DREYERS GRAND ICE CREAM HOLDINGS INC - 10-Q Quarterly Report

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 March 27, 2004


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

Commission file number 000-50325

DREYER’S GRAND ICE CREAM HOLDINGS, INC.

(Exact name of registrant as specified in its charter)


Delaware		No. 02-0623497
(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 o

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act.)

Yes x No o

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


	Shares Outstanding at May 5, 2004
Class A callable puttable common stock, $.01 par value		29,883,630
Class B common stock, $.01 par value		64,564,315

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 (Unaudited).
	ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
	ITEM 4. CONTROLS AND PROCEDURES.
PART II: OTHER INFORMATION
	ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
	ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
SIGNATURE
INDEX OF EXHIBITS
Exhibit 10.46
Exhibit 10.47
Exhibit 10.48
Exhibit 31.1
Exhibit 31.2
Exhibit 32.1
Exhibit 32.2

PART I: FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS.

DREYER’S GRAND ICE CREAM HOLDINGS, INC.
CONSOLIDATED BALANCE SHEET


	March 27, 2004			Dec. 27, 2003
($ in thousands, except per share amounts)	(Unaudited)
Assets
Current Assets:
Cash and cash equivalents	$	1,938		$	1,623
Trade accounts receivable, net of allowance for doubtful accounts of $7,783 in 2004 and $5,668 in 2003		128,872			110,381
Other accounts receivable		10,064			11,580
Inventories		162,142			148,426
Prepaid expenses and other		55,991			37,723
Income taxes refundable		12,428			18,283
Taxes receivable due from affiliates		12,236			12,236
Deferred income taxes		17,265			17,265

Total current assets		400,936			357,517
Property, plant and equipment, net		387,040			392,613
Other assets		20,209			20,735
Other intangibles, net		387,872			389,133
Goodwill		1,926,982			1,931,425

Total assets	$	3,123,039		$	3,091,423

Liabilities, Class A Callable Puttable Common Stock, and Stockholders’ Equity
Current Liabilities:
Accounts payable and accrued liabilities	$	135,874		$	130,360
Accrued payroll and employee benefits		48,625			59,359
Current portion of long-term debt		2,143			2,143

Total current liabilities		186,642			191,862
Nestlé S.A. credit facility		195,000			125,000
Long-term debt, less current portion		24,286			24,286
Long-term stock option liability		111,334			135,121
Other long-term obligations		18,353			18,207
Deferred income taxes		63,870			81,065

Total liabilities		599,485			575,541

Commitments and contingencies

Class A Callable Puttable Common Stock:
Class A callable puttable common stock, $.01 par value - 31,830,332 shares authorized; 29,842,899 and 29,449,201 issued and outstanding in 2004 and 2003, respectively		298			294
Class A capital in excess of par		1,997,502			1,904,124
Notes receivable from Class A callable puttable common stockholders		(789	)		(1,104	)

Total Class A callable puttable common stock		1,997,011			1,903,314

Stockholders’ Equity:
Class B common stock, $.01 par value - 96,394,647 shares authorized; 64,564,315 shares issued and outstanding in 2004 and 2003		646			646
Class B capital in excess of par		961,932			961,932
Accumulated deficit		(436,035	)		(350,010	)

Total stockholders’ equity		526,543			612,568

Total liabilities, Class A callable puttable common stock, and stockholders’ equity	$	3,123,039		$	3,091,423

See accompanying Notes to Consolidated Financial Statements.

DREYER’S GRAND ICE CREAM HOLDINGS, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
(Unaudited)


	Quarter Ended
	March 27, 2004			March 30, 2003
($ in thousands, except per share amounts)
Revenues:
Net sales to external customers	$	324,924		$	113,246
Net sales to affiliates		1,135			646

Net sales		326,059			113,892
Other revenues		11,824			905

Total net revenues		337,883			114,797

Costs and expenses:
Cost of goods sold to external customers		315,208			92,065
Cost of goods sold to affiliates		1,135			646

Cost of goods sold		316,343			92,711
Selling, general and administrative expense		48,271			27,091
Interest, net of amounts capitalized		1,486			330
Royalty expense		5,078			5,272
Other (income) expense, net		(5,641	)
Severance and retention expense		3,097			2,500

		368,634			127,904

Loss before income tax benefit		(30,751	)		(13,107	)
Income tax benefit		11,993			3,834

Net loss		(18,758	)		(9,273	)

Accretion of Class A callable puttable common stock.		(61,603	)

Net loss available to Class A callable puttable and Class B common stockholders	$	(80,361	)	$	(9,273	)

Net loss per share of Class A callable puttable and Class B common stock:
Basic	$	(.85	)	$	(.14	)

Diluted	$	(.85	)	$	(.14	)

Dividends declared per share of common stock:
Class A callable puttable	$	.06

Class B	$	.06

See accompanying Notes to Consolidated Financial Statements.

DREYER’S GRAND ICE CREAM HOLDINGS, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)


	Quarter Ended
(In thousands)	March 27, 2004			March 30, 2003

*Cash flows from operating activities:*
Net loss	$	(18,758	)	$	(9,273	)
Adjustments to reconcile net loss to cash flows from operations, net of amounts acquired:
Depreciation and amortization		18,168			6,491
Provision for losses on accounts receivable		3,543			895
Provision for severance and retention expense		3,097
Stock option compensation expense		4,514
Provision for deferred income taxes		(11,993	)		6,596
Accretion of long-term stock option liability		586
Other noncash transactions		(132	)		508
Changes in assets and liabilities:
Trade accounts receivable and other accounts receivable		(20,242	)		(16,029	)
Inventories		(13,716	)		(16,398	)
Prepaid expenses and other		(19,816	)		(858	)
Income taxes refundable		5,855
Due to/from member(s)/affiliates					600
Taxes receivable due from affiliates					(10,430	)
Accounts payable and accrued liabilities		5,061			18,413
Accrued payroll and employee benefits		(13,685	)		(2,437	)

		(57,518	)		(21,922	)

*Cash flows from investing activities:*
Additions to property, plant and equipment		(11,930	)		(1,797	)
Retirements of property, plant and equipment		663			18
Payment for acquired businesses		(692	)
Increase in other assets		(2,040	)

		(13,999	)		(1,779	)

*Cash flows from financing activities:*
Proceeds from Nestlé S.A. credit facility, net		70,000
Proceeds from Nestlé USA, Inc. demand notes, net					23,181
Proceeds from repayments of notes receivable from Class A callable puttable common stockholders		315
Proceeds from stock option exercises		7,158
Cash dividends paid		(5,641	)

		71,832			23,181

Increase (decrease) in cash and cash equivalents		315			(520	)
Cash and cash equivalents, beginning of period		1,623			2,435

Cash and cash equivalents, end of period	$	1,938		$	1,915

Supplemental cash flow information:
Cash paid during the period for:
Interest (net of amounts capitalized)	$	988		$	330

Income tax refunds received	$	(5,855	)	$	—

Supplemental disclosure of noncash transactions:
Increase in equity resulting from push-down of acquisition costs paid by Nestlé Prepared Foods related to Dreyer’s Nestlé Transaction	$	—		$	2,930

See accompanying Notes to Consolidated Financial Statements.

DREYER’S GRAND ICE CREAM HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

Note 1. Description of Business and Basis of Presentation

Description of Business

Dreyer’s Grand Ice Cream Holdings, Inc. and its subsidiaries (the Company) are engaged primarily in the business of manufacturing and distributing premium and superpremium ice cream and other frozen snacks 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.

Financial Statement Form and Content

The Consolidated Financial Statements for the quarters ended March 27, 2004 and March 30, 2003 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 disclosures normally included in financial statements prepared in conformity with accounting principles generally accepted in the United States of America (U.S. GAAP) 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 27, 2003, appearing in the Company’s 2003 Annual Report on Form 10-K.

Dreyer’s Nestlé Transaction

The Company is the successor entity to the Nestlé Ice Cream Company, LLC (NICC) business. The Company was formed as a result of the combination of NICC and Dreyer’s Grand Ice Cream, Inc. (DGIC) (the Dreyer’s Nestlé Transaction). The Dreyer’s Nestlé Transaction closed on June 26, 2003 (the Merger Closing Date) and was accounted for as a reverse acquisition under the purchase method of accounting as required by Statement of Financial Accounting Standards No. 141, “Accounting for Business Combinations” (Note 6). For this purpose, NICC was deemed to be the acquirer and DGIC was deemed to be the acquiree. The accompanying Consolidated Financial Statements for the quarter ended March 27, 2004 include the results of operations of DGIC and NICC for that period. The accompanying Consolidated Financial Statements for the quarter ended March 30, 2003 reflect the results of operations of only NICC.

The estimated purchase price and related preliminary allocation were recorded in two components reflecting the two primary transactions pursuant to which Nestlé Holdings, Inc. (Nestlé) and NICC Holdings, Inc. (NICC Holdings) acquired, or will acquire, all of the DGIC shares. The first component of the purchase accounting was based on Nestlé’s original ownership of 9,563,016 shares, representing 27.2 percent (the Nestlé Original Equity Investment) of the 35,101,634 total DGIC shares outstanding on the Merger Closing Date. The second component of the purchase accounting was based on Nestlé’s purchase of the remaining 25,538,618 shares, representing 72.8 percent (the Non-Nestlé Ownership) of the 35,101,634 total DGIC shares outstanding on the Merger Closing Date.

The Divestiture Transaction

As a condition to the closing of the Dreyer’s Nestlé Transaction, the United States Federal Trade Commission (FTC) required that DGIC and NICC divest certain assets. On March 3, 2003, New December, Inc. (the former name of the Company), DGIC, NICC and Integrated Brands, Inc. (Integrated Brands), a subsidiary of CoolBrands International, Inc. (CoolBrands), entered into an Asset Purchase and Sale Agreement, which was amended and restated on June 4, 2003 (the APA). The APA provided for the sale of DGIC’s Dreamery® and Whole Fruit™ Sorbet

brands and the assignment of its license to the Godiva® ice cream brand (the Dreamery, Whole Fruit and Godiva brands are referred to as the Divested Brands) and the transfer and sale by NICC of leases, warehouses, equipment and vehicles and related distribution assets (the Purchased Assets) in certain states and territories (the Territories) to Eskimo Pie Frozen Distribution, Inc. (Eskimo Pie), a subsidiary of CoolBrands. On July 5, 2003 (the Divestiture Closing Date), the parties closed the transaction (the Divestiture Transaction) (Note 6 and Note 11) and the Company received $10,000,000 in consideration for the sale of the Divested Brands and the Purchased Assets.

The Häagen-Dazs Shoppe Company

On February 17, 2004, DGIC acquired all of the equity interest of The Häagen-Dazs Shoppe Company, Inc. (the Shoppe Company) from The Pillsbury Company (Pillsbury). The Shoppe Company has been the franchisor of the United States Häagen-Dazs parlor business since the early 1980’s. As of March 27, 2004, there were approximately 236 franchised Häagen-Dazs parlors in the United States.

Note 2. Significant Accounting Policies

Fiscal Year

Effective upon the closing of the Dreyer’s Nestlé Transaction, the Company changed its fiscal periods from NICC’s calendar year ending on December 31st with interim periods based on a four- or five-week month (13 weeks per quarter) to a 52-week or 53-week year ending on the last Saturday in December with fiscal quarters ending on the Saturday closest to the end of the calendar quarter. As a result, the accompanying Consolidated Statements of Operations and Cash Flows present the results for the following periods:


Year		Quarter
2004		12/28/03 to 03/27/04
2003		01/01/03 to 03/30/03

This change in fiscal periods did not have a material impact on the Consolidated Financial Statements. The operating results for interim periods are not necessarily indicative of the results to be expected for an entire year.

Significant Accounting Assumptions and Estimates

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions. These estimates and assumptions include, among others, assessing the following: the adequacy of liabilities for trade promotion expenses; the adequacy of the provision for retail freezer cabinet retirements; the recoverability of goodwill; the adequacy of liabilities for employee bonuses and profit-sharing plan contributions; the adequacy of liabilities for self-insured health, workers compensation and vehicle plans; the recoverability and estimated useful lives of property, plant and equipment; and the recoverability of trade accounts receivable. 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 and assumptions.

Financial Statement Presentation

Certain reclassifications have been made to prior year financial statements to conform to the current period presentation.

New Accounting Pronouncements

In January 2003, the Financial Accounting Standards Board issued FASB Interpretation No. 46, “Consolidation of Variable Interest Entities” (FIN 46). This interpretation, which was subsequently revised in December 2003 (FIN 46-R), clarifies certain issues related to Accounting Research Bulletin No. 51, “Consolidated Financial Statements” and addresses consolidation by business enterprises of the assets, liabilities, and results of the activities of a variable interest entity. The Company has determined that it does not hold a significant variable interest in a variable interest entity under FIN 46-R at March 27, 2004.

Note 3. Inventories

Inventories are stated at the lower of cost (determined by the first-in, first-out method) or market. Inventories at March 27, 2004 and December 27, 2003 consisted of the following:


	March 27, 2004		Dec. 27, 2003
	(In thousands)
Raw materials	$	22,450	$	18,752
Finished goods		139,692		129,674

	$	162,142	$	148,426

Inventories on consignment with retailers and distributors included in the above balances at March 27, 2004 and December 27, 2003 totaled $10,139,000 and $10,674,000, respectively.

Note 4. 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 proactively mitigate the effects of butter price volatility, the Company will periodically purchase butter or butter futures contracts with the intent of reselling or settling its positions in order to reduce its exposure to the volatility of this market. Since the Company’s investment in butter does not qualify as a hedge for accounting purposes, it “marks to market” its investment at the end of each quarter and records any resulting gain or loss as a decrease or increase in Other (income) expense, net.

Investments in butter, included in Prepaid expenses and other, have a current market value of $17,846,000 and $6,277,000 at March 27, 2004 and December 27, 2003, respectively. During the quarter ended March 27, 2004, gains from butter investments, included as a component of Other income (expense), net, totaled $5,074,000. There were no (gains) losses from butter investments in 2003 since the Company’s predecessor, NICC, did not invest in butter in 2003.

Note 5. Other Intangibles, Net

The gross carrying amount and related accumulated amortization of other intangibles at March 27, 2004 consisted of the following:


	March 27, 2004
	Amortizable	Gross
	Lives determined	Carrying		Accumulated
	June 26, 2003	Amount		Amortization		Net
				(In thousands)
Definite-lived other intangibles
Distribution rights	0.5 year	$	292	$	292	$	—
Foreign trademark	0.8 year		66		66		—
Covenants not to compete	4.3 years		289		51		238
Joint venture agreement	0.5 year		218		218		—
Whole Fruit Bar brand	1.0 year		1,819		1,375		444
Distribution agreement	8.2 years		3,783		357		3,426
Call option agreement	8.3 years		1,674		158		1,515
Flavor formulations	10 years		4,365		330		4,035
Customer relationships — foodservice	14 years		800		43		757
Customer relationships — non-grocery	27 years		6,901		193		6,708
Customer relationships — grocery	29 years		44,653		1,163		43,491
Independent distributors	29 years		2,547		66		2,481
Favorable leasehold arrangements	84.6 years		728		7		721

			68,135		4,319		63,816

Indefinite-lived other intangibles
Dreyer’s brand name	Indefinite		134,453				134,453
Edy’s⁽¹⁾ brand name	Indefinite		176,507				176,507
Base formulations/brand processes	Indefinite		13,096				13,096

			324,056		—		324,056

Total other intangibles		$	392,191	$	4,319	$	387,872

The gross carrying amount and related accumulated amortization of other intangibles at December 27, 2003 consisted of the following:


	December 27, 2003
	Amortizable	Gross
	Lives determined	Carrying		Accumulated
	June 26, 2003	Amount		Amortization		Net
				(In thousands)
Definite-lived other intangibles
Distribution rights	0.5 year	$	292	$	292	$	—
Foreign trademark	0.8 year		66		44		22
Covenants not to compete	4.3 years		289		34		255
Joint venture agreement	0.5 year		218		218		—
Whole Fruit Bar brand	1.0 year		1,819		919		900
Distribution agreement	8.2 years		3,783		239		3,544
Call option agreement	8.3 years		1,674		106		1,568
Flavor formulations	10 years		4,365		221		4,144
Customer relationships — foodservice	14 years		800		30		770
Customer relationships — non-grocery	27 years		6,901		129		6,772
Customer relationships — grocery	29 years		44,653		778		43,875
Independent distributors	29 years		2,547		44		2,503
Favorable leasehold arrangements	84.6 years		728		4		724

			68,135		3,058		65,077

Indefinite-lived other intangibles
Dreyer’s brand name	Indefinite		134,453				134,453
Edy’s⁽¹⁾ brand name	Indefinite		176,507				176,507
Base formulations/brand processes	Indefinite		13,096				13,096

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	Class B Common Stock
										Investment		Accumulated
					Capital in		Accumulated			From		Net Loss to
	Shares		Par Value		Excess of Par		Deficit			Member		Member			Total
(In thousands)
Balances at December 31, 2002		—	$	—	$	—	$	—		$	750,252	$	(141,587	)	$	608,665
Capital contributions - acquisition costs paid by Nestlé affiliate											2,930					2,930
Net loss to member													(9,273	)		(9,273	)

Balances at March 30, 2003		—	$	—	$	—	$	—		$	753,182	$	(150,860	)	$	602,322


Balances at December 27, 2003		64,564	$	646	$	961,932	$	(350,010	)	$	—		—		$	612,568
Net loss								(18,758	)							(18,758	)
Accretion of Class A callable puttable common stock								(61,603	)							(61,603	)
Class A callable puttable and Class B common stock dividends declared								(5,664	)							(5,664	)

Balances at March 27, 2004		64,564	$	646	$	961,932	$	(436,035	)	$	—	$	—		$	526,543