, flavor selection, price and often through advertising and promotion. If consistency in the product's quality and image are strictly maintained, a brand can develop a clearly defined and loyal consumer following. It is the Company's goal to develop such a consumer following in each major market in which it does business. The Company embarked on a strategic plan (the Strategic 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 national scale and leverage this capability with sophisticated information 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. The Company believes that the benefits under the Strategic Plan will be realized in future years. However, no assurance can be given that the expectations relative to future market share and earnings benefits of the strategy will be achieved. The realization of the benefits will depend upon, among other things, consumer purchase responsiveness to the Company's new products and increased marketing and promotion expenditures, competitors' marketing and promotion responses, market conditions affecting the price of the Company's products, commodity costs and efficiencies achieved in manufacturing and distribution operations. For additional information regarding the Strategic Plan see the discussion set forth under the caption "Results of Operations" which appears on page 31 of the Company's 1997 Annual Report to Stockholders. Unlike many other ice cream manufacturers, the Company uses a direct-store-delivery system which allows distribution of the Company's products directly to the retail ice cream cabinet by either the Company's 2 4 own personnel or independent distributors who primarily distribute the Company's products. This store level distribution allows service to be tailored to the needs of each store. Dreyer's believes this service ensures proper product handling, quality control, flavor selection and retail display. The implementation of this system has resulted in an ice cream distribution network capable of providing frequent direct service to grocery stores in every market where the Company's products are sold. Under the Strategic Plan, the Company's distribution network has been significantly expanded to where the Company's products are available to grocery stores serving approximately 86% of the United States. This distribution system is considerably larger than any other direct-store-delivery system for ice cream products currently operating in the United States. Each distributor, whether Company-owned or independent, is primarily responsible for sales of all products within its respective market area. However, the Company provides sales and marketing support to its independent distributors, including training seminars, sales aids of many kinds, point of purchase materials, assistance with promotions and other sales support. The distribution network in the West now includes fourteen distribution centers operated by the Company in large metropolitan areas such as Los Angeles, the San Francisco Bay Area, Phoenix, San Diego, Seattle and Denver. The remaining metropolitan areas throughout the thirteen western states, Texas and the Far East are served through independent distributors. Distribution in the remainder of the United States is under the Edy's brand name with most of the distribution handled through nineteen Company-owned distribution centers, including centers in New Jersey, Chicago, Washington, D.C., Atlanta, Tampa and Kansas City. The Company also has independent distributors handling the Company's products in certain market areas east of the Rocky Mountains. Taken together, independent distributors accounted for approximately 22% of the Company's consolidated net sales in 1997. The Company's agreements with its independent distributors are generally terminable upon 30 days notice by either party. For fiscal 1997, no customer accounted for more than 10% of consolidated net sales of the Company. The Company's export sales were about 1% of 1997 consolidated net sales. The Company experiences a seasonal fluctuation in sales, with more demand for its products during the spring and summer than during the fall and winter. MANUFACTURING The Company manufactures its products at its plants in Union City, California; City of Commerce, California; Fort Wayne, Indiana; Houston, Texas; and Salt Lake City, Utah. In order to serve high altitude markets and to occasionally meet peak periods of demand, the Company has manufacturing agreements with three ice cream manufacturers to produce Dreyer's line of products in accordance with specifications and quality control provided by Dreyer's. Of the approximately 90 million gallons of the Company's products sold in 1997, approximately three million gallons were manufactured under these arrangements. The Company also has manufacturing agreements with five different facilities to produce the majority of its novelty products. During 1997, these facilities produced approximately three million cases of Dreyer's and Edy's Ice Cream Bars and Fruit Bars. In addition, the Company has agreements to produce products for other manufacturers. In 1997, the Company manufactured approximately 12 million gallons of product under these agreements. The primary factor in the Company's product costs is the price of basic dairy ingredients (cream, milk and skim milk) and sugar. The minimum prices paid for dairy ingredients are established by the market under the Federal Milk Price Support Program. During 1996, the Company experienced an $8,140,000 increase in dairy raw materials costs which negatively impacted the Company's gross profit. During 1997, dairy prices decreased to slightly lower levels resulting in a favorable impact of $3,842,000 on gross profit when compared to 1996 price levels. In order to ensure consistency of flavor, each of the Company's manufacturing plants purchases, to the extent practicable, all of its required dairy ingredients from one local supplier. These dairy products and most 3 5 other ingredients or their equivalents are available from multiple sources. The Company maintains a rigorous process for evaluating qualified alternative suppliers of its key ingredients. COMPETITION The Company's manufactured products compete on the basis of brand image, quality and breadth of flavor selection. The ice cream industry is highly competitive and most ice cream manufacturers, including full line dairies, the major grocery chains and the other independent ice cream processors, are capable of manufacturing and marketing high quality ice creams. Furthermore, there are relatively few barriers to new entrants in the ice cream business. However, reduced fat, reduced sugar and low cholesterol ice cream products generally require technologically sophisticated formulations in comparison to standard or "regular" ice cream products. Much of the Company's competition comes from the "private label" brands produced by or for the major supermarket chains and which generally sell at prices below those charged by the Company for its products. Because these brands are owned by the retailer, they often receive preferential treatment when the retailers allocate available freezer space. The Company's competition also includes premium ice creams produced by other ice cream manufacturers, some of whom are owned by parent companies much larger than Dreyer's. EMPLOYEES On December 27, 1997, the Company had approximately 3,500 employees. The Company's Union City manufacturing and distribution employees are represented by the Teamsters Local 853, whose contract with the Company expires between September 1999 and December 2000 for different types of employees, and the International Union of Operating Engineers, Stationary Local No. 39, whose contract with the Company expires in August 2001. The Sacramento distribution employees are represented by the Chauffeurs, Teamsters and Helpers Union, Local 150 whose contract with the Company expires in August 1999. The St. Louis distribution employees are represented by the United Food & Commercial Workers Union, Local 655 whose contract with the Company expires in December 2000. The Company has never experienced a strike by any of its employees. ITEM 2. PROPERTIES The Company owns its headquarters located at 5929 College Avenue in Oakland, California. The headquarters buildings include 54,000 square feet of office space utilized by the Company and 10,000 square feet of retail space leased to third parties. The Company owns a manufacturing and distribution facility in Union City, California. This facility has approximately 60,000 square feet of manufacturing and dry storage space, 40,000 square feet of cold storage warehouse space and 15,000 square feet of office space. The plant has the current production capacity of 28 million gallons per year. During 1997, the facility produced approximately 22 million gallons of ice cream and related products. The Company leases an ice cream manufacturing plant with an adjoining cold storage warehouse located in the City of Commerce, California. This facility has approximately 76,000 square feet of manufacturing and dry storage space, 25,000 square feet of cold storage space and 19,000 square feet of office space. The lease on this property, including renewal options, expires in 2022. The plant has the current production capacity of 20 million gallons per year. During 1997, the facility produced approximately 19 million gallons of ice cream and related products. The Company owns a cold storage warehouse facility located in the City of Industry, California. This facility includes 52,000 square feet of cold and dry storage warehouse space and 13,000 square feet of office space. This facility supplements the cold storage warehouse and office space leased in the City of Commerce. The Company owns a manufacturing plant with an adjoining cold storage warehouse in Fort Wayne, Indiana. This facility has approximately 112,000 square feet of manufacturing and storage space and 9,000 square feet of office space. In January 1998, the Company completed construction of an additional 4 6 warehouse on land adjacent to the Ft. Wayne manufacturing facility. The newly constructed warehouse has cold storage space of 76,000 square feet and office space of 13,000 square feet. Until its lease expires in March 1998, the Company leases approximately 50,000 square feet of cold storage and 2,000 square feet of office space near the Fort Wayne facility. The newly constructed warehouse facility replaces the leased warehouse facility. The plant has the current production capacity of 54 million gallons per year, with projected future production capacity of 64 million gallons in 1999 achieved through machinery and equipment purchases to increase efficiency. During 1997, the facility produced approximately 46 million gallons of ice cream and related products. The Company's original purchase and development of the Fort Wayne facility was financed by industrial development bonds and the property is pledged as collateral to secure payment of the Company's obligations to the issuer of the irrevocable letter of credit established for the benefit of the bondholders. The Company owns a manufacturing and distribution facility in Houston, Texas. This facility was recently renovated and has approximately 69,000 square feet of manufacturing and dry storage space, 46,000 square feet of cold storage warehouse space and 20,000 square feet of office space. The plant has the current production capacity of approximately 26 million gallons per year. During 1997, this facility produced approximately 15 million gallons of ice cream and related products. The Company owns a manufacturing and distribution facility in Salt Lake City, Utah. This facility has approximately 12,000 square feet of manufacturing and dry storage space, 13,000 square feet of cold storage space and 1,000 square feet of office space. The plant has the current production capacity of 5 million gallons per year. During 1997, the facility produced approximately 4 million gallons of ice cream and related products. The Company intentionally acquires, designs and constructs its manufacturing and distribution facilities with a capacity greater than current needs require. This is done to facilitate growth and expansion and minimize future capital outlays. The cost of carrying this excess capacity is not significant. The Company also leases or rents various local distribution and office facilities with leases expiring through the year 2022 (including options to renew). ITEM 3. LEGAL PROCEEDINGS Not applicable. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS The information set forth under the caption "Item 4. Submission of Matters to a Vote of Security Holders" in the Company's Form 10-Q for the period ended September 27, 1997 filed with the Commission on November 11, 1997, is incorporated herein by reference. EXECUTIVE OFFICERS OF THE REGISTRANT The Company's executive officers and their ages are as follows:
NAME POSITION AGE ---- -------- --- T. Gary Rogers......... Chairman of the Board and Chief Executive Officer 55 William F. Cronk, III.. President 55 Edmund R. Manwell...... Secretary 55 Thomas M. Delaplane.... Vice President -- Sales 53 J. Tyler Johnston...... Vice President -- Marketing 44 Timothy F. Kahn........ Vice President -- Finance and Administration and Chief Financial Officer 44 William R. Oldenburg... Vice President -- Operations 51
All officers hold office at the pleasure of the Board of Directors. There is no family relationship among the above officers. 5 7 Mr. Rogers has served as Dreyer's Chairman of the Board and Chief Executive Officer since its incorporation in February 1977. Mr. Cronk has served as a director of the Company since its incorporation in February 1977 and has been the Company's President since April 1981. Mr. Manwell has served as Secretary of the Company since its incorporation and as a director of the Company since April 1981. Since March 1982, Mr. Manwell has been a partner in the law firm of Manwell & Milton, general counsel to the Company. Mr. Delaplane has served as Vice President -- Sales of the Company since May 1987. Mr. Johnston has served as Vice President -- Marketing of the Company since March 1996. From September 1995 to March 1996, he served as the Company's Vice President -- New Business. From May 1988 to August 1995, he served as the Company's Director of Marketing. Mr. Kahn has served as Vice President -- Finance and Administration and Chief Financial Officer since March 1998. From August 1996 until October 1997, he served as Senior Vice President, Finance and Development for the PepsiCo Restaurant Services division of PepsiCo, Inc., which included Taco Bell, Pizza Hut and KFC restaurants. From January 1995 until July 1996, Mr. Kahn was Senior Vice President and Chief Financial Officer of Pizza Hut Inc. and had responsibility for finance, strategic planning, information technology, real estate, construction and facility management, purchasing and refranchising. From March 1993 until January 1995, he served as Vice President and Chief Financial Officer of Pizza Hut International, a restaurant division with 4,000 restaurants in 80 countries and 18 regional offices. Prior to March 1993, Mr. Kahn held the position of Vice President, Corporate Strategic Planning with PepsiCo, Inc. Mr. Oldenburg has served as Vice President -- Operations of the Company since September 1986. 6 8 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The information set forth in Note 15 under the caption "Price Range (NASDAQ)" which appears on page 28 of the Company's 1997 Annual Report is incorporated herein by reference. The bid and asked quotations for the Company's Common Stock are as reported by NASDAQ. On March 19, 1998, the number of holders of record of the Company's common stock was 5,199. On November 18, 1997, the Company issued shares of common stock to holders of record on October 30, 1997 to effect a two-for-one common stock split. All share information appearing in this report has been restated to reflect this stock split on a retroactive basis. The Company paid a regular quarterly dividend of $.03 per share of common stock for each quarter of 1997. On March 3, 1998, the Board of Directors, subject to compliance with law, contractual restrictions and future review of the condition of the Company, declared its intention to issue regular quarterly dividends of $.03 per share of common stock for each quarter of 1998. Also on March 3, 1998, the Board of Directors declared a dividend of $.03 per share of common stock for the first quarter of 1998 for stockholders of record on March 27, 1998. ITEM 6. SELECTED FINANCIAL DATA The information set forth under the caption "Five Year Summary of Significant Financial Data" which appears on page 30 of the Company's 1997 Annual Report to Stockholders is incorporated herein by reference. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Certain statements contained in this report are forward-looking statements that are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are subject to uncertainties that could cause actual results to differ materially from those anticipated in the forward-looking statements. Factors that might cause such a difference include, but are not limited to, the following: consumer purchase responsiveness to the Company's new products and increased marketing and promotion expenditures, competitors' marketing and promotion responses, market conditions affecting the price of the Company's products, commodity costs and efficiencies achieved in manufacturing and distribution operations. The information set forth under the caption "Management's Discussion and Analysis" which appears on pages 31-34 of the Company's 1997 Annual Report to Stockholders is incorporated herein by reference. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The consolidated financial statements, together with the report thereon of Price Waterhouse LLP dated February 19, 1998 appearing on pages 16-29 of the Company's 1997 Annual Report to Stockholders, are incorporated herein by reference. ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Not applicable. 7 9 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The information set forth under the captions "Board of Directors -- Nominees for Director -- Continuing Directors," "Matters Submitted to the Vote of Stockholders -- Election of Directors" and "Section 16(a) Beneficial Ownership Reporting Compliance" in the Company's Proxy Statement for the 1998 Annual Meeting of Stockholders to be filed with the Commission on or before April 26, 1998, and the information contained in Part I of this Annual Report on Form 10-K under the caption "Executive Officers of the Registrant," is incorporated herein by reference. ITEM 11. EXECUTIVE COMPENSATION The information set forth under the caption "Executive Compensation" in the Company's Proxy Statement for the 1998 Annual Meeting of Stockholders to be filed with the Commission on or before April 26, 1998 is incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information set forth under the caption "Security Ownership of Certain Beneficial Owners and Management" in the Company's Proxy Statement for the 1998 Annual Meeting of Stockholders to be filed with the Commission on or before April 26, 1998 is incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information set forth under the captions "Compensation Committee Interlocks and Insider Participation" and "Other Relationships" in the Company's Proxy Statement for the 1998 Annual Meeting of Stockholders to be filed with the Commission on or before April 26, 1998 is incorporated herein by reference. 8 10 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES: The following documents are filed as part of this report:
PAGE(S) IN ANNUAL REPORT* -------------- 1. Financial Statements: Consolidated Statement of Income for the three years ended December 27, 1997......................................... 16 Consolidated Balance Sheet at December 27, 1997 and December 28, 1996.................................................. 17 Consolidated Statement of Changes in Stockholders' Equity for the three years ended December 27, 1997............... 18 Consolidated Statement of Cash Flows for the three years ended December 27, 1997................................... 19 Notes to Consolidated Financial Statements.................. 20-28 Report of Independent Accountants........................... 29
PAGE(S) ------- 2. Financial Statement Schedules: Report of Independent Accountants on Financial Statement Schedule for the three years ended December 27, 1997........ 17 II. Valuation and Qualifying Accounts..................... 18 M-K-D Distributors, Inc. and Subsidiary Consolidated Financial Statements: Report of Independent Accountants......................... 19 Consolidated Balance Sheet at December 30, 1995........... 20 Consolidated Statement of Income and Retained Earnings for the fiscal year ended December 30, 1995................. 21 Consolidated Statement of Cash Flows for the fiscal year ended December 30, 1995................................. 22 Notes to Consolidated Financial Statements................ 23-27
- --------------- * Incorporated by reference to the indicated pages of the Company's 1997 Annual Report to Stockholders. All other schedules are omitted because they are not applicable or the required information is shown in the financial statements or notes thereto. Financial statements of any other 50% or less owned company have been omitted because the Registrant's proportionate share of income from continuing operations before income taxes and cumulative effect of change in accounting principle, and total assets is less than 20% of the respective consolidated amounts, and the investment in and advances to any such company is less than 20% of consolidated total assets. 3. List of Management Compensation Agreements (i) Dreyer's Grand Ice Cream, Inc. Incentive Stock Option Plan (1982) referenced in Exhibit 10.3 herein. (ii) Indemnification Agreements by and between Dreyer's Grand Ice Cream, Inc. and each of its directors, executive officers and certain other officers referenced in Exhibit 10.10 herein. (iii) Dreyer's Grand Ice Cream, Inc. Stock Option Plan (1992) referenced in Exhibit 10.16 herein. (iv) Dreyer's Grand Ice Cream, Inc. Incentive Bonus Plan referenced in Exhibit 10.19 herein. (v) Dreyer's Grand Ice Cream, Inc. Stock Option Plan (1993) referenced in Exhibit 10.20 herein. 9 11 (vi) Dreyer's Grand Ice Cream, Inc. Income Swap Plan referenced in Exhibit 10.21 herein. (b) REPORTS ON FORM 8-K Not applicable. (c) EXHIBITS
EXHIBIT NUMBER DESCRIPTION - ------- ----------- 2.1 Securities Purchase Agreement dated June 24, 1993 by and among Dreyer's Grand Ice Cream, Inc., Trustees of General Electric Pension Trust, GE Investment Private Placement Partners, I and General Electric Capital Corporation (Exhibit 2.1(11)). 2.2 Amendment to Securities Purchase Agreement dated May 6, 1994 by and among Dreyer's Grand Ice Cream, Inc., Trustees of General Electric Pension Trust, GE Investment Private Placement Partners, I and General Electric Capital Corporation, amending Exhibit 2.1 (Exhibit 2.1(14)). 2.3 Stock and Warrant Purchase Agreement dated as of May 6, 1994 by and between Dreyer's Grand Ice Cream, Inc. and Nestle Holdings, Inc. (Exhibit 2.1(15)). 2.4 First Amendment to Stock and Warrant Purchase Agreement dated as of June 14, 1994 by and between Dreyer's Grand Ice Cream, Inc. and Nestle Holdings, Inc., amending Exhibit 2.3 (Exhibit 2.1(16)). 2.5 Second Amendment to Securities Purchase Agreement dated July 28, 1995 and effective as of June 1, 1995 by and among Dreyer's Grand Ice Cream, Inc., Trustees of General Electric Pension Trust, GE Investment Private Placement Partners, I and General Electric Capital Corporation, amending Exhibit 2.1 (Exhibit 10.2(18)). 2.6 Third Amendment to Securities Purchase Agreement dated October 30, 1995 and effective as of September 30, 1995 by and among Dreyer's Grand Ice Cream, Inc., Trustees of General Electric Pension Trust, GE Investment Private Placement Partners, I and General Electric Capital Corporation, amending Exhibit 2.1 (Exhibit 10.1(19)). 2.7 Amended and Restated Fourth Amendment to Securities Purchase Agreement dated March 12, 1996 and effective as of October 1, 1995 by and among Dreyer's Grand Ice Cream, Inc., Trustees of General Electric Pension Trust, GE Investment Private Placement Partners, I and General Electric Capital Corporation, amending Exhibit 2.1 (Exhibit 2.8(20)). 3.1 Certificate of Incorporation of Dreyer's Grand Ice Cream, Inc., as amended, including the Certificate of Designation of Series A Convertible Preferred Stock, as amended, setting forth the Powers, Preferences, Rights, Qualifications, Limitations and Restrictions of such series of Preferred Stock and the Certificate of Designation of Series B Convertible Preferred Stock, as amended, setting forth the Powers, Preferences, Rights, Qualifications, Limitations and Restrictions of such series of Preferred Stock (Exhibit 3.1(16)). 3.2 Certificate of Designation, Preferences and Rights of Series A Participating Preference Stock (Exhibit 3.2(17)). 3.3 By-laws of Dreyer's Grand Ice Cream, Inc., as last amended May 2, 1994 (Exhibit 3.2(16)). 4.1 Amended and Restated Rights Agreement dated March 4, 1991 between Dreyer's Grand Ice Cream, Inc. and Bank of America, NT & SA (Exhibit 10.1(6)). 4.2 Registration Rights Agreement dated as of June 30, 1993 among Dreyer's Grand Ice Cream, Inc., Trustees of General Electric Pension Trust, and GE Investment Private Placement Partners, I and General Electric Capital Corporation (Exhibit 4.1(12)).
10 12
EXHIBIT NUMBER DESCRIPTION - ------- ----------- 4.3 Amendment to Registration Rights Agreement dated May 6, 1994 by and among Dreyer's Grand Ice Cream, Inc., Trustees of General Electric Pension Trust, GE Investment Private Placement Partners, I and General Electric Capital Corporation, amending Exhibit 4.2 (Exhibit 4.1(14)). 4.4 First Amendment to Amended and Restated Rights Agreement dated as of June 14, 1994 between Dreyer's Grand Ice Cream, Inc. and First Interstate Bank of California (as successor Rights Agent to Bank of America NT & SA), amending Exhibit 4.1 (Exhibit 4.1(16)). 4.5 Registration Rights Agreement dated as of June 14, 1994 between Dreyer's Grand Ice Cream, Inc. and Nestle Holdings, Inc. (Exhibit 4.2(16)). 4.6 Warrant Agreement dated as of June 14, 1994 between Dreyer's Grand Ice Cream, Inc. and Nestle Holdings, Inc. (Exhibit 4.3(16)). 4.7 Second Amendment to Amended and Restated Rights Agreement dated March 17, 1997 between Dreyer's Grand Ice Cream, Inc. and ChaseMellon Shareholder Services, LLC, as Rights Agent, amending Exhibit 4.1 (Exhibit 10.1 (24)). 4.8 Third Amendment to Amended and Restated Rights Agreement dated May 15, 1997 between Dreyer's Grand Ice Cream, Inc. and ChaseMellon Shareholder Services, LLC, as Rights Agent, amending Exhibit 4.1 (Exhibit 10.1 (25)). 10.1 Agreement dated September 18, 1978 between Dreyer's Grand Ice Cream, Inc. and Kraft, Inc. (Exhibit 10.8(1)). 10.2 Agreement and Lease dated as of January 1, 1982 and Amendment to Agreement and Lease dated as of January 27, 1982 between Jack and Tillie Marantz and Dreyer's Grand Ice Cream, Inc., as amended (Exhibit 10.2(17)). 10.3 Dreyer's Grand Ice Cream, Inc. Incentive Stock Option Plan (1982), as amended. (Exhibit 10.6(13)). 10.4 Loan Agreement between Edy's and City of Fort Wayne, Indiana dated September 1, 1985 and related Letter of Credit, Letter of Credit Agreement, Mortgage, Security Agreement, Pledge and Security Agreement and General Continuing Guaranty of Dreyer's Grand Ice Cream, Inc. (Exhibit 10.33(2)). 10.5 Distribution Agreement between Dreyer's Grand Ice Cream, Inc. and Ben & Jerry's Homemade, Inc. dated January 6, 1987 (Exhibit 10.1(3)). 10.6 Amendment and Waiver dated July 17, 1987 between Dreyer's Grand Ice Cream, Inc. and Security Pacific National Bank, amending the General Continuing Guaranty referenced in Exhibit 10.4 (Exhibit 10.44(7)). 10.7 Amendment and Waiver dated December 24, 1987 between Dreyer's Grand Ice Cream, Inc. and Security Pacific National Bank, amending the General Continuing Guaranty referenced in Exhibit 10.4 (Exhibit 10.45(7)). 10.8 Agreement for Amendments to Distribution Agreement dated as of January 20, 1989 among Dreyer's Grand Ice Cream, Inc., Edy's Grand Ice Cream, Edy's of New York, Inc., and Ben & Jerry's Homemade, Inc., amending Exhibit 10.5 (Exhibit 10.46 (4)). 10.9 Amendment to the Distribution Agreement dated as of April 11, 1989 by and among Dreyer's Grand Ice Cream, Inc., Edy's Grand Ice Cream, Edy's of New York, Inc., and Ben & Jerry's Homemade, Inc., amending Exhibit 10.5 (Exhibit 10.46(5)). 10.10 Form of Indemnification Agreement between Dreyer's Grand Ice Cream, Inc. and each officer and director of Dreyer's Grand Ice Cream, Inc. (Exhibit 10.47(4)). 10.11 Assignment of Lease dated as of March 31, 1989 among Dreyer's Grand Ice Cream, Inc., Smithway Associates, Inc. and Wilsey Foods, Inc. (Exhibit 10.52(5)).
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EXHIBIT NUMBER DESCRIPTION - ------- ----------- 10.12 Amendment of Lease dated as of March 31, 1989 between Dreyer's Grand Ice Cream, Inc. and Smithway Associates, Inc., as amended by letter dated April 17, 1989 between Dreyer's Grand Ice Cream, Inc. and Wilsey Foods, Inc., amending Exhibit 10.11 (Exhibit 10.53(5)). 10.13 Third Amendment to General Continuing Guaranty and Waiver dated January 29, 1991 between Dreyer's Grand Ice Cream, Inc. and Security PacificNational Bank, amending the General Continuing Guaranty referenced in Exhibit 10.4 (Exhibit 10.46(7)). 10.14 $25,000,000 9.3% Senior Notes: Form of Note Agreement dated as of March 15, 1991, and executed on April 12, 1991 between Dreyer's Grand Ice Cream, Inc. and each of Massachusetts Mutual Life Insurance Company, Massachusetts Mutual Life Pension Insurance Company, Connecticut Mutual Life Insurance Company, the Equitable Life Assurance Society of the United States, and Transamerica Occidental Life Insurance Company (Exhibit 19.1(8)). 10.15 Second Amendment to Distribution Agreement dated as of August 31, 1992 between Dreyer's Grand Ice Cream, Inc. and Ben & Jerry's Homemade, Inc., amending Exhibit 10.5 (Exhibit 19.6(9)). 10.16 Dreyer's Grand Ice Cream, Inc., Stock Option Plan (1992) (Exhibit 10.35(13)). 10.17 Agreement of Amendment and Waiver, dated as of September 30, 1992, between Dreyer's Grand Ice Cream, Inc. and each of Massachusetts Mutual Life Insurance Company, MML Pension Insurance Company, the Connecticut Mutual Life Insurance Company, the Equitable Life Assurance Society of the United States, and Transamerica Occidental Life Insurance Company (together, the "Lenders") regarding the Note Agreements dated as of March 15, 1991 between Dreyer's Grand Ice Cream, Inc. and each of the Lenders, which Note Agreements are referenced in Exhibit 10.14 (Exhibit 19.5(9)). 10.18 Second Amendment to Note Agreements dated as of September 30, 1992, between Dreyer's Grand Ice Cream, Inc. and each of Massachusetts Mutual Life Insurance Company, MML Pension Insurance Company, the Connecticut Mutual Life Insurance Company, the Equitable Life Assurance Society of the United States, and Transamerica Occidental Life Insurance Company (together, the "Lenders") regarding the Note Agreements dated as of March 15, 1991 between Dreyer's Grand Ice Cream, Inc. and each of the Lenders, which Note Agreements are referenced in Exhibit 10.14 (Exhibit 10.58(10)). 10.19 Description of Dreyer's Grand Ice Cream, Inc. Incentive Bonus Plan (Exhibit 10.57(10)). 10.20 Dreyer's Grand Ice Cream, Inc. Stock Option Plan (1993), as amended May 1, 1996. 10.21 Dreyer's Grand Ice Cream, Inc. Income Swap Plan (Exhibit 10.38(13)). 10.22 Amendment to Distribution Agreement dated April 18, 1994, and Letter Agreement modifying such Amendment to Distribution Agreement dated April 18, 1994 between Dreyer's Grand Ice Cream, Inc. and Ben & Jerry's Homemade, Inc., amending Exhibit 10.5 (Exhibit 10.3(14)). 10.23 Amendment to Distribution Agreement dated December 12, 1994 between Dreyer's Grand Ice Cream, Inc. and Ben & Jerry's Homemade, Inc., amending Exhibit 10.5 (Exhibit 10.27(17)). 10.24 Third Amendment to Note Agreement dated as of June 5, 1995 between Dreyer's Grand Ice Cream, Inc. and each of Massachusetts Mutual Life Insurance Company, MML Pension Insurance Company, the Connecticut Mutual Life Insurance Company, the Equitable Life Assurance Society of the United States, and Transamerica Occidental Life Insurance Company (together, the "Lenders"), regarding the Note Agreements dated as of March 15, 1991 between Dreyer's Grand Ice Cream, Inc. and each of the Lenders, which Note Agreements are referenced in Exhibit 10.14 (Exhibit 10.3(18)). 10.25 Letter Agreement dated August 4, 1995 between Dreyer's Grand Ice Cream, Inc. and Smithway Associates, Inc., amending Exhibits 10.2 and 10.11 (Exhibit 10.29(20)).
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EXHIBIT NUMBER DESCRIPTION - ------- ----------- 10.26 Credit Agreement dated as of December 22, 1995 among Dreyer's Grand Ice Cream, Inc., Bank of America NT & SA (as a Bank and as Agent), ABN-AMRO Bank N.V. (as a Bank and as Co-Agent), Credit Suisse and The Bank of California (Exhibit 10.30(20)). 10.27 Participation Agreement dated March 29, 1996 among Dreyer's Grand Ice Cream, Inc., Edy's Grand Ice Cream, BA Leasing & Capital Corporation (as Agent and as a Participant), ABN- AMRO Bank, NV and Credit Suisse (Exhibit 10.2(21)). 10.28 First Amendment to Credit Agreement dated April 15, 1996 among Dreyer's Grand Ice Cream, Inc., Bank of America, NT & SA (as Agent and as a Bank), ABN-AMRO Bank, NV (as Co-Agent and as a Bank), Credit Suisse and Union Bank of California, NA, amending Exhibit 10.26 (Exhibit 10.1(21)). 10.29 April 1996 Amendment to Commerce Lease dated April 23, 1996 between Dreyer's Grand Ice Cream, Inc. and Smithway Associates, Inc., amending Exhibits 10.2 and 10.11 (Exhibit 10.29(23)). 10.30 Letter Agreement dated April 23, 1996 between Dreyer's Grand Ice Cream, Inc. and Smithway Associates, Inc., amending Exhibits 10.2 and 10.11 (Exhibit 10.30(23)). 10.31 $15,000,000 7.86% Series A Senior Notes Due 2002, $15,000,000 8.06% Series B Senior Notes Due 2006 and $20,000,000 8.34% Series C Senior Notes Due 2008: Form of Note Agreement dated as of June 6, 1996 between Dreyer's Grand Ice Cream, Inc. and each of The Prudential Insurance Company of America, Pruco Life Insurance Company, and Transamerica Life Insurance and Annuity Company (Exhibit 10.1(22)). 10.32 Fourth Amendment to Note Agreement dated as of June 10, 1997 between Dreyer's Grand Ice Cream, Inc. and each of Massachusetts Mutual Life Insurance Company, MML Pension Insurance Company, the Connecticut Mutual Life Insurance Company, the Equitable Life Assurance Society of the United States, and Transamerica Occidental Life Insurance Company, (together, the "Lenders"), regarding the Note Agreements dated as of March 15, 1991 between Dreyer's Grand Ice Cream, Inc. and each of the Lenders, which Note Agreements are referenced in Exhibit 10.14 (Exhibit 10.1(26)). 10.33 Second Amendment to Credit Agreement dated as of December 26, 1997 among Dreyer's Grand Ice Cream, Inc., Bank of America, NT&SA (as Agent and as a bank), ABN-AMRO Bank, NV (as Co-Agent and as a bank), Credit Suisse First Boston and Union Bank of California, NA, amending Exhibit 10.26. 13 Those portions of the Dreyer's Grand Ice Cream, Inc. 1997 Annual Report to Stockholders which are incorporated by reference into this Annual Report on Form 10-K. 21 Subsidiaries of Registrant. 23 Consent of Independent Accountants. 27 Financial Data Schedule.
- --------------- (1) Incorporated by reference to the designated exhibit to Dreyer's Grand Ice Cream, Inc.'s Registration Statement on Form S-1 and Amendment No. 1 thereto, filed under Commission File No. 2-71841 on April 16, 1981 and June 11, 1981, respectively. (2) Incorporated by reference to the designated exhibit to Dreyer's Grand Ice Cream, Inc.'s Annual Report on Form 10-K and Amendment No. 1 thereto for the fiscal year ended December 28, 1985 filed under Commission File No. 0-10259 on March 28, 1986 and April 14, 1986, respectively. (3) Incorporated by reference to the designated exhibit to Dreyer's Grand Ice Cream, Inc.'s Current Report on Form 8-K filed under Commission File No. 0-10259 on January 23, 1987. 13 15 (4) Incorporated by reference to the designated exhibit to Dreyer's Grand Ice Cream, Inc.'s Annual Report on Form 10-K for the fiscal year ended December 31, 1988 filed under Commission File No. 0-10259 on March 31, 1989. (5) Incorporated by reference to the designated exhibit to Dreyer's Grand Ice Cream, Inc.'s Annual Report on Form 10-K for the fiscal year ended December 30, 1989 filed under Commission File No. 0-10259 on March 30, 1990. (6) Incorporated by reference to the designated exhibit to Dreyer's Grand Ice Cream, Inc.'s Current Report on Form 8-K filed under Commission File No. 0-10259 on March 20, 1991. (7) Incorporated by reference to the designated exhibit to Dreyer's Grand Ice Cream, Inc.'s Annual Report on Form 10-K for the fiscal year ended December 29, 1990 filed under Commission File No. 0-10259 on March 29, 1991. (8) Incorporated by reference to the designated exhibit to Dreyer's Grand Ice Cream, Inc.'s Quarterly Report on Form 10-Q for the quarterly period ended on June 29, 1991 filed under Commission File No. 0-10259 on August 13, 1991. (9) Incorporated by reference to the designated exhibit to Dreyer's Grand Ice Cream, Inc.'s Quarterly Report on Form 10-Q for the quarterly period ended on September 26, 1992 filed under Commission File No. 0-10259 on November 10, 1992. (10) Incorporated by reference to the designated exhibit to Dreyer's Grand Ice Cream, Inc.'s Annual Report on Form 10-K for the fiscal year ended December 26, 1992 filed under Commission File No. 0-10259 on March 26, 1993. (11) Incorporated by reference to the designated exhibit to Dreyer's Grand Ice Cream, Inc.'s Current Report on Form 8-K filed under Commission File No. 0-10259 on June 25, 1993. (12) Incorporated by reference to the designated exhibit to Dreyer's Grand Ice Cream, Inc.'s Quarterly Report on Form 10-Q for the quarterly period ended on June 26, 1993 filed under Commission File No. 0-10259 on August 10, 1993. (13) Incorporated by reference to the designated exhibit to Dreyer's Grand Ice Cream, Inc.'s Annual Report on Form 10-K for the fiscal year ended December 25, 1993 filed under Commission File No. 0-14190 on March 25, 1994. (14) Incorporated by reference to the designated exhibit to Dreyer's Grand Ice Cream, Inc.'s Quarterly Report on Form 10-Q for the quarterly period ended March 26, 1994 filed under Commission File No. 0-14190 on May 10, 1994. (15) Incorporated by reference to the designated exhibit to Dreyer's Grand Ice Cream, Inc.'s Current Report on Form 8-K filed under Commission File No. 0-14190 on May 9, 1994. (16) Incorporated by reference to the designated exhibit to Dreyer's Grand Ice Cream, Inc.'s Quarterly Report on Form 10-Q for the quarterly period ended June 25, 1994 filed under Commission File No. 0-14190 on August 9, 1994. (17) Incorporated by reference to the designated exhibit to Dreyer's Grand Ice Cream, Inc.'s Annual Report on Form 10-K for the fiscal year ended December 31, 1994 filed under Commission File No. 0-14190 on March 30, 1995. (18) Incorporated by reference to the designated exhibit to Dreyer's Grand Ice Cream, Inc.'s Quarterly Report on Form 10-Q for the quarterly period ended July 1, 1995 filed under Commission File No. 0-14190 on August 15, 1995. (19) Incorporated by reference to the designated exhibit to Dreyer's Grand Ice Cream, Inc.'s Quarterly Report on Form 10-Q for the quarterly period ended September 30, 1995 filed under Commission File No. 0-14190 on November 14, 1995. (20) Incorporated by reference to the designated exhibit to Dreyer's Grand Ice Cream, Inc.'s Annual Report on Form 10-K for the fiscal year ended December 30, 1995 filed under Commission File No. 0-14190 on March 29, 1996. 14 16 (21) Incorporated by reference to the designated exhibit to Dreyer's Grand Ice Cream, Inc.'s Quarterly Report on Form 10-Q for the quarterly period ended March 30, 1996 filed under Commission File No. 0-14190 on May 14, 1996. (22) Incorporated by reference to the designated exhibit to Dreyer's Grand Ice Cream, Inc.'s Quarterly Report on Form 10-Q for the quarterly period ended June 29, 1996 filed under Commission File No. 0-14190 on August 13, 1996. (23) Incorporated by reference to the designated exhibit to Dreyer's Grand Ice Cream, Inc.'s Annual Report on Form 10-K for the fiscal year ended December 28, 1996 filed under Commission File No. 0-14190 on March 28, 1997. (24) Incorporated by reference to the designated exhibit to Dreyer's Grand Ice Cream, Inc.'s Current Report on Form 8-K filed under Commission File No. 0-14190 on March 21, 1997. (25) Incorporated by reference to the designated exhibit to Dreyer's Grand Ice Cream, Inc.'s Current Report on Form 8-K filed under Commission File No. 0-14190 on May 19, 1997. (26) Incorporated by reference to the designated exhibit to Dreyer's Grand Ice Cream, Inc.'s Quarterly Report on Form 10-Q for the quarterly period ended September 27, 1997 filed under Commission File No. 0-14190 on November 11, 1997. 15 17 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) 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. By: /s/ T. GARY ROGERS ------------------------------------ T. Gary Rogers Chairman of the Board and Chief Executive Officer and Director (Principal Executive Officer) Date: March 27, 1998 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE --------- ----- ---- /s/ T. GARY ROGERS Chairman of the Board and March 27, 1998 - -------------------------------------------------------- Chief Executive Officer and (T. Gary Rogers) Director (Principal Executive Officer) /s/ WILLIAM F. CRONK, III President and Director March 27, 1998 - -------------------------------------------------------- (William F. Cronk, III) /s/ EDMUND R. MANWELL Secretary and Director March 27, 1998 - -------------------------------------------------------- (Edmund R. Manwell) /s/ TIMOTHY F. KAHN Vice President -- Finance March 27, 1998 - -------------------------------------------------------- and Administration and Chief (Timothy F. Kahn) Financial Officer (Principal Financial Officer) /s/ JEFFREY P. PORTER Corporate Controller March 27, 1998 - -------------------------------------------------------- (Principal Accounting (Jeffrey P. Porter) Officer) /s/ JAN L. BOOTH Director March 27, 1998 - -------------------------------------------------------- (Jan L. Booth) /s/ ROBERT A. HELMAN Director March 27, 1998 - -------------------------------------------------------- (Robert A. Helman) /s/ M. STEVEN LANGMAN Director March 27, 1998 - -------------------------------------------------------- (M. Steven Langman) /s/ JOHN W. LARSON Director March 27, 1998 - -------------------------------------------------------- (John W. Larson) /s/ JACK O. PEIFFER Director March 27, 1998 - -------------------------------------------------------- (Jack O. Peiffer) /s/ TIMOTHY P. SMUCKER Director March 27, 1998 - -------------------------------------------------------- (Timothy P. Smucker)
Supplemental Information to be Furnished With Reports Filed Pursuant to Section 15(d) of the Act by Registrants Which Have Not Registered Securities Pursuant to Section 12 of the Act: Not applicable. 16 18 REPORT OF INDEPENDENT ACCOUNTANTS ON FINANCIAL STATEMENT SCHEDULE To the Board of Directors of Dreyer's Grand Ice Cream, Inc. Our audits of the consolidated financial statements referred to in our report dated February 19, 1998 appearing in the 1997 Annual Report to Stockholders of Dreyer's Grand Ice Cream, Inc. (which report and consolidated financial statements are incorporated by reference in this Annual Report on Form 10-K) also included an audit of the Financial Statement Schedule listed in Item 14(a)2 of this Form 10-K. In our opinion, this Financial Statement Schedule presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. PRICE WATERHOUSE LLP San Francisco, California February 19, 1998 17 19 SCHEDULE II DREYER'S GRAND ICE CREAM, INC. VALUATION AND QUALIFYING ACCOUNTS (IN THOUSANDS)
ADDITIONS BALANCE AT CHARGED TO BALANCE AT BEGINNING COSTS AND END CLASSIFICATION OF PERIOD EXPENSES DEDUCTIONS OF PERIOD -------------- ---------- ---------- ---------- ---------- Fiscal year ended December 30, 1995: Allowance for doubtful accounts............. $ 635 $1,234 $1,171(1) $ 698 Amortization of goodwill and distribution rights................................... 10,443 2,971 -- 13,414 Amortization of other assets................ 6,222 1,184 3,209(2) 4,197 ------- ------ ------ ------- $17,300 $5,389 $4,380 $18,309 ======= ====== ====== ======= Fiscal year ended December 28, 1996: Allowance for doubtful accounts............. $ 698 $ 891 $ 834(1) $ 755 Amortization of goodwill and distribution rights................................... 13,414 3,202 -- 16,616 Amortization of other assets................ 4,197 992 191(2) 4,998 ------- ------ ------ ------- $18,309 $5,085 $1,025 $22,369 ======= ====== ====== ======= Fiscal year ended December 27, 1997: Allowance for doubtful accounts............. $ 755 $1,463 $1,508(1) $ 710 Amortization of goodwill and distribution rights................................... 16,616 3,201 -- 19,817 Amortization of other assets................ 4,998 923 -- 5,921 ------- ------ ------ ------- $22,369 $5,587 $1,508 $26,448 ======= ====== ====== =======
- --------------- (1) Write-off of receivables considered uncollectible. (2) Removal of fully-amortized assets. 18 20 REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Stockholders of M-K-D Distributors, Inc. In our opinion, the accompanying consolidated balance sheet and the related consolidated statements of income and retained earnings and of cash flows present fairly, in all material respects, the financial position of M-K-D Distributors, Inc. and its subsidiary at December 30, 1995, and the results of their operations and their cash flows for the fiscal year 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 audit. We conducted our audit 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 audit provides a reasonable basis for the opinion expressed above. PRICE WATERHOUSE LLP San Francisco, California April 9, 1996 19 21 M-K-D DISTRIBUTORS, INC. AND SUBSIDIARY CONSOLIDATED BALANCE SHEET ASSETS
DECEMBER 30, 1995 ------------ Current Assets: Cash...................................................... $ 46,871 Trade accounts receivable, net of allowance for doubtful accounts of $71,303.................................... 4,784,633 Inventories............................................... 2,361,881 Prepaid expenses and other................................ 562,266 ----------- Total current assets.............................. 7,755,651 Property, plant and equipment, net.......................... 9,256,360 Notes receivable and other.................................. 432,458 ----------- Total assets...................................... $17,444,469 =========== LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities: Accounts payable and accrued liabilities.................. $ 2,804,416 Accrued payroll and employee benefits..................... 709,343 Current portion of long-term debt......................... 446,334 ----------- Total current liabilities......................... 3,960,093 Long-term debt, less current portion........................ 1,563,263 Deferred income taxes....................................... 521,027 ----------- Total liabilities................................. $ 6,044,383 =========== Commitments Stockholders' Equity: Common stock, $1 par value -- 10,000 shares authorized, issued and outstanding................................. 10,000 Capital in excess of par.................................. 40,265 Retained earnings......................................... 11,349,821 ----------- Total stockholders' equity........................ 11,400,086 ----------- Total liabilities and stockholders' equity........ $17,444,469 ===========
See accompanying notes to consolidated financial statements. 20 22 M-K-D DISTRIBUTORS, INC. AND SUBSIDIARY CONSOLIDATED STATEMENT OF INCOME AND RETAINED EARNINGS
FISCAL YEAR ENDED DECEMBER 30, 1995 ----------------- Revenues: Net sales................................................. $74,218,680 Other income.............................................. 334,884 ----------- 74,553,564 ----------- Costs and Expenses: Cost of goods sold........................................ 58,902,661 Selling, general and administrative....................... 12,806,842 Interest.................................................. 119,758 ----------- 71,829,261 ----------- Income before income taxes................................ 2,724,303 Income taxes.............................................. 1,037,090 ----------- Net income................................................ 1,687,213 Retained earnings, beginning of year...................... 9,662,608 ----------- Retained earnings, end of year............................ $11,349,821 ===========
See accompanying notes to consolidated financial statements. 21 23 M-K-D DISTRIBUTORS, INC. AND SUBSIDIARY CONSOLIDATED STATEMENT OF CASH FLOWS
FISCAL YEAR ENDED DECEMBER 30, 1995 ----------------- Cash Flows from Operating Activities: Net income................................................ $1,687,213 Adjustments to reconcile net income to cash provided from operations: Depreciation........................................... 1,191,747 Deferred taxes......................................... 129,330 Changes in assets and liabilities, net of amounts acquired: Trade accounts receivable......................... (156,585) Inventories....................................... 964,040 Prepaid expenses and other........................ (318,147) Notes receivable and other........................ (27,728) Accounts payable and accrued liabilities.......... (1,179,772) Accrued payroll and employee benefits............. 97,010 Income taxes payable.............................. (145,141) ---------- 2,241,967 ---------- Cash Flows from Investing Activities: Acquisition of property, plant and equipment.............. (3,135,357) ---------- Cash Flows from Financing Activities: Proceeds from long-term debt.............................. 2,075,547 Reductions in long-term debt.............................. (1,369,700) ---------- 705,847 ---------- Decrease in cash............................................ (187,543) Cash, beginning of year..................................... 234,414 ---------- Cash, end of year........................................... $ 46,871 ========== Supplemental Cash Flow Information: Cash paid during the year for: Interest............................................... $ 101,749 Income taxes (net of refunds).......................... 1,038,500
See accompanying notes to consolidated financial statements. 22 24 M-K-D DISTRIBUTORS, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis of Presentation The accompanying consolidated financial statements of M-K-D Distributors, Inc. and subsidiary (the Company) include the accounts of M-K-D Distributors, Inc. (MKD) and its wholly-owned subsidiary, Snelgrove Ice Cream, Inc. (Snelgrove). All significant intercompany balances and transactions have been eliminated. The Company reports on a fifty-two or fifty-three week fiscal year, ending on the last Saturday in December. Operations MKD, a Texas corporation, was incorporated on December 14, 1979, and is engaged in the wholesale distribution of Dreyer's Grand Ice Cream, Ben and Jerry's, Nestle and other premium ice cream products, primarily in Washington, Oregon and Alaska. Dreyer's Grand Ice Cream, Inc. (Dreyer's), a Delaware corporation, holds 49.7% of MKD's outstanding common stock (see Note 11, Subsequent Event). In 1991, MKD acquired the assets of Snelgrove Ice Cream, Inc. (formerly known as Snelgrove Distinctive Ice Cream, Inc.), a manufacturer and distributor of premium ice cream products, and commenced manufacturing and distribution operations late in 1991 for Utah and other high altitude markets in the western United States. Sales are primarily to retail grocers. Revenue Recognition Sales revenues are recognized when deliveries of products are made to customers. Inventories Inventories of purchased and manufactured products are stated at the lower of cost (first-in, first-out method) or market. Costs of purchased products manufactured by others and of raw materials include costs of acquisition and transportation in. Manufactured product inventories are costed based on standards which approximate actual costs of materials, labor and production overhead. Property, Plant and Equipment Depreciation and amortization are provided on property, plant and equipment on the straight-line basis over their estimated useful lives as follows: Building and improvements................................... 5 to 35 years Equipment................................................... 3 to 15 years Delivery trucks and other vehicles.......................... 5 to 8 years Furniture and fixtures...................................... 3 to 8 years
Leasehold improvements are amortized over the life remaining in the applicable lease (4 to 10 years). The cost of maintenance and repairs, which neither materially add to the value of property nor appreciably prolong its life, are expensed as incurred. Estimates and Assumptions Management makes estimates and assumptions in preparing financial statements in accordance with generally accepted accounting principles. These estimates and assumptions affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities, and the reported revenues and expenses. Actual results could differ from those estimates. 23 25 M-K-D DISTRIBUTORS, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Federal and State Income Taxes Effective for the fiscal year ended December 25, 1993, the Company adopted Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes" (SFAS 109), on a prospective basis. SFAS 109 required the Company to change its method of accounting for income taxes from the deferred method to the liability method. Under the liability 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. The adoption of SFAS 109 did not have a material effect on the Company's Consolidated Financial Statements. 2. INVENTORIES Components of inventories at December 30, 1995 were as follows: Purchased products.......................................... $1,639,437 Raw materials............................................... 365,745 Finished goods.............................................. 356,699 ---------- $2,361,881 ==========
3. PROPERTY, PLANT AND EQUIPMENT The cost and accumulated depreciation of property, plant and equipment at December 30, 1995 were as follows: Building and improvements................................... $2,722,371 Machinery and equipment..................................... 9,869,316 Office furniture and fixtures............................... 1,498,363 ---------- 14,090,050 Accumulated depreciation.................................... (5,539,341) ---------- 8,550,709 Land........................................................ 705,651 ---------- $9,256,360 ==========
Depreciation expense for property, plant and equipment was $1,191,747 in 1995. 4. LONG-TERM NOTES RECEIVABLE At December 30, 1995, long-term notes receivable of $144,779 are due from a customer with payments due every year beginning in 1996 in the amount of $20,000 plus accrued interest at the prime rate plus 2%. The notes are secured by delivery and freezer equipment and are due in December 2000. 24 26 M-K-D DISTRIBUTORS, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 5. LONG-TERM DEBT Long-term debt at December 30, 1995 consisted of the following: Note payable to bank, payable in monthly installments of $16,687 from August 1995 to June 2000, plus interest at 7.81% per annum, secured by equipment..................... $ 916,665 Note payable to bank, payable in monthly installments of $17,335 from August 1995 to July 2000, plus interest at 7.8% per annum, secured by equipment...................... 954,475 Capital lease obligation payable in monthly minimum payments of $1,026 from August 1995 to July 1998, including interest at 4.9%, secured by computer equipment........... 30,457 Note payable, payable in annual installments of $27,000 from June 1995 to June 1999, plus interest at 8.00% per annum, secured by property and building.......................... 108,000 ---------- 2,009,597 Less current portion of long-term debt...................... 446,334 ---------- $1,563,263 ==========
Principal payments due on long-term debt for each of the years subsequent to December 30, 1995 are as follows: 1996........................................................ $ 446,334 1997........................................................ 446,889 1998........................................................ 443,026 1999........................................................ 435,264 2000........................................................ 238,084 ---------- $2,009,597 ==========
At December 30, 1995, the Company had an unused secured revolving line of credit of $2,000,000 available for working capital needs. The interest rate on borrowings is equal to the bank's floating commercial loan reference rate or LIBOR plus 1.5%. 6. PROFIT SHARING PLAN The Company has a 401(k) profit sharing plan and trust covering all employees over 21 years of age with more than one year of service. Participating employees may make elective salary deferrals into the plan up to the maximum qualifying amount permitted by federal income tax law. In addition, employer matching contributions and/or profit sharing contributions are made to the plan at the discretion of the Company's Board of Directors. Matching and profit sharing contributions made by the Company to the plan for fiscal 1995 were $225,440. 25 27 M-K-D DISTRIBUTORS, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 7. INCOME TAXES The provision for income taxes for the fiscal year ended December 30, 1995 consisted of the following:
1995 ---------- Current Federal................................................... $ 825,960 State..................................................... 81,800 ---------- 907,760 Deferred.................................................... 129,330 ---------- $1,037,090 ==========
The deferred tax liability arises principally because of an accumulated depreciation temporary difference. The effective tax rate differs from the federal statutory income tax rate due primarily to state taxes, net of federal benefit. 8. RELATED PARTIES The Company purchases premium ice cream and related products from Dreyer's under a long-term distribution agreement. In addition, the Company sells ice cream products to Dreyer's, which are manufactured at the Snelgrove plant in Utah. Purchases from Dreyer's were $25,174,000 in fiscal 1995. Sales of Snelgrove manufactured products to Dreyer's were $6,021,636 in fiscal 1995. In addition, under the distribution agreement, the Company is reimbursed by Dreyer's for 65% of costs relating to jointly-directed consumer promotion programs. The Company charged Dreyer's $1,874,845 in fiscal 1995, for Dreyer's share of such costs. Amounts due from and due to Dreyer's at December 30, 1995, were as follows: Accounts receivable from Dreyer's........................... $ 505,331 ========== Accounts payable to Dreyer's................................ $1,579,544 ==========
9. MAJOR CUSTOMERS The Company had four retail customers that accounted for approximately 48% of net sales for the fiscal year ended December 30, 1995. 10. COMMITMENTS Leases The Company leases its office and warehouse facilities and certain vehicles and equipment under various leases accounted for as operating leases. Future minimum lease payments under these leases at December 30, 1995 are as follows:
YEAR ENDING DECEMBER, - --------------------- 1996........................................................ $ 322,421 1997........................................................ 329,963 1998........................................................ 314,243 1999........................................................ 172,512 2000........................................................ 172,587 Thereafter.................................................. 694,822 ---------- $2,006,548 ==========
Rent expense for the fiscal year ended December 30, 1995 was $478,788. 26 28 M-K-D DISTRIBUTORS, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 11. SUBSEQUENT EVENT On March 27, 1996, the stockholders, other than Dreyer's, entered into an agreement to exchange their shares of the Company's common stock for 300,000 shares of Dreyer's common stock, distributed to such stockholders on a basis proportionate to their ownership of the Company's common stock. One of the stockholders received an additional 20,000 shares of Dreyer's common stock as a finder's fee related to the transaction. 27 29 EXHIBIT INDEX EXHIBIT NUMBER DESCRIPTION - ------- ----------- 10.33 Second Amendment to Credit Agreement dated as of December 26, 1997 among Dreyer's Grand Ice Cream, Inc., Bank of America, NT&SA (as Agent and as a bank), ABN-AMRO Bank, NV (as Co-Agent and as a bank), Credit Suisse First Boston and Union Bank of California, NA, amending Exhibit 10.26. 13 Those portions of the Dreyer's Grand Ice Cream, Inc. 1997 Annual Report to Stockholders which are incorporated by reference into this Annual Report on Form 10-K. 21 Subsidiaries of Registrant. 23 Consent of Independent Accountants. 27 Financial Data Schedule. EX-10.33 2 2ND AGREEMENT TO CREDIT AGREEMENT DATED 12/26/97 1 EXHIBIT 10.33 SECOND AMENDMENT TO CREDIT AGREEMENT THIS SECOND AMENDMENT TO CREDIT AGREEMENT (this "Amendment"), is entered into as of December 26, 1997 among Dreyer's Grand Ice Cream, Inc., a Delaware corporation (the "Company"), the several financial institutions from time to time party to this Agreement (collectively, the "Banks"; individually, a "Bank"), ABN-AMRO Bank N.V., San Francisco International Branch as Co-Agent, and Bank of America National Trust and Savings Association, as agent for the Banks. RECITALS A. The Company, Banks, and Agent are parties to a Credit Agreement dated as of December 22, 1995, as amended by a First Amendment to Credit Agreement dated as of April 15, 1996 (as so amended, the "Credit Agreement"), pursuant to which the Agent and the Banks have extended certain credit facilities to the Company. B. The Company has requested that the Banks agree to certain amendments of the Credit Agreement. C. The Banks are willing to amend the Credit Agreement subject to the terms and conditions of this Amendment. NOW, THEREFORE, for valuable consideration, the receipt and adequacy of which are hereby acknowledged, the parties hereto hereby agree as follows: 1. Defined Terms. Unless otherwise defined herein, capitalized terms used herein shall have the meanings, if any, assigned to them in the Credit Agreement. 2. Amendments to Credit Agreement. (a) Section 7.15 of the Credit Agreement is hereby amended and restated in its entirety as follows: 7.15 FUNDED DEBT/EBITDA RATIO. (a) THE COMPANY SHALL NOT PERMIT ITS FUNDED DEBT/EBITDA RATIO TO BE GREATER THAN: (1) 5.25 FOR THE PERIOD FROM THE CLOSING DATE THROUGH ITS FOURTH FISCAL QUARTER IN 1995; (2) 4.75 FOR ITS FIRST FISCAL QUARTER IN 1996; (3) 4.50 FOR ITS SECOND FISCAL QUARTER IN 1996; (4) 4.00 FOR ITS THIRD FISCAL QUARTER IN 1996; -1- 2 (5) 3.50 FOR ITS FOURTH FISCAL QUARTER IN 1996; (6) 3.00 FOR THE FIRST THREE FISCAL QUARTERS IN 1997; AND (7) 3.50 FOR ITS FOURTH FISCAL QUARTER IN 1997 AND EACH OF ITS FISCAL QUARTERS THEREAFTER. (b) IN DETERMINING COMPLIANCE WITH THIS SECTION, THE COMPANY'S FUNDED DEBT AT EACH QUARTERLY MEASUREMENT PERIOD SHALL BE REDUCED BY THE AMOUNTS SHOWN IN THE FOLLOWING TABLE TO ACCOMMODATE INCREASES IN THE COMPANY'S SEASONAL DEBT: EACH YEAR AFTER FISCAL QUARTER ENDING IN: 1996 1996 MARCH $10,000,000 $10,000,000 JUNE $45,000,000 $50,000,000 SEPTEMBER $35,000,000 $40,000,000 DECEMBER $0 $0
(b) The portion of Schedule 2 of the Compliance Certificate relating to Section 7.15 is amended in its entirety to provide as follows: 7.15 FUNDED DEBT/EBITDA RATIO. (a) THE COMPANY SHALL NOT PERMIT ITS FUNDED DEBT/EBITDA RATIO TO BE GREATER THAN: (1) 5.25 FOR THE PERIOD FROM THE CLOSING DATE THROUGH ITS FOURTH FISCAL QUARTER IN 1995; (2) 4.75 FOR ITS FIRST FISCAL QUARTER IN 1996; (3) 4.50 FOR ITS SECOND FISCAL QUARTER IN 1996; (4) 4.00 FOR ITS THIRD FISCAL QUARTER IN 1996; (5) 3.50 FOR ITS FOURTH FISCAL QUARTER IN 1996; (6) 3.00 FOR THE FIRST THREE FISCAL QUARTERS IN 1997; AND (7) 3.50 FOR ITS FOURTH FISCAL QUARTER IN 1997 AND EACH OF ITS FISCAL QUARTERS THEREAFTER. -2- 3 (b) IN DETERMINING COMPLIANCE WITH THIS SECTION, THE COMPANY'S FUNDED DEBT AT EACH QUARTERLY MEASUREMENT PERIOD SHALL BE REDUCED BY THE AMOUNTS SHOWN IN THE FOLLOWING TABLE TO ACCOMMODATE INCREASES IN THE COMPANY'S SEASONAL DEBT: EACH YEAR AFTER FISCAL QUARTER ENDING IN: 1996 1996 MARCH $10,000,000 $10,000,000 JUNE $45,000,000 $50,000,000 SEPTEMBER $35,000,000 $40,000,000 DECEMBER $0 $0
1. CAPITALIZED LEASE OBLIGATIONS (FOR EACH QUARTER COMMENCING AFTER MARCH 31, 1997) $ --------------- 2. OTHER FUNDED DEBT --------------- 3. TOTAL FUNDED DEBT (1 + 2) --------------- 4. MINUS AMOUNT AS DETERMINED ACCORDING TO THE TABLE IN Section 7.15(b): =============== 5. FUNDED DEBT FOR PURPOSES OF Section 7.15 (3 MINUS 4) --------------- 6. EBITDA = __________ 7. RATIO OF FUNDED DEBT TO EBITDA = _____ 8. REQUIRED RATIO AS SET FORTH IN Section 7.15(A): NOT GREATER THAN _____
FOR PURPOSES OF DETERMINING THE APPLICABLE MARGIN AND THE COMMITMENT FEE: 1. CAPITALIZED LEASE OBLIGATIONS (NOT APPLICABLE IF ADDITIONAL CAPITAL HAS BEEN RAISED) $ ---------------
-3- 4 2. OTHER FUNDED DEBT --------------- 3. TOTAL FUNDED DEBT (1 + 2) --------------- 4. MINUS AMOUNT AS DETERMINED ACCORDING TO THE TABLE IN Section 7.15(b): =============== 5. FUNDED DEBT FOR PURPOSES OF DETERMINING THE APPLICABLE MARGIN AND THE COMMITMENT FEE (3 MINUS 4) --------------- 6. EBITDA = __________ 7. RATIO OF FUNDED DEBT TO EBITDA TO BE USED IN DETERMINING THE APPLICABLE MARGIN AND THE COMMITMENT FEE: _____
3. Representations and Warranties. The Company hereby represents and warrants to the Agent and the Banks as follows: (a) After giving effect to this Amendment, no Default or Event of Default has occurred and is continuing. (b) The execution, delivery and performance by the Company of this Amendment have been duly authorized by all necessary corporate and other action and do not and will not require any registration with, consent or approval of, notice to or action by, any Person (including any Governmental Authority) in order to be effective and enforceable. The Credit Agreement as amended by this Amendment constitutes the legal, valid and binding obligations of the Company, enforceable against it in accordance with its respective terms, without defense, counterclaim or offset. (c) All representations and warranties of the Company contained in the Credit Agreement are true and correct in all material respects. (d) The Company is entering into this Amendment on the basis of its own investigation and for its own reasons, without reliance upon the Agent and the Banks or any other Person. 4. Effective Date. This Amendment will become effective as of December 26, 1997 (the "Effective Date"), provided that each of the following conditions precedent is satisfied: (a) The Agent has received from the Company and the Majority Banks a duly executed original (or, if elected by the Agent, an executed facsimile copy) of this Amendment. -4- 5 (b) The Agent has received from the Company a copy of a resolution passed by the board of directors of such corporation, certified by the Secretary or an Assistant Secretary of such corporation as being in full force and effect on the date hereof, authorizing the execution, delivery and performance of this Amendment. (c) All representations and warranties contained herein are true and correct as of the Effective Date. 5. Miscellaneous. (a) Except as herein expressly amended, all terms, covenants and provisions of the Credit Agreement are and shall remain in full force and effect and all references therein to such Credit Agreement shall henceforth refer to the Credit Agreement as amended by this Amendment. This Amendment shall be deemed incorporated into, and a part of, the Credit Agreement. (b) This Amendment shall be binding upon and inure to the benefit of the parties hereto and thereto and their respective successors and assigns. No third party beneficiaries are intended in connection with this Amendment. (c) This Amendment shall be governed by and construed in accordance with the law of the State of California. (d) This Amendment may be executed in any number of counterparts, each of which shall be deemed an original, but all such counterparts together shall constitute but one and the same instrument. Each of the parties hereto understands and agrees that this document (and any other document required herein) may be delivered by any party thereto either in the form of an executed original or an executed original sent by facsimile transmission to be followed promptly by mailing of a hard copy original, and that receipt by the Agent of a facsimile transmitted document purportedly bearing the signature of a Bank or the Company shall bind such Bank or the Company, respectively, with the same force and effect as the delivery of a hard copy original. Any failure by the Agent to receive the hard copy executed original of such document shall not diminish the binding effect of receipt of the facsimile transmitted executed original of such document of the party whose hard copy page was not received by the Agent. (e) This Amendment, together with the Credit Agreement, contains the entire and exclusive agreement of the parties hereto with reference to the matters discussed herein and therein. This Amendment supersedes all prior drafts and communications with respect thereto. This Amendment may not be amended except in accordance with the provisions of Section 10.01 of the Credit Agreement. (f) If any term or provision of this Amendment shall be deemed prohibited by or invalid under any applicable law, such provision shall be invalidated without affecting the remaining provisions of this Amendment or the Credit Agreement, respectively. -5- 6 IN WITNESS WHEREOF, the parties hereto have executed and delivered this Amendment as of the date first above written. DREYER'S GRAND ICE CREAM, INC. By: _____________________________________ Name: _____________________________________ Title: _____________________________________ BANK OF AMERICA NATIONAL TRUST AND SAVINGS ASSOCIATION, as Agent By: ___________________________________ Name: ___________________________________ Title: ___________________________________ ABN AMRO BANK N.V., as Co-Agent By: ___________________________________ Name: ___________________________________ Title: ___________________________________ By: ___________________________________ Name: ___________________________________ Title: ___________________________________ BANK OF AMERICA NATIONAL TRUST AND SAVINGS ASSOCIATION, as a Bank By: ___________________________________ Name: ___________________________________ Title: ___________________________________ -6- 7 ABN AMRO BANK N.V., as a Bank By: _____________________________________ Name: _____________________________________ Title: _____________________________________ By: _____________________________________ Name: _____________________________________ Title: _____________________________________ CREDIT SUISSE FIRST BOSTON By: _____________________________________ Name: _____________________________________ Title: _____________________________________ By: _____________________________________ Name: _____________________________________ Title: _____________________________________ UNION BANK OF CALIFORNIA, N.A. By: _____________________________________ Name: _____________________________________ Title: _____________________________________ By: _____________________________________ Name: _____________________________________ Title: _____________________________________ -7- EX-13 3 PORTIONS OF THE 1997 ANNUAL REPORT 1 EXHIBIT 13 DREYER'S GRAND ICE CREAM, INC. 1997 ANNUAL REPORT CONSOLIDATED STATEMENT OF INCOME
YEAR ENDED ------------------------------------------- ($ in thousands, except per share amounts) Dec. 27, 1997 Dec. 28, 1996 Dec. 30, 1995 - ------------------------------------------------------------------------------------------------------ Revenues: Net sales $ 970,097 $ 791,841 $ 678,797 Other income 2,994 4,354 2,255 - ------------------------------------------------------------------------------------------------------ 973,091 796,195 681,052 - ------------------------------------------------------------------------------------------------------ Costs and expenses: Cost of goods sold 764,551 629,285 530,561 Selling, general and administrative 183,390 146,003 143,090 Interest, net of interest capitalized 10,695 9,548 9,912 - ------------------------------------------------------------------------------------------------------ 958,636 784,836 683,563 - ------------------------------------------------------------------------------------------------------ Income (loss) before income taxes and cumulative effect of change in accounting principle 14,455 11,359 (2,511) Income tax provision (benefit) 5,681 4,362 (987) - ------------------------------------------------------------------------------------------------------ Income (loss) before cumulative effect of change in accounting principle 8,774 6,997 (1,524) Cumulative effect of change in accounting principle 746 - ------------------------------------------------------------------------------------------------------ Net income (loss) 8,028 6,997 (1,524) Accretion of preferred stock to redemption value 424 424 168 Preferred stock dividends 3,636 4,573 1,804 - ------------------------------------------------------------------------------------------------------ Net income (loss) applicable to common stock $ 3,968 $ 2,000 $ (3,496) ====================================================================================================== Net income (loss) per common share: Basic: Income (loss) before cumulative effect of change in accounting principle $ .18 $ .08 $ (.13) Cumulative effect of change in accounting principle .03 - ------------------------------------------------------------------------------------------------------ Net income (loss) per common share $ .15 $ .08 $ (.13) ====================================================================================================== Diluted: Income (loss) before cumulative effect of change in accounting principle $ .17 $ .07 $ (.13) Cumulative effect of change in accounting principle .03 - ------------------------------------------------------------------------------------------------------ Net income (loss) per common share $ .14 $ .07 $ (.13) ======================================================================================================
See accompanying Notes to Consolidated Financial Statements 2 DREYER'S GRAND ICE CREAM, INC. 1997 ANNUAL REPORT CONSOLIDATED BALANCE SHEET
($ in thousands, except per share amounts) DEC. 27, 1997 DEC. 28, 1996 - ------------------------------------------------------------------------------------------------- Assets Current Assets: Cash and cash equivalents $ 3,626 $ 4,134 Trade accounts receivable, net of allowance for doubtful accounts of $710 in 1997 and $755 in 1996 82,011 73,053 Other accounts receivable 16,527 13,638 Inventories 49,720 40,760 Prepaid expenses and other 14,416 13,652 - ----------------------------------------------------------------------------------------------- Total current assets 166,300 145,237 Property, plant and equipment, net 232,826 225,038 Goodwill and distribution rights, net of accumulated amortization of $19,817 in 1997 and $16,616 in 1996 89,932 92,010 Other assets 13,740 16,622 - ----------------------------------------------------------------------------------------------- Total assets $502,798 $478,907 =============================================================================================== Liabilities and Stockholders' Equity Current Liabilities: Accounts payable and accrued liabilities $ 57,037 $ 48,391 Accrued payroll and employee benefits 22,323 18,198 Current portion of long-term debt 8,364 8,512 - ----------------------------------------------------------------------------------------------- Total current liabilities 87,724 75,101 Long-term debt, less current portion 165,913 163,135 Deferred income taxes 40,591 37,802 - ----------------------------------------------------------------------------------------------- Total liabilities 294,228 276,038 - ----------------------------------------------------------------------------------------------- Commitments and contingencies Redeemable convertible preferred stock, $1 par value -- 1,008,000 shares authorized; 1,008,000 shares issued and outstanding in 1997 and 1996 99,230 98,806 - ----------------------------------------------------------------------------------------------- Stockholders' Equity: Preferred stock, $1 par value -- 8,992,000 shares authorized; no shares issued or outstanding in 1997 and 1996 Common stock, $1 par value -- 60,000,000 shares authorized; 27,020,000 shares and 13,345,000 shares issued and outstanding in 1997 and 1996, respectively 27,020 13,345 Capital in excess of par 42,822 51,956 Retained earnings 39,498 38,762 - ----------------------------------------------------------------------------------------------- Total stockholders' equity 109,340 104,063 - ----------------------------------------------------------------------------------------------- Total liabilities and stockholders' equity $502,798 $478,907 ===============================================================================================
See accompanying Notes to Consolidated Financial Statements 3 DREYER'S GRAND ICE CREAM, INC. 1997 ANNUAL REPORT CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
COMMON STOCK CAPITAL --------------------- IN EXCESS RETAINED (In thousands) SHARES AMOUNT OF PAR EARNINGS TOTAL - ------------------------------------------------------------------------------------------------------------------------------ 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) Repurchases and retirements of common stock (9) (9) (253) (262) Employee stock plans and other 105 105 2,359 2,464 Common stock issued in acquisition of M-K-D Distributors, Inc. 320 320 10,480 10,800 - ------------------------------------------------------------------------------------------------------------------------------ Balance at December 28, 1996 13,345 13,345 51,956 38,762 104,063 Net income for 1997 8,028 8,028 Accretion of preferred stock to redemption value (424) (424) Preferred stock dividends declared (3,636) (3,636) Common stock dividends declared (3,232) (3,232) Repurchases and retirements of common stock (7) (7) (268) (275) Employee stock plans and other 177 177 4,639 4,816 Common stock split 13,505 13,505 (13,505) - ------------------------------------------------------------------------------------------------------------------------------ Balance at December 27, 1997 27,020 $ 27,020 $ 42,822 $ 39,498 $109,340 ==============================================================================================================================
See accompanying Notes to Consolidated Financial Statements 4 DREYER'S GRAND ICE CREAM, INC. 1997 ANNUAL REPORT CONSOLIDATED STATEMENT OF CASH FLOWS
YEAR ENDED ------------------------------------------------------ ($ in thousands) DEC. 27, 1997 DEC. 28, 1996 DEC. 30, 1995 - ------------------------------------------------------------------------------------------------------------------------ Cash flows from operating activities: Net income (loss) $ 8,028 $ 6,997 $ (1,524) Adjustments to reconcile net income (loss) to cash flows from operations: Depreciation and amortization 31,946 27,549 20,568 Deferred income taxes 1,846 2,364 2,058 Cumulative effect of change in accounting principle 746 Changes in assets and liabilities, net of amounts acquired: Trade accounts receivable (8,958) (7,664) (11,779) Other accounts receivable (2,889) 809 (12,829) Inventories (8,960) (5,389) (4,120) Prepaid expenses and other 3,545 3,116 (1,998) Accounts payable and accrued liabilities 9,611 6,555 5,470 Accrued payroll and employee benefits 4,125 (1,077) 2,833 - ------------------------------------------------------------------------------------------------------------------------- 39,040 33,260 (1,321) - ------------------------------------------------------------------------------------------------------------------------ Cash flows from investing activities: Acquisition of property, plant and equipment (38,470) (58,470) (39,437) Retirement of property, plant and equipment 677 2,152 590 Increase in goodwill and distribution rights (146) (772) (1,959) Increase in other assets (947) (3,600) (6,104) - ------------------------------------------------------------------------------------------------------------------------ (38,886) (60,690) (46,910) - ------------------------------------------------------------------------------------------------------------------------ Cash flows from financing activities: Proceeds from long-term debt 11,700 76,000 91,500 Reductions in long-term debt (9,070) (43,858) (4,500) Issuance of common stock under employee stock plans 4,816 2,464 3,499 Repurchases of common stock (275) (262) (40,521) Cash dividends paid (7,833) (5,831) (5,030) - ------------------------------------------------------------------------------------------------------------------------ (662) 28,513 44,948 - ------------------------------------------------------------------------------------------------------------------------ (Decrease) increase in cash and cash equivalents (508) 1,083 (3,283) Cash and cash equivalents, beginning of year 4,134 3,051 6,334 - ------------------------------------------------------------------------------------------------------------------------ Cash and cash equivalents, end of year $ 3,626 $ 4,134 $ 3,051 ======================================================================================================================== Supplemental Cash Flow Information Cash paid during the year for: Interest (net of amounts capitalized) $ 10,634 $ 8,856 $ 9,738 Income taxes (net of refunds) 1,070 398 2,172 Non-cash transactions: Acquisition of M-K-D Distributors, Inc. 10,800 Conversion of convertible subordinated debentures into redeemable convertible preferred stock 100,752
See accompanying Notes to Consolidated Financial Statements 5 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DREYER'S GRAND ICE CREAM, INC. 1997 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 1997, 1996 and 1995 each consisted of fifty-two weeks. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions. These estimates and assumptions affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Financial Statement Presentation Certain reclassifications have been made to prior years' financial statements to conform to the 1997 presentation. Cash Equivalents The Company classifies financial instruments as cash equivalents if the original maturity of such investments is three months or less. Inventories Inventories are stated at the lower of cost (determined by the first-in, first-out method) or market. Cost includes materials, labor and manufacturing overhead. Property, Plant and Equipment The cost of additions and major improvements and repairs 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. The Company's unamortized preoperating cost balance was $1,623,000 and $2,492,000 at December 27, 1997 and December 28, 1996, respectively. Impairment of Long-Lived Assets The Company reviews long-lived assets and certain identifiable intangibles, including goodwill and distribution rights, for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. The assessment of impairment is based on the estimated undiscounted future cash flows from operating activities compared with the carrying value of the assets. If the undiscounted future cash flows of an asset are less than the carrying value, a write-down would be recorded measured by the amount of the difference between the carrying value of the asset and the fair value of the asset. Advertising Costs The Company defers production costs for media advertising and expenses these costs in the period the advertisement is first run. All other advertising costs are expensed as incurred. Advertising expense, including consumer promotion spending, was $28,849,000, $28,770,000 and $39,971,000 in 1997, 1996 and 1995, 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. 6 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DREYER'S GRAND ICE CREAM, INC. 1997 ANNUAL REPORT - -------------------------------------------------------------------------------- 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. Cumulative Effect of Change in Accounting Principle On November 20, 1997, the Financial Accounting Standards Board's Emerging Issues Task Force issued a pronouncement requiring that reengineering costs be expensed as incurred. Furthermore, the pronouncement requires that all previously unamortized capitalized reengineering costs be written off and treated as a cumulative effect of a change in accounting principle as of the beginning of the quarter including November 20, 1997. In connection with this pronouncement, the Company recorded an after-tax charge of $746,000 during the fourth quarter of 1997. Net Income (Loss) Per Common Share The Company adopted the provisions of Statement of Financial Accounting Standards No. 128 "Earnings per Share" (SFAS No. 128) as of the beginning of the fourth quarter of 1997. SFAS No. 128 required the Company to replace its traditional earnings per share (EPS) disclosures with a dual presentation of basic and diluted EPS and to restate all prior EPS data presented. The reconciliations of the numerators and denominators used in the basic and diluted computations are as follows:
Income Shares Per Share (In thousands, except per share amounts) (Numerator) (Denominator) Amount - -------------------------------------------------------------------------------------------------------------------- 1997: Income before cumulative effect of change in accounting principle $ 8,774 Less: Preferred stock dividends and accretion 4,060 - ------------------------------------------------------------------------------------- Basic: Income available to common stockholders 4,714 26,872 $.18 ==== Effect of dilutive securities: Stock options 1,096 Stock warrants 500 - ----------------------------------------------------------------------------------------------------- Diluted: Income available to common stockholders $ 4,714 28,468 $.17 ==================================================================================================================== 1996: Income before cumulative effect of change in accounting principle $ 6,997 Less: Preferred stock dividends and accretion 4,997 - ------------------------------------------------------------------------------------- Basic: Income available to common stockholders 2,000 26,496 $.08 ==== Effect of dilutive securities: Stock options 214 - ----------------------------------------------------------------------------------------------------- Diluted: Income available to common stockholders $ 2,000 26,710 $.07 ====================================================================================================================
The effect of potentially dilutive securities was anti-dilutive during 1995 due to the Company's net loss. Accordingly, 1995 basic and diluted net loss per common share use the same denominator of 26,570,000 shares. The effect of the Company's redeemable convertible preferred stock was anti-dilutive for fiscal years 1997 and 1996 and, accordingly, is not included in the calculations. The effect of the Company's stock warrants was anti-dilutive for fiscal year 1996 and, accordingly, is not included in the calculation. Note 3 Inventories Inventories at December 27, 1997 and December 28, 1996 consisted of the following:
- ------------------------------------------------------------------- (In thousands) 1997 1996 - ------------------------------------------------------------------- Raw materials $ 7,411 $ 5,361 Finished goods 42,309 35,399 - ------------------------------------------------------------------- $49,720 $40,760 ===================================================================
7 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DREYER'S GRAND ICE CREAM, INC. 1997 ANNUAL REPORT - -------------------------------------------------------------------------------- Note 4 Property, Plant and Equipment - -------------------------------------------------------------------------------- Property, plant and equipment at December 27, 1997 and December 28, 1996 consisted of the following:
(In thousands) 1997 1996 - ----------------------------------------------------------------- Buildings and improvements $ 84,409 $ 84,732 Machinery and equipment 181,628 168,417 Capital leased assets 18,993 17,463 Office furniture and fixtures 6,484 7,778 - ----------------------------------------------------------------- 291,514 278,390 Less: Accumulated depreciation 112,839 88,342 - ----------------------------------------------------------------- 178,675 190,048 Land 11,838 12,190 Construction in progress 42,313 22,800 - ----------------------------------------------------------------- $232,826 $225,038 =================================================================
Accumulated amortization of the Company's capital leased assets was $5,837,000 and $2,260,000 at December 27, 1997 and December 28, 1996, respectively. Interest capitalized was $2,254,000, $2,627,000 and $2,288,000 in 1997, 1996 and 1995, respectively. Depreciation expense for property, plant and equipment, including capital leased assets, was $27,799,000, $23,510,000 and $16,412,000 in 1997, 1996 and 1995, respectively. Construction in progress at December 27, 1997 included $29,130,000 of costs associated with expansion of manufacturing and distribution capacity. NOTE 5 GOODWILL AND DISTRIBUTION RIGHTS - -------------------------------------------------------------------------------- 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 $8,144,000 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 stockholders' 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 Company's equity in the earnings of M-K-D was $779,000 in 1995. The Company's sales of its branded products to M-K-D were $25,174,000 in 1995. Summarized financial information for M-K-D was as follows:
- ----------------------------------------------------------------- (In thousands) 1995 -------- Net sales $74,219 Gross profit 15,316 Net income 1,687 - ----------------------------------------------------------------- (*) The share information is presented before the effect of the 1997 common stock split. (See Note 10).
NOTE 6 INCOME TAXES - -------------------------------------------------------------------------------- The provision (benefit) for federal and state income taxes consisted of the following:
- ------------------------------------------------------------------ (In thousands) 1997 1996 1995 ------------------------------------- Current: Federal $3,644 $1,683 $(3,045) State 191 315 - ------------------------------------------------------------------ 3,835 1,998 (3,045) - ------------------------------------------------------------------ Deferred: Federal 1,267 2,003 2,127 State 579 361 (69) - ------------------------------------------------------------------ 1,846 2,364 2,058 - ------------------------------------------------------------------ $5,681 $4,362 $ (987) ==================================================================
The cumulative effect of change in accounting principle of $746,000 is net of an income tax benefit of $484,000, comprised of federal and state income taxes, which is not reflected in the above table. The deferred income tax liability as of December 27, 1997 and December 28, 1996 consisted of the following:
(In thousands) 1997 1996 - ----------------------------------------------------------------- Depreciation $19,814 $16,897 Intangible assets and related amortization 15,773 16,124 Deferred costs 4,063 3,401 Other 941 1,380 - ----------------------------------------------------------------- $40,591 $37,802 =================================================================
8 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DREYER'S GRAND ICE CREAM, INC. 1997 ANNUAL REPORT The federal statutory income tax rate is reconciled to the Company's effective income tax rate as follows:
1997 1996 1995 - ------------------------------------------------------------------ Federal statutory income tax rate 35.0% 35.0% (35.0)% State income taxes, net of federal tax benefit 3.5 3.9 (1.7) Reversal of income taxes provided in prior periods (3.7) (5.8) Other 0.8 3.2 3.2 - ------------------------------------------------------------------ 39.3% 38.4% (39.3)% ==================================================================
NOTE 7 LONG-TERM DEBT - -------------------------------------------------------------------------------- Long-term debt at December 27, 1997 and December 28, 1996 consisted of the following:
(In thousands) 1997 1996 - ------------------------------------------------------------------ Revolving line of credit with banks, due 1999 with interest payable at three different rate options $ 87,400 $ 75,700 Senior notes, with principal due through 2008 and interest payable semiannually at three different interest rates 50,000 50,000 Capital lease obligation, with payments due through 2000 and interest payable quarterly at a floating rate 18,177 23,647 Senior notes, with principal due through 2001 and interest payable semiannually at 9.3% 14,200 17,800 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 - ------------------------------------------------------------------ 174,277 171,647 Less: Current portion 8,364 8,512 - ------------------------------------------------------------------ $165,913 $163,135 ==================================================================
The aggregate annual maturities of long-term debt, including capital lease obligation, as of December 27, 1997 are as follows:
(In thousands) - ----------------------------------------------------------------- Year ending: 1998 $ 8,364 1999 95,747 2000 19,409 2001 15,043 2002 7,143 Later years 28,571 - ----------------------------------------------------------------- Total $174,277 =================================================================
Line of Credit The Company has a credit agreement with certain banks for a total revolving line of credit of $150,000,000. The total available line of credit decreases by $25,000,000 on 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 6.39% at December 27, 1997. At December 27, 1997, there was $87,400,000 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 borrowings under the Company's line of credit 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 capital lease transaction involving a 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 borrowings under the Company's line of credit and to fund capital expenditures. The interest rate on the capital lease obligation was 6.25% at December 27, 1997. The four-year lease has been classified as a capital lease and the related assets are recorded in property, plant and equipment. 9 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DREYER'S GRAND ICE CREAM, INC. 1997 ANNUAL REPORT - -------------------------------------------------------------------------------- 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 27, 1997 and December 28, 1996, the fair value of the Company's long-term debt was determined to approximate the carrying amount. The fair value was based on quoted market prices for the same or similar issues or on the current rates offered to the Company for a term equal to the same remaining maturities. It is not practicable to estimate the fair value of the redeemable convertible preferred stock due to the unique terms and conditions of these securities. The Company is subject to the requirements of various financial covenants, including dividend restrictions, under its long-term debt obligations. 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-five years including renewal options. Certain of these leases include non-bargain purchase options. The minimum rental payments required under non-cancelable leases at December 27, 1997 are as follows:
(In thousands) Capital Operating - ------------------------------------------------------------------ Year ending: 1998 $ 5,826 $ 3,475 1999 5,491 2,650 2000 8,812 1,962 2001 1,377 2002 1,043 Later years 3,683 - ------------------------------------------------------------------ 20,129 $14,190 ======= Less: Amounts representing interest 1,952 - -------------------------------------------------- Present value of minimum lease payments 18,177 Less: Current portion 4,764 - -------------------------------------------------- $13,413 ==================================================
Rental expense for operating leases was $13,994,000, $11,665,000 and $12,824,000 in 1997, 1996 and 1995, respectively. NOTE 9 REDEEMABLE CONVERTIBLE 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. On October 3, 1997, the Series B preferred stock was converted into a total of 1,008,000 shares of redeemable convertible Series A preferred stock (Series A), redeemable on June 30, 2001. The Series A preferred stock is convertible, under certain conditions, at an initial conversion price of $17.37 into a total of 5,800,000 shares of common stock. Series A preferred stock can be called by the Company for early redemption, subject to certain limitations. In preference to shares of common stock, the Series A preferred stockholders are entitled to receive cumulative cash dividends, payable quarterly in arrears. Dividends on the Series A preferred stock are payable at a dividend rate equal to the amount they would receive as if the shares were converted into comparable shares of common stock. Series A preferred stockholders have common stock voting rights equal to the number of common shares into which their preferred stock is convertible. NOTE 10 COMMON STOCK - -------------------------------------------------------------------------------- The Company paid a regular quarterly dividend of $.03 per share of common stock for each quarter of 1997, 1996 and 1995. 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. 10 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DREYER'S GRAND ICE CREAM, INC. 1997 ANNUAL REPORT - -------------------------------------------------------------------------------- Common Stock Split On November 18, 1997, the Company issued shares of common stock to holders of record on October 30, 1997 to effect a two-for-one common stock split. An amount equal to the par value of the common stock issued was transferred from capital in excess of par to common stock to reflect this split. Additionally, the number of shares, stock price per share, and earnings and dividends per share information appearing in these consolidated financial statements have been restated to reflect this stock split on a retroactive basis unless otherwise indicated. Nestle Equity Issuance Pursuant to an equity transaction (the Nestle Agreement) with an affiliate of Nestle USA, Inc. (Nestle), Nestle purchased 6,000,000 newly issued shares of common stock and warrants to purchase an additional 4,000,000 shares at an exercise price of $16 per share. Warrants for 2,000,000 shares expired unexercised on June 14, 1997 and warrants for the other 2,000,000 shares will expire on June 14, 1999. The Company has the right to cause Nestle to exercise the remaining warrants at any time through the warrant expiration date at $16 per share if the average trading price of the common stock exceeds $30 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 $30 during a 130 trading day period before June 14, 1999, Nestle will be required to pay an additional $1 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 1995, the Company repurchased and retired 1,291,000 shares of its common stock(*) at prices ranging from $25.38 to $34.25 per share(*) under a plan to repurchase up to 5,000,000 shares of common stock(*) through open market purchases and negotiated transactions. This plan was completed during 1995. Separately, during 1995 the Company repurchased and retired 28,000 shares of its common stock(*) at prices ranging from $24.50 to $38.50 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 (pension 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 $7,500,000, $7,683,000 and $7,202,000 in 1997, 1996 and 1995, respectively. The Company's liability for accrued pension contributions and salary deferrals was $7,841,000 and $6,242,000 at December 27, 1997 and December 28, 1996, respectively. Pension expense for employees covered by multi-employer retirement plans under collective bargaining agreements was $1,056,000, $956,000 and $848,000 in 1997, 1996 and 1995, respectively. NOTE 12 EMPLOYEE STOCK PLANS - -------------------------------------------------------------------------------- The Company offers to certain employees various stock option plans, a Section 423 employee stock purchase plan and an employee secured stock purchase plan. Stock Option Plans The Company has three stock option plans under which options may be granted for the purchase of the Company's common stock at a price not less than 100% of the fair market value at the date of grant. The incentive stock option plan (the 1982 Plan) provides that options are not exercisable until after two years from the date of grant and generally expire six years from the date of grant. The non-qualified stock option plan (the 1992 Plan) provides that options are not exercisable until after two years from the date of grant and expire upon death or termination of employment. In 1994, the stockholders approved an additional stock option plan (the 1993 Plan) under which granted options may be either incentive stock options or non-qualified stock options. 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. (*) The share information is presented before the effect of the 1997 common stock split. (See Note 10). 11 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DREYER'S GRAND ICE CREAM, INC. 1997 ANNUAL REPORT No compensation cost has been recognized for these stock option plans. If compensation cost for these plans had been determined based on the fair value at the grant dates, the Company's net income (loss) 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) 1997 1996 1995 - ------------------------------------------------------------------ Net income (loss) applicable to common stock $1,757 $249 $(4,111) Net income (loss) per common share: Basic .07 .01 (.15) Diluted .06 .01 (.15) - ------------------------------------------------------------------
The Company used the Black-Scholes option pricing model to estimate the fair value of options granted during 1997, 1996 and 1995. The weighted average assumptions used to compute compensation cost in the above pro forma and to estimate the weighted average fair market value of options granted are as follows:
1997 1996 1995 - ----------------------------------------------------------------- Risk-free interest rate 6.59% 5.96% 7.01% Dividend yield .78% .75% .85% Volatility 31.51% 33.62% 34.24% Expected term (years) 5.7 4.5 4.9 Weighted average fair market value $6.07 $6.17 $5.60 - -----------------------------------------------------------------
Stock options exercisable were 1,719,000, 1,236,000 and 782,000 at year-end 1997, 1996 and 1995, respectively. These stock options were exercisable at a weighted average option price of $13.15, $13.06 and $12.35 for 1997, 1996 and 1995, respectively. The activity in the three stock option plans for each of the three years in the period ended December 27, 1997 is summarized below:
Options Weighted Available Options Average Price (In thousands, except per share amounts) for Grant Outstanding Per Share - -------------------------------------------------------------------------------------------------------- Balance, Dec. 31, 1994 1,782 2,108 $11.75 Granted (892) 892 12.98 Exercised (240) 7.14 Canceled 30 (30) - -------------------------------------------------------------------------------------------------------- Balance, Dec. 30, 1995 920 2,730 12.55 Authorized 2,000 Granted (902) 902 15.75 Exercised (106) 8.87 Canceled 106 (106) - -------------------------------------------------------------------------------------------------------- Balance, Dec. 28, 1996 2,124 3,420 13.49 Granted (932) 932 15.35 Exercised (243) 12.58 Canceled 143 (143) - -------------------------------------------------------------------------------------------------------- Balance, Dec. 27, 1997 1,335 3,966 $13.97 ========================================================================================================
12 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DREYER'S GRAND ICE CREAM, INC. 1997 ANNUAL REPORT Significant option groups outstanding at December 27, 1997 and related weighted average price per share and life information follows:
(In thousands, except per share amounts) - --------------------------------------------------------------------------------------------------------------------------- Options Outstanding Options Exercisable -------------------------- ------------------------ Weighted Weighted Weighted Average Average Exercise Average Grant Options Exercise Options Exercise Price Remaining Plan Year Outstanding Price Exercisable Price Range Life (Years) - --------------------------------------------------------------------------------------------------------------------------- 1982 Plan 1992 86 $ 9.85 86 $ 9.85 $ 9.75-12.07 0.7 1993 145 12.96 114 12.94 12.38-15.07 1.4 1992 Plan 1992 87 11.27 87 11.27 9.75-14.63 NA 1993 477 13.83 386 13.83 12.38-14.69 NA 1993 Plan 1994 680 12.19 482 12.31 10.88-14.69 6.2 1995 782 13.05 319 13.11 12.66-16.13 7.2 1996 831 15.77 144 15.85 15.75-17.00 8.2 1997 878 15.36 101 15.55 15.19-19.75 9.2 - --------------------------------------------------------------------------------------------------------------------------- Total 3,966 1,719 ===========================================================================================================================
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 30,000 shares(*) at prices ranging from $24.65 to $25.93 per share(*) in 1997, 24,000 shares(*) at prices ranging from $22.00 to $32.94 per share(*) in 1996, and 40,000 shares(*) at prices ranging from $20.29 to $21.67 per share(*) in 1995. Compensation cost based on the fair value of the employees' purchase rights was not material in 1997, 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 20,000 shares(*) at prices ranging from $30.25 to $48.25 per share(*) in 1997, 28,000 shares(*) at prices ranging from $28.50 to $31.75 per share(*) in 1996, and 23,000 shares(*) at prices ranging from $25.28 to $39.50 per share(*) in 1995. NOTE 13 INSURANCE SETTLEMENTS AND TRADEMARK SALE During 1997 and 1996, the Company recorded several gains relating to claims filed under its insurance policies. These claims were primarily caused by the accidental releases of ammonia (refrigerant) into its manufacturing facilities which contaminated finished goods inventories. Under the Company's insurance policies, the Company is entitled to receive the value of the finished goods inventories at their normal selling price, plus expenses incurred in recovering from these accidents. These claims resulted in gains of $2,355,000 and $2,100,000 in 1997 and 1996, respectively, which were recorded as reductions in cost of goods sold. In December 1996, the Company sold trademark rights for the People's Republic of China, Hong Kong and Macau to a third-party independent distributor for $2,600,000. Also in December 1996, the Company recorded gross profit of $1,043,000 relating to the sale of a three to five month supply of its products to this same distributor. The 1997 insurance claims had the effect of increasing 1997 net income by $1,430,000, or $0.05 per diluted common share. The 1996 transactions, including gains from insurance claims, had the effect of increasing 1996 net income by $3,538,000, or $0.13 per diluted common share. (*) The share information is presented before the effect of the 1997 common stock split. (See Note 10). 13 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DREYER'S GRAND ICE CREAM, INC. 1997 ANNUAL REPORT NOTE 14 CONTINGENCIES The Company is engaged in various legal actions as both plaintiff and defendant. Management believes that the outcome of these actions, either individually or in the aggregate, will not have a material adverse effect on the Company's financial position, results of operations or cash flows. NOTE 15 SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
- ------------------------------------------------------------------------------------------------------------------------------------ Income (Loss) Before Cumulative Cumulative Net Income Effect of Change Effect of Change (Loss) Price Range Per (In thousands, Net Gross in Accounting in Accounting Applicable to Common Share except per share amounts) Sales Margin Principle(1) Principle Common Stock (NASDAQ)(2) - ------------------------------------------------------------------------------------------------------------------------------------ 1997 1st Quarter $200,438 $ 38,187 $(1,300) $(1,300) $14.50-17.25 2nd Quarter 271,972 59,255 4,937 4,937 14.88-20.13 3rd Quarter 286,256 65,641 3,715 3,715 18.75-27.50 4th Quarter 211,431 42,463 (2,638) $746 (3,384) 18.50-26.50 - ------------------------------------------------------------------------------------------------------------------------------------ $970,097 $205,546 $ 4,714 $746 $ 3,968 ==================================================================================================================================== 1996 1st Quarter $166,970 $ 32,309 $ 434 $ 434 $13.94-18.88 2nd Quarter 211,568 46,836 3,771 3,771 15.75-18.50 3rd Quarter 234,644 51,657 2,055 2,055 12.50-16.13 4th Quarter 178,659 31,754 (4,260) (4,260) 12.00-15.13 - ------------------------------------------------------------------------------------------------------------------------------------ $791,841 $162,556 $ 2,000 $ 2,000 ====================================================================================================================================
Basic Net Income (Loss) Per Common Share(2) Diluted Net Income (Loss) Per Common Share(2) ----------------------------------------------------- ------------------------------------------------------ Income Income (Loss) Before (Loss) Before Cumulative Cumulative Cumulative Cumulative Effect of Change Effect of Change Effect of Change Effect of Change in Accounting in Accounting Net Income in Accounting in Accounting Net Income Principle(3) Principle (Loss)(3) Principle(3) Principle (Loss)(3) - ------------------------------------------------------------------------------------------------------------------------------------ 1997 1st Quarter $(.05) $(.05) $(.05) $(.05) 2nd Quarter .18 .18 .18 .18 3rd Quarter .14 .14 .13 .13 4th Quarter (.10) $(.03) (.13) (.10) $(.03) (.13) 1996 1st Quarter $ .02 $ .02 $ .02 $ .02 2nd Quarter .14 .14 .14 .14 3rd Quarter .08 .08 .08 .08 4th Quarter (.16) (.16) (.16) (.16) - ------------------------------------------------------------------------------------------------------------------------------------
(1) Income (loss) has been reduced by preferred stock dividends and accretion of preferred stock to redemption value. (2) Retroactively restated to reflect the effects of the common stock split in 1997. (3) The number of weighted average shares outstanding used in the computation of net income (loss) per common share increases and decreases as shares are issued and repurchased during the year. For this reason, the sum of net income (loss) per common share for the quarters may not be the same as the net income (loss) per common share for the year. 14 REPORT OF INDEPENDENT ACCOUNTANTS DREYER'S GRAND ICE CREAM, INC. 1997 ANNUAL REPORT 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 27, 1997 and December 28, 1996, and the results of their operations and their cash flows for each of the three years in the period ended December 27, 1997, 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 audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. As discussed in Note 2 to the consolidated financial statements, the Company changed its method of accounting for reengineering costs in the fourth quarter of 1997. PRICE WATERHOUSE LLP San Francisco, California February 19, 1998 15 FIVE-YEAR SUMMARY OF SIGNIFICANT FINANCIAL DATA DREYER'S GRAND ICE CREAM, INC. 1997 ANNUAL REPORT
Fiscal Year Ended December - ---------------------------------------------------------------------------------------------------------------------- (In thousands, except per share amounts) 1997 1996 1995 1994 1993 Operations: Net sales and other income $ 973,091 $ 796,195 $ 681,052 $ 566,602 $ 471,790 Income (loss) before cumulative effect of change in accounting principle 8,774 6,997 (1,524) 1,001 16,789 Net income (loss) 8,028 6,997 (1,524) 1,001 16,789 Net income (loss) applicable to common stock 3,968 2,000 (3,496) 1,001 16,789 Per Common Share: Basic: Income (loss) before cumulative effect of change in accounting principle(1) .18 .08 (.13) .03 .57 Net income (loss)(1) .15 .08 (.13) .03 .57 Diluted: Income (loss) before cumulative effect of change in accounting principle(1) .17 .07 (.13) .03 .57 Net income (loss)(1) .14 .07 (.13) .03 .57 Dividends declared(1) .12 .12 .12 .12 .12 Balance Sheet: Total assets 502,798 478,907 414,105 362,026 322,275 Working capital 78,576 70,136 69,361 48,403 57,397 Long-term debt, including convertible subordinated debentures 165,913 163,135 134,000 146,852 139,627 Redeemable convertible preferred stock 99,230 98,806 98,382 Stockholders' equity 109,340 104,063 92,263 135,921 123,034 - ----------------------------------------------------------------------------------------------------------------------
(1) Retroactively restated to reflect the effects of the common stock split in 1997. 16 MANAGEMENT'S DISCUSSION AND ANALYSIS DREYER'S GRAND ICE CREAM, INC. 1997 ANNUAL REPORT RESULTS OF OPERATIONS Forward-Looking Statements The Company may from time to time make written or oral forward-looking statements. Written forward-looking statements may appear in documents filed with the Securities and Exchange Commission, in press releases, and in reports to stockholders. The Private Securities Litigation Reform Act of 1995 contains a "safe harbor" for forward-looking statements upon which the Company relies in making such disclosures. In accordance with this "safe harbor" provision, we have identified that forward-looking statements are contained in this Annual Report. The Company undertakes no obligation to publicly revise these forward-looking statements to reflect subsequent events or circumstances. Also, in connection with this "safe harbor" provision, the Company identifies important factors that could cause the Company's actual results to differ materially from those contained in any forward-looking statement made by or on behalf of the Company. 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. Common Stock Split During 1997, the Company issued shares of common stock to effect a two-for-one common stock split. The number of shares, stock price per share, and earnings and dividends per share information appearing in this Management's Discussion and Analysis have been restated to reflect this stock split on a retroactive basis unless otherwise indicated. (See Note 10 of Notes to Consolidated Financial Statements.) Earnings Per Share The Company adopted the provisions of Statement of Financial Accounting Standards No. 128, "Earnings per Share"(SFAS No. 128) as of the beginning of the fourth quarter of 1997. SFAS No. 128 required the Company to replace its traditional earnings per share (EPS) disclosures with a dual presentation of basic and diluted EPS and to restate all prior EPS data presented. All EPS disclosures in this Management's Discussion and Analysis have been restated in accordance with SFAS No. 128. All EPS amounts disclosed in this section are diluted EPS, which reflects the impact of dilutive securities. (See Note 2 of Notes to Consolidated Financial Statements.) The Strategic Plan The Company embarked on a strategic plan (the Strategic Plan) during the second quarter of 1994 to accelerate 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 national scale and leverage this capability with sophisticated information 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. The Company continues to make significant progress against the key elements of the Strategic Plan. This progress has yielded a leading market share in a consolidating industry. The Company's direct-store-delivery system has now reached national scope and includes emerging category management and demand management capabilities. The Company has launched a wide range of new product initiatives. Following the national introduction of Whole Fruit Sorbet and Starbucks(R) Ice Cream, the Company has expanded its Dreyer's and Edy's Homemade brand from its test markets in the Southeast to a national roll-out. In light of these successes, the Company believes that the benefits under the Strategic Plan will be realized in future years. However, no assurance can be given that the expectations relative to future market share and earnings benefits of the strategy will be achieved. The realization of the benefits will depend upon, among other things, consumer purchase responsiveness to the Company's new products and increased marketing and promotion expenditures, competitors' marketing and promotion responses, market conditions affecting the price of the Company's products, commodity costs and efficiencies achieved in manufacturing and distribution operations. 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 $0.07 per common share, from a net loss in 1995 of $(1,524,000), or $(0.13) per common share. In 1997, the Company recorded 17 MANAGEMENT'S DISCUSSION AND ANALYSIS DREYER'S GRAND ICE CREAM, INC. 1997 ANNUAL REPORT income before cumulative effect of change in accounting principle of $8,774,000, or $0.17 per common share. Net profitability in 1997 was higher than the prior year primarily due to an improvement in the Company's gross margin offset by significantly higher trade promotion expenses. The Company believes that the cost of the Strategic Plan's key elements will continue to negatively affect its short-term earnings. Fiscal 1997 Compared With 1996 Consolidated net sales for fiscal 1997 increased 23%, or $178,256,000, to $970,097,000 from $791,841,000 for fiscal 1996. Sales of the Company's branded products were 25%, or $124,776,000, higher than fiscal 1996 and accounted for the majority of the overall sales increase. The increase in sales of the Company's branded products related primarily to higher unit sales in all markets. The products that led this increase were Dreyer's and Edy's Grand Ice Cream, Dreyer's and Edy's Homemade Ice Cream, Starbucks(R) Ice Cream, and Dreyer's and Edy's Grand Light(R) Ice Cream. These higher sales were due in part to the effect of a significant increase in trade promotion spending. National market share of the Company's Dreyer's and Edy's branded products increased to 15.5% at the end of 1997 from 13.8% at the end of 1996. Sales of other companies' branded products (partner brands) increased 18%, led by Healthy Choice(R) low fat ice cream from Con Agra, Inc., Ben and Jerry's Homemade(R) superpremium products, and frozen novelty and ice cream products from Nestle Ice Cream Company. Sales of partner brands represented 36% of consolidated net sales in fiscal 1997 compared with 38% in fiscal 1996. Wholesale prices for the Company's branded products increased approximately 3%, before the effect of increased trade promotion expenses. The effect of price increases for partner brands was not significant. Other income decreased $1,360,000, or 31%, due to the 1996 sale of trademark rights for the People's Republic of China, Hong Kong and Macau to a third-party distributor for $2,600,000 (see Note 13 of Notes to Consolidated Financial Statements), partially offset in 1997 by higher earnings from a joint venture accounted for under the equity method. Cost of goods sold increased $135,266,000, or 22%, over fiscal 1996, while the overall gross margin increased to 21.2% from 20.5%. The gross margin increased due to higher margins on the Company's branded products, and a comparatively higher proportion of those sales (which carry a higher margin than partner brands), offset slightly by a decrease in partner brand gross margin due to changes in product mix. The improvement in the gross margin on the Company's branded products was due to lower dairy costs in fiscal 1997 as compared to fiscal 1996. The Company recorded a pre-tax gain of $2,355,000 resulting from various insurance claims during 1997, which was recorded as a reduction in cost of goods sold. (See Note 13 of Notes to Consolidated Financial Statements.) This insurance gain is largely non-recurring and as such may not be available in future periods. Selling, general and administrative expenses increased from 18% of net sales for fiscal 1996 to 19% of net sales for fiscal 1997. The increase of $37,387,000, or 26%, related primarily to significantly higher trade promotion expenses in fiscal 1997 compared with fiscal 1996. Interest expense was $1,147,000, or 12%, higher in fiscal 1997 than fiscal 1996 due primarily to additional interest expense from the issuance of senior notes in the second quarter of 1996, partially offset by a reduction in interest expense due to lower average borrowings on the Company's line of credit. Fiscal 1996 Compared With 1995 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 Starbucks(R) Ice Cream. National market share of the Company's Dreyer's and Edy's branded products increased to 13.8% at the end of 1996 from 13.4% during the fourth quarter of 1995. Sales of 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. Wholesale prices for both Company and partner brands increased an average of 3% between 1995 and 1996. 18 MANAGEMENT'S DISCUSSION AND ANALYSIS DREYER'S GRAND ICE CREAM, INC. 1997 ANNUAL REPORT Other income increased $2,099,000, or 93%, due to the 1996 sale of trademark rights to a third-party distributor for $2,600,000, as mentioned above. (See Note 13 of Notes to Consolidated Financial Statements.) Cost of goods sold for 1996 increased $98,724,000, or 19%, over the prior year, while the Company's overall gross margin decreased from 21.8% in 1995 to 20.5% in 1996. The gross margin decreased due to 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 $2,913,000, or 2%, higher than 1995. Accordingly, selling general and administrative costs decreased as a percent of sales to 18% 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 $11,201,000 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 expense from the issuance of senior notes, the completion of a lease transaction and higher average borrowings under 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 1996 which had the effect of increasing net income by $3,538,000 or $0.13 per common share. (See Note 13 of Notes to Consolidated Financial Statements.) These sources of income are largely non-recurring and as such may not be available in future periods. 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.) Seasonality The Company experiences more demand for its products during the spring and summer than during the fall and winter. (See Note 15 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. During 1997, dairy prices decreased to slightly lower levels resulting in a favorable impact of $3,842,000 on gross profit when compared to 1996 price levels. Other cost increases such as labor and general administrative costs have been offset by productivity gains and other operating efficiencies. FINANCIAL CONDITION Liquidity and Capital Resources The Company's operations provided cash flow of $39,040,000 during 1997 compared with $33,260,000 provided in 1996. Cash of $1,321,000 was used in operations during 1995. Working capital of the Company increased to $78,576,000 in 1997 compared with $70,136,000 and $69,361,000 during 1996 and 1995, 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 27, 1997. The Company continued to expand its manufacturing capacity and direct-store-delivery distribution system through investments of $38,470,000 in property, plant and equipment during 1997 compared with $58,470,000 and $39,437,000 during 1996 and 1995, respectively. The Company plans to spend approximately $40,000,000 19 MANAGEMENT'S DISCUSSION AND ANALYSIS DREYER'S GRAND ICE CREAM, INC. 1997 ANNUAL REPORT during 1998 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. On October 3, 1997, the Company converted its redeemable convertible Series B preferred stock to redeemable convertible Series A preferred stock. (See Note 9 of Notes to Consolidated Financial Statements.) On November 18, 1997, the Company issued shares of common stock to holders of record on October 30, 1997 to effect a two-for-one common stock split. (See Note 10 of Notes to Consolidated Financial Statements.) 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 its common stock(*) having a value of $10,800,000. (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 financing activities used cash of $662,000 during 1997 compared with $28,513,000 and $44,948,000 cash provided during 1996 and 1995, respectively. During 1997, borrowings on the Company's line of credit of $11,700,000 and cash flows from operations were used to pay $9,070,000 of scheduled payments on the Company's other debt and to pay $7,833,000 in cash dividends to common and preferred stockholders. During 1996, proceeds from the issuance of senior notes and the completion of a lease transaction involving a 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 borrowings on the Company's long-term line of credit. (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. (See Note 9 of Notes to Consolidated Financial Statements.) During 1995, the Company completed its plan to repurchase up to 5,000,000 shares of common stock(*) through open market purchases and negotiated transactions. The Company repurchased and retired 1,291,000 shares of its common stock(*) under the Stock Repurchase Plan during 1995. (See Note 10 of Notes to Consolidated Financial Statements.) As of year-end 1997, the Company had $3,626,000 in cash and cash equivalents, and an unused credit line of $62,600,000. (See Note 7 of Notes to Consolidated Financial Statements.) 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. Year 2000 Compliance The Company has reviewed its computer systems to determine which systems require enhancements and upgrades to make them Year 2000 compliant. Based on its review, the Company estimates that its computer systems will be in compliance by approximately the second quarter of 1999. In connection with this review, the Company is also surveying key customers and suppliers to determine the status of their Year 2000 compliance programs. The Company does not expect the costs relating to Year 2000 compliance to have a material impact on the Company's financial position, results of operations or cash flows. (*) The share information is presented before the effect of the 1997 common stock split. (See Note 10 of Notes to Consolidated Financial Statements.) EX-21 4 SUBSIDIARIES OF REGISTRANT 1 EXHIBIT 21 SUBSIDIARIES OF DREYER'S GRAND ICE CREAM, INC.
NAME JURISDICTION ---- ------------ Edy's Grand Ice Cream................................. California *Edy's of Illinois, Inc................................ Illinois Dreyer's International, Inc........................... U.S. Virgin Islands Grand Soft Capital Company............................ California Grand Soft Equipment Company.......................... Kentucky (formerly Polar Express Systems International, Inc.) Portofino Company..................................... California M-K-D Distributors, Inc............................... Texas **Snelgrove Ice Cream, Inc.............................. Utah
- --------------- * Subsidiary of Edy's Grand Ice Cream ** Subsidiary of M-K-D Distributors, Inc. EX-23 5 CONSENT OF PRICE WATERHOUSE LLP 1 EXHIBIT 23 CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the incorporation by reference in the Registration Statements on Form S-8 (Nos. 33-7350, 33-8418, 33-35561, 33-36092, 33-40275, 33-56417, 33-56411, 33-56413 and 333-16701) of Dreyer's Grand Ice Cream, Inc. of our report dated February 19, 1998 appearing in the 1997 Annual Report to Stockholders which is incorporated in this Annual Report on Form 10-K. We also consent to the incorporation by reference of our report on the Financial Statement Schedule, which appears on page 17 of this Form 10-K. We also consent to the incorporation by reference of our report dated April 9, 1996 relating to the consolidated financial statements of M-K-D Distributors, Inc. appearing on page 19 of this Form 10-K. PRICE WATERHOUSE LLP San Francisco, California March 27, 1998 EX-27 6 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 YEAR DEC-27-1997 DEC-28-1996 DEC-27-1997 3,626 0 82,721 710 49,720 166,300 345,665 (112,839) 502,798 87,724 165,913 27,020 99,230 0 82,320 502,798 970,097 973,091 764,551 764,551 181,927 1,463 10,695 14,455 5,681 8,774 0 0 746 8,028 .15 .14 For Purposes of This Exhibit, Primary means Basic.
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