SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
----------------------
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended September 30, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______ to _______
Commission file number 0-23048
LINCOLN SNACKS COMPANY
(exact name of registrant as specified in its charter)
Delaware 47-0758569
(State or other jurisdiction (IRS Employer Identification No.)
of incorporation or organization)
4 High Ridge Park, Stamford, Connecticut 06905
(Address of principal executive offices) (zip code)
(Registrant's telephone number, including area code) (203) 329-4545
Not Applicable
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
The number of shares of the issuer's Common Stock, $.01 par value, outstanding
on October 30, 1999 was 6,331,790 shares.
LINCOLN SNACKS COMPANY
INDEX TO FORM 10-Q
PAGE
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
Balance Sheets as of September 30, 1999
and June 30, 1999 3-4
Statements of Operations for the
three months ended September 30, 1999
and September 30, 1998 5
Statements of Changes in Stockholders'
Equity for the three months ended
September 30, 1999 and September 30, 1998 6
Statements of Cash Flows for the
three months ended September 30, 1999
and September 30, 1998 7
Notes to Financial Statements 8-10
Item 2. Management's Discussion and Analysis
Of Financial Condition and Results of
Operations 11-14
Item 3. Quantitative and Qualitative Disclosure
About Market Risk 14
Part II. OTHER INFORMATION
Item 1-4. OTHER INFORMATION 15
Item 5. OTHER INFORMATION 15
Item 6. EXHIBITS AND REPORTS ON FORM 8-K 15
Signatures 16
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LINCOLN SNACKS COMPANY
BALANCE SHEETS
ASSETS
AS OF SEPTEMBER 30, 1999 AND JUNE 30, 1999
September 30, June 30,
1999 1999
------------- ------------
ASSETS (Unaudited)
CURRENT ASSETS:
Cash $ 6,541,760 $ 6,781,556
Accounts receivable (net of allowance
for doubtful accounts and cash discounts
of $426,358 and $384,875 respectively) 4,464,761 3,304,003
Inventories 2,838,829 2,682,434
Prepaid and other current assets 60,666 13,696
------------ ------------
Total current assets 13,906,016 12,781,689
PROPERTY, PLANT AND EQUIPMENT:
Land 370,000 370,000
Building and leasehold improvements 1,789,809 1,789,809
Machinery and equipment 4,714,683 4,714,683
Construction in process 203,174 100,044
------------ ------------
7,077,666 6,974,536
Less: accumulated depreciation
and amortization (3,504,195) (3,349,176)
------------ ------------
3,573,471 3,625,360
INTANGIBLE AND OTHER ASSETS,
net of accumulated amortization of
$983,337 and $937,123 3,300,145 3,346,359
------------ ------------
TOTAL ASSETS $ 20,779,632 $ 19,753,408
============ ============
The accompanying notes to financial statements
are an integral part of these balance sheets.
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LINCOLN SNACKS COMPANY
BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS' EQUITY
AS OF SEPTEMBER 30, 1999 AND JUNE 30, 1999
September 30, June 30,
1999 1999
------------- ------------
LIABILITIES AND STOCKHOLDERS' EQUITY (Unaudited)
CURRENT LIABILITIES:
Accounts payable $ 1,378,815 $ 674,388
Accrued expenses 1,631,576 1,677,855
Accrued trade promotions 2,293,599 2,059,854
Deferred gain-short term 13,434 13,434
------------ ------------
Total current liabilities 5,317,424 4,425,531
LONG TERM DEBT 5,000,000 5,000,000
Deferred Gain 86,710 89,941
------------ ------------
TOTAL LIABILITIES 10,404,134 9,515,472
COMMITMENTS
STOCKHOLDERS' EQUITY:
Common stock, $0.01 par value,
20,000,000 shares authorized,
6,450,090 shares issued at
September 30, 1999 and June 30, 1999 64,501 64,501
Special stock, $0.01 par value, 300,000
shares authorized, none outstanding -- --
Additional paid-in capital 18,010,637 18,010,637
Accumulated deficit ( 7,673,614) ( 7,811,176)
Less: cost of common stock in
treasury 118,300 shares (26,026) (26,026)
------------ ------------
TOTAL STOCKHOLDERS' EQUITY 10,375,498 10,237,936
------------ ------------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 20,779,632 $ 19,753,408
============ ============
The accompanying notes to financial statements
are an integral part of these balance sheets.
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LINCOLN SNACKS COMPANY
STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1999 AND SEPTEMBER 30, 1998
1999 1998
------------ ------------
(Unaudited) (Unaudited)
NET SALES $ 8,169,147 $ 7,537,900
COST OF SALES 5,077,332 5,429,941
------------ ------------
Gross profit 3,091,815 2,107,959
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES 2,947,161 2,317,276
------------ ------------
Income (loss) from operations 144,654 (209,317)
INTEREST INCOME, NET 2,908 29,220
------------ ------------
Income (loss) before provision
for income taxes 147,562 (180,097)
PROVISION FOR INCOME TAXES 10,000 10,000
------------ ------------
Net income (loss) $ 137,562 $ (190,097)
============ ============
BASIC NET INCOME (LOSS) PER SHARE $ 0.02 $ (0.03)
============ ============
DILUTED NET INCOME (LOSS) PER SHARE $ 0.02 $ (0.03)
============ ============
Weighted Average Number of
Shares Outstanding
Basic 6,331,790 6,331,790
============ ============
Diluted 9,998,820 6,331,790
============ ============
The accompanying notes to financial statements
are an integral part of these statements.
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LINCOLN SNACKS COMPANY
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1999 AND SEPTEMBER 30, 1998
(UNAUDITED)
Common Special Paid In Accumulated Treasury
Stock Stock Capital Deficit Stock
------- ------- ----------- ------------ ---------
June 30, 1998 $64,501 $ -- $18,010,637 ($ 6,433,288) ($26,026)
Net loss -- -- -- (190,097) --
------- ------- ----------- ------------ ---------
September 30,
1998 $64,501 -- $18,010,637 ($ 6,623,385) ($26,026)
------- ------- ----------- ------------ ---------
June 30, 1999 $64,501 -- $18,010,637 ($ 7,811,176) ($26,026)
Net income -- -- -- 137,562 --
------- ------- ----------- ------------ ---------
September 30,
1999 $64,501 $ -- $18,010,637 ($ 7,673,614) ($26,026)
======= ======= =========== ============ =========
The accompanying notes to financial statements
are an integral part of these statements.
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LINCOLN SNACKS COMPANY
STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1999 AND SEPTEMBER 30, 1998
1999 1998
------------ --------------
(Unaudited) (Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 137,562 $ (190,097)
Adjustments to reconcile net income
to cash provided by operating activities:
Depreciation and amortization 201,233 227,603
Allowance for doubtful accounts and
cash discounts, net 41,483 8,915
Changes in Assets and Liabilities:
Increase in accounts receivable (1,202,241) (1,211,253)
Increase in inventories (156,395) (627,872)
Increase in prepaid and other
current assets (46,970) (58,243)
Increase in accounts payable
and accrued expenses 888,662 213,619
----------- ------------
Net cash used in operating activities (136,666) (1,637,328)
----------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (103,130) (60,083)
----------- ------------
Net cash used in investing activities (103,130) (60,083)
----------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayments under note payable --- (125,000)
----------- ------------
Net cash used in financing
activities --- (125,000)
----------- ------------
Net increase (decrease) in cash (239,796) (1,822,411)
CASH, beginning of period 6,781,556 3,726,400
----------- ------------
CASH, end of period $ 6,541,760 $ 1,903,989
=========== ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid $ 76,185 $ 2,704
=========== ============
Income taxes paid $ 10,680 $ 41,660
=========== ============
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LINCOLN SNACKS COMPANY
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 1999
(Unaudited)
(1) The Company:
------------
Lincoln Snacks Company ("Lincoln" or the "Company"), formerly Lincoln
Foods Inc., is a Delaware corporation and is a majority-owned subsidiary
of Brynwood Partners III L.P. (the "Parent"). Lincoln is engaged in the
manufacture and marketing of caramelized pre-popped popcorn and glazed
popcorn/nut mixes. Sales of the Company's products are subject to
seasonal trends with a significant portion of sales occurring in the
last four months of the calendar year.
(2) Basis of Presentation:
----------------------
The balance sheet as of September 30, 1999, and the related statements
of operations, changes in stockholders' equity and cash flows for the
three months ended September 30, 1999 and September 30, 1998, have been
prepared by the Company without audit. In the opinion of management,
all adjustments necessary to present fairly the financial position,
results of operations and cash flows at and for periods ended September
30, 1999 and September 30, 1998 have been made. During the interim
periods presented, the accounting policies followed are in conformity
with generally accepted accounting principles and are consistent with
those applied for annual periods and described in the Company's Annual
Report on Form 10-K for the twelve months ended June 30, 1999 filed with
the Securities and Exchange Commission on September 21, 1999 (the
"Annual Report").
Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted
accounting principles have been omitted. It is suggested that these
financial statements be read in conjunction with the financial
statements included in the Annual Report. The results of operations for
the three months ending September 30, 1999 and September 30, 1998 are
not necessarily indicative of the operating results for the full year.
(3) Net income (loss) per share:
----------------------------
The Company follows the provisions of Statement of Financial Accounting
Standards No. 128 ("SFAS No. 128"). This statement establishes
standards for computing and presenting basic and diluted earnings per
share.
Below is a reconciliation of the numerators and denominators of the
basic and diluted earnings per share computations:
- 8 -
September 30, September 30,
1999 1998
------------ ------------
Basic earnings per share weighted
average number of shares outstanding 6,331,790 6,331,790
Dilutive effect:
Stock options 17,395 ---
Convertible debt 3,649,635 ---
----------- -----------
Diluted earnings per share weighted
average number of shares outstanding 9,998,820 6,331,790
=========== ===========
Net income (loss) $ 137,562 $ (190,097)
Effect of assumed conversion
of convertible debt 72,000 ---
----------- -----------
Net income (loss) plus assumed
conversion of convertible debt $ 209,562 $ (190,097)
=========== ===========
Basic and diluted earnings
(loss) per share $.02 $ (.03)
=========== ===========
Options to purchase 231,861 shares of common stock were outstanding at
September 30, 1999 and included in the computation of diluted earnings
per share for the three months ended September 30, 1999. Additional
options to purchase 471,500 shares of common stock were not included in
the computation of diluted earnings per share because the options'
exercise price was greater than the average market price of the common
shares. In addition, diluted earnings per share reflect the issuance of
3,649,635 shares upon the assumed conversion of the Brynwood debenture
(see Note 5).
Options to purchase 608,659 shares of common stock were outstanding at
September 30, 1998 but were not included in the computation of diluted
earnings per share as the effect would be anti-dilutive for the three
months ended September 30, 1998.
(4) Debt Facility:
--------------
The Company terminated the $4 million revolving credit facility that it
maintained with a financial institution on August 6, 1999. There were
no outstanding borrowings at that time. At the time of termination, the
Company was in breach of certain covenants set forth in the revolving
credit agreement, including the EBITDA covenants as of September 30,
1999 and the requirement of obtaining the bank's consent relative to the
Brynwood Debenture.
The Company plans to obtain a new revolving credit facility with another
financial institution in the future, however, there can be no assurance
that the Company will be able to obtain such a facility. The Company
presently believes that its cash will be adequate to meet its needs for
the next twelve months.
- 9 -
(5) Brynwood Convertible Subordinated Debenture:
--------------------------------------------
On April 1, 1999, the Company executed and delivered a Convertible
Subordinated Debenture (the "Brynwood Debenture") in favor of Brynwood,
in the principal amount of $5,000,000. The Brynwood Debenture bears
interest at the rate of 6% per annum, matures on December 31, 2001 and
is convertible, at the option of Brynwood III, for shares of common
stock of the Company at any time after a Convertability Event (as
defined in the Brynwood Debenture). The note is convertible at $1.37
per share into shares of common stock. Interest is payable quarterly.
The Company's breach of its bank covenants (see Note 4) resulted in a
default of the Brynwood Debenture. Brynwood has waived its right to
demand payment of the debenture until January 2001 by reason of current
defaults existing under the bank agreement.
(6) Inventory:
----------
Inventory consists of the following:
September 30, June 30,
1999 1999
----------- ------------
Raw materials and supplies $ 1,646,135 $ 1,828,542
Finished Goods 1,192,694 853,892
----------- ------------
$ 2,838,829 $ 2,682,434
=========== ============
- 10 -
ITEM 2. - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (UNAUDITED)
- ------------------------------------------------------------------------------
Results of Operations:
- ----------------------
Introduction
- ------------
The Company's net sales are subject to significant seasonal variation,
with results from operations fluctuating due to these trends. This seasonality
is due principally to customers' buying patterns of Poppycock during the
traditional holiday season. As a result, third and fourth calendar quarter
sales account for a significant portion of the Company's annual sales.
Three months ended September 30, 1999 versus September 30, 1998
- ---------------------------------------------------------------
Overall net sales increased 8% or $.63 million to $8.17 million for the
three months ended September 30, 1999 versus $7.54 million in the corresponding
period of 1998. An increase in branded case sales for the 1999 Holiday season
resulted in the overall sales increase for the quarter. Branded sales increased
to 76% of net sales versus 56% a year ago and private label sales increased to
24% of net sales versus 17% a year ago. The company has terminated its
contract manufacturing business and as a result copack sales represent 0% of
net sales versus 27% a year ago.
Gross profit increased $.98 million to $3.09 million for the three months
ended September 30, 1999 versus $2.11 million in the corresponding period of
1998. Gross profits increased due to increases in branded and private label
sales which have higher gross margins than copack sales.
Selling, general and administrative expenses increased 27% or $.63
million to $2.95 million for the three months ended September 30, 1999 versus
$2.32 million for the same period in 1998. The increase is primarily due to
variable selling costs associated with increases in branded sales, increases
in consumer marketing programs and slotting fees for new distribution of
branded products.
The quarter net income of $.14 million versus a net loss of $.19 million
in the same period in 1998 represents an increase in earnings of $.33 million.
The increase in earnings is attributable to increases in branded and private
label sales, which increases were partially offset by increases in marketing
and slotting costs.
Liquidity and Capital Resources
- -------------------------------
As of September 30, 1999, the Company had working capital of $8.6 million
compared to a working capital of $8.4 million at June 30, 1999 (the Company's
fiscal year end), an increase in working capital of $.2 million. The increase
in working capital is primarily attributable to the Company's net income of
$.14 million.
On April 1, 1999, the Company executed and delivered a Convertible
Subordinated Debenture (the "Debenture") in favor of Brynwood Partners III
L.P., ("Brynwood III"), in the principal amount of $5,000,000. The Debenture
bears interest at the rate of 6% per annum, matures on December 31, 2001 and
is convertible, at the option of Brynwood III, into shares of Common Stock of
the Company at any time after a Convertability Event (as defined in the
Debenture). The note is convertible at $1.37 per share into shares of common
stock.
- 11 -
The Company currently meets its short-term liquidity needs from its cash
on hand. On August 6, 1999, the Company terminated the revolving credit
facility the Company maintained with a financial institution. The Company
plans to obtain a new revolving credit facility with another financial
institution in the future, however, there can be no assurance that the Company
will be able to obtain such a facility. The Company presently believes that
its cash will be adequate to meet its needs for the next twelve months.
Management continues to focus on increasing product distribution and
continues to review all operating costs with the objective of increasing
profitability and ensuring future liquidity. However, there can be no
assurance that any of these objectives will be achieved in future periods.
The Company's short-term liquidity is affected by seasonal increases in
inventory and accounts receivable levels, payment terms in excess of 60 days
granted in some situations during certain months of the year, and seasonality
of sales. Inventory and accounts receivable levels increase substantially
during the latter part of the third calendar quarter and during the remainder
of the calendar year.
Three Months Ended
---------------------------
September 30, September 30,
1999 1998
------------ ------------
(in thousands)
Net cash used in operating activities $ (137) $(1,637)
Net cash used in investing activities (103) (60)
Net cash used in financing activities --- (125)
Net cash used in operating activities decreased $1.50 million to a use
of $.14 million during the three months ended September 30, 1999 compared to
a use of $1.64 million in 1998. The decrease in cash used by operating
activities is primarily due to an increase in net income of $.33 million for
the three months ended September 30, 1999 versus September 30, 1998 coupled
with decreases in cash used for inventories and the timing of accounts payable
and accrued expenses.
Net cash used in investing activities of $.10 million and $.06 million
for the three months ended September 30, 1999 and 1998, respectively,
represents capital expenditures.
Net cash used in financing activities of $.13 million for the three
months ended September 30, 1998, consisted of payments under the short term
note relating to the Iroquois acquisition.
Year 2000 Disclosure
- --------------------
The Year 2000 issue has arisen because many computer programs use only
the last two digits to refer to a year. Such programs will not properly
recognize a year that begins with "20" instead of "19." If not corrected or
replaced prior to the year 2000, these programs could fail or create erroneous
results. The Company uses a number of computer programs both in connection
with its management information systems and its manufacturing, distribution and
sales operations.
The Company has identified its critical management information systems
hardware and software for Year 2000 compliance. The Company's assessment of
its hardware and software Year 2000 compliance is highly dependent upon
representations from the hardware and software manufacturers. The Company has
completed testing of its critical hardware and software. The Company incurred
approximately $.1 million to make these systems Year 2000 compliant.
Other systems used by the Company in conducting its business are also
dependent on microprocessor components. These would include manufacturing
equipment and building control systems. The Company has assessed each of the
systems and has completed any necessary replacements or upgrades to make
critical manufacturing and building control systems Year 2000 compliant. The
Company's assessment was highly dependent upon the expertise and
representations from the manufacturers of the Company's equipment.
The Company relies on third parties for all of its manufacturing raw
materials, supplies, water, utilities, transportation and other key services.
Interruption of supplier operations due to Year 2000 issues could affect
Company operations. The Company sent vendor questionnaires to critical third
parties it relies upon. The Company has received satisfactory responses from
the majority of its critical third parties documenting they will be Year 2000
complaint. These activities are intended to provide a means of managing risk,
but cannot eliminate the potential for disruption due to third party failure.
The Company is dependent upon its customers for sales and cash flow. Year
2000 interruptions in the Company's customers' operations could result in
reduced sales, increased inventory or receivable levels and cash flow
reductions. The Company has sent questionnaires to its significant customers
to determine whether their information management systems and other technology
assets are Year 2000 compliant. The Company has received satisfactory
responses from the majority of its significant customers documenting that they
will be Year 2000 compliant. The Company is monitoring the status of its
customers as a means of determining risks and alternatives.
Although the Company has received the majority of the responses to its
inquiries, until the Company receives all responses to its inquiries, it cannot
assess whether a failure of one or more of the information systems of its
suppliers, vendors or customers would likely have a material adverse effect on
the Company.
While the Company believes its planning efforts are adequate to address
its Year 2000 concerns, there can be no assurance that the systems of other
companies on which the Company's systems and operations rely on will be
converted on a timely basis and will not have a material adverse effect on the
Company. However, based on the progress the Company has made on its internal
initiative and the information available from third parties, the Company has
not identified a need to develop an extensive contingency plan for non-
compliance issues at this time. The need for such plan is evaluated on an
ongoing basis as part of the Company's overall Year 2000 initiative.
- 13 -
Forward Looking Statement
- -------------------------
This Quarterly Report on Form 10-Q contains, in addition to historical
information, certain forward-looking statements regarding future financial
condition and results of operations. The words "expect," "estimate,"
"anticipate," "predict," "believe," and similar expressions are intended to
identify forward-looking statements. Such statements involve certain risks and
uncertainties. Should one or more of these risks or uncertainties materialize,
actual outcomes may vary materially from those indicated.
ITEM 3. - QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
- ------------------------------------------------------------------------
Not Applicable.
- 14 -
PART II. OTHER INFORMATION
Item 1. Legal Proceedings Not Applicable
Item 2. Changes in Securities and Use of Proceeds Not Applicable
Item 3. Defaults Upon Senior Securities Not Applicable
Item 4. Submission of Matters
to a Vote of Security Holders Not Applicable
Item 5. Other Information Not Applicable
Item 6. Exhibits and Reports on Form 8-K
a Exhibits
(2) Not Applicable
(3) Articles of Incorporation and By-Laws
(a) Certificate of Incorporation, as amended and as
currently in effect (Incorporated by reference
to Exhibit 3(A), filed by the Company with the
Registration Statement on Form S-1 (33-71432)).
(b) By-Laws as currently in effect (Incorporated by
reference to Exhibit 3(B) filed by the Company
with the Registration Statement on Form S-1 (33-71432)).
(4) Not Applicable
(10) Not Applicable
(11) Statement regarding computation of per share earnings
is not required because the relevant computation can
be determined from the material contained in the
Financial Statements included herein.
(15) Not Applicable
(18) Not Applicable
(19) Not Applicable
(22) Not Applicable
(23) Not Applicable
(24) Not Applicable
(27) Financial Data Schedule
(99) Not Applicable
b Reports on Form 8-K Not Applicable
- 15 -
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
November 9, 1999 Lincoln Snacks Company
(Registrant)
By: /s/Hendrik J. Hartong III
--------------------------------------
Name: Hendrik J. Hartong III
Title: President and Chief Executive Officer
(Principal Executive Officer)
By: /s/Kristine A. Crabs
-------------------------------------
Name: Kristine A. Crabs
Title: Vice President and Chief Financial
Officer, Secretary and Treasurer
(Principal Financial Officer and
Principal Accounting Officer)
- 16 -