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FORM 10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
       
(Mark One)    
[X]   QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
 

For the quarterly period ended September 28, 2002

       
    OR  
[  ]   TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
 

Commission file number 0-14190

DREYER’S GRAND ICE CREAM, INC.

(Exact name of registrant as specified in its charter)
     
Delaware   No. 94-2967523
(State or other jurisdiction of   (I.R.S. Employer
incorporation or organization)   Identification No.)

5929 College Avenue, Oakland, California 94618
(Address of principal executive offices) (Zip Code)

(510) 652-8187
(Registrant’s telephone number, including area code)

         Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes [X] No [   ]

         Indicate the number of shares outstanding of each of the issuer’s classes of common stock as of the latest practicable date.

         
    Shares Outstanding
    November 11, 2002
   
Common stock, $1 par value
    34,911,000  

 


TABLE OF CONTENTS

PART I: FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
ITEM 2.    MANAGEMENT’S DISCUSSION AND ANALYSIS OF CONSOLIDATED FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
ITEM 3.    QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK.
ITEM 4.    CONTROLS AND PROCEDURES.
PART II: OTHER INFORMATION
ITEM 6.    EXHIBITS AND REPORTS ON FORM 8-K.
SIGNATURE
CERTIFICATIONS
INDEX OF EXHIBITS
Exhibit 10.1
Exhibit 99.1
Exhibit 99.2


Table of Contents

PART I: FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS.

DREYER’S GRAND ICE CREAM, INC.

CONSOLIDATED BALANCE SHEET

                     
        Sept. 28, 2002   Dec. 29, 2001
       
 
($ in thousands, except per share amounts)   (Unaudited)        
 
Assets
               
Current Assets:
               
   
 Cash and cash equivalents
$ 1,859     $ 1,650  
   
 Trade accounts receivable, net of allowance for doubtful accounts of
 $1,584 in 2002 and $1,024 in 2001
  116,640       89,721  
   
 Other accounts receivable
  14,384       16,116  
   
 Inventories
  85,533       81,298  
   
 Deferred income taxes
  1,698       3,547  
   
 Prepaid expenses and other
  17,253       8,849  
 
 
   
     
 
   
 Total current assets
  237,367       201,181  
 
Property, plant and equipment, net
    210,665       198,565  
Goodwill
    84,701       39,114  
Other intangibles, net
    1,849       55,354  
Other assets
    3,364       4,475  
 
 
   
     
 
Total assets
  $ 537,946     $ 498,689  
 
 
   
     
 
Liabilities and Stockholders’ Equity
               
Current Liabilities:
               
   
 Accounts payable and accrued liabilities
$ 109,673     $ 91,794  
   
 Accrued payroll and employee benefits
  32,194       25,369  
   
 Current portion of long-term debt
  2,143          
 
 
   
     
 
   
Total current liabilities
  144,010       117,163  
 
Long-term debt, less current portion
    146,429       148,671  
Deferred income taxes
    14,468       24,490  
 
 
   
     
 
Total liabilities
    304,907       290,324  
 
 
   
     
 
Commitments and contingencies
               
 
Stockholders’ Equity:
               
   
 Preferred stock, $1 par value - 10,000,000 shares authorized; no shares issued
 or outstanding in 2002 and 2001
             
   
 Common stock, $1 par value - 60,000,000 shares authorized; 34,883,000
 shares and 34,461,000 shares issued and outstanding in 2002 and 2001,
 respectively
  34,883       34,461  
   
 Capital in excess of par
  166,962       160,103  
   
 Notes receivable from stockholders
  (2,228 )     (2,546 )
   
 Retained earnings
  33,422       16,347  
 
 
   
     
 
Total stockholders’ equity
    233,039       208,365  
 
 
   
     
 
Total liabilities and stockholders’ equity
  $ 537,946     $ 498,689  
 
 
   
     
 

See accompanying Notes to Consolidated Financial Statements.

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DREYER’S GRAND ICE CREAM, INC.

CONSOLIDATED STATEMENT OF INCOME

(Unaudited)
                                     
        Thirteen Weeks Ended   Thirty-nine Weeks Ended
       
 
($ in thousands, except per share amounts)   Sept. 28, 2002   Sept. 29, 2001   Sept. 28, 2002   Sept. 29, 2001
   
 
 
 
Net sales
  $ 383,598     $ 361,636     $ 1,050,823     $ 936,473  
 
   
     
     
     
 
Costs and expenses:
                               
 
Cost of goods sold
    327,624       321,020       912,650       831,136  
 
Selling, general and administrative
    35,632       28,884       90,560       84,204  
 
Interest, net of amounts capitalized
    1,947       2,814       5,835       9,092  
 
Other income, net
    (575 )     (1,029 )     (386 )     (2,198 )
 
Merger transaction expenses
    2,823               5,711          
 
   
     
     
     
 
 
    367,451       351,689       1,014,370       922,234  
 
   
     
     
     
 
Income before income tax provision
    16,147       9,947       36,453       14,239  
Income tax provision
    5,813       3,899       13,123       5,582  
 
   
     
     
     
 
Net income
    10,334       6,048       23,330       8,657  
Accretion of preferred stock to redemption value
                            212  
Preferred stock dividends
                            348  
 
   
     
     
     
 
Net income available to common stockholders
  $ 10,334     $ 6,048     $ 23,330     $ 8,097  
 
   
     
     
     
 
Net income per common share:
                               
 
Basic
  $ .30     $ .18     $ .67     $ .26  
 
   
     
     
     
 
 
Diluted
  $ .27     $ .17     $ .62     $ .24  
 
   
     
     
     
 
Dividends per common share
  $ .06     $ .06     $ .18     $ .18  
 
   
     
     
     
 

See accompanying Notes to Consolidated Financial Statements.

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DREYER’S GRAND ICE CREAM, INC.

CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY

(Unaudited)
                                                   
                              Notes                
      Common Stock       Receivable            
     
  Capital in   From   Retained        
(In thousands)   Shares   Amount   Excess of Par   Stockholders   Earnings   Total
   
 
 
 
 
 
Balances at December 30, 2000
    28,268     $ 28,268     $ 58,396     $ (2,284 )   $ 15,992     $ 100,372  
 
Net income
                                    8,657       8,657  
 
Accretion of preferred stock to redemption value
                                    (212 )     (212 )
 
Preferred stock dividends declared
                                    (348 )     (348 )
 
Common stock dividends declared
                                    (5,845 )     (5,845 )
 
Conversion of mandatorily redeemable convertible preferred stock to common stock
    5,800       5,800       94,952                       100,752  
 
Issuance of common stock under employee stock plans, net
    480       480       7,739       (819 )             7,400  
 
Repurchases and retirements of common stock
    (82 )     (82 )     (2,249 )                     (2,331 )
 
   
     
     
     
     
     
 
Balances at September 29, 2001
    34,466     $ 34,466     $ 158,838     $ (3,103 )   $ 18,244     $ 208,445  
 
   
     
     
     
     
     
 
 
Balances at December 29, 2001
    34,461     $ 34,461     $ 160,103     $ (2,546 )   $ 16,347     $ 208,365  
 
Net income
                                    23,330       23,330  
 
Common stock dividends declared
                                    (6,255 )     (6,255 )
 
Issuance of common stock under employee stock plans, net
    477       477       8,952       (78 )             9,351  
 
Repurchases and retirements of common stock
    (55 )     (55 )     (2,093 )     396               (1,752 )
 
   
     
     
     
     
     
 
Balances at September 28, 2002
    34,883     $ 34,883     $ 166,962     $ (2,228 )   $ 33,422     $ 233,039  
 
   
     
     
     
     
     
 

See accompanying Notes to Consolidated Financial Statements.

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DREYER’S GRAND ICE CREAM, INC.

CONSOLIDATED STATEMENT OF CASH FLOWS

(Unaudited)
                       
          Thirty-nine Weeks Ended
         
($ in thousands)   Sept. 28, 2002   Sept. 29, 2001
   
 
Cash flows from operating activities:
               
 
Net income
  $ 23,330     $ 8,657  
 
Adjustments to reconcile net income to cash flows from operations:
               
   
Depreciation and amortization
    26,067       26,940  
   
Deferred income taxes
    1,993       1,029  
   
Impairment of investment in Momentx Corporation
    1,093          
   
Changes in assets and liabilities, net of amounts acquired:
               
     
Trade accounts receivable
    (26,919 )     (52,241 )
     
Other accounts receivable
    1,732       (1,957 )
     
Inventories
    (4,235 )     (12,688 )
     
Prepaid expenses and other
    (8,404 )     219  
     
Accounts payable and accrued liabilities
    17,854       42,353  
     
Accrued payroll and employee benefits
    6,825       (424 )
 
 
   
     
 
 
    39,336       11,888  
 
 
   
     
 
Cash flows from investing activities:
               
 
Acquisition of property, plant and equipment
    (37,927 )     (29,218 )
 
Retirement of property, plant and equipment
    536       1,662  
 
Purchase of independent distributors and other intangibles
    (2,757 )     (5,646 )
 
Increase in other assets
    (249 )     513  
 
 
   
     
 
 
    (40,397 )     (32,689 )
 
 
   
     
 
Cash flows from financing activities:
               
 
Net (repayments of) proceeds from long-term debt
    (99 )     42,700  
 
Repayments of long-term debt
          (22,186 )
 
Issuance of common stock under employee stock plans, net
    9,351       7,400  
 
Repurchases and retirements of common stock
    (1,752 )     (2,331 )
 
Cash dividends paid
    (6,230 )     (4,974 )
 
 
   
     
 
 
    1,270       20,609  
 
 
   
     
 
Increase (decrease) in cash and cash equivalents
    209       (192 )
 
Cash and cash equivalents, beginning of period
    1,650       2,721  
 
 
   
     
 
Cash and cash equivalents, end of period
  $ 1,859     $ 2,529  
 
 
   
     
 
Supplemental cash flow information:
               
 
Cash paid during the period for:
               
     
Interest (net of amounts capitalized)
  $ 5,511     $ 8,848  
 
 
   
     
 
     
Income taxes (net of refunds)
  $ 6,653     $ 261  
 
 
   
     
 
Supplemental schedule of noncash investing and financing activities:
               
 
Conversion of redeemable convertible preferred stock to common stock
          $ 100,752  
 
 
           
 

See accompanying Notes to Consolidated Financial Statements.

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DREYER’S GRAND ICE CREAM, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 1 — Operations and Financial Statement Presentation

         Dreyer’s Grand Ice Cream, Inc. and its subsidiaries (the Company) are engaged primarily in the business of manufacturing and distributing premium and superpremium ice cream and other frozen dessert products to grocery and convenience stores, foodservice accounts and independent distributors in the United States.

         The Company accounts for its operations geographically for management reporting purposes. These geographic segments have been aggregated for financial reporting purposes due to similarities in the economic characteristics of the geographic segments and the nature of the products, production processes, customer types and distribution methods throughout the United States.

         The consolidated financial statements for the thirteen and thirty-nine weeks ended September 28, 2002 and September 29, 2001 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 (SEC). Accordingly, certain information and footnote disclosures normally included in financial statements prepared in conformity with accounting principles generally accepted in the United States of America 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 29, 2001, appearing in the Company’s Report on Form 8-K filed on November 5, 2002. Certain reclassifications have been made to prior years’ financial statements to conform to the current year presentation.

NOTE 2 — Significant Accounting Assumptions and Estimates

         The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions. These estimates include assessing the recoverability of accounts receivable; the adequacy of the valuation allowance for deferred tax assets; the recoverability of goodwill; the adequacy of the Company’s liabilities for self-insured health, workers compensation and vehicle plans; and the adequacy of the Company’s liabilities for employee bonuses and profit-sharing plan contributions, among others. 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 these estimates.

NOTE 3 — Merger and Contribution Agreement

         On June 16, 2002, the Company entered into an Agreement and Plan of Merger and Contribution (the Merger Agreement) with New December, Inc. (New Dreyer’s), December Merger Sub, Inc., Nestlé Holdings, Inc. (Nestlé) and NICC Holdings, Inc. (NICC Holdings), a wholly-owned subsidiary of Nestlé, to combine the Company with Nestlé’s United States frozen dessert business. The combination will result in both the Company and Nestlé Ice Cream Company, LLC (NICC), which holds Nestlé’s United States frozen dessert business, becoming wholly-owned subsidiaries of New Dreyer’s, a newly formed Delaware corporation. This transaction will be recorded under the purchase method of accounting and will be treated as a reverse acquisition. Under reverse acquisition accounting, NICC will be deemed to be the acquirer for accounting purposes only, and the Company will be treated as the acquiree. As a result, the Company is expensing all merger transaction expenses as incurred. These expenses totaled $2,823,000 and $5,711,000 for the thirteen and thirty-nine weeks ended September 28, 2002, respectively.

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         If the transactions contemplated by the Merger Agreement are completed, each non-Nestlé stockholder who holds shares of the Company’s common stock at the effective time of the merger will receive one share of class A callable puttable common stock of New Dreyer’s. Under the amended and restated certificate of incorporation of New Dreyer’s, subject to the terms set forth therein, the holders of New Dreyer’s class A callable puttable stock will be permitted to sell (put) some or all of their shares to New Dreyer’s for $83.00 per share during two periods, the first beginning on December 1, 2005 and ending on January 13, 2006, and the second beginning on April 3, 2006 and ending on May 12, 2006. New Dreyer’s class A callable puttable common stock will also be subject to redemption (call) by New Dreyer’s at the request of Nestlé at $88.00 per share during a six-month period beginning on January 1, 2007. For the contribution of its ownership interest of NICC Holdings, Nestlé will receive approximately 55 million shares of class B common stock of New Dreyer’s. The class B common shares are similar to the class A common shares, except that they lack the call and put features. The shares of the Company’s common stock currently held by Nestlé will be converted into the same number of shares of class B common stock of New Dreyer’s. As of September 28, 2002, Nestlé owned approximately 23 percent of the Company’s common stock on a diluted basis. If the transactions contemplated by the Merger Agreement are completed, Nestlé will own approximately 67 percent of the diluted common stock of New Dreyer’s.

         Each outstanding option to purchase the Company’s common stock under the Company’s existing stock option plans will, at the completion of the transactions, be converted into an option to acquire:

  prior to the date New Dreyer’s class A callable puttable common stock is redeemed under the call right, that number of shares of New Dreyer’s class A callable puttable common stock equal to the number of shares of the Company’s common stock subject to options immediately prior to the completion of the transactions, at the price or prices per share in effect immediately prior to the completion of the transactions; and
 
  at or after the date New Dreyer’s class A callable puttable common stock is redeemed under the call right or to the consummation of a short-form merger of New Dreyer’s with Nestlé or an affiliate of Nestlé S.A., pursuant to the terms of the governance agreement in the form attached as an exhibit to the Merger Agreement, the same consideration which the holder of the options would have received had he or she exercised such option prior to such redemption and received consideration pursuant to the redemption at the price or prices in effect at that time.

The options will otherwise be subject to the same terms and conditions applicable to the original options to purchase the Company’s common stock immediately prior to the completion of the transactions.

         Certain regulatory requirements must be complied with before the transactions contemplated by the Merger Agreement are completed. The Company and Nestlé are not aware of any material governmental consents or approvals that are required prior to the completion of the transactions other than those described below:

  Under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the HSR Act), and the rules promulgated thereunder by the United States Federal Trade Commission (the FTC), the transactions cannot be completed until notifications have been given and information has been furnished to the FTC and the Antitrust Division of the United States Department of Justice, and the specified waiting periods have expired or have been terminated. The Company and Nestlé filed notification and report forms under the HSR Act with the FTC and the Antitrust Division on July 3, 2002. On August 2, 2002, the FTC made a request for additional information and documentary material, thereby extending the statutory waiting period until 30 days after the Company and Nestlé each substantially comply with this request, unless the waiting period is terminated earlier or extended with the consent of the Company and Nestlé. The Company and Nestlé are continuing to work closely with the FTC staff on its request.
 
  On November 6, 2002, New Dreyer’s filed with the SEC a Registration Statement on Form S-4 which included a proxy statement/prospectus pertaining to the transactions contemplated by the Merger Agreement. The SEC may choose to review the filing, and if it does so, it will typically provide comments within 30 days.
 
  If the registration statement is declared effective by the SEC, and if the transactions contemplated by the Merger Agreement are completed, then all shares of New Dreyer’s class A callable puttable common stock received by the Company’s stockholders in the merger will be freely transferable, except that shares of New Dreyer’s class A callable

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    puttable common stock received by persons who are deemed to be “affiliates” of the Company under the Securities Act of 1933, as amended (the 1933 Act), at the time of the special meeting of the Company’s stockholders, may be resold by such affiliates only in transactions permitted by Rule 145 under the 1933 Act or as otherwise permitted under the 1933 Act. Persons who may be deemed to be affiliates of the Company for such purposes generally include individuals or entities that control, are controlled by or are under common control with the Company and include the members of the Company’s board of directors.

         Several of the Company’s joint venture partners and partner brand manufacturers have rights to terminate their arrangements with the Company upon consummation of the transactions contemplated by the Merger Agreement, subject to various other terms and conditions. While the Company intends to continue in these ventures and partner brand relationships, it can provide no assurance as to the potential actions of its business partners. Should any of the Company’s significant partners or suppliers choose to exit these arrangements in accordance with their rights to do so following the consummation, the Company may incur significant decreases in gross profit or be required to write-off certain assets as a result of the loss of these business partners.

NOTE 4 — Inventories

         Inventories are stated at the lower of cost (determined by the first-in, first-out method) or market. Inventories at September 28, 2002 and December 29, 2001 consisted of the following:

                 
(In thousands)   Sept. 28, 2002   Dec. 29, 2001
   
 
Raw materials
  $ 9,173     $ 9,099  
Finished goods
    76,360       72,199  
 
   
     
 
 
  $ 85,533     $ 81,298  
 
   
     
 

NOTE 5 — Butter Investments

         Under current federal and state regulations and industry practice, the price of cream, a primary ingredient in ice cream, is linked to the price of butter. In an effort to mitigate the effects of butter price volatility, the Company periodically purchases butter or butter futures contracts with the intent of reselling or settling its positions in order to lower its cream cost and overall exposure to the volatility of this market. The Company has elected to not treat its investment in butter as a hedge for accounting purposes. Consequently, it “marks to market” its investment at the end of each quarter and records any resulting gain or loss in other income, net. The Company typically holds its butter investments for periods of up to four months.

         Investments in butter, included in prepaid expenses and other at September 28, 2002 consisted of the following:

         
(In thousands)   Sept. 28, 2002
   
Butter
  $ 3,501  
Butter futures contracts
    155  
 
   
 
 
  $ 3,656  
 
   
 

         During the thirteen and thirty-nine weeks ended September 28, 2002, the Company recorded losses of $746,000 and $2,065,000, respectively. During 2001, the Company made no investments in butter.

NOTE 6 — Net Income Per Common Share

         The denominator for basic net income per share includes the number of weighted-average common shares outstanding. The denominator for diluted net income per share includes the number of weighted-average shares outstanding plus the

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effects of potentially dilutive securities which include stock options and redeemable convertible preferred stock. The following table reconciles the numerators and denominators of the basic and diluted net income per common share calculations:

                                   
      Thirteen Weeks Ended   Thirty-nine Weeks Ended
     
 
(In thousands, except per share amounts)   Sept. 28, 2002   Sept. 29, 2001   Sept. 28, 2002   Sept. 29, 2001
   
 
 
 
Net income available to common stockholders-basic
  $ 10,334     $ 6,048     $ 23,330     $ 8,097  
Add: preferred dividends and accretion
                            560  
 
   
     
     
     
 
Net income available to common stockholders-diluted
  $ 10,334     $ 6,048     $ 23,330     $ 8,657  
 
   
     
     
     
 
 
Weighted-average shares-basic
    34,814       34,420       34,670       30,688  
Dilutive effect of options
    3,358       1,801       3,020       1,897  
Dilutive effect of preferred stock
                            3,633  
 
   
     
     
     
 
Weighted-average shares-diluted
    38,172       36,221       37,690       36,218  
 
   
     
     
     
 
 
Net income per common share:
                               
 
Basic
  $ .30     $ .18     $ .67     $ .26  
 
   
     
     
     
 
 
Diluted
  $ .27     $ .17     $ .62     $ .24  
 
   
     
     
     
 

         Each outstanding and unvested option to purchase the Company’s common stock under the Company’s existing stock option plans became fully vested on June 14, 2002, the date that the Company’s board of directors approved the Merger Agreement and the transactions contemplated by the Merger Agreement (Note 3). In connection with the execution of the Merger Agreement, certain executive officers waived their rights to accelerated vesting of their unvested stock options in conjunction with entering into Employment Agreements with New Dreyer’s. The employment agreements are effective if and when the transactions contemplated by the Merger Agreement are completed. Under the Merger Agreement, the Company can have no more than 41,393,348 outstanding or issuable shares of common stock if and when the transactions contemplated by the Merger Agreement are completed. This total includes shares issuable upon exercise of options, whether vested or unvested.

Anti-dilutive securities

         Potentially dilutive securities are excluded from the calculations of diluted net income per common share when their inclusion would have an anti-dilutive effect. There were no potentially dilutive securities to be excluded during the thirteen and thirty-nine weeks ended September 28, 2002. Potentially dilutive securities, stated in absolute equivalent shares of common stock, consisted of 753,000 stock options during the thirteen and thirty-nine weeks ended September 29, 2001.

NOTE 7 – Adoption of New Accounting Pronouncements

Accounting for Consideration Given by a Vendor to a Customer (Including a Reseller of the Vendor’s Products)

         In November 2001, the Emerging Issues Task Force of the Financial Accounting Standards Board (EITF) issued EITF 01-9, “Accounting for Consideration Given by a Vendor to a Customer (Including a Reseller of the Vendor’s Products)” (EITF 01-9). This pronouncement requires that discounts (off-invoice promotion and coupons), amounts paid to retailers to advertise a company’s products (fixed trade promotion) and fees paid to retailers to obtain shelf space (slotting fees) be recorded as a reduction of revenue.

         The Company adopted EITF 01-9 at the beginning of fiscal 2002. For the thirteen and thirty-nine weeks ended September 28, 2002, the Company presented the expenses described above of $65,881,000 and $176,589,000, respectively, as a reduction of net sales in accordance with this pronouncement. For the thirteen and thirty-nine weeks ended September 29, 2001, the Company retroactively reclassified expenses of $58,274,000 and $140,300,000,

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respectively. The retroactive reclassification of these expenses resulted in a decrease in total sales and gross profit, along with a corresponding decrease in selling, general and administrative expenses, with no effect on net income as previously reported.

Accounting for Goodwill and Other Intangible Assets

         In June 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 142, “Goodwill and Other Intangible Assets” (SFAS No. 142). This pronouncement requires recognition of goodwill and other unidentifiable intangible assets with indeterminate lives as long-term assets. Amortization as previously required by Accounting Principles Board Opinion No. 17, “Intangible Assets”, is no longer permitted. In lieu of amortization, these assets are now tested for impairment on an annual basis and between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. The Company adopted SFAS No. 142 at the beginning of fiscal 2002 and completed its transitional impairment test during the first quarter of 2002; the Company has not recorded any impairment charges under SFAS No. 142.

         The following table reconciles reported net income available to common stockholders and the related per common share amounts to the corresponding adjusted net income and related per common share amounts. Adjusted net income and net income per common share amounts reflecting the exclusion of goodwill amortization of $655,000 ($1,100,000 net of tax of $445,000) and $1,942,000 ($3,193,000 net of tax of $1,251,000), respectively, for the thirteen and thirty-nine weeks ended September 29, 2001, respectively, follow:

                                   
      Thirteen Weeks Ended   Thirty-nine Weeks Ended
     
 
(In thousands, except per share amounts)   Sept. 28, 2002   Sept. 29, 2001   Sept. 28, 2002   Sept. 29, 2001
   
 
 
 
 
                               
As reported
  $ 10,334     $ 6,048     $ 23,330     $ 8,097  
Goodwill amortization, net of tax
            655               1,942  
 
   
     
     
     
 
As adjusted
  $ 10,334     $ 6,703     $ 23,330     $ 10,039  
 
   
     
     
     
 
Per common share:
                               
 
As reported-basic
  $ .30     $ .18     $ .67     $ .26  
 
Goodwill amortization, net of tax
            .02               .06  
 
   
     
     
     
 
 
As adjusted-basic
  $ .30     $ .20     $ .67     $ .32  
 
   
     
     
     
 
 
                               
 
As reported-diluted
  $ .27     $ .17     $ .62     $ .24  
 
Goodwill amortization, net of tax
            .02               .05  
 
   
     
     
     
 
 
As adjusted-diluted
  $ .27     $ .19     $ .62     $ .29  
 
   
     
     
     
 

         In accordance with SFAS No. 142, the Company reclassified the long-term deferred income tax liability associated with nondeductible goodwill, resulting in a noncash reduction in goodwill and a corresponding reduction in the deferred income tax liability of $10,166,000. Also in accordance with SFAS No. 142, the Company now presents goodwill separately from other intangibles in the Consolidated Balance Sheet. In addition, the Company reclassified $52,997,000 of acquisition-related intangibles with indefinite lives to goodwill at the beginning of the first quarter of 2002. In accordance with this pronouncement, the corresponding prior year amounts were not retroactively reclassified. The remaining change in goodwill since December 29, 2001 consists of acquisition goodwill.

Accounting for the Impairment or Disposal of Long-Lived Assets

         In October 2001, the Financial Accounting Standards Board issued SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets” (SFAS No. 144). This pronouncement clarifies certain issues related to SFAS No. 121, “Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of” and develops a single accounting model for long-lived assets to be disposed of. The Company adopted SFAS No. 144 in the first quarter of 2002. The adoption of SFAS No. 144 did not impact the Company’s financial position, results of operations or cash flows.

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NOTE 8-Investment in Momentx Corporation

         At December 29, 2001, the Company had a $1,093,000 investment in Momentx Corporation (Momentx), included in long-term Other Assets. Momentx is an e-market solution provider for the dairy, food and beverage industries. The Company followed the cost method in accounting for this investment since its ownership interest was less than three percent. During the second quarter of 2002, the Company determined that Momentx’s shortfalls to its business plan, which plan called for a substantial acceleration of its sales growth which did not occur, negatively impacted the recovery of the Company’s investment and recognized a $1,093,000 loss which is included as a component of Other income, net, in the Consolidated Statement of Income.

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ITEM 2.    MANAGEMENT’S DISCUSSION AND ANALYSIS OF CONSOLIDATED FINANCIAL CONDITION AND RESULTS OF
                  OPERATIONS (Unaudited).

FORWARD-LOOKING STATEMENTS

         This report contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, which contains a “safe harbor” for forward-looking statements upon which the Company relies in making such disclosures. These forward-looking statements are based on the Company’s current expectations and projections about future events. These forward-looking statements are subject to risks, uncertainties and assumptions about the Company, including, but not limited to:

    uncertainty regarding the Company’s future operating results;
 
    the Company’s ability to achieve efficiencies in its manufacturing and distribution operations without negatively affecting sales;
 
    the cost of energy used in manufacturing and distribution;
 
    the cost of dairy raw materials and other commodities used in the Company’s products;
 
    competitors’ marketing and promotion responses;
 
    market conditions affecting the prices of the Company’s products;
 
    the Company’s ability to increase sales of its own branded products;
 
    responsiveness of both the trade and consumers to the Company’s new products and marketing and promotional programs; and
 
    uncertainty regarding the completion and effect of the proposed transactions described under “MERGER AND CONTRIBUTION AGREEMENT” below.

         Other factors that could cause actual results to differ from expectations are discussed in this “Item 2 – Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Item 3 – Qualitative and Quantitative Disclosures About Market Risk” below. The Company’s actual results could differ substantially from those anticipated in these forward-looking statements. The Company undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information or future events.

         The following discussion should be read together with the Company’s consolidated financial statements and related notes thereto included elsewhere in this document and in “Item 5 – Management’s Discussion and Analysis of Financial Condition and Results of Operations” appearing in the Company’s Report on Form 8-K filed on November 5, 2002 and in “Item 7A – Qualitative and Quantitative Disclosures About Market Risk” appearing in the Company’s 2001 Annual Report on Form 10-K.

APPLICATION OF CRITICAL ACCOUNTING POLICIES

         The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions. The Company believes that the following critical accounting policies, which the Company’s senior management has discussed with the audit committee of the board of directors, represent the most significant judgments and estimates used in the preparation of the consolidated financial statements:

  The Company assesses the recoverability of trade accounts receivable based on estimated losses resulting from the inability of customers to make required payments. The Company’s estimates are based on the aging of accounts receivable balances and historical write-off experience, net of recoveries. The Company reviews trade accounts receivable for recoverability regularly and whenever events or circumstances, such as deterioration in the financial condition of a customer, indicate that additional allowances might be required. Changes in the financial condition of the Company’s major customers could result in significant accounts receivable write-offs.
 
  The Company records a valuation allowance related to deferred tax assets if, based on the weight of the available evidence, the Company concludes that it is more likely than not that some portion or all of the deferred tax assets will

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    not be realized. While the Company has considered future taxable income and prudent and feasible tax planning strategies in assessing the need for the valuation allowance, should the Company determine that it would not be able to realize all or part of its net deferred tax assets in the future, an adjustment to the carrying value of the deferred tax assets would be charged to income in the period in which such determination is made.
 
  The Company has goodwill related to business acquisitions. The Company tests goodwill for impairment on an annual basis and between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying value. If the fair value of a reporting unit is less than its carrying value, then an impairment loss would be recognized equal to the excess of the carrying value of the reporting unit goodwill over the fair value of that goodwill. The fair value of goodwill is based on estimates that carry a degree of uncertainty.
 
  The Company’s liabilities for self-insured health, workers compensation and vehicle plans are developed from actuarial valuations that rely on various key assumptions. Changes in key assumptions may occur in the future, which could result in changes to related self-insurance costs.
 
  The Company’s liabilities for employee bonuses and profit-sharing plan contributions are based primarily on estimated full-year profitability at the end of each quarter. Changes in the performance of the business and in estimated full-year profitability could result in significant interim adjustments to the cost of these programs.

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 these estimates.

MERGER AND CONTRIBUTION AGREEMENT

         On June 16, 2002, the Company entered into an Agreement and Plan of Merger and Contribution (the Merger Agreement) with New December, Inc. (New Dreyer’s), December Merger Sub, Inc., Nestlé Holdings, Inc. (Nestlé) and NICC Holdings, Inc. (NICC Holdings), a wholly-owned subsidiary of Nestlé, to combine the Company with Nestlé’s United States frozen dessert business. The combination will result in both the Company and Nestlé Ice Cream Company, LLC (NICC), which holds Nestlé’s United States frozen dessert business, becoming wholly-owned subsidiaries of a newly formed Delaware corporation. This transaction will be recorded under the purchase method of accounting and will be treated as a reverse acquisition. Under reverse acquisition accounting, NICC will be deemed to be the acquirer for accounting purposes only, and the Company will be treated as the acquiree. As a result, the Company is expensing all merger transaction expenses as incurred. These expenses totaled $2,823,000 and $5,711,000 for the thirteen and thirty-nine weeks ended September 28, 2002, respectively.

         If the transactions contemplated by the Merger Agreement are completed, each non-Nestlé stockholder who holds shares of the Company’s common stock at the effective time of the merger will receive one share of class A callable puttable common stock of New Dreyer’s. Under the amended and restated certificate of incorporation of New Dreyer’s, subject to the terms set forth therein, the holders of New Dreyer’s class A callable puttable stock will be permitted to sell (put) some or all of their shares to New Dreyer’s for $83.00 per share during two periods, the first beginning on December 1, 2005 and ending on January 13, 2006, and the second beginning on April 3, 2006 and ending on May 12, 2006. New Dreyer’s class A callable puttable common stock will also be subject to redemption (call) by New Dreyer’s at the request of Nestlé at $88.00 per share during a six-month period beginning on January 1, 2007. For the contribution of its ownership interest of NICC Holdings, Nestlé will receive approximately 55 million shares of class B common stock of New Dreyer’s. The class B common shares are similar to the class A common shares, except that they lack the call and put features. The shares of the Company’s common stock currently held by Nestlé will be converted into the same number of shares of class B common stock of New Dreyer’s. As of September 28, 2002, Nestlé owned approximately 23 percent of the Company’s common stock on a diluted basis. If the transactions contemplated by the Merger Agreement are completed, Nestlé will own approximately 67 percent of the diluted common stock of New Dreyer’s.

         Each outstanding option to purchase the Company’s common stock under the Company’s existing stock option plans will, at the completion of the transactions, be converted into an option to acquire:

  prior to the date New Dreyer’s class A callable puttable common stock is redeemed under the call right, that number of shares of New Dreyer’s class A callable puttable common stock equal to the number of shares of the Company’s common stock subject to options immediately prior to the completion of the transactions, at the price or prices per share in effect immediately prior to the completion of the transactions; and
 
  at or after the date New Dreyer’s class A callable puttable common stock is redeemed under the call right or to the consummation of a short-form merger of New Dreyer’s with Nestlé or an affiliate of Nestlé S.A., pursuant to the terms of the governance agreement in the form attached as an exhibit to the Merger Agreement, the same consideration which the holder of the options would have received had he or she exercised such option prior to such redemption and received consideration pursuant to the redemption at the price or prices in effect at that time.

The options will otherwise be subject to the same terms and conditions applicable to the original options to purchase the Company’s common stock immediately prior to the completion of the transactions.

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         Certain regulatory requirements must be complied with before the transactions contemplated by the Merger Agreement are completed. The Company and Nestlé are not aware of any material governmental consents or approvals that are required prior to the completion of the transactions other than those described below:

  Under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the HSR Act), and the rules promulgated thereunder by the United States Federal Trade Commission (the FTC), the transactions cannot be completed until notifications have been given and information has been furnished to the FTC and the Antitrust Division of the United States Department of Justice, and the specified waiting periods have expired or have been terminated. The Company and Nestlé filed notification and report forms under the HSR Act with the FTC and the Antitrust Division on July 3, 2002. On August 2, 2002, the FTC made a request for additional information and documentary material, thereby extending the statutory waiting period until 30 days after the Company and Nestlé each substantially comply with this request, unless the waiting period is terminated earlier or extended with the consent of the Company and Nestlé. The Company and Nestlé are continuing to work closely with the FTC staff on its request.
 
  On November 6, 2002, New Dreyer’s filed with the Securities and Exchange Commission (SEC)  a Registration Statement on Form S-4 which included a proxy statement/prospectus pertaining to the transactions contemplated by the Merger Agreement. The SEC may choose to review the filing, and if it does so, it will typically provide comments within 30 days.
 
  If the registration statement is declared effective by the SEC, and if the transactions contemplated by the Merger Agreement are completed, then all shares of New Dreyer’s class A callable puttable common stock received by the Company’s stockholders in the merger will be freely transferable, except that shares of New Dreyer’s class A callable puttable common stock received by persons who are deemed to be “affiliates” of the Company under the Securities Act of 1933, as amended (the 1933 Act), at the time of the special meeting of the Company’s stockholders, may be resold by such affiliates only in transactions permitted by Rule 145 under the 1933 Act or as otherwise permitted under the 1933 Act. Persons who may be deemed to be affiliates of the Company for such purposes generally include individuals or entities that control, are controlled by or are under common control with the Company and include the members of the Company’s board of directors.

         Several of the Company’s joint venture partners and partner brand manufacturers have rights to terminate their arrangements with the Company upon consummation of the transactions contemplated by the Merger Agreement, subject to various other terms and conditions. While the Company intends to continue in these ventures and partner brand relationships, it can provide no assurance as to the potential actions of its business partners. Should any of the Company’s significant partners or suppliers choose to exit these arrangements in accordance with their rights to do so following the consummation, the Company may incur significant decreases in gross profit or be required to write-off certain assets as a result of the loss of these business partners.

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ADOPTION OF NEW ACCOUNTING PRONOUNCEMENTS

Accounting for Consideration Given by a Vendor to a Customer (Including a Reseller of the Vendor’s Products)

         In November 2001, the Emerging Issues Task Force of the Financial Accounting Standards Board (EITF) issued EITF 01-9, “Accounting for Consideration Given by a Vendor to a Customer (Including a Reseller of the Vendor’s Products)” (EITF 01-9). This pronouncement requires that discounts (off-invoice promotion and coupons), amounts paid to retailers to advertise a company’s products (fixed trade promotion) and fees paid to retailers to obtain shelf space (slotting fees) be recorded as a reduction of revenue.

         The Company adopted EITF 01-9 at the beginning of fiscal 2002. For the thirteen and thirty-nine weeks ended September 28, 2002, the Company presented the expenses described above of $65,881,000 and $176,589,000, respectively, as a reduction of net sales in accordance with this pronouncement. For the thirteen and thirty-nine weeks ended September 29, 2001, the Company retroactively reclassified expenses of $58,274,000 and $140,300,000, respectively. The retroactive reclassification of these expenses resulted in a decrease in total sales and gross profit, along with a corresponding decrease in selling, general and administrative expenses, with no effect on net income as previously reported.

Accounting for Goodwill and Other Intangible Assets

         In June 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 142, “Goodwill and Other Intangible Assets” (SFAS No. 142). This pronouncement requires recognition of goodwill and other unidentifiable intangible assets with indeterminate lives as long-term assets. Amortization as previously required by Accounting Principles Board Opinion No. 17, “Intangible Assets”, is no longer permitted. In lieu of amortization, these assets are now tested for impairment on an annual basis and between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. The Company adopted SFAS No. 142 at the beginning of fiscal 2002 and completed its transitional impairment test during the first quarter of 2002; the Company has not recorded any impairment charges under SFAS No. 142.

         The following table reconciles reported net income available to common stockholders and the related per common share amounts to the corresponding adjusted net income and related per common share amounts. Adjusted net income and net income per common share amounts reflecting the exclusion of goodwill amortization of $655,000 ($1,100,000 net of tax of $445,000) and $1,942,000 ($3,193,000 net of tax of $1,251,000), respectively, for the thirteen and thirty-nine weeks ended September 29, 2001, respectively, follow:

                                   
      Thirteen Weeks Ended   Thirty-nine Weeks Ended
     
 
(In thousands, except per share amounts)   Sept. 28, 2002   Sept. 29, 2001   Sept. 28, 2002   Sept. 29, 2001
   
 
 
 
 
                               
As reported
  $ 10,334     $ 6,048     $ 23,330     $ 8,097  
Goodwill amortization, net of tax
            655               1,942  
 
   
     
     
     
 
As adjusted
  $ 10,334     $ 6,703     $ 23,330     $ 10,039  
 
   
     
     
     
 
Per common share:
                               
 
As reported-basic
  $ .30     $ .18     $ .67     $ .26  
 
Goodwill amortization, net of tax
            .02               .06  
 
   
     
     
     
 
 
As adjusted-basic
  $ .30     $ .20     $ .67     $ .32  
 
   
     
     
     
 
 
                               
 
As reported-diluted
  $ .27     $ .17     $ .62     $ .24  
 
Goodwill amortization, net of tax
            .02               .05  
 
   
     
     
     
 
 
As adjusted-diluted
  $ .27     $ .19     $ .62     $ .29  
 
   
     
     
     
 

         In accordance with SFAS No. 142, the Company reclassified the long-term deferred income tax liability associated with nondeductible goodwill, resulting in a noncash reduction in goodwill and a corresponding reduction in the deferred income tax liability of $10,166,000. Also in accordance with SFAS No. 142, the Company now presents goodwill separately from other intangibles in the Consolidated Balance Sheet. In addition, the Company reclassified $52,997,000

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of acquisition-related intangibles with indefinite lives to goodwill at the beginning of the first quarter of 2002. In accordance with this pronouncement, the corresponding prior year amounts were not retroactively reclassified. The remaining change in goodwill since December 29, 2001 consists of acquisition goodwill.

Accounting for the Impairment or Disposal of Long-Lived Assets

         In October 2001, the Financial Accounting Standards Board issued SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets” (SFAS No. 144). This pronouncement clarifies certain issues related to SFAS No. 121, “Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of” and develops a single accounting model for long-lived assets to be disposed of. The Company adopted SFAS No. 144 in the first quarter of 2002. The adoption of SFAS No. 144 did not impact the Company’s financial position, results of operations or cash flows.

RESULTS OF OPERATIONS

         The following table sets forth for the periods indicated the percent which the items in the Consolidated Statement of Income bear to net sales and the percentage change of such items compared to the indicated prior period:

                                                   
                                      Period-to-Period
                                      Variance
      Percentage of Sales   Favorable (Unfavorable)
     
 
                                      Thirteen   Thirty-nine
                                      Weeks   Weeks
      Thirteen Weeks Ended   Thirty-nine Weeks Ended   Ended   Ended
     
 
  2002   2002
      Sept. 28,   Sept. 29,   Sept. 28,   Sept. 29,   Compared   Compared
      2002   2001   2002   2001   To 2001   To 2001
     
 
 
 
 
 
Net sales
    100.0 %     100.0 %     100.0 %     100.0 %     6.1 %     12.2 %
 
   
     
     
     
                 
Costs and expenses:
                                               
 
Cost of goods sold
    85.4       88.7       86.9       88.8       (2.1 )     (9.8 )
 
Selling, general and administrative
    9.3       8.0       8.6       9.0       (23.4 )     (7.5 )
 
Interest, net of amounts capitalized
    0.5       0.8       0.5       1.0       30.8       35.8  
 
Other expense (income)
    (0.1 )     (0.3 )           (0.3 )     (44.1 )     (82.4 )
 
Merger transaction expenses
    0.7               0.5             NM   NM
 
   
     
     
     
                 
 
    95.8       97.2       96.5       98.5       (4.5 )     (10.0 )
 
   
     
     
     
                 
Income before income tax provision
    4.2       2.8       3.5       1.5       62.3       156.0  
Income tax provision
    1.5       1.1       1.3       0.6       (49.1 )     (135.1 )
 
   
     
     
     
                 
Net income
    2.7       1.7       2.2       0.9       70.9       169.5  
Accretion of preferred stock to redemption value
                                          NM  
Preferred stock dividends
                                          NM  
 
   
     
     
     
                 
Net income available to common stockholders
    2.7 %     1.7 %     2.2 %     0.9 %     70.9       188.1  
 
   
     
     
     
                 

Thirteen Weeks ended September 28, 2002 Compared with Thirteen Weeks ended September 29, 2001

         Consolidated net sales for the third quarter of 2002 increased $21,962,000, or six percent, to $383,598,000 from $361,636,000 for the same quarter last year.

         Net sales of the Company’s branded products, including licensed and joint venture products (company brands), increased $4,929,000, or two percent, to $209,739,000 from $204,810,000 for the same quarter last year. Company brands represented 55 percent of consolidated net sales in 2002 compared with 57 percent in the same quarter last year. The products that led this increase were Dreyer’s and Edy’s® Grand Ice Cream and Whole Fruit™ Bars. The average price of company brands, net of the effect of trade promotion expenses, increased by five percent. Gallon sales of

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company brands, including novelties, decreased approximately 600,000 gallons, or two percent, to approximately 31,400,000 gallons.

         Net sales of products distributed for other manufacturers (partner brands), including Ben & Jerry’s Homemade, Inc. (Ben & Jerry’s), increased $17,033,000, or 11 percent, to $173,859,000 from $156,826,000 for the same quarter last year. This increase was driven primarily by increased sales of distributed novelty products (including a significant increase in sales of Silhouette Brands, Inc. (Silhouette) novelty products) and Ben & Jerry’s superpremium products. Sales of partner brands represented 45 percent of consolidated net sales compared with 43 percent in the same quarter last year. Average wholesale prices for partner brands increased approximately 14 percent. Unit sales of partner brands decreased by three percent over the same quarter last year.

         Cost of goods sold increased $6,604,000, or two percent, to $327,624,000 from $321,020,000 for the same quarter last year. The Company’s gross profit increased by $15,358,000, or 38 percent, to $55,974,000 from $40,616,000, representing a 14.6 percent gross margin compared with an 11.2 percent gross margin for the same quarter last year. The improvement in gross profit was primarily attributable to lower dairy raw material costs and higher volume, partially offset by increases in distribution expenses. During the third quarter of 2002, the decrease in dairy raw material costs accounted for a $16,200,000 pre-tax benefit (excluding the results of butter trading activities, which are included in other income, net and discussed below) as compared to the same quarter last year.

         Selling, general and administrative expenses increased $6,748,000, or 23 percent, to $35,632,000 from $28,884,000 for the same quarter last year. The increase in expenses from 2001 reflects higher marketing expenses and higher administrative expenses, partially offset by a $1,100,000 reduction in amortization of goodwill as a result of the adoption of SFAS No. 142. Selling, general and administrative expenses represented nine and eight percent of consolidated net sales in the third quarters of 2002 and 2001, respectively.

         Interest expense decreased $867,000, or 31 percent, to $1,947,000 from $2,814,000 for the same quarter last year, primarily due to lower interest rates.

         Other income, net, decreased $454,000, or 44 percent, to $575,000 from $1,029,000 for the same quarter last year. Other income, net, includes $746,000 of losses from butter trading activities. Decreases in other income, net, were partially offset by an increase in earnings from joint ventures accounted for under the equity method.

         Nestlé merger transaction expenses (discussed earlier) totaled $2,823,000 during the third quarter of 2002. The Company currently estimates that it will incur total merger transaction expenses, including costs to be incurred to close the transactions, in the range of $28,000,000 to $30,000,000.

         The income tax provision increased $1,914,000, or 49 percent, to $5,813,000 from $3,899,000 for the same quarter last year. The effective tax rate decreased to 36.0 percent from 39.2 percent for the same quarter last year due primarily to the reversal of income taxes provided in prior periods, the elimination of certain permanent differences in connection with the adoption of SFAS No. 142 and the utilization of certain income tax credits.

Thirty-nine Weeks ended September 28, 2002 Compared with Thirty-nine Weeks ended September 29, 2001

         Consolidated net sales for the first thirty-nine weeks of 2002 increased $114,350,000, or 12 percent, to $1,050,823,000 from $936,473,000 for the same period last year.

         Net sales of the Company’s branded products, including licensed and joint venture products (company brands), increased $36,801,000, or seven percent, to $580,235,000 from $543,434,000 for the same period last year. Company brands represented 55 percent of consolidated net sales in 2002 compared with 58 percent in the same period last year. The products that led this increase were Dreyer’s and Edy’s® Grand Ice Cream, Whole Fruit™ Bars and the Company’s superpremium portfolio. The average price of company brands, net of the effect of trade promotion expenses, increased by three percent. Gallon sales of company brands, including novelties, increased approximately 3,500,000 gallons, or four percent, to approximately 88,600,000 gallons.

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         Net sales of products distributed for other manufacturers (partner brands), including Ben & Jerry’s, increased $77,549,000, or 20 percent, to $470,588,000 from $393,039,000 for the same period last year. This increase was driven largely by increased sales of distributed novelty products (including a significant increase in sales of Silhouette novelty products), Ben & Jerry’s superpremium products and Healthy Choice ice cream. Sales of partner brands represented 45 percent of consolidated net sales compared with 42 percent in the same period last year. Average wholesale prices for partner brands increased approximately 13 percent. Unit sales of partner brands increased by six percent over the same period last year.

         Cost of goods sold increased $81,514,000, or ten percent, to $912,650,000 from $831,136,000 for the same period last year. The Company’s gross profit increased by $32,836,000, or 31 percent, to $138,173,000 from $105,337,000, representing a 13.1 percent gross margin compared with an 11.2 percent gross margin for the same period last year. The improvement in gross profit was primarily attributable to lower dairy raw material costs and higher volume, partially offset by increases in distribution expenses. During the first thirty-nine weeks of 2002, the decrease in dairy raw material costs accounted for a $29,500,000 pre-tax benefit (excluding the results of butter trading activities, which are included in other income, net, and are discussed below) as compared to the same period last year.

         Selling, general and administrative expenses increased $6,356,000, or eight percent, to $90,560,000 from $84,204,000 for the same period last year. The increase in expenses from 2001 reflects higher administrative expenses and higher marketing expenses, partially offset by a $3,193,000 reduction in amortization of goodwill as a result of the adoption of SFAS No. 142. Selling, general and administrative expenses represented nine percent of consolidated net sales in each of the first thirty-nine weeks of 2002 and 2001.

         Interest expense decreased $3,257,000, or 36 percent, to $5,835,000 from $9,092,000 for the same period last year, primarily due to lower interest rates.

         Other income, net, decreased $1,812,000, or 82 percent, to $386,000 from $2,198,000 for the same period last year. Other income, net, includes $2,065,000 of losses from butter trading activities and a $1,093,000 impairment of an investment in Momentx Corporation (Momentx), an e-market solution provider for the dairy, food and beverage industries. During the second quarter of 2002, the Company determined that Momentx’s shortfalls to its business plan, which plan called for a substantial acceleration of its sales growth which did not occur, negatively impacted the recovery of the Company’s investment. Decreases in other income, net, were partially offset by an increase in earnings from joint ventures accounted for under the equity method.

         Nestlé merger transaction expenses (discussed earlier) totaled $5,711,000 during the first thirty-nine weeks of 2002. The Company currently estimates that it will incur total merger transaction expenses, including costs to be incurred to close the transactions, in the range of $28,000,000 to $30,000,000.

         The income tax provision increased $7,541,000, or 135 percent, to $13,123,000 from $5,582,000 for the same period last year. The effective tax rate decreased to 36.0 percent from 39.2 percent for the same period last year due primarily to the reversal of income taxes provided in prior periods, the elimination of certain permanent differences in connection with the adoption of SFAS No. 142 and the utilization of income tax credits.

LIQUIDITY AND CAPITAL RESOURCES

         Working capital at September 28, 2002 increased $9,339,000 from year-end 2001. The Company’s cash flows from operating activities increased to $39,336,000 from $11,888,000 for the same period last year. Cash flows from operating activities for 2002 primarily consisted of net income of $23,330,000, depreciation and amortization of $26,067,000, and an increase in accounts payable and accrued liabilities of $17,854,000, partially offset by an increase in trade accounts receivable of $26,919,000. Cash flows from operating activities for 2001 primarily consisted of net income of $8,657,000, depreciation and amortization of $26,940,000, and an increase in accounts payable and accrued liabilities of $42,353,000, partially offset by an increase in trade accounts receivable of $52,241,000.

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         Cash flows used in investing activities totaled $40,397,000 and $32,689,000, in 2002 and 2001, respectively. Cash flows used in investing activities primarily consisted of property, plant and equipment purchases of $37,927,000 and $29,218,000, in 2002 and 2001, respectively.

         Cash flows from financing activities totaled $1,270,000 and $20,609,000, in 2002 and 2001, respectively. Cash flows from financing activities for 2002 primarily consisted of issuance of common stock of $9,351,000 partially offset by cash dividends paid of $6,230,000 and repurchases and retirements of common stock of $1,752,000. Cash flows from financing activities for 2001 primarily consisted of a net increase of $42,700,000 in the revolving line of credit, partially offset by repayments of debt totaling $22,186,000.

         At September 28, 2002, the Company had $1,859,000 in cash and cash equivalents, and an unused credit line of $120,000,000. As discussed earlier, the Company currently estimates that it will incur total merger transaction expenses, including costs to be incurred to close the transactions, in the range of $28,000,000 to $30,000,000. 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, including the merger transaction expenses. In connection with the transactions contemplated by the Merger Agreement, the Company is currently in the process of negotiating modifications to its revolving line of credit agreement, including modifications relating to dividends permitted under such credit agreement.

ITEM 3.    QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK.

         This Item 3 should be read in conjunction with Item 7A of the Company’s 2001 Annual Report on Form 10-K and in conjunction with Item 2 above.

         Under current federal and state regulations and industry practice, the price of cream, a primary ingredient in ice cream, is linked to the price of butter. In an effort to mitigate the effects of butter price volatility, the Company periodically purchases butter or butter futures contracts with the intent of reselling or settling its positions in order to lower its cream cost and overall exposure to the volatility of this market. The Company has elected to not treat its investment in butter as a hedge for accounting purposes. Consequently, it “marks to market” its investment at the end of each quarter and records any resulting gain or loss in Other income, net. During the thirteen and thirty-nine weeks ended September 28, 2002, the Company marked its butter investments to market and recorded losses of $746,000 and $2,065,000, respectively.

         During the thirteen and thirty-nine weeks ended September 28, 2002, the decrease in dairy raw material costs accounted for a $16,200,000 pre-tax benefit and a $29,500,000 pre-tax benefit (excluding the results of butter trading activities), respectively, as compared to the thirteen and thirty-nine weeks ended September 29, 2001, respectively.

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ITEM 4.    CONTROLS AND PROCEDURES.

(a)   Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of our disclosure controls and procedures, as such term is defined under Rule 13a-14(c) promulgated under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), within 90 days prior to the filing date of this report. Based on their evaluation, our principal executive officer and principal accounting officer concluded that our disclosure controls and procedures are effective.
 
(b)   There have been no significant changes (including corrective actions with regard to significant deficiencies or material weaknesses) in our internal controls or in other factors that could significantly affect these controls subsequent to the date of the evaluation referenced in paragraph (a) above.

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PART II:    OTHER INFORMATION

ITEM 6.    EXHIBITS AND REPORTS ON FORM 8-K.

(a)   The following exhibits are filed herewith:

     
Exhibit No.   Description

 
10.1   Second Amendment dated October 18, 2002 to Credit Agreement dated as of July 25, 2000 among Dreyer’s Grand Ice Cream, Inc., the banks party to this agreement, Bank of America, N.A. as Agent for the Banks, as Swing Line Bank and as Letter of Credit Issuing Bank; Union Bank of California, N.A. as Syndication Agent and Banc of America Securities LLC as Lead Arranger and Book Manager.
99.1   Chief Executive Officer Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
99.2   Chief Financial Officer Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

(b)   A Report on Form 8-K was filed on August 7, 2002, reporting the submission of sworn statements by the Company’s Principal Executive Officer and Principal Financial Officer to the SEC pursuant to SEC Order No. 4-460.
 
    A Report on Form 8-K was filed on October 25, 2002, reporting an amendment to the Merger and Contribution Agreement dated June 16, 2002, to change the name of the holding company resulting from the transactions contemplated by the Merger and Contribution Agreement from “Dreyer’s Grand Ice Cream, Inc.” to “Dreyer’s Grand Ice Cream Holdings, Inc.” and to report the anticipated filing of the proxy statement/prospectus.
 
    A Report on Form 8-K was filed on November 5, 2002 which includes the information in Item 7-Management’s Discussion and Analysis of Financial Condition and Results of Operations and Item 8-Financial Statements and Supplementary Data appearing in the Company’s Form 10-K for the fiscal year ended December 29, 2001, giving effect to the adoption of the provisions of certain new accounting pronouncements.

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SIGNATURE

         Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

         
    DREYER’S GRAND ICE CREAM, INC.
         
         
         
Dated: November 12, 2002   By:   /s/ Timothy F. Kahn
       
        Timothy F. Kahn
        Vice President — Finance and Administration
  and Chief Financial Officer (Principal Financial Officer)

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CERTIFICATIONS

CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER

I, T. Gary Rogers, certify that:

1.     I have reviewed this quarterly report on Form 10-Q of Dreyer’s Grand Ice Cream, Inc.;

2.     Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;

3.     Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the Corporation as of, and for, the periods presented in this quarterly report;

4.     The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

         (a)  designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;

         (b)  evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and

         (c)  presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

5.     The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of the registrant’s board of directors:

         (a)  all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and

         (b)  any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls;

6.     The registrant’s other certifying officer and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

/s/ T. Gary Rogers
T. Gary Rogers
Chairman of the Board of Directors and
Chief Executive Officer

Dated: November 12, 2002

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CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER

I, Timothy F. Kahn, certify that:

1.     I have reviewed this quarterly report on Form 10-Q of Dreyer’s Grand Ice Cream, Inc.;

2.     Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;

3.     Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the Corporation as of, and for, the periods presented in this quarterly report;

4.     The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

         (a)  designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;

         (b)  evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and

         (c)  presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

5.     The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of the registrant’s board of directors:

         (a)  all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and

         (b)  any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls;

6.     The registrant’s other certifying officer and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

/s/ Timothy F. Kahn
Timothy F. Kahn
Vice President — Finance and Administration and
Chief Financial Officer

Dated: November 12, 2002

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DREYER’S GRAND ICE CREAM, INC.

INDEX OF EXHIBITS

     
Exhibit No.   Description

 
10.1   Second Amendment dated October 18, 2002 to Credit Agreement dated as of July 25, 2000 among Dreyer’s Grand Ice Cream, Inc., the banks party to this agreement, Bank of America, N.A. as Agent for the Banks, as Swing Line Bank and as Letter of Credit Issuing Bank; Union Bank of California, N.A. as Syndication Agent and Banc of America Securities LLC as Lead Arranger and Book Manager.
99.1   Chief Executive Officer Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
99.2   Chief Financial Officer Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

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