DREYERS GRAND ICE CREAM HOLDINGS INC - 10-K Annual Report

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-K


(Mark One)
þ		ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

		For the fiscal year ended December 25, 2004

Or

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

		For the transition period from to

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 incorporation or organization)		(I.R.S. Employer Identification No.)

5929 College Avenue, Oakland, California 94618

(Address of principal executive offices) (Zip Code)

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

Securities registered pursuant to Section 12(b) of the Act: None


Title of Each Class		Name of Each Exchange on Which Registered

Not applicable		Not applicable

Securities Registered Pursuant to Section 12(g) of the Act:

Common Stock, $.01 Par Value

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 þ No o

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. þ

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). Yes þ No o

The aggregate market value of the voting and non-voting common stock held by non-affiliates of the registrant, as of June 26, 2004 (based on the average of the high and low prices of the Class A callable puttable common stock on June 26, 2004, as reported by the Nasdaq National Market), was approximately $2,275,300,000. The aggregate market value calculation excludes the aggregate market value of shares beneficially owned by the executive officers and directors of the registrant and holders affiliated with them. This determination of affiliate status is not necessarily a conclusive determination that such persons are affiliates for any other purposes.

As of March 3, 2005, the latest practicable date, 30,783,782 shares of Class A callable puttable common stock and 64,564,315 shares of Class B common stock were outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Dreyer’s Grand Ice Cream Holdings, Inc. definitive Proxy Statement for the 2005 Annual Meeting of Stockholders to be held on May 18, 2005, are incorporated by reference in Part III of this Annual Report on Form 10-K to the extent stated herein. With the exception of those portions which are specifically incorporated by reference in this Annual Report on Form 10-K, the Dreyer’s Grand Ice Cream Holdings, Inc. Proxy Statement for the 2005 Annual Meeting of Stockholders is not to be deemed filed as part of this Annual Report.

TABLE OF CONTENTS


PART I
	Item 1. Business.
	Item 2. Properties.
	Item 3. Legal Proceedings.
	Item 4. Submission of Matters to a Vote of Security Holders.
PART II
	Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
	Item 6. Selected Financial Data.
	Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
	Item 7A. Quantitative and Qualitative Disclosures about Market Risk.
	Item 8. Financial Statements and Supplementary Data.
	Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
	Item 9A. Controls and Procedures.
	Item 9B. Other Information.
PART III
	Item 10. Directors and Executive Officers of the Registrant.
	Item 11. Executive Compensation.
	Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
	Item 13. Certain Relationships and Related Transactions.
	Item 14. Principal Accountant Fees and Services.
		CONSOLIDATED STATEMENT OF OPERATIONS
		CONSOLIDATED BALANCE SHEET
		CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY
		CONSOLIDATED STATEMENT OF CASH FLOWS
		NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
EXHIBIT 21
EXHIBIT 23.1
EXHIBIT 23.2
EXHIBIT 31.1
EXHIBIT 31.2
EXHIBIT 32.1
EXHIBIT 32.2

Forward-Looking Statements.

This Annual Report on Form 10-K contains forward-looking information. Forward-looking information includes statements relating to future actions, prospective products, future performance or results of current or anticipated products, sales and marketing efforts, costs and expenses, interest rates, outcome of contingencies, financial condition, results of operations, liquidity, business strategies, cost savings, objectives of management of Dreyer’s Grand Ice Cream Holdings, Inc. (the Company) and other matters. The Private Securities Litigation Reform Act of 1995 provides a “safe harbor” for forward-looking information to encourage companies to provide prospective information about themselves without fear of litigation so long as that information is identified as forward-looking and is accompanied by meaningful cautionary statements identifying important factors that could cause actual results to differ materially from those projected in the information. Forward-looking information may be included in this Annual Report on Form 10-K or may be incorporated by reference from other documents filed with the Securities and Exchange Commission (the SEC) by the Company. You can find many of these statements by looking for words including, for example, “believes,” “expects,” “anticipates,” “estimates” or similar expressions in this Annual Report on Form 10-K or in documents incorporated by reference in this Annual Report on Form 10-K. The Company undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information or future events.

We have based the forward-looking statements relating to the Company’s operations on management’s current expectations, estimates and projections about the Company and the industry in which it operates. These statements are not guarantees of future performance and involve risks, uncertainties and assumptions that we cannot predict. In particular, we have based many of these forward-looking statements on assumptions about future events that may prove to be inaccurate. Accordingly, the Company’s actual results may differ materially from those contemplated by these forward-looking statements. Any differences could result from a variety of factors discussed elsewhere in this Annual Report on Form 10-K and in the documents referred to in this Annual Report on Form 10-K (if any), including, but not limited to the following:


	•	risk factors described under the “Risks and Uncertainties” section in Item 7;

	•	the level of consumer spending for frozen dessert products;

	•	the Company’s ability to achieve efficiencies in manufacturing and distribution operations without negatively affecting sales;

	•	costs or difficulties resulting from the combination of the business of Dreyer’s Grand Ice Cream, Inc. and Nestlé Ice Cream Company, LLC, including the integration of the operations of those companies, the divestiture of assets and compliance with the Federal Trade Commission’s order;

	•	costs or difficulties related to the expansion and closing of the Company’s manufacturing and distribution facilities;

	•	the cost of energy and gasoline used in manufacturing and distribution;

	•	the cost of dairy raw materials and other commodities used in the Company’s products;

	•	the Company’s ability to develop, market and sell new frozen dessert products;

	•	the success of the Company’s marketing and promotion programs and competitors’ marketing and promotion responses;

	•	market conditions affecting the prices of the Company’s products;

	•	responsiveness of both the trade and consumers to the Company’s new products and marketing and promotion programs;


	•	the costs associated with any litigation proceedings; and

	•	existing and future governmental regulations resulting from the events of September 11, 2001, the military action in Iraq and the continuing threat of terrorist attacks, which could affect commodity and service costs to the Company.

Website Access to Reports.

The Company’s website address is http://www.dreyersinc.com. The Company’s SEC filings, including its Annual Reports on Form 10-K, its Quarterly Reports on Form 10-Q, and its Current Reports on Form 8-K, including amendments thereto, are made available as soon as reasonably practicable after such material is electronically filed with the SEC. These filings can be accessed free of charge at the SEC’s website at http://www.sec.gov, or by following the links provided under “Financial Information” and “SEC EDGAR Filings” in the Investor Relations section of the Company’s website. In addition, the Company will voluntarily provide paper copies of its filings free of charge, upon request, when the printed version becomes available. The request should be directed to Dreyer’s Grand Ice Cream Holdings, Inc., Attn: Investor Relations, 5929 College Avenue, Oakland, CA 94618-1391.

PART I


Item 1.	*Business.*

Overview

Dreyer’s Grand Ice Cream Holdings, Inc. (DGICH) was incorporated in Delaware on June 14, 2002 and became a publicly traded company under the Nasdaq National Market (NASDAQ) symbol “DRYR” upon the closing of the merger of Dreyer’s Grand Ice Cream, Inc. (DGIC) and Nestlé Ice Cream Company, LLC (NICC) on June 26, 2003 (the Merger Closing Date). Prior to the Merger Closing Date, DGIC was a publicly traded company and NICC was an indirect, wholly-owned subsidiary of Nestlé S.A. From the Merger Closing Date until December 25, 2004, DGICH’s business was conducted by the two wholly-owned subsidiaries, DGIC and NICC. For purposes of this Annual Report on Form 10-K, references to “the Company” will mean DGICH, DGIC and/or NICC. On December 25, 2004, NICC was merged into DGICH and the assets held by NICC which were located in the western United States were transferred to DGIC, and the assets held by NICC in the eastern United States were transferred to DGIC and then to DGIC’s wholly-owned subsidiary, Edy’s Grand Ice Cream (Edy’s).

The Company manufactures and distributes ice cream and other frozen snack products. The “Dreyer’s Grand Ice Cream” line of products is marketed throughout the western United States, Texas and certain markets in the Far East. The “Edy’s® Grand® Ice Cream” line of products is sold under the Edy’s brand name throughout the remaining regions of the United States and certain markets in the Caribbean and South America. According to ACNielsen, the ice cream and other frozen snack products sold under the Dreyer’s and Edy’s brand names are sold in more than 90 percent of the grocery outlets serving the households in the United States. The Company manufactures and/or distributes products under license from Nestlé USA Prepared Foods, Nestlé S.A., Société des Produits Nestlé S.A. and Nestec Ltd., including Häagen-Dazs® ice cream, Drumstick® ice cream sundae cones, Nestlé Crunch® and Butterfinger® ice cream bars and Carnation® ice cream sandwiches. The Company’s line of ice cream and related products are distributed primarily through a direct-store-delivery system further described below under the caption “Marketing, Aggregated Segments, Sales and Distribution.” These products are sold by the Company and its independent distributors to grocery stores, convenience stores, club stores, ice cream parlors, restaurants, hotels and certain other accounts. The Company’s branded products, including licensed and joint venture products (Company Brands) enjoy strong consumer recognition and loyalty. The Company also manufactures under license and/or distributes brand ice cream and frozen snack products for other companies (Partner Brands).

The Company entered into an Agreement and Plan of Merger and Contribution, dated June 16, 2002, as amended (the Merger Agreement), with DGIC, December Merger Sub, Inc., Nestlé Holdings, Inc. (Nestlé) and NICC Holdings, Inc. (NICC Holdings), a wholly-owned subsidiary of Nestlé, to combine DGIC with NICC. On the Merger Closing Date, upon the closing of the transactions under the Merger Agreement (the Dreyer’s Nestlé Transaction), the businesses of DGIC and NICC were combined and each became a subsidiary of the Company. As a result of the Dreyer’s Nestlé Transaction, the former stockholders of DGIC (other than Nestlé) received shares of the Company’s Class A callable puttable common stock constituting approximately 33 percent of the diluted shares of the Company in exchange for their shares of DGIC common stock. Nestlé and NICC Holdings (in exchange for its contribution of the equity interest of NICC to the Company) received shares of the Company’s Class B common stock constituting approximately 67 percent of the diluted shares of the Company. The Company’s Class A callable puttable common stock is listed on the NASDAQ and began trading under the symbol “DRYR” on June 27, 2003, concurrent with the cessation of trading in DGIC stock. The Company’s Class B common stock is not listed for trading on any exchange.

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 Integrated Brands. On June 25, 2003, the FTC issued its decision and order approving the aforementioned divestiture transaction in In the Matter of Nestlé Holdings, Inc. et al., Docket No. C-40 (the Decision and Order). On July 5, 2003 (the Divestiture Closing Date), the parties closed the transaction (the Divestiture Transaction) and the Company received $10,000,000 in consideration for the sale of the Divested Brands and Purchased Assets.

Pursuant to the APA, the parties entered into certain agreements (the Divestiture Agreements) related to: (i) manufacture of the Divested Brands by DGIC for Integrated Brands for a period of up to one year from the Divestiture Closing Date; (ii) provision of certain transition services to Integrated Brands and Eskimo Pie; (iii) delivery of the Divested Brands to customers by DGIC for a transition period of up to one year from the Divestiture Closing Date (Transition IB Product Distribution Agreement); (iv) delivery of the ice cream brands licensed to NICC (Häagen-Dazs and Nestlé brands) to customers by Eskimo Pie for a transition period of up to one year from the Divestiture Closing Date (Transition NICC Product Distribution Agreement); (v) delivery, under certain circumstances, of certain DGIC owned and licensed ice cream brands to customers by Eskimo Pie for a period of up to five years from the Divestiture Closing Date in the Territories (Drayage Agreements); and (vi) delivery of the Divested Brands, if requested by Integrated Brands, to customers in areas where DGIC maintains company-owned routes for a period of up to 10 years from the Divestiture Closing Date. Pursuant to the terms of the Drayage Agreements, Eskimo Pie has the right, under certain circumstances, to deliver certain DGIC owned and licensed ice cream products in the Territories. The right is subject to fixed dollar limits for three years from the Divestiture Closing Date, with such limits decreasing over two additional years. The exact markets within the Territories, the product mix and the volume of products that Eskimo Pie will choose to deliver are uncertain and the Company is unable to estimate the financial implications of this right.

On July 9, 2004, the FTC approved a request made by the Company and Integrated Brands to amend certain aspects of the agreements between the parties to the Divestiture Transaction and thereby modify the Decision and Order, in order to facilitate the manufacture of the Divested Brands and the sale and distribution of certain DGIC products. On September 7, 2004, the FTC approved a request made by the Company and Integrated Brands to amend certain additional aspects of the agreements between the parties to the Divestiture Transaction and thereby modify the Decision and Order in order to facilitate the distribution of certain Integrated Brands and DGIC products as well as extend the license from Integrated Brands to DGIC for use of the Whole Fruit name for DGIC’s line of fruit bars. The Company is unable to estimate the financial implications of this change.

Under the Decision and Order, Ben & Jerry’s Homemade, Inc. (Ben & Jerry’s) was permitted to give DGIC early notice of termination of the distribution agreement dated October 10, 2000 between DGIC and Ben & Jerry’s (the B&J Agreement). Pursuant to the Decision and Order, the B&J Agreement was terminated effective December 31, 2003. The Decision and Order also provided for the termination of DGIC’s joint venture with M&M/ Mars, a division of Mars, Incorporated (Mars), as well as certain manufacturing and distribution agreements with Mars as of December 31, 2003. Pursuant to the Decision and Order, the joint venture between the Company and Mars was terminated, although the Company continued, at the request of Mars, to distribute Mars products through February 2004.

The Häagen-Dazs Shoppe Company

On February 17, 2004, the Company 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 December 25, 2004, there were approximately 237 franchised Häagen-Dazs parlors in the United States. The Company performed the significant subsidiary test on this acquisition and determined it was not material.

Silhouette Brands, Inc.

On July 26, 2004, the Company acquired Silhouette Brands, Inc. (Silhouette) for a purchase price of approximately $63,000,000. The purchase price consisted of approximately $58,000,000 in cash paid for the capital stock of Silhouette plus approximately $5,000,000 of other intangibles acquired in the Dreyer’s Nestlé Transaction. Silhouette sold low fat and low carb ice cream snacks under its brands, Skinny Cow® and Skinny Carb Bar^tm. The Company performed the significant subsidiary test on this acquisition and determined it was not material.

Laurel Maryland Land Acquisitions

On August 2, 2004, the Company acquired all of the stock of a corporation which owned real property adjacent to the Company’s manufacturing plant in Laurel, Maryland for the sole purpose of acquiring such real property, as well as an additional parcel of real property adjacent to the plant. On August 4, and October 18, 2004, the Company acquired additional pieces of real property adjacent to the plant. The total price paid for these purchases was approximately $13,000,000.

Markets

Ice cream was traditionally supplied by dairies as an adjunct to their basic milk business. Accordingly, ice cream was marketed like milk, as a fungible commodity, and manufacturers competed primarily on the basis of price. This price competition motivated ice cream producers to seek economies in their formulations. The resulting trend to lower quality ice cream created an opportunity for the Company and other producers of premium ice creams, whose products can be differentiated on the basis of quality, technological sophistication and brand image, rather than price. Moreover, the market for all packaged ice creams was influenced by the steady increase in market share of “private label” ice cream products owned by the major grocery chains and the purchase or construction by the chains of their own milk and ice cream plants resulting in less demand for the ice cream supplied by independent dairies. As a result, independent brands, such as the Company’s, are normally stocked by major grocery chains.

While many foodservice operators, including hotels, schools, hospitals and other institutions, buy ice cream primarily on the basis of price, there are others in the foodservice industry who purchase ice cream based on its quality. Operators of ice cream shops that desire to feature a quality brand, restaurants that include an ice cream brand on their menu and clubs or chefs that are concerned with the quality of their fare are often willing to pay for the Company’s quality, image and brand identity.

Products

The Company through DGIC and NICC has always been an innovator of flavors, package development and formulation. William A. Dreyer, the founder of DGIC and the creator of Dreyer’s Grand Ice Cream, is credited with inventing many popular flavors including Rocky Road. DGIC was the first manufacturer to produce an ice cream lower in calories. The Company uses only the highest quality ingredients in its products. The Company’s philosophy is to make changes in its formulations or production processes only to the extent that such changes do not compromise quality for cost even when the industry in general may adopt such new formulation or process compromises.

The Company’s premium product line includes Dreyer’s and Edy’s Grand Ice Cream, the Company’s flagship product line. This ice cream utilizes traditional formulations with all natural flavorings and is characterized by premium quality, taste and texture, and diverse flavor selection. The flagship product line is complemented by the Company’s “better for you” products including Slow Churned^tm Light Ice Cream, Frozen Yogurt, Carb Benefit^tm and No Sugar Added ice creams. The Company believes that these better for you products are well-positioned in the market where products are characterized by lower levels of fat and sugar than those of regular ice cream. The proprietary technologies underlying the Company’s new Slow Churned Light Ice Cream brand offer significant

low-fat and low-calorie benefits to consumers while maintaining taste and texture that the majority of consumers find comparable to regular full-fat ice cream.

The Company’s superpremium product line includes Häagen-Dazs and Starbucks® Ice Cream. The Company manufactures and distributes Häagen-Dazs under a long-term license with Nestlé S.A., Société des Produits Nestlé S.A. and Nestec Ltd. and manufactures and distributes Starbucks Ice Cream products under a joint venture with Starbucks Corporation (Starbucks).

The Company’s frozen snack line features Fruit Bars and Starbucks Frappuccino® Bars. During 2004, the Company acquired Silhouette Brands, Inc., including the Skinny Cow and Skinny Carb Bar brands of frozen snacks. The Company also manufactures and distributes frozen snack products under license from Nestlé USA Prepared Foods, Nestlé S.A., Société des Produits Nestlé S.A. and Nestec Ltd., including Drumstick ice cream sundae cones, Nestlé Crunch and Butterfinger ice cream bars, and Carnation ice cream sandwiches. The Company also produces and markets Grand Soft®, a premium soft serve product.

The Company operates a continuous flavor development and evaluation program and adjusts its product line based on general popularity and intensity of consumer response. Some flavors are seasonal and are produced only as a featured flavor during particular months. The frozen snack business in particular is characterized by a high rate of new product introduction and the Company anticipates substantial new launches in this area in 2005 and beyond, including new product ranges of both stick-based and bite-sized frozen snacks.

The Company holds registered trademarks on many of its products. The Company believes that consumers associate its trademarks, distinctive packaging and trade dress with its high-quality products. The Company does not own any patents that are material to its business. Research and development expenses are currently not significant, nor have they been significant in the past.

In addition to its Company Brand products, the Company also distributes Partner Brands. During 2004, the most significant Partner Brand relationships for the Company, in terms of sales, were those with CoolBrands and ConAgra Foods, Inc. (Healthy Choice® products). The Company distributed Skinny Cow frozen snacks as a Partner Brand prior to the Company’s acquisition of Silhouette on July 26, 2004; these products are now sold as Company Brands. The Company had a long-standing distribution relationship with Ben & Jerry’s, but since the Decision and Order required the Company to terminate the distribution agreement with Ben & Jerry’s as of December 31, 2003, there was no significant amount of sales of Ben & Jerry’s products in 2004.

Marketing, Aggregated Segments, Sales and Distribution

Business Strategy

The Company’s marketing strategy is based on management’s belief that a significant number of people prefer a quality product and quality image in ice cream and frozen snacks just as they do in other product categories. A quality image is communicated in many ways — taste, packaging, flavor selection, price and often through advertising and promotion. It is the Company’s goal to use these means to develop brands with clearly defined and loyal consumer followings in each major market where it does business.

The Company’s products are offered for sale in a large variety of retail outlets, including grocery stores, convenience stores, club stores, restaurants, movie theaters, hotels, other retailers, and to affiliates of Nestlé for export. In addition, the Company provides Häagen-Dazs ice cream to General Mills, Inc. for export.

for the bulk of the Company’s sales, the Company also uses a variety of other distribution methods, such as direct shipment to supermarket-owned warehouses, independent distributors and foodservice broad-line distributors. The Company also invests in freezer cabinets in retail outlets to increase consumer demand for its products. These cabinets are either serviced by the Company’s own distribution system or are leased to independent distributors who stock them with the Company’s products.

The Company seeks to increase its sales and profitability through a business strategy which focuses on four long-term initiatives. The specific programs applied to achieve each initiative are updated each year, as required. These initiatives are: (1) development of leading brands in all three segments in which the Company competes — premium, superpremium, and frozen snacks; (2) building leadership positions in all channels where ice cream and frozen desserts are sold; (3) optimizing the Company’s cost structure; and (4) continued alignment of the Company’s employees on achievement of business objectives and enhancement of the Company’s culture and values.

These initiatives are based on the Company’s belief that significant advantages can be achieved by the synergistic interaction of strong brands and a strong distribution system. Underlying the strategic initiatives is a commitment to win consumer preference through the presentation of well-marketed brands and products in a wide variety of channels, with a strong focus on the factors of display, stocking and flavor selection that impact impulse-based consumer purchases.

In implementing these strategic initiatives, the Company places strong emphasis on development of new products and flavors, which is a key factor for success in ice cream and frozen snack products. The introduction of such products can require significant upfront expenditures which may materially impact the Company’s financial results. While the Company expects to recover both product introduction and ongoing marketing expenses through sales growth of its brands, there can be no assurance of such recovery.

The Company also provides distribution services through its own system for Partner Brands. Significant current Partner Brands include Healthy Choice and certain CoolBrands products. Distribution of Partner Brands through its own distribution system provides the Company with incremental revenues. Partner Brand distribution arrangements are generally provided under contracts of various durations. While the Company believes that distribution of Partner Brand products is beneficial to its profits and is valuable to the brand owners, the Partner Brands often compete with the Company’s own products, and the owners of the Partner Brands are generally accountable for selling and marketing functions. The owners of the Partner Brands may elect to terminate their relationships with the Company when allowed to do so by their individual contracts, and such relationships have been terminated in the past.

Integration Plan

Prior to the closing of the Dreyer’s Nestlé Transaction, the Company developed a detailed plan for the integration of the NICC and DGIC businesses and the realization of synergies arising from the transaction (the Integration Plan). This Integration Plan and the related progress in its implementation are reviewed on a regular basis by the Company’s Board of Directors. The key components of the Integration Plan include:


	•	Consolidation of the functions of the DGIC and NICC headquarters into a single unit.

	•	Transfer of selling accountability from the previous NICC system to DGIC’s system, and divestiture of the NICC route structure and its supporting personnel and assets to Eskimo Pie.

	•	Transfer of certain distribution operations of NICC from various third-party distribution methods to the Company’s own route system.

	•	Elimination of redundant third-party service agreements and procurement arrangements.


	•	Realization of freight, warehousing, and manufacturing savings by reallocation of production to more efficient geographical locations, closing of the DGIC Union City, California manufacturing facility, and transfer of warehousing from third-parties to Company-owned warehouses in some areas.

	•	Execution of the divestiture and other requirements of the Decision and Order.

While many of these activities were accomplished within the first year following the closing of the Dreyer’s Nestlé Transaction, others, such as the realization of manufacturing and logistical savings, will not be fully realized until 2006 and beyond. The Company has incurred, and expects to continue to incur substantial expenses and capital expenditures in order to implement the Integration Plan and carry out its business strategy, particularly in the process of integrating the businesses of DGIC and NICC and realizing synergies from the Dreyer’s Nestlé Transaction.

The Company believes that the benefits of this business strategy will be realized in future years, although no assurance can be given that the expectations relative to future sales and earnings benefits will be realized. Specific factors that might cause a shortfall in the business strategy include, but are not limited to, the Company’s ability to achieve efficiencies in its cost structure; the cost of dairy and other raw materials used in the Company’s products; competitor’s marketing and promotion responses; market conditions affecting the prices of the Company’s products; the Company’s ability to increase sales of its own products; and responsiveness of both the trade and consumers to the Company’s new products and marketing and promotion programs.

Premium and Superpremium Products and Channel Development

The packaged ice cream category, which is the Company’s primary market, may be characterized as composed of three main sectors: low-priced brands; premium brands; and superpremium brands. These sectors are primarily distinguished by a broad range of retail price differences, the quantity and quality of ingredients and packaging; however the category is fluid and these distinctions between sectors are often blurred as product offerings and price points frequently change. The category is relatively fragmented among national and regional competitors in comparison with many other food categories. The Company believes that its key competitive advantages lie in its capabilities in marketing and product development and in the breadth of its product line.

Direct-Store-Distribution Network

Unlike most other ice cream manufacturers, the Company uses a direct-store-delivery distribution network to distribute a significant amount of the Company’s products directly to the retail ice cream cabinet by either the Company’s own personnel or independent distributors who primarily distribute the Company’s products. This store level distribution allows service to be tailored to the needs of each store. The implementation of this system has resulted in an ice cream distribution network capable of providing frequent direct service to grocery stores in every market where the Company’s products are sold. The Company’s distribution network is considerably larger than any other direct-store-delivery system for ice cream products currently operating in the United States.

The Company refers to its distribution system as “direct-store-service” to distinguish the value-added activities provided to consumers and retail customers from the more traditional “distribution” activities. Part of this service is the expansion of “scan-based trading” with major retailers. Under this program, the Company reaches agreements with major supermarket chains under which the Company maintains and owns the inventory of its products in each store, and is paid by the supermarket based on the actual volume sales to consumers each week. This program involves the electronic transfer of sales data from the supermarket to the Company. Because faster payments roughly offset higher inventory levels, this program has not significantly impacted the Company’s working capital, but has the potential to result in significantly lower per-unit distribution costs.

The distribution network in the western United States includes 10 distribution centers in large metropolitan areas including Los Angeles, the San Francisco Bay Area, Phoenix, Portland, Salt Lake City, Houston, Seattle and Denver. The Company also has independent distributors handling the Company’s products in various areas of the 13 western United States, Texas and certain markets in the Far East. Distribution in the remainder of the

United States is under the Edy’s brand name with most of the distribution handled through 17 distribution centers, including centers in the New York/ New Jersey metropolitan area, Chicago, the Washington/ Baltimore metropolitan area, Atlanta, Tampa, Miami and St. Louis. The Company also has independent distributors handling the Company’s products in certain market areas east of the Rocky Mountains, in the Caribbean and in South America.

The Company’s agreements with its independent distributors range in duration from agreements with multi-year terms to agreements that are terminable upon 30 days notice by either party. Each distributor, whether company-owned or independent, is primarily responsible for sales of all products within its respective market area. However, the Company provides sales and marketing support to its independent distributors, including training seminars, sales aids of many kinds, point of purchase materials, assistance with promotions and other sales support.

Aggregated Segments

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.

Aggregated Total net revenues for management reporting purposes consist of Net sales of Company Brands, Net sales of Partner Brands and Other revenues for the manufacture and distribution of products for other companies.

Net sales of Company Brands were $1,312,180,000, $882,944,000 and $560,721,000 in 2004, 2003 and 2002, respectively. Net sales of Partner Brands were $235,512,000, $264,705,000 and $37,460,000 in 2004, 2003 and 2002, respectively. Other revenues were $40,736,000, $42,912,000 and $4,850,000 in 2004, 2003 and 2002, respectively.

Net loss available to Class A callable puttable and Class B common stockholders for the aggregated segments totaled $(342,366,000), $(191,780,000) and $(70,994,000) in 2004, 2003 and 2002, respectively. Total assets for the aggregated geographic segments were $3,246,694,000 and $3,091,423,000 at December 25, 2004 and December 27, 2003, respectively.

Sales

No customers accounted for 10 percent or more of Total net revenues in 2004, 2003 or 2002. Since the closing of the Dreyer’s Nestlé Transaction on June 26, 2003, sales between NICC and DGIC are intercompany transactions that are eliminated in consolidation. As a result, DGIC is no longer considered a customer for financial reporting purposes. The Company’s export sales were one percent of Total net revenues in 2004 and less than one percent of Total net revenues in 2003 and 2002. The Company typically experiences a seasonal fluctuation in Total net revenues, with more demand for its products during the spring and summer than during the fall and winter.

Manufacturing

The Company currently manufactures its products at its plants in Bakersfield, California; Fort Wayne, Indiana; Houston, Texas; Tulare, California; Laurel, Maryland; City of Commerce, California; and Salt Lake City, Utah. In addition, prior to February 2004, the Company manufactured products at a plant in Union City, California. The Company also has manufacturing agreements with various companies to produce frozen snack products and to produce a number of specialized products, including Nestlé® branded frozen novelties and Häagen-Dazs® bars. During 2004, approximately 15,800,000 dozens of Company owned or licensed frozen snack products were produced under these agreements. In addition, the Company has agreements to produce products for other manufacturers. In 2004, the Company manufactured approximately 11,000,000 gallons of products

under these Partner Brand agreements. Total Company production, including both Company Brands and Partner Brands, was 142,000,000 gallons and 91,000,000 dozens during 2004.

The largest components of the Company’s cost of production, which are primary factors causing volatility, are the costs of dairy raw materials and other commodities. Under current Federal and state regulations and industry practice, the price of cream is linked to the price of butter as traded on the Chicago Mercantile Exchange. Over the past 10 years, the price of butter in the United States has averaged $1.29 per pound. However, the market is inherently volatile and can experience large seasonal fluctuations. The monthly average price per pound of AA butter was $1.82 and $1.14 for 2004 and 2003, respectively. The Chicago Mercantile Exchange butter market is characterized by very low trading volumes and a limited number of participants. The available futures market for butter is still in the early stages of development, and does not have sufficient liquidity to enable the Company to fully reduce its exposure to the volatility of the market. Beginning in 2002, the Company proactively addressed this price volatility by purchasing either butter or butter futures contracts with the intent of reselling or settling its positions at the Chicago Mercantile Exchange. In spite of these efforts to mitigate this risk, commodity price volatility still has the potential to materially affect the Company’s performance, including, but not limited to, its profitability and cash flow.

Vanilla is another significant raw material used in the manufacture of the Company’s products. At the present time, the Company is unable to effectively hedge against the price volatility of vanilla and, therefore, cannot predict the effect of future price increases. As a result, future increases in the costs of vanilla could have a material adverse effect on the Company’s profitability and cash flow.

While the ice cream industry has generally sought to compensate for the cost of increased raw materials costs through price increases, the industry is highly competitive and there can be no guarantee that the Company will be able to increase prices to compensate for increased dairy prices in the future. In addition, price increases may have negative effects on sales volume.

In order to ensure consistency of flavor, each of the Company’s manufacturing plants purchase, to the extent practicable, all of its required dairy ingredients from a limited number of suppliers. These dairy products and most other ingredients or their equivalents are available from multiple sources. The Company maintains a rigorous process for evaluating qualified alternative suppliers of its key ingredients.

The events of September 11, 2001 reinforced the need to enhance the security of the United States. Congress responded by passing the Public Health Security and Bioterrorism Preparedness and Protection Act of 2002 (the Act), which President Bush signed into law on June 12, 2002. The Act includes a large number of provisions to help ensure the safety of the United States from bioterrorism, including new authority for the Secretary of Health and Human Services (HHS) to take action to protect the nation’s food supply against the threat of intentional contamination. The Food and Drug Administration, as the food regulatory arm of HHS, is responsible for developing and implementing these food safety measures, including four major regulations. The Company has internally reviewed its policies and procedures regarding food safety and has increased security procedures as appropriate. The Company continues to monitor risks in this area and is evaluating the impact of these regulations on an ongoing basis.

Competition

The Company’s manufactured products compete on the basis of brand image, quality, breadth of flavor selection and price. The ice cream industry is highly competitive and most ice cream manufacturers, including full line dairies, major supermarket chains and other independent ice cream processors, are capable of manufacturing and marketing high quality ice creams. Furthermore, there are relatively few barriers to new entrants in the ice cream business. However, reduced fat and reduced sugar ice cream products generally require technologically-sophisticated formulations and production in comparison to standard or “regular” ice cream products.

Much of the Company’s competition comes from the “private label” brands produced by or for the major supermarket chains. These brands generally sell at prices below those charged by the Company for its products. Because these brands are owned by the retailer, they often receive preferential treatment when the retailers allocate available freezer space. The Company’s competition also includes premium and superpremium ice creams produced by other ice cream manufacturers.

The Company distributes products as Partner Brands for several key competitors such as ConAgra Foods, Inc. (Healthy Choice products). In most of these cases, the Company only provides distribution services while maintaining a competitive selling effort for its own brands with key retail accounts. The distribution of these Partner Brand products provides profits for the Company, and the Company believes that the parent companies of the Partner Brands realize substantial benefits from this program.

Employees

On December 25, 2004, the Company had approximately 5,979 employees of which 97 were covered by collective bargaining agreements on that date. As a result of the closing of the Union City manufacturing plant, 160 employees were terminated in 2004. The Company’s Union City manufacturing, sales and distribution employees were represented by the Teamsters Local 853 and by the International Union of Operating Engineers, Stationary Local No. 39. The contract with Teamsters Local 853 for the Company’s manufacturing employees was terminated with the closing of the Union City manufacturing plant in February 2004. The contract for the sales and distribution employees was ratified in August 2004 and expires in September 2006. The contract with the International Union of Operating Engineers, Stationary Local No. 39 was terminated on July 1, 2004. Certain of the Company’s route sales and delivery employees in the Monterey area were represented by the General Teamsters, Warehousemen and Helpers Union Local 890. The contract with this union expired in June 2003 and these employees are no longer represented by contract. The Sacramento distribution employees were represented by the Chauffeurs, Teamsters and Helpers Union, Local 150, whose contract with the Company expired in August 2004, and the parties are presently negotiating the terms of a new agreement. The St. Louis distribution employees are represented by the United Food & Commercial Workers Union, Local 655, whose contract with the Company expires in 2008. Sixteen warehouse employees in the Company’s Bronx, New York facility were represented by the Teamsters Milk & Ice Cream Drivers and Employees Union, Local 584. The contract with the Teamsters Milk & Ice Cream Drivers and Employees Union, Local 584 expired in April 2004, and these employees are no longer represented by a contract. The Company has never experienced a strike or work stoppage by any of its employees.


Item 2.	*Properties.*

The Company owns its headquarters located at 5929 College Avenue in Oakland, California. The headquarters buildings include 83,000 square feet of office space utilized by the Company and 10,000 square feet of retail space leased to third parties.

The Company tracks production of its packaged ice cream products in terms of gallons and its frozen snacks in terms of dozens.

The Company owns a manufacturing and distribution facility in Bakersfield, California. This facility has approximately 161,000 square feet of manufacturing and office space and 87,000 square feet of cold and dry storage warehouse space. The plant has an estimated maximum capacity of 98,000,000 dozens and 9,000,000 gallons per year. During 2004, approximately 53,000,000 dozens and 6,000,000 gallons of ice cream and related products were produced at this facility. Due to the plant expansion currently in progress, there will be a 220,000 square foot increase in manufacturing and office space and 125,000 square foot increase in cold and dry storage warehouse space. This will bring increased capacity of approximately 53,000,000 gallons. The expansion is expected to be completed in 2005.

The Company owns a manufacturing plant with an adjoining cold storage warehouse in Fort Wayne, Indiana. This facility has approximately 58,000 square feet of manufacturing and office space and 102,000 square feet of

dry and cold storage space. The plant has an estimated maximum capacity of 75,000,000 gallons per year. During 2004, approximately 65,000,000 gallons of ice cream and related products were produced at this facility.

The Company owns a manufacturing and distribution facility in Houston, Texas. This facility has approximately 50,000 square feet of manufacturing, dry storage and office space and 80,000 square feet of cold storage warehouse space. The plant has an estimated maximum capacity of 30,000,000 gallons per year. During 2004, approximately 26,000,000 gallons of ice cream and related products were produced at this facility.

The Company owns a manufacturing plant with an adjoining cold storage warehouse in Tulare, California. This facility has approximately 66,000 square feet of manufacturing and office space and 57,000 square feet of cold storage space. The plant has an estimated maximum capacity of 22,000,000 gallons and 10,000,000 dozens per year. During 2004, approximately 17,000,000 gallons and 8,000,000 dozens of ice cream and related products were produced at this facility.

The Company owns a manufacturing and distribution facility in Laurel, Maryland. This facility has approximately 86,000 square feet of manufacturing and office space and 22,000 square feet of cold and dry storage warehouse space. The plant has an estimated maximum capacity of 48,000,000 dozens per year. During 2004, approximately 29,000,000 dozens of ice cream and related products were produced at this facility. Due to the plant expansion currently in progress, there will be a 272,000 square foot increase in manufacturing and office space and 311,000 square foot increase in cold and dry storage warehouse space. This will bring increased capacity to approximately 118,000,000 dozens. The expansion is expected to be completed in 2005 and 2006.

The Company leases an ice cream manufacturing plant with an adjoining cold storage warehouse located in the City of Commerce, California. This facility has approximately 72,000 square feet of manufacturing, dry storage and office space and 18,000 square feet of cold storage space. The lease on this property, including renewal options, expires in 2011. The plant has an estimated maximum capacity of 28,000,000 gallons and 15,000,000 dozens per year. During 2004, approximately 22,000,000 gallons and 1,000,000 dozens of ice cream and related products were produced at this facility.

The Company owns a cold storage warehouse facility located in the City of Industry, California. This facility has approximately 80,000 square feet of cold and dry storage warehouse space and office space. This facility supplements the cold storage warehouse and office space leased in the City of Commerce.

The Company owns a manufacturing and distribution facility in Salt Lake City, Utah. This facility has approximately 26,000 square feet of manufacturing, dry storage and office space and 28,000 square feet of cold storage space. Approximately 2,600 square feet of dry storage space included in the facility’s 26,000 square feet is leased. Another 18,000 square feet of dry storage space and 4,000 square feet of cold storage space is leased. The plant has an estimated maximum capacity of 8,000,000 gallons per year. During 2004, approximately 6,000,000 gallons of ice cream and related products were produced at this facility.

The Company intentionally acquires, designs and constructs its manufacturing and distribution facilities with a capacity greater than current needs require. This is done to facilitate growth and expansion and minimize future capital outlays. The cost of carrying this excess capacity is not significant. The estimated capacities mentioned above represent the maximum potential production for each plant. Actual plant capacity can be heavily influenced by seasonal demand fluctuations, internal or external inventory storage availability and costs, and the type of product or package produced.

The Company leases or rents other various local distribution and office facilities with leases expiring within a period of eight years (including renewal options), except for one that has approximately 83 years remaining (including renewal options).


Item 3.	*Legal Proceedings.*

The Company is subject to legal proceedings, claims and litigation arising in the ordinary course of business. While the outcome of these matters is currently not determinable, the Company does not expect that the ultimate costs to resolve these matters will have a material adverse effect on its consolidated financial position, results of operations or cash flows.


Item 4.	*Submission of Matters to a Vote of Security Holders.*

Not applicable.

Executive Officers of the Registrant

The Company’s executive officers and their ages are as follows:


Name	Age		Position

T. Gary Rogers		62	Chairman of the Board of Directors and Chief Executive Officer
Thomas M. Delaplane		60	Executive Vice President — Sales
J. Tyler Johnston		51	Executive Vice President — Marketing
Timothy F. Kahn		51	Executive Vice President — Chief Operating Officer
William R. Oldenburg		58	Executive Vice President — Operations
Alberto E. Romaneschi		46	Executive Vice President — Finance and Administration and
			Chief Financial Officer

All officers hold office at the pleasure of the Board of Directors. There is no family relationship among the above officers.

Mr. Rogers has served as the Chairman of the Board of Directors and Chief Executive Officer of the Company since the closing of the Dreyer’s Nestlé Transaction on June 26, 2003. Prior thereto, Mr. Rogers served as Chairman of the Board of Directors and Chief Executive Officer of DGIC since its incorporation in 1977.

Mr. Delaplane has served as Executive Vice President — Sales of the Company since June 26, 2003. Prior thereto, Mr. Delaplane served as Vice President — Sales of DGIC since May 1987.

Mr. Johnston has served as Executive Vice President — Marketing of the Company since June 26, 2003. Prior thereto, Mr. Johnston served as Vice President — Marketing of DGIC since March 1996. From September 1995 to March 1996, he served as Vice President — New Business of DGIC. From May 1988 to August 1995, he served as Director of Marketing of DGIC.

Mr. Kahn has served as Executive Vice President — Chief Operating Officer of the Company since June 26, 2003. From March 1998 to June 26, 2003, Mr. Kahn served as Vice President — Finance and Administration and Chief Financial Officer of DGIC. From 1994 through October 1997, Mr. Kahn served in the positions of Senior Vice President, Chief Financial Officer and Vice President for several divisions of PepsiCo, Inc., including Pizza Hut, Inc., and from November 1997 to February 1998 was employed by Tricon, Inc., following PepsiCo’s spin-off of Pizza Hut to Tricon, Inc.

Mr. Oldenburg has served as Executive Vice President — Operations of the Company since June 26, 2003. Prior thereto, Mr. Oldenburg served as Vice President — Operations of DGIC since 1986.

Mr. Romaneschi has served as Executive Vice President — Finance and Administration and Chief Financial Officer of the Company since June 26, 2003. From March 2003 to June 2003, Mr. Romaneschi served as the Integration Advisor for Nestec S.A. From February 1999 to March 2003, Mr. Romaneschi served as the Chief Financial Officer for Cereal Partners Worldwide S.A., a joint venture between Nestlé S.A. and General Mills, Inc.

PART II


Item 5.	*Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.*

(a) Market information.

The Company’s Class A callable puttable common stock has been traded on the Nasdaq National Market (NASDAQ) under the symbol “DRYR” since June 27, 2003, following the closing of the Dreyer’s Nestlé Transaction. The following table sets forth the range of quarterly high and low closing sale prices of the Class A callable puttable common stock of the Company as reported on NASDAQ from June 27, 2003 to December 25, 2004:


		High		Low

2004
	First Quarter	$	79.00	$	77.55
	Second Quarter		79.24		78.80
	Third Quarter		80.00		78.97
	Fourth Quarter		80.50		79.90
2003
	Second Quarter (since June 27, 2003)		78.75		78.75
	Third Quarter		79.00		77.05
	Fourth Quarter		77.82		77.16

Prior to the closing of the Dreyer’s Nestlé Transaction, the common stock of DGIC was traded on NASDAQ under the symbol “DRYR.” The following table sets forth the range of quarterly high and low closing sale prices of the common stock of DGIC as reported on NASDAQ during the periods indicated:


		High		Low

2003
	First Quarter	$	74.58	$	61.30
	Second Quarter (through June 26, 2003)		79.10		59.65

Holders.

On March 3, 2005, there were approximately 1,639 holders of record of the Company’s Class A callable puttable common stock and two holders of record of the Company’s Class B common stock.

Dividends.

The Company declared regular quarterly dividends of $.06 per share of Class A callable puttable and Class B common stock for stockholders of record on March 26, 2004, June 25, 2004, September 24, 2004, December 24, 2004, June 27, 2003, September 26, 2003 and December 26, 2003.

As provided in the Governance Agreement among the Company, Nestlé Holdings, Inc., and Nestlé S.A. which was entered into at the closing of the Dreyer’s Nestlé Transaction, as amended (the Governance Agreement), the dividend policy of the Company shall be to pay a dividend not less than the greater of (i) $.24 per common share on an annualized basis or (ii) 30 percent of the Company’s net income per share for the preceding fiscal year (net income, calculated for this purpose by excluding from net income the ongoing non-cash impact of accounting entries arising from the accounting for the Dreyer’s Nestlé Transaction, including increases in amortization or depreciation expenses resulting from required write-ups, and entries related to recording of the put or call options on the Class A callable puttable common stock), unless the Board, in discharging its fiduciary duties, determines not to declare a dividend. Having made the calculation of net income for 2004 after excluding those accounting entries as prescribed in its dividend policy, the Company expects to

declare dividends in 2005 at an annualized rate of $.24, or a quarterly rate of $.06, per share of Class A callable puttable and Class B common stock.

The information set forth under the caption “Security Ownership of Certain Beneficial Owners and Management — Equity Compensation Plan Information” in the Company’s definitive Proxy Statement for the 2005 Annual Meeting of Stockholders to be filed with the Securities Exchange Commission is incorporated by reference.

(b) Recent Sales of Unregistered Securities; Use of Proceeds from Registered Securities.

Not applicable.

(c) Purchases of equity securities by the issuer and affiliated purchasers.

Not applicable.


Item 6.	*Selected Financial Data.*

The selected consolidated financial data of the Company has been derived from the audited consolidated financial statements and accompanying notes of the Company for the years ended December 25, 2004 and December 27, 2003 and of NICC for the years ended December 31, 2002, December 31, 2001 and December 31, 2000. The Company is the successor entity to NICC and was formed in connection with the Dreyer’s Nestlé Transaction. The accompanying selected financial data that is as of a date, or for a period ended, before June 27, 2003 represents the accounts of NICC or its predecessor entities. The information set forth below is not necessarily indicative of the results of the Company’s future operations and should be read in conjunction with “Item 7 — Management’s Discussion and Analysis of Financial Condition and Results of Operations.”


		Year⁽¹⁾

		2004^(2),(3)			2003^(2),(3)			2002⁽³⁾			2001			2000

		(In thousands, except per share amounts)
Operations:
	Net sales⁽⁴⁾	$	1,547,692		$	1,147,649		$	598,181		$	618,489		$	666,901
	Total net revenues		1,588,428			1,190,561			603,031			621,564			668,938
	Net (loss) income		(81,891	)		(75,735	)		(70,994	)		(28,731	)		6,427
	Net (loss) income available to Class A callable puttable and Class B common stockholders		(342,366	)		(191,780	)		(70,994	)		(28,731	)		6,427
Operations — Pro Forma (unaudited):
	(Loss) income before income tax benefit (provision)⁽⁵⁾		n/a			n/a			n/a			(25,369	)		6,427
	Income tax benefit (provision)⁽⁶⁾		n/a			n/a			n/a			8,561			(3,667	)
	Net (loss) income to member(s)⁽⁷⁾		n/a			n/a			n/a			(16,808	)		2,760
Per Share of Class A Callable Puttable and Class B Common Stock:
	Basic net (loss) income per share		(3.62	)		(2.44	)		(1.10	)		(.45	)		.10
	Diluted net (loss) income per share		(3.62	)		(2.44	)		(1.10	)		(.45	)		.10
	Dividends declared per share⁽⁸⁾		.24			.18			n/a			n/a			n/a
Balance Sheet:
	Total assets		3,246,694			3,091,423			754,136			875,772			331,168
	Working capital		81,193			165,655			3,861			22,212			66,920
	Long-term debt⁽⁹⁾		354,600			151,429			73,142			71,442
	Class A callable puttable common stock⁽¹⁰⁾		2,251,040			1,903,314			n/a			n/a			n/a
	Stockholders’ equity		247,471			612,568			608,665			680,683			251,138


⁽¹⁾	The Company’s fiscal year is a 52-week or 53-week period ending on the last Saturday in December. Effective upon the closing of the Dreyer’s Nestlé Transaction, the Company changed its fiscal periods from NICC’s calendar year ending on December 31 to a 52-week or 53-week year ending on the last Saturday in December.

For the period from January 1, 2000 to December 31, 2001, NICC maintained a calendar fiscal year and interim periods. Subsequent to Nestlé Prepared Foods’ acquisition of the remaining 50 percent interest in NICC in December 2001, NICC adopted a modified 52-week fiscal year. Interim periods were based on a four-week or five-week month (13 weeks per quarter) with the exception that the full fiscal year ended on December 31.


⁽²⁾	Results for 2004 reflect the results of NICC and DGIC from December 28, 2003 to December 25, 2004. Results for 2003 reflect the results of NICC from January 1, 2003 to December 27, 2003 and the results of DGIC from June 27, 2003 to December 27, 2003.

⁽³⁾	Results for 2004 and 2003 reflect substantially higher revenues and expenses primarily as a result of the Dreyer’s Nestlé Transaction. Results for 2004 and 2003 were also affected by significant transaction, integration and restructuring charges relating to the Dreyer’s Nestlé Transaction. For 2004, these charges include $260,475,000 of accretion of Class A callable puttable common stock and $16,788,000 of stock

option compensation expense. For 2003, these charges include $116,045,000 of accretion of Class A callable puttable common stock, $51,086,000 of employee severance and retention benefits, $18,148,000 of stock option compensation expense, $14,941,000 of loss on divestiture and $11,495,000 of in-process research and development expense. Accretion of Class A callable puttable common stock will continue until December 1, 2005 (Initial Put Date). Stock option compensation expense represents unearned compensation which is being expensed over the terms of three-year employment agreements as service is performed and as the unvested options vest. Future stock option compensation expense will be $13,207,000 and $3,325,000 for 2005 and 2006, respectively.

Fiscal 2004, 2003 and 2002 results do not include goodwill amortization because, on January 1, 2002, the Company adopted Statement of Financial Accounting Standards No. 142, “Goodwill and Other Intangible Assets” (SFAS No. 142) which required that goodwill and other indefinite-lived intangible assets no longer be amortized. During the third quarter of 2002, NICC determined that the carrying value of goodwill exceeded its implied fair market value and reduced the carrying value of its goodwill by $69,956,000 to equal the estimated fair market value of goodwill.

⁽⁴⁾ As a result of the Emerging Issues Task Force (EITF), “Accounting for Consideration Given by a Vendor to a Customer (Including a Reseller of the Vendor’s Products),” (EITF 01-9) beginning in the first quarter of 2002 certain expenses previously classified as Cost of goods sold or as Selling, general and administrative expenses are now recorded as a reduction of Net sales. In accordance with this pronouncement, the results for 2001 and 2000 reflect this retroactive reclassification which had no effect on net (loss) income as previously reported. NICC adopted EITF 01-9 for all periods since its inception.

⁽⁵⁾ NICC was a limited liability company and until December 26, 2001 was treated as a partnership for United States income tax purposes. When it was treated as a partnership, NICC was not subject to taxation; rather, any income tax liability was the responsibility of its members. Effective December 26, 2001, NICC became a wholly-owned subsidiary of Nestlé Prepared Foods and was taxed as a division of its corporate owner.

⁽⁶⁾ Pro forma income tax benefit (provision) is presented as if NICC had been a taxable entity for all periods prior to becoming a taxable entity. The pro forma effective tax rate differs from the statutory rate of 35 percent primarily due to state taxes and certain nondeductible items.

⁽⁷⁾ Pro forma net (loss) income to member(s) is calculated as (loss) income before income tax benefit (provision) plus Pro forma income tax benefit (provision).

⁽⁸⁾ The Company declared regular quarterly dividends of $.06 per share of Class A callable puttable and Class B common stock for shareholders of record on March 26, 2004, June 25, 2004, September 24, 2004, December 24, 2004, June 27, 2003, September 26, 2003 and December 26, 2003. No dividends were declared by NICC during 2003 and earlier years.

⁽⁹⁾ Includes the current and long-term portions of long-term debt and the Nestlé S.A. credit facility.

⁽¹⁰⁾

Class A callable puttable common stock is classified as temporary equity (mezzanine capital) because of its put and call features. Each stockholder of Class A callable puttable common stock has the option to require the Company to purchase (put) all or part of their shares at $83 per share during two periods: December 1, 2005 to January 13, 2006 and April 3, 2006 to May 12, 2006. The Class A callable puttable common stock may be redeemed (called) by the Company at the request of Nestlé S.A., in whole, but not in part, at a price of $88 per share during the period beginning on January 1, 2007 and ending on June 30, 2007.


Item 7.	*Management’s Discussion and Analysis of Financial Condition and Results of Operations.*

Forward-Looking Statements


	•	risk factors described under the “Risks and Uncertainties” section below;

	•	the level of consumer spending for frozen dessert products;

	•	the Company’s ability to achieve efficiencies in manufacturing and distribution operations without negatively affecting sales;

	•	costs or difficulties resulting from the combination of the businesses of Dreyer’s Grand Ice Cream, Inc. and Nestlé Ice Cream Company, LLC, including the integration of the operations of those companies, the divestiture of assets and compliance with the Federal Trade Commission’s order;

	•	costs or difficulties related to the expansion and closing of the Company’s manufacturing and distribution facilities;

	•	the cost of energy and gasoline used in manufacturing and distribution;

	•	the cost of dairy raw materials and other commodities used in the Company’s products;

	•	the Company’s ability to develop, market and sell new frozen dessert products;

	•	the success of the Company’s marketing and promotion programs and competitors’ marketing and promotion responses;

	•	market conditions affecting the prices of the Company’s products;


	•	responsiveness of both the trade and consumers to the Company’s new products and marketing and promotion programs;

	•	the costs associated with any litigation proceedings; and

	•	existing and future governmental regulations resulting from the events of September 11, 2001, the military action in Iraq and the continuing threat of terrorist attacks, which could affect commodity and service costs to the Company.

The Merger Agreement and Recent Acquisitions

The Company entered into an Agreement and Plan of Merger and Contribution, dated June 16, 2002, as amended (the Merger Agreement), with Dreyer’s Grand Ice Cream, Inc. (DGIC), December Merger Sub, Inc., Nestlé Holdings, Inc. (Nestlé) and NICC Holdings, Inc. (NICC Holdings), a wholly-owned subsidiary of Nestlé, to combine DGIC with Nestlé Ice Cream Company, LLC (NICC). On June 26, 2003 (the Merger Closing Date), upon the closing of the transactions under the Merger Agreement (the Dreyer’s Nestlé Transaction), the businesses of DGIC and NICC were combined and each became a subsidiary of the Company. As a result of the Dreyer’s Nestlé Transaction, the former stockholders of DGIC (other than Nestlé) received shares of the Company’s Class A callable puttable common stock constituting approximately 33 percent of the diluted shares of the Company in exchange for their shares of DGIC common stock. Nestlé and NICC Holdings (in exchange for its contribution of the equity interest of NICC to the Company) received shares of the Company’s Class B common stock constituting approximately 67 percent of the diluted shares of the Company. The Company’s Class A callable puttable common stock is listed on the Nasdaq National Market (NASDAQ) and began trading under the symbol “DRYR” on June 27, 2003, concurrent with the cessation of trading in DGIC stock. The Company’s Class B common stock is not listed for trading on any exchange.

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^tm 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 Integrated Brands. On June 25, 2003, the FTC issued its decision and order approving the aforementioned divestiture transaction in In the Matter of Nestlé Holdings, Inc. et al., Docket No. C-40 (the Decision and Order). On July 5, 2003 (the Divestiture Closing Date), the parties closed the transaction (the Divestiture Transaction) and the Company received $10,000,000 in consideration for the sale of the Divested Brands and Purchased Assets.

Pursuant to the APA, the parties entered into certain agreements (the Divestiture Agreements) related to: (i) manufacture of the Divested Brands by DGIC for Integrated Brands for a period of up to one year from the Divestiture Closing Date; (ii) provision of certain transition services to Integrated Brands and Eskimo Pie; (iii) delivery of the Divested Brands to customers by DGIC for a transition period of up to one year from the Divestiture Closing Date (Transition IB Product Distribution Agreement); (iv) delivery of the ice cream brands licensed to NICC (Häagen-Dazs® and Nestlé brands) to customers by Eskimo Pie for a transition period of up to one year from the Divestiture Closing Date (Transition NICC Product Distribution Agreement); (v) delivery, under certain circumstances, of certain DGIC owned and licensed ice cream brands to customers by Eskimo Pie for a period of up to five years from the Divestiture Closing Date in the Territories (Drayage Agreements); and (vi) delivery of the Divested Brands, if requested by Integrated Brands, to customers in areas where DGIC maintains company-owned routes for a period of up to 10 years from the Divestiture Closing Date. Pursuant to the terms of the Drayage Agreements, Eskimo Pie has the right, under certain circumstances, to deliver certain DGIC owned and licensed ice cream products in the Territories. The right is subject to fixed dollar limits for three years from the Divestiture Closing Date, with such limits decreasing over two additional years. The exact markets

within the Territories, the product mix and the volume of products that Eskimo Pie will choose to deliver are uncertain and the Company is unable to estimate the financial implications of this right.

Under the Decision and Order, Ben & Jerry’s Homemade, Inc. (Ben & Jerry’s) was permitted to give DGIC early notice of termination of the Distribution Agreement dated October 10, 2000 between DGIC and Ben & Jerry’s (the B&J Agreement). Pursuant to the Decision and Order, the B&J Agreement was terminated effective December 31, 2003. The Decision and Order also provides for the termination of DGIC’s joint venture with M&M/ Mars, a division of Mars, Incorporated (Mars), as well as certain manufacturing and distribution agreements with Mars as of December 31, 2003. Pursuant to the Decision and Order, the joint venture between the Company and Mars was terminated, although the Company continued, at the request of Mars, to distribute Mars products through February 2004.

On July 26, 2004, the Company acquired Silhouette Brands, Inc. (Silhouette) for a purchase price of approximately $63,000,000. The purchase price consisted of approximately $58,000,000 paid in cash for the capital stock of Silhouette plus approximately $5,000,000 of other intangibles acquired in the Dreyer’s Nestlé Transaction. Silhouette sold low fat and low carb ice cream snacks under its brands, Skinny Cow® and Skinny Carb Bar^tm. The Company performed the significant subsidiary test on this acquisition and determined it was not material.

Business Strategy

The Company manufactures and distributes ice cream and other frozen dessert products. The “Dreyer’s Grand Ice Cream” line of products is marketed throughout the western states and Texas and select markets in the Far East. The “Edy’s® Grand® Ice Cream” line of products is sold under the Edy’s brand name throughout the remaining regions of the United States and select markets in the Caribbean and South America. The Company manufactures and/or distributes products under license from Nestlé USA Prepared Foods, Nestlé S.A., Société des Produits Nestlé S.A. and Nestec Ltd., including Häagen-Dazs ice cream, Drumstick® ice cream sundae cones, Nestlé Crunch® and Butterfinger® ice cream bars and Carnation® ice cream sandwiches. The Company also manufactures under license and/or distributes brand ice cream and frozen dessert products for other companies (Partner Brands).

categories. A quality image is communicated in many ways — taste, packaging, flavor selection, price and often through advertising and promotion. It is the Company’s goal to use these means to develop brands with clearly defined and loyal consumer followings in each major market where it does business.

The Company’s products are offered for sale in a large variety of retail outlets, including supermarkets, convenience stores, club stores, restaurants, movie theaters, hotels, other retailers and to affiliates of Nestlé for export. In addition, the Company provides Häagen-Dazs ice cream to General Mills, Inc. for export.

The Company’s primary strategy rests on a direct-store-distribution system, which is Company-owned in most major metropolitan markets. In this system, the Company’s products are sold, distributed and merchandised at the retail store level by the Company’s own sales force. Because the Company places a high emphasis on the qualitative advantages of such a system in maintaining stock levels, tailoring offerings to individual stores, and meeting trade customer needs, the Company increasingly refers to its approach as “direct-store-service,” rather than the more traditional “direct-store-distribution.” While Company-owned direct store service routes account for the bulk of the Company’s sales, the Company also uses a variety of other distribution methods, such as direct shipment to supermarket-owned warehouses, independent distributors and foodservice broad-line distributors. The Company also invests in freezer cabinets in retail outlets to increase consumer demand for its products. These cabinets are either serviced by the Company’s own distribution system or are leased to independent distributors who stock them with the Company’s products.

Integration Plan

Integration Plan). This Integration Plan and related progress in its implementation are reviewed on a regular basis by the Company’s Board of Directors. The key components of the Integration Plan include:


	•	Consolidation of the functions of the DGIC and NICC headquarters into a single unit.

	•	Transfer of selling accountability from the previous NICC system to DGIC’s system, and divestiture of the NICC route structure and its supporting personnel and assets to Eskimo Pie.

	•	Transfer of certain distribution operations of NICC from various third-party distribution methods to the Company’s own route system.

	•	Elimination of redundant third-party service agreements and procurement arrangements.

	•	Realization of freight, warehousing, and manufacturing savings by reallocation of production to more efficient geographical locations, closing of the DGIC Union City, California manufacturing facility, and transfer of warehousing from third-parties to Company-owned warehouses in some areas.

	•	Execution of the divestiture and other requirements of the Decision and Order.

While many of these activities accomplished within the first year following the closing of the Dreyer’s Nestlé Transaction, others, such as the realization of manufacturing and logistical savings, will not be fully realized until 2006 and beyond. The Company has incurred, and expects to continue to incur substantial expenses and capital expenditures in order to implement the Integration Plan and carry out its business strategy, particularly in the process of integrating the businesses of DGIC and NICC and realizing synergies from the combination.

The Company believes that the benefits of this business strategy will be realized in future years, although no assurance can be given that the expectations relative to future sales and earnings benefits will be realized. Specific factors that might cause a shortfall in the business strategy include, but are not limited to, the Company’s ability to achieve efficiencies in its cost structure; the cost of dairy and other raw materials 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 products, and responsiveness of both the trade and consumers to the Company’s new products and marketing and promotion programs.

Risks and Uncertainties

The business combination of DGIC and NICC involves the integration of two businesses that previously operated independently. It is possible that the Company will not be able to integrate the operations of DGIC and NICC without encountering difficulties. Any difficulty in successfully integrating the operations of the two businesses could have a material adverse effect on the business, financial condition, results of operations or liquidity of the Company, and could lead to a failure to realize the anticipated synergies of the combination. The Company’s management has been required to dedicate substantial time and effort to the integration of DGIC and NICC. During the integration process, these efforts could divert management’s focus and resources from other strategic opportunities and operational matters. If the Company’s plans for expansion of its existing manufacturing facilities or build out of new manufacturing facilities are delayed, such delays could have a material adverse effect on the Company’s business, financial condition, results of operations and cash flows.

As a condition to the closing of the Dreyer’s Nestlé Transaction, the FTC required that DGIC and NICC divest certain assets. In accordance with the Decision and Order, DGIC sold its Dreamery and Whole Fruit Sorbet brands and assigned its license to the Godiva ice cream brand, and NICC transferred and sold certain distribution assets in certain geographic territories. In addition, DGIC and NICC entered into various agreements providing for continuing obligations for both DGIC and NICC in connection with the divestitures. The implementation of the divestitures and the performance of continuing obligations in connection with the divestitures involve risks and uncertainties, and may divert the attention and resources of management. Failure by the Company to implement the divestitures in an effective manner or perform its continuing obligations in connection therewith

could cause a material adverse effect on the Company’s business, financial condition, results of operations and cash flows.

The FTC retains the authority to enforce the terms and conditions of the Decision and Order as well as to impose financial penalties on the Company for non-compliance with the Decision and Order. The FTC’s enforcement authority includes the ability to impose an interim monitor to supervise compliance with the Decision and Order, or to appoint a trustee to manage the disposition of the assets to be divested under the Divestiture Agreements. In addition, the FTC could institute an administrative action and seek to impose civil penalties and seek forfeiture of profits obtained through a violation of the Decision and Order. The imposition of an interim monitor or trustee could subject the Company to additional reporting requirements, costs and administrative expense.

In order to market and promote sales of its products, the Company engages in various promotional programs with retailers and consumers. Accruals for such promotional programs are recorded in the period in which they occur based on actual and estimated liabilities incurred. Due to the high volume of promotional activity and the difficulty of coordinating trade promotional pricing with retailers and consumers, differences between the Company’s accrued liability and subsequent settlement frequently occur. Usually, these differences are individually insignificant. However, no assurance can be given that these differences will not be significant and will not have a material adverse effect on the Company’s financial results.

To facilitate the sales of products, the Company has placed a large number of freezer cabinets with selected retailers and independent distributors. During the second quarter of 2003, the Company concluded that the practice of recording retirements based on the reported condition of each freezer cabinet was no longer practical due to the large number and dispersed locations of the freezer cabinets. The Company had calculated an allowance for freezer cabinet retirements using a sampling methodology. When specific freezer cabinets were reported or identified as retired through physical counts, the remaining net book value of the retired freezer cabinets, if any, were applied against this allowance. In the second quarter of 2004, the Company completed a project which implemented a new system to inventory and track its retail freezer cabinets. The new system allows for the specific identification of freezers and the recording of retirements when they occur. The change in the methodology for recording retail freezer cabinet retirements did not have a material impact on the Company’s results of operations.

As a result of the Dreyer’s Nestlé Transaction, the Company has recorded a substantial investment in goodwill. In the event of a decline in the Company’s business resulting in a decline in the fair value of any of the Company’s reporting units below its respective carrying value, goodwill could be impaired, resulting in a noncash charge which could have a material adverse effect on the Company’s financial results.

and a limited number of participants. The available futures market for butter is still in the early stages of development, and does not have sufficient liquidity to enable the Company to fully reduce its exposure to the volatility of the market. Beginning in 2002, the Company has proactively addressed this price volatility by purchasing either butter or butter futures contracts with the intent of reselling or settling its positions at the Chicago Mercantile Exchange. In spite of these efforts to mitigate this risk, commodity price volatility still has the potential to materially affect the Company’s performance, including, but not limited to, its profitability and cash flow.

Vanilla is another significant raw material used in the manufacture of the Company’s products. At the present time, the Company is unable to effectively hedge against the price volatility of vanilla and, therefore, cannot predict the effect of future price increases. As a result, future increases in the cost of vanilla could have a material adverse effect on the Company’s profitability and cash flow.

Periodically, the Company has been involved in litigation as both plaintiff and defendant. Any litigation, with or without merit, can be time-consuming, result in high litigation costs, impose damage awards, require substantial settlement payments and divert management’s attention and resources. Impacts such as these could have a material adverse effect on the Company’s business, financial condition, results of operations and cash flows. No assurance can be made that the Company will not be involved in litigation that is material to its business.

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 accompanying Consolidated Financial Statements. 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.

Trade Promotions

In order to market and promote the sales of its products, the Company may temporarily lower its price on selected products in order to encourage retailers to, in turn, lower their price to consumers. Trade promotion costs include these temporary discounts offered to retailers (referred to as variable or off-invoice promotion) as well as the cost of promotional advertising and in-store displays paid to retailers (referred to as fixed trade promotion). Typically, the timing of the Company’s trade promotion discount will correspond with a retailer’s promotional program, usually spanning two to four weeks. Trade promotion spending is seasonal, with the highest levels of activity occurring during the spring and summer months. On selected new product introductions, the Company may pay retailers a single payment stocking allowance that is usually based on the amount of retail shelf space to be occupied by the new product.

Accruals for trade promotions are recorded in the period in which the trade promotion occurs based on a combination of the actual and estimated amounts incurred. Accruals for variable promotions are primarily based on the actual number of units sold and, to a lesser extent, estimates based on each customer’s historic and planned rate of volume sales of the promoted product. Accruals for fixed trade promotions are primarily based on actual trade promotion contracts with retailers and, to a lesser extent, estimates based on each customer’s historic and planned rate of fixed trade promotion spending. Stocking allowances are recorded as a reduction in sales in the period in which the related products are placed on the retailer’s shelves.

While accruals for trade promotions are recorded in the period in which the trade promotion occurs, settlement of these liabilities can take up to a year or more. Settlement of variable promotion typically takes place at the time the sales invoice is prepared (i.e., invoice includes discounts) or when the customer takes a deduction

from a subsequent remittance. Settlement of fixed trade promotion typically takes place when the customer takes a deduction from a subsequent remittance and, to a lesser extent, through a payment made to the customer.

Due to the high volume of trade promotion activity and the difficulty of coordinating trade promotion pricing with its customers, differences between the Company’s accrual and the subsequent settlement amount occur frequently. Usually these differences are individually insignificant. However, in rare situations these differences can be large within a single fiscal quarter. These large differences occur so infrequently that the Company cannot reliably include them in its estimating methodology. Under the circumstances, the Company believes its methodology has been reasonably reliable in recording its trade promotion expenses and period-end accruals. The Company therefore believes that there is a low to moderate likelihood that the use of different assumptions or estimates would result in a material change to its trade promotion expense or its accrual for future trade promotion settlements.

The accrual for future trade promotion settlements as of December 25, 2004 and December 27, 2003 was $18,326,000 and $19,596,000, respectively. A variation of five percent in the 2004 accrual would change the 2004 trade promotion expense by approximately $916,000.

Retail Freezer Cabinets

The net book value of freezer cabinets with retail customers and independent distributors was $17,861,000 (original cost of $42,457,000, less accumulated depreciation of $24,596,000) and $22,532,000 (original cost of $47,021,000, less accumulated depreciation of $18,639,000 and an allowance for retirement of $5,850,000) at December 25, 2004 and December 27, 2003, respectively. At December 25, 2004, there was no allowance for freezer retirements.

Goodwill

Prior to the Dreyer’s Nestlé Transaction, DGIC and NICC maintained different goodwill impairment methodologies. Since the Merger Closing Date, the operations of these two companies have been integrated. As such, the NICC goodwill impairment methodology was phased-out and replaced by a methodology similar to that previously employed by DGIC.

In 2003, subsequent to the Merger Closing Date, DGIC and NICC performed their individual annual goodwill impairment tests at their respective pre-Dreyer’s Nestlé Transaction impairment testing dates. DGIC performed its impairment test on each of its five reporting units, which is the same methodology used in 2004 (described below).

Prior to the Dreyer’s Nestlé Transaction, NICC operated as a single segment with one reporting unit. Consequently, NICC performed a single test to assess impairment of its goodwill. NICC used an income valuation approach to measure its fair market value. Under this valuation methodology, fair market value was based on the present value of the estimated future cash flows that NICC was expected to generate over its remaining estimated life. In applying this approach, NICC was required to make estimates of future operating trends, judgments about discount rates and other assumptions. The Company’s impairment tests at June 2003 and August 2003 each reported a fair value in excess of the carrying value for each of the reporting units.

In the second quarter of 2004, the Company performed its impairment test on each of its five reporting units. These reporting units correspond to the Company’s five geographic segments that it used to manage its operations. Goodwill was either assigned to the specific reporting unit in which the acquisition occurred or allocated to a reporting unit based on a percentage of sales methodology. The Company estimated the fair market value of its reporting units based on a multiple of their specific pre-tax earnings (after overhead allocations). The Company employed an earnings multiple believed to be the market rate for the valuation of businesses that are equivalent to its reporting units. However, the estimated earnings multiple, together with other inputs to the impairment test, are based upon estimates that carry a degree of uncertainty. As of June 26, 2004, the results of the Company’s impairment test reported a fair value greater than its carrying value for all reporting units. The carrying value of all of the Company’s reporting units closely approximated its fair market value. As a result, a moderate decline in the estimated fair market value of any of its reporting units could result in a goodwill impairment charge that could be material.

Goodwill at December 25, 2004 and December 27, 2003 totaled $1,945,208,000 and $1,931,425,000 respectively.

Employee Bonuses, Pension and 401(k) Plan Contributions

The Company’s liabilities for employee bonuses, pension and 401(k) plan contributions at year-end are based primarily on full-year results as compared to the Company’s annual plan. In interim periods, these accruals are based primarily on estimated full-year results and allocated to interim fiscal quarters on a pro rata basis. Historically, this methodology has been a fairly reliable means of estimating and allocating expenses to interim fiscal quarters. The Company therefore believes that there is a low likelihood that the use of different estimates and assumptions would result in a material change to these expenses. However, due to variability of the Company’s business and the resulting difficulties in accurately forecasting full-year results, interim fiscal quarterly adjustments are frequently required and occasionally some of these adjustments could be material.

The Company’s liability for employee bonuses, pension and 401(k) plan contributions at December 25, 2004 and December 27, 2003 totaled $33,487,000 and $29,188,000 respectively. A variation of five percent in the 2004 accrual would change the 2004 expense of these programs by $1,674,000.

Self-Insurance

The Company’s liabilities for self-insured health, workers compensation, general liability and vehicle plans are developed from third-party actuarial valuations that rely on various key assumptions. These valuation assumptions have historically been fairly reliable at estimating the Company’s self-insurance liabilities at each balance sheet date. In addition, the Company maintains individual claim and aggregated stop-loss policies with third-party insurance carriers. These policies effectively limit the range of potential claim losses. As a result of the historical reliability of these third party valuation assumptions and its stop-loss insurance policies, the Company believes that there is a low likelihood that the use of different assumptions or estimates would result in a material change in its self-insurance assets, liabilities or expense.

The Company’s liability for self-insured health and workers compensation plans at December 25, 2004 and December 27, 2003 totaled $9,177,000 and $8,312,000, respectively. Collateral for workers compensation, general liability and vehicle self-insurance claims, in the form of net cash deposits of $1,437,000 and $6,641,000 and standby letters of credits with a total face value of $22,375,000, and $7,875,000 was held by insurers at December 25, 2004 and December 27, 2003, respectively. The estimated cost of claims is charged to expense as incurred.

Deferred Tax Assets

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 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, if the Company determines 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 expense in the period in which such determination is made.

At December 25, 2004, the Company had deferred tax assets relating to tax credit carryforwards totaling $7,219,000. Of this amount, $4,598,000 will expire between 2013 and 2024. The remaining $2,621,000 is indefinite. Utilization of these tax credit carryforwards may be limited in the event of a change in ownership of the Company. No valuation allowance for these assets has been recorded because the Company believes that it is more likely than not that these carryforwards will be used in future years to offset taxable income.

At December 25, 2004, the Company had net operating losses totaling $491,275,000 which can be carried forward 20 years to the extent taxable income is generated. No valuation allowance for these assets has been recorded because the Company believes that it is more likely than not that these carryforwards will be used in future years to offset taxable income.

The Company’s evaluation of the need for a deferred tax asset valuation allowances has been based on objective data (e.g. income tax regulations) which is not subject to a high degree of variability. The Company therefore believes there is a low likelihood that the use of different assumptions or estimates would result in a material change to the deferred tax asset valuation allowances.

Property, Plant and Equipment, Net

The costs of additions to property, plant and equipment, along with major repairs and improvements, are capitalized, while maintenance and minor repairs are charged to expense as incurred. Property, plant and equipment is depreciated using the straight-line method over the assets’ estimated useful lives, generally ranging from three to 40 years.

The Company has been using the same types of property, plant and equipment (e.g. trucks, manufacturing equipment) for many years. Based on this experience, the Company believes its depreciation method, depreciable lives and salvage values have proven to be fairly reliable estimates. This belief has been substantiated by historically small gains and losses recorded when assets have been retired. The Company therefore believes that there is a low likelihood that the use of different assumptions and estimates would result in a material change to its depreciation expense. However, future changes to the Company’s business strategy or operating plans could result in a shortening of the estimated useful life of certain affected assets. In these cases, the Company would decrease the remaining depreciable life on a prospective basis. This would result in an increase in depreciation expense that, in limited situations, could be material. If changes to the Company’s plans occur suddenly or are implemented quickly, an impairment charge could result. Depending on the scope of the changes and the assets affected, such an impairment charge could be material.

During 2004 and 2003, the Company concluded that the NICC finance, distribution and operations data processing systems would be transferred to the corresponding DGIC systems by 2004. As a result, the Company shortened the estimated useful lives of the affected assets to twelve months on a prospective basis as of the beginning of the third quarter of 2003. In 2004, this change resulted in a $3,913,000 increase in depreciation expense and corresponding increase in net loss of $(2,413,000), after the effect of the related income tax benefit, or $(.03) per diluted common share. In 2003, this change resulted in a $2,293,000 increase in depreciation expense and a corresponding increase in net loss of $(1,513,000), after the effect of the related income tax benefit, or $(.02) per diluted common share.

During the second quarter of 2003, the Company changed to a statistical-based sampling methodology to estimate retail freezer cabinet retirements. Based on the results of the initial statistical sample and recent historical experience, the Company concluded that the estimated useful lives of these assets should be shortened from eight to five years on a prospective basis as of the beginning of the third quarter of 2003. In 2004, this change resulted in a $1,500,000 increase in depreciation expense and a corresponding increase in net loss of $(925,000), after the effect of the related income tax benefit, or $(.01) per diluted common share. In 2003, this

change resulted in a $3,000,000 increase in depreciation expense and a corresponding increase in net loss of $(1,980,000), after the effect of the related income tax benefit, or $(.03) per diluted common share.

Trade Accounts Receivable, Net

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 a change in the allowance might be required.

Historically, this methodology has been a fairly reliable means of assessing the recoverability of trade accounts receivable at each balance sheet date. The Company therefore believes that there is a low likelihood that the use of different assumptions or estimates would result in a material change to the bad debt provision or allowance for doubtful accounts. However, lack of information about the financial deterioration of a major customer could result in a material change in the bad debt provision.

At December 25, 2004 and December 27, 2003, the allowance for doubtful accounts totaled $5,987,000 and $5,668,000, respectively.

Other Long-Term Obligations

Tax returns for years after 2001 are open to examination by the Internal Revenue Service. Management believes that adequate amounts of taxes and related interest and penalties, if any, have been provided for adjustments that may result from any examination of tax returns for these years.

Results of Operations

Factors Affecting Comparability

The Company, the successor entity to NICC, was formed as a result of the Dreyer’s Nestlé Transaction on the Merger Closing Date. The accompanying Consolidated Financial Statements and related notes that are as of a date, or for a period ended, before June 27, 2003, represent the accounts of NICC or its predecessor entities.

The Consolidated Financial Statements for 2004 include the results of operations of DGIC and NICC for the entire period from December 28, 2003 to December 25, 2004. The Consolidated Financial Statements for 2003 include the results of operations of DGIC for the period following the Merger Closing Date through December 27, 2003, and of NICC for the period from January 1, 2003 to December 27, 2003. The Consolidated Financial Statements for 2002 include the results of operations of NICC only.

Due to the lack of comparability of results due to the Dreyer’s Nestlé Transaction, the period-to-period percentage changes for 2004 versus 2003 and 2003 versus 2002 presented below are not necessarily indicative of percentage changes to be expected in the future.

Pro Forma Disclosures

The following table summarizes unaudited pro forma financial information assuming the Dreyer’s Nestlé Transaction and the Divestiture Transaction had occurred at the beginning of the periods presented in 2003 and 2002. This pro forma financial information is for informational purposes only and does not reflect any operating efficiencies or inefficiencies which may result from the Dreyer’s Nestlé Transaction and the Divestiture Transaction and, therefore, is not necessarily indicative of results that would have been achieved had the businesses been combined during the periods presented. This unaudited pro forma financial information should be read in conjunction with the Company’s Current Report on Form 8-K/ A filed with the Securities and Exchange Commission on July 21, 2003. In addition, the preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions. These estimates and assumptions affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. The pro forma adjustments use estimates and assumptions based on currently available information. Management believes that the estimates and assumptions are reasonable and that the significant effects of the Dreyer’s Nestlé Transaction and the Divestiture Transaction are properly reflected. However, actual results may differ from these estimates and assumptions. As the Dreyer’s Nestlé Transaction and the Divestiture Transaction occurred prior to the 2004 fiscal year, pro forma disclosures do not apply in 2004.


	2003⁽¹⁾			2002

	(In thousands, except per
	share amounts)
Pro forma total net revenues	$	1,761,325		$	1,797,637

Pro forma net loss	$	(95,387	)	$	(55,189	)

Pro forma net loss available to Class A callable puttable and Class B common stockholders⁽²⁾	$	(336,890	)	$	(296,656	)

Pro forma net loss per share of Class A callable puttable and Class B common stock⁽³⁾	$	(3.74	)	$	(3.29	)


⁽¹⁾	Pro forma net loss includes certain expenses directly related to the Dreyer’s Nestlé Transaction and the Divestiture Transaction which may not have a significant impact on the ongoing results of operations of the Company. These expenses include, among others, In-process research and development, Severance and retention expense, and Loss on divestiture.

⁽²⁾	Accretion of Class A callable puttable common stock increases the pro forma net loss to arrive at the pro forma net loss available to Class A callable puttable and Class B common stockholders.

⁽³⁾	Pro forma net loss per Class A callable puttable and Class B common share was calculated by dividing pro forma net loss available to Class A callable puttable and Class B common stockholders by the pro forma weighted-average Class A callable puttable and Class B shares outstanding as if the Dreyer’s Nestlé Transaction had occurred at the beginning of the periods presented. The unaudited pro forma financial information reports net losses. Therefore, the pro forma diluted net loss per common share is equal to the pro forma basic net loss per common share, because the effect of common stock equivalents is anti-dilutive.

Financial Overview

For 2004, the Company reported a net loss available to Class A callable puttable and Class B common stockholders of $(342,366,000), or $(3.62) per diluted common share, compared to a net loss available to Class A callable puttable and Class B common stockholders of $(191,780,000), or $(2.44) per diluted common share, for 2003. Total net revenues increased 33 percent to $1,588,428,000 for 2004 from $1,190,561,000 for 2003. Total net revenues increased 97 percent to $1,190,561,000 for 2003 from $603,031,000 for 2002.

Results for 2004 and 2003 reflect substantially higher revenues and expenses primarily as a result of the Dreyer’s Nestlé Transaction. In addition, results for 2004 and 2003 were also affected by significant transaction, integration and restructuring charges relating to the Dreyer’s Nestlé Transaction. For 2004, these transaction, integration and restructuring charges include $260,475,000 of accretion of Class A callable puttable common stock⁽¹⁾and $16,788,000 of stock option compensation expense⁽²⁾. For 2003, these transaction, integration and restructuring charges include $116,045,000 of accretion of Class A callable puttable common stock⁽¹⁾, $51,086,000 of employee severance and retention benefits, $18,148,000 of stock option compensation expense⁽²⁾, $14,941,000 of loss on divestiture and $11,495,000 of in-process research and development expense.


⁽¹⁾	Accretion of Class A callable puttable common stock will continue until December 1, 2005 (Initial Put Date) (See discussion following the table below).

⁽²⁾	Stock option compensation expense represents unearned compensation which is being expensed over the terms of three-year employment agreements as service is performed and as the unvested options vest. Future stock option compensation expense will be $13,207,000 and $3,325,000, for 2005 and 2006, respectively.

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


											Period-to-Period
											Variance
											Favorable (Unfavorable)

		Percentage of Total Net Revenues									2004			2003
											Compared			Compared
		Dec. 25, 2004			Dec. 27, 2003			Dec. 31, 2002			to 2003			to 2002

Total net revenues			100.0	%		100.0	%		100.0	%		33.4	%		97.4	%

Costs and expenses:
	Cost of goods sold		90.4			84.4			82.8			(42.8	)		(101.4	)
	Selling, general and administrative expense		15.6			16.6			18.9			(24.7	)		(74.3	)
	Interest, net of amounts capitalized		0.6			0.3			0.3			(126.4	)		(123.8	)
	Royalty expense to affiliates		1.7			1.9			4.1			(19.9	)		8.8
	Other (income) expense, net					(0.2	)		0.2			(71.3	)		280.7
	Severance and retention expense		0.1			4.3						95.4			(100.0	)
	Impairment of goodwill								11.6						100.0
	In-process research and development					1.0						100.0			(100.0	)
	Loss on divestiture					1.3						101.4			(100.0	)

			108.4			109.6			117.9			(31.9	)		(83.6	)

Loss before income tax benefit			(8.4	)		(9.6	)		(17.9	)		(15.7	)		(6.2	)
Income tax benefit			3.2			3.2			6.1			30.4			5.3

Net loss			(5.2	)		(6.4	)		(11.8	)		(8.1	)		(6.7	)
	Accretion of Class A callable puttable common stock		(16.4	)		(9.7	)					(124.5	)		(100.0	)

	Net loss available to Class A callable puttable and Class B common stockholders		(21.6	)%		(16.1	)%		(11.8	)%		(78.5	)%		(170.1	)%

52 Weeks Ended 2004 Compared with 52 Weeks Ended 2003

Total net revenues increased $397,867,000, or 33 percent, to $1,588,428,000 for 2004 from $1,190,561,000 for 2003.

Net sales of company branded products, including licensed, joint venture products and Net sales to affiliates (Company Brands), increased $429,236,000, or 49 percent, to $1,312,180,000 for 2004 from $882,944,000 for 2003. The increase in net sales of Company Brands was primarily driven by sales of DGIC Company Brand products acquired in the Dreyer’s Nestlé Transaction, which is not indicative of increases to be expected in the future, and success of marketing campaigns and new product launches for specific products. In addition, net sales increased $26,065,000 due to the reclassification of Silhouette products as Company Brands from products manufactured and/or distributed for other companies following the Company’s acquisition of Silhouette on July 26, 2004.

Net sales of Company Brands represented 83 percent of Total net revenues in 2004 compared with 74 percent in 2003. The average price of Company Brands, net of the effect of trade promotion expenses, decreased by nine percent. Changes in the average price of Company Brands are heavily influenced by shifts in product mix between the Company’s different packaged and frozen snack products. The decrease in average price during the period was primarily due to such mix shifts towards lower-priced products as a result of the Dreyer’s Nestlé Transaction. Gallon sales of Company Brands, including frozen snacks, increased approximately 59,300,000 gallons, or 64 percent, to approximately 152,300,000 gallons, primarily as a result of the Dreyer’s Nestlé Transaction.

Net sales of Partner Brands decreased $29,193,000, or 11 percent, to $235,512,000 for 2004 from $264,705,000 for 2003. The decrease was driven primarily by a $106,922,000 reduction in net sales following the termination of certain distribution agreements resulting from the Dreyer’s Nestlé Transaction, offset by net sales of Partner Brands that resulted from the Dreyer’s Nestlé Transaction. The decrease also includes a $26,065,000 reduction in Partner Brand net sales following the reclassification of Silhouette products as Company Brands after the Company’s acquisition of Silhouette on July 26, 2004.

Net sales of Partner Brands represented 15 percent of Total net revenues in 2004 compared with 22 percent in 2003. Average wholesale prices for Partner Brands decreased approximately 12 percent. These decreases in average price were largely a result of the volume and mix change due to the Dreyer’s Nestlé Transaction. Gallon sales of Partner Brands increased approximately 200,000 gallons, or one percent, to approximately 18,000,000 gallons, primarily as a result of the Dreyer’s Nestlé Transaction offset by a reduction in net sales following the termination of certain distribution agreements.

Other revenues decreased $2,176,000, or five percent, to $40,736,000 for 2004 from $42,912,000 for 2003. This decrease was primarily attributable to a decrease of $13,458,000 for reimbursements received from Eskimo Pie for expenses incurred by the Company for employees working for Eskimo Pie in the divested distribution centers in the Territories, offset by an increase of $10,755,000 for revenues received following the July 5, 2003 Divestiture Transition from Integrated Brands, a subsidiary of CoolBrands, for manufacturing and distribution of the Divested Brands. The cost of providing these services is included in Cost of goods sold. Other revenues represented two percent of Total net revenues in 2004 compared with four percent in 2003.

Cost of goods sold increased $430,667,000 or 43 percent, to $1,435,862,000 for 2004 from $1,005,195,000 for 2003. The increase in Cost of goods sold was driven by the incremental sales volume of the DGIC product lines, incremental distribution expenses from the DGIC distribution system, an approximate $57,300,000 increase in the cost of cream and an $11,380,000 increase in drayage expense paid to Integrated Brands for the delivery of certain products.

The Company’s gross profit, which is defined as Total net revenues less Cost of goods sold, decreased by $32,800,000, or 18 percent, to $152,566,000 from $185,366,000, representing a 9.6 percent gross margin compared with a 15.6 percent gross margin for 2003. The decrease in gross profit is primarily attributable to an increase of approximately $57,300,000 in the cost of cream which was partially offset by a product mix shift from lower margin Partner Brands towards higher margin Company Brands. The Company cannot predict the future cost of raw materials (including cream and vanilla), and increases in the cost of raw materials could negatively affect cost of goods sold and gross margin in future periods.

Selling, general and administrative expenses increased $49,060,000, or 25 percent, to $247,405,000 for 2004 from $198,345,000 for 2003. Selling, general and administrative expenses were 15.6 percent and 16.6 percent of Total net revenues in 2004 and 2003, respectively. The dollar increase was primarily attributable to the selling, general and administrative expenses of the acquired DGIC business as a result of the Dreyer’s Nestlé Transaction, an increase in marketing expenses, expense related to minimum volume commitments under co-pack arrangements of $14,538,000 and a decrease in stock option compensation expense of $1,360,000. The decrease in Selling, general and administrative expenses as a percentage of Total net revenues is primarily attributable to the Dreyer’s Nestlé Transaction which increased Total net revenues by a relatively larger amount than the increase in Selling, general and administrative expenses.

Interest expense increased $5,188,000, or 126 percent, to $9,291,000 for 2004 from $4,103,000 for 2003, primarily due to the repayment of the obligations under the Note Purchase Agreements, which included make-whole interest of $2,828,000, accrued interest of $666,000 and unamortized debt issuance costs of $210,000. The make-whole interest represented the present value of the remaining interest payments which would have been paid over the original term of the debt. In addition, the Company expensed the remaining unamortized debt issuance costs of $706,000 due to the termination of the revolving line of credit in 2004. The increase was also attributed to higher average borrowings which were partially offset by lower weighted-average interest rates.

Royalty expense to affiliates increased $4,524,000, or 20 percent, to $27,288,000 for 2004 from $22,764,000 for 2003, due to increased net sales of Company Brand products which are licensed to the Company. Royalty expense is comprised of royalties paid to affiliates of Nestlé S.A. for the use of trademarks and/or technology owned or licensed by them and licensed or sublicensed to the Company for use in the manufacture and sale of frozen snack products.

Other (income) expense, net decreased $1,866,000, or 71 percent, to income of $(752,000) for 2004 from income of $(2,618,000) for 2003. The decrease in Other (income) expense, net was primarily attributable to other income from settlement of litigation in 2003 of $(2,602,000) offset by an increase in earnings from joint ventures and equity affiliates of $(1,674,000) in 2004.

Severance and retention expense decreased $48,752,000, or 95 percent, to $2,334,000 for 2004 from $51,086,000 for 2003. The 2004 expense consists of $2,334,000 of severance and retention benefits as a result of the Dreyer’s Nestlé Transaction. The 2003 expense consists of $48,545,000 of severance and retention benefits and $2,541,000 relating to the forgiveness of NICC employee loans, both as a result of the Dreyer’s Nestlé Transaction.

In-process research and development expense totaled $11,495,000 for 2003, which represents the fair value of new products under development by DGIC that were acquired in the Dreyer’s Nestlé Transaction. Pursuant to Financial Accounting Standards Board (FASB) Interpretation No. 4, “Applicability of FASB Statement No. 2 to Business Combinations Accounted for by the Purchase Method” (FIN 4), this assigned value was charged to expense.

Reversal of accrued divestiture expenses was $(216,000) for 2004. Loss on divestiture of $14,941,000 for 2003 includes an impairment of the Purchased Assets of $11,867,000, $2,851,000 for divesture expenses and a $223,000 loss on sale of the Divested Brand inventory.

Income tax benefit increased by $11,878,000 to $50,893,000 for 2004 from $39,015,000 for 2003 primarily due to a correspondingly higher pre-tax loss in 2004. The effective tax rate increased to 38.3 percent for 2004 from 34.0 percent for 2003. The effective tax rate was lower during 2003 due to the fact that the 2003 rate included In-process research and development expense of $11,495,000 which is not deductible for income tax purposes.

Accretion of Class A callable puttable common stock increased by $(144,430,000) to $(260,475,000) for 2004 from $(116,045,000) for 2003. The increase is primarily attributable to the fact that there were 364 days of accretion in 2004 and only 184 days of accretion in 2003. In addition, the increase is attributable to additional

Class A shares that were outstanding during 2004 versus 2003 as a result of stock option exercises and the increase in the fair value from the Merger Closing Date to the Initial Put Date. The Class A callable puttable common stock is being accreted from the $57.99 average closing market price of DGIC’s common stock on the NASDAQ over the five business days beginning two business days prior to the announcement date of the Merger Agreement and ending two business days following the announcement date of the Merger Agreement, to the put value of $83 at the Initial Put Date, calculated using the effective interest rate method.

52 Weeks Ended 2003 Compared with 52 Weeks Ended 2002

Total net revenues increased $587,530,000 or 97 percent, to $1,190,561,000 for 2003 from $603,031,000 for 2002.

Net sales of Company Brands, including licensed, joint venture products, and Net sales to affiliates, increased $322,223,000, or 57 percent, to $882,944,000 for 2003 from $560,721,000 for 2002. The increase in net sales of Company Brands was primarily driven by sales of DGIC Company Brand products acquired in the Dreyer’s Nestlé Transaction.

Net sales of Company Brands represented 74 percent of Total net revenues in 2003 compared with 93 percent in 2002. The average price of Company Brands, net of the effect of trade promotion expenses, decreased by 24 percent. Changes in the average price of Company Brands are heavily influenced by shifts in product mix between the Company’s different packaged and frozen snack products. The decrease during the period was primarily due to such mix shifts towards lower-priced products as a result of the Dreyer’s Nestlé Transaction. Gallon sales of Company Brands, including frozen snacks, increased approximately 47,800,000 gallons, or 106 percent, to approximately 93,000,000 gallons as a result of the Dreyer’s Nestlé Transaction.

Net sales of Partner Brands increased $227,245,000, or 607 percent, to $264,705,000 for 2003 from $37,460,000 for 2002. This increase was primarily driven by sales of Partner Brands that resulted from the Dreyer’s Nestlé Transaction.

Net sales of Partner Brands represented 22 percent of Total net revenues in 2003 compared with six percent in 2002. Average wholesale prices for Partner Brands increased approximately 57 percent. Gallon sales of Partner Brands increased by 350 percent over those in 2002. These extraordinarily high increases were largely a result of the volume and mix change due to the Dreyer’s Nestlé Transaction.

Other revenues increased $38,062,000, or 785 percent, to $42,912,000 for 2003 from $4,850,000 for 2002. This increase was attributable to $25,005,000 of revenues received from Integrated Brands for manufacturing and distribution of the Divested Brands, $13,884,000 of reimbursements received from Eskimo Pie for the payroll expense incurred by the Company for employees working for Eskimo Pie in the divested distribution centers in the Territories, and $488,000 of revenues related to transition services provided to Integrated Brands and Eskimo Pie to support the divested distribution centers in the Territories. The cost of providing these services is included in Cost of goods sold. The increase was partially offset by a decrease in special handling revenue of $867,000 and a decrease in freezer rental revenue of $448,000. Other revenues represented four percent of Total net revenues in 2003 compared with one percent in 2002.

Cost of goods sold increased $506,151,000 or 101 percent, to $1,005,195,000 for 2003 from $499,044,000 for 2002. The increase in Cost of goods sold was attributable to the Dreyer’s Nestlé Transaction.

The Company’s gross profit increased by $81,379,000, or 78 percent, to $185,366,000 from $103,987,000, representing a 15.6 percent gross margin compared with a 17.2 percent gross margin for 2002. The increase in gross profit was primarily attributable to an increase in Total net revenues as a result of the Dreyer’s Nestlé Transaction and a decrease in inventory write-downs associated with packaging changes and retail spoils of $5,686,000, partially offset by a provision for freezer cabinet retirements of $6,992,000 an increase in depreciation expense of $3,000,000 resulting from a change in the estimated useful lives of freezers, an increase in expense related to minimum volume commitments under copack arrangements of $1,576,000, and settlement

costs and expenses of $1,303,000 related to the resolution of certain litigation matters. The Company cannot predict the future cost of raw materials (including butter and vanilla), and increases in the cost of raw materials could negatively affect Cost of goods sold and gross margin.

Selling, general and administrative expenses increased $84,531,000, or 74 percent, to $198,345,000 for 2003 from $113,814,000 for 2002. Selling, general and administrative expenses were 16.6 percent and 18.9 percent of Total net revenues in 2003 and 2002, respectively. The dollar increase was primarily attributable to the selling, general and administrative expenses of the acquired DGIC business, stock option compensation expense of $18,632,000, professional fees to support integration and other activities of $4,146,000, settlement costs and expenses of $3,701,000 related to the resolution of certain litigation matters, payroll taxes of $3,054,000 related to stock option exercises, an increase in depreciation expense of $2,293,000 resulting from a change in the estimated useful lives of NICC’s financial and distribution data processing systems, lease termination expenses of $1,509,000 and accretion of unvested stock options of $385,000. These increases were partially offset by a decrease in compensation expense related to NICC employee loans of $447,000; there were no NICC employee loans outstanding at December 27, 2003. The unvested stock options will accrete to fair value using the effective interest rate method until the Initial Put Date, when the put value of the Class A callable puttable common share will be $83 per share.

Interest expense increased $2,270,000, or 124 percent, to $4,103,000 for 2003 from $1,833,000 for 2002, primarily due to higher average borrowings, partially offset by lower weighted-average interest rates.

Royalty expense to affiliates decreased $2,205,000, or nine percent, to $22,764,000 for 2003 from $24,969,000 for 2002, due to lower net sales of Company Brand products which are licensed to the Company. Royalty expense is comprised of royalties paid to affiliates of Nestlé S.A. for the use of trademarks and/or technology owned or licensed by them and licensed or sublicensed to the Company for use in the manufacture and sale of frozen snack products.

Other (income) expense, net increased $4,067,000 to income of $(2,618,000) for 2003 from expense of $1,449,000 for 2002. The increase in Other (income) expense, net was primarily attributable to other income from settlement of litigation of $(2,602,000), an increase in earnings from joint ventures and equity affiliates of $1,249,000, an increase in income from brokerage programs of $738,000 and a decrease in losses from butter trading activities of $512,000, partially offset by an increase in other expense of $1,305,000 due to accretion of vested stock options. The Decision and Order required the Company to terminate DGIC’s joint venture with Mars, as well as certain manufacturing and distribution agreements with Mars as of December 31, 2003. Pursuant to the Decision and Order, the joint venture between the Company and Mars was terminated, although the Company continued, at the request of Mars, to distribute Mars products through February 2004. The vested stock options will accrete to fair value using the effective interest rate method until the Initial Put Date, when the put value of the Class A callable puttable common share will be $83 per share.

Severance and retention expense totaled $51,086,000 for 2003. This expense consists of $48,545,000, of severance and retention benefits and $2,541,000 relating to the forgiveness of NICC employee loans, both as a result of the Dreyer’s Nestlé Transaction.

During the third quarter of 2002, NICC determined that the carrying value of goodwill exceeded its implied fair market value and reduced the carrying value of its goodwill by $69,956,000 to equal the estimated fair market value of goodwill.

In-process research and development expense totaled $11,495,000 for 2003. The $11,495,000 represents the fair value of new products under development by DGIC that were acquired in the Dreyer’s Nestlé Transaction. Pursuant to Financial Accounting Standards Board (FASB) Interpretation No. 4, “Applicability of FASB Statement No. 2 to Business Combinations Accounted for by the Purchase Method” (FIN 4), this assigned value was charged to expense.

Loss on divestiture of $14,941,000 for 2003 includes an impairment of the Purchased Assets of $11,867,000, $2,851,000 for divesture expenses and a $223,000 loss on sale of the Divested Brand inventory.

Income tax benefit increased by $1,975,000 to $39,015,000 for 2003 from $37,040,000 for 2002 primarily due to a correspondingly higher pre-tax loss in 2003. The effective tax rate decreased to 34.0 percent from 34.3 percent for 2002 due primarily to $11,495,000 of In-process research and development which is not deductible for income tax purposes and an adjustment of $3,093,000 related to the change in NICC’s tax status.

Accretion of Class A callable puttable common stock totaled $(116,045,000) for 2003. The Class A callable puttable common stock is being accreted from the $57.99 average closing market price of DGIC’s common stock on the NASDAQ over the five business days beginning two business days prior to the announcement date of the Merger Agreement and ending two business days following the announcement date of the Merger Agreement, to the put value of $83 at the Initial Put Date, calculated using the effective interest rate method.

Seasonality

The Company typically experiences more demand for its products during the spring and summer than during the fall and winter. The Company’s inventory is maintained at the same general level relative to sales throughout the year by adjusting production and purchasing schedules to meet demand. The ratio of inventory to sales typically does not vary significantly from year to year.

Effects of Inflation and Changing Prices

The largest components of the Company’s cost of production, which are primary factors causing volatility, are the costs of dairy raw materials and other commodities. Under current Federal and state regulations and industry practice, the price of cream is linked to the price of butter. Over the past 10 years, the price of butter in the United States has averaged $1.29 per pound. However, the market is inherently volatile and can experience large seasonal fluctuations. The monthly average price per pound of AA butter was $1.82 and $1.14 for 2004 and 2003, respectively. The Chicago Mercantile Exchange butter market is characterized by very low trading volumes and a limited number of participants. The available futures market for butter is still in the early stages of development and does not have sufficient liquidity to enable the Company to fully reduce its exposure to the volatility of the market. Beginning in 2002, the Company proactively addressed this price volatility by purchasing either butter or butter futures contracts with the intent of reselling or settling its positions at the Chicago Mercantile Exchange. In spite of these efforts to mitigate this risk, commodity price volatility still has the potential to materially affect the Company’s performance, including, but not limited to, its profitability and cash flow.

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 in Other (income) expense, net. During the years ended 2004, 2003 and 2002, losses from butter investments totaled $1,704,000, $937,000 and $1,449,000, respectively.

Vanilla is another significant raw material used in the manufacture of the Company’s products. At the present time, the Company is unable to effectively hedge against the price volatility of vanilla and, therefore, cannot predict the effect of future price increases. As a result, future increases in the cost of vanilla could have a material adverse effect on the Company’s profitability and cash flow.

New Accounting Pronouncement

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 December 25, 2004.

Financial Condition

Liquidity and Capital Resources

The Company’s primary cash needs are to fund capital expenditures, working capital requirements, finance acquisitions, repayment of debt, and the payment of dividends to stockholders. Working capital decreased by $84,462,000 during 2004. The decrease is primarily attributable to a decrease in Trade accounts receivable and other accounts receivable of $26,168,000 during 2004 primarily due to improved timeliness of collections. The decrease is also due to an increase in Accounts payable and accrued liabilities of $21,749,000 primarily due to increased liabilities incurred for capital expenditures. The decrease is offset by an increase in Inventories of $29,369,000 primarily due to increased production for the following season’s sales needs. Taxes receivable due from affiliates decreased by $12,236,000 due to the receipt of the final reimbursement from Nestlé for tax losses. During 2004 and 2003, the Company received $21,664,000 and $16,943,000, respectively, from Nestlé for tax reimbursements.

During 2004 and 2003, the Company paid $13,533,000 and $40,087,000, respectively, in severance and retention benefits. The Company expects to pay accrued severance and retention expenses of $1,653,000 during 2005. The estimated maximum liability for the remaining vested and unvested severance and retention is approximately $2,036,000. The majority of this amount is expected to be paid during 2005.

During 2004 and 2003, the Company paid $182,475,000 and $32,696,000, respectively, for capital expenditures. In addition, in 2004, the Company accrued $21,889,000 for capital expenditures. In 2004, the Company completed the closure of its Union City, California manufacturing plant and began the process of relocating the production capacity to its larger Bakersfield site which is undergoing an expansion that will increase the facility’s size and capacity. In addition, the Company is significantly expanding its East Coast production facility to enable manufacturing to be closer to the Company’s large East Coast markets. Significant future capital expenditures may be required as a part of the Company’s integration and other restructuring activities (See “Recent Acquisitions” below). The Company plans to make additional capital expenditures of approximately $272,000,000 during 2005.

During 2004, the Company paid approximately $58,000,000 for the capital stock of Silhouette, and $707,000 for the equity interest of the Shoppe Company. Silhouette sold low fat and low carb ice cream snacks under its distinctive brands, Skinny Cow and Skinny Carb Bar. The Shoppe Company has been the franchisor of the United States Häagen-Dazs parlors in the United States. During 2003, the Company acquired $597,000 of cash as a result of the Dreyer’s Nestlé Transaction.

During 2004, cash dividends paid totaled $22,670,000 resulting from a quarterly dividend rate of $.06 per share of stock that was declared to holders of Class A callable puttable common stock and Class B common stock. At December 25, 2004, the Company had 95,050,458 shares of common stock outstanding (consisting of 30,486,143 shares of Class A callable puttable common stock and 64,564,315 shares of Class B common stock) and options to purchase 1,267,644 shares of common stock. In the event that all options outstanding at December 25, 2004 were to be exercised, funds required to pay dividends at a $.06 per share quarterly rate would total approximately $23,116,000 per year.

Cash proceeds from stock option exercises totaled $21,724,000 and $68,290,000 in 2004 and 2003, respectively. During 2004, options to purchase 1,036,942 shares were exercised (net of shares surrendered), with a weighted-average exercise price per share of $21.36. At December 25, 2004, 661,351 vested options and 606,293 unvested options were outstanding. The Company expects that most of the remaining vested stock options will be exercised during 2005 and 2006. The unvested stock options outstanding at December 25, 2004 that will vest during 2005 and 2006 totaled 285,110 and 321,183, respectively.

The Company utilizes the following long-term debt facilities as a primary source of liquidity:

Nestlé S.A. Credit Facility

On June 27, 2003, the Company entered into a long-term bridge loan facility with Nestlé S.A. for up to $400,000,000. On September 26, 2003, the Company and Nestlé S.A. amended the specified term of the bridge loan facility to allow the facility’s term to be extended at the option of the Company to December 31, 2005. On March 23, 2004, the Company and Nestlé S.A. amended the applicable margin on borrowings from the initial agreement’s flat margin to a margin based on the year-end and the half-year financial results. On May 28, 2004, the Company and Nestlé S.A. amended the events of default of this facility in conjunction with the addition of the Nestlé Capital Corporation Sub-Facility (discussed below). On December 6, 2004, the Company and Nestlé S.A. amended the maximum amount available under this facility with an increase of $250,000,000 for a new available maximum of $650,000,000.

Under the terms of the agreement, drawdowns under this facility bear interest at the three-month USD LIBOR on the initial drawdown date, increased by a margin determined by certain financial ratios at the Company’s year end and half year reporting. At December 25, 2004 and December 27, 2003, the Company had $350,000,000 and $125,000,000 outstanding on this bridge loan facility bearing interest at 3.01 and 2.37 percent, respectively.

As of December 25, 2004 and December 27, 2003, interest expense for borrowings from Nestlé S.A. totaled $5,158,000 and $1,701,000, respectively.

Nestlé Capital Corporation Sub-Facility

On May 24, 2004, the Company entered into a loan agreement with Nestlé Capital Corporation for up to $50,000,000 in overnight and short-term advancements. This loan agreement constitutes an amendment to the long-term bridge loan facility with Nestlé S.A. As such, aggregate proceeds or repayments under this facility will result in a corresponding decrease or increase in the total borrowings available under the $650,000,000 Nestlé S.A. bridge loan facility.

Under the terms of the agreement, drawdowns under this facility bear interest at the average daily three-month USD LIBOR for all overnight drawdowns taken during any given month, increased by a margin determined by certain financial ratios at the Company’s year end and half year reporting. At December 25, 2004, the Company had $4,600,000 outstanding on this sub-facility bearing interest at 2.99 percent.

As of December 25, 2004, the interest expense under this facility totaled $105,000.

At December 25, 2004 and December 27, 2003, the unused amount of the total available Nestlé S.A. credit facility, including the Nestlé Capital Corporation sub-facility, was $295,400,000 and $275,000,000, respectively.

Note Purchase Agreements

On June 6, 1996, the Company’s subsidiary, DGIC, borrowed $50,000,000 under certain Note Purchase Agreements (the Notes) with various noteholders. On June 26, 2003, a third amendment to these Notes became effective under which the Company was added as a party to the Notes and became, along with NICC and Edy’s Grand Ice Cream, a guarantor of the Notes. The Notes had scheduled principal payments through 2008 and interest payable semiannually at rates ranging from 8.06 percent to 8.34 percent. Under the terms of the third amendment, the interest rates effective on the remaining principal could have increased by 0.5 percent or 1.0 percent depending on performance under various financial covenants.

On September 5, 2003, a fourth amendment to the Notes became effective which amended the definition of EBITDA for covenant calculations to be replaced by a new “Adjusted EBITDA” defined as consolidated earnings before interest, taxes, depreciation and amortization, exclusive of certain restructuring charges.

Upon review of its financial results during the third quarter of 2004, the Company commenced negotiations with the noteholders to modify the terms of the Notes. The Company received a waiver of certain debt covenants effective June 26, 2004 through August 31, 2004. Effective August 27, 2004 the waiver was extended through September 30, 2004. On September 30, 2004, the Company repaid the obligations of the Notes in full with available funds. The repayment of $27,780,000 included principal of $24,286,000, make-whole interest of $2,828,000, and accrued interest of $666,000. The make-whole interest represented the present value of the remaining interest payments which would have been paid over the original term of the debt. In addition, the Company expensed the remaining unamortized debt issuance costs of $210,000. At December 25, 2004 and December 27, 2003, the Company had $0 and $26,429,000, respectively, of remaining principal outstanding on these Notes.

Revolving Line of Credit

On July 25, 2000, DGIC entered into a credit agreement with certain banks for a revolving line of credit of $240,000,000 with an expiration date of July 25, 2005. Effective on June 16, 2004, the Company notified its revolving line of credit lenders to voluntarily terminate the $240,000,000 available line and the Company expensed the remaining unamortized debt issuance costs of $706,000.

Fair Value of Financial Instruments

At December 25, 2004, the fair value of the Company’s long-term debt equaled its carrying amount. At December 27, 2003, the fair value of the Company’s long-term debt was determined to approximate the carrying amount. The fair value was based on quoted market prices for the same or similar issues or on the current rates offered to the Company for a term equal to the same remaining maturities.

Funding Put/ Call of Class A Callable Puttable Common Stock

Each stockholder of Class A callable puttable common stock has the option to require the Company to purchase (put) all or part of their shares at $83.00 per share during the two put periods of December 1, 2005 to January 13, 2006 and April 3, 2006 to May 12, 2006.

If the put right is exercised by the Class A callable puttable common stockholders, the Company’s obligation to redeem the Class A callable puttable common stock and pay the put price of $83 per share could be conditioned upon the Company’s receipt of funds from Nestlé or Nestlé S.A. The Company estimates that the aggregate put price will approximate $2,636,000,000, based on 30,486,143 shares of Class A callable puttable common stock outstanding and outstanding options to purchase 1,267,644 shares of Class A puttable common stock. Pursuant to the terms of the Governance Agreement, upon the exercise of the put right or call right, Nestlé or Nestlé S.A. has agreed to contribute to the aggregate funds under the put right or call right. However, the Governance Agreement provides that, rather than funding the aggregate amounts under the put right or call right, Nestlé or Nestlé S.A. may elect, in these circumstances, to offer to purchase shares of Class A callable puttable common stock directly from the Company’s stockholders.

The Company believes that the Nestlé S.A. credit facility and its contractual commitments from Nestlé and Nestlé S.A. to fund the put and/or call for the Class A callable puttable common stock, 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.

Known Contractual Obligations

Known contractual obligations and their related due dates at December 25, 2004 are as follows:


Contractual Obligations	Total		Year 1		Year 2		Year 3		Year 4		Year 5		Thereafter

	(In thousands)
Nestlé S.A. credit facility ⁽¹⁾	$	354,600	$	-	$	354,600	$	-	$	-	$	-	$	-
Operating leases		34,125		11,631		6,702		4,632		3,640		3,164		4,356
Purchase obligations⁽²⁾		410,298		373,200		22,802		6,235		4,552		1,997		1,512
Penalty for co-pack arrangement⁽³⁾		19,500		3,900		3,900		3,900		3,900		3,900
Other long-term obligations ⁽⁴⁾		2,635,600		2,635,600

Total	$	3,454,123	$	3,024,331	$	388,004	$	14,767	$	12,092	$	9,061	$	5,868

The Company does not have any capital lease obligations.

The Company has guaranteed certain liabilities of The Häagen-Dazs Shoppe Company, Inc. (the franchisor) which DGIC acquired from The Pillsbury Company on February 17, 2004. The Company has guaranteed the obligations of the franchisor to furnish goods and services to certain franchisees in the State of Illinois.


⁽¹⁾	The Company’s future estimated interest payable under the $650,000,000 Nestlé S.A. credit facility, which includes the $50,000,000 Nestlé Capital Corporation sub-facility, is a function of borrowing levels and interest rates which will vary in the future. Interest payments under these facilities are currently estimated to be approximately $20,500,000 for the next four quarters.

⁽²⁾	The Company’s purchase obligations are primarily contracts to purchase ingredients used in manufacturing the Company’s products and capital expenditures.

⁽³⁾	The Company incurred penalty fees for not purchasing an amount greater than or equal to the yearly volume commitment under a co-pack arrangement. In 2004, the Company formally decided to cease the use of services under the co-pack arrangement with the manufacturing company and incurred penalties for the remaining years of the arrangement.

⁽⁴⁾	The estimated aggregate put price, the only obligation included in the Company’s Other long-term obligations, is calculated by multiplying the total estimated number of Class A callable puttable shares of common stock times the $83.00 per share put price. At December 25, 2004, the estimated number of Class A callable puttable shares of common stock totaled 31,753,787 (consisting of 30,486,143 shares of Class A callable puttable common stock outstanding and outstanding options to purchase 1,267,644 shares of Class A callable puttable common stock). For purposes of the above table, the Company has assumed that the put right will be exercised during the first put option period beginning in December 2005. If the Class A callable puttable common stockholders do not fully exercise their put rights in December 2005, a portion of this long-term obligation could be incurred in fiscal 2006.

Recent Acquisitions

On February 17, 2004, the Company acquired all of the equity interest of the Shoppe Company from Pillsbury. The Shoppe Company has been the franchisor of the United States Häagen-Dazs parlor business since the early 1980’s. As of December 25, 2004, there were approximately 237 franchised Häagen-Dazs parlors in the United States. The Company performed the significant subsidiary test on this acquisition and determined it was not material.

On July 26, 2004, the Company acquired Silhouette for a purchase price of approximately $63,000,000. The purchase price consisted of approximately $58,000,000 in cash paid for the capital stock of Silhouette plus approximately $5,000,000 of other intangibles acquired in the Dreyer’s Nestlé Transaction. Silhouette sold low

fat and low carb ice cream snacks under its brands, Skinny Cow and Skinny Carb Bar. The Company performed the significant subsidiary test on this acquisition and determined it was not material.

Related Party Transactions

In addition to the Nestlé S.A. credit facility, the Nestlé Capital Corporation sub-facility, Governance Agreement and the contractual commitments from Nestlé and Nestlé S.A. to fund the put and/or call discussed above, the following represent material related party transactions with Nestlé and its affiliates:

Inventory Purchases

The Company’s inventory purchases from Nestlé Prepared Foods or its affiliates were $18,856,000 and $10,510,000 for 2004 and 2003, respectively.

Taxes Receivable Due from Affiliates

In accordance with the Nestlé tax sharing policy, any intercompany taxes for NICC are to be settled by actual payment. The final reimbursement due from Nestlé for tax losses for the period from January 1, 2003 through June 26, 2003 is presented as Taxes receivable due from affiliates. Taxes receivable due from affiliates totaled $12,236,000 at December 27, 2003. The balance was paid in full by Nestlé in 2004; as such, there was no balance at December 25, 2004. During 2004 and 2003, the Company received $21,664,000 and $16,943,000, respectively, from Nestlé for tax reimbursements.

Net sales and Cost of goods sold to affiliates

Net sales to affiliates totaled $5,096,000, $3,505,000 and $4,209,000 for 2004, 2003 and 2002, respectively.

Cost of goods sold to affiliates totaled $5,096,000, $3,505,000 and $4,209,000 for 2004, 2003 and 2002, respectively.

Transition Services Agreement

On the Merger Closing Date, NICC entered into a Transition Services Agreement with Nestlé USA, Inc. for the provision of certain services at cost. The services provided under this agreement may include information technology support and payroll services, consumer response, risk management, travel, corporate credit cards and promotions.

The Company recognized Selling, general and administrative expense of $752,000, $1,470,000 and $3,460,000 for 2004, 2003 and 2002, respectively, primarily for information technology services provided under the Transition Services Agreement.

Royalty Expense to Affiliates

Royalty expense to affiliates is comprised of royalties paid to affiliates of Nestlé S.A. for the use of trademarks or technology owned by such affiliates and licensed or sublicensed to the Company for use in the manufacture and sale of frozen snacks. Royalty expense to affiliates totaled $27,288,000, $22,764,000 and $24,969,000 for 2004, 2003 and 2002, respectively.


Item 7A.	*Quantitative and Qualitative Disclosures about Market Risk.*

Long-term Debt

The Company has long-term debt with variable interest rates. As a result, the Company is exposed to market risk caused by fluctuations in interest rates. The following summarizes interest rates on the Company’s long-term debt at December 25, 2004:


	Long-Term Debt		Interest Rates

	(In thousands)
Variable Interest Rates:
Nestlé S.A. credit facility	$	350,000		3.01	%
Nestlé Capital Corporation sub-facility		4,600		2.99	%

	$	354,600

If variable interest rates were to increase by a factor of 10 percent, the Company’s annual interest expense would increase approximately $1,067,000.

Investments

The Company does not have short-term or long-term monetary investments.

Commodity Costs

The largest components of the Company’s cost of production, which are primary factors causing volatility, are the costs of dairy raw materials and other commodities. Under current Federal and state regulations and industry practice, the price of cream is linked to the price of butter. Over the past 10 years, the price of butter in the United States has averaged $1.29 per pound. However, the market is inherently volatile and can experience large seasonal fluctuations. The monthly average price per pound of AA butter for 2004 and 2003 was $1.82 and $1.14, respectively. The Chicago Mercantile Exchange butter market is characterized by very low trading volumes and a limited number of participants. The available futures market for butter is still in the early stages of development and does not have sufficient liquidity to enable the Company to fully reduce its exposure to the volatility of the market. Beginning in 2002, the Company has proactively addressed this price volatility by purchasing either butter or butter futures contracts with the intent of reselling or settling its positions at the Chicago Mercantile Exchange. In spite of these efforts to mitigate this risk, commodity price volatility still has the potential to materially affect the Company’s performance, including, but not limited to, its profitability and cash flow.

Vanilla is another significant raw material used in the manufacture of the Company’s products. At the present time, the Company is unable to effectively hedge against the price volatility of vanilla and, therefore, cannot predict the effect of future price increases. As a result, future increases in the cost of vanilla could have a material adverse effect on the Company’s profitability and cash flow.


Item 8.	*Financial Statements and Supplementary Data.*

The information required by Item 8 is incorporated by reference herein from Part IV, Item 15(a)(1) and (2).


Item 9.	*Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.*

Not applicable.


Item 9A.	*Controls and Procedures.*

(a) Disclosure Controls and Procedures

Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we evaluated the effectiveness of the design and operation of our disclosure controls and procedures, as such term is defined under Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Based on this evaluation, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures were effective as of the end of the period covered by this report.

(b) Management’s Annual Report on Internal Control Over Financial Reporting

Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rule 13a-15(f). Our internal control system was designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.

Our management assessed the effectiveness of our internal control over financial reporting as of December 25, 2004. In making this assessment, we used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in a report entitled Internal Control — Integrated Framework. Based upon such assessment, our management concluded that as of December 25, 2004, the Company’s internal control over financial reporting was effective based on those criteria.

Management’s assessment of the effectiveness of its internal control over financial reporting as of December 25, 2004 has been audited to by PricewaterhouseCoopers LLP (“PwC”), an independent registered public accounting firm and auditors of our consolidated financial statements, as stated in their report which is included herein.

No changes in the Company’s internal control over financial reporting occurred during the quarter ending December 25, 2004 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

Item 9B. Other Information.

Not applicable.

PART III


Item 10.	*Directors and Executive Officers of the Registrant.*

The information set forth under the captions “Board of Directors — Nominees for Director,” “Board of Directors — Committees” “Security Ownership of Certain Beneficial Owners and Management — Section 16(a) Beneficial Ownership Reporting Compliance,” “Executive Compensation — Compensation Committee Interlocks and Insider Participation” and “Matters Submitted to a Vote of Stockholders — Election of Directors” in the Company’s definitive Proxy Statement for the 2005 Annual Meeting of Stockholders to be filed with the Securities and Exchange Commission, and the information contained in Part I of this Annual Report on Form 10-K under the caption “Executive Officers of the Registrant” is incorporated herein by reference.

The Company has adopted a Code of Conduct that applies to all directors, officers and employees. A copy of the Code of Conduct can be accessed at the Company’s website located at http://www.dreyersinc.com by following the links provided in the “Careers and Culture” section.


Item 11.	*Executive Compensation.*

The information set forth under the captions “Executive Compensation” and “Board of Directors — Remuneration of Directors” in the Company’s definitive Proxy Statement for the 2005 Annual Meeting of Stockholders to be filed with the Securities and Exchange Commission is incorporated herein by reference.


Item 12.	*Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.*

The information set forth under the caption “Security Ownership of Certain Beneficial Owners and Management” in the Company’s definitive Proxy Statement for the 2005 Annual Meeting of Stockholders to be filed with the Securities and Exchange Commission is incorporated herein by reference.


Item 13.	*Certain Relationships and Related Transactions.*

The information set forth under the captions “Executive Compensation — Compensation Committee Interlocks and Insider Participation” and “Executive Compensation — Other Relationships” in the Company’s definitive Proxy Statement for the 2005 Annual Meeting of Stockholders to be filed with the Securities and Exchange Commission is incorporated herein by reference.


Item 14.	*Principal Accountant Fees and Services.*

The information set forth under the caption “Audit and Other Fees” in the Company’s definitive Proxy Statement for the 2005 Annual Meeting of Stockholders to be filed with the Securities and Exchange Commission is incorporated herein by reference.

PART IV


Item 15.	*Exhibits and Financial Statement Schedules.*

(a) The following documents are filed as part of this Annual Report on Form 10-K:


		Page

(1)	Financial Statements
	Consolidated Statement of Operations for each of the three years in the period ended December 25, 2004		46
	Consolidated Balance Sheet at December 25, 2004 and December 27, 2003		47
	Consolidated Statement of Changes in Stockholders’ Equity for each of the three years in the period ended December 25, 2004		48
	Consolidated Statement of Cash Flows for each of the three years in the period ended December 25, 2004		49
	Notes to Consolidated Financial Statements		50
	Report of Independent Registered Public Accounting Firm for each of the two years in the period ended December 25, 2004		84
	Report of Independent Registered Public Accounting Firm for the year ended December 31, 2002		86
	Financial statements of any other 50 percent or less owned company have been omitted because the Company’s proportionate share of income (loss) from continuing operations before income tax benefit (provision) and cumulative effect of change in accounting principle is less than 20 percent of the respective consolidated amounts, and the investment in and advances to any such company is less than 20 percent of consolidated total assets

(2)	Financial Statement Schedules
	Financial statement schedules are omitted because they are not applicable or the required information is shown in the financial statements or notes thereto

(3)	Exhibits
	The exhibits listed in the accompanying exhibit index are filed herein or incorporated by reference to exhibits previously filed with the Securities and Exchange Commission as part of this Annual Report on Form 10-K		87

CONSOLIDATED STATEMENT OF OPERATIONS


			December 25,			December 27,			December 31,
			2004			2003			2002

			(In thousands, except per share amounts)
Revenues:
	Net sales to external customers		$	1,542,596		$	1,144,144		$	593,972
	Net sales to affiliates			5,096			3,505			4,209

		Net sales		1,547,692			1,147,649			598,181
	Other revenues			40,736			42,912			4,850

		Total net revenues		1,588,428			1,190,561			603,031

Costs and expenses:
	Cost of goods sold to external customers			1,430,766			1,001,690			494,835
	Cost of goods sold to affiliates			5,096			3,505			4,209

		Cost of goods sold		1,435,862			1,005,195			499,044
	Selling, general and administrative expense			247,405			198,345			113,814
	Interest, net of amounts capitalized			9,291			4,103			1,833
	Royalty expense to affiliates			27,288			22,764			24,969
	Other (income) expense, net			(752	)		(2,618	)		1,449
	Severance and retention expense			2,334			51,086
	Impairment of goodwill									69,956
	In-process research and development						11,495
	(Reversal of accrued divestiture expenses) loss on divestiture			(216	)		14,941

				1,721,212			1,305,311			711,065

	Loss before income tax benefit			(132,784	)		(114,750	)		(108,034	)
	Income tax benefit			50,893			39,015			37,040

	Net loss			(81,891	)		(75,735	)		(70,994	)
	Accretion of Class A callable puttable common stock			(260,475	)		(116,045	)

	Net loss available to Class A callable puttable and Class B common stockholders		$	(342,366	)	$	(191,780	)	$	(70,994	)

	Net loss per share of Class A callable puttable and Class B common stock:
		Basic	$	(3.62	)	$	(2.44	)	$	(1.10	)

		Diluted	$	(3.62	)	$	(2.44	)	$	(1.10	)

	Dividends declared per common share:
		Class A callable puttable	$	.24		$	.18

		Class B	$	.24		$	.18

See accompanying Notes to Consolidated Financial Statements.

CONSOLIDATED BALANCE SHEET


			December 25,			December 27,
			2004			2003

			(In thousands, except share
			and per share amounts)
ASSETS
Current Assets:
	Cash and cash equivalents		$	870		$	1,623
	Trade accounts receivable, net			92,755			110,381
	Other accounts receivable			5,890			11,580
	Inventories			178,107			148,426
	Prepaid expenses and other			26,450			37,723
	Income taxes refundable			11,797			18,283
	Taxes receivable due from affiliates						12,236
	Deferred income taxes			5,643			17,265

		Total current assets		321,512			357,517
Property, plant and equipment, net				519,562			392,613
Other assets				14,578			20,735
Other intangibles, net				445,834			389,133
Goodwill				1,945,208			1,931,425

		Total assets	$	3,246,694		$	3,091,423


LIABILITIES, CLASS A CALLABLE PUTTABLE COMMON STOCK AND STOCKHOLDERS’ EQUITY
Current Liabilities:
	Accounts payable and accrued liabilities		$	185,863		$	130,360
	Accrued payroll and employee benefits			54,456			59,359
	Current portion of long-term debt						2,143

		Total current liabilities		240,319			191,862
Nestlé S.A. credit facility				354,600			125,000
Long-term debt, less current portion							24,286
Long-term stock option liability				73,209			135,121
Other long-term obligations				41,655			18,207
Deferred income taxes				38,400			81,065

		Total liabilities		748,183			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; 30,486,143 and 29,449,201 issued and outstanding in 2004 and 2003, respectively			305			294
	Class A capital in excess of par			2,251,228			1,904,124
	Notes receivable from Class A callable puttable common stockholders			(493	)		(1,104	)

		Total Class A callable puttable common stock		2,251,040			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			(715,107	)		(350,010	)

		Total stockholders’ equity		247,471			612,568

		Total liabilities, Class A callable puttable common stock and stockholders’ equity	$	3,246,694		$	3,091,423

See accompanying Notes to Consolidated Financial Statements.

CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY


		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, 2001			—	$	—	$	—	$	—		$	735,383		$	(54,700	)	$	680,683
	Capital contributions											2,166						2,166
	Adjustment of capital contribution related to acquisition of members’ interest											(1,990	)					(1,990	)
	Capital contributions — acquisition costs paid by Nestlé affiliate											14,693						14,693
	Tax sharing adjustment														(15,893	)		(15,893	)
	Net loss to member														(70,994	)		(70,994	)

Balances at December 31, 2002												750,252			(141,587	)		608,665
	Capital contributions — acquisition costs paid by Nestlé affiliate											17,121						17,121
	Reclassification of investment from member to Class B capital in excess of par						767,373					(767,373	)					—
	Reclassification of accumulated net loss to member to accumulated deficit								(141,587	)					141,587			—
	Conversion of DGIC common stock held by Nestlé to Class B common stock		9,563		96		194,559											194,655
	Issuance of Class B common stock in connection with the Dreyer’s Nestlé Transaction		55,001		550													550
	Net loss								(75,735	)								(75,735	)
	Accretion of Class A callable puttable common stock								(116,045	)								(116,045	)
	Class A callable puttable and Class B common stock dividends declared								(16,643	)								(16,643	)

Balances at December 27, 2003			64,564		646		961,932		(350,010	)		—			—			612,568
	Net Loss								(81,891	)								(81,891	)
	Accretion of Class A callable puttable common stock								(260,475	)								(260,475	)
	Class A callable puttable and Class B common stock dividends declared								(22,731	)								(22,731	)

Balances at December 25, 2004			64,564	$	646	$	961,932	$	(715,107	)	$	—		$	—		$	247,471

See accompanying Notes to Consolidated Financial Statements,

including Class A callable puttable common stock (Note 19).

CONSOLIDATED STATEMENT OF CASH FLOWS


				December 25,			December 27,			December 31,
				2004			2003			2002

				(In thousands)
Cash flows from operating activities:
	Net loss			$	(81,891	)	$	(75,735	)	$	(70,994	)
	Adjustments to reconcile net loss to cash flows from operations, net of amounts acquired:
		Depreciation and amortization			74,545			51,288			25,404
		In-process research and development						11,495
		(Reversal of) accrued divestiture expenses			(216	)		14,941
		(Gain) loss on disposal of property, plant and equipment			(766	)		3,596			3,932
		Provision for loss on accounts receivable			319			2,564			1,148
		Provision for severance and retention expense			2,334			10,999
		Penalty for co-pack arrangement			18,113			3,519			1,943
		Impairment of goodwill									69,956
		Provision for retail freezer retirements						6,992
		Accretion of long-term stock option liability			2,752			1,690
		Tax-sharing adjustment									(15,893	)
		Stock option compensation expense			17,037			18,632
		Supplemental management retirement and savings plan expense						470			381
		Employee loan compensation expense						228			675
		Deferred income taxes			(44,413	)		(27,479	)		(3,995	)
		Increase in other long-term obligations			9,235			11,392
		Other noncash charges			1,070
		Changes in assets and liabilities, net of amounts acquired:
			Trade accounts receivable and other accounts receivable		26,168			60,408			29,770
			Inventories		(29,369	)		12,255			13,492
			Prepaid expenses and other		7,697			9,224			3,420
			Income taxes refundable		7,995			(11,304	)
			Due to/from member/ affiliates								16,959
			Taxes receivable due from affiliates		12,236			4,707			(16,943	)
			Accounts payable and accrued liabilities		21,749			(65,598	)		(42,077	)
			Accrued payroll and employee benefits		(7,444	)		12,837			(140	)

					37,151			57,121			17,038

Cash flows from investing activities:
	Additions to property, plant and equipment				(182,475	)		(32,696	)		(25,342	)
	Retirements of property, plant and equipment				9,194			2,441
	Purchases of businesses, net of cash acquired				(59,068	)					(2,642	)
	Cash acquired in the acquisition of Dreyer’s Grand Ice Cream, Inc.							597
	(Increase) decrease in other assets				(8,391	)		241

					(240,740	)		(29,417	)		(27,984	)

Cash flows from financing activities:
	(Repayments under) long-term line of credit							(139,000	)
	Proceeds from Nestlé S.A. credit facility				229,600			125,000
	(Repayments under) proceeds from Nestlé USA, Inc. demands notes, net							(73,142	)		1,700
	(Repayments under) note purchase agreements				(26,429	)
	Collection of notes receivable from Class A callable puttable common stockholders				611			828
	Proceeds from stock option exercises				21,724			68,290
	Collection of employee loans							510
	Capital contributions from member										2,166
	Cash dividends paid				(22,670	)		(11,002	)

					202,836			(28,516	)		3,866

	Decrease in cash and cash equivalents				(753	)		(812	)		(7,080	)
	Cash and cash equivalents, beginning of period				1,623			2,435			9,515

	Cash and cash equivalents, end of period			$	870		$	1,623		$	2,435

See accompanying Notes to Consolidated Financial Statements,

including Supplemental Cash Flow Disclosures (Note 24).

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


Note 1.	Description of Business

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

Predecessor Entities

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) on June 26, 2003 (the Merger Closing Date). The accompanying Consolidated Financial Statements of the Company and related notes that are as of a date, or for a period ended, before June 27, 2003, represent the accounts of NICC or its predecessor entities.

NICC (formerly known as Ice Cream Partners USA, LLC) began operations on October 8, 1999 (inception date) as a joint venture between The Pillsbury Company (Pillsbury) and Nestlé USA — Prepared Foods Division, Inc. (Nestlé Prepared Foods). Nestlé Prepared Foods is a wholly-owned subsidiary of Nestlé Holdings, Inc. (Nestlé), the United States holding company for the principal food and beverage operations of Nestlé S.A., the ultimate parent company incorporated in Switzerland. Through October 31, 2001, Pillsbury was a wholly-owned subsidiary of Diageo PLC; thereafter, Pillsbury was a wholly-owned subsidiary of General Mills, Inc. The term of the joint venture was established as 40 years. Pillsbury contributed assets and liabilities of its United States Häagen-Dazs® frozen dessert business and Nestlé Prepared Foods contributed assets and liabilities of its United States frozen dessert business. The contribution of net assets was made at predecessor book value.

For the period from the inception date through December 25, 2001, Pillsbury and Nestlé Prepared Foods were the only members of NICC and shared equally in the profits and losses of NICC. The members shared decision-making authority equally. Additional capital contributions were made by Pillsbury in 2000 in accordance with the terms of the limited liability agreement of NICC. Capital contributions were made quarterly by Nestlé Prepared Foods based on the amount of royalties paid by NICC to Swiss affiliates of Nestlé Prepared Foods that owned trademarks and technology sublicensed to NICC. Royalties were paid to affiliates of the members for use of trademarks and technology. No other capital contributions were required from the members during 2001.

Effective December 26, 2001, Nestlé Prepared Foods acquired from Pillsbury the 50 percent interest in NICC that Nestlé Prepared Foods did not already own. At that time, Nestlé Prepared Foods’ wholly-owned subsidiary, NICC Holdings, Inc. (NICC Holdings), became NICC’s sole member.

Recent Acquisitions

On July 26, 2004, the Company acquired Silhouette Brands, Inc. (Silhouette) for a purchase price of approximately $63,000,000. The purchase price consisted of approximately $58,000,000 paid in cash for the capital stock of Silhouette plus approximately $5,000,000 of other intangibles acquired in the Dreyer’s Nestlé Transaction (Note 11). Silhouette sold low fat and low carb ice cream snacks under its brands, Skinny Cow® and Skinny Carb Bar^tm. The Company performed the significant subsidiary test on this acquisition and determined it was not material.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

On August 2, 2004, the Company acquired all of the stock of a corporation which owns real property adjacent to the Company’s manufacturing plant in Laurel, Maryland for the sole purpose of acquiring such real property, as well as an additional parcel of real property adjacent to the plant. On August 4, and October 18, 2004, the Company acquired additional pieces of real property adjacent to the plant. The total price paid for these purchases was approximately $13,000,000.

Segment Information

Aggregated Total net revenues for management reporting purposes consist of Net sales of company branded products, including licensed, joint venture products and Net sales to affiliates (Company Brands), Net sales of products manufactured and/or distributed for other companies (Partner Brands), and Other revenues primarily for the manufacture and distribution of products for other companies. Net sales of Company Brands were $1,312,180,000, $882,944,000 and $560,721,000 in 2004, 2003 and 2002, respectively. Net sales of Partner Brands were $235,512,000, $264,705,000 and $37,460,000 in 2004, 2003 and 2002, respectively. Other revenues were $40,736,000, $42,912,000 and $4,850,000 in 2004, 2003 and 2002, respectively.


Note 2.	Summary of Significant Accounting Policies

Consolidation

The Consolidated Financial Statements include the accounts of the Company and its subsidiaries. All intercompany transactions have been eliminated.

Fiscal Year

The Company’s fiscal year is a 52-week or 53-week period ending on the last Saturday in December. Effective upon the closing of the Dreyer’s Nestlé Transaction, the Company changed its fiscal periods from NICC’s calendar year ending on December 31 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, Stockholders’ Equity and Cash Flows present the results of NICC and DGIC for the following periods:


Year	NICC		DGIC

2004		12/28/03 to 12/25/04		12/28/03 to 12/25/04
2003		1/1/03 to 12/27/03		6/27/03 to 12/27/03
2002		1/1/02 to 12/31/02		n/a

This change in fiscal periods did not have a material impact on the Consolidated Financial Statements.

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 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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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 year presentation. The reclassifications did not impact the previously reported net loss, total assets, total liabilities, total stockholders’ equity or accumulated deficit.

Cash Equivalents

The Company classifies financial instruments as cash equivalents if the original maturity of such investments is three months or less.

Inventories

Inventories are stated at the lower of cost (determined by the first-in, first-out method) or market. Cost includes materials, labor, manufacturing overhead, and certain warehouse and distribution expenses.

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.

Property, Plant and Equipment, Net

The cost of additions to property, plant and equipment, along with major repairs and improvements, is capitalized, while maintenance and minor repairs are charged to expense as incurred. Property, plant and equipment is depreciated using the straight-line method over the assets’ estimated useful lives, currently ranging from three to 40 years. Interest costs relating to capital assets under construction are capitalized.

Other Intangibles, Net

Other intangibles with definite lives are amortized using the straight-line method over their estimated useful lives, ranging from less than one year up to 84.6 years. Other intangibles with indefinite lives are not amortized.

Goodwill

Goodwill is 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 used methodologies that take into account, the goodwill for the entire Company.

Impairment of Long-Lived Assets

The Company reviews long-lived assets and certain identifiable intangibles for impairment annually or between annual tests if events or changes in circumstances indicate that the carrying amount of an asset may not

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

be recoverable. The assessment of impairment is based on the estimated undiscounted future cash flows from operating activities compared with the carrying value of the assets. If the undiscounted future cash flows of an asset are less than the carrying value, a write-down will be recorded, measured by the amount of the difference between the carrying value and the fair value of the asset. Assets to be disposed of are recorded at the lower of carrying value or fair value less costs to sell. Such assets are not depreciated while held for sale.

Revenue Recognition

Revenue is recognized when title and risk of loss have transferred to the customer, the collection of the resulting receivable is reasonably assured, and all significant Company obligations have been satisfied. Revenue from consignment sales is recognized upon purchase of the product by retail customers. The Company provides appropriate provisions for uncollectible accounts.

The Company records 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) as a reduction of revenue.

Trade Promotions

In order to market and promote the sales of its products, the Company may temporarily lower its price on selected products in order to encourage retailers to, in turn, lower their price to consumers. Trade promotion costs include these temporary discounts offered to retailers (referred to as variable or off-invoice promotion) as well as the cost of promotional advertising and in-store displays paid to retailers (referred to as fixed trade promotion). Typically the timing of the Company’s trade promotion discount will correspond with a retailer’s promotional program, usually spanning two to four weeks. Trade promotion spending is seasonal, with the highest levels of activity occurring during the spring and summer months. On selected new product introductions, the Company may pay retailers a single payment stocking allowance that is usually based on the amount of retail shelf space to be occupied by the new product.

Accruals for trade promotions are recorded in the period in which the trade promotion occurs based on a combination of the actual and estimated amounts incurred. Accruals for variable promotions are primarily based on the actual number of units sold, and, to a lesser extent, estimates based on each customer’s historic and planned rate of volume sales of the promoted product. Accruals for fixed trade promotions are primarily based on actual trade promotion contracts with retailers and, to a lesser extent, estimates based on each customer’s historic and planned rate of fixed trade promotion spending. Stocking allowances are recorded as a reduction in sales in the period in which the related products are placed on the retailer’s shelves.

While accruals for trade promotion are recorded in the period in which the trade promotion occurs, settlement of these liabilities can take up to a year or more. Settlement of variable promotion typically takes place at the time the sales invoice is prepared (i.e., invoice includes discounts) or when the customer takes a deduction from a subsequent remittance. Settlement of fixed trade promotion typically takes place when the customer takes a deduction from a subsequent remittance and, to a lesser extent, through a payment made to the customer.

Retail Freezer Cabinets

To facilitate the sales of products, the Company has placed a large number of freezer cabinets with selected retailers and independent distributors. In the second quarter of 2004, the Company completed a project which implemented a new system to inventory and track its retail freezer cabinets. Previously, the Company had estimated freezer retirements using a sampling methodology. The new system allows for the specific identification of freezers and the recording of retirements when they occur. The change in the methodology for recording retail freezer cabinet retirements did not have a material impact on the Company’s results of operations.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Shipping and Handling Costs

The Company classifies shipping and handling expenses related to product sales as a cost of goods sold.

Advertising Costs

The Company defers production costs for advertising and expenses these costs in the period during which the advertisement is first run. All other advertising costs are expensed as incurred. At December 25, 2004 and December 27, 2003, deferred advertising spending, including consumer promotion spending, was $5,050,000 and $3,809,000, respectively. Advertising spending, including consumer promotion spending, was $74,320,000, $40,405,000 and $12,410,000 in 2004, 2003 and 2002, respectively.

Income Taxes

Income taxes are accounted for using the liability method. Under this method, deferred tax assets and liabilities are recognized for the tax consequences of temporary differences between the financial reporting basis and tax basis of assets and liabilities. A valuation allowance is recorded if, based on the weight of available evidence, it is more likely than not that a deferred tax asset will not be used in future years to offset taxable income. This assessment is performed without regard to any reimbursement provisions of NICC’s tax sharing agreement with Nestlé.

NICC was a limited liability company during 2002, 2003 and 2004. Rock Island Foods, Inc. (Rock Island) was a taxable domestic corporation wholly-owned by NICC that was acquired on October 26, 2001. Effective December 26, 2001, when NICC became a taxable division of its corporate parent, both NICC’s and Rock Island’s taxable income were included in a consolidated income tax return with Nestlé. The income tax provision for the period during which NICC was a taxable entity has been prepared as though NICC was a separate taxpayer, with the exception of net operating losses that were utilized by the Nestlé consolidated group.

Effective June 27, 2003, NICC, Rock Island and DGIC and its subsidiaries became part of a new consolidated group, for which the Company was established as the parent. Effective December 25, 2004, Rock Island was merged into NICC and then, NICC was merged into the Company. Consolidated tax returns were filed for this new consolidated group for the period June 27, 2003 through December 27, 2003, and will be filed for 2004 and for future tax years.

In accordance with the Nestlé tax sharing policy through September 29, 2002, NICC was not entitled to a reimbursement for tax losses. Any intercompany taxes receivable were eliminated as an adjustment to members’ equity. Subsequent to that date, the policy was amended such that any intercompany taxes would be settled by actual payment. Reimbursement for tax losses for the period September 30, 2002 through June 26, 2003 is presented as Taxes receivable due from affiliates.

Accounting for Stock-Based Compensation

The Company accounts for its employee stock options (Note 21) at fair value under FASB Interpretation No. 44, “Accounting for Certain Transactions Involving Stock Compensation” (FIN 44).

Net Loss Per Share of Class A Callable Puttable and Class B Common Stock

The denominator for basic net loss per share includes the number of weighted-average shares outstanding. The denominator for diluted net loss per share includes the number of weighted-average shares outstanding plus the effect of potentially dilutive securities.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

The following table presents the numerators and denominators used in the basic and diluted net loss per common share calculations:


		2004			2003			2002

		(In thousands, except per share amounts)
Net loss		$	(81,891	)	$	(75,735	)	$	(70,994	)
Accretion of Class A callable puttable common stock			(260,475	)		(116,045	)

Net loss available to Class A callable puttable and Class B common stockholders		$	(342,366	)	$	(191,780	)	$	(70,994	)

Weighted-average shares of Class A callable puttable and Class B common stock-basic and diluted			94,563			78,681			64,564

Net loss per share of Class A callable puttable and Class B common stock:
	Basic	$	(3.62	)	$	(2.44	)	$	(1.10	)

	Diluted	$	(3.62	)	$	(2.44	)	$	(1.10	)

The weighted-average shares presented above for 2004 and 2003 include the shares that are now classified as Class B common stock for the entire period and the shares of Class A callable puttable common stock beginning on the Merger Closing Date. The weighted-average shares presented above for 2002 include the 64,564,315 shares that are now classified as Class B common stock. Diluted net loss per share for 2004, 2003 and 2002 is equal to basic net loss per share because the effect of common stock equivalents is anti-dilutive.

Potentially dilutive securities, calculated in terms of the weighted-average share equivalent of stock options outstanding, are excluded from the calculations of diluted net loss per share when their inclusion would have an anti-dilutive effect. During 2004 and 2003, 923,000 and 2,794,000 shares of potentially dilutive securities were excluded from the weighted-average share calculation for purposes of calculating weighted-average diluted shares and diluted loss per share. There were no potentially dilutive securities outstanding during 2002.

New Accounting Pronouncement

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 December 25, 2004.


Note 3.	The Merger Agreement

The Dreyer’s Nestlé Transaction

The Company entered into an Agreement and Plan of Merger and Contribution, dated June 16, 2002, as amended (the Merger Agreement), with DGIC, December Merger Sub, Inc., Nestlé and NICC Holdings to combine DGIC with NICC. On the Merger Closing Date, the businesses of DGIC and NICC were combined and each became a subsidiary of the Company. As a result of the Dreyer’s Nestlé Transaction, the former stockholders of DGIC (other than Nestlé) received shares of the Company’s Class A callable puttable common stock constituting approximately 33 percent of the diluted shares of the Company in exchange for their shares of DGIC common stock. Nestlé and NICC Holdings (in exchange for its contribution of the equity interest of NICC to the Company) received shares of Class B common stock of the Company constituting approximately

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

67 percent of the diluted shares of the Company. The Company’s Class A callable puttable common stock is listed on the Nasdaq National Market (NASDAQ) and began trading under the symbol “DRYR” on June 27, 2003, concurrent with the cessation of trading in DGIC stock. The Class B common stock is not listed for trading on any exchange.

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^tm 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 Integrated Brands. On June 25, 2003, the FTC issued its decision and order approving the aforementioned divestiture transaction in In the Matter of Nestlé Holdings, Inc. et al., Docket No. C-40 (the Decision and Order). On July 5, 2003 (the Divestiture Closing Date), the parties closed the transaction (the Divestiture Transaction) and the Company received $10,000,000 in consideration for the sale of the Divested Brands and Purchased Assets.

Pursuant to the APA, the parties entered into certain agreements (the Divestiture Agreements) related to: (i) manufacture of the Divested Brands by DGIC for Integrated Brands for a period of up to one year from the Divestiture Closing Date; (ii) provision of certain transition services to Integrated Brands and Eskimo Pie; (iii) delivery of the Divested Brands to customers by DGIC for a transition period of up to one year from the Divestiture Closing Date (Transition IB Product Distribution Agreement); (iv) delivery of the ice cream brands licensed to NICC (Häagen-Dazs and Nestlé brands) to customers by Eskimo Pie for a transition period of up to one year from the Divestiture Closing Date (Transition NICC Product Distribution Agreement); (v) delivery, under certain circumstances, of certain DGIC owned and licensed ice cream brands to customers by Eskimo Pie for a period of up to five years from the Divestiture Closing Date in the Territories (Drayage Agreements); and (vi) delivery of the Divested Brands, if requested by Integrated Brands, to customers in areas where DGIC maintains company-owned routes for a period of up to 10 years from the Divestiture Closing Date. Pursuant to the terms of the Drayage Agreements, Eskimo Pie has the right, under certain circumstances, to deliver certain DGIC owned and licensed ice cream products in the Territories. The right is subject to fixed dollar limits for three years from the Divestiture Closing Date, with such limits decreasing over two additional years. It is uncertain as to the exact markets within the Territories, product mix and volume of products that Eskimo Pie will choose to deliver. The Company is unable to estimate the financial implications of this right.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

agreements with Mars as of December 31, 2003. Pursuant to the Decision and Order, the joint venture between the Company and Mars was terminated, although the Company continued, at the request of Mars, to distribute Mars products through February 2004.

Integration Plan


	•	Consolidation of the functions of the DGIC and NICC headquarters into a single unit.

	•	Transfer of selling accountability from the previous NICC system to DGIC’s system, and divestiture of the NICC route structure and its supporting personnel and assets to Eskimo Pie.

	•	Transfer of certain distribution operations of NICC from various third-party distribution methods to the Company’s own route system.

	•	Elimination of redundant third-party service agreements and procurement arrangements.

	•	Realization of freight, warehousing, and manufacturing savings by reallocation of production to more efficient geographical locations, closing of the DGIC Union City, California manufacturing facility, and transfer of warehousing from third-parties to Company-owned warehouses in some areas.

	•	Execution of the divestiture and other requirements of the Decision and Order.

This Integration Plan and the related progress in its implementation are reviewed on a regular basis by the Company’s Board of Directors.


Note 4.	Accounting for the Dreyer’s Nestlé Transaction

Reverse Acquisition Purchase Accounting

The Dreyer’s Nestlé Transaction has been accounted for as a reverse acquisition under the purchase method of accounting. For this purpose, NICC was deemed the acquirer and DGIC was deemed to be the acquiree. The estimated purchase price and related preliminary allocation were recorded in two components reflecting the two primary transactions pursuant to which Nestlé and NICC Holdings acquired, or will acquire all of the DGIC shares (i.e., the initial investment beginning in 1994 that acquired 27.2 percent of the DGIC shares and the June 26, 2003 transaction to acquire the remaining 72.8 percent).

The first component of the purchase accounting was based on Nestlé’s original ownership of 9,563,016 shares, or 27.2 percent (the Nestlé Original Equity Investment), of the 35,101,634 total DGIC shares outstanding on the Merger Closing Date. The estimated purchase price for these shares was allocated to the DGIC assets and liabilities to reflect Nestlé’s historical cost as calculated under the equity method of accounting in accordance with U.S. GAAP.

The second component of the purchase accounting was based on Nestlé’s purchase of the remaining 25,538,618 shares, or 72.8 percent (the Non-Nestlé Ownership), of the 35,101,634 total DGIC shares outstanding on the Merger Closing Date. The estimated purchase price for these shares was recorded at fair value on the announcement date of the Merger Agreement (June 17, 2002), and also included the fair value of the vested and unvested stock options of DGIC and the Dreyer’s Nestlé Transaction expenses, less deferred compensation

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

relating to the unvested stock options. This purchase price was allocated to the assets and liabilities based on a valuation study completed as of June 26, 2003 by an independent third party.

The components of the estimated purchase price and preliminary allocation as of December 27, 2003 were as follows:


					Nestlé’s
					Original			Non-Nestlé
					Equity			Ownership at
					Investment			Fair Value			Total
			Notes		(27.2 percent)			(72.8 percent)			(100.0 percent)

					(In thousands)
Components of the Estimated Purchase Price:
	Nestlé Original Equity Investment in DGIC			(i)	$	193,273		$	—		$	193,273
	Class A callable puttable common stock			(ii)					1,480,933			1,480,933
	Long-term stock option liability			(iii)					372,097			372,097
	Deferred compensation (unvested stock options)			(iv)					(51,468	)		(51,468	)
	Dreyer’s Nestlé Transaction expenses			(v)					31,924			31,924

					$	193,273		$	1,833,486		$	2,026,759

Components of the Preliminary Allocation:
	Current assets, excluding inventories				$	44,661		$	119,268		$	163,929
	Inventories					29,445			78,749			108,194

		Total current assets				74,106			198,017			272,123
	Property, plant and equipment					57,200			164,071			221,271
	Other assets					1,210			3,234			4,444
	DGIC historical intangible assets					389			258			647
	Other intangibles			(vi)					391,544			391,544
	In-process research and development			(vii)					11,495			11,495
	Goodwill					152,706			1,397,504			1,550,210

		Total assets acquired				285,611			2,166,123			2,451,734

	Current liabilities			(viii)		(41,798	)		(123,597	)		(165,395	)
	Long-term debt, less current portion					(44,485	)		(118,801	)		(163,286	)
	Deferred income taxes			(ix)		(6,055	)		(90,239	)		(96,294	)

		Total liabilities assumed				(92,338	)		(332,637	)		(424,975	)

					$	193,273		$	1,833,486		$	2,026,759


(i)		Nestlé’s Original Equity Investment in DGIC — Represents the historical cost of Nestlé’s initial equity investment in DGIC common stock (9,563,016 shares, or 27.2 percent) as determined using the equity method under U.S. GAAP.

(ii)		Class A callable puttable common stock — Represents the Non-Nestlé Ownership shares (25,538,618 shares, or 72.8 percent) multiplied by the average of the closing market prices of DGIC’s common stock on the NASDAQ over the five business days beginning two business days prior to the announcement date of the Merger Agreement and ending two business days following the announcement date of the Merger Agreement ($57.99 per share, the Announcement Date Average Closing Price). As described more fully in Note 19, the Class A callable puttable common stock is being accreted to the put value of $83.00 per share.

(iii)		Long-term stock option liability — Represents the fair value of the DGIC vested and unvested stock options as calculated under the Black-Scholes option-pricing model. As described more fully in Note 19,

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)


		the vested and unvested stock options are being accreted to the put value of the Class A callable puttable common stock of $83.00 per share.

(iv)		Deferred compensation (unvested stock options) — Represents the deferred compensation associated with the unvested stock options. The intrinsic value of the unvested stock options was allocated to unearned compensation to the extent future service is required in order to vest the unvested stock options. As described more fully in Note 19, this unearned compensation will be charged to stock compensation expense, a component of Selling, general and administrative expense, as services are performed.

(v)		Dreyer’s Nestlé Transaction expenses — Represents the Dreyer’s Nestlé Transaction expenses incurred and paid by NICC and an affiliate of Nestlé. As described more fully in Note 20, substantially all of these expenses were recorded as a capital contribution and classified as Class B common stock capital in excess of par. The remainder was paid directly by NICC.

(vi)		Other intangibles — Represents the identifiable intangible assets relating to the Non-Nestlé Ownership purchase price allocation. See Note 11 for more detail of definite-lived and indefinite-lived intangible assets.

(vii)		In-process research and development — Pursuant to FASB Interpretation No. 4, “Applicability of FASB Statement No. 2 to Business Combinations Accounted for by the Purchase Method” (FIN 4), the acquired in-process research and development costs have been expensed. The in-process research and development costs relate to a new product that DGIC is developing to provide consumers with an enhanced ice cream eating experience. The initial development work on a subset of the project had been completed as of the Merger Closing Date. An appraisal was performed by an independent third party to determine the fair value of these costs; a discounted probable future cash flow analysis was performed, anticipating material changes from the historical cash flows, such as higher margins, due to the superiority of the new product compared with the old product. A 13 percent discount rate was applied, as well as an exponentially declining (20 percent per year) probability factor of continued business, to each year of the projection period and to the residual value. Cash flows associated with the project commenced in 2004.

(viii)		Current liabilities — Included in the Non-Nestlé Ownership current liabilities were certain liabilities that were incurred upon the closing of the Dreyer’s Nestlé Transaction relating to the closing of the Divestiture Transaction and the implementation of the Integration Plan. These liabilities were included in the purchase price to the extent of the 72.8 percent Non-Nestlé Ownership and the remaining 27.2 percent were charged to expense. The liabilities relating to the Divestiture Transaction of $10,169,000 consisted of a cancellation fee of $5,000,000 paid to Godiva Chocolatier, Inc. for the assignment of the license of the Godiva brand to Integrated Brands, transaction expenses incurred by CoolBrands of $1,977,000 that were reimbursed by the Company, and marketing expenses of $3,192,000 related to the Divested Brands that were paid or are payable by the Company. The liabilities relating to the Integration Plan of $6,288,000 consisted of Severance and retention expenses of $5,754,000 paid to employees of the Union City facility (Note 6), and an inventory reserve of $534,000 related to the termination of the Mars joint venture.

(ix)		Deferred income taxes — Represents the deferred income taxes recorded as a result of the Dreyer’s Nestlé Transaction purchase accounting. These deferred income taxes relate to the revalued increase in book value for inventory, fixed assets and intangible assets and to the Dreyer’s Nestlé Transaction expenses capitalized (v). These deferred income taxes were established using a 39 percent effective rate. In addition, deferred income taxes were recorded relating to the income tax benefit from the exercise of nonqualified employee stock options issued in connection with the nontaxable Dreyer’s Nestlé Transaction that were fully vested on the Merger Closing Date and to the severance payments made as a result of the Union City facility closure (Note 6). These deferred income taxes were established using a 38 percent effective rate, the rate the Company believed would be in effect at the time the deferred tax temporary differences reverse.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Reversal of Accrued Divestiture Expenses) Loss on Divestiture

The (Reversal of accrued divestiture expenses) loss on divestiture included in the 2004 and 2003 Consolidated Statements of Operations consisted of the following:


	2004			2003

	(In thousands)
Impairment of Purchased Assets (Note 10)	$	—		$	11,867
Loss on sale of Divested Brand inventory (Note 8)					223
(Reversal of accrued divestiture expenses) divestiture expenses		(216	)		2,851

	$	(216	)	$	14,941

Pro Forma Disclosures

The following table summarizes unaudited pro forma financial information assuming the Dreyer’s Nestlé Transaction and the Divestiture Transaction (Note 3) had occurred at the beginning of the periods presented in 2003 and in 2002. This pro forma financial information is for informational purposes only and does not reflect any operating efficiencies or inefficiencies which may result from the Dreyer’s Nestlé Transaction and the Divestiture Transaction and, therefore is not necessarily indicative of results that would have been achieved had the businesses been combined during the periods presented. In addition, the preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions. These estimates and assumptions affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. The pro forma adjustments use estimates and assumptions based on currently available information. Management believes that the estimates and assumptions are reasonable and that the significant effects of the Dreyer’s Nestlé Transaction and the Divestiture Transaction are properly reflected. However, actual results may materially differ from these estimates and assumptions. As the Dreyer’s Nestlé Transaction and the Divestiture Transaction occurred prior to the 2004 fiscal year, pro forma disclosures do not apply in 2004.


	2003⁽¹⁾			2002

	(In thousands, except per share
	amounts)
Pro forma total net revenues	$	1,761,325		$	1,797,637

Pro forma net loss	$	(95,387	)	$	(55,189	)

Pro forma net loss available to Class A callable puttable and Class B common stockholders⁽²⁾	$	(336,890	)	$	(296,656	)

Pro forma net loss per share of Class A callable puttable and Class B common stock⁽³⁾	$	(3.74	)	$	(3.29	)


⁽¹⁾	Pro forma net loss includes certain expenses directly related to the Dreyer’s Nestlé Transaction and the Divestiture Transaction which may not have a significant impact on the ongoing results of operations of the Company. These expenses include, among others, In-process research and development, Severance and retention expense, and Loss on divestiture.

⁽²⁾	Accretion of the Class A callable puttable common stock (Note 19) increases the pro forma net loss to arrive at the pro forma net loss available to Class A callable puttable and Class B common stockholders.

⁽³⁾	Pro forma net loss per Class A callable puttable and Class B common share was calculated by dividing pro forma net loss available to Class A callable puttable and Class B common stockholders by the pro forma weighted-average Class A callable puttable and Class B shares outstanding as if the Dreyer’s Nestlé

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)


	Transaction had occurred at the beginning of the periods presented. The unaudited pro forma financial information reports net losses. Therefore, the pro forma diluted net loss per common share is equal to the pro forma basic net loss per common share, because the effect of common stock equivalents is anti-dilutive.

Note 5. Other Revenues

Included in Other revenues are amounts received from Integrated Brands for the manufacture and distribution of Divested Brands subsequent to the Divestiture Closing Date. Also included in Other revenues are the reimbursements received from Eskimo Pie for the payroll expenses incurred by the Company for employees working for Eskimo Pie in the divested distribution centers in the Territories, as well as revenues related to transition services provided to Integrated Brands and Eskimo Pie to support these divested distribution centers. The cost of providing these services is included in Cost of goods sold. In addition, Other revenues include freezer rental revenue, special handling revenue and the Shoppe Company revenue.

Other revenues for 2004, 2003 and 2002 consisted of the following:


		2004		2003		2002

		(In thousands)
Revenues from Integrated Brands for:
	Manufacture of Divested Brands	$	25,694	$	16,030	$	—
	Distribution of Divested Brands		10,066		8,975

			35,760		25,005
Eskimo Pie payroll reimbursements and transition services			914		14,372
Freezer rental revenue			1,277		1,774		2,222
Special handling revenue			333		1,761		2,628
The Shoppe Company revenue			2,452

		$	40,736	$	42,912	$	4,850


Note 6.	Severance and Retention Expense

Integration Plan-Union City Severance and Retention Plan

As of the Merger Closing Date, the Company developed a detailed plan for the integration of the NICC and DGIC businesses and the realization of synergies arising from the Dreyer’s Nestlé Transaction (the Integration Plan) (Note 3). The Company formulated the Integration Plan to restructure and integrate certain activities. During 2003, as a step in the Integration Plan, the Company decided to close its Union City, California manufacturing facility. This facility closed in February 2004 and production was transferred to other facilities.

In 2003, when the affected employees were notified of their termination, the Company estimated that severance and related costs for the closure would total approximately $5,754,000. Of this total, $4,187,000, representing the 72.8 percent Non-Nestlé Ownership, was recorded as a component of the purchase price of DGIC resulting in a corresponding increase to Goodwill during 2003. The remaining $1,567,000, representing the 27.2 percent Nestlé Original Equity Investment, was charged to expense during 2003. During the year ended December 25, 2004, the Company adjusted severance and related benefits by $(208,000). Through December 25, 2004, the Company eliminated positions for 142 manufacturing employees who were covered under collective bargaining agreements with Teamsters Local 853 and International Union of Operating Engineers, Stationary Local No. 39, and for 18 nonunion employees in the research and development department. Through December 25, 2004, 156 of the 160 employees had been paid severance. The majority of the remaining liability of $1,147,000 is expected to be paid during 2005.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Severance and retention expense (relating to the Integration Plan), included in 2004 and 2003, consisted of the following:


	Dec. 25, 2004			Dec. 27, 2003

	(In thousands)
Severance benefits	$	(344	)	$	1,545
Retention benefits		136			22

	$	(208	)	$	1,567

NICC Severance and Retention Plan

Prior to the closing of the Dreyer’s Nestlé Transaction, NICC adopted a severance and retention plan for employees of NICC (NICC Severance and Retention Plan). The purpose of this plan was to reduce employee turnover in the period following the closing of the Dreyer’s Nestlé Transaction. In addition, in connection with the Dreyer’s Nestlé Transaction, the Company agreed to forgive all outstanding amounts under loan agreements with NICC employees if the NICC employee was terminated as a result of the integration, or by December 31, 2003, whichever occurred first. During the years ended December 25, 2004 and December 27, 2003, the Company expensed severance and retention benefits of $2,542,000 and $49,519,000, respectively. The severance plan expenses relate to 822 positions, primarily at the distribution centers that were sold to Eskimo Pie. Through December 25, 2004, 810 employees have been paid severance and 12 employees have been notified but have not yet been paid severance. In addition, the Company also expects to eliminate up to an additional 10 positions in finance and administration. The majority of the remaining liability of $506,000 is expected to be paid during 2005. The estimated maximum liability for the remaining vested and unvested severance and retention is approximately $889,000. The majority of this amount is expected to be paid during 2005.

Severance and retention expense (relating to the NICC Severance and Retention Plan) included in 2004 and 2003, consisted of the following:


	Dec. 25, 2004		Dec. 27, 2003

	(In thousands)
Severance benefits	$	1,097	$	28,472
Retention benefits		1,445		18,506
Forgiveness of employee loans				2,541

	$	2,542	$	49,519

Integration Plan and NICC Severance and Retention Plan

Cumulative severance and retention expense incurred through December 25, 2004, including expenses for both the Integration Plan and for the NICC Severance and Retention Plan, consisted of the following:


			NICC Severance
	Integration		and Retention		Total

	(In thousands)
Severance benefits	$	1,201	$	29,569	$	30,770
Retention benefits		158		19,951		20,109
Forgiveness of employee loans				2,541		2,541

	$	1,359	$	52,061	$	53,420

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

The following table summarizes the activity for the accrued severance and retention liability included in Accrued payroll and employee benefits:


				NICC Severance
	Integration			and Retention			Total

	(In thousands)
Accrual at December 27, 2003	$	5,754		$	6,891		$	12,645
Additions to accrual		502			5,977			6,479
Adjustments to accrual		(503	)		(3,435	)		(3,938	)
Payments made		(4,606	)		(8,927	)		(13,533	)

Accrual at December 25, 2004	$	1,147		$	506		$	1,653


Note 7.	Trade Accounts Receivable, Net and Significant Customers

Trade accounts receivable, net at December 25, 2004 and December 27, 2003 consisted of the following:


	2004			2003

	(In thousands)
Trade accounts receivable	$	98,742		$	116,049
Allowance for doubtful accounts		(5,987	)		(5,668	)

	$	92,755		$	110,381

The activity in the allowance for doubtful accounts for 2004, 2003 and 2002 consisted of the following:


	2004			2003			2002

	(In thousands)
Balance at beginning of period	$	5,668		$	3,104		$	1,956
DGIC acquired balances					2,294
Additions to costs and expenses		706			3,730			1,372
Deductions		(387	)		(3,460	)		(224	)

Balance at end of period	$	5,987		$	5,668		$	3,104

No customers accounted for 10 percent or more of Total net revenues in 2004, 2003 or 2002. Since the closing of the Dreyer’s Nestlé Transaction, sales between NICC and DGIC were considered intercompany transactions and eliminated in consolidation. As a result, DGIC is no longer considered a customer for financial reporting purposes.


Note 8.	Inventories

Inventories at December 25, 2004 and December 27, 2003 consisted of the following:


	2004		2003

	(In thousands)
Raw materials	$	16,940	$	18,752
Finished goods		161,167		129,674

	$	178,107	$	148,426

Inventories on consignment with retailers and distributors included in the above balances at December 25, 2004 and December 27, 2003 totaled $12,843,000 and $10,674,000 respectively. Inventory write-downs in 2004

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

and 2003 were not material. Inventory write-downs associated with packaging changes and retail spoils, included in Cost of goods sold in 2002, totaled $6,073,000.

Loss on Sale of Divested Brand Inventory

The Divested Brand inventory was sold to Integrated Brands on the Divestiture Closing Date. The net book value of the Divested Brand inventory of $8,405,000 was reduced to the purchase price of $8,182,000, resulting in a $223,000 loss on divestiture for 2003. This amount is included in (Reversal of accrued divestiture expense) loss on divestiture in 2003.


Note 9.	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. The Company periodically purchases 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. The Company typically holds its butter investments for up to one month.

Investments in butter, included in Prepaid expenses and other had a market value totaling $410,000 and $6,277,000 at December 25, 2004 and December 27, 2003, respectively. During the years ended 2004, 2003 and 2002, losses from butter investments, included as a component of Other (income) expense, net, totaled $1,704,000, $937,000 and $1,449,000, respectively.


Note 10.	Property, Plant and Equipment, Net

Property, plant and equipment, net at December 25, 2004 and December 27, 2003 consisted of the following:


	Lives		2004			2003

			(In thousands)
Machinery and equipment		3 to 15 years	$	234,622		$	191,817
Buildings and improvements		7 to 40 years		129,584			124,533
Retail freezer cabinets with customers and distributors		5 years		42,457			47,021
Computer equipment and software		3 to 5 years		26,667			42,247
Office furniture and fixtures		3 to 8 years		4,954			5,419

				438,284			411,037
Accumulated depreciation and amortization				(105,813	)		(70,741	)
Allowance for retail freezer retirements							(5,850	)

				332,471			334,446
Land		Not depreciable		33,247			20,776
Construction in progress		Not depreciable		153,844			37,391

			$	519,562		$	392,613

Depreciation expense for property, plant and equipment was $68,943,000, $47,705,000 and $25,229,000 for 2004, 2003 and 2002, respectively.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Capitalized Interest

Interest capitalized relating to capital assets under construction was $1,681,000 and $379,000 in 2004 and 2003. No interest was capitalized during 2002.

Allowance for Retail Freezer Retirements

The change in the allowance for freezer retirements in 2004 and 2003 consisted of the following:


	(In thousands)
Balance at December 31, 2002	$	—
Provision for freezer retirements		(6,992	)
Reduction in freezer allowance		1,142

Balance at December 27, 2003		(5,850	)
Provision for freezer retirements
Reduction in freezer allowance		5,850

Balance at December 25, 2004	$	—

The Company rents its freezer cabinets to retailers under short-term contracts. These short-term contracts are generally month-to-month arrangements. The net book value of freezer cabinets with retail customers and independent distributors was as follows:


	2004			2003

	(In thousands)
Original cost	$	42,457		$	47,021
Accumulated depreciation		(24,596	)		(18,639	)

		17,861			28,382
Allowance for freezer retirements					(5,850	)

Net book value	$	17,861		$	22,532

Change in Estimated Useful Lives

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

expense and a corresponding increase in net loss of $(1,513,000), after the effect of the related income tax benefit, or $(.02) per diluted common share.

During the second quarter of 2003, the Company changed to a statistical-based sampling methodology to estimate retail freezer cabinet retirements (Note 2). Based on the results of the initial statistical sample and recent historical experience, the Company concluded that the estimated useful lives of these assets should be shortened from eight to five years on a prospective basis as of the beginning of the third quarter of 2003. In 2004, this change resulted in a $1,500,000 increase in depreciation expense and a corresponding increase in net loss of $(925,000), after the effect of the related income tax benefit, or $(.01) per diluted common share. In 2003, this change resulted in a $3,000,000 increase in depreciation expense and a corresponding increase in net loss of $(1,980,000), after the effect of the related income tax benefit, or $(.03) per diluted common share.

Loss on Sale of Distribution Assets

The Purchased Assets (Note 3) were sold to Integrated Brands on the Divestiture Closing Date. The net book value of the Purchased Assets, primarily distribution assets, of $13,685,000 was reduced to the purchase price of $1,818,000 during the year ended December 27, 2003, resulting in an impairment of assets held for sale of $11,867,000. This $11,867,000 amount is included in (Reversal of accrued divestiture expense) loss on divestiture in 2003 (Note 4).


Note 11.	Other Intangibles, Net

Other intangibles, net at December 25, 2004 and December 27, 2003 consisted of the following:


				Dec. 25, 2004						Dec. 27, 2003

						Accum.						Accum.
		Lives		Gross		Amort.		Net		Gross		Amort.		Net

		(In thousands)
Definite-lived other intangibles
	Distribution rights		0.5 year	$	-	$	-	$	-	$	292	$	292	$	-
	Joint venture agreement		0.5 year								218		218		-
	Foreign trademark		0.8 year		66		66		-		66		44		22
	Whole Fruit Bar brand		1 year		1,819		1,819		-		1,819		919		900
	Customer List		3 years		425		24		401
	Covenants not to compete		4.3 years		289		102		187		289		34		255
	License agreement⁽¹⁾		5 years		6,101		514		5,587
	Distribution agreement⁽¹⁾		8.2 years								3,783		239		3,544
	Call option agreement⁽¹⁾		8.3 years								1,674		106		1,568
	Flavor formulations		10 years		4,365		655		3,710		4,365		221		4,144
	Technology⁽¹⁾		10 years		1,743		73		1,670
	Customer relationships - foodservice		14 years		800		86		714		800		30		770
	Customer relationships - non-grocery		27 years		6,901		383		6,518		6,901		129		6,772
	Customer relationships - grocery		29 years		44,653		2,311		42,342		44,653		778		43,875
	Independent distributors		29 years		2,547		132		2,415		2,547		44		2,503
	Favorable leasehold arrangements		84.6 years		728		13		715		728		4		724

					70,437		6,178		64,259		68,135		3,058		65,077

Indefinite-lived other intangibles
	Dreyer’s brand name		Indefinite		134,453				134,453		134,453				134,453
	Edy’s®⁽²⁾brand name		Indefinite		176,507				176,507		176,507				176,507
	Silhouette trade names⁽¹⁾		Indefinite		57,519				57,519
	Base formulations/brand processes		Indefinite		13,096				13,096		13,096				13,096

					381,575				381,575		324,056				324,056

	Total other intangibles			$	452,012	$	6,178	$	445,834	$	392,191	$	3,058	$	389,133

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)


⁽¹⁾	The distribution agreement and call option agreement relate to Silhouette and were acquired in the Dreyer’s Nestlé Transaction. These intangibles were included in the purchase price of the Silhouette acquisition that closed on July 26, 2004. As a result of the Silhouette acquisition, the license agreement, technology and Silhouette trade names were acquired.

⁽²⁾	Edy’s Grand Ice Cream, a wholly-owned subsidiary of DGIC (Edy’s).

Amortization expense of other intangibles for 2004, 2003 and 2002 was $4,335,000, $3,583,000 and $175,000, respectively. Future estimated amortization expense of other intangibles at December 25, 2004 is as follows:


		(In thousands)
Year ending:
	2005	$	4,052
	2006		3,975
	2007		3,932
	2008		3,766
	2009		3,252
Thereafter			45,282

		$	64,259


Note 12.	Goodwill

The changes in the carrying amount of Goodwill for 2004 and 2003 consisted of the following:


	(In thousands)
Balance at December 31, 2002	$	381,215
Goodwill acquired during year		1,550,210

Balance at December 27, 2003		1,931,425
Deferred tax adjustments, net⁽¹⁾		24,671
Income tax benefit from exercise of stock options⁽²⁾		(11,301	)
Goodwill acquired during year		775
Adjustment of acquisition price		(362	)

Balance at December 25, 2004	$	1,945,208


⁽¹⁾	The Company recorded a noncash debit to Goodwill and a credit to long-term deferred tax assets related to the tax consequences of temporary differences between the financial reporting basis and tax basis for assets purchased in acquisitions.

⁽²⁾	The Company recorded a debit to long-term deferred tax assets and a noncash credit to Goodwill related to the income tax benefit from disqualifying dispositions and from the exercise of nonqualifying employee stock options issued in connection with the nontaxable Dreyer’s Nestlé Transaction that were fully vested on the Merger Closing Date.


	Goodwill Impairment Test

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

such, the NICC goodwill impairment methodology was phased-out and replaced by a methodology similar to that previously employed by DGIC.

The Company’s impairment tests at June 2003 and August 2003 each reported a fair value in excess of the carrying value for each of the reporting units. The carrying value of all of the Company’s reporting units closely approximates its fair market value. As a result, a moderate decline in the estimated fair market value of any of its reporting units could result in a goodwill impairment charge and that impairment charge could be material.


Note 13.	Accounts Payable and Accrued Liabilities

Accounts payable and accrued liabilities at December 25, 2004 and December 27, 2003 consisted of the following:


	2004		2003

	(In thousands)
Accounts payable	$	42,758	$	29,883
Accrued liabilities		143,105		100,477

	$	185,863	$	130,360


Note 14.	Employee Benefit Plans


	Pension and 401(k) Plans

The Company maintains a defined contribution retirement plan (the Pension Plan) for employees not covered by collective bargaining agreements. The Pension Plan provides retirement and other benefits based upon the assets of the Pension Plan held by the trustee. The Company also maintains a salary deferral plan (the 401(k) Plan) under which it may make a matching contribution of a percentage of each participant’s annual deferred salary amount.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Pension expense and 401(k) matching contributions under these plans were approximately $17,872,000, $11,718,000 and $7,570,000 in 2004, 2003 and 2002, respectively. The Company’s liability for pension and 401(k) matching contributions, included in Accrued payroll and employee benefits was $18,489,000 and $11,096,000 at December 25, 2004 and December 27, 2003, respectively.

Pension expense for employees covered by multi-employer retirement plans under collective bargaining agreements was $784,000 in 2004 and $630,000 in 2003, respectively. The Company had no employees covered by multi-employer retirement plans under collective bargaining agreements in 2002.


	Supplemental Management Retirement and Savings Plan

The Company maintained a nonqualified, unfunded and unsecured retirement and savings plan for employees meeting certain eligibility requirements during 2003 and 2002 (the Supplemental Management Retirement and Savings Plan). Contributions commence upon reaching the annual qualified plan limits of the Pension Plan and the 401(k) Plan. The Supplemental Management Retirement and Savings Plan was terminated in 2004 and any remaining employees previously covered by it were transferred to the Deferred Compensation Plan described below.

Expense and matching contributions under the Supplemental Management Retirement and Savings Plan were approximately $470,000 and $381,000 in 2003 and 2002, respectively. The Company’s liability for accrued contributions under this plan of $3,819,000 at December 27, 2003, included in Other long-term obligations was paid out to qualified employees and/or transferred to the Deferred Compensation Plan for remaining employees. Thus there was no liability for this plan at December 25, 2004.


	Long-Term Incentive Compensation

NICC established a long-term incentive compensation program for key management personnel based on the economic and operating profitability of NICC for the three-year period ended December 31, 2002.

Economic profit is defined as after-tax profit less a theoretical charge for capital employed in the business. Participants elected to defer all or part of any payment under this program and had such amounts included in the Supplemental Management Retirement and Savings plan. Expense (benefit) for these long-term incentives was $(3,011,000) in 2002. During March 2003 upon termination of this program, NICC paid $2,449,000 under this program of which participants deferred $239,000.


	Long-Term Incentive Plan

The Merger Agreement provides that the Company implement a long-term incentive plan providing long-term incentive compensation opportunities comparable to those provided by DGIC under its former stock option plans. The Company’s Board of Directors adopted the Dreyer’s Grand Ice Cream Holdings, Inc. 2004 Long-Term Incentive Plan (the 2004 LTIP) which provides incentive compensation for participants in the 2004 LTIP based on increases in the value of the Company’s earnings. Awards granted under the 2004 LTIP generally vest at the rate of 40 percent on January 1 of the second fiscal year following the date on which an award is granted and to the extent of 20 percent of the award on each subsequent January 1, provided that vesting of an award shall be accelerated upon a participant’s death, disability or retirement or upon early termination of the plan. Awards granted under the 2004 LTIP generally have a term of 10 years. Based on the Company’s performance in 2004, there was no current year expense or liability recorded in the Company’s Consolidated Financial Statements with respect to the 2004 LTIP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)


	Deferred Compensation Plan

In April 2004, the Company implemented an unfunded, non-qualified deferred compensation plan (the Deferred Compensation Plan). The Deferred Compensation Plan allows a select group of management, as determined by the Deferred Compensation Plan Committee, to defer payment of a portion of their compensation. The deferred compensation will later be paid to the participants or their designated beneficiaries upon retirement, death or separation from the Company. To support the Deferred Compensation Plan, the Company has elected to purchase Company-owned life insurance. The cash surrender value of the Company-owned life insurance related to deferred compensation, included in Other assets, was $4,141,000 at December 25, 2004. The liability for the deferred compensation, included in Other long-term obligations, was $4,196,000 at December 25, 2004. For the year ended December 25, 2004, participant contributions totaled $3,885,000. The difference between the cumulative participant contributions and the deferred compensation represents the change in market value during the three quarters ended December 25, 2004.


Note 15.	Income Tax Benefit

The income tax benefit consisted of the following:


		2004			2003		2002

		(In thousands)
Current:
	Federal	$	4,990		$	10,925	$	29,035
	State		(258	)		611		4,011

			4,732			11,536		33,046


Deferred:
	Federal		40,261			23,339		3,679
	State		5,900			4,140		315

			46,161			27,479		3,994

		$	50,893		$	39,015	$	37,040

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

The net deferred income tax (liability) asset at December 25, 2004 and December 27, 2003 consisted of the following:


		2004			2003

		(In thousands)
Net deferred income tax assets — current:
	Accrued liabilities	$	(964	)	$	149
	Bad debts		2,410			2,178
	Inventories		(306	)		1,578
	Employee benefits		2,839			3,406
	Union City facility closure (Note 6)		303			1,111
	Other		1,361			8,843

			5,643			17,265

Net deferred income tax liabilities — noncurrent:
	Goodwill and other intangible assets and related amortization		(189,108	)		(156,953	)
	Depreciation		(65,860	)		(43,127	)
	Net operating losses		192,844			114,984
	Deferred compensation (unvested stock options)		10,009			7,317
	Tax credit carryforwards		7,219			6,930
	Penalty for co-pack arrangement liability		5,543
	Other		953			(10,216	)

			(38,400	)		(81,065	)

		$	(32,757	)	$	(63,800	)

The Federal statutory income tax rate is reconciled to the Company’s effective income tax rate as follows:


	2004			2003			2002

Federal statutory income tax rate		35.0	%		35.0	%		35.0	%
State income taxes, net of Federal tax benefit		4.1			3.2			2.7
Change in tax status — prior period true-up								(2.9	)
In-process research and development					(3.5	)
Other		(0.8	)		(0.7	)		(0.5	)

		38.3	%		34.0	%		34.3	%

At December 25, 2004, the Company had net operating losses totaling $491,275,000 which can be carried forward 20 years to the extent taxable income will be generated. No valuation allowance for these assets has been recorded because the Company believes that it is more likely than not that these carryforwards will be used in future years to offset taxable income.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)


Note 16.	Long-Term Debt

Long-term debt at December 25, 2004 and December 27, 2003 consisted of the following:


	2004		2003

	(In thousands)
Nestlé S.A. credit facility due 2005 at LIBOR plus 0.5 percent and 1.2 percent, respectively	$	350,000	$	125,000
Nestlé Capital Corporation sub-facility due 2005 at LIBOR plus 0.5 percent		4,600
Note purchase agreements with principal due through 2008 and interest payable semiannually at rates ranging from 8.06 percent to 8.34 percent				26,429

		354,600		151,429
Current portion				(2,143	)

	$	354,600	$	149,286

The aggregate annual maturities of long-term debt as of December 25, 2004 for the next five years are as follows:


Year	(In thousands)
2005	$	—
2006		354,600
2007
2008
2009

	$	354,600

The Company utilizes the following long-term debt facilities as a primary source of liquidity:


	Nestlé S.A. Credit Facility

As of December 25, 2004 and December 27, 2003, interest expense for borrowings from Nestlé S.A. totaled $5,158,000 and $1,701,000, respectively.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)


	Nestlé Capital Corporation Sub-Facility

As of December 25, 2004, the interest expense under this facility totaled $105,000.

Note Purchase Agreements

On June 6, 1996, the Company’s subsidiary, DGIC, borrowed $50,000,000 under certain Note Purchase Agreements (the Notes) with various noteholders. On June 26, 2003, a third amendment to these Notes became effective under which the Company was added as a party to the Notes and became, along with NICC and Edy’s, a guarantor of the Notes. The Notes had scheduled principal payments through 2008 and interest payable semiannually at rates ranging from 8.06 percent to 8.34 percent. Under the terms of the third amendment, the interest rates effective on the remaining principal could have increased by 0.5 percent or 1.0 percent depending on performance under various financial covenants.

Revolving Line of Credit

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Fair Value of Financial Instruments


Note 17.	Leasing Arrangements

The Company conducts certain of its operations from leased facilities, which include land and buildings, production equipment, and certain vehicles. All of these leases expire within a period of eight years (including renewal options) except one that has approximately 83 years remaining (including renewal options). Certain of these leases include non-bargain purchase options.

Future minimum rental payments required under noncancelable operating leases with terms in excess of one year at December 25, 2004 for the next five years and thereafter are as follows:


Year	(In thousands)
2005	$	11,631
2006		6,702
2007		4,632
2008		3,640
2009		3,164
Thereafter		4,356

	$	34,125

Rental expense under all operating leases, both cancelable and noncancelable, were as follows:


	2004			2003			2002

	(In thousands)
Minimum rentals	$	15,448		$	15,751		$	11,746
Less: Sublease rentals		(1,012	)		(3,954	)		(1,000	)

	$	14,436		$	11,797		$	10,746


Note 18.	Long-term Stock Option Liability

In connection with the Dreyer’s Nestlé Transaction, each option to purchase one share of DGIC common stock was converted into an option to purchase one share of the Company’s Class A callable puttable common stock on the Merger Closing Date. Except as provided below, each unvested option to purchase DGIC’s common stock under DGIC’s existing stock option plan became fully vested on June 14, 2002, the date that DGIC’s board of directors approved the Merger Agreement. In connection with the execution of the Merger Agreement, certain employees entered into three-year employment agreements in exchange for their waiver of the accelerated vesting of their unvested stock options. The employment agreements became effective on the Merger Closing Date.

In accordance with FIN 44 (Note 2), these stock options were recorded at fair value on the Merger Closing Date and were included in the purchase price of DGIC. The fair values of the vested and unvested options were

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

determined using the Black-Scholes option pricing model, as of the Merger Closing Date, using the following assumptions:


Risk-free interest rate		1.66%
Dividend yield		0.3%
Expected volatility⁽¹⁾		23.8%
Expected life (years)		2.89
Weighted-average expected term (years)		2.82


⁽¹⁾	As a result of the unique features of these securities, such as the existence of the put and call feature and the short-term nature of the security, expected volatility was estimated to be significantly less than the historical volatility of DGIC’s common stock, which has ranged between 30 and 45 percent prior to the Dreyer’s Nestlé Transaction.

The activity in the long-term stock option liability for 2003 and 2004 consisted of the following:


	Vested			Unvested
	Stock			Stock
	Options			Options			Total

	(In thousands)
Fair value at June 26, 2003	$	318,769		$	53,328		$	372,097
Fair value of stock option exercises		(238,666	)					(238,666	)
Fair value of newly vested stock options		2,385			(2,385	)		—
Accretion of stock options		1,305			385			1,690

Fair value at December 27, 2003		83,793			51,328			135,121
Fair value of stock option exercises		(64,664	)					(64,664	)
Fair value of newly vested stock options		18,471			(18,471	)		—
Accretion of stock options		2,134			618			2,752

Fair value at December 25, 2004	$	39,734		$	33,475		$	73,209

The original fair value of the vested stock options of $318,769,000 was calculated using the number of vested stock options outstanding as of June 26, 2003 of 5,252,702 multiplied by the weighted-average fair value per vested option share. The weighted-average fair value per vested option share as determined using the Black-Scholes option pricing model was $60.69 at June 28, 2003. The weighted-average exercise price per vested option share on the remaining vested stock options outstanding was $23.75 and $21.46 at December 25, 2004 and December 27, 2003, respectively. As the vested stock options are exercised, the fair value of the exercised options decreases the Long-term stock option liability and increases the Class A callable puttable common stock. The fair value of stock options exercised was $64,664,000 and $238,666,000 for 2004 and 2003, respectively.

The original fair value of the existing unvested stock options of $53,328,000 was calculated using the number of unvested options outstanding as of June 26, 2003 of 986,911 multiplied by the weighted-average fair value per unvested option share. The weighted-average fair value per unvested option share as determined using the Black-Scholes option pricing model was $54.03 at June 28, 2003. The weighted-average exercise price per unvested option share was $25.62 and $25.63 at December 25, 2004 and December 27, 2003, respectively. The fair value of the unvested stock options that vested in 2004 and 2003 was $18,471,000 and $2,385,000, respectively.

The vested and unvested options will accrete to fair value using the effective interest rate method until December 1, 2005 (Initial Put Date), when the put value of the Class A callable puttable common stock will be $83 per share (Note 19). The weighted-average fair value per share of the vested and unvested options at the

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Initial Put Date will be $64.38 and $55.96 (representing the $83.00 put price, less the weighted average option grant price), respectively.

Pursuant to FIN 44, paragraph 85, the intrinsic value of the unvested options was allocated to unearned compensation to the extent future service is required in order to vest the unvested options. The intrinsic value of the unvested options at June 26, 2003 was $51,468,000. This unearned compensation is being expensed throughout the term of the three-year employment agreements as service is performed and as the unvested options vest. Stock option compensation expense, included in Selling, general and administrative expenses was $16,788,000 and $18,148,000 in 2004 and 2003, respectively. The short-term portion of unearned compensation, included in Prepaid expenses and other totaled $13,207,000 and $16,788,000 at December 25, 2004 and December 27, 2003, respectively. The long-term portion of unearned compensation, included in Other assets totaled $3,326,000 and $16,532,000 at December 25, 2004 and December 27, 2003, respectively.

Note 19. Class A Callable Puttable Common Stock

The Class A callable puttable common stock is classified as temporary equity (mezzanine capital) because of its put and call features. Each stockholder of Class A callable puttable common stock has the option to require the Company to purchase (put) all or part of their shares at $83 per share during two periods:


	•	December 1, 2005 to January 13, 2006; and

	•	April 3, 2006 to May 12, 2006.

The Class A callable puttable common stock may be redeemed (called) by the Company at the request of Nestlé S.A., in whole, but not in part, at a price of $88 per share during the call period beginning on January 1, 2007 and ending on June 30, 2007.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

The following table summarizes the 2004 and 2003 activity of the Class A callable puttable common stock:


						Capital in
				Par		Excess of			Notes
	Shares			Value		Par			Receivable			Total

	(In thousands)
Balances at December 31, 2002		—		$	—	$	—		$	—		$	—
Conversion of DGIC common stock to Class A callable puttable common stock		25,539			255		1,480,678						1,480,933
Conversion of notes receivable from DGIC common stockholders to notes receivable from Class A callable puttable common stockholders										(1,932	)		(1,932	)
Stock option exercises		3,928			39		239,676						239,715
Shares surrendered in stock option exercises		(18	)				(1,049	)					(1,049	)
Cash received for stock option exercises							68,290						68,290
Accretion of Class A callable puttable common stock							116,045						116,045
Stock compensation expense							484						484
Collection of notes receivable from Class A callable puttable common stockholders										828			828

Balances at December 27, 2003		29,449			294		1,904,124			(1,104	)		1,903,314
Stock option exercises		1,044			11		65,113						65,124
Shares surrendered in stock option exercises		(7	)				(458	)					(458	)
Cash received for stock option exercises							21,724						21,724
Accretion of Class A callable puttable common stock							260,475						260,475
Stock compensation expense							250						250
Collection of notes receivable from Class A callable puttable common stockholders										611			611

Balances at December 25, 2004		30,486		$	305	$	2,251,228		$	(493	)	$	2,251,040

The Class A callable puttable common stock is being accreted from the closing of the Dreyer’s Nestlé Transaction at the Announcement Date Average Closing Price to the put value of $83 at the Initial Put Date, calculated using the effective interest rate method. Accretion of the Class A callable puttable common stock for 2004 and 2003 totaled $260,475,000 and $116,045,000, respectively.

If the put right is exercised by the Class A callable puttable common stockholders, the Company’s obligation to redeem the Class A callable puttable common stock and pay the put price of $83 per share could be conditioned upon the Company’s receipt of funds from Nestlé or Nestlé S.A. Pursuant to the terms of the Governance Agreement (the Governance Agreement) entered into on the Merger Closing Date among the Company, Nestlé and Nestlé S.A., upon the exercise of the put right or call right, Nestlé or Nestlé S.A. has agreed to contribute to the aggregate funds to be paid to stockholders under the put right or call right. However, the Governance Agreement provides that, rather than funding the aggregate amounts under the put right or call right, Nestlé or Nestlé S.A. may elect, in these circumstances, to offer to purchase shares of Class A callable puttable common stock directly from the Company’s stockholders.

The Governance Agreement among the Company, Nestlé and Nestlé S.A., which was entered into at the closing of the Dreyer’s Nestlé Transaction, as amended (the Governance Agreement), provides that the dividend policy of the Company shall be to pay a dividend not less than the greater of (i) $.24 per common share on an annualized basis or (ii) 30 percent of the Company’s net income per share for the preceding fiscal year (net income, calculated for this purpose by excluding from net income the ongoing non-cash impact of accounting entries arising from the accounting for the Dreyer’s Nestlé Transaction, including increases in amortization or

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

depreciation expenses resulting from required write-ups, and entries related to recording of the put or call options on the Class A callable puttable common stock), unless the Board, in discharging its fiduciary duties, determines not to declare a dividend.

The Company declared regular quarterly dividends of $.06 per share of Class A callable puttable and Class B common stock for shareholders of record on March 26, 2004, June 25, 2004, September 24, 2004, December 24, 2004, June 27, 2003, September 26, 2003 and December 26, 2003.

Note 20. Class B Common Stock

On the Merger Closing Date, all 9,563,016 shares of DGIC common stock owned by Nestlé were converted into Class B common stock. In addition, 55,001,299 shares of Class B common stock were issued to NICC Holdings as a result of the Dreyer’s Nestlé Transaction. At December 25, 2004, 64,564,315 shares of Class B common stock are issued and outstanding.

During 2002, an affiliate of Nestlé incurred expenses of $14,693,000 relating to the Dreyer’s Nestlé Transaction. During 2003, this same affiliate of Nestlé incurred an additional $17,121,000 of such expenses, for a total of $31,814,000. The Company recorded these expenses as a capital contribution and classified them as Class B capital in excess of par.

There was no activity with respect to Class B common stock in 2004.


Note 21.	Employee Stock Plans

DGIC offered various stock option plans, a Section 423 Employee Stock Purchase Plan and an Employee Secured Stock Purchase Plan to certain DGIC employees. Pursuant to the terms of the Merger Agreement (Note 3), these plans were terminated according to their terms. However, notes receivable under the Employee Secured Stock Purchase Plan are still outstanding and have been classified as a reduction of Class A callable puttable common stock (Note 19).

Stock Option Plans

DGIC’s stock option plans provided for the immediate vesting of all options under the plans in the event of an approval by the Board of Directors of an event which would cause a change in ownership of DGIC. Accordingly, when DGIC’s Board of Directors approved the Merger Agreement, all unvested stock options under both plans became fully vested. In connection with the Dreyer’s Nestlé Transaction, certain officers and employees entered into employment agreements that included a provision that waived their rights to accelerated vesting of their stock options which were unvested at the time DGIC’s Board of Directors approved the Merger Agreement. In connection with the Dreyer’s Nestlé Transaction, each option to purchase one share of DGIC common stock was converted into an option to purchase one share of the Company’s Class A callable puttable common stock.

Stock options exercisable totaled 661,000 and 1,369,000 at December 25, 2004 and December 27, 2003, respectively. These stock options were exercisable at a weighted-average price per share of $23.75 and $21.46 in 2004 and 2003, respectively.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

The activity in the two DGIC stock option plans for 2004 and 2003 follows:


				Weighted-
	Options			Average Price
	Outstanding			Per Share

	(In thousands, except
	per share amounts)
Balance at June 27, 2003		6,240		$	19.74

Exercised		(3,928	)	$	17.73


Balance at December 27, 2003		2,312		$	23.16

Exercised		(1,044	)	$	21.36


Balance at December 25, 2004		1,268		$	24.64

Pursuant to the terms of the Merger Agreement, no additional options or awards with respect to the Company’s Class A callable puttable or Class B common stock can be granted under DGIC’s stock option plans.

Significant option groups outstanding at December 25, 2004 and related weighted-average exercise price per share and life information follows:


		Options Outstanding								Options Exercisable

						Weighted-		Weighted-
						Average		Average				Weighted-
Exercise				Weighted-		Remaining		Remaining				Average
Price		Options		Average Price		Life (Years)		Life (Years)		Options		Price
Range		Outstanding		Per Share		First Put⁽¹⁾		Call⁽²⁾		Outstanding		Per Share

		(In thousands, except years and per share amounts)
$	12.38-13.75		250	$	12.46		0.8		2.2		125	$	12.54

	14.09-17.34		346		16.75		0.9		2.3		209	$	16.36

	21.44-31.13		392		28.76		0.9		2.5		194	$	27.94

	39.40-46.50		280		39.55		0.9		2.5		133	$	39.71

			1,268								661


⁽¹⁾	For purposes of calculating the weighted-average remaining life in years presented in the above table, the Company assumed that the put right will be exercised during the first put option period beginning in December 2005. Some of these options may be exercised in 2006.

⁽²⁾	For purposes of calculating the weighted-average remaining life in years presented in the above table, the Company assumed that the remaining life in years could not extend out beyond June 30, 2007.

Section 423 Employee Stock Purchase Plan

Under the Section 423 Employee Stock Purchase Plan, employees of DGIC were able to authorize payroll deductions of up to 10 percent of their compensation for the purpose of acquiring shares of DGIC’s common stock at 85 percent of the market price determined at the beginning of a specified 12-month period. Pursuant to the terms of the Merger Agreement, this plan was terminated according to its terms following the completion of the offering period in effect when the Merger Agreement was signed.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Employee Secured Stock Purchase Plan

Under the Employee Secured Stock Purchase Plan, on specified dates employees of DGIC were able to purchase shares of DGIC’s common stock at fair market value by paying 20 percent of the purchase price in cash and the remaining 80 percent of the purchase price in the form of a non-recourse promissory note with a term of 30 years. These notes have been classified as a reduction of Class A callable puttable common stock and are being repaid according to the terms of the note agreement. Pursuant to the terms of the Merger Agreement, this plan was terminated pursuant to its terms.

Note 22. Commitments and Contingencies

The FTC retains the authority to enforce the terms and conditions of the Decision and Order (Note 3) as well as to impose financial penalties on the Company for non-compliance with the Decision and Order. The FTC’s enforcement authority includes the ability to impose an interim monitor to supervise compliance with the Decision and Order, or to appoint a trustee to manage the disposition of the assets to be divested under the Divestiture Agreements. In addition, the FTC could institute an administrative action and seek to impose civil penalties and seek forfeiture of profits obtained through a violation of the Decision and Order. The imposition of an interim monitor or trustee could subject the Company to additional reporting requirements, costs and administrative expenses.

At December 25, 2004 and December 27, 2003, the Company was a holder of irrevocable standby letters of credit issued by Citibank, N.A. with a total face value of $22,425,000 and $7,925,000, respectively. Of these amounts, $22,375,000 and $7,875,000, respectively, served as a guarantee by the creditor bank to cover workers compensation, general liability and vehicle claims. The Company pays fees on the standby letters of credit. Drawings under the letters of credit are subject to interest at various rates.

The Company’s purchase obligations are primarily contracts to purchase ingredients used in the manufacture of the Company’s products. Future minimum purchase obligations for the next five years and thereafter at December 25, 2004 total approximately $410,298,000.

Funding Put/ Call of Class A Callable Puttable Common Stock

Each stockholder of Class A callable puttable common stock (Note 19) has the option to require the Company to purchase (put) all or part of their shares at $83.00 per share during the two put periods of December 1, 2005 to January 13, 2006 and April 3, 2006 to May 12, 2006.

Penalty for Co-Pack Arrangement

The Company incurred penalty fees for not purchasing an amount greater than or equal to the yearly volume commitment under a co-pack arrangement. In 2004, the Company formally decided to cease the use of services

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

under the co-pack arrangement with the manufacturing company and incurred penalties for the remaining years of the arrangement.

The Company accounted for the penalty fees to be incurred in accordance with Statement of Financial Accounting Standards No. 146, “Accounting for Costs Associated with Exit or Disposal Activities” and Statement of Financial Accounting Standards No. 5, “Accounting for Contingencies.” The Company considers the penalty fees to be incurred to be probable and reasonably estimated.

The total known contractual obligation amount of the penalty fees incurred, which includes penalty fees incurred before the Company formally decided to cease the use of services, was $19,500,000 at December 25, 2004. The Company recorded the fair value of the aggregate penalty fee amount to be incurred using the net present value method based on a risk-adjusted interest rate of 3.83%. This amount totaled $18,113,000, in which $14,538,000 was included as an expense in Selling, general and administrative expense, and $3,575,000 was included as an expense in Cost of goods sold, in 2004. $3,900,000 of the related liability is included in Accounts payable and accrued liabilities at December 25, 2004, and $14,213,000 of the related liability is included in Other long-term obligations at December 25, 2004. The difference between the fair value and cash value of the penalty fees for future years will be recognized as an increase in the carrying amount of the liability and as an expense to be accreted ratably during the remaining life of the co-pack arrangement. The Company did not record cash payments against the related liability in 2004.


Note 23.	Related Parties

The following represent material related party transactions between the Company, Nestlé and its affiliates which are in addition to the related party transactions discussed above under Long-term debt (Note 16) and Class A callable puttable common stock (Note 19):

Inventory Purchases

The Company’s inventory purchases from Nestlé Prepared Foods or its affiliates were $18,856,000 and $10,510,000 for 2004 and 2003, respectively.

Taxes Receivable Due from Affiliates

Net sales and Cost of goods sold to affiliates

Net sales to affiliates totaled $5,096,000, $3,505,000 and $4,209,000 for 2004, 2003 and 2002, respectively.

Cost of goods sold to affiliates totaled $5,096,000, $3,505,000 and $4,209,000 for 2004, 2003 and 2002, respectively.

Transition Services Agreement

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

technology support and payroll services, consumer response, risk management, travel, corporate credit cards and promotions.

Royalty Expense to Affiliates

Royalty expense to affiliates is comprised of royalties paid to affiliates of Nestlé S.A. for the use of trademarks and/or technology owned by such affiliates and licensed or sublicensed to the Company for use in the manufacture and sale of frozen snacks. Royalty expense to affiliates totaled $27,288,000, $22,764,000 and $24,969,000 for 2004, 2003 and 2002, respectively.

Note 24. Supplemental Cash Flow Disclosures

Supplemental cash flow disclosures for 2004, 2003 and 2002 are as follows:


		December 25,			December 27,			December 31,
		2004			2003			2002

		(In thousands)
Supplemental cash flow information:
	Cash paid during the period for interest, net of amounts capitalized	$	10,055		$	3,569		$	1,833

	Income tax refund received from affiliates	$	(21,664	)	$	(16,943	)

	Income (tax refunds received) taxes paid, net	$	(7,322	)	$	468

Supplemental disclosure of noncash transactions:
	Increase in property, plant and equipment due to accruals for capital expenditures	$	21,889

	Increase in equity resulting from push-down of acquisition costs paid by Nestlé affiliate related to the Dreyer’s Nestlé Transaction				$	17,121		$	14,693

	Change in equity resulting from push-down of acquisition by Nestlé Prepared Foods of 50 percent interest in NICC not previously owned, net of cash acquired							$	(1,990	)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)


Note 25.	Selected Quarterly Financial Data (Unaudited)


						Net Loss Available to
						Class A Callable Puttable and Class B
						Common Stockholders^(1),(2),(3)

									Per Common
									Share⁽⁴⁾
		Total		Gross
		Net Revenues		Profit^(2),(5)					Basic			Diluted

		(In thousands, except per share amounts)
2004
	First Quarter	$	337,883	$	21,540	$	(80,361	)	$	(.85	)	$	(.85	)
	Second Quarter		429,841		47,040		(88,367	)	$	(.94	)	$	(.94	)
	Third Quarter		473,677		57,314		(76,824	)	$	(.81	)	$	(.81	)
	Fourth Quarter		347,027		26,672		(96,814	)	$	(1.02	)	$	(1.02	)

		$	1,588,428	$	152,566	$	(342,366	)	$	(3.62	)	$	(3.62	)

2003
	First Quarter	$	114,797	$	22,086	$	(9,273	)	$	(.14	)	$	(.14	)
	Second Quarter		176,796		32,201		(47,156	)	$	(.72	)	$	(.72	)
	Third Quarter		514,893		81,354		(64,965	)	$	(.71	)	$	(.71	)
	Fourth Quarter		384,075		49,725		(70,386	)	$	(.75	)	$	(.75	)

		$	1,190,561	$	185,366	$	(191,780	)	$	(2.44	)	$	(2.44	)


⁽¹⁾	The Company’s fiscal year is a 52-week or 53-week period ending on the last Saturday in December. Effective upon the closing of the Dreyer’s Nestlé Transaction, the Company changed its fiscal periods from NICC’s calendar year ending on December 31 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.

⁽²⁾	Results of operations for 2004 reflect the results of NICC and DGIC from December 28, 2003 to December 25, 2004. Results of operations for 2003 reflect the results of NICC from January 1, 2003 to December 27, 2003 and the results of DGIC from June 27, 2003 to December 27, 2003.

⁽³⁾	Results from 2004 and 2003 were affected by significant transaction, integration and restructuring charges relating to the Dreyer’s Nestlé Transaction. For 2004, these transaction, integration and restructuring charges include $260,475,000 of accretion of Class A callable puttable common stock and $16,788,000 of stock option compensation expense. For 2003, these transaction, integration and restructuring charges include $116,045,000 of accretion of Class A callable puttable common stock, $51,086,000 of employee severance and retention benefits, $18,148,000 of stock option compensation expense, $14,941,000 of loss on divestiture and $11,495,000 of in-process research and development expense.

⁽⁴⁾	The number of weighted-average shares outstanding used in the quarterly computation of net loss per common share increases and decreases as shares are issued and surrendered during the year. In addition, the number of weighted-average shares outstanding can also vary each quarter due to the exclusion of securities that would have an anti-dilutive effect.

The weighted-average shares presented above for 2004 and 2003 include the shares that are now classified as Class B common shares for the entire period and the Class A callable puttable common shares beginning on the Merger Closing Date. The net loss per Class A callable puttable common share figures presented above for the first quarter of 2003 include only the shares that are now classified as Class B common shares of 64,564,315. For these reasons, along with the rounding of each quarter’s net loss per Class A callable puttable and Class B common share, the sum of net loss per common share for the quarters may not be the same as the net loss per common share for the year.


⁽⁵⁾	Gross profit is defined as Total net revenues less Cost of goods sold.

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders of

Dreyer’s Grand Ice Cream Holdings, Inc.

We have completed an integrated audit of Dreyer’s Grand Ice Cream Holding’s 2004 consolidated financial statements and of its internal control over financial reporting as of December 25, 2004 and an audit of its 2003 consolidated financial statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Our opinions, based on our audits, are presented below.

Consolidated financial statements

In our opinion, the consolidated financial statements listed in the index appearing under Item 15(a)(1) present fairly, in all material respects, the financial position of Dreyer’s Grand Ice Cream Holdings, Inc. and its subsidiaries at December 25, 2004 and December 27, 2003, and the results of their operations and their cash flows for each of the two years in the period ended December 25, 2004 in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit of financial statements includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

Internal control over financial reporting

Also, in our opinion, management’s assessment, included in Management’s Annual Report on Internal Control Over Financial Reporting appearing under Item 9A, that the Company maintained effective internal control over financial reporting as of December 25, 2004 based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), is fairly stated, in all material respects, based on those criteria. Furthermore, in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 25, 2004, based on criteria established in Internal Control — Integrated Framework issued by COSO. The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express opinions on management’s assessment and on the effectiveness of the Company’s internal control over financial reporting based on our audit. We conducted our audit of internal control over financial reporting in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. An audit of internal control over financial reporting includes obtaining an understanding of internal control over financial reporting, evaluating management’s assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we consider necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinions.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

/s/ PricewaterhouseCoopers LLP

PricewaterhouseCoopers LLP

San Francisco, California

March 7, 2005

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To Member

Nestlé Ice Cream Company, LLC:

We have audited the accompanying consolidated statements of operations, changes in stockholders’ equity and cash flows of Nestlé Ice Cream Company, LLC (NICC), a Delaware limited liability company, (formerly known as Ice Cream Partners USA, LLC) (NICC), and subsidiary for the year ended December 31, 2002. These consolidated financial statements are the responsibility of NICC’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated results of operations, changes in stockholders’ equity and cash flows of Nestlé Ice Cream Company, LLC for the year ended December 31, 2002.

/s/ KPMG LLP

KPMG LLP

San Francisco, California

January 17, 2003, except as to note 3,

which is as of June 13, 2003


(c)	Exhibits

EXHIBIT INDEX


Exhibit
Number		Description

	2.1	Agreement and Plan of Merger and Contribution, dated as of June 16, 2002, Amendment No. 1 thereto, dated as of October 25, 2002, and Amendment No. 2 thereto, dated as of February 5, 2003 (attached as Annex A to the proxy statement/ prospectus which is part of this registration statement) (Exhibit 2.1(1)).
	2.2	Amendment No. 3, dated June 16, 2003, to the Agreement and Plan of Merger and Contribution, dated as of June 16, 2002, as amended on October 25, 2002 and February 5, 2003, by and among Dreyer’s Grand Ice Cream, Inc., December Merger Sub, Inc. Nestlé Holdings, Inc. and NICC Holdings, Inc. (Exhibit 2.2(2)).
	2.3*	Amended and Restated Asset Purchase and Sale Agreement, dated June 4, 2003, by and among Dreyer’s Grand Ice Cream, Inc., New December, Inc. (the former name of Registrant), Nestlé Ice Cream Company, LLC and Integrated Brands, Inc. (Exhibit 2.3(3)).
	3.1	Restated Certificate of Incorporation of Dreyer’s Grand Ice Cream Holdings, Inc. (Exhibit 3.1 (11)).
	3.2	Amended and Restated Bylaws of Dreyer’s Grand Ice Cream Holdings, Inc. (formerly New December, Inc.) (Exhibit 3.2(2)).
	4.1	Governance Agreement, dated as of June 26, 2003, among Nestlé Holdings, Inc., Nestlé S.A. and Dreyer’s Grand Ice Cream Holdings, Inc. (Exhibit 4.1(2)).
	4.2	Amendment No. 1, dated January 26, 2004, to the Governance Agreement, dated as of June 26, 2003, among Nestlé Holdings, Inc., Nestlé S.A. and Dreyer’s Grand Ice Cream Holdings, Inc.
	10.1	Agreement dated September 18, 1978 between Dreyer’s Grand Ice Cream, Inc. and Kraft, Inc. (Exhibit 10.8(4)).
	10.2	Agreement and Lease dated as of January 1, 1982 and Amendment to Agreement and Lease dated as of January 27, 1982 between Jack and Tillie Marantz and Dreyer’s Grand Ice Cream, Inc. (Exhibit 10.2(5)).
	10.3	Assignment of Lease dated as of March 31, 1989 among Dreyer’s Grand Ice Cream, Inc., Smithway Associates, Inc. and Wilsey Foods, Inc. (Exhibit 10.52(6)).
	10.4	Amendment of Lease dated as of March 31, 1989 between Dreyer’s Grand Ice Cream, Inc. and Smithway Associates, Inc., as amended by letter dated April 17, 1989 between Dreyer’s Grand Ice Cream, Inc. and Wilsey Foods, Inc. (Exhibit 10.53(6)).
	10.5	Dreyer’s Grand Ice Cream, Inc. Stock Option Plan (1992) (Exhibit 10.35(7)).
	10.6	Letter Agreement dated August 4, 1995 between Dreyer’s Grand Ice Cream, Inc. and Smithway Associates, Inc. (Exhibit 10.29(8)).
	10.7	April 1996 Amendment to Commerce Lease dated April 23, 1996 between Dreyer’s Grand Ice Cream, Inc. and Smithway Associates, Inc. (Exhibit 10.29(9)).
	10.8	Letter Agreement dated April 23, 1996 between Dreyer’s Grand Ice Cream, Inc. and Smithway Associates, Inc. (Exhibit 10.30(9)).
	10.9	Distribution Agreement dated as of October 10, 2000 by and between Dreyer’s Grand Ice Cream, Inc. and Ben & Jerry’s Homemade, Inc. and First Amendment to 2000 Distribution Agreement dated as of January 19, 2001 (Exhibit 10.22(10)).
	10.10	Dreyer’s Grand Ice Cream, Inc. Stock Option Plan (1993), as amended (Exhibit 10.23(10)).
	10.11	Employment Agreement dated as of June 16, 2002, by and between Registrant and T. Gary Rogers. (Exhibit 10.1(1)).
	10.12	Employment Agreement dated as of June 16, 2002, by and between Registrant and Thomas M. Delaplane (Exhibit 10.2(1)).
	10.13	Employment Agreement dated as of June 16, 2002, by and between Registrant and Timothy F. Kahn (Exhibit 10.3(1)).


Exhibit
Number		Description

	10.14	Employment Agreement dated as of June 16, 2002, by and between Registrant and William R. Oldenburg (Exhibit 10.4(1)).
	10.15	Employment Agreement dated as of June 16, 2002, by and between Registrant and J. Tyler Johnston (Exhibit 10.5(1)).
	10.16	Amended and Restated Sublicense Agreement for Other Pillsbury Proprietary Information, dated as of December 26, 2001, by and between Nestlé USA — Prepared Foods Division, Inc. and Nestlé Ice Cream Company, LLC (Exhibit 10.6(1)).
	10.17	Amended and Restated Sublicense Agreement for Pillsbury Trademarks and Technology, dated as of December 26, 2001, by and among Societe des Produits Nestlé S.A., Nestec Ltd. And Nestlé Ice Cream Company, LLC (Exhibit 10.7(1)).
	10.18	Amended and Restated Other Nestlé USA Proprietary Information License Agreement, dated October 8, 1999, by and between Nestlé USA — Prepared Foods Division, Inc. and Nestlé Ice Cream Company, LLC (Exhibit 10.8(1)).
	10.19	Amended and Restated Trademark/ Technology License Agreement, dated December 26, 2001, by and among Nestlé S.A., Nestec Ltd., Societe des Produits Nestlé S.A., and Nestlé Ice Cream Company, LLC (Exhibit 10.9(1)).
	10.20*	Co-Pack Agreement, dated July 5, 2003, between Dreyer’s Grand Ice Cream, Inc. and Integrated Brands, Inc. (Exhibit 10.20(3)).
	10.21*	Transition Services Agreement, dated July 5, 2003, between Dreyer’s Grand Ice Cream, Inc. and Integrated Brands, Inc. (Exhibit 10.21(3)).
	10.22*	Transition IB Products Distribution Agreement, dated July 5, 2003, between Dreyer’s Grand Ice Cream, Inc. and Integrated Brands, Inc. (Exhibit 10.22(3)).
	10.23*	Grocery Carrier Agreement, dated July 5, 2003, between Dreyer’s Grand Ice Cream, Inc. and Integrated Brands, Inc. (Exhibit 10.23(3)).
	10.24*	Non-Grocery Distribution Agreement, dated July 5, 2003, between Dreyer’s Grand Ice Cream, Inc. and Integrated Brands, Inc. (Exhibit 10.24(3)).
	10.25*	Transition NICC Product Distribution Agreement, dated July 5, 2003, between Integrated Brands, Inc. and Nestlé Ice Cream Company, LLC (Exhibit 10.25(3)).
	10.26*	IB Products Distribution Agreement, dated July 5, 2003, between Dreyer’s Grand Ice Cream, Inc. and Integrated Brands, Inc. (Exhibit 10.26(3)).
	10.27	Third Amendment, dated April 14, 2003, among Dreyer’s Grand Ice Cream, Inc., Dreyer’s Grand Ice Cream Holdings, Inc., various financial institutions, and Bank of America, N.A., as Agent. (Exhibit 10.27 (11)).
	10.28	Third Amendment to Note Purchase Agreement, dated June, 27, 2003, among Dreyer’s Grand Ice Cream, Inc., New December, Inc. (to be renamed Dreyer’s Grand Ice Cream Holdings, Inc.) and each of the institutions which is a signatory to the agreement (Exhibit 10.28 (11)).
	10.29	Nestlé S.A. — Dreyer’s Grand Ice Cream Holdings, Inc. Bridge loan facility for up to USD 400 million dated June 11, 2003. (Exhibit 10.29 (11)).
	10.30	Form of Indemnification Agreement for Directors and Officers of Dreyer’s Grand Ice Cream Holdings, Inc. (Exhibit 10.30 (11)).
	10.31	Employment Agreement dated as of August 30, 2002, by and between Registrant and Mark J. LeHocky. (Exhibit 10.31 (11)).
	10.32	First Amendment to Employment Agreement dated as of July 21, 2003, by and between Registrant and T. Gary Rogers. (Exhibit 10.32 (11)).
	10.33	First Amendment to Employment Agreement dated as of July 21, 2003, by and between Registrant and Thomas M. Delaplane. (Exhibit 10.33 (11)).
	10.34	First Amendment to Employment Agreement dated as of July 21, 2003, by and between Registrant and Timothy F. Kahn. (Exhibit 10.34 (11)).


Exhibit
Number		Description

	10.35	First Amendment to Employment Agreement dated as of July 21, 2003, by and between Registrant and William Oldenburg. (Exhibit 10.35 (11)).
	10.36	First Amendment to Employment Agreement dated as of July 21, 2003, by and between Registrant and J. Tyler Johnston. (Exhibit 10.36 (11)).
	10.37	First Amendment to Employment Agreement dated as of July 21, 2003, by and between Registrant and Mark J. LeHocky. (Exhibit 10.37 (11)).
	10.38	Ice Cream Partners USA (former name of Nestlé Ice Cream Company, LLC) Supplemental Management Retirement & Savings Plan effective as of June 1, 2000. (Exhibit 10.38 (11)).
	10.39	Amendment No. 1 to Ice Cream Partners USA (former name of Nestlé Ice Cream Company, LLC) Supplemental Management Retirement & Savings Plan dated as of December 31, 2001. (Exhibit 10.39 (11)).
	10.40	Amendment No. 2 to Ice Cream Partners USA (former name of Nestlé Ice Cream Company, LLC) Supplemental Management Retirement & Savings Plan dated as of February 5, 2002. (Exhibit 10.40 (11)).
	10.41	Amendment No. 3 to Nestlé Ice Cream Company Supplemental Management Retirement & Savings Plan dated as of April 26, 2002. (Exhibit 10.41 (11)).
	10.42	Amendment No. 4 to Nestlé Ice Cream Company Supplemental Management Retirement & Savings Plan dated as of December 20, 2002. (Exhibit 10.42 (11)).
	10.43	Fourth Amendment, dated August 27, 2003, among Dreyer’s Grand Ice Cream, Inc., Dreyer’s Grand Ice Cream Holdings, Inc., various financial institutions and Bank of America, N.A., as Agent. (Exhibit 10.43(12)).
	10.44	Fourth Amendment to Note Purchase Agreement, dated September 5, 2003, among Dreyer’s Grand Ice Cream, Inc., Dreyer’s Grand Ice Cream Holdings, Inc., and each of the institutions which is a signatory to the agreement. (Exhibit 10.44(12)).
	10.45	Letter Amendment dated October 22, 2003 to Nestlé S.A. — Dreyer’s Grand Ice Cream Holdings, Inc. Bridge loan facility for up to USD 400 million dated June 11, 2003. (Exhibit 10.45(12)).
	10.46	Letter Amendment dated February 11, 2004, effective March 23, 2004, to Nestlé S.A. — Dreyer’s Grand Ice Cream Holdings, Inc. Bridge loan facility for up to USD 400 million (Exhibit 10.46 (13)).
	10.47	Form of Letter dated March 22, 2004, among Dreyer’s Grand Ice Cream, Inc., Dreyer’s Grand Ice Cream Holdings, Inc., various financial institutions and Bank of America, N.A., as Agent (Exhibit 10.47 (13)).
	10.48	Dreyer’s Grand Ice Cream Holdings, Inc. Long-term Incentive Plan (Exhibit 10.48 (13)).
	10.49	Demand Loan Facility dated May 24, 2004, by and between Nestlé Capital Corporation and Dreyer’s Grand Ice Cream Holdings, Inc. for up to USD 50 million, with Assignment by Nestlé S.A. to Nestlé Capital Corporation of a portion of its rights and obligations under USD 400 million Bridge Loan Facility dated June 11, 2003, as amended (Exhibit 10.49 (14)).
	10.50	Amendment to Letter Amendment to Nestlé S.A. Credit Facility dated May 28, 2004, to Nestlé S.A. — Dreyer’s Grand Ice Cream Holdings, Inc. Bridge loan facility for up to USD 400 million (Exhibit 10.50 (14)).
	10.51	Form of Letter dated June 10, 2004, effective June 16, 2004 among Dreyer’s Grand Ice Cream, Inc., Dreyer’s Grand Ice Cream Holdings, Inc., various financial institutions and Bank of America, N.A., as Agent (Exhibit 14)).
	10.52	Amendment dated June 25, 2004 to Letter Amendment dated February 11, 2004, effective June 26, 2004 to Nestlé S.A. — Dreyer’s Grand Ice Cream Holdings, Inc. Bridge loan facility for up to USD 400 million (Exhibit 10.52 (14)).
	21	List of Subsidiaries.
	23.1	Consent of Independent Registered Public Accounting Firm — PricewaterhouseCoopers LLP.
	23.2	Consent of Independent Registered Public Accounting Firm — KPMG LLP.


Exhibit
Number		Description

	31.1	Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
	31.2	Certification of Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
	32.1	Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
	32.2	Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.


*	Confidential treatment requested and granted as to certain portions of this exhibit. The term “confidential treatment” and the mark “*” used throughout the indicated exhibit means that material has been omitted and separately filed with the Commission.


(1)	Incorporated by reference to the designated exhibit to Annex A to Proxy Statement/ Prospectus filed on February 18, 2003 pursuant to Rule 424(b)(3) under the Securities Act of 1933 in connection with Registration No. 333-101052.

(2)	Incorporated by reference to the designated exhibit to Dreyer’s Grand Ice Cream Holdings, Inc.’s Current Report on Form 8-K filed on June 27, 2003.

(3)	Incorporated by reference to the designated exhibit to Dreyer’s Grand Ice Cream Holdings, Inc.’s Current Report on Form 8-K/ A filed on July 21, 2003.

(4)	Incorporated by reference to the designated exhibit to Dreyer’s Grand Ice Cream, Inc.’s Registration Statement on Form S-1 and Amendment No. 1 thereto, filed under Commission File No. 2-71841 on April 16, 1981 and June 11, 1981, respectively.

(5)	Incorporated by reference to the designated exhibit to Dreyer’s Grand Ice Cream, Inc.’s Annual Report on Form 10-K for the year ended December 31, 1994 filed on March 30, 1995.

(6)	Incorporated by reference to the designated exhibit to Dreyer’s Grand Ice Cream, Inc.’s Annual Report on Form 10-K for the year ended December 30, 1989 filed on March 30, 1990.

(7)	Incorporated by reference to the designated exhibit to Dreyer’s Grand Ice Cream, Inc.’s Annual Report on Form 10-K for the year ended December 25, 1993 filed on March 25, 1994.

(8)	Incorporated by reference to the designated exhibit to Dreyer’s Grand Ice Cream, Inc.’s Annual Report on Form 10-K for the year ended December 30, 1995 filed on March 29, 1996.

(9)	Incorporated by reference to the designated exhibit to Dreyer’s Grand Ice Cream, Inc.’s Annual Report on Form 10-K for the year ended December 28, 1996 filed on March 28, 1997.


(10)	Incorporated by reference to the designated exhibit to Dreyer’s Grand Ice Cream, Inc.’s Annual Report on Form 10-K for the year ended December 30, 2000 filed on March 30, 2001.

(11)	Incorporated by reference to the designated exhibit to Dreyer’s Grand Ice Cream Holdings, Inc.’s Quarterly Report on Form 10-Q for the quarter ended June 28, 2003 filed on August 18, 2003.

(12)	Incorporated by reference to the designated exhibit to Dreyer’s Grand Ice Cream Holdings, Inc.’s Quarterly Report on Form 10-Q for the quarter ended September 27, 2003 filed on November 17, 2003.

(13)	Incorporated by reference to the designated exhibit to Dreyer’s Grand Ice Cream Holdings, Inc.’s Quarterly Report on Form 10-Q for the quarter ended March 27, 2004 filed on May 6, 2004.

(14)	Incorporated by reference to the designated exhibit to Dreyer’s Grand Ice Cream Holdings, Inc.’s Quarterly Report on Form 10-Q for the quarter ended June 26, 2004 filed on August 5, 2004.

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.


	Dreyer’s Grand Ice Cream Holdings, Inc.


	By:	/s/ T. Gary Rogers



	(T. Gary Rogers)
	Chairman of the Board of Directors and
	Chief Executive Officer
	(Principal Executive Officer)

Date: March 7, 2005

KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints T. Gary Rogers and Alberto E. Romaneschi, and each of them, as such person’s true and lawful attorneys-in-fact and agents, with full power of substitution and resubstitution, for such person and in such person’s name, place and stead, in any and all capacities, to sign any and all amendments to this Annual Report on Form 10-K, and to file same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in connection therewith, as fully to all intents and purposes as such person might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or any of them, or their or his or her substitute or substitutes, may lawfully do or cause to be done by virtue hereof.

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.


Signature	Title	Date


/s/ T. Gary Rogers (T. Gary Rogers)	Chairman of the Board of Directors and Chief Executive Officer (Principal Executive Officer)	March 7, 2005

/s/ Peter Brabeck-Letmathe (Peter Brabeck-Letmathe)	Vice-Chairman of the Board of Directors	March 7, 2005

/s/ Alberto E. Romaneschi (Alberto E. Romaneschi)	Executive Vice President — Finance and Administration and Chief Financial Officer (Principal Financial and Accounting Officer)	March 7, 2005

/s/ Jan L. Booth (Jan L. Booth)	Director	March 7, 2005

/s/ William F. Cronk (William F. Cronk)	Director	March 7, 2005

/s/ Tahira Hassan (Tahira Hassan)	Director	March 7, 2005

/s/ John W. Larson (John W. Larson)	Director	March 7, 2005


Signature	Title	Date


/s/ Carlos E. Represas (Carlos E. Represas)	Director	March 7, 2005

/s/ Jean-Marie Gurné (Jean-Marie Gurné)	Director	March 7, 2005

/s/ Timothy P. Smucker (Timothy P. Smucker)	Director	March 7, 2005

/s/ Joe Weller (Joe Weller)	Director	March 7, 2005

Supplemental Information to be Furnished With Reports Filed Pursuant to Section 15(d) of the Act by Registrants Which Have Not Registered Securities Pursuant to Section 12 of the Act:

Not applicable.


	option compensation expense. For 2003, these charges include $116,045,000 of accretion of Class A callable puttable common stock, $51,086,000 of employee severance and retention benefits, $18,148,000 of stock option compensation expense, $14,941,000 of loss on divestiture and $11,495,000 of in-process research and development expense. Accretion of Class A callable puttable common stock will continue until December 1, 2005 (Initial Put Date). Stock option compensation expense represents unearned compensation which is being expensed over the terms of three-year employment agreements as service is performed and as the unvested options vest. Future stock option compensation expense will be $13,207,000 and $3,325,000 for 2005 and 2006, respectively. Fiscal 2004, 2003 and 2002 results do not include goodwill amortization because, on January 1, 2002, the Company adopted Statement of Financial Accounting Standards No. 142, “Goodwill and Other Intangible Assets” (SFAS No. 142) which required that goodwill and other indefinite-lived intangible assets no longer be amortized. During the third quarter of 2002, NICC determined that the carrying value of goodwill exceeded its implied fair market value and reduced the carrying value of its goodwill by $69,956,000 to equal the estimated fair market value of goodwill.

⁽⁴⁾	As a result of the Emerging Issues Task Force (EITF), “Accounting for Consideration Given by a Vendor to a Customer (Including a Reseller of the Vendor’s Products),” (EITF 01-9) beginning in the first quarter of 2002 certain expenses previously classified as Cost of goods sold or as Selling, general and administrative expenses are now recorded as a reduction of Net sales. In accordance with this pronouncement, the results for 2001 and 2000 reflect this retroactive reclassification which had no effect on net (loss) income as previously reported. NICC adopted EITF 01-9 for all periods since its inception.

⁽⁵⁾	NICC was a limited liability company and until December 26, 2001 was treated as a partnership for United States income tax purposes. When it was treated as a partnership, NICC was not subject to taxation; rather, any income tax liability was the responsibility of its members. Effective December 26, 2001, NICC became a wholly-owned subsidiary of Nestlé Prepared Foods and was taxed as a division of its corporate owner.

⁽⁶⁾	Pro forma income tax benefit (provision) is presented as if NICC had been a taxable entity for all periods prior to becoming a taxable entity. The pro forma effective tax rate differs from the statutory rate of 35 percent primarily due to state taxes and certain nondeductible items.

⁽⁷⁾	Pro forma net (loss) income to member(s) is calculated as (loss) income before income tax benefit (provision) plus Pro forma income tax benefit (provision).

⁽⁸⁾	The Company declared regular quarterly dividends of $.06 per share of Class A callable puttable and Class B common stock for shareholders of record on March 26, 2004, June 25, 2004, September 24, 2004, December 24, 2004, June 27, 2003, September 26, 2003 and December 26, 2003. No dividends were declared by NICC during 2003 and earlier years.

⁽⁹⁾	Includes the current and long-term portions of long-term debt and the Nestlé S.A. credit facility.