FORM 10-Q

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

(Mark One)

For the quarterly period ended September 25, 2004

OR

Commission file number 000-50325

DREYER’S GRAND ICE CREAM HOLDINGS, 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 þ No o

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

Yes þ No o

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

Table of Contents

PART I: FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS.

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

      See accompanying Notes to Consolidated Financial Statements.

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

See accompanying Notes to Consolidated Financial Statements.

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DREYER’S GRAND ICE CREAM HOLDINGS, INC.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY

See accompanying Notes to Consolidated Financial Statements.

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

      See accompanying Notes to Consolidated Financial Statements.

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DREYER’S GRAND ICE CREAM HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

Note 1. Description of Business and Basis of Presentation

Description of Business

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

Financial Statement Form and Content

     The Consolidated Financial Statements for the quarter and three quarters ended September 25, 2004 and September 27, 2003 have not been audited by an independent registered public accounting firm, but include all adjustments, consisting only of normal recurring adjustments, which management considers necessary for a fair presentation of the consolidated operating results for the interim periods. The statements have been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission. Accordingly, certain information and footnote disclosures normally included in financial statements prepared in conformity with accounting principles generally accepted in the United States of America (U.S. GAAP) have been condensed or omitted pursuant to such rules and regulations. The operating results for interim periods are not necessarily indicative of results to be expected for an entire year. The aforementioned statements should be read in conjunction with the Consolidated Financial Statements for the year ended December 27, 2003, appearing in the Company’s 2003 Annual Report on Form 10-K.

Dreyer’s Nestlé Transaction

     The Company is the successor entity to the Nestlé Ice Cream Company, LLC (NICC) business. The Company was formed as a result of the combination of Dreyer’s Grand Ice Cream, Inc. (DGIC) and NICC (the Dreyer’s Nestlé Transaction). The Dreyer’s Nestlé Transaction closed on June 26, 2003 (the Merger Closing Date) and was accounted for as a reverse acquisition under the purchase method of accounting as required by Statement of Financial Accounting Standards No. 141, “Accounting for Business Combinations” (Note 7). For this purpose, NICC was deemed to be the acquirer and DGIC was deemed to be the acquiree.

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

The Divestiture Transaction

     As a condition to the closing of the Dreyer’s Nestlé Transaction, the United States Federal Trade Commission (FTC) required that DGIC and NICC divest certain assets. On March 3, 2003, New December, Inc. (the former name of the Company), DGIC, NICC and Integrated Brands, Inc. (Integrated Brands), a subsidiary of CoolBrands International, Inc. (CoolBrands), entered into an Asset Purchase and Sale Agreement, which was amended and restated on June 4, 2003 (the APA). The APA provided for the sale of DGIC’s Dreamery^® and Whole Fruit™ Sorbet brands and the assignment of its license to the Godiva^® ice cream brand (the Dreamery, Whole Fruit and Godiva brands are referred to as the Divested Brands) and the transfer and sale by NICC of leases, warehouses, equipment and vehicles and related distribution assets (the Purchased Assets) in certain states and territories (the Territories) to Eskimo Pie Frozen Distribution, Inc. (Eskimo Pie), a subsidiary of Integrated Brands. On July 5, 2003 (the

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Divestiture Closing Date), the parties closed the transaction (the Divestiture Transaction) (Note 7 and Note 10) and the Company received $10,000,000 in consideration for the sale of the Divested Brands and Purchased Assets.

     On July 9, 2004, the FTC approved a request made by the Company and Integrated Brands to amend certain agreements between the parties and thereby modify the Decision and Order issued by the FTC on November 12, 2003 in In the Matter of Nestlé Holdings, Inc. et al., Docket No. C-40 (the Decision and Order) authorizing the Divestiture Transaction, 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 agreements between the parties 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 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 September 25, 2004, there were approximately 234 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 $4,752,000 of Other intangibles, net acquired in the Dreyer’s Nestlé Transaction (Note 6). Silhouette sells low fat and low carb ice cream snacks under its distinctive brands, Skinny Cow^® and Skinny Carb^®. 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 owns real property adjacent to the Company’s manufacturing plant in Laurel, Maryland (the Plant) 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.

Note 2. Significant Accounting Policies

Fiscal Year

     Effective upon the closing of the Dreyer’s Nestlé Transaction, the Company changed its fiscal periods from NICC’s calendar year ending on December 31st with interim periods based on a four- or five-week month (13 weeks per quarter) to a 52-week or 53-week year ending on the last Saturday in December with fiscal quarters ending on the Saturday closest to the end of the calendar quarter. This change in fiscal periods did not have a material impact on the Consolidated Financial Statements.

     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 operating results for interim periods are not necessarily indicative of the results to be expected for an entire year.

     The Consolidated Financial Statements for the quarter ended September 25, 2004 include the results of operations of DGIC and NICC for the period from June 27, 2004 to September 25, 2004 (91 days). The Consolidated Financial Statements for the quarter ended September 27, 2003 include the results of operations of DGIC and NICC for the period from June 29, 2003 to September 27, 2003 (91 days).

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     The Consolidated Financial Statements for the three quarters ended September 25, 2004 include the results of operations of DGIC and NICC for the entire period from December 28, 2003 to September 25, 2004 (273 days). The Consolidated Financial Statements for the three quarters ended September 27, 2003 include the results of operations of DGIC for the period following the Merger Closing Date to September 27, 2003 (93 days), and of NICC for the period from January 1, 2003 to September 27, 2003 (270 days).

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 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.

     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.

Financial Statement Presentation

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

New Accounting Pronouncements

     In January 2003, the Financial Accounting Standards Board issued FASB Interpretation No. 46, “Consolidation of Variable Interest Entities” (FIN 46). This interpretation, which was subsequently revised in December 2003 (FIN 46-R), clarifies certain issues related to Accounting Research Bulletin No. 51, “Consolidated Financial Statements” and addresses consolidation by business enterprises of the assets, liabilities, and results of the activities of a variable interest entity. The Company has determined that it does not hold a significant variable interest in a variable interest entity under FIN 46-R at September 25, 2004.

Note 3. Inventories

     Inventories are stated at the lower of cost (determined by the first-in, first-out method) or market. Inventories at September 25, 2004 and December 27, 2003 consisted of the following:

     Inventories on consignment with retailers and distributors included in the above balances at September 25, 2004 and December 27, 2003 totaled $12,711,000 and $10,674,000, respectively.

Note 4. Butter Investments

     Under current Federal and state regulations and industry practice, the price of cream, a primary ingredient in ice cream, is linked to the price of butter. In an effort to proactively mitigate the effects of butter price volatility, the Company will periodically purchase butter or butter futures contracts with the intent of reselling or settling its positions in order to reduce its exposure to the price volatility of this market. Since the Company’s investment in

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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 expense, net.

     Investments in butter, included in Prepaid expenses and other in the Consolidated Balance Sheet, had a market value totaling $1,222,000 and $6,277,000 at September 25, 2004 and December 27, 2003, respectively. During the quarters ended September 25, 2004 and September 27, 2003, losses from butter investments, included as a component of Other expense, net, totaled $2,403,000 and $789,000, respectively. During the three quarters ended September 25, 2004 and September 27, 2003, losses from butter investments, included as a component of Other expense, net, totaled $1,429,000 and $832,000, respectively.

Note 5. Deferred Compensation Plan

     In April 2004, the Company implemented an unfunded, non-qualified deferred compensation plan (the Plan). The 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 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 $2,791,000 at September 25, 2004. The liability for the deferred compensation, included in Other long-term obligations, was $3,006,000 at September 25, 2004. For the quarter and three quarters ended September 25, 2004, participant contributions totaled $1,095,000 and $3,001,000, respectively. The difference between the cumulative participant contributions and the deferred compensation represents the change in market value during the three quarters ended September 25, 2004.

Note 6. Other Intangibles, Net

     The gross carrying amount and related accumulated amortization of other intangibles at September 25, 2004 and December 27, 2003 consisted of the following:

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     Amortization expense of other intangibles for the quarters ended September 25, 2004 and September 27, 2003 was $983,000 and $1,542,000, respectively. Amortization expense of other intangibles for the three quarters ended September 25, 2004 and September 27, 2003 was $3,399,000 and $2,067,000, respectively.

     Future estimated amortization expense for the last quarter of 2004 and for the four fiscal periods ending on the last Saturday of December 2005 through 2008 and thereafter are as follows:

Note 7. Goodwill

     The changes in the carrying amount of Goodwill for the three quarters ended September 25, 2004 consisted of the following:

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 quarter and three quarters ended September 27, 2003. 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

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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.

Note 8. Long-term debt

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

(1) 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).

     During the second quarter of 2004, the Company exercised its option to extend the current facility from its initial expiration date of June 26, 2004 for an additional twelve-month term expiring on June 26, 2005.

     At September 25, 2004, the Company’s borrowings on this facility were $310,000,000 bearing interest at 1.90 percent. At December 27, 2003, the Company’s borrowings under this facility were $125,000,000 bearing interest at 2.37 percent. Net proceeds from the Nestlé S.A. credit facility were $185,000,000 and $145,000,000 during the three quarters ended September 25, 2004 and September 27, 2003, respectively.

     Interest expense under this facility totaled $1,374,000 and $900,000 for the quarters ended September 25, 2004 and September 27, 2003, respectively. Interest expense under this facility totaled $3,138,000 and $900,000 for the three quarters ended September 25, 2004 and September 27, 2003, respectively.

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(1a) 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 $400,000,000 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 $400,000,000 Nestlé S.A bridge loan facility.

     At September 25, 2004 the Company had $50,000,000 available under this facility. No advances are currently outstanding.

(2) 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 have 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 can increase 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.

     At September 25, 2004, the Company had $24,286,000 of remaining principal outstanding on these Notes, with $2,143,000 currently due on the next principal payment scheduled for June 1, 2005.

     Subsequent to the quarter ended June 26, 2004, and upon review of its financial results, 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, subsequent to the quarter ended September 25, 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.

Note 9. 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.

     The Company accounts for its employee stock options at fair value under FASB Interpretation No. 44, “Accounting for Certain Transactions Involving Stock Compensation” (FIN 44). In accordance with FIN 44, 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 determined using the Black-Scholes option pricing model, as of the Merger Closing Date, using the following assumptions:

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

     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 is $60.69. The weighted-average exercise price per vested option share on the remaining vested stock options outstanding is $23.30. 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 $51,419,000 for the three quarters ended September 25, 2004.

     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 is $54.03. The weighted-average exercise price per unvested option share is $25.44. The fair value of the unvested stock options that vested in the three quarters ended September 25, 2004 was $16,479,000.

     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 11). The weighted-average fair value per share of the vested and unvested options at the Initial Put Date will be $64.38 and $55.96 (representing the $83.00 put price, less the weighted average option grant price), respectively.

     Accretion of vested and unvested options, included in the Consolidated Statement of Operations, for the quarter and three quarters ended September 25, 2004 and September 27, 2003, consisted of the following:

     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 in the Consolidated Statement of Operations, was $4,266,000 and $9,750,000 for the quarter ended September 25, 2004 and September 27, 2003, respectively. Stock option compensation expense, included in Selling, general and administrative expenses in the Consolidated Statement of Operations, was $12,797,000 and $9,964,000 for the three quarters ended September 25, 2004 and September 27, 2003, respectively. The short-term portion of unearned compensation, included in Prepaid expenses and other in the Consolidated Balance Sheet, totaled $13,693,000 and $16,788,000 at September 25, 2004 and December 27, 2003, respectively. The long-term portion of unearned compensation, included in Other assets, in the Consolidated Balance Sheet totaled $6,830,000 and $16,532,000 at September 25, 2004 and December 27, 2003, respectively.

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Note 10. Commitments and Contingencies

Purchase Commitments

     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 September 25, 2004 total approximately $167,880,000.

Guarantees

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

The Divestiture Transaction

     Pursuant to the APA (Note 1), the parties entered into certain agreements (the Divestiture Agreements) related to the: (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 volume limits for three years from the Divestiture Closing Date, with such limits decreasing over two additional years.

     On July 9, 2004, the FTC approved a request made by the Company and Integrated Brands to amend certain agreements between the parties 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 agreements between the parties 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.

     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 at December 31, 2003. Pursuant to the 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.

Note 11. 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 redeem (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.

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     The Class A callable puttable common stock may be redeemed (called) by the Company at the request of Nestlé 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.

     The following table summarizes the 2004 activity for the Class A callable puttable common stock in the Consolidated Balance Sheet:

     The Class A callable puttable common stock is being accreted using the effective interest rate method from the value at the closing of the Dreyer’s Nestlé Transaction to the put value of $83 at the Initial Put Date. Accretion of Class A callable puttable common stock for the quarters ended September 25, 2004 and September 27, 2003 totaled $66,345,000 and $55,329,000, respectively. Accretion of Class A callable puttable common stock for the three quarters ended September 25, 2004 and September 27, 2003 totaled $191,967,000 and $56,570,000, 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 provides that the Company shall declare and pay cash dividends on the Company’s common stock (Class A callable puttable and Class B) in any fiscal year in an amount not exceeding the greater of $.24 per share (without giving effect to any stock split, material issuance of stock or similar event after June 26, 2003), or 30 percent of the Company’s consolidated net income for the preceding fiscal year. The Governance Agreement provides that the calculation of net income will exclude the ongoing noncash impacts of accounting entries arising from the accounting for the Dreyer’s Nestlé Transaction.

Note 12. 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). The Company formulated the Integration Plan to restructure and integrate certain activities. During the third quarter of 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 the fourth quarter of 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,

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$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. Through September 25, 2004, the Company eliminated positions for 139 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 September 25, 2004, 153 of the 157 employees had been paid severance. During the quarter and three quarters ended September 25, 2004, the Company adjusted severance and related benefits by $(209,000) and $(134,000), respectively. The majority of the remaining liability of $1,635,000 is expected to be paid during the remainder of 2004.

     There was no severance and retention expense related to the Integration Plan in the three quarters ended September 27, 2003.

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. During the quarters ended September 25, 2004 and September 27, 2003, the Company adjusted severance and retention benefits by $(428,000) and expensed $5,081,000 of severance and retention benefits, respectively. During the three quarters ended September 25, 2004 and September 27, 2003, the Company expensed $2,727,000 and $45,905,000 of severance and retention, respectively. The severance plan expenses relate to 823 positions, primarily at the distribution centers that were sold to Eskimo Pie. In addition, the Company also expects to eliminate up to an additional 11 positions in finance and administration. Through September 25, 2004, 810 employees have been paid severance and 13 employees have been notified but have not yet been paid severance. The estimated maximum liability for the remaining vested and unvested severance and retention is approximately $1,611,000. The majority of this amount is expected to be paid during the remainder of 2004.

     Severance and retention expense (relating to the NICC Severance and Retention Plan) included in the Consolidated Statement of Operations for the quarters and three quarters ended September 25, 2004 and September 27, 2003, consisted of the following:

Integration Plan and NICC Severance and Retention Plan

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

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

Note 13. 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 common shares outstanding. The denominator for diluted net loss per share includes the number of weighted-average common shares outstanding plus the effect of potentially dilutive securities. Diluted net loss per common share for the quarter and three quarters ended September 25, 2004 and September 27, 2003 is equal to basic net loss per common share because the effect of common stock equivalents is antidilutive.

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

     The weighted-average common shares presented above include both the Class A callable puttable common shares and the Class B common shares. The weighted-average Class A callable puttable and Class B common shares for the quarter and three quarters ended September 25, 2004 include the Class A callable puttable shares plus the 64,564,315 Class B common shares, both of which were outstanding for the entire period. The weighted-average Class A callable puttable and Class B common shares for the quarter and three quarters ended September 27, 2003 include the Class A callable puttable shares which were outstanding beginning on the Merger Closing Date and ending on September 27, 2003, plus the 64,564,315 Class B common shares which were outstanding for the entire period.

Antidilutive Securities

     Potentially dilutive securities, calculated in terms of the weighted-average common share equivalent of stock options outstanding, are excluded from the calculations of diluted net loss per share of common stock when their inclusion would have an antidilutive effect. During the quarter and three quarters ended September 25, 2004, 822,000 and 977,000, respectively, of potentially dilutive common equivalent shares were excluded from the weighted-average share calculation for purposes of calculating weighted-average diluted common shares and diluted loss per common share. During the quarter and three quarters ended September 27, 2003, 3,032,000 and 3,270,000, respectively, of potentially dilutive common equivalent shares were excluded from the weighted-average share

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calculation for purposes of calculating weighted-average diluted common shares and diluted loss per share of common stock.

Note 14. Related Party Transactions

     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 8) and Class A callable puttable common stock (Note 11) :

Inventory Purchases

     The Company’s inventory purchases from Nestlé Prepared Foods or its affiliates were $4,973,000 and $3,702,000 for the quarters ended September 25, 2004 and September 27, 2003, respectively. The Company’s inventory purchases from Nestlé Prepared Foods or its affiliates were $13,239,000 and $9,566,000 for the three quarters ended September 25, 2004 and September 27, 2003, respectively.

Taxes Receivable Due from Affiliate

     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 affiliate. Taxes receivable due from affiliate, included in the Consolidated Balance Sheet, totaled $12,236,000 at December 27, 2003. The balance was paid in full by Nestlé in the third quarter of 2004.

Net sales and Cost of goods sold to affiliates

     Net sales to affiliates, included in the 2004 and 2003 Consolidated Statement of Operations, totaled $1,360,000 and $1,078,000 for the quarters ended September 25, 2004 and September 27, 2003, respectively. Net sales to affiliates, included in the 2004 and 2003 Consolidated Statement of Operations, totaled $3,984,000 and $2,882,000 for the three quarters ended September 25, 2004 and September 27, 2003, respectively.

     Cost of goods sold to affiliates, included in the 2004 and 2003 Consolidated Statement of Operations, totaled $1,360,000 and $1,078,000 for the quarters ended September 25, 2004 and September 27, 2003, respectively. Cost of goods sold to affiliates, included in the 2004 and 2003 Consolidated Statement of Operations, totaled $3,984,000 and $2,882,000 for the three quarters ended September 25, 2004 and September 27, 2003, 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 $154,000 and $254,000 for the quarters ended September 25, 2004 and September 27, 2003, respectively, primarily for information technology services provided under the Transition Services Agreement. The Company recognized Selling, general and administrative expense of $559,000 and $1,212,000 for the three quarters ended September 25, 2004 and September 27, 2003, respectively, for services provided under the Transition Services Agreement.

Royalty Expense to Affiliates

     Royalty expense to affiliates, included in the Consolidated Statement of Operations, 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 $8,931,000 and $6,553,000 for the quarters ended September 25, 2004 and September 27, 2003, respectively. Royalty expense to affiliates totaled $21,629,000 and $18,685,000 for the three quarters ended September 25, 2004 and September 27, 2003, respectively.

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

     The Management’s Discussion and Analysis should be read in conjunction with the Consolidated Financial Statements for the year ended December 27, 2003, appearing in the 2003 Annual Report on Form 10-K of Dreyer’s Grand Ice Cream Holdings, Inc. (the Company).

Forward-Looking Statements

     This Quarterly Report on Form 10-Q 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 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. You can find many of these statements by looking for words including, for example, “believes”, “expects”, “anticipates”, “estimates” or similar expressions in this Quarterly Report on Form 10-Q or in documents incorporated by reference (if any) in this Quarterly Report on Form 10-Q. 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 Quarterly Report on Form 10-Q and in the documents referred to in this Quarterly Report on Form 10-Q (if any), including, but not limited to the following:

	•		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 business of Dreyer’s Grand Ice Cream, Inc. and Nestlé Ice Cream Company, LLC, including the integration of the operations of those companies and compliance with the Federal Trade Commission’s order, and costs or difficulties associated with the integration of the operations of other companies that have been acquired, including The Häagen-Dazs Shoppe Company and Silhouette Brands, Inc.
	•		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;

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	•		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 actions in Iraq and Afghanistan 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.

Risks and Uncertainties

     The business combination (the Dreyer’s Nestlé Transaction) of Dreyer’s Grand Ice Cream, Inc. (DGIC) and Nestlé Ice Cream Company, LLC (NICC) on June 26, 2003 (the Merger Closing Date) 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. The Company is in the process of implementing consistent internal controls across the combined companies, although this process has not been completed. Any difficulty in successfully integrating the operations of the two businesses, including the implementation of consistent internal controls, 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 continues 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, under the Decision and Order issued by the FTC on June 25, 2003 in In the Matter of Nestlé Holdings, Inc. et al., Docket No. C-40 (the Decision and Order), the Federal Trade Commission (FTC) required that DGIC and NICC divest certain assets (the Divestiture Transaction). In accordance with the 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 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.

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     On July 9, 2004, the FTC approved a request made by the Company and Integrated Brands to amend certain agreements between the parties 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 agreements between the parties 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.

     Since the Merger Closing Date, the Company has completed the acquisitions of The Häagen-Dazs Shoppe Company, Inc. and Silhouette Brands, Inc. (Silhouette). The Company is in the process of integrating these businesses and difficulties in successfully integrating the operations of these businesses with the Company’s could lead to a failure to realize the anticipated benefits of the acquisitions. The Company expects to continue to review opportunities to acquire other businesses or assets that would complement the Company’s business. Risks associated with such acquisitions include: (i) problems assimilating the purchased operations or assets; (ii) unanticipated costs and liabilities associated with the acquisition; (iii) diversion of management’s attention from the business of the Company; (iv) adverse effects on existing business relationships with suppliers, partners and customers; and (v) potential loss of key employees of purchased businesses. There can be no assurance that the Company will be successful in overcoming future problems encountered in connection with the Company’s past or future acquisitions, and the Company’s inability to do so could have a material adverse effect on the Company’s business, financial condition, results of operations and cash flows.

     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. As an alternative, the Company employed a statistical-based sampling methodology to calculate an allowance for freezer cabinets that were retired by retailers and independent distributors, but which had not yet been reported to the Company. As specific freezer cabinets were reported or identified as retired through physical counts, the remaining net book value of the retired freezer cabinets, if any, was applied against this allowance. In the second quarter of 2004, the Company implemented a new system to inventory and track each freezer cabinet and now records freezer cabinet retirements as they occur. Accordingly, as of and subsequent to June 26, 2004, the allowance for freezer retirements was eliminated.

     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.

     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 proposed regulations on an ongoing basis.

     The primary factors causing volatility in the Company’s manufacturing costs are the costs of dairy raw materials and other commodities used in the Company’s products. Under current Federal and state regulations and industry practice, the price of cream is linked to the price of butter. The average price per pound of AA butter in the United

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States from 1993 to 2003 was $1.19. However, the market is inherently volatile and can experience large seasonal fluctuations. The monthly average price per pound of AA butter at the end of the third quarter of 2004 and 2003 was $1.68 and $1.18, 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. The Company proactively addresses 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. Adverse weather conditions in a key growing region reduced the supply of vanilla, resulting in substantial cost increases. 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 Critical Accounting Policies (appearing in the 2003 Annual Report on Form 10-K of the Company), 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.

     Included below are updates to the Critical Accounting Policies appearing in the 2003 Annual Report on Form 10-K of the Company:

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. 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. As an alternative, the Company employed a statistical-based sampling methodology to calculate an allowance for freezer cabinets that were retired by retailers and independent distributors, but which had not yet been reported to the Company. As specific freezer cabinets were reported or identified as retired through physical counts, the remaining net book value of the retired freezer cabinets, if any, was applied against this allowance. In the second quarter of 2004, the Company created a new system which allows for the specific identification of freezers and the recording of retirements when they occur. Accordingly, as of and subsequent to June 26, 2004, the allowance for freezer retirements was eliminated. The change in the methodology for recording retail freezer cabinet retirements did not have a material impact on the Company’s results of operations.

     The net book value of freezer cabinets with retail customers and independent distributors was $16,454,000 (original cost of $38,607,000 less accumulated depreciation of $22,153,000) and $17,519,000 (original cost of $41,366,000, less accumulated depreciation of $17,997,000 and an allowance for retirements of $5,850,000) at September 25, 2004 and December 27, 2003, respectively.

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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 in the process of being 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. 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.

     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 current five geographic segments that it uses 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.

     Goodwill at September 25, 2004 and December 27, 2003 totaled $1,926,872,000 and $1,931,425,000, respectively.

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 25 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.

     As an example, during 2003, the Company determined that the estimated useful life of its freezers should be shortened from eight years to five years. The Company decreased the remaining depreciable life on a prospective

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basis. This resulted in an increase in depreciation expense of $3,000,000 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.

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 the quarter ended September 25, 2004 include the results of operations of DGIC and NICC for the period from June 27, 2004 to September 25, 2004 (91 days). The Consolidated Financial Statements for the quarter ended September 27, 2003 include the results of operations of DGIC and NICC for the period from June 29, 2003 to September 27, 2003 (91 days).

     The Consolidated Financial Statements for the three quarters ended September 25, 2004 include the results of operations of DGIC and NICC for the entire period from December 28, 2003 to September 25, 2004 (273 days). The Consolidated Financial Statements for the three quarters ended September 27, 2003 include the results of operations of DGIC for the period following the Merger Closing Date through September 27, 2003 (93 days), and of NICC for the period from January 1, 2003 to September 27, 2003 (270 days).

     Due to the lack of comparability of results due to the Dreyer’s Nestlé Transaction, the period-to-period percentage changes for the three quarters ended September 25, 2004 versus the three quarters ended September 27, 2003 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 quarter and three quarters ended September 27, 2003. 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.

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Financial Overview for the Third Quarter of 2004 Compared with the Third Quarter of 2003

     The Company is engaged primarily in the business of manufacturing and distributing premium and superpremium ice cream and other frozen snacks to grocery and convenience stores, foodservice accounts and independent distributors in the United States.

     The Company reported a net loss available to Class A callable puttable and Class B common stockholders of $(76,824,000), or $(.81) per diluted common share for the quarter ended September 25, 2004, compared to a net loss available to Class A callable puttable and Class B common stockholders of $(64,965,000), or $(.71) per diluted common share, for the quarter ended September 27, 2003.

Table of Percentages of Total Net Revenues and Period-to-Period Percentage Changes

     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.

     Due to the lack of comparability of results due to the Dreyer’s Nestlé Transaction, the period-to-period percentage changes for the three quarters ended September 25, 2004 versus the three quarters ended September 27, 2003 presented below are not necessarily indicative of percentage changes to be expected in the future.

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Quarter ended September 25, 2004 Compared with the Quarter ended September 27, 2003

     Total net revenues decreased $41,216,000, or eight percent, to $473,677,000 for the quarter ended September 25, 2004 from $514,893,000 for the quarter ended September 27, 2003.

     Net sales of the Company’s branded products, including licensed, joint venture products, and Net sales to affiliates (Company Brands), increased $62,873,000, or 18 percent, to $410,412,000 for the quarter ended September 25, 2004 from $347,539,000 for the quarter ended September 27, 2003. The increase in net sales was driven by the success of marketing campaigns and new product launches for specific products. In addition, net sales increased $13,142,000 due to the classification of net sales of Silhouette products as Company Brands from products manufactured and/or distributed for other companies (Partner Brands) following the Company’s acquisition of Silhouette on July 26, 2004. The increase in net sales was offset by increased promotion expenses and the termination of a joint venture agreement which decreased net sales by $11,976,000.

     Company Brands represented 87 percent of Total net revenues for the quarter ended September 25, 2004 compared to 67 percent for the quarter ended September 27, 2003. The average price of Company Brands, net of the effect of trade promotion expenses, increased by two percent. Gallon sales of Company Brands, including frozen snacks, increased approximately 6,200,000 gallons, or 16 percent, to approximately 46,000,000 gallons.

     Net sales of Partner Brands decreased $91,248,000, or 63 percent, to $53,819,000 for the quarter ended September 25, 2004 from $145,067,000 for the quarter ended September 27, 2003. The decrease was driven primarily by a $69,658,000 reduction in net sales following the termination of certain distribution agreements resulting from the Dreyer’s Nestlé Transaction. The decrease also includes a $13,142,000 reduction in Partner Brand sales following the classification of Silhouette net sales as Company Brands after the Company’s July 26, 2004 acquisition of Silhouette.

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     Partner Brands represented 11 percent of Total net revenues for the quarter ended September 25, 2004 compared to 28 percent for the quarter ended September 27, 2003. Average wholesale prices for Partner Brands decreased approximately 27 percent. Gallon sales of Partner Brands decreased approximately 4,600,000 gallons, or 49 percent, to approximately 4,700,000 gallons.

     Other revenues decreased $12,841,000, or 58 percent, to $9,446,000 for the quarter ended September 25, 2004 from $22,287,000 for the quarter ended September 25, 2003. The decrease was primarily attributed to a decrease of $4,569,000 for revenues received following the July 5, 2003 (the Divestiture Closing Date) Divesture Transaction from Integrated Brands, Inc. (Integrated Brands), a subsidiary of CoolBrands International Inc. (CoolBrands), for manufacturing and distribution of the Divested Brands and $7,662,000 for reimbursements received from Eskimo Pie Frozen Distribution, Inc. (Eskimo Pie) for expenses incurred by the Company for employees working for Eskimo Pie in the divested distribution centers in certain states and territories (the Territories). The cost of providing these services is included in Cost of goods sold.

     Cost of goods sold decreased $17,175,000, or four percent, to $416,363,000 for the quarter ended September 25, 2004 from $433,538,000 for the quarter ended September 27, 2003. The decrease in Cost of goods sold was driven by a shift in product mix from Partner Brands to Company Brands and a $4,559,000 decrease in drayage expense paid to Integrated Brands for the delivery of certain products. The decrease was offset by approximately $18,100,000 for an increase in the cost of cream.

     The Company’s gross profit decreased by $24,041,000, or 30 percent, to $57,314,000 from $81,355,000 representing a 12.1 percent gross margin for the quarter ended September 25, 2004 compared with a 15.8 percent gross margin for the quarter ended September 27, 2003 (gross profit is defined as Total net revenues less Cost of goods sold). The decrease in gross profit was primarily attributable to an $18,100,000 increase in the cost of cream and the loss of gross profit from net sales of Partner Brands following the termination of certain distribution agreements resulting from the Dreyer’s Nestlé Transaction, which was partially offset by a product mix shift from lower margin Partner Brands towards higher margin Company Brands.

     The average of the monthly average prices per pound of AA butter in the United States from 1993 to 2003 was $1.19. However, the market is inherently volatile and can experience large seasonal fluctuations. The monthly average price per pound of AA butter was $1.68 and $1.18 for the quarters ended September 25, 2004 and September 27, 2003, respectively. 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.

     Selling, general and administrative expenses decreased $19,111,000, or 23 percent, to $62,258,000 for the quarter ended September 25, 2004 from $81,369,000 for the quarter ended September 27, 2003. Selling, general and administrative expenses were 13.1 percent and 15.8 percent of Total net revenues in 2004 and 2003, respectively. The decrease is primarily attributable to a reduction in compensation related expenses of $9,450,000 due to reduced staffing levels, payroll taxes related to stock option exercises in the prior year, and reduction in the 2004 bonus accrual, a decrease of $5,484,000 attributable to stock option compensation expense, a decrease in broker commissions of $3,334,000 due to the Company now selling certain products previously handled by third parties and a decrease of $2,152,000 in Dreyer’s Nestlé Transaction consulting costs. The decreases were offset by an increase of $11,298,000 for marketing expenses.

     Interest expense decreased $136,000, or seven percent, to $1,744,000 for the quarter ended September 25, 2004 from $1,880,000 for the quarter ended September 27, 2003. Although average borrowings increased in the current quarter, significantly lower interest rates resulted in a decrease in interest expense.

     Royalty expense to affiliates increased $2,378,000, or 36 percent, to $8,931,000 for the quarter ended September 25, 2004 from $6,553,000 for the quarter ended September 27, 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 or technology owned or licensed by them and licensed or sublicensed to the Company for use in the manufacture and sale of frozen dessert products.

     Other expense, net increased $1,665,000 to $2,196,000 for the quarter ended September 25, 2004 from $531,000 for the quarter ended September 27, 2003. The increased expense is primarily attributable to an increase in losses from butter trading activities of $1,614,000.

     Severance and retention expense decreased $5,718,000, to $(637,000) for the quarter ended September 25, 2004 from $5,081,000 for the quarter ended September 27, 2003. The 2004 expense consists of severance benefit

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adjustments of $(604,000) and retention benefit adjustments of $(33,000) resulting from the Dreyer’s Nestlé Transaction. The 2003 expense consists of $(783,000) of severance benefit adjustments and $5,864,000 of retention benefit expense.

     Loss on divestiture (Reversal of accrued divestiture expenses) was $323,000 for the quarter ended September 27, 2003.

     The Income tax benefit increased by $1,953,000, or 41 percent, to $6,699,000 for the quarter ended September 25, 2004 from $4,746,000 for the quarter ended September 27, 2003. The effective tax benefit rate increased to 39 percent for the quarter ended September 25, 2004 from 33 percent for the quarter ended September 27, 2003. The effective tax benefit rate was lower during the third quarter of 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 $11,016,000 to $(66,345,000) for the quarter ended September 25, 2004 from $(55,329,000) for the quarter ended September 27, 2003. The increase is attributable to additional Class A shares that were outstanding during the quarter ended September 25, 2004 versus the quarter ended September 27, 2003 as a result of stock option exercises. The Class A callable puttable common stock is being accreted using the effective interest rate method to the put value of $83 at the December 1, 2005 Initial Put Date.

Three Quarters ended September 25, 2004 Compared with the Three Quarters ended September 27, 2003

     Total net revenues increased $434,915,000, or 54 percent, to $1,241,401,000 for the three quarters ended September 25, 2004 from $806,486,000 for the three quarters ended September 27, 2003.

     Net sales of Company Brands, including licensed, joint venture products, and Net sales to affiliates, increased $404,601,000, or 66 percent, to $1,019,237,000 for the three quarters ended September 25, 2004 from $614,636,000 for the three quarters ended September 27, 2003. The increase in net sales of Company Brands, which was primarily driven by sales of DGIC Company Brand products acquired in the Dreyer’s Nestlé Transaction, is not indicative of increases to be expected in the future.

     Company Brands represented 82 percent of Total net revenues for the three quarters ended September 25, 2004 compared to 76 percent for the three quarters ended September 27, 2003. The average price of Company Brands, net of the effect of trade promotion expenses, decreased by 12 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 a one-time shift in the mix of products attributable to the addition of the DGIC premium products to the NICC superpremium and frozen snack products as a result of the Dreyer’s Nestlé Transaction. Gallon sales of Company Brands, including frozen snacks, increased approximately 55,100,000 gallons, or 89 percent, to approximately 116,700,000 gallons as a result of the Dreyer’s Nestlé Transaction.

     Net sales of Partner Brands increased $21,751,000, or 13 percent, to $189,573,000 for the three quarters ended September 25, 2004 from $167,822,000 for the three quarters ended September 27, 2003. This increase was primarily driven by sales of Partner Brands that resulted from the Dreyer’s Nestlé Transaction.

     Partner Brands represented 15 percent of Total net revenues in the three quarters ended September 25, 2004 compared to 21 percent for the three quarters ended September 27, 2003. Average wholesale prices for Partner Brands decreased approximately eight percent. Gallon sales of Partner Brands increased approximately 2,700,000 gallons, or 23 percent, to approximately 14,400,000 gallons. These variances were a result of the volume and mix changes due to the Dreyer’s Nestlé Transaction.

     Other revenues increased $8,563,000, or 36 percent, to $32,591,000 for the three quarters ended September 25, 2004 from $24,028,000 for the three quarters ended September 27, 2003. This increase was primarily attributable to an increase of $15,640,000 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 offset by a decrease of $6,992,000 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. The cost of providing these services is included in Cost of goods sold.

     Cost of goods sold increased $444,662,000, or 66 percent, to $1,115,507,000 for the three quarters ended September 25, 2004 from $670,845,000 for the September 27, 2003. The increase in Cost of goods sold was driven

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by the incremental sales volume of the DGIC product lines, incremental distribution expenses from the DGIC distribution system, a $45,900,000 increase in the cost of cream, and drayage expense of $11,885,000 paid to Integrated Brands for the delivery of certain products.

     The Company’s gross profit decreased by $9,747,000, or seven percent, to $125,894,000 from $135,641,000, representing a 10.1 percent gross margin for the three quarters ended September 25, 2004 compared with a 16.8 percent gross margin for the three quarters ended September 27, 2003 (gross profit is defined as Total net revenues less Cost of goods sold). The decrease in gross profit is primarily attributable to the Dreyer’s Nestlé Transaction which increased Cost of goods sold by a larger amount than the increase in Total net revenues and approximately $45,900,000 for an increase in the cost of cream.

     The average of the monthly average prices per pound of AA butter in the United States from 1993 to 2003 was $1.19. However, the market is inherently volatile and can experience large seasonal fluctuations. The monthly average price per pound of AA butter was $1.84 and $1.12 for the three quarters ended September 25, 2004 and September 27, 2003, respectively. 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.

     Selling, general and administrative expenses increased $42,813,000, or 30 percent, to $184,098,000 for the three quarters ended September 25, 2004 from $141,285,000 for the three quarters ended September 27, 2003. Selling, general and administrative expenses were 14.8 percent and 17.5 percent of Total net revenues in 2004 and 2003, respectively. The dollar increase is 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 for marketing expenses, and an increase in stock option compensation expense of $2,833,000. 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 $2,769,000, or 105 percent, to $5,407,000 for the three quarters ended September 25, 2004 from $2,638,000 for the three quarters ended September 27, 2003, primarily due to higher average borrowings. In addition, due to the termination of the revolving line of credit facility on June 16, 2004, the Company expensed the remaining unamortized debt issuance costs totaling $706,000 in the second quarter of 2004.

     Royalty expense to affiliates increased $2,944,000, or 16 percent, to $21,629,000 for the three quarters ended September 25, 2004 from $18,685,000 for the three quarters ended September 27, 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 or technology owned or licensed by them and licensed or sublicensed to the Company for use in the manufacture and sale of frozen dessert products.

     Other expense, net decreased $230,000 to $224,000 for the three quarters ended September 25, 2004 from $454,000 for the three quarters ended September 27, 2003.

     Severance and retention expense decreased $43,312,000, or 94 percent, to $2,593,000 for the three quarters ended September 25, 2004 from $45,905,000 for the three quarters ended September 27, 2003. The 2004 expense consists of $1,042,000 of severance benefits and $1,551,000 of retention benefits resulting from the Dreyer’s Nestlé Transaction. The 2003 expense consists of $29,178,000 of severance benefits, $14,186,000 of retention benefits and $2,541,000 relating to the forgiveness of employee loans.

     In-process research and development expense of $11,495,000 for the three quarters ended September 27, 2003 was related to the Company’s new products under development.

     The Impairment of the distribution assets held for sale in the first half of 2003, which were subsequently sold to Eskimo Pie (in the third quarter of 2003) in connection with the Divestiture Agreement, totaled $8,715,000. Of the $10,000,000 purchase price paid in connection with the Divestiture Agreement, $1,818,000 was allocated to the Purchased Assets. The $8,715,000 impairment resulted from adjusting the net book value of the Purchased Assets to the fair value of $1,818,000.

     In 2003, certain liabilities incurred upon the closing of the Dreyer’s Nestlé Transaction relating to the closing of the Divestiture Transaction were included in the purchase price to the extent of the 72.8 percent Non-Nestlé Ownership. The remaining 27.2 percent of these divestiture expenses, approximately $2,893,000, were charged to expense in the second quarter of 2003. Reversal of accrued divestiture expenses of $216,000 for the three quarters

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ended September 25, 2004 primarily relates to marketing expenses related to the Divested Brands that were estimated to be payable by the Company. Actual divestiture expenses were less than estimated, so the excess accrual was reversed.

     The Income tax benefit increased by $2,330,000, or seven percent, to $34,258,000 for the three quarters ended September 25, 2004 from $31,928,000 for the three quarters ended September 27, 2003. While the Loss before income tax benefit decreased by $8,911,000, or nine percent, to $(87,841,000) for the three quarters ended 2004 from $(96,752,000) for the same period last year, the income tax benefit increased compared to the same period last year due to an increase in the effective tax benefit rate to 39 percent for the three quarters ended 2004 from 33 percent for the same period last year. The effective tax benefit 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 $135,397,000 to $191,967,000 for the three quarters ended September 25, 2004 from $56,570,000 for the three quarters ended September 27, 2003. The increase is attributable to the fact that there were 273 days of accretion in the three quarters ended of September 25, 2004 and only 93 days of accretion in the three quarters ended September 27, 2003. The Class A callable puttable common stock is being accreted using the effective interest rate method to the put value of $83 at the December 1, 2005 Initial Put Date.

New Accounting Pronouncements

     In January 2003, the Financial Accounting Standards Board issued FASB Interpretation No. 46, “Consolidation of Variable Interest Entities” (FIN 46). This interpretation, which was subsequently revised in December 2003 (FIN 46-R), clarifies certain issues related to Accounting Research Bulletin No. 51, “Consolidated Financial Statements” and addresses consolidation by business enterprises of the assets, liabilities, and results of the activities of a variable interest entity. The Company implemented FIN 46 in the second quarter of 2003. The Company has determined that it does not hold a significant variable interest in a variable interest entity under FIN 46-R at September 25, 2004.

Financial Condition

Liquidity and Capital Resources

     The Company’s primary cash needs are to fund working capital requirements, to fund capital expenditures, finance acquisitions of distributors, and to distribute dividends to stockholders. Working capital increased by $16,480,000 over the three quarters ended September 25, 2004. The increase is primarily attributable to an increase in Trade accounts receivable and other accounts receivable and Inventories of $31,401,000 and $15,997,000, respectively, over the fiscal 2003 year-end primarily due to seasonality. This increase was offset by an increase in Accounts payable and accrued liabilities of $11,727,000 due to seasonality and a decrease in Prepaid expenses and other of $8,706,000 due to a decrease in butter investments. Taxes receivable due from affiliate decreased by $12,236,000 due to the receipt of the final reimbursement from Nestlé for tax losses.

     During the three quarters ended September 25, 2004 and September 27, 2003, the Company paid $12,935,000 and $17,338,000, respectively, in severance and retention benefits. The Company expects to pay the accrued severance and retention expenses of $2,510,000 during the remainder of 2004. The estimated maximum liability for the remaining vested and unvested severance and retention is approximately $3,246,000. The majority of this amount is expected to be paid during the remainder of 2004.

     The Company made capital expenditures of $91,039,000 and $13,515,000 in the three quarters ended September 25, 2004 and September 27, 2003, respectively. The Company plans to make additional capital expenditures of approximately $107,000,000 during the remainder of 2004. In the three quarters ended September 25, 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 its capacity. In addition, the Company is significantly expanding its East Coast production facility to enable manufacturing to be close 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).

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     For the three quarters ended September 25, 2004, the Company paid $58,300,000 for the capital stock of Silhouette, and $707,000 for the equity interest of The Häagen-Dazs Shoppe Company, Inc. (the Shoppe Company). Silhouette sells low fat and low carb ice cream snacks under its distinctive brands, Skinny Cow^® and Skinny Carb^®. The Shoppe Company has been the franchisor of the United States Häagen-Dazs parlors in the United States. For the three quarters ended September 27, 2003, the Company acquired $597,000 of cash as a result of the Dreyer’s Nestlé Transaction.

     During the three quarters ended September 25, 2004, cash dividends paid totaled $16,979,000 resulting from a 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 September 25, 2004, the Company had 94,838,738 shares of common stock outstanding (consisting of 30,274,423 shares of Class A callable puttable common stock and 64,564,315 shares of Class B common stock) and options to purchase 1,479,364 shares of common stock. In the event that all options outstanding at September 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 $17,118,000 and $52,541,000 in the three quarters ended September 25, 2004 and September 27, 2003, respectively. During the three quarters ended September 25, 2004, options to purchase 825,222 shares were exercised (net of shares surrendered), with a weighted-average exercise price per share of $21.26. At September 25, 2004, 836,999 vested options and 642,365 unvested options were outstanding. The Company expects that most of the remaining vested stock options will be exercised during the last quarter of 2004 and 2005. The unvested stock options outstanding at September 25, 2004 that will vest during the last quarter of 2004, fiscal 2005 and fiscal 2006 total 36,072, 285,110 and 321,183, respectively.

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

(1) 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).

     During the second quarter of 2004, the Company exercised its option to extend the current facility from its initial expiration date of June 26, 2004 for an additional twelve-month term expiring on June 26, 2005.

     At September 25, 2004, the Company’s borrowings on this facility were $310,000,000 bearing interest at 1.90 percent. At December 27, 2003, the Company’s borrowings under this facility were $125,000,000 bearing interest at 2.37 percent. Net proceeds from the Nestlé S.A. credit facility were $185,000,000 and $145,000,000 during the three quarters ended September 25, 2004 and September 27, 2003, respectively.

     Interest expense under this facility totaled $1,374,000 and $900,000 for the quarters ended September 25, 2004 and September 27, 2003, respectively. Interest expense under this facility totaled $3,138,000 and $900,000 for the three quarters ended September 25, 2004 and September 27, 2003, respectively.

(1a) 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 $400,000,000 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 $400,000,000 Nestlé S.A bridge loan facility.

     At September 25, 2004 the Company had $50,000,000 available under this facility. No advances are currently outstanding.

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(2) 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 have 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 can increase 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.

     At September 25, 2004, the Company had $24,286,000 of remaining principal outstanding on these Notes, with $2,143,000 currently due on the next principal payment scheduled for June 1, 2005.

     Subsequent to the quarter ended June 26, 2004, and upon review of its financial results, 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, subsequent to the quarter ended September 25, 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.

Standby Letters of Credit

     At September 25, 2004, the Company was the account party for irrevocable standby letters of credit issued by Citibank, N.A. totaling $23,425,000. Of this total, $22,375,000 served as a guarantee by the issuing bank to cover workers compensation, general liability and vehicle claims.

     At December 27, 2003, the Company was the account party for irrevocable standby letters of credit issued by Citibank, N.A. totaling $7,925,000. Of this total, $7,875,000 served as a guarantee by the issuing bank to cover workers compensation, general liability and vehicle claims.

     The Company pays fees on each of these standby letters of credit. Drawings under the standby letters of credit are subject to interest at various rates.

Fair Value of Financial Instruments

     At September 25, 2004, 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 30,274,423 shares of Class A callable puttable common stock outstanding and outstanding options to purchase 1,479,364 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.

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     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.

Recent Acquisitions

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 $4,752,000 of Other intangibles, net acquired in the Dreyer’s Nestlé Transaction (Note 6). Silhouette sells low fat and low carb ice cream snacks under its distinctive brands, Skinny Cow^® and Skinny Carb^®. 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 owns real property adjacent to the Company’s manufacturing plant in Laurel, Maryland (the Plant) 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.

Related Party Transactions

     In addition to the Nestlé S.A. Credit Facility, the Nestlé Capital Corporation Facility, the Nestlé USA, Inc. Demand Notes, the 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 $4,973,000 and $3,702,000 for the quarters ended September 25, 2004 and September 27, 2003, respectively. The Company’s inventory purchases from Nestlé Prepared Foods or its affiliates were $13,239,000 and $9,566,000 for the three quarters ended September 25, 2004 and September 27, 2003, respectively.

Taxes Receivable Due from Affiliate

     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 affiliate. Taxes receivable due from affiliate, included in the Consolidated Balance Sheet, totaled $12,236,000 at December 27, 2003. The balance was paid in full by Nestlé in the third quarter of 2004.

Net sales and Cost of goods sold to affiliates

     Net sales to affiliates, included in the 2004 and 2003 Consolidated Statement of Operations, totaled $1,360,000 and $1,078,000 for the quarters ended September 25, 2004 and September 27, 2003, respectively. Net sales to affiliates, included in the 2004 and 2003 Consolidated Statement of Operations, totaled $3,984,000 and $2,882,000 for the three quarters ended September 25, 2004 and September 27, 2003, respectively.

     Cost of goods sold to affiliates, included in the 2004 and 2003 Consolidated Statement of Operations, totaled $1,360,000 and $1,078,000 for the quarters ended September 25, 2004 and September 27, 2003, respectively. Cost of goods sold to affiliates, included in the 2004 and 2003 Consolidated Statement of Operations, totaled $3,984,000 and $2,882,000 for the three quarters ended September 25, 2004 and September 27, 2003, respectively.

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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 $154,000 and $254,000 for the quarters ended September 25, 2004 and September 27, 2003, respectively, primarily for information technology services provided under the Transition Services Agreement. The Company recognized Selling, general and administrative expense of $559,000 and $1,212,000 for the three quarters ended September 25, 2004 and September 27, 2003, respectively, for services provided under the Transition Services Agreement.

Royalty Expense to Affiliates

     Royalty expense to affiliates, included in the Consolidated Statement of Operations, 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 $8,931,000 and $6,553,000 for the quarters ended September 25, 2004 and September 27, 2003, respectively. Royalty expense to affiliates totaled $21,629,000 and $18,685,000 for the three quarters ended September 25, 2004 and September 27, 2003, respectively.

Known Contractual Obligations

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