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FORM 10-Q

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

For the quarterly period ended June 29, 2002

OR

Commission file number 0-14190

DREYER’S GRAND ICE CREAM, INC.
(Exact name of registrant as specified in its charter)

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

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

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

Yes  [X]     No [   ]

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

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PART I: FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS.

DREYER’S GRAND ICE CREAM, INC.

CONSOLIDATED BALANCE SHEET

				June 29, 2002				Dec. 29, 2001
($ in thousands, except per share amounts)				(Unaudited)
Assets
Current Assets:
	Cash and cash equivalents			$	1,700			$	1,650
	Trade accounts receivable, net of allowance for doubtful accounts of $1,755 in 2002 and $1,024 in 2001				145,374				89,721
	Other accounts receivable				14,578				16,116
	Inventories				96,227				81,298
	Deferred income taxes				2,517				3,547
	Prepaid expenses and other				29,614				8,849
		Total current assets			290,010				201,181
Property, plant and equipment, net					210,004				198,565
Goodwill					84,856				39,114
Other intangibles, net					2,019				55,354
Other assets					3,138				4,475
Total assets				$	590,027			$	498,689
Liabilities and Stockholders’ Equity
Current Liabilities:
	Accounts payable and accrued liabilities			$	128,290			$	91,794
	Accrued payroll and employee benefits				24,514				25,369
	Current portion of long-term debt				2,143
	Total current liabilities				154,947				117,163
Long-term debt, less current portion					199,429				148,671
Deferred income taxes					14,404				24,490
Total liabilities					368,780				290,324
Commitments and contingencies
Stockholders’ Equity:
	Preferred stock, $1 par value — 10,000,000 shares authorized; no shares issued or outstanding in 2002 and 2001
	Common stock, $1 par value — 60,000,000 shares authorized; 34,746,000 shares and 34,461,000 shares issued and outstanding in 2002 and 2001, respectively				34,746				34,461
	Capital in excess of par				163,809				160,103
	Notes receivable from stockholders				(2,489	)			(2,546	)
	Retained earnings				25,181				16,347
Total stockholders’ equity					221,247				208,365
Total liabilities and stockholders’ equity				$	590,027			$	498,689

See accompanying Notes to Consolidated Financial Statements.

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DREYER’S GRAND ICE CREAM, INC.

CONSOLIDATED STATEMENT OF INCOME
(Unaudited)

				Thirteen Weeks Ended								Twenty-six Weeks Ended
($ in thousands, except per share amounts)				June 29, 2002				June 30, 2001				June 29, 2002				June 30, 2001
Net sales				$	376,811			$	335,424			$	667,225			$	574,837
Costs and expenses:
	Cost of goods sold				322,865				293,326				585,026				510,116
	Selling, general and administrative				29,370				28,313				54,928				55,320
	Interest, net of amounts capitalized				2,102				3,264				3,888				6,278
	Other expense (income)				1,327				(930	)			189				(1,169	)
	Merger transaction expenses				2,888								2,888
					358,552				323,973				646,919				570,545
Income before income tax provision					18,259				11,451				20,306				4,292
Income tax provision					6,573				4,410				7,310				1,683
Net income					11,686				7,041				12,996				2,609
Accretion of preferred stock to redemption value									106								212
Preferred stock dividends																	348
Net income available to common stockholders				$	11,686			$	6,935			$	12,996			$	2,049
Net income per common share:
	Basic			$	.34			$	.24			$	.38			$	.07
	Diluted			$	.31			$	.20			$	.35			$	.07
Dividends per common share				$	.06			$	.06			$	.12			$	.12

See accompanying Notes to Consolidated Financial Statements.

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CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY
(Unaudited)

															Notes
			Common Stock												Receivable
											Capital in				From				Retained
(In thousands)			Shares				Amount				Excess of Par				Stockholders				Earnings				Total
Balances at December 30, 2000				28,268			$	28,268			$	58,396			$	(2,284	)		$	15,992			$	100,372
	Net income																			2,609				2,609
	Accretion of preferred stock to redemption value																			(212	)			(212	)
	Preferred stock dividends declared																			(348	)			(348	)
	Common stock dividends declared																			(3,777	)			(3,777	)
	Conversion of mandatorily redeemable convertible preferred stock to common stock			5,800				5,800				94,952												100,752
	Issuance of common stock under employee stock plans, net			391				391				5,858				(20	)							6,229
	Repurchases and retirements of common stock			(74	)			(74	)			(2,096	)											(2,170	)
Balances at June 30, 2001				34,385			$	34,385			$	157,110			$	(2,304	)		$	14,264			$	203,455
Balances at December 29, 2001				34,461			$	34,461			$	160,103			$	(2,546	)		$	16,347			$	208,365
	Net income																			12,996				12,996
	Common stock dividends declared																			(4,162	)			(4,162	)
	Issuance of common stock under employee stock plans, net			338				338				5,776				(339	)							5,775
	Repurchases and retirements of common stock			(53	)			(53	)			(2,070	)			396								(1,727	)
Balances at June 29, 2002				34,746			$	34,746			$	163,809			$	(2,489	)		$	25,181			$	221,247

See accompanying Notes to Consolidated Financial Statements.

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DREYER’S GRAND ICE CREAM, INC.

CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)

See accompanying Notes to Consolidated Financial Statements.

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DREYER’S GRAND ICE CREAM, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

NOTE 1 — Operations and Financial Statement Presentation

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

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

     The consolidated financial statements for the thirteen and twenty-six weeks ended on June 29, 2002 and June 30, 2001 have not been audited by independent public accountants, but include all adjustments, such as normal recurring accruals, which management considers necessary for a fair presentation of the consolidated operating results for the interim periods. The statements have been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission. Accordingly, certain information and footnote disclosures normally included in financial statements prepared in conformity with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to such rules and regulations. The operating results for interim periods are not necessarily indicative of results to be expected for an entire year. The aforementioned statements should be read in conjunction with the Consolidated Financial Statements for the year ended December 29, 2001, appearing in the Company’s 2001 Annual Report on Form 10-K. Certain reclassifications have been made to prior years’ financial statements to conform to the current year presentation.

NOTE 2 — Significant Accounting Assumptions and Estimates

     The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions. These estimates include assessing the recoverability of accounts receivable; the adequacy of the valuation allowance for deferred tax assets; the recoverability of goodwill; the adequacy of the Company’s liabilities for self-insured health, workers compensation and vehicle plans; and the adequacy of the Company’s liabilities for employee bonuses and profit-sharing plan contributions, among others. These estimates and assumptions affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

NOTE 3 — Merger and Contribution Agreement with Nestlé Holdings, Inc.

     On June 16, 2002, the Company entered into an Agreement and Plan of Merger and Contribution (the Merger Agreement) with Nestlé Holdings, Inc. (Nestlé) and NICC Holdings, Inc., a wholly-owned subsidiary of Nestlé, to combine the Company with Nestlé’s United States frozen dessert business. The combination will result in both the Company and Nestlé Ice Cream Company, LLC (NICC), which holds Nestlé’s United States frozen dessert business, becoming wholly-owned subsidiaries of a newly formed Delaware corporation (New Dreyer’s). This transaction will be recorded under the purchase method of accounting and will be treated as a reverse acquisition. Under reverse acquisition accounting, NICC will be deemed the acquirer for accounting purposes only, and the Company will be treated as the acquiree. As a result, the Company will expense all merger transaction expenses as incurred. These expenses totaled $2,888,000 for the thirteen and twenty-six weeks ended June 29, 2002.

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     If the transactions contemplated by the Merger Agreement are completed, each stockholder who holds shares of the Company’s common stock at the effective time of the merger will receive one share of class A callable puttable common stock of New Dreyer’s. Under the amended and restated certificate of incorporation of New Dreyer’s, subject to the terms set forth therein, the holders of New Dreyer’s class A callable puttable stock will be permitted to sell (put) some or all of their shares to New Dreyer’s for $83.00 per share during two periods, the first beginning on December 1, 2005 and ending on January 13, 2006, and the second beginning on April 3, 2006 and ending on May 12, 2006. The New Dreyer’s class A callable puttable common stock will also be subject to redemption (call) by New Dreyer’s at the request of Nestlé at $88.00 per share during a six-month period beginning January 1, 2007. For the contribution of its ownership interest of NICC, Nestlé will receive approximately 55 million shares of class B common stock of New Dreyer’s. The class B common shares are similar to the class A common shares, except that they lack the call and put features. The shares of the Company’s common stock currently held by Nestlé will be converted into the same number of shares of class B common stock of New Dreyer’s. As of June 29, 2002, Nestlé owned approximately 23 percent of the Company’s common stock on a diluted basis. If the transactions contemplated by the Merger Agreement are completed, Nestlé will own approximately 67 percent of the diluted common stock of New Dreyer’s.

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

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

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

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

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

NOTE 4 — Inventories

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

NOTE 5 — Butter Investment

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

     Investments in butter, included in Prepaid Expenses and Other at June 29, 2002 consisted of the following:

     During the thirteen and twenty-six weeks ended June 29, 2002, the Company recorded expense of $1,147,000 and $1,319,000, respectively. During 2001, the Company made no investments in butter.

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NOTE 6 — Net Income Per Common Share

     The denominator for basic net income per share includes the number of weighted-average common shares outstanding. The denominator for diluted net income per share includes the number of weighted-average shares outstanding plus the effects of potentially dilutive securities which include stock options and redeemable convertible preferred stock.

			Thirteen Weeks Ended								Twenty-six Weeks Ended
(In thousands, except per share amounts)			June 29, 2002				June 30, 2001				June 29, 2002				June 30, 2001
Net income available to common stockholders — basic			$	11,686			$	6,935			$	12,996			$	2,049
Add: preferred dividends and accretion								106								560
Net income available to common stockholders — diluted			$	11,686			$	7,041			$	12,996			$	2,609
Weighted-average shares — basic				34,685				29,275				34,598				28,822
Dilutive effect of options				2,923				1,733				2,795				1,923
Dilutive effect of preferred stock								5,099								5,449
Weighted-average shares — diluted				37,608				36,107				37,393				36,194
Net income per common share:
	Basic		$	.34			$	.24			$	.38			$	.07
	Diluted		$	.31			$	.20			$	.35			$	.07

     Each outstanding and unvested option to purchase the Company’s common stock under the Company’s existing stock option plans became fully vested on June 14, 2002, the date that the Company’s board of directors approved the Merger Agreement and the transactions contemplated by the Merger Agreement (Note 3). In connection with the execution of the Merger Agreement, certain executive officers entered into employment agreements which, among other things, waived the accelerated vesting of such officer’s unvested stock options as a result of the approval of the transactions by the Company’s board of directors. The employment agreements are effective if and when the transactions contemplated by the Merger Agreement are completed. Under the Merger Agreement, the Company can have no more than 41,393,348 outstanding or issuable shares of common stock if and when the transactions contemplated by the Merger Agreement are completed. This total includes shares issuable upon exercise of options, whether vested or unvested.

Anti-dilutive securities

     Potentially dilutive securities are excluded from the calculations of diluted net income per common share when their inclusion would have an anti-dilutive effect. There were no potentially dilutive securities to be excluded during the thirteen and twenty-six weeks ended June 29, 2002. Potentially dilutive securities, stated in absolute equivalent shares of common stock, consisted of 774,000 and 753,000 stock options during the thirteen and twenty-six weeks ended June 30, 2001, respectively.

NOTE 7 — Adoption of New Accounting Pronouncements

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

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

     The Company adopted EITF 01-9 at the beginning of fiscal 2002. The Company presented expenses of $63,038,000 and $110,708,000, respectively, in accordance with this pronouncement for the thirteen and twenty-six weeks ended June 29, 2002. The Company retroactively reclassified expenses of $49,410,000 and $82,026,000, respectively, for the thirteen and twenty-six weeks ended June 30, 2001. The retroactive reclassification of these expenses resulted in a

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decrease in total sales and gross profit, along with a corresponding decrease in selling, general and administrative expenses, with no effect on net income as previously reported.

Accounting for Goodwill and Other Intangible Assets

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

     A reconciliation of reported net income and net income per common share to the amounts adjusted for the exclusion of goodwill amortization of $980,000 and $2,093,000, respectively, for the thirteen and twenty-six weeks ended June 30, 2001, net of the related income tax effects of $382,000 and $806,000, respectively, follows:

			Thirteen Weeks Ended								Twenty-six Weeks Ended
(In thousands, except per share amounts)			June 29, 2002				June 30, 2001				June 29, 2002				June 30, 2001
Reported net income			$	11,686			$	6,935			$	12,996			$	2,049
Goodwill amortization, net of tax								598								1,287
Adjusted net income			$	11,686			$	7,533			$	12,996			$	3,336
Net income per common share:
	Reported basic		$	.34			$	.24			$	.38			$	.07
	Goodwill amortization, net of tax							.02								.05
	Adjusted basic		$	.34			$	.26			$	.38			$	.12
	Reported diluted		$	.31			$	.20			$	.35			$	.07
	Goodwill amortization, net of tax							.01								.04
	Adjusted diluted		$	.31			$	.21			$	.35			$	.11

     In accordance with SFAS No. 142, the Company reclassified the long-term deferred income tax liability associated with nondeductible goodwill, resulting in a noncash reduction in goodwill and a corresponding reduction in the deferred income tax liability of $10,166,000. Also in accordance with SFAS No. 142, the Company now presents goodwill separately from other intangibles in the Consolidated Balance Sheet. In addition, the Company reclassified $53,927,000 of acquisition-related intangibles with indefinite lives to goodwill at the beginning of the first quarter of 2002. Fiscal 2001 acquisition-related intangibles are included in Other Intangibles, Net, in the Consolidated Balance Sheet.

Accounting for the Impairment or Disposal of Long-Lived Assets

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

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NOTE 8 — Investment in Momentx Corporation

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

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

FORWARD-LOOKING STATEMENTS

     This report contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, which contains a “safe harbor” for forward-looking statements upon which the Company relies in making such disclosures. These forward-looking statements are based on the Company’s current expectations and projections about future events. These forward-looking statements are subject to risks, uncertainties and assumptions about us, including:

	•		uncertainty regarding the Company’s future operating results;
	•		the Company’s ability to achieve efficiencies in its manufacturing and distribution operations without negatively affecting sales;
	•		the cost of energy used in manufacturing and distribution;
	•		the cost of dairy raw materials and other commodities used in the Company’s products;
	•		competitors’ marketing and promotion responses;
	•		market conditions affecting the prices of the Company’s products;
	•		the Company’s ability to increase sales of its own branded products;
	•		responsiveness of both the trade and consumers to the Company’s new products and marketing and promotional programs; and
	•		uncertainty regarding the completion and effect of the proposed transactions with Nestlé Holdings, Inc.

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

     The following discussion should be read together with the Company’s consolidated financial statements and related notes thereto included elsewhere in this document and “Item 7 — Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Item 7A — Qualitative and Quantitative Disclosures About Market Risk” in the Company’s Form 10-K Report for the fiscal year ended December 29, 2002.

APPLICATION OF CRITICAL ACCOUNTING POLICIES

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

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

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

These estimates and assumptions affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

MERGER AND CONTRIBUTION AGREEMENT WITH NESTLÉ HOLDINGS, INC.

     The Company entered into an Agreement and Plan of Merger and Contribution (the Merger Agreement) with Nestlé Holdings, Inc. (Nestlé) and NICC Holdings, Inc., a wholly-owned subsidiary of Nestlé, to combine the Company with Nestlé’s United States frozen dessert business. The combination will result in both the Company and Nestlé Ice Cream Company, LLC (NICC), which holds Nestlé’s United States frozen dessert business, becoming wholly-owned subsidiaries of a newly formed Delaware corporation (New Dreyer’s). This transaction will be recorded under the purchase method of accounting and will be treated as a reverse acquisition. Under reverse acquisition accounting, NICC will be deemed the acquirer for accounting purposes only, and the Company will be treated as the acquiree. As a result, the Company will expense all merger transaction expenses as incurred. These expenses totaled $2,888,000 for the thirteen and twenty-six weeks ended June 29, 2002.

     If the transactions contemplated by the Merger Agreement are completed, each stockholder who holds shares of the Company’s common stock at the effective time of the merger will receive one share of class A callable puttable common stock of New Dreyer’s. Under the amended and restated certificate of incorporation of New Dreyer’s, subject to the terms set forth therein, the holders of New Dreyer’s class A callable puttable stock will be permitted to sell (put) some or all of their shares to New Dreyer’s for $83.00 per share during two periods, the first beginning on December 1, 2005 and ending on January 13, 2006, and the second beginning on April 3, 2006 and ending on May 12, 2006. The New Dreyer’s class A callable puttable common stock will also be subject to redemption (call) by New Dreyer’s at the request of Nestlé at $88.00 per share during a six-month period beginning January 1, 2007. For the contribution of its ownership interest of NICC, Nestlé Holdings, Inc. will receive approximately 55 million shares of class B common stock of New Dreyer’s. The class B common shares are similar to the class A common shares, except that they lack the call and put features. The shares of the Company’s common stock currently held by Nestlé will be converted into the same number of shares of class B common stock of New Dreyer’s. As of June 29, 2002, Nestlé owned approximately 23 percent of the Company’s common stock on a diluted basis. If the transactions contemplated by the Merger Agreement are completed, Nestlé and NICC Holdings, Inc. will own approximately 67 percent of the diluted common stock of New Dreyer’s.

     Each outstanding and unvested option to purchase the Company’s common stock under the Company’s existing stock option plans became fully vested on June 14, 2002, the date that the Company’s board of directors approved the Merger Agreement and the transactions contemplated by the Merger Agreement. In connection with the execution of the Merger Agreement, certain executive officers entered into employment agreements which, among other things, waived the accelerated vesting of such officer’s unvested stock options as a result of the approval of the transactions by the

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Company’s board of directors. The employment agreements are effective if and when the transactions contemplated by the Merger Agreement are completed. Under the Merger Agreement, the Company can have no more than 41,393,348  outstanding or issuable shares of common stock if and when the transactions contemplated by the Merger Agreement are completed. This total includes shares issuable upon exercise of options, whether vested or unvested.

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

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

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

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

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

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ADOPTION OF NEW ACCOUNTING PRONOUNCEMENTS

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

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

     The Company adopted EITF 01-9 at the beginning of fiscal 2002. The Company presented expenses of $63,038,000 and $110,708,000, respectively, in accordance with this pronouncement for the thirteen and twenty-six weeks ended June 29, 2002. The Company retroactively reclassified expenses of $49,410,000 and $82,026,000, respectively, for the thirteen and twenty-six weeks ended June 30, 2001. The retroactive reclassification of these expenses resulted in a decrease in total sales and gross profit, along with a corresponding decrease in selling, general and administrative expenses, with no effect on net income as previously reported.

     Accounting for Goodwill and Other Intangible Assets

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

     A reconciliation of reported net income and net income per common share to the amounts adjusted for the exclusion of goodwill amortization of $980,000 and $2,093,000, respectively, for the thirteen and twenty-six weeks ended June 30, 2001, net of the related income tax effects of $382,000 and $806,000, respectively, follows:

			Thirteen Weeks Ended								Twenty-six Weeks Ended
(In thousands, except per share amounts)			June 29, 2002				June 30, 2001				June 29, 2002				June 30, 2001
Reported net income			$	11,686			$	6,935			$	12,996			$	2,049
Goodwill amortization, net of tax								598								1,287
Adjusted net income			$	11,686			$	7,533			$	12,996			$	3,336
Net income per common share:
	Reported basic		$	.34			$	.24			$	.38			$	.07
	Goodwill amortization, net of tax							.02								.05
	Adjusted basic		$	.34			$	.26			$	.38			$	.12
	Reported diluted		$	.31			$	.20			$	.35			$	.07
	Goodwill amortization, net of tax							.01								.04
	Adjusted diluted		$	.31			$	.21			$	.35			$	.11

     In accordance with SFAS No. 142, the Company reclassified the long-term deferred income tax liability associated with nondeductible goodwill, resulting in a noncash reduction in goodwill and a corresponding reduction in the deferred income tax liability of $10,166,000. Also in accordance with SFAS No. 142, the Company now presents goodwill separately from other intangibles in the Consolidated Balance Sheet. In addition, the Company reclassified $53,927,000 of acquisition-related intangibles with indefinite lives to goodwill at the beginning of the first quarter of 2002. Fiscal 2001 acquisition-related intangibles are included in Other Intangibles, Net, in the Consolidated Balance Sheet.

Accounting for the Impairment or Disposal of Long-Lived Assets

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

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RESULTS OF OPERATIONS

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

																			Period-to-Period
																			Variance
			Percentage of Sales																Favorable (Unfavorable)
																			Thirteen				Twenty-six
																			Weeks				Weeks
			Thirteen Weeks Ended								Twenty-six Weeks Ended								Ended				Ended
																			2002				2002
			June 29,				June 30,				June 29,				June 30,				Compared				Compared
			2002				2001				2002				2001				To 2001				To 2001
Net sales				100.0	%			100.0	%			100.0	%			100.0	%			12.3	%			16.1	%
Costs and expenses:
	Cost of goods sold			85.7				87.5				87.7				88.8				(10.1	)			(14.7	)
	Selling, general and administrative			7.8				8.4				8.2				9.6				(3.7	)			0.7
	Interest, net of amounts capitalized			0.6				1.0				0.6				1.1				35.6				38.1
	Other expense (income)			0.3				(0.3	)			0.1				(0.2	)			(242.7	)			(116.2	)
	Merger transaction expenses			0.8				—				0.4				—			NM				NM
				95.2				96.6				97.0				99.3				(10.7	)			(13.4	)
Income before income tax provision				4.8				3.4				3.0				0.7				59.5				373.1
Income tax provision				1.7				1.3				1.1				0.3				(49.0	)			(334.3	)
Net income				3.1				2.1				1.9				0.4				66.0				398.1
Accretion of preferred stock to redemption value				—				—				—				—				—				—
Preferred stock dividends				—				—				—				—				—				—
Net income available to common stockholders				3.1	%			2.1	%			1.9	%			0.4	%			68.5				534.3