-----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, TQ3xL2Dhs0e1C4zpuez11Jw+zIVJYyzixzAuGgza/i0aRpeoOfrmX47M8M7xamu4 FjFsew0ct9iLX7nkDlRuyg== 0000950149-99-001416.txt : 19990811 0000950149-99-001416.hdr.sgml : 19990811 ACCESSION NUMBER: 0000950149-99-001416 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990626 FILED AS OF DATE: 19990810 FILER: COMPANY DATA: COMPANY CONFORMED NAME: DREYERS GRAND ICE CREAM INC CENTRAL INDEX KEY: 0000352305 STANDARD INDUSTRIAL CLASSIFICATION: ICE CREAM & FROZEN DESSERTS [2024] IRS NUMBER: 942967523 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-14190 FILM NUMBER: 99682291 BUSINESS ADDRESS: STREET 1: 5929 COLLEGE AVE CITY: OAKLAND STATE: CA ZIP: 94618 BUSINESS PHONE: 5106528187 10-Q 1 FORM 10-Q FOR THE QUARTERLY PERIOD ENDED 06-26-99 1 FORM 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 26, 1999 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission file number 0-14190 DREYER'S GRAND ICE CREAM, INC. (Exact name of registrant as specified in its charter) Delaware No. 94-2967523 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 5929 College Avenue, Oakland, California 94618 (Address of principal executive offices) (Zip Code) (510) 652-8187 (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate the number of shares outstanding of each of the issuer's classes of common stock as of the latest practicable date.
Shares Outstanding August 5, 1999 ------------------- Common stock 27,589,324
2 PART I: FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS DREYER'S GRAND ICE CREAM, INC. CONSOLIDATED BALANCE SHEET
June 26, 1999 Dec. 26, 1998 ------------- ------------- ($ in thousands, except per share amounts) (Unaudited) Assets Current Assets: Cash and cash equivalents $ 3,898 $ 1,171 Trade accounts receivable, net of allowance for doubtful accounts of $5,720 in 1999 and $5,710 in 1998 127,667 83,053 Other accounts receivable 21,657 29,165 Inventories 56,925 49,472 Prepaid expenses and other 14,282 13,271 --------- --------- Total current assets 224,429 176,132 Property, plant and equipment, net 203,445 207,772 Goodwill and distribution rights, net 66,089 67,226 Other assets 11,444 12,050 --------- --------- Total assets $ 505,407 $ 463,180 ========= ========= Liabilities and Stockholders' Equity Current Liabilities: Accounts payable and accrued liabilities $ 128,104 $ 87,273 Accrued payroll and employee benefits 20,188 19,545 Current portion of long-term debt 21,291 8,255 --------- --------- Total current liabilities 169,583 115,073 Long-term debt, less current portion 149,832 169,781 Deferred income taxes 18,799 16,039 --------- --------- Total liabilities 338,214 300,893 --------- --------- Commitments and contingencies Redeemable convertible preferred stock, $1.00 par value - 1,008,000 shares authorized; 1,008,000 shares issued and outstanding in 1999 and 1998 99,866 99,654 --------- --------- Stockholders' Equity: Preferred stock, $1.00 par value - 8,992,000 shares authorized; no shares issued or outstanding in 1999 and 1998 Common stock, $1.00 par value - 60,000,000 shares authorized; 27,529,000 shares and 27,312,000 shares issued and outstanding in 1999 and 1998, respectively 27,529 27,312 Capital in excess of par 49,110 46,722 Accumulated deficit (9,312) (11,401) --------- --------- Total stockholders' equity 67,327 62,633 --------- --------- Total liabilities and stockholders' equity $ 505,407 $ 463,180 ========= =========
See accompanying Notes to Consolidated Financial Statements. 2 3 DREYER'S GRAND ICE CREAM, INC. CONSOLIDATED STATEMENT OF OPERATIONS (Unaudited)
Thirteen Weeks Ended Twenty-six Weeks Ended ------------------------- ------------------------- June 26, 1999 June 27, 1998 June 26, 1999 June 27, 1998 ------------- ------------- ------------- ------------- ($ in thousands, except per share amounts) Revenues: Sales $ 306,861 $ 280,273 $ 535,247 $ 495,355 Other income 689 960 841 1,637 --------- --------- --------- --------- 307,550 281,233 536,088 496,992 --------- --------- --------- --------- Costs and expenses: Cost of goods sold 230,356 217,771 418,277 396,739 Selling, general and administrative 60,658 52,668 103,526 96,120 Interest, net of amounts capitalized 3,127 3,273 6,247 5,940 --------- --------- --------- --------- 294,141 273,712 528,050 498,799 --------- --------- --------- --------- Income (loss) before income tax provision (benefit) and cumulative effect of change in accounting principle 13,409 7,521 8,038 (1,807) Income tax provision (benefit) 5,179 2,986 3,143 (717) --------- --------- --------- --------- Income (loss) before cumulative effect of change in accounting principle 8,230 4,535 4,895 (1,090) Cumulative effect of change in accounting principle -- -- 595 -- --------- --------- --------- --------- Net income (loss) 8,230 4,535 4,300 (1,090) Accretion of preferred stock to redemption value 106 106 212 212 Preferred stock dividends 174 174 348 348 --------- --------- --------- --------- Net income (loss) available to common stockholders $ 7,950 $ 4,255 $ 3,740 $ (1,650) ========= ========= ========= ========= Per common share-basic: Income (loss) available to common stockholders before cumulative effect of change in accounting principle $ .29 $ .16 $ .16 $ (.06) Cumulative effect of change in accounting principle -- -- .02 -- --------- --------- --------- --------- Net income (loss) available to common stockholders $ .29 $ .16 $ .14 $ (.06) ========= ========= ========= ========= Per common share-diluted: Income (loss) available to common stockholders before cumulative effect of change in accounting principle $ .24 $ .13 $ .15 $ (.06) Cumulative effect of change in accounting principle -- -- .02 -- --------- --------- --------- --------- Net income (loss) available to common stockholders $ .24 $ .13 $ .13 $ (.06) ========= ========= ========= ========= Dividends per common share $ .03 $ .03 $ .06 $ .06 ========= ========= ========= =========
See accompanying Notes to Consolidated Financial Statements. 3 4 DREYER'S GRAND ICE CREAM, INC. CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (Unaudited)
Retained Common Stock Earnings ---------------------- Capital in (Accumulated (In thousands) Shares Amount Excess of Par Deficit) Total -------- -------- -------- -------- -------- Balances at December 27, 1997 27,020 $ 27,020 $ 42,822 $ 39,498 $109,340 Net loss (1,090) (1,090) Accretion of preferred stock to redemption value (212) (212) Preferred stock dividends declared (348) (348) Common stock dividends declared (1,630) (1,630) Repurchases and retirements of common stock (5) (5) (132) (137) Issuance of common stock under employee stock plans 203 203 2,610 2,813 -------- -------- -------- -------- -------- Balances at June 27,1998 27,218 $ 27,218 $ 45,300 $ 36,218 $108,736 ======== ======== ======== ======== ======== Balances at December 26, 1998 27,312 $ 27,312 $ 46,722 $(11,401) $ 62,633 Net income 4,300 4,300 Accretion of preferred stock to redemption value (212) (212) Preferred stock dividends declared (348) (348) Common stock dividends declared (1,651) (1,651) Repurchases and retirements of common stock (19) (19) (216) (235) Issuance of common stock under employee stock plans 236 236 2,604 2,840 -------- -------- -------- -------- -------- Balances at June 26, 1999 27,529 $ 27,529 $ 49,110 $ (9,312) $ 67,327 ======== ======== ======== ======== ========
See accompanying Notes to Consolidated Financial Statements. 4 5 DREYER'S GRAND ICE CREAM, INC. CONSOLIDATED STATEMENT OF CASH FLOWS (Unaudited)
Twenty-six Weeks Ended -------------------------- (In thousands) June 26, 1999 June 27, 1998 ------------- ------------- Cash flows from operating activities: Net income (loss) $ 4,300 $ (1,090) Adjustments to reconcile net income (loss) to cash from operations: Depreciation and amortization 17,417 17,311 Deferred income taxes 2,760 (195) Cumulative effect of change in 595 -- accounting principle Changes in assets and liabilities: Trade accounts receivable (44,614) (35,919) Other accounts receivable 7,508 (7,194) Inventories (7,453) (6,998) Prepaid expenses and other (1,391) 374 Accounts payable and accrued liabilities 40,476 21,913 Accrued payroll and employee benefits 643 (7,083) -------- -------- 20,241 (18,881) -------- -------- Cash flows from investing activities: Acquisition of property, plant and equipment (11,456) (24,395) Retirement of property, plant and equipment 354 359 Increase in goodwill and distribution rights (125) (304) Increase in other assets (160) (42) -------- -------- (11,387) (24,382) -------- -------- Cash flows from financing activities: Proceeds from long-term debt -- 46,600 Repayments of long-term debt (7,088) (5,990) Issuance of common stock under employee stock plans 2,840 2,813 Repurchases and retirements of common stock (235) (137) Cash dividends paid (1,644) (1,966) -------- -------- (6,127) 41,320 -------- -------- Increase (decrease) in cash and cash equivalents 2,727 (1,943) Cash and cash equivalents, beginning of period 1,171 3,626 -------- -------- Cash and cash equivalents, end of period $ 3,898 $ 1,683 ======== ======== Supplemental Cash Flow Information Cash paid (refunded) during the period for: Interest (net of amounts capitalized) $ 6,673 $ 5,784 ======== ======== Income taxes (net of refunds) $ (555) $ (100) ======== ========
See accompanying Notes to Consolidated Financial Statements. 5 6 DREYER'S GRAND ICE CREAM, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) NOTE 1 - General Dreyer's Grand Ice Cream, Inc. and its subsidiaries (the Company) is a single segment industry company engaged in manufacturing and distributing premium ice cream and other frozen dessert products to grocery and convenience stores, foodservice accounts and independent distributors in the United States. The Company accounts for its operations geographically for management reporting purposes. These geographic segments have been aggregated for financial reporting purposes due to similarities in the economic characteristics of the geographic segments and the nature of the products, production processes, customer types and distribution methods throughout the United States. The consolidated financial statements for each of the 13-week and 26-week periods ended June 26, 1999 and June 27, 1998, have not been audited by independent public accountants, but include all adjustments, such as normal recurring accruals, which management considers necessary for a fair presentation of the consolidated operating results for the interim periods. The statements have been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission. Accordingly, certain information and footnote disclosure normally included in financial statements prepared in conformity with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations. The operating results for interim periods are not necessarily indicative of results to be expected for an entire year. The aforementioned statements should be read in conjunction with the Consolidated Financial Statements for the year ended December 26, 1998, appearing in the Company's 1998 Annual Report to Stockholders. NOTE 2 - Preoperating Costs In the first quarter of 1999, the Company adopted Statement of Position 98-5, "Reporting on the Costs of Start-Up Activities" (SOP 98-5). SOP 98-5 requires that the costs of start-up activities, including preoperating costs, be expensed as incurred and that previously unamortized preoperating costs be written off and treated as a cumulative effect of a change in accounting principle. As a result of adopting SOP 98-5, the Company recorded an after-tax charge of $595,000, or $.02 per common share, in the first quarter of 1999. NOTE 3 - Net Income (Loss) Per Common Share Under Statement of Financial Accounting Standards No. 128, "Earnings per Share", the denominator for basic net income (loss) per share includes the number of weighted average common shares outstanding. The denominator for diluted net income (loss) per share includes the number of weighted average shares outstanding plus the effect of potentially dilutive securities which include stock options, stock warrants and redeemable convertible preferred stock. Net income (loss) per common share is computed as follows: 6 7
Thirteen Weeks Ended Twenty-six Weeks Ended -------------------------- --------------------------- (In thousands, except per share amounts) June 26, 1999 June 27, 1998 June 26, 1999 June 27, 1998 ------------- ------------- ------------- ------------- Net income (loss) available to common stockholders - basic $ 7,950 $ 4,255 $ 3,740 $ (1,650) Add: preferred dividends and accretion 280 280 560 -- -------- -------- -------- -------- Net income (loss) available to common stockholders - diluted $ 8,230 $ 4,535 $ 4,300 $ (1,650) ======== ======== ======== ======== Weighted-average shares-basic 27,516 27,160 27,446 27,100 Dilutive effect of options 289 1,630 194 -- Dilutive effect of warrants -- 677 -- -- Dilutive effect of preferred stock 5,800 5,800 5,800 -- -------- -------- -------- -------- Weighted-average shares-diluted 33,605 35,267 33,440 27,100 ======== ======== ======== ======== Net income (loss) per common share: Basic $ .29 $ .16 $ .14 $ (.06) ======== ======== ======== ======== Diluted $ .24 $ .13 $ .13 $ (.06) ======== ======== ======== ========
Anti-dilutive securities Potentially dilutive securities are excluded from the calculations of diluted net income (loss) per common share as their inclusion would have an anti-dilutive effect. These securities, stated in equivalent shares of common stock, consisted of the following:
Thirteen Weeks Ended Twenty-six Weeks Ended ------------------------ -------------------------- (In thousands) June 26, 1999 June 27, 1998 June 26, 1999 June 27, 1998 ------------- ------------- ------------- ------------- Stock options 2,505 21 2,543 4,477 Stock warrants 2,000 -- 2,000 2,000 Preferred stock -- -- -- 5,800
Pursuant to a 1994 equity transaction, an affiliate of Nestle USA, Inc. purchased 6,000,000 newly issued shares of common stock and warrants to purchase 4,000,000 shares at an exercise price of $16 per share. Warrants for 2,000,000 shares expired unexercised on June 14, 1997. Warrants for the remaining 2,000,000 shares expired unexercised on June 14, 1999; these warrants have been excluded from the above diluted weighted-average share computations for the thirteen-week period ended June 26, 1999 and for both of the twenty-six week periods. In May 1999, stockholders approved an amendment to the Company's Stock Option Plan (1993) to increase the number of shares reserved for issuance thereunder from 4,400,000 to 6,400,000. NOTE 4 - Status of Restructuring and Other Actions During 1998, as a result of higher dairy raw material costs, a decline in "better for you" volumes, and a reduction in future sales of Ben & Jerry's products, the Company implemented certain restructuring and other actions designed to improve profitability and accelerate cost reductions by increasing focus on the core elements of the Company's Strategic Plan. The restructuring and other actions are substantially complete except for the withdrawal from the Grand Soft equipment manufacturing business and paying the remaining severance benefits. The Company has been pursuing various options relative to exiting its Grand Soft equipment manufacturing business and expects to withdraw from the manufacturing business by the second half of 1999. The Company is currently negotiating the transitioning of the equipment production to a sub-manufacturer. The Grand Soft accrual at December 26, 1998, included $576,000 of severance-related costs for 23 employees. The Company paid $359,000 of costs relating to exiting the manufacturing business in the first half of 1999. The $359,000 was comprised of $244,000 of transition 7 8 payroll and legal and related transaction costs along with $115,000 in severance payments for seven employees who were terminated in the first half of 1999. In addition, in 1998, the Company recorded $1,042,000 of severance and related charges for 38 sales and distribution employees. During 1998, 16 employees were terminated and paid $153,000 in severance benefits resulting in a balance of $889,000 at December 26, 1998. During 1999, 14 employees were terminated and paid $456,000 in severance benefits. Remaining severance benefits totaling $433,000 will be paid by the end of 1999. In 1998, the Company also recorded a charge of $933,000 to cost of goods sold for severance actions begun in advance of board approval of the remaining restructuring actions. During 1998, the Company paid $514,000 in benefits related to these actions resulting in a balance of $419,000 at December 26, 1998. During 1999, the Company paid $286,000 in benefits related to these actions. The following table summarizes the first half of 1999 activity in the restructuring and other accruals included in accounts payable and accrued liabilities in the Consolidated Balance Sheet:
(In thousands) Dec. 26, 1998 Additions Payments June 26, 1999 ------------- --------- -------- ------------- Restructuring accruals: Grand Soft $ 2,258 $ -- $ (359) $ 1,899 Sales and distribution severance 889 -- (456) 433 ------- ------- ------- ------- 3,147 -- (815) 2,332 ------- ------- ------- ------- Other accruals: Sales and distribution severance 419 -- (286) 133 ------- ------- ------- ------- $ 3,566 $ -- $(1,101) $ 2,465 ======= ======= ======= =======
NOTE 5 - Inventories Inventories are stated at the lower of cost (determined by the first-in, first-out method) or market. Inventories at June 26, 1999 and December 26, 1998 consisted of the following:
(In thousands) June 26, 1999 Dec. 26, 1998 ------------- ------------- Raw materials $ 5,432 $ 4,840 Finished goods 51,493 44,632 ------ ------ $56,925 $49,472 ======= =======
8 9 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Unaudited) The following table sets forth for the periods indicated the percent which the items in the Consolidated Statement of Operations bear to sales and the percentage change of such items compared to the indicated prior period:
Period-to-Period Variance Percentage of Sales Favorable (Unfavorable) -------------------- ----------------------- Thirteen Twenty-six Thirteen Weeks Twenty-six Weeks Weeks Ended Weeks Ended Ended Ended Compared Compared 1999 1998 1999 1998 To 1998 To 1998 ---- ---- ---- ---- ------- ------- Revenues: Sales 100.0% 100.0% 100.0% 100.0% 9.5% 8.1% Other income 0.2 0.3 0.2 0.3 (28.2) (48.6) ----- ----- ----- ----- 100.2 100.3 100.2 100.3 9.4 7.9 ----- ----- ----- ----- Costs and expenses: Cost of goods sold 75.0 77.7 78.2 80.1 (5.8) (5.4) Selling, general and administrative 19.8 18.8 19.3 19.4 (15.2) (7.7) Interest, net of amounts capitalized 1.0 1.1 1.2 1.2 4.5 (5.2) ----- ----- ----- ----- 95.8 97.6 98.7 100.7 (7.5) (5.9) ----- ----- ----- ----- Income (loss) before income tax provision (benefit) and cumulative effect of change in accounting principle 4.4 2.7 1.5 (0.4) 78.3 544.8 Income tax provision (benefit) 1.7 1.1 0.6 (0.2) (73.4) (538.4) ----- ----- ----- ----- Income (loss) before cumulative effect of change in accounting principle 2.7 1.6 0.9 (0.2) 81.5 549.1 Cumulative effect of change in accounting principle -- -- 0.1 -- -- NM ----- ----- ----- ----- Net income (loss) 2.7 1.6 0.8 (0.2) 81.5 494.5 Accretion of preferred stock to redemption value -- -- -- -- -- -- Preferred stock dividends 0.1 0.1 0.1 0.1 -- -- ----- ----- ----- ----- Net income (loss) available to common stockholders 2.6% 1.5% 0.7% (0.3)% 86.8 326.7 ===== ===== ===== =====
9 10 RESULTS OF OPERATIONS Forward-Looking Statements The Company may from time to time make written or oral forward-looking statements. Written forward-looking statements may appear in documents filed with the Securities and Exchange Commission, in press releases, and in reports to stockholders. The Private Securities Litigation Reform Act of 1995 contains a "safe harbor" for forward-looking statements upon which the Company relies in making such disclosures. In accordance with this "safe harbor" provision, we have identified that forward-looking statements are contained in this Management's Discussion and Analysis of Consolidated Financial Condition and Results of Operations. The Company undertakes no obligation to publicly revise these forward-looking statements to reflect subsequent events or circumstances. Also, in connection with this "safe harbor" provision, the Company identifies important factors that could cause the Company's actual results to differ materially from those contained in any forward-looking statement made by or on behalf of the Company. Any such statement is qualified by reference to the cautionary statements set forth below and in the Company's other filings with the Securities and Exchange Commission. Background In 1994, the Company adopted a strategic plan to accelerate the sales of its brand throughout the country (the Strategic Plan). The key elements of this plan are: 1) to build high margin brands with leading market shares through effective consumer marketing activities, 2) to expand the Company's direct-store-delivery distribution network to national scale and enhance this capability with sophisticated information and logistics systems and 3) to introduce innovative new products. The potential benefits of the Strategic Plan are increased market share and future earnings above those levels that would be attained in the absence of the Strategic Plan. In accordance with the Strategic Plan, the Company embarked on an aggressive national expansion. This expansion involved the entry into 34 new markets, which included the opening of a major manufacturing and distribution center in Texas, a significant increase in marketing spending and the introduction of several new products. At the same time, the Company invested in its soft-serve equipment manufacturing business, Grand Soft. The investments which were required to fund the brand-building actions and national expansion and to support the Grand Soft business substantially increased the Company's cost structure. In 1998, the cost of dairy raw materials peaked at a rate more than double of that experienced in 1997. This increase reduced the Company's 1998 gross margin by approximately $22,000,000 when compared to 1997. During this same period, sales volumes of the Company's "better for you" products continued the significant decline that began in 1997, consistent with an industry-wide trend. Finally, in August 1998, Ben & Jerry's Homemade, Inc. (Ben & Jerry's) informed the Company of its intention to terminate its distribution contract. Subsequent negotiations with Ben & Jerry's yielded revisions to the original contract terms which will reduce the Company's distribution gross margin of Ben & Jerry's products by approximately 54 percent starting September 1, 1999. The Company estimates that the distribution gross margin in the markets where it will stop distributing Ben & Jerry's products represented approximately six percent, or $13,000,000, of its total gross margin in 1998. The above factors: the higher dairy raw material costs; the decline in "better for you" volumes; and the reduction in future Ben & Jerry's sales either had in the past, or may continue to have in the future, a negative effect on the Company's gross margin and its ability to successfully implement the Strategic Plan. The Company, therefore, concluded that a thorough reassessment of its cost structure and strategy was necessary. This reassessment yielded restructuring actions designed to improve profitability and accelerate cost reductions by increasing focus on the core elements of the Strategic Plan. On October 16, 1998, the board of directors approved the restructuring actions. The Company continues to make progress towards the key elements of the Strategic Plan. This progress has yielded an increased market share in a consolidating industry. For example, the Company has had significant success in the superpremium segment in recent years with the introductions of Whole Fruit Sorbet, Starbucks(R) Ice Cream, and Godiva(R) Ice Cream. As part of its ongoing strategy to offer products in the high-margin superpremium segment, the Company will introduce a new line of superpremium ice cream under the brand name Dreyer's and Edy's Dreamery(TM) Ice Cream in September of 1999. While the Company will continue to distribute Ben & Jerry's products in a smaller geographic area, it will have no further restrictions on competing in the superpremium segment with its own pint products. 10 11 The Company believes that the benefits under the Strategic Plan will be realized in future years, although no assurance can be given that the expectations relative to future market share and earnings benefits of the strategy will be achieved. Specific factors that might cause actual results to differ from expectations include, but are not limited to, the following: the Company's ability to achieve the cost reductions anticipated from its restructuring actions and efficiencies in its manufacturing and distribution operations without negatively affecting sales, the cost of dairy raw materials and other commodities used in the Company's products, competitors' marketing and promotion responses, market conditions affecting the price of the Company's products, the Company's ability to increase sales of its own branded products, and responsiveness of the trade and consumers to the Company's new products and increased marketing and promotional expenses. These or other factors may be difficult to forecast and could have a material adverse effect on the Company's business, operating results, and financial condition. Status of Restructuring and Other Actions During 1998, as a result of higher dairy raw material costs, a decline in "better for you" volumes, and a reduction in future sales of Ben & Jerry's products, the Company implemented certain restructuring and other actions designed to improve profitability and accelerate cost reductions by increasing focus on the core elements of the Company's Strategic Plan. The restructuring and other actions are substantially complete except for the withdrawal from the Grand Soft equipment manufacturing business and paying the remaining severance benefits. The Company has been pursuing various options relative to exiting its Grand Soft equipment manufacturing business and expects to withdraw from the manufacturing business by the second half of 1999. The Company is currently negotiating the transitioning of the equipment production to a sub-manufacturer. The Grand Soft accrual at December 26, 1998, included $576,000 of severance-related costs for 23 employees. The Company paid $359,000 of costs relating to exiting the manufacturing business in the first half of 1999. The $359,000 was comprised of $244,000 of transition payroll and legal and related transaction costs along with $115,000 in severance payments for seven employees who were terminated in the first half of 1999. In addition, in 1998, the Company recorded $1,042,000 of severance and related charges for 38 sales and distribution employees. During 1998, 16 employees were terminated and paid $153,000 in severance benefits resulting in a balance of $889,000 at December 26, 1998. During 1999, 14 employees were terminated and paid $456,000 in severance benefits. Remaining severance benefits totaling $433,000 will be paid by the end of 1999. In 1998, the Company also recorded a charge of $933,000 to cost of goods sold for severance actions begun in advance of board approval of the remaining restructuring actions. During 1998, the Company paid $514,000 in benefits related to these actions resulting in a balance of $419,000 at December 26, 1998. During 1999, the Company paid $286,000 in benefits related to these actions. The following table summarizes the first half of 1999 activity in the restructuring and other accruals included in accounts payable and accrued liabilities in the Consolidated Balance Sheet:
(In thousands) Dec. 26, 1998 Additions Payments June 26, 1999 ------------- --------- -------- ------------- Restructuring accruals: Grand Soft $ 2,258 $ -- $ (359) $ 1,899 Sales and distribution severance 889 -- (456) 433 ------- ------- ------- ------- 3,147 -- (815) 2,332 ------- ------- ------- ------- Other accruals: Sales and distribution severance 419 -- (286) 133 ------- ------- ------- ------- $ 3,566 $ -- $(1,101) $ 2,465 ======= ======= ======= =======
Thirteen Weeks ended June 26, 1999 Compared with Thirteen Weeks ended June 27, 1998 Consolidated sales for the second quarter of 1999 increased by $26,588,000, or nine percent, to $306,861,000 from $280,273,000 for the same period last year. Sales of the Company's branded products, representing 64 percent of consolidated sales, were $21,044,000, or 12 percent, higher than the comparable quarter in 1998 and accounted for 79 percent of the overall increase. The increase in sales of the Company's branded products related primarily to an increase in unit sales and higher average wholesale prices in all markets. The products that led this increase were Classic Dreyer's and Edy's Grand Ice Cream, Godiva(R) Ice Cream, and Grand Light(R) Ice Cream. Sales of branded products distributed for other manufacturers (partner brands) increased five percent led by Nestle Ice Cream Company and Dove products. Sales of partner brands represented 36 percent of consolidated sales compared with 37 percent in the same period last year. As a result of changes in product mix and wholesale price increases, the average price of the Company's branded products increased approximately five percent, before the effect of increased trade promotion expenses. Average wholesale prices for partner brands increased approximately five percent. Gallon sales of the Company's branded products increased eight percent to 26,844,000 gallons, while unit sales of partner brands were relatively comparable to the same period last year. Cost of goods sold increased $12,585,000 or six percent, over the second quarter of 1998, while the overall gross margin increased to 25 percent from 22 percent. The gross margin improvement was primarily the result of wholesale price increases and changes in product mix, along with comparatively lower dairy material prices. The impact of the change in dairy raw material prices for the quarter was a $3,200,000 benefit versus last year. Selling, general and administrative expenses in the second quarter of 1999 were $7,990,000 or 15 percent higher than in the same period of 1998. This increase related primarily to significantly higher marketing expenses and, to a lesser extent, higher trade promotion expenses compared with the same period in 1998. The higher marketing and trade promotion expenses support the recent introduction of Godiva(R) Ice Cream and the upcoming launch of the Dreamery(TM) line. Selling, general and administrative expenses increased to 20 percent of total sales in 1999 compared to 19 percent of total sales in 1998. Interest expense decreased $146,000, or five percent, over the second quarter of 1998, primarily attributable to lower average borrowings. The income tax provision increased due to a correspondingly higher pre-tax income in 1999. The effective tax rate decreased to 38.6 percent for the second quarter of 1999 from 39.7 percent for the second quarter of 1998. Twenty-six Weeks ended June 26, 1999 Compared with Twenty-six Weeks ended June 27, 1998 Consolidated sales for the first half of 1999 increased by $39,892,000, or eight percent, to $535,247,000 from $495,355,000 for the same period last year. Sales of the Company's branded products, representing 63 percent of consolidated sales, were $24,997,000, or eight percent, higher than the comparable quarter in 1998 and accounted for 63 percent of the overall increase. The increase in sales of the Company's branded products related primarily to wholesale price increases and changes in mix. The products that led this increase were Classic Dreyer's and Edy's Grand Ice Cream and Godiva(R) Ice Cream. Sales of partner brands increased eight percent led by Ben & Jerry's and Nestle Ice Cream Company products. Sales of partner brands represented 37 percent of consolidated sales in both 11 12 periods. Wholesale prices for the Company's branded products increased approximately five percent, before the effect of increased trade promotion expenses. Wholesale prices for partner brands increased approximately three percent. Gallon sales of the Company's branded products increased four percent to 46,847,000 gallons, while unit sales of partner brands increased five percent. Cost of goods sold increased $21,538,000 or five percent, over the first half of 1998, while the overall gross margin increased to 22 percent from 20 percent. The gross margin improvement was primarily the result of wholesale price increases and changes in mix, along with comparatively lower distribution expenses as a percent of sales. Selling, general and administrative expenses in the first half of 1999 were $7,406,000 or eight percent, higher than in the same period of 1998. This increase related primarily to significantly higher marketing expenses compared with the same period in 1998. These expenses primarily relate to the launch of new products. Selling, general and administrative expenses represented 19 percent of total sales in 1999 and in 1998. Interest expense increased $307,000, or five percent, over the first half of 1998, primarily attributable to higher average borrowings. The income tax provision increased due to a correspondingly higher pre-tax income in 1999. The effective tax rate decreased to 39.1 percent for the first half of 1999 from 39.7 percent for the first half of 1998. In the first quarter of 1999, the Company adopted Statement of Position 98-5, "Reporting on the Costs of Start-Up Activities" (SOP 98-5). SOP 98-5 requires that the costs of start-up activities, including preoperating costs, be expensed as incurred and that previously unamortized preoperating costs be written off and treated as a cumulative effect of a change in accounting principle. As a result of adopting SOP 98-5, the Company recorded an after-tax charge of $595,000, or $.02 per common share, in the first quarter of 1999. LIQUIDITY AND CAPITAL RESOURCES Working capital at June 26, 1999 decreased $6,213,000 from year-end 1998 due primarily to the seasonal increase in accounts payable and accrued liabilities, partially offset by an increase in trade accounts receivable. The Company's operations provided cash of $20,241,000 that was primarily used to fund an $11,456,000 increase in property, plant and equipment and repayments of $7,088,000 of long-term debt. At June 26, 1999, the Company had $3,898,000 in cash and cash equivalents, and an unused credit line of $76,000,000. The total available under the Company's revolving line of credit decreases to $149,286,000 on December 31, 1999 and the line expires on December 31, 2000. The Company intends to refinance the line and believes it will be successful in obtaining such financing from available sources. The Company's Series A redeemable convertible preferred stock, par value $100,752,000, is convertible at any time at the option of the holder into 5,800,000 newly issued shares of common stock of the Company. The holder may instead redeem the issue for cash at par value on June 30, 2001. The Company presently anticipates that it would fund such a redemption from operating cash flows, borrowings or other financing sources. The Company believes that its credit line, along with its liquid resources, internally-generated cash and financing capacity, are adequate to meet both short-term and long-term operating and capital requirements. YEAR 2000 COMPLIANCE The Company continues to address its Year 2000 compliance. Critical centralized information systems (software and hardware) are either being upgraded, enhanced, or replaced for Year 2000 compliance. The Company completed upgrading and enhancing all critical centralized systems and expects to complete enterprise-wide testing during the second half of 1999. The review of embedded chip technology used in the Company's manufacturing systems determined that only minor upgrades or enhancements will be necessary. The Company expects to complete the embedded chip upgrade and enhancement process during the second half of 1999. The Company is also surveying key customers and suppliers to determine the risk associated with their Year 2000 compliance programs. The initial risk analysis is scheduled for completion during the second half of 1999. The Company believes the Year 2000 issue does not pose significant operational or financial risks. The Company has a broad base of customers and had only one customer accounting for ten percent of total sales in 1998. The Company also has a broad base of suppliers with multiple sourcing possibilities for all purchases. Nevertheless, the Company is in the process of developing appropriate contingency plans in an attempt to minimize the effect of any issues that may arise 12 13 from the failure of the Company, its customers or its suppliers to complete Year 2000 compliance work. The Company believes that it will complete the contingency plan development during the second half of 1999. The Company's assessment of the Year 2000 issue is based upon certain assumptions that may later prove to be inaccurate. The greatest potential risks relate to those situations beyond the Company's control, particularly the inability of suppliers and customers to be Year 2000 compliant, which may cause disruptions in the manufacturing and distribution operations. Additionally, a customer's inability to pay in a timely manner and the disruption of electronic invoicing and payment systems could cause financial risk and losses to the Company. The Company expects to complete probability studies and risk analyses as part of the initial phase of the contingency plan development. The total cost for the Company's Year 2000 initiatives is estimated to be $6,000,000, of which $3,500,000 was incurred during 1998 and $2,500,000 is being incurred during 1999. The majority of these costs relate to the accelerated replacement of capitalized hardware and software systems. Of the $6,000,000, approximately $4,500,000 will be capitalized and approximately $1,500,000, relating to the costs of modifying computer software for the Year 2000, will be expensed as incurred. The Company's cost estimates do not include costs that may result from the failure of third parties to be Year 2000 compliant or the costs to implement contingency plans. The Company does not expect the costs of Year 2000 compliance to have a material impact on the Company's financial position, results of operations or cash flows. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Since December 26, 1998, there have been no material changes in the Company's market risk exposure. 13 14 PART II: OTHER INFORMATION ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS An Annual Meeting of Stockholders was held in Oakland, California on May 12, 1999. A total of 25,970,785 shares (94.4 percent) of the outstanding common shares and 1,007,522 shares (100.0 percent) of the outstanding Series A convertible preferred shares (convertible into 5,800,000 common shares) were represented at the meeting whether in person or by proxy. The following matters were voted upon by the stockholders: (a) Election of three directors to Class II of the Board of Directors The following persons, who were the only nominees, were re-elected as directors of Class II of the Board of Directors until the 2002 Annual Meeting of Stockholders or until their respective successors are elected and qualified, and received the following number of votes:
Nominee For Withheld ------- --- -------- Robert A. Helman 31,224,828 545,957 Edmund R. Manwell 30,414,253 1,356,532 Timothy P. Smucker 31,230,962 539,823
(b) Approving the amendment to the Company's Stock Option Plan (1993) to increase the number of shares reserved for issuance thereunder from 4,400,000 to 6,400,000
Votes ----- For 24,062,182 Against 4,791,435 Abstain 18,855 Broker Non-Votes 2,898,313
and (c) Approving the appointment of PricewaterhouseCoopers LLP as independent public accountants for the fiscal year 1999 and thereafter until its successor is appointed
Votes ----- For 31,700,399 Against 37,370 Abstain 32,116 Broker Non-Votes 900
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) The following exhibit is filed herewith:
Exhibit No. Description ----------- ----------- 27.1 Financial Data Schedule.
(b) No reports on Form 8-K were filed by the Company during the quarter ended June 26, 1999. 14 15 SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. DREYER'S GRAND ICE CREAM, INC. Dated: August 10, 1999 By:/s/ Timothy F. Kahn --------------------------------- Timothy F. Kahn Vice President - Finance and Administration and Chief Financial Officer (Principal Financial Officer) 15 16 DREYER'S GRAND ICE CREAM, INC. INDEX OF EXHIBITS
Exhibit No. Description - ----------- ----------- 27.1 Financial Data Schedule.
16 EX-27.1 2 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED BALANCE SHEET AND THE CONSOLIDATED STATEMENT OF OPERATIONS, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 6-MOS DEC-25-1999 DEC-27-1998 JUN-26-1999 1 3,898 0 133,387 5,720 56,925 224,429 346,948 143,503 505,407 169,583 171,123 99,866 0 27,529 39,798 505,407 535,247 536,088 418,277 418,277 0 428 6,247 8,038 3,143 4,895 0 0 595 4,300 0.14 0.13 EXCLUDES SELLING, GENERAL AND ADMINISTRATIVE EXPENSES AS THESE ARE PART OF 5-03(b)(4) FOR PURPOSES OF THIS EXHIBIT, "PRIMARY" MEANS "BASIC".
-----END PRIVACY-ENHANCED MESSAGE-----