================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
____________
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
Commission file number 0-19867
________________________
ESKIMO PIE CORPORATION
(Exact name of registrant as specified in its charter)
Virginia 54-0571720
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
901 Moorefield Park Drive
Richmond, VA 23236
(Address of principal executive offices, including zip code)
___________
Registrant's phone number, including area code:
(804) 560-8400
____________
Securities registered pursuant to section 12(g) of the Act:
ESKIMO PIE CORPORATION COMMON STOCK, $1.00 par value,
and Preferred Stock Purchase Rights
___________
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days Yes X No ___
---
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
There were 3,479,964 shares of the Registrant's Common Stock outstanding on
March 20, 2000. The aggregate market value held by non-affiliates on March 20,
2000 was approximately $29 million.
DOCUMENTS INCORPORATED BY REFERENCE
Certain information in the Registrant's Proxy Statement for the Annual
Meeting to be held on May 3, 2000 is incorporated by reference into Part III
herein.
================================================================================
INDEX
Part I
Page
Item 1. Business................................................... 1
Item 2. Properties................................................. 5
Item 3. Legal Proceedings.......................................... 6
Item 4. Submission of Matters to a Vote of Security Holders........ 6
Executive Officers of the Registrant....................... 7
Part II
Item 5. Market for Registrant's Common Equity and Related
Shareholder Matters........................................ 8
Item 6. Selected Financial Data.................................... 9
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations........................ 10
Item 7A. Quantitative and Qualitative Disclosures about Market Risk. 16
Item 8. Financial Statements and Supplementary Data................ 17
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure..................... 33
Part III
Item 10 Directors and Executive Officers of the Registrant......... 33
Item 11. Executive Compensation..................................... 33
Item 12. Security Ownership of Certain Beneficial Owners
and Management............................................. 33
Item 13. Certain Relationships and Related Transactions............. 33
Part IV
Item 14. Exhibits, Financial Statement Schedules and
Reports on Form 8-K.......................................... 34
________________________________
Trademarks and service marks of the Company are italicized where they
appear herein. NutraSweet(R) is the registered trademark of Monsanto Company,
Chicago, Illinois. Welch's(R) is the registered trademark of Welch Foods Inc.,
a Cooperative ("Welch's"), Concord, Massachusetts. Nabisco(R), OREO(R) and
SnackWell's(R) are the registered trademarks of Nabisco Brands Company
("Nabisco"), San Francisco, California. Weight Watchers(R) and Smart Ones(R)
are the registered trademarks of Weight Watchers International, Inc. ("Weight
Watchers"), Jericho, New York. All Rights Reserved.
Market share and product distribution data were obtained from ACNielsen, a
nationally recognized market research firm based in Schaumburg, Illinois, which
provides the Company with scanner-based product movement data from U.S. grocery
stores.
Forward Looking Statements:
Statements contained in this Annual Report on Form 10-K regarding the
Company's future plans and performance are forward looking statements within the
meaning of the federal securities laws. These statements are based upon
management's current expectations and beliefs about future events and their
effect upon the Company. There can be no assurance that future developments
affecting the Company will mirror those currently anticipated by management.
Actual results may vary materially from those included in the forward looking
statements. These forward looking statements involve risks and uncertainties,
including but not limited to, the highly competitive nature of the frozen
dessert market and the level of consumer interest in the Company's products,
product costing, the weather, the performance of management, the Company's
relationships with its licensees and licensors and government regulation. For a
more complete discussion of these risks and uncertainties, see "Other Factors
Affecting the Business of the Company" beginning on page 3 hereof. The Company
assumes no duty to update any forward looking statements.
PART I
ITEM 1. BUSINESS
Introduction
Eskimo Pie Corporation (the Company) created the frozen novelty industry in
1921 with the invention of the Eskimo Pie ice cream bar. Today, the Company
markets a broad range of frozen novelties, ice cream and sorbet products under
the Eskimo Pie, RealFruit, Welch's, Weight Watchers Smart Ones, SnackWell's and
OREO brand names. These nationally branded products are generally manufactured
by a select group of licensed dairies who purchase the necessary flavors,
ingredients and packaging directly from the Company. The Company also sells a
full line of quality flavors and ingredients for use in dairy and frozen dessert
products outside of those used in its nationally licensed brands business and
manufactures soft serve yogurt and premium ice cream products for sale to the
foodservice industry.
The Company's strengths include national brand recognition, quality products
and the management of complex sales and distribution networks. The Company's
growth has come primarily as a result of the development and introduction of
Eskimo Pie brand frozen dessert products, the development and marketing of
frozen dessert products under the licensing of other well-known national brands
under sublicensing arrangements, and the use of a select group of quality-
oriented licensee manufacturers who provide a cost effective means to
manufacture and distribute the Company's products.
In September 1999, the Company announced that its Board of Directors had
authorized management to actively pursue all strategic alternatives to maximize
shareholder value, including a sale of the Company as a whole or one or more
sales of the Company's strategic assets.
The Company is a Virginia corporation with executive offices at 901
Moorefield Park Drive, Richmond, Virginia 23236.
Licensing Strategy
The Company has granted licenses to seven dairies who purchase packaging and
ingredients from the Company for use in the manufacture and distribution of the
Eskimo Pie and other branded novelties and ice cream products. Licensees are
selected based upon their reputation for product quality and manufacturing and
distribution capabilities. The licensees produce, store and distribute products
in accordance with specific quality control standards which ensure uniform
formulations, taste and appearance across all licensee territories. The Company
regularly inspects the licensees' production and storage facilities and monitors
finished products for adherence to the Company's quality standards.
Each licensee operates within geographic territorial boundaries under
agreements which generally include three year terms subject to termination by
the Company for quality control violations, failure to meet minimum volume
requirements or material changes in the Company's ownership or the licensee's
business. These agreements provide for six to twelve month transition periods
in the event of termination. Beginning in 1999, licensees were contractually
required to contribute to trade promotion spending and to make separate
quarterly payments to the Company for licensing fees. These licensing fees
amounted to $1,040,000 in 1999 and are expected to total to $1,040,000
annually, through 2001.
Certain key ingredients (such as chocolate coatings and powders) and
wrappers used by the Company's licensees in the manufacture of Eskimo Pie and
other licensed frozen novelties and ice cream products are produced at Company
owned facilities located in New Berlin, Wisconsin and Bloomfield, New Jersey.
Other products sold within the licensing system are purchased from
approved vendors and "drop shipped" directly to licensee production facilities.
Products sold under "drop shipped" arrangements include cartons, ice cream
sandwich wafers and proprietary ingredients used in the manufacture of
sublicensed brand products.
As a result of the Company's licensing strategy, the seven licensee dairies
account for approximately 60% of the Company's net sales. The licensing
strategy allows the Company to select a strong customer base which it actively
monitors to minimize the impact of an unforeseen loss of any of its licensee
customers. The loss of one or more licensees could cause some disruption in the
Company's operations, although, based upon prior experience with replacing
licensees, management believes it could find a suitable replacement within a
short period of time. As a result, such customer loss would not have a
significant impact on the Company's operations, liquidity or capital resources.
The licensing strategy also allows the Company to operate with relatively
low capital requirements. The Company's working capital requirements are limited
to that necessary to support advertising, sales promotion and administrative
activities rather than the much larger amounts that would be required to support
the self-manufacture of finished consumer goods.
The Company provides significant marketing support for the Eskimo Pie and
other licensed brands manufactured and distributed by its licensees. The
Company engages in product/concept development, and advertising and sales
promotion expense generally includes trade promotion and introductory costs,
price-off and feature price promotions, regional consumer promotion, couponing
and other trial purchase generating programs and broker commissions.
The Company has 13 field sales personnel among the Company's operating
divisions, and engages broker representatives in each major U.S. market.
Distribution of the Company's finished consumer products is handled by the
licensees and distributors in their respective territories.
Sublicensing Efforts
The Company leverages its licensee and trade relationships and marketing
presence by securing the limited rights for nationally recognized brand names
such as Welch's, Weight Watchers Smart Ones, SnackWell's and OREO. These rights
allow the Company to manage the product development, manufacture, distribution,
marketing and sales of branded frozen novelties and ice cream products in
exchange for royalty payments to the owners of the brand names.
Welch's. Since 1980, the Company has managed the manufacture and marketing
-------
of Welch's brand frozen fruit juice bars under an exclusive agreement with Welch
Foods Inc. (Welch's). Under the Company's management, the four varieties of
Welch's frozen juice bars continue to be leading products in the "All Family"
fruit and juice bar category according to ACNielsen. The Company introduced, in
selected test markets, two new Welch's products in 1999 which were targeted to
attract the attention of a more youthful audience.
Weight Watchers. In January 1995, the Company entered into an agreement
---------------
with Weight Watchers Food Company whereby it assumed the management of an
existing line of frozen novelty products. During 1998, the Company transitioned
the Weight Watchers brand to incorporate the Smart Ones trademark consistent
with an overall brand repositioning by Weight Watchers International, Inc. There
are currently six Weight Watchers Smart Ones products being distributed to
retail grocery stores including the new Mocha Java bar which was introduced in
the fourth quarter of 1998.
Nabisco Brands. In December 1994, the Company entered into an agreement
--------------
with Nabisco Brands Company under which it has developed and marketed frozen
novelty and packaged ice cream products under the SnackWell's and OREO brand
names. The Company currently manages one SnackWell's and two OREO novelty
products that are currently distributed to the retail grocery and single serve
convenience markets.
2
Master License Agreements between the Company and each respective licensor
set forth the Company's rights and obligations in connection with the respective
sub-licensed businesses. Although the specific terms vary, each of the Master
License Agreements provides for royalty payments or license fees (although the
basis and rate are different under each agreement), the length of the agreement
(5 to 20 years) and conditions for termination (which may be exercised by either
party based on certain conditions). The agreements have been subjected to
various renegotiations and amendments from time to time as business conditions
have changed.
Although each agreement also includes certain threshold performance
requirements (such as the requirement to develop a certain number of new
products each year, reach certain distribution goals, etc.), there are no
guaranteed payments required of the Company by any of the agreements. Failure
to comply with the terms of the Master License Agreements may result in
termination of the respective agreement (or as is more likely the case, some
cure or other renegotiation of terms), but in no case would the Company be
required to make specified payments if the Company does not continue to utilize
the rights under the respective agreements.
Non-licensed Products
In addition to products manufactured for use in its licensed and
sublicensed businesses, the Company sells various other ingredients to the dairy
industry produced at its New Berlin, Wisconsin facility. This business involves
blending, cooking and processing basic flavors and fruits to produce products
which subsequently are used by the Company's customers to flavor frozen
desserts, ice cream novelties and fluid dairy products. This business, which
accounts for approximately 20% of the Company's sales, has grown in recent years
and provides a positive gross margin contribution although at lower levels than
the Company's licensing business.
The Company also manufactures soft serve yogurt and premium ice cream mix
in a leased facility in Russellville, Arkansas. Soft serve mix is sold under the
Eskimo Pie brand name to broad- line foodservice distributors, yogurt shops and
other foodservice establishments who, in turn, sell soft serve ice cream and
yogurt products to consumers. The sale of soft serve yogurt and ice cream mix,
which accounts for approximately 14% of the Company's sales, is managed by a
separate sales force working within the Company's wholly owned subsidiary, Sugar
Creek Foods, Inc.
The Company also manufactures flexible packaging, such as private label ice
cream novelty wraps, at its Bloomfield, New Jersey plant. These products are
sold to the dairy industry, including many of the Company's licensees.
Other Factors Affecting the Business of the Company
This document and other information or statements the Company may release
from time to time include forward looking statements, within the meaning of
federal securities laws, about the Company's future plans and performance.
Numerous factors, including but not limited to those discussed below, produce
risks and uncertainties that may cause actual results to vary materially from
those included in the forward looking statements.
Competition. The principal outlet for the Company's licensed and
-----------
sublicensed products is retail grocery stores which sell approximately $1.8
billion of frozen novelties annually according to the International Dairy Foods
Association. The Company's branded frozen novelties compete with over 300
national, regional and local brands, including the brands of two of the world's
largest food conglomerates. The Company also competes with national, regional
and local brands of soft serve frozen yogurt and premium ice cream, packaged ice
cream and sorbet products.
Management believes that the Company has a number of competitive advantages
in the frozen dessert market. The Eskimo Pie brand name is one of the most
widely recognized names in this market and it is management's belief that
consumers identify the Eskimo Pie name with a
3
consistently high quality product. The Company has been an active leader in new
product introductions, as evidenced by Eskimo Pie Sweetened with NutraSweet and
the numerous sub-licensed products developed in recent years. In addition, the
Company's licensing strategy enables it to operate with relatively low capital
requirements.
Product Costing. The Company purchases raw materials such as sugar and
---------------
coconut oil from a number of suppliers. Other materials used by the Company
include paper, cartons and chocolate liquor. With the exception of ice cream
sandwich wafers, NutraSweet brand aspartame, and the proprietary items required
to be purchased from the owners of the sublicensed brands, the Company believes
that its raw materials are readily available from a number of sources. Raw
material costs may be influenced by fluctuations in the commodity markets.
Seasonality. The frozen dessert market is seasonal with sales concentrated
-----------
in the summer months. Because the Company supplies packaging and ingredients to
manufacturers of its licensed and sublicensed products, the Company has a higher
level of sales preceding and during the summer months and a lower level of sales
in the first and fourth quarters. Annual sales can be adversely affected by
unseasonably cool weather during the summer months.
Management. The Company is reliant on the abilities of the management team
----------
led by David B. Kewer, the Company's President and Chief Executive Officer.
These personnel have significant experience in their respective functional areas
and the loss of these individuals or others could have an adverse effect on the
Company's ability to implement its future plans.
Licensee Relationships. The nature and extent of the Company's
----------------------
relationships with its licensees are discussed under "Licensing Strategy" above.
Licensor Relationships. The Company derives approximately 33% of its
----------------------
revenues from sub-licensed products which, in general, are governed by
contractual agreements between the licensor and the Company (as discussed under
"Sublicensing Efforts" above). The loss of these sub-licensed brands could have
an adverse effect on the Company's business.
Year 2000 Matters. See "Management's Discussion and Analysis of Financial
-----------------
Condition and Results of Operations - Impact of Year 2000" for a discussion of
this issue.
Government Regulation. Like other companies in the food industry, the
---------------------
Company and its licensees are subject to extensive regulation by various local,
state and federal governmental agencies. Pursuant to a wide range of statutes,
rules and regulations, such agencies prescribe requirements governing product
quality, purity, manufacturing, advertising and labeling. Food products are
often subject to "standard of identity" requirements, which are promulgated at
both the federal and state level to control the permissible qualitative and
quantitative ingredient content of foods and related information that must be
provided on food product labels. The Federal Food and Drug Administration
("FDA"), the Federal Trade Commission ("FTC") and many states review product
labels and advertising to assure compliance with applicable statutes and
regulations.
The Company cannot predict the impact of the changes that it may be required
to make in the future as a result of other legislation, rules or governmental
review. FDA regulations may, in certain instances, affect the ability of the
Company, as well as others in the industry, to develop and market new products
and to utilize technological innovations in the manufacturing of existing
products. Nevertheless, the Company does not currently believe these rules and
regulations will have a significant impact on its operations.
Trademarks. The licensing of trademarks owned and sublicensed by the
----------
Company, especially the Eskimo Pie brand, is central to the business of the
Company. The Company has exclusive rights with respect to these trademarks in
the U.S. and, for Eskimo Pie and RealFruit, in Canada and certain other
countries around the world. The Company has made federal and various
international filings with respect to its significant trademarks and intends to
keep these filings
4
current. The Company is not aware of any challenge to the validity of any
trademark material to its business in areas where the Company and its licensees
are currently conducting operations.
Environmental. The Company's operations are subject to rules and
-------------
regulations governing air quality, waste disposal and other environmental
related matters, as well as other general employee health and safety laws and
regulations. Other than as set forth below with respect to the Bloomfield
plant, the Company believes that it is in substantial compliance with all such
applicable laws and rules.
In the third quarter of 1991, the Company learned that small quantities of
cleanup solvents, solvent inks and oil were disposed of many years before at its
Bloomfield, New Jersey plant. The Company promptly notified regulatory
authorities and undertook testing to determine the extent of any contamination.
In connection with the consummation of the Company's public offering in March,
1992, the Company's former parent, Reynolds Metals Company ("Reynolds"), entered
into an agreement with the Company under which Reynolds will continue to manage
environmental testing and remediation activities at the Bloomfield plant. Under
the agreement, Reynolds will reimburse the Company for certain cleanup costs (as
defined in the agreement), relating to the Bloomfield plant, that may be
incurred by the Company in excess of $300,000. The Company recorded a $300,000
liability for these costs in 1992 of which approximately $70,000 remains unused
at December 31, 1999.
In connection with the Board's decision to explore a possible sale of the
Company, management is attempting to accelerate resolution of the Bloomfield
environmental issue. As a result of its efforts, management has made certain
estimates and recorded an additional liability of $106,000 relating to costs
associated with (1) testing and remediation with respect to certain items as to
which the Company and Reynolds do not agree on the extent of Reynolds'
remediation responsibility under the agreement and (2) expediting the timeframe
under which certain testing results are available for review by management,
regulatory authorities and potential purchasers of the Company.
Except as provided for in the agreement relating to the Bloomfield facility,
Reynolds has not otherwise undertaken any responsibility or assumed liability
for any environmental obligations of the Company.
Employees. At December 31, 1999, the Company employed approximately 105
---------
persons. No employees are currently covered by collective bargaining
agreements. The Company believes that its employee relations are good.
ITEM 2. PROPERTIES
In 1992, the Company acquired an office building in the Moorefield Office
Park in Richmond, Virginia. The building consists of approximately 32,496
square feet on 3.4 acres which serves as the Company's executive and
administrative offices and as the Company's new product development and quality
control facility. Approximately 8,500 square feet of the headquarters building
is leased to outside parties at rates consistent with local market conditions.
The Company owns its ingredients manufacturing plant in New Berlin,
Wisconsin which consists of approximately 73,820 square feet on 4.0 acres. The
Company expanded its New Berlin plant by 18,000 square feet in 1990 and
purchased certain new equipment at that time. The Company completed $800,000 of
capital improvements in the New Berlin facility during 1998 (consisting
primarily of equipment additions) in connection with the consolidation of its
flavors production at the New Berlin facility which was completed in 1997.
The Company also owns its printing and packaging plant in Bloomfield, New
Jersey, which consists of approximately 71,583 square feet on 2.0 acres. The
Bloomfield plant was expanded and modernized in 1985 with a 35,000 square foot
addition.
5
In connection with the March 1, 1994 acquisition of Sugar Creek Foods of
Russellville, Inc., the Company's subsidiary, Sugar Creek Foods, Inc., is
leasing from the former owner of the business a soft serve yogurt and ice cream
mix production facility, consisting of approximately 23,805 square feet, and a
packaging facility, consisting of approximately 16,000 square feet, both located
in Russellville, Arkansas. In addition, Sugar Creek Foods, Inc. owns a freezer
facility, consisting of approximately 5,013 square feet, adjacent to the
production facility in Russellville. In 1999, the Company purchased a small
parcel of land adjacent to the freezer facility for future potential expansion
of the freezer facility.
The Company owns virtually all of its equipment and replacement parts for
all manufacturing equipment are readily available.
ITEM 3. LEGAL PROCEEDINGS
The Company is party to ordinary routine litigation incidental to its
business, the disposition of which is not expected to have a significant effect
on the Company's financial condition or operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
6
EXECUTIVE OFFICERS OF THE REGISTRANT
Present Position and
Name (Age) Length of Service Other Business Experience During Past Five Years
- ---------- ----------------- ------------------------------------------------
Arnold H. Dreyfuss (71) Chairman of the Board Director since 1992; Chief Executive Officer from September 1996
since September 1996. to February 1998; President of Jupiter Ocean and Racquet Club of
Jupiter, Florida; formerly (1982 until 1991) Chairman of the
Board and Chief Executive Officer of Hamilton
Beach/Proctor-Silex, Inc.
Kimberly P. Ferryman (43) Vice President, Corporate Director, Quality Assurance and Product Development
Quality Assurance and from March 1994 to February 1995; Senior Product Development
Product Development Technologist from November 1988 to February 1994. (All were
since February 1995. positions with the Company)
Craig L. Hettrich (40) Vice President and Formerly, Vice President, Sales and Marketing for Frionor USA
General Manager, from March 1996 to January 1998; Director of National Sales and
Foodservice Division various other sales and marketing positions with General Mills -
since February 1998. Yoplait/Columbo Division from September 1991 to February 1996.
V. Stephen Kangisser (48) Vice President, Sales Vice President, Marketing, May 1996 to July 1998; formerly, Vice
since August 1998. President, Sales and Marketing for H.P. Hood, Inc., Boston,
Massachusetts from 1993 to 1996; Director of Sales and
Marketing and various other positions with Kraft, Inc. from 1974
through 1993.
David B. Kewer (45) President and Director since May 1997; President and Chief Operating Officer
Chief Executive Officer from March 1997 to February 1998; formerly, President, Willy
since March 1998. Wonka Candy Factory, a division of Nestle' USA, Inc., from
August 1993 to February 1996; Senior Vice President Marketing
and Strategic Planning and various other marketing and sales
positions with Nestle' Ice Cream Company from 1988 to 1993.
Thomas M. Mishoe, Jr. (47) Chief Financial Officer, Independent Consultant, from August 1995 to February 1996; Chief
Vice President, Treasurer Financial and Administrative Officer, Goldome Credit Corporation
and Corporate Secretary from May 1993 to May 1995; Senior Manager with Ernst & Young
since February 1996. LLP, from 1987 to May 1993.
William J. Weiskopf (39) Vice President and National Sales Manager, Flavors, November 1995 to August 1997;
General Manager, Regional Sales Manager from May 1994 to November 1995; formerly
Flavors Division Account Manager, Food Group for E. T. Horn Company from 1987 to
since August 1997. 1994.
7
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY
AND RELATED SHAREHOLDER MATTERS
The Company's Common Stock trades on the Nasdaq National Market tier of The
Nasdaq Stock Market under the symbol "EPIE". As of March 20, 2000, there were
approximately 500 Shareholders of Record of the Company's Common Stock
(including brokers, dealers, banks and other nominees participating in The
Depository Trust Company).
The high and low sales prices for shares of the Company's Common Stock as
reported on The Nasdaq Stock Market and dividends declared per share during the
periods indicated are set forth below:
------------------------------------------------------
High Low Dividends
- ------------------------------------------------------------------------------------------------
1999
First Quarter $ 15 $ 6 5/8 $0.05
Second Quarter 10 1/4 6 5/8 0.05
Third Quarter 11 1/2 8 1/8 -
Fourth Quarter 10 3/8 7 3/8 -
- ------------------------------------------------------------------------------------------------
1998
First Quarter $ 14 1/4 $ 10 1/8 $0.05
Second Quarter 16 1/4 11 9/16 0.05
Third Quarter 13 5/16 7 3/4 0.05
Fourth Quarter 14 7 1/8 0.05
- ------------------------------------------------------------------------------------------------
The Company's Board of Directors voted not to declare the 1999 third and
fourth quarter dividends, in light of the announcement made in September 1999 to
pursue all strategic alternatives to maximize shareholder value, including a
possible sale of the Company as a whole or one or more sales of the Company's
strategic assets. The declaration of dividends is subject to the discretion of
the Company's Board of Directors, based on the general business conditions
encountered by the Company, as well as the financial condition, earnings and
capital requirements of the Company and other factors deemed relevant by the
Board. Management believes that the elimination of the dividend will enhance the
Company's financial flexibility as it pursues a potential sale of the Company.
8
ITEM 6. SELECTED FINANCIAL DATA
- -----------------------------------------------------------------------------------------------------------------------
For the year ended and as of December 31, 1999/1/ 1998/2/ 1997/3/ 1996/4/ 1995
- -----------------------------------------------------------------------------------------------------------------------
(In thousands, except Per Share Data)
Income Statement Data:
Net sales $ 66,452 $ 63,492 $ 66,392 $ 74,084 $ 83,975
Operating income (loss) 1,683 1,755 498 (2,009) 8,804
Net income (loss) $ 836 $ 795 $ 108 $ (2,046) $ 5,076
Per Share Data:
Basic:
Weighted average number of
common shares outstanding 3,463,211 3,458,394 3,456,180 3,460,729 3,475,119
Net income (loss) $ 0.24 $ 0.23 $ 0.03 $ (0.59) $ 1.46
========== ========== ========== ========== ==========
Assuming dilution:
Weighted average number of
common shares outstanding 3,463,211 3,462,677 3,461,867 3,460,729 3,642,624
Net income (loss) $ 0.24 $ 0.23 $ 0.03 $ (0.59) $ 1.42
========== ========== ========== ========== ==========
Cash dividends $ 0.10 $ 0.20 $ 0.20 $ 0.20 $ 0.20
Balance Sheet Data:
Cash and cash equivalents $ 1,751 $ 530 $ 3,353 $ 2,143 $ 717
Working capital 3,929 6,345 6,732 6,002 9,193
Total assets 36,486 40,088 41,580 44,440 45,872
Total debt 3,901 9,018 10,335 9,800 9,800
Shareholders' equity 22,796 22,226 22,081 22,470 25,687
- -----------------------------------------------------------------------------------------------------------------------
____________________
/1/ The 1999 results of operations include special charges associated with
analysis of strategic alternatives, restructuring and proxy contest
activities which aggregate to a loss of $1,808,000 ($1,139,000 after
related income tax benefits). Additional discussion is provided in
Management's Discussion and Analysis of Financial Condition and Results of
Operations and the Notes to Consolidated Financial Statements.
/2/ The 1998 results of operations include the recovery of $600,000 of past due
rent associated with equipment leased to one of the Company's licensees and
$80,000 of incremental expenses associated with the Company's consideration
of strategic alternatives which aggregate to a gain of $520,000 ($325,000
after related income tax expense). Additional discussion is provided in
Management's Discussion and Analysis of Financial Condition and Results of
Operations and the Notes to Consolidated Financial Statements.
/3/ The 1997 results of operations include income and expenses associated with
restructuring activities which aggregate to a gain of $272,000 ($169,000
after related income tax expense). Additional discussion is provided in
Management's Discussion and Analysis of Financial Condition and Results of
Operations and the Notes to Consolidated Financial Statements.
/4/ The 1996 results of operations include special charges relating to
executive severance accruals ($593,000), a loss on the disposal of fixed
assets ($725,000) and the disposal of licensee and Company held inventories
($920,000), aggregating to $2,238,000 ($1,482,000 after related income tax
benefits).
9
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
- ---------------------
For the year ended December 31, 1999, the Company recorded sales of $66.5
million, which resulted in net income of $836,000 or $0.24 per share. These
results compare with net income of $795,000 ($0.23 per share) in 1998 and
$108,000 ($0.03 per share) in 1997. The increased profitability reflects an
improved sales mix towards more profitable business, renegotiated licensing
contracts with the Company's licensees and a continued focus on expense control.
The 1999 results include expenses associated with the Company's analysis of
strategic alternatives of approximately $1,223,000, restructuring activities of
$191,000 and proxy contest expenses of $394,000 which, after related tax
effects, reduced net income by $1,139,000 or $0.33 per share. Exclusive of
these special charges incurred during 1999, net income would have been
$1,975,000 or $0.57 per share.
The 1998 results include the recovery of $600,000 of past due rent
associated with ice cream making equipment leased to one of the Company's
licensee customers as well as approximately $80,000 of incremental expenses
associated with the Company's consideration of strategic alternatives. Combined,
these two items accounted for additional 1998 net income of approximately
$325,000 ($0.09 per share) after related tax effects. The 1997 results include
income (offset by certain expenses) associated with restructuring activities
which aggregate to a gain of $169,000 ($0.05 per share) after related tax
effects.
Additional details regarding all of these items are provided below.
Net Sales and Gross Profit
- --------------------------
Net sales consist of the following:
-----------------------------------
For the year ended December 31, 1999 1998 1997
- ----------------------------------------------------------------------------------
Eskimo Pie brand $20,495 $22,038 $23,380
Other licensed brands 21,618 19,610 21,048
------- ------- -------
Total licensed brands 42,113 41,648 44,428
Flavors and ingredients 13,181 12,040 12,319
Foodservice 9,477 8,127 8,164
Packaging and other revenues 1,681 1,677 1,481
------- ------- -------
$66,452 $63,492 $66,392
======= ======= =======
- ----------------------------------------------------------------------------------
The Company's frozen novelty business competes in a mature category which
is dominated by two of the world's largest food conglomerates who together
account for over one third of the category's sales. Consumer demand for frozen
novelty products has been flat in recent years. Packaged ice cream producers
continue to seek consumer attention with retail price promotions thus providing
extensive price competition to the Company's novelty products. The competitive
environment and recent consumption trends have provided challenges to
management's attempts to return the Company to its former profitability.
1999 Compared with 1998, Eskimo Pie Brand
- -----------------------------------------
10
Eskimo Pie brand sales decreased 6.3% in 1999 as compared to 1998. Sales of
"regular" Eskimo Pie milk and dark chocolate products were flat as compared to
1998. Declines in sales velocity and distribution on flanker items in the Eskimo
Pie No Sugar Added product line resulted in overall decline in Eskimo Pie Brand
sales. Consumer resistance to price advances caused by escalating dairy
ingredient prices in 1997 and 1998 continued to affect ice cream novelty
products in 1999.
1999 Compared with 1998, Other Licensed Brands
- ----------------------------------------------
Sales of other licensed brand products (RealFruit, Welch's, Weight Watchers
Smart Ones, OREO and SnackWell's brands) increased 9.3% in 1999.
Welch's brand sales increased 19% in 1999, primarily due to the
introduction of the Double Dare product line. While trade acceptance of these
new products was very good, consumer takeaway was below expectations. Sales of
the regular Welch's fruit juice line were down 5%, following the trend in
overall fruit juice bar novelty sales. Sales gains on the base fruit juice bars
in western markets were more than offset by declines in eastern markets where
the brand experienced significant competitive pressure.
Weight Watcher's novelty sales were up 7.5%, continuing its growth from
1998 spurred by the repositioning to the Smart Ones trademark. A new flavor,
Mocha Java, was introduced in key consumption markets and added incremental
sales volume. Geographic expansion of the line is being considered for the
fourth quarter of 2000 to take advantage of the continuing sales momentum and
consumer interest in the Smart Ones brand.
Nabisco sales increased 4% in 1999. The limited regional introduction of
the OREO Big Stuf ice cream sandwich in retail grocery and club store channels
more than offset declines in the remainder of the Nabisco product line. The
SnackWell brand continued its decline, reflecting the continuing consumer
retreat from "good for you" products. In addition, the OREO cookies'n cream cone
introduced in 1998 was withdrawn from the market due to a complete interruption
of production caused by an explosion at the production facility contracted to
produce the product and the inability to locate an alternative producer that
could provide product of similar quality.
Sales of RealFruit brand sorbet continued to decline in 1999 consistent
with segment trends. In 2000, a number of opportunities will be explored to
further develop the RealFruit brand.
Other licensed brands also include sales of approximately $600,000 to the
single serve impulse market. The Company entered the single serve market during
1998 with a range of Eskimo Pie, Welch's and OREO brand novelty products created
specifically for this retail channel.
1998 Compared with 1997
- -----------------------
Eskimo Pie brand sales decreased 5.8% for the year due to significant sales
declines during the first half of the year, largely due to unseasonably cool and
wet weather in some of the Company's strongest (west coast) markets. However,
Eskimo Pie brand sales increased by 16.9% in the second half of 1998, as
compared with 1997, as a result of increased distribution into the populous
northeast markets and increased promotional activity during the later part of
the 1998 summer selling season.
Sales of other licensed brand products (RealFruit, Welch's, Weight Watchers
Smart Ones, OREO and SnackWell's brands) decreased 6.8% in 1998. As is similar
to the trends noted with the Eskimo Pie brand, these sales were much stronger in
the second half of 1998 (actually showing an 11.3% improvement over 1997) but
not enough to offset declines from the first half of the year.
Welch's brand sales declined in the first half of 1998, largely due to El
Nino weather effects in the west coast markets where the Welch's brand has its
strongest consumer acceptance. Welch's brand sales in the second half of 1998
returned to prior year levels.
11
Weight Watchers brand sales increased 17.8% during 1998 largely due to the
successful repositioning of this line of products under the Smart Ones
trademark. Weight Watchers International, Inc., the owner of the Weight
Watchers and Smart Ones trademarks, transitioned its entire line of products to
the Smart Ones brand and contributed part of their 1998 earned royalties to the
Company's cost of converting to the new trademark.
Sales of OREO and SnackWell's brands decreased 13.3% during 1998 as
compared with 1997. The decrease is due to the discontinuance of the packaged
ice cream products sold under these brands and the continued consumer retreat
from "good-for-you" products. However, test market introduction of two new OREO
brand novelties provided additional sales volume that reduced the overall
decline in OREO and SnackWell's brand sales.
Other licensed brands also include approximately $850,000 of 1998 sales
from the single serve impulse market.
Flavors and Ingredients
- -----------------------
Revenue in the Flavors and Ingredients Division increased by 9.5% in 1999,
following slight declines in revenue during 1998 and 1997. The Division's
improvement was primarily due to the successful implementation of the Company's
sales initiative to further penetrate the national frozen dessert and fluid
dairy manufacturers. The Flavors Division secured new business during 1999 with
four targeted national accounts. Management believes this development of
national accounts, coupled with continued support of its regional dairy
customers, will position the Division for further growth in the rapidly
consolidating dairy industry.
Foodservice
- -----------
Revenue in the Foodservice Division increased by 17% in 1999, following a
relatively flat year in 1998 and a 7% decline in 1997. During 1999, management
implemented a strategy to increase sales and profitability, capitalizing on the
fact that Eskimo Pie markets the only nationally branded premium soft serve ice
cream, in addition to a full range of frozen yogurt and smoothie products. This
message has been delivered to distributors and operators using the Company's
"The Right Choice System." The Right Choice System is a comprehensive,
consultative approach to marketing the Company's soft serve products which
features premium quality products, provides operational support and provides
merchandising and promotional opportunities to foodservice distributors.
Gross Profit
- ------------
Gross profit, as a percent of sales, increased 170 basis points in 1999 to
41.8%, as compared to 40.1% in 1998,exclusive of the fourth quarter 1998 benefit
of the recovery of $600,000 in past due rental income discussed below.
Renegotiated licensing contracts with the Company's licensees provided for
increases in fixed royalty licensing fees, which more than offset some margin
erosion within the licensed brands. Further margin improvement is attributable
to continued focus on expense control and efficiencies at the manufacturing
facilities, including the discontinuance of certain unprofitable packaging
operations in the first quarter of 1999, as discussed below.
The $600,000 of rental income recorded in 1998 arose in connection with an
arrangement under which one of the Company's licensee customers had leased ice
cream novelty making equipment from the Company which provided rental income
based on the "units of production" manufactured on the equipment. Since 1992,
the Company had received annual rental payments that, in the aggregate, were
less than that required to fully amortize the Company's original investment.
The customer acknowledged its past due obligation and agreed to pay $600,000 to
bring the lease current at December 31, 1998. As collectibility of the lease
payments was not reasonably predictable, no contingent rent had been previously
recorded and the $600,000 recovery was recognized in the fourth
12
quarter 1998 as a reduction of cost of goods sold (consistent with the previous
rent received on this equipment).
During 1998, significant attention was focused on the ice cream industry
based on 1998 butterfat prices which increased by approximately 150% from 1997
levels. As a licensing company that does not actually produce finished novelty
and packaged ice cream products, the Company was not directly impacted by the
increased cost of this commodity. However, as a result of the butterfat cost
increases some of the Company's licensees increased the price of the Company's
licensed ice cream and novelty products they produce which may have ultimately
affected consumer demand and the Company's sale of related components and
packaging. The Company is also affected by butterfat pricing in connection with
premium soft serve ice cream products sold to the foodservice industry.
Butterfat purchases within the Foodservice division traditionally account for
less than 1% of consolidated cost of goods sold. In 1999 butterfat pricing
returned to 1997 levels.
Expenses and Other Income
- -------------------------
Advertising and sales promotion for 1999 was consistent with 1998 in
absolute dollars, but as a percent of sales, decreased from 25.3% in 1998 to
24.4% in 1999. Management's intent to increase spending under its previously
announced Growth and Restructuring Plan was curtailed as a result of the
Company's September 1999 announcement of its intention to explore a possible
sale of the Company.
Selling, general and administrative expenses decreased in 1999 by $144,000
or 1.7% despite bonus payments of approximately $550,000 (as compared to
$115,000 in 1998). In 1998, these expenses decreased $1,095,000 or 11.7% after a
decrease of $960,000 or 9.3% in 1997. These decreased expenditures are a result
of management's continued focus on cost control initiatives.
During 1999, the Company incurred $1.8 million of restructuring and other
special charges.
The Company incurred approximately $1,223,000 in expenses related to the
analysis of strategic alternatives, the development of the Company's Growth and
Restructuring Plan and management's pursuit of a possible sale of the Company in
whole or in parts. $433,000 of these charges relate to partial payments of
retention incentives intended to maintain the employment of key personnel during
uncertain times. The remaining costs consist primarily of legal, investment
banking, and other professional services.
The Company undertook two reduction-in-force programs in the first half of
the year to reduce overhead expenses, resulting in restructuring charges of
approximately $191,000.
In March 1999, the Company discontinued certain non-core manufacturing
operations and terminated the employment of seven production employees at its
Bloomfield, New Jersey packaging plant who were not involved in the production
of products for the Company's licensing businesses. As a result, the Company
incurred related severance costs of approximately $105,000, all of which has
been paid. As a result of this action, profitability in the Packaging Division,
exclusive of the severance costs, improved by approximately $350,000 over 1998
results.
During the second quarter of 1999, the Company eliminated two vacant
positions and terminated the employment of six employees located at the
Company's corporate headquarters. The severance costs associated with these
terminations totaled approximately $86,000; however, when combined with the
savings from the eliminated positions, these actions are anticipated to provide
annualized savings of approximately $300,000 per year.
The Company incurred approximately $394,000 of proxy contest related
expenses, including legal and other professional service fees and administrative
expenses associated with the Company's delayed annual meeting of shareholders in
1999.
13
During the third quarter of 1997, the Company consolidated its flavors
production in New Berlin, Wisconsin. In connection with the consolidation, the
Company discontinued flavors operations in Los Angeles, California, terminated
the employment of the plant's 14 employees and sold the plant facility.
Included in income from restructuring activities is an approximate $1,000,000
gain from the sale of plant assets offset primarily by approximately $300,000 of
employee severance expenses. The Company used a portion of the proceeds from
the sale of the Los Angeles facility to complete an expansion of the New Berlin
facility. The New Berlin expansion, which cost approximately $800,000, provides
the necessary capacity to serve the Company's current and expected business
requirements at costs which are lower than operating two plants.
During the fourth quarter of 1997, the Company completed a restructuring of
its operations into a divisional operating unit alignment. In connection with
this restructuring, two senior level employees were terminated with severance
benefits of approximately $215,000. In addition, $200,000 of previously incurred
severance and other special costs associated with the Company's 1997
restructuring activities were offset against the income recognized from the
flavors consolidation. The Company also recorded $593,000 of restructuring
charges during the third quarter of 1996, relating to severance commitments
associated with a change in executive management. All severance commitments
associated with the above restructuring activities had been paid as of December
31, 1998.
Seasonality
- -----------
The frozen novelty industry is seasonal with sales concentrated in the
summer months. Because the Company supplies packaging and ingredients to
manufacturers of its licensed and sublicensed products, the Company has a higher
level of sales preceding and during the summer months.
The following table provides two years of unaudited quarterly financial
data:
For the 1999 quarter ended March 31 June 30 Sept 30 Dec 31
- ----------------------------------------------------------------------------------------
(In thousands, except per share data)
Net sales $16,129 $22,146 $15,686 $12,491
Gross profit 6,846 10,431 6,862 3,656
Net income (loss) 232 1,399 105 (900)
Per share
Basic 0.07 0.40 0.03 (0.26)
Assuming dilution 0.07 0.40 0.03 (0.26)
For the 1998 quarter ended March 31 June 30 Sept 30 Dec 31
- ----------------------------------------------------------------------------------------
(In thousands, except per share data)
Net sales $16,031 $20,114 $15,179 $12,168
Gross profit 6,530 9,062 6,154 4,336
Net income (loss) 201 1,049 65 (520)
Per share
Basic 0.06 0.30 0.02 (0.15)
Assuming dilution 0.06 0.30 0.02 (0.15)
1999 gross profit includes special charges of approximately $1.8 million as
discussed under the caption Expenses and Other Income above. These special
charges, after related tax benefits, reduced 1999 net income by approximately
$1.1 million or $0.33 per share.
As discussed under the caption Net Sales and Gross Profit above, the
Company recorded $600,000 of past due rental income in the fourth quarter of
1998 and approximately $80,000 of incremental expenses associated with the
previously announced decision to explore strategic alternatives. Combined, these
two items provided additional net income of $325,000 ($0.09 per share) after
related tax effects.
LIQUIDITY, CAPITAL RESOURCES AND OTHER MATTERS
- ----------------------------------------------
14
The Company's utilization of licensees in its national branded novelty
business allows it to operate with relatively low capital requirements. The
Company's licensing strategy reduces working capital requirements to that
necessary to support advertising, sales promotion and administrative activities
rather than the much larger amounts that would be required to support the self-
manufacture of finished consumer goods. Working capital requirements generally
precede the seasonal pattern of the Company's sales. The Company believes that
the cash generated from operations and funds available under its credit
agreements provide the Company with sufficient funds and the financial
flexibility to support its ongoing business.
The Company's principal customers are seven licensee dairies, who account
for approximately 60% of the Company's net sales. Each licensee operates within
geographic territorial boundaries under agreements which generally include three
year terms subject to termination by the Company for quality control violations,
failure to meet minimum volume requirements or material changes in the Company's
ownership or the licensee's business. These agreements provide for six to twelve
month transition periods in the event of termination. Beginning in 1999,
licensees were required to contribute to trade promotion spending and make
separate quarterly payments to the Company for licensing royalty fees which are
expected to aggregate to $1,040,000 annually through 2001.
The Company's licensing strategy allows it to manage a strong licensee base
which it can actively monitor to minimize the impact of an unforeseen loss of
any of its licensees. The loss of one or more of these major licensees could
cause some disruption in the Company's operations, although, based upon prior
experience with replacing major licensees, management believes it could locate a
suitable replacement within a short period of time and, as a result, such
customer loss would not have a significant impact on the Company's operations,
liquidity or capital resources.
During the third quarter of 1998, the Company extended its licensing
agreement with Welch Foods, Inc. (Welch's). Under the agreement, the Company
will continue to provide product development, sales, marketing and production
support for the Welch's Fruit Juice Bars which the Company has managed since
1980. The extended licensing agreement continues through the year 2008 and
provides for enhanced opportunities for new product development under the
Welch's trademark. The Company paid Welch's approximately $800,000 in August
1998 as partial payment against a total of $1,500,000 license fees payable over
the term of the license. There are no guaranteed or required payments under the
license and certain termination clauses exist which would preclude payment of
the balance of the license fees.
As partial consideration in connection with the 1994 acquisition of Sugar
Creek Foods, the Company issued $3,800,000 in convertible subordinated notes
payable to the former Sugar Creek Foods shareholders. These notes became due in
February 1999. Payment of the subordinated debt was initially funded under the
Company's committed line of credit. By December 31, 1999 the balance on the
line of credit had been paid in full, with cash flows provided by the Company's
operations.
On May 20, 1999, the Company renewed its $10 million committed line of
credit, which is now available for general corporate purposes through April
2001. Borrowings under the line bear interest at the lender's overnight money
market rate plus 100 basis points.
In September 1999, the Company's Board of Directors voted to suspend the
quarterly dividend payments indefinitely. The Board's decision to suspend its
dividend was made in light of the Company's decision to pursue all strategic
alternatives to maximize shareholder value, including a possible sale of the
Company as a whole or one or more sales of the Company's strategic assets.
Management believes that the elimination of the dividend will enhance the
Company's financial flexibility as it pursues a possible sale of the Company.
At this time, the Board of Directors has no plans to reinstate the
quarterly dividend payments. The declaration of dividends is subject to the
discretion of the Company's Board of Directors, based on
15
the general business conditions encountered by the Company, as well as the
financial condition, earnings and capital requirements of the Company and other
factors deemed relevant by the Board.
The Company believes that the annual cash generated from operations and
funds available under its credit agreements will provide the Company with
sufficient funds and the financial flexibility to support its ongoing business,
strategic objectives and debt repayment requirements.
IMPACT OF YEAR 2000
Considerable attention was given to the effect of the Year 2000 (Y2K) on
various computer systems. This concern stemmed from the inability of certain
computerized applications and devices (hardware, software and equipment) to
process dates after December 31, 1999. The Company's efforts to address the Y2K
Problem consisted of the implementation of new management information systems,
review of other internal systems and equipment and inquiries of external trading
partners (key licensees, customers, suppliers and service providers). As a
result of these efforts, the Company has experienced no significant disruptions
in business related to Year 2000 issues. The Company will continue to monitor
its mission critical computer applications and those of its suppliers and
vendors throughout the year 2000 to ensure that any latent Year 2000 matters
that may arise are addressed promptly.
The Company's implementation of its new management information systems was
divided into two phases. One phase of the project was the installation and
continued integration of the Company's plant production management system. This
phase of the project, which is not critical to the Company's Y2K capabilities,
has been slowed as a result of the Company's decision to seek a sale of the
Company in whole or in parts. The other phase related to the implementation of
newly acquired software was completed prior to the end of the year. This new
software is now being used by the Company to run its daily financial operations.
Project expenditures relating to the new management information systems of
approximately $1.9 million have been capitalized under the provisions of the
AICPA's Statement of Position 98-1 and will be amortized to expense over the
expected useful life.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company believes that its exposure to market risks is not
material.
16
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
CONSOLIDATED STATEMENTS OF INCOME
For the year ended December 31, 1999 1998 1997
- -----------------------------------------------------------------------------------------------------------------
(In thousands, except Per Share Data)
Net sales $ 66,452 $ 63,492 $ 66,392
Cost of products sold 38,657 37,410 39,682
-------------------------------------
Gross profit 27,795 26,082 26,710
Advertising and sales promotion expenses 16,195 16,074 17,136
Selling, general and administrative expenses 8,109 8,253 9,348
(Income) expense from restructuring activities 191 - (272)
Expense from analysis of strategic alternatives 1,223 - -
Expense from proxy contest 394 - -
-------------------------------------
Operating income 1,683 1,755 498
Interest (income)/expense and other-net 356 493 508
Gain (loss) on disposal of fixed assets - - 184
-------------------------------------
Income (loss) before income taxes 1,327 1,262 174
Income tax expense 491 467 66
-------------------------------------
Net income $ 836 $ 795 $ 108
=====================================
Per Share Data
Basic:
Weighted average number of common shares outstanding 3,463,211 3,458,394 3,456,180
Net income $ 0.24 $ 0.23 $ 0.03
=====================================
Assuming dilution:
Weighted average number of common shares outstanding 3,463,211 3,462,677 3,461,867
Net income $ 0.24 $ 0.23 $ 0.03
=====================================
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
Common Stock Additional Retained
(In thousands, except share data) Shares Amount Capital Earnings Total
- -----------------------------------------------------------------------------------------------------------------------------
Balance at January 1, 1997 3,447,573 $3,448 $4,168 $14,854 $22,470
Net income 108 108
Cash dividends ($0.20 per share) (692) (692)
Issuance of common stock 10,429 10 115 125
Compensation from stock option grant 70 70
----------------------------------------------------------------
Balance at December 31, 1997 3,458,002 3,458 4,353 14,270 22,081
Net income 795 795
Cash dividends ($0.20 per share) (691) (691)
Issuance of common stock 595 1 7 8
Compensation from stock option grant 33 33
----------------------------------------------------------------
Balance at December 31, 1998 3,458,597 $3,459 $4,393 $14,374 $22,226
Net income 836 836
Cash dividends ($0.10 per share) (346) (346)
Issuance of common stock 5,452 5 56 61
Compensation from stock option grant 19 19
----------------------------------------------------------------
Balance at December 31, 1999 3,458,597 $3,464 $4,468 $14,864 $22,796
================================================================
CONSOLIDATED BALANCE SHEETS
17
As of December 31, 1999 1998
- -------------------------------------------------------------------------------------------------------
(In thousands, except share data)
Assets
Current assets:
Cash and cash equivalents $ 1,751 $ 530
Receivables 6,057 6,817
Inventories 4,032 4,897
Prepaid expenses 557 889
----------------------
Total current assets 12,397 13,133
Property, plant and equipment - net 6,578 7,665
Goodwill and other intangibles 16,598 17,645
Other assets 913 1,645
----------------------
Total assets $ 36,486 $ 40,088
======================
Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable $ 3,208 $ 2,875
Accrued advertising and promotion 2,217 1,728
Accrued compensation and related amounts 1,033 211
Other accrued expenses 1,038 657
Current portion of long term debt 972 1,317
----------------------
Total current liabilities 8,468 6,788
Long term debt 2,929 3,901
Convertible subordinated notes - 3,800
Postretirement benefits and other liabilities 2,293 3,373
Shareholders' equity:
Preferred stock, $1.00 par value; 1,000,000 shares authorized,
none issued and outstanding - -
Common stock, $1.00 par value; 10,000,000 shares authorized,
3,464,050 issued and outstanding in 1999 and 3,458,597 in 1998 3,464 3,459
Additional capital 4,468 4,393
Retained earnings 14,864 14,374
----------------------
Total shareholders' equity 22,796 22,226
----------------------
Total liabilities and shareholders' equity $ 36,486 $ 40,088
======================
See accompanying notes to consolidated financial statements.
18
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the year ended December 31, 1999 1998 1997
- ------------------------------------------------------------------------------------------------------------------------
(In thousands)
Operating activities
Net income (loss) $ 836 $ 795 $ 108
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation 1,296 1,560 1,426
Amortization 1,116 1,097 1,086
Gain on disposal of fixed assets - - (1,183)
Compensation from stock option grant 19 33 70
Change in deferred income taxes and other assets 419 451 (69)
Change in postretirement benefits and other liabilities (1,132) 136 (333)
Change in receivables 761 (1,496) (1,270)
Change in inventories and prepaid expenses 1,359 (729) 3,836
Change in accounts payable and accrued expenses 2,023 (531) (2,762)
--------------------------------
Net cash provided by operating activities 6,697 1,316 909
Investing activities
Acquisition of intangible assets - (975) (587)
Capital expenditures (610) (1,334) (1,413)
Proceeds from disposal of fixed assets 401 - 1,994
Other 147 178 464
--------------------------------
Net cash (used in) provided by investing activities (62) (2,131) 458
Financing activities
Borrowings under long term credit facility 3,800 - 1,150
Redemption of convertible subordinate notes (3,800)
Principal payments on long term debt (5,117) (1,317) (615)
Issuance of common stock 49 - -
Cash dividends (346) (691) (692)
--------------------------------
Net cash used in financing activities (5,414) (2,008) (157)
--------------------------------
Change in cash and cash equivalents 1,221 (2,823) 1,210
Cash and cash equivalents at beginning of year 530 3,353 2,143
--------------------------------
Cash and cash equivalents at end of year $ 1,751 $ 530 $ 3,353
================================
Income tax payments (recoveries) $ - $ 150 $(1,632)
================================
Interest payments $ 437 $ 567 $ 636
================================
See accompanying notes to consolidated financial statements.
19
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A - SIGNIFICANT ACCOUNTING POLICIES
The Company, which operates primarily in the United States, markets and
manufactures through its own plants and licensed dairies a broad range of frozen
novelties, frozen yogurt, ice cream and sorbet products under the Eskimo Pie,
RealFruit, Welch's, Weight Watchers, Smart Ones, SnackWell's and OREO brand
names. The Company also continues to manufacture ingredients and packaging for
sale to the dairy industry.
Principles of Consolidation: The accounts of the Company and its wholly-owned
subsidiaries are included in the consolidated financial statements after
elimination of all material intercompany balances and transactions.
Use of Estimates: The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make certain
estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results could differ from those
estimates.
Cash Equivalents and Investments: The Company considers all highly liquid
investments with a maturity of three months or less when purchased to be cash
equivalents. The carrying amount of cash equivalents approximates fair value
because of the short maturity of those investments. Investments with maturities
beyond three months are carried at fair value.
Inventories: Inventories are stated at the lower of cost or market. The cost
of inventories is determined by the last-in, first-out (LIFO) method except for
approximately $650,000 of inventories at December 31, 1999 and $625,000 in 1998
which were determined by the first-in, first-out (FIFO) method. LIFO
liquidations reduced cost of goods sold by $118,000 in 1999 and $120,000 in
1997.
Inventories are classified as follows:
As of December 31, 1999 1998
- -------------------------------------------------------------------------------------------
(In thousands)
Finished goods $ 2,667 $ 3,294
Raw materials and packaging supplies 2,286 2,642
-------- --------
Total FIFO inventories 4,953 5,936
Reserve to adjust inventories to LIFO (921) (1,039)
-------- --------
$ 4,032 $ 4,897
======== ========
- -------------------------------------------------------------------------------------------
Property, Plant, and Equipment : Property, plant and equipment is stated at
cost and consists of the following:
As of December 31, 1999 1998
- -------------------------------------------------------------------------------------------
(In thousands)
Land $ 679 $ 630
Buildings 5,315 5,304
Machinery and equipment 11,070 10,789
Equipment leased or loaned to customers 2,400 3,727
-------- --------
19,464 20,450
Less accumulated depreciation and amortization (12,886) (12,785)
-------- --------
$ 6,578 $ 7,665
======== ========
- -------------------------------------------------------------------------------------------
Development and implementation costs for purchased and internally developed
software are capitalized in accordance with AICPA Statement of Position 98-1,
"Accounting for the Costs of Computer Software Development for or Obtained for
Internal Use." At December 31, 1999 and
20
1998, capitalized software costs included in machinery and equipment above
amounted to $1.9 million and $1.5 million, respectively. Depreciation and
amortization are provided by the straight line method over the estimated useful
lives of the assets which is generally 30 years for buildings, and five to ten
years for machinery and equipment, five to seven years for computer software and
three years for computer hardware.
Goodwill and Other Intangibles: Goodwill, which represents the excess of the
purchase price of acquired companies over the fair value of the net assets
acquired, is amortized on a straight line basis over 40 years. Other
intangibles include costs associated primarily with trademarks, sub-licensed
brand names and carton development and are amortized on a straight line basis
over periods which range from four to twenty years. Accumulated amortization at
December 31, 1999 and 1998 was approximately $3,691,000 and $2,831,000,
respectively.
The Company periodically evaluates the recoverability of material components of
goodwill and other intangibles based on expected undiscounted cash flows. Any
impairment in value would be charged to earnings in the year recognized. The
Company believes that no impairment of value exists as of December 31, 1999.
Revenue Recognition: The Company records sales when products are shipped from
its manufacturing facilities or those of its "drop ship" vendors. No right of
return exists. The Company also accrues licensing fees as they are earned based
upon the terms of the respective licensing agreements.
Advertising and Sales Promotion Expenses: The Company generally expenses
advertising and sales promotion costs in the period incurred. There were no
material capitalized advertising and sales promotion costs as of December 31,
1999 and 1998.
Product Development and Quality Control Costs: Costs for product development
and quality control, which are performed by the same personnel, are expensed as
incurred and were approximately $1,265,000 in 1999, $1,300,000 in 1998 and
$1,350,000 in 1997.
Stock Options: The Company accounts for stock options granted under incentive
stock plans in accordance with Accounting Principles Board Opinion No. 25 (APB
25), "Accounting for Stock Issued to Employees" and related interpretations.
New Accounting Standards: In 1998, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standards No. 133, "Accounting for
Derivative Instruments and Hedging Activities." This statement requires the
recognition of all derivatives on the balance sheet at fair value. This
statement is effective for the Company in 2001 and is not expected to materially
affect the consolidated balance sheet or statement of income.
Reclassifications: Certain amounts in the prior year financial statements have
been reclassified to conform with current presentation.
NOTE B - INCOME TAXES
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. At December 31, 1999,
the Company had $432,000 ($272,000 in 1998) of current deferred tax assets
included in prepaid expenses and $8,000 of long term deferred tax liabilities
included in postretirement benefits and other liabilities. At December 31,
1998, the Company had $567,000 of long term deferred tax assets included in
other assets.
The significant components of deferred tax assets and liabilities are as
follows:
- ----------------------------------------------------------------------------------------------
As of December 31, 1999 1998
- ----------------------------------------------------------------------------------------------
21
(In thousands)
Assets:
Bad Debt Reserves $ 95 $ 29
Inventory 238 86
Accrued postretirement benefits 718 1,277
Net operating loss carryforwards 397 429
Other amounts 204 379
------- -------
1,652 2,200
Liabilities:
Depreciation and amortization (1,228) (1,137)
Other amounts - (224)
------- -------
(1,228) (1,361)
Total deferred tax assets $ 424 $ 839
======= =======
- ----------------------------------------------------------------------------------------------
At December 31, 1999, there is approximately $397,000 of tax benefits
associated with approximately $1,030,000 of net operating loss (NOL)
carryforwards which expire in 2011. No valuation allowance has been recorded
against the benefits associated with the NOL as the Company believes it will
generate sufficient taxable income in the future to ensure realization of the
tax benefit.
Significant components of the provision for income taxes are as follows:
- ----------------------------------------------------------------------------------------------
For the year ended December 31, 1999 1998 1997
- ----------------------------------------------------------------------------------------------
(In thousands)
Current:
Federal 51 $ ( 23) $ 165
State 9 (3) 36
----- ------- -------
80 (26) 201
Deferred:
Federal 341 436 (111)
State 73 57 (24)
----- ------- -------
414 493 (135)
----- ------- -------
Total income tax provision $ 494 $ 467 $ 66
===== ======= =======
- ----------------------------------------------------------------------------------------------
A reconciliation of federal statutory and effective income tax rates is as
follows:
- ----------------------------------------------------------------------------------------------
For the year ended December 31, 1999 1998 1997
- ----------------------------------------------------------------------------------------------
Federal statutory rate 34.0% 34.0% 34.0%
Effect of
State taxes 1.4 4.6 4.4
Permanent differences and other 1.6 (1.6) (.5)
---- ---- ----
Effective income tax rate 37.0% 37.0% 37.9%
==== ==== ====
- ----------------------------------------------------------------------------------------------
22
NOTE C - FINANCING ARRANGEMENTS
- --------------------------------------------------------------------------------------------------------
Long Term Debt Carrying Amount
----------------------------
As of December 31, 1999 1998
- --------------------------------------------------------------------------------------------------------
(In thousands)
Revolving credit facility $3,786 $ 4,643
(variable interest rate, currently 7.0%)
Long term line of credit 115 575
(variable interest rate, currently 6.6%)
Convertible subordinated notes ___ 3,800
------ -------
(4.5% interest rate)
3,901 9,018
Less current maturities (972) (1,317)
------ -------
$2,929 $ 7,701
====== =======
- --------------------------------------------------------------------------------------------------------
Based upon prevailing interest rates and after consideration of credit
risk, the carrying value of the Company's long term debt is a fair approximation
of market value. Interest expense for 1999, 1998 and 1997 was $437,000,
$591,000 and $606,000, respectively.
In 1994, the Company entered into a $6,000,000, ten year revolving credit
facility with a commercial bank which provided for renewable loans with required
principal reductions beginning in June 1997. Under the terms of the agreement,
the Company will retire the loan over the seven year period ending June 2004.
Except for the amounts due in 2000, the Company has classified all of this loan
as long term debt based upon its ability and intention to defer payment past
2000.
During 1997, the Company borrowed $1,150,000 under one of the Company's
existing long term lines of credit to finance the acquisition of computer
hardware and software. Borrowings under the line bear interest at the 30 day
LIBOR rate plus 100 basis points and will be repaid in equal monthly
installments through April 2000.
As partial consideration in connection with the 1994 acquisition of Sugar
Creek Foods, the Company issued $3,800,000 in convertible subordinated notes to
the former Sugar Creek Foods' shareholders. These notes, which became due in
February 1999, were classified as long term debt at December 31, 1998 as the
Company had the intent and ability to refinance the notes on a long-term basis.
In February 1999, the Company refinanced the $3.8 million note payment by
transferring the amount to its $10 million committed line of credit discussed
below. During 1999 the Company used cash generated from operations to pay off
the $3.8 million balance. The Company had previously reserved 162,567 shares of
its common stock for conversion of the notes (at $23 3/8 per share).
During 1999, the Company renewed its $10,000,000 committed line of credit
which is available for general corporate purposes through April 2001.
Borrowings under the line bear interest at the bank's overnight money market
rate plus 75 basis points. At December 31, 1999, there were no borrowings under
the line.
The revolving and committed credit agreements impose, among other things,
certain requirements on the ratio of total debt to net worth, the maintenance of
minimum shareholders' equity and minimum interest coverage. No assets are
pledged as security under these agreements.
The combined aggregate amount of the scheduled maturites for all long term debt
is as follows:
- --------------------------------------------------------------------------------
2000 2001 2002 2003 2004
- --------------------------------------------------------------------------------
$972 $ 857 $ 857 $ 857 $ 358
- --------------------------------------------------------------------------------
23
NOTE D - SHAREHOLDERS' EQUITY
Stock Options
Under the Company's Incentive Stock Plans (the Plans), key employees and
non-employee directors of the Company may receive grants and awards of up to a
total of 425,000 shares of stock options, stock appreciation rights and
restricted stock.
Stock options are generally granted at a price not less than the fair
market value on the date the options are granted, become exercisable at various
intervals which generally range from the date of grant to four years after the
date of the grant and expire after ten years. Effective January 7, 1999, the
Board of Directors authorized that all outstanding option agreements be amended
to be immediately vested upon a corporate change of control (as defined).
The details of stock option activity are as follows:
-------------------------------------------------------
Range of Weighted Average
Number of Shares Exercise Prices Exercise Price
- ----------------------------------------------------------------------------------------------------------------------
1997
Outstanding, beginning of year 138,227 17.00 - 21.25 18.60
Granted at fair market value 125,986 10.88 - 12.50 12.49
Granted at less than fair market value 50,000 10.00 10.00
Cancelled 92,874 12.50 - 20.50 17.53
Outstanding, end of year 221,339 10.00 - 21.25 13.63
Exercisable, end of year 61,236 10.00 - 21.25 15.57
1998
Granted 81,000 13.38 - 14.50 13.39
Cancelled 58,233 10.88 - 21.25 16.45
Outstanding, end of year 244,106 10.00 - 21.25 12.87
Exercisable, end of year 55,569 10.00 - 21.25 13.25
1999
Granted 96,700 10.44 - 13.25 13.22
Cancelled 45,012 12.50 - 13.38 13.04
Outstanding, end of year 295,794 10.00 - 21.25 12.96
Exercisable, end of year 132,232 10.00 - 21.25 12.92
- ------------------------------------------------------------------------------------------------------------------
Included in the amounts shown above is the effect of certain modifications
made to prior year awards during 1997. On March 4, 1997, the Board of Directors
approved a plan whereby employee stock options on a total of 48,100 shares with
a weighted average exercise price of $18.51 were exchanged for 37,486 shares of
repriced options with an exercise price of $12.50 per share. The repriced and
forfeited options, which had an equivalent value under the Black-Scholes Option
Pricing Model, are included in the 1997 "Granted at fair market value" and
"Cancelled" captions, respectively, in the above table.
On March 4, 1997, the Company also awarded 50,000 shares of stock options
at a $2.50 discount to the then fair market value of $12.50 per share. This
discount-to-market is being expensed over a three year graded scale consistent
with the terms upon which the options become exercisable. As a result of this
award, amounts expensed under this plan were approximately $19,000 in 1999,
$33,000 in 1998, and $70,000 in 1997.
As permitted by the provisions of Statement of Financial Accounting
Standards No. 123 (SFAS 123), "Accounting for Stock Based Compensation", the
Company continues to follow APB 25 and related interpretations in accounting for
its stock based awards. As stock options are generally issued at the fair
market value on the date of grant, the Company does not recognize compensation
cost related to its stock option plans except as discussed above as it relates
to stock option grants with exercise prices which were less than the fair market
value on the date of the grant.
24
The following information is provided solely in connection with the
disclosure requirements of SFAS 123. If the Company had elected to recognize
compensation expense related to its stock options in accordance with the
provisions of SFAS 123, the additional costs from options granted since 1995
would have resulted in a pro forma net income of $ 515,000 in 1999 ($0.15 per
share), $564,000 in 1998 ($0.16 per share), and a pro forma loss of $119,000 in
1997 ($0.03 per share). These pro forma amounts are not indicative of the future
effects of applying the provisions of SFAS 123 since the respective vesting
periods are used to measure each respective period's pro forma compensation
expense.
The weighted average fair value of options granted in 1999, 1998 and 1997
was $5.51, $5.16 and $5.47 per share, respectively. The fair values were
estimated at the date of grant using the Black-Scholes Option Pricing Model with
the following weighted-average assumptions:
- -------------------------------------------------------------------------------
For the year ended December 31, 1999 1998 1997
- -------------------------------------------------------------------------------
Volatility factor .371 .319 .333
Risk free interest rate 4.74% 5.69% 6.49%
Dividend yields 1.5% 1.5% 1.6%
Expected life (years) 7.9 7.2 7.1
- -------------------------------------------------------------------------------
As of December 31, 1999, the weighted average remaining contractual life of
all outstanding stock options was 7.8 years.
The Company has also granted the following restricted stock awards in
accordance with the Plans:
- -------------------------------------------------------------------------------
For the year ended December 31, 1999 1998 1997
- -------------------------------------------------------------------------------
Number of shares issued 1,200 1,000 11,000
Weighted average fair value $10.44 $14.13 $ 12.35
- -------------------------------------------------------------------------------
At December 31, 1999, approximately 85,000 shares were available for future
grants under the Plans.
Earnings Per Share
The following table sets forth the computation of earnings per share:
- --------------------------------------------------------------------------------------------------------------------
For the year ended December 31, 1999 1998 1997
- --------------------------------------------------------------------------------------------------------------------
Net income (loss) $ 836,000 $ 795,000 $ 108,000
========== ========== ==========
Weighted average number of common shares outstanding 3,463,211 3,458,394 3,456,180
Dilutive effect of stock options - 4,283 5,687
---------- ---------- ----------
Weighted average number of common shares outstanding assuming
potential dilution 3,463,211 3,462,677 3,461,867
========== ========== ==========
Basic earnings per share $ 0.24 $ 0.23 $ 0.03
========== ========== ==========
Earnings per share - assuming dilution $ 0.24 $ 0.23 $ 0.03
========== ========== ==========
- --------------------------------------------------------------------------------------------------------------------
Options to purchase 296,000 shares in 1999, 193,000 shares in 1998 and
170,000 shares in 1997 were not considered for their dilutive effect because the
exercise price of the options exceeded the average market price for the
respective year, and as such, the effect would be anti-dilutive.
25
Additional disclosure concerning the convertible subordinated notes is
provided in Note C to the Consolidated Financial Statements. The effect of the
assumed conversion was not considered for its dilutive effect in any of the
years presented as the conversion would have been anti-dilutive.
Shareholder Rights Plan
In January 1993, the Board of Directors approved the adoption of the
Shareholder Rights Agreement wherein, effective February 5, 1993, one Right
attaches to and trades with each share of Common Stock. Each Right entitles the
registered holder to purchase from the Company one one-hundredth of a share
(Unit) of Series A Junior Participating Preferred Stock, par value $1.00 per
share. The Company has designated 100,000 shares of its Preferred Stock as
Series A Junior Participating Preferred Stock. The exercise price per Right is
$75.00, subject to adjustment. Each Unit of Preferred Stock is structured to be
the equivalent of one share of Common Stock.
The Rights are initially exercisable to purchase one Unit of Preferred
Stock at the exercise price only if a person or group (Acquiring Person)
acquires 20% or more of the Company's Common Stock or announces a tender offer
for 20% or more of the outstanding Common Stock at which time the Rights detach
and trade separately from the Common Stock. At any time thereafter, the Company
may issue 1.5 shares of Common Stock in exchange for each Right other than those
held by the Acquiring Person. Generally, if an Acquiring Person acquires 30% or
more of the Company's Common Stock or an Acquiring Person merges into or
combines with the Company, or if the Company is acquired in a merger or other
business combination in which it does not survive, or if 50% of its earnings
power or assets is sold, each Rights holder other than the Acquiring Person may
be entitled, upon payment of the exercise price, to purchase securities of the
Company or the surviving company having a market value equal to twice the
exercise price. The Rights, which do not have voting privileges, expire in 2003,
but may be redeemed under certain circumstances by the Board prior to that time
for $.01 per Right.
NOTE E - RETIREMENT PLANS
The Company currently maintains two defined benefit pension plans covering
substantially all salaried employees. These plans provide retirement benefits
based primarily on employee compensation and years of service. In addition, the
Company entered into an agreement with Reynolds Metals Company to indemnify the
cost of retiree health care and life insurance benefits for salaried employees
of the Company who had retired prior to April 1992. Under the agreement, the
Company may elect to prepay the Company's remaining obligation. The Company does
not provide postretirement health and life insurance benefits for employees who
retire subsequent to April 1992. The above mentioned plans are collectively
referred to as the "Plans."
The following table reconciles the changes in benefit obligations and plan
assets in 1999 and 1998, and reconciles the funded status to accrued benefit
cost at December 31, 1999 and 1998:
26
- -------------------------------------------------------------------------------------------------------------------------------
Pension Benefits Other Benefits
---------------- --------------
For the year ended December 31, 1999 1998 1999 1998
- -------------------------------------------------------------------------------------------------------------------------------
(In thousands)
Change in Benefit Obligation:
Benefit obligation at beginning of year $2,052 $1,672 $2,542 $2,397
Service cost 283 268 - -
Interest cost 143 116 119 116
Actuarial (gain)/loss (409) 13 54 29
Benefit payments (44) (17) 649 -
-------------------------- --------------------------
Benefit obligation at end of year 2,025 2,052 2,066 2,542
-------------------------- --------------------------
Change in Plan assets:
Fair value of Plan assets at beginning of year 1,863 1,592 - -
Actual return on Plan assets 226 196 - -
Employer contributions 20 92 - -
Benefit payments (44) (17) - -
-------------------------- --------------------------
Fair value of Plan assets at end of year 2,065 1,863 - -
-------------------------- --------------------------
Funded status:
Benefit obligations in excess of Plan assets (40) 189 2,006 2,542
Unrecognized actuarial gains 766 285 186 300
-------------------------- --------------------------
Accrued benefit cost $ 726 $ 474 $2,252 $2,842
========================== ==========================
- -------------------------------------------------------------------------------------------------------------------------------
The Company funds its ERISA qualified defined benefit plan in accordance with
guidelines established by the U.S. Department of Labor and limitations under
federal income tax regulations. Other benefit plans are funded as benefit
payments are required. The projected and accumulated benefit obligation for the
Company's unfunded, non-qualified, defined benefit pension plan were $459,000
and $337,000, respectively, as of December 31, 1999 ($400,000 and $245,000,
respectively, in 1998). At December 31, 1999 and 1998, accrued benefit costs of
$2,197,000 and $3,316,000 are included in postretirement benefits and other
liabilities; accrued benefit costs of $781,000 are included in current
liabilities at December 31, 1999.
The following table provides the components of the net periodic benefit cost:
- ---------------------------------------------------------------------------------------------------------------
Pension Benefits Other Benefits
------------------ ----------------
For the year ended December 31, 1999 1998 1997 1999 1998 1997
- ---------------------------------------------------------------------------------------------------------------
(In thousands)
Service cost $ 283 $ 268 $ 294 $ - $ - $ -
Interest cost 143 116 100 118 116 126
Expected return on Plan assets (149) (127) (101) - - -
Recognized net actuarial gain (7) (2) (2) - (83) (69)
---------------------------------------------------------
Net period benefit cost $ 270 $ 255 $ 291 $ 118 $ 33 $ 57
=========================================================
- ---------------------------------------------------------------------------------------------------------------
The assumptions used in the measurement of the Company's benefit obligations
are as follows:
- ------------------------------------------------------------------------------------------------------------------------------------
Pension Benefits Other Benefits
---------------- --------------
1999 1998 1999 1998
- ------------------------------------------------------------------------------------------------------------------------------------
Benefit obligation, beginning of year 7% 7% 7.75% 7.25%
Rate of compensation increase, end of year 5% 5%
Expected return on plan assets, during the year 8% 8%
- ------------------------------------------------------------------------------------------------------------------------------------
The weighted average annual assumed rate of increase in the per capita cost
of covered benefits (i.e., health care cost trend rate) is 6.50% for 2000 and is
assumed to decrease to 5% by 2003 and remain at that level thereafter. A one
percentage point increase or decrease in the assumed health care cost trend rate
would change the accumulated postretirement benefit obligation by approximately
$100,000 and the net periodic postretirement benefit cost by
27
approximately $10,000. The Company recognizes 20% of deferred postretirement
gains or losses annually.
The Company also sponsors a defined contribution plan which covers
substantially all salaried and hourly employees. Company contributions are
generally determined as a percentage of the covered employees' contributions up
to 3% of the employees' annual salary. Amounts expensed under this plan were
approximately $109,000 in 1999, $129,000 in 1998 and $140,000 in 1997.
NOTE F - BUSINESS SEGMENTS
Effective January 1, 1998, the Company began operating under a divisional
structure aligned with separate lines of business based on the types of products
sold. Prior to 1998, the Company was operated as a single business segment under
a functional management structure (i.e. sales, production). Under the former
alignment, sales were reported and reviewed by product line but costs and assets
were aggregated on a corporate basis without reference to the respective
products. Therefore, complete segment information required by Statement of
Financial Accounting Standards No. 131, "Disclosures about Segments of an
Enterprise and Related Information," is provided for 1999 and 1998, however only
sales is provided for 1997 as other financial data was not previously captured
with adequate detail to allow for accurate restatement.
The Company's reportable segments are separate divisions that offer
different products although customers are often served by more than one segment
(primarily as it relates to the National Brands, Flavors and Packaging division
customers). The National Brands division sells proprietary flavorings,
ingredients and packaging used in the licensed production of the Company's
nationally branded frozen novelties and other ice cream products. The Flavors
division blends, cooks and processes basic flavors and fruits to produce
products which subsequently are used by the Company's customers to flavor frozen
desserts, ice cream novelties and fluid dairy products. The Foodservice division
sells soft serve yogurt and premium ice cream mix to foodservice distributors.
The Other segment consists primarily of amounts relating to the Company's
Packaging division which sells flexible packaging to dairies for their frozen
novelty products. The Company generally does not require collateral or other
security from its licensees and customers.
Management measures divisional operating performance based on operating
profit before selling, general and administrative expenses. Operating profit for
the National Brands and Flavors divisions include the effects of $570,000 in
1999 and $600,000 in 1998 of inter-segment cost allocations associated with the
Flavors division's production of National Brands flavors and ingredients. This
inter-segment charge, which has no net effect on consolidated profitability,
increases Flavors' profitability with an offsetting decrease in the National
Brands profitability.
Segment assets include receivables (1999 only), inventories; property,
plant and equipment; and goodwill and other intangibles. All other assets are
managed on a corporate basis and are not considered in divisional analysis. The
accounting policies for each of the business segments are the same as those
described in the summary of significant accounting policies.
28
National
Business Segments Brands Flavors Foodservice Other Totals
- -------------------------------------------------------------------------------------------------------------------------------
(In thousands)
1999 Segment Data
- -----------------
Sales $ 42,113 $ 13,181 $ 9,477 $ 1,681 $ 66,452
Depreciation and amortization expense 950 354 621 119 2,044
- ------------------------------------------------------------------------------------------------------------------------------
Corporate expense 368
---------
Total depreciation and amortization expenses $ 2,412
Segment profitability $ 7,500 $ 2,210 $ 1,914 $ (24) $ 11,600
- ------------------------------------------------------------------------------------------------------------------------------
Selling, general and
administrative expenses 8,109
Restructuring and other special charges 1,808
Interest income & expenses - net 356
---------
Income before income taxes $ 1,327
=========
Identifiable assets $ 12,229 $ 6,720 $ 12,377 $ 685 $ 32,011
- ------------------------------------------------------------------------------------------------------------------------------
Corporate assets 4,475
---------
Total assets $ 36,486
=========
Capital Expenditures $ 30 $ 202 $ 164 $ - $ 396
- ------------------------------------------------------------------------------------------------------------------------------
Corporate expenditures 214
---------
Total capital expenditures $ 610
=========
1998 Segment Data
- -----------------
Sales $ 41,648 $ 12,040 $ 8,127 $ 1,677 $ 63,492
Depreciation and amortization expense 1,045 363 742 122 2,272
- ------------------------------------------------------------------------------------------------------------------------------
Corporate expense 385
---------
Total depreciation and amortization $ 2,657
=========
Expenses
Segment profitability $ 7,054 $ 1,559 $ 1,848 $ (453) $ 10,008
- ------------------------------------------------------------------------------------------------------------------------------
Selling, general and
administrative expenses 8,253
Interest income & expenses - net 493
---------
Income before income taxes $ 1,262
=========
Identifiable assets $ 9,767 $ 4,773 $ 12,379 $ 991 $ 27,910
- ------------------------------------------------------------------------------------------------------------------------------
Corporate assets 12,178
---------
Total assets $ 40,088
=========
Capital Expenditures $ 145 $ 639 $ 256 $ 95 $ 1,135
- ------------------------------------------------------------------------------------------------------------------------------
Corporate expenditures 199
---------
Total capital expenditures $ 1,334
=========
1997 Segment Data
- -----------------
Sales $ 44,428 $ 12,319 $ 8,164 $ 1,481 $ 66,392
=========================================================================
Due to the nature of the Company's licensing operations, four of the
licensee dairies individually account for over 10% of the Company's total net
sales. These four customers, in the aggregate, account for approximately 50% of
annual net sales, most of which occur within the National Brands division. Based
upon prior experience, management believes it could find a suitable replacement
for the loss of any of its licensees and, as a result, such loss would not have
a significant effect on the Company's operations, liquidity or capital
resources.
29
NOTE G - INCOME (EXPENSE) FROM RESTRUCTURING AND OTHER ACTIVITIES
During 1999, the Company incurred $1,808,000 in restructuring and other
special charges, associated with three separate activities.
The Company incurred approximately $1,223,000 in costs associated with its
examination of strategic alternatives to enhance shareholder value, the
development of the Company's Growth and Restructuring Plan and the Company's
pursuit to sell the Company in whole or in parts. $433,000 of these costs relate
to retention bonuses to be paid to certain key employees for their continued
employment. The remaining costs consist primarily of legal, investment banking,
additional directors fees and other professional fees associated with continued
due diligence efforts of potential buyers of the Company.
The Company executed two programs to reduce overhead expenses. During the
first quarter of 1999, the Company discontinued certain non-core manufacturing
operations and terminated the employment of seven production employees at its
Bloomfield, New Jersey packaging plant. As a result, the Company incurred
related severance costs of approximately $105,000 all of which was paid as of
December 31,1999. During the second quarter of 1999, the Company eliminated two
vacant positions and terminated the employment of six employees at the Company's
corporate headquarters. The severance costs associated with the terminations
totaled $86,000, of which $30,000 remains accrued at December 31, 1999 and will
be paid during the first quarter of 2000.
The Company incurred approximately $394,000 of proxy contest expenses
associated with the Company's delayed annual meeting of shareholders held on
September 8, 1999. These costs consisted primarily of legal fees, other
professional fees and administrative costs.
During the third quarter of 1997, the Company consolidated its flavors
production in New Berlin, Wisconsin. In connection with the consolidation, the
Company discontinued flavors operations in Los Angeles, California, terminated
the employment of the plant's 14 employees and sold the plant facility. The
Company recorded third quarter 1997 income of $689,000 which included a
$1,000,000 gain from the sale of the Los Angeles plant offset primarily by
employee severances.
During the fourth quarter of 1997, the Company completed a restructuring of
its operations into a divisional operating unit alignment. In connection with
this restructuring, two senior level employees were terminated with severance
benefits of approximately $215,000. In addition, $200,000 of previously incurred
severance and other non-recurring costs associated with the Company's 1997
restructuring activities were offset against the income recognized from the
Flavors consolidation.
NOTE H - OTHER INFORMATION
The Company is subject to litigation incidental to the conduct of its
business, the disposition of which is not expected to have a significant effect
on the Company's financial condition or operations. The Company is also subject
to government agency regulations relating to food products, environmental
matters and other aspects of its business. The Company is involved in
environmental testing activities resulting from past operations. The Company has
recorded amounts which, in management's best estimate, will be sufficient to
satisfy the anticipated cost of such activities.
In September 1999, the Company's Board of Directors approved a plan which
would provide certain lump sum payments to key employees if a change in control
of the Company occurred prior to December 31, 2000. Assuming all employees
covered remain employed through a change in control, these payments would total
approximately $700,000. In addition, the plan also provides for
30
certain lump sum payments as well as continued medical and healthcare benefits
to employees who are terminated subsequent to a change in control of the
Company.
In 1991, the Company sold, at its cost, approximately $1,000,000 of
machinery and equipment purchased for resale. As a result of the sale, the
Company received a ten year note, payable annually, from its customer. The long
term portion of the note receivable amounts to approximately $140,000 at
December 31, 1999 ($275,000 in 1998), which is included in other assets, and is
net of an unamortized discount of approximately $30,000 ($58,000 in 1998). The
note bears imputed interest at approximately 10% and is collateralized by the
machinery and equipment. Based upon prevailing interest rates, and after
consideration of credit risk, the carrying value is a fair approximation of
market value.
During the fourth quarter of 1998, the Company entered into negotiations
and reached a settlement of terms relating to past due rental income owed to the
Company in connection with ice cream making equipment leased to one of the
Company's licensee customers. The Company had previously received rental income
based on the "units of production" manufactured on the equipment since 1992 but
at amounts less than that required to fully amortize the Company's original
investment. The customer acknowledged its past due obligation and agreed to pay
$600,000 to bring the lease current at December 31, 1998. As collectibility of
the lease payments was not reasonably predictable, no contingent rent had been
previously recorded and the $600,000 recovery was recognized in the fourth
quarter 1998 as a reduction of cost of goods sold (consistent with the previous
rent received on this equipment). In January 1999, the Company sold the leased
equipment to the licensee customer at the Company's net carrying value of
approximately $400,000 which, management believes, approximated the fair market
value.
31
REPORT OF INDEPENDENT AUDITORS, ERNST & YOUNG LLP
Shareholders and Board of Directors
Eskimo Pie Corporation
We have audited the accompanying consolidated balance sheets of Eskimo Pie
Corporation as of December 31, 1999 and 1998, and the related consolidated
statements of income, changes in shareholders' equity and cash flows for each of
the three years in the period ended December 31, 1999. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Eskimo
Pie Corporation at December 31, 1999 and 1998, and the consolidated results of
its operations and its cash flows for each of the three years in the period
ended December 31, 1999, in conformity with accounting principles generally
accepted in the United States.
/s/ Ernst & Young LLP
Richmond, Virginia
March 2, 2000
REPORT OF MANAGEMENT
Eskimo Pie Corporation
The consolidated financial statements and other financial information of Eskimo
Pie Corporation have been prepared by management, which is responsible for their
integrity and objectivity. These statements have been prepared in accordance
with generally accepted accounting principles and, where appropriate, reflect
estimates based on judgements of management.
The Company maintains a system of internal financial controls which considers
the expected costs and benefits of specific control procedures and provides
reasonable assurance that Company assets are protected against loss or misuse,
that transactions are executed in accordance with management's authorization and
that the financial records can be relied upon to produce financial statements in
accordance with generally accepted accounting principles. The internal financial
controls system is supported by the management of the Company through the
establishment and communication of business and accounting policies, the
division of responsibility in organizational matters and the careful selection
and training of management personnel.
The consolidated financial statements have been audited by the Company's
independent auditors, Ernst & Young LLP. Their audit was conducted in accordance
with generally accepted auditing standards and their report is included
elsewhere herein. As a part of their audit, Ernst & Young LLP develops and
maintains an understanding of the Company's internal accounting controls and
conducts such tests and employs such procedures as they consider necessary to
render their opinion on the financial statements.
The Board of Directors exercises its oversight role with respect to the
Company's system of internal financial controls primarily through its Audit
Committee which consists of outside directors. The Board of Directors, upon the
recommendation of the Audit Committee, selects the independent auditors subject
to ratification by the shareholders. The Audit Committee meets periodically with
representatives of management. Ernst & Young LLP has full and free access to
meet with the Audit Committee, with or without the presence of management
representatives.
/s/ David B. Kewer /s/ Thomas M. Mishoe, Jr.
David B. Kewer Thomas M. Mishoe, Jr.
President Chief Financial Officer,
And Chief Executive Officer Vice President, Treasurer
and Corporate Secretary
32
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information on the Company's Board of Directors is included under the
caption "Election of Directors" in the Registrant's Proxy Statement for the
Annual Meeting scheduled to be held on May 3, 2000 (Proxy Statement) and is
incorporated herein by reference. Information on Section 16(a) compliance is
included under the caption "Section 16(a) Beneficial Ownership Reporting
Compliance" in the Proxy Statement and is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
Information on compensation is included under the captions "Compensation
Committee Interlocks and Insider Participation", "Compensation of Directors" and
"Executive Compensation" in the Proxy Statement and is incorporated herein by
reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT
Information on security ownership of certain beneficial owners and
management is included under the caption "Security Ownership of Certain
Beneficial Owners and Management" in the Proxy Statement and is incorporated
herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information on certain relationships and related transactions is included
under the caption "Certain Relationships" in the Proxy Statement and is
incorporated herein by reference.
33
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
AND REPORTS ON FORM 8-K
(a) (1) The following financial statements of Eskimo Pie Corporation are
included in Item 8:
Consolidated Statements of Income for the years ended December
31, 1999, 1998 and 1997
Consolidated Statements of Changes in Shareholders' Equity for
the years ended December 31, 1999, 1998 and 1997
Consolidated Balance Sheets at December 31, 1999 and 1998
Consolidated Statements of Cash Flows for the years ended
December 31, 1999, 1998 and 1997
Notes to Consolidated Financial Statements
Report of Independent Auditors, Ernst & Young LLP
(2) Financial Statements Schedules
No financial statement schedules are required because the required
information is not present in amounts sufficient to warrant submission
of the schedules or the required information is included in the
consolidated financial statements or notes to consolidated financial
statements.
(b) Reports on Form 8-K
-------------------
No reports on Form 8-K were filed by the registrant during the
last quarter of the period covered by this report.
(c) Exhibits
--------
The exhibits listed in the accompanying "Index of Exhibits" are filed
as part of this Annual Report and each management contract or
compensatory plan or arrangement included therein is identified as
such.
34
Signatures
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized, as of the 23/rd/ day of
March, 2000.
ESKIMO PIE CORPORATION
/s/ David B. Kewer
------------------
David B. Kewer
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities as of the 23/rd/ day of March 2000.
Signature Title
/s/ David B. Kewer President and
- -------------------------------- Chief Executive Officer
David B. Kewer (Principal Executive Officer)
/s/ Thomas M. Mishoe, Jr. Chief Financial Officer,
- -------------------------------- Vice President, Treasurer
Thomas M. Mishoe, Jr. and Corporate Secretary
(Principal Financial and Accounting
Officer)
/s/ Kathryn L. Tyler Controller
- --------------------------------
Kathryn L. Tyler
*/s/ Arnold H. Dreyfuss Chairman of the Board
- --------------------------------
Arnold H. Dreyfuss
*/s/ Wilson H. Flohr, Jr. Director
- --------------------------------
Wilson H. Flohr, Jr.
*/s/ F. Claiborne Johnston, Jr. Director
- --------------------------------
F. Claiborne Johnston, Jr.
*/s/ Daniel J. Ludeman Director
- --------------------------------
Daniel J. Ludeman
*/s/ Judith B. McBee Director
- --------------------------------
Judith B. McBee
*/s/ Robert C. Sledd Director
- --------------------------------
Robert C. Sledd
*By /s/ David B. Kewer
- --------------------------------
David B. Kewer
Attorney-in-fact
35
INDEX OF EXHIBITS
Exhibit No. Description
3.1 Amended and Restated Articles of Incorporation incorporated herein
by reference to Exhibit C to the Company's Proxy Statement for its
1996 Annual Meeting of Shareholders.
3.2 Amended and Restated Bylaws, amended through December 16, 1999,
filed herewith.
4.1 (a) Rights Agreement dated as of January 21, 1993, between the
Company and Mellon Securities Trust Company, incorporated herein by
reference to Exhibit 28.1 to the Company's Current Report on
Form 8-K dated January 21, 1993.
(b) Amendment No. 1, dated as of November 23, 1998, between Eskimo
Pie Corporation and First Union National Bank, as successor Rights
Agent, to Rights Agreement dated as of January 21, 1993, between
the Company and Mellon Securities Trust Company, incorporated
herein by reference to Exhibit 4.1(b) to the Company's Annual
Report on Form 10-K for the year ended December 31, 1998.
4.2 The Company agrees to furnish to the Commission upon request any
instrument with respect to long-term debt as to which the total
amount of securities authorized thereunder does not exceed 10% of
the Company's total consolidated assets.
10.1* Executive Retention and Severance Agreement between the Company and
Thomas M. Mishoe, Jr., dated October 23, 1999, filed herewith.
10.2* Executive Retention and Severance Agreement between the Company and
William J. Weiskopf, dated October 25, 1999, filed herewith.
10.3* Executive Retention and Severance Agreement between the Company and
Kimberly P. Ferryman, dated October 25, 1999, filed herewith.
10.4* Executive Retention and Severance Agreement between the Company and
Craig L. Hettrich, dated October 19, 1999, filed herewith.
10.5* Executive Retention and Severance Agreement between the Company and
V. Stephen Kangisser, dated October 25, 1999, filed herewith.
10.6* Executive Retention and Severance Agreement between the Company and
David B. Kewer, dated October 21, 1999, filed herewith.
10.7* Incentive Stock Plan dated February 17, 1992, incorporated herein
by reference to Exhibit 10.8 to the Company's Registration
Statement on Form S-1 (Registration No.33-45852).
10.8* 1996 Incentive Stock Plan, as amended effective December 16, 1999,
filed herewith.
10.9* Senior Management Annual Incentive Plan, dated as of January 1,
1993, incorporated herein by reference to Exhibit 10.7 to the
Company's Annual Report on Form 10-K for the year ended December
31, 1992.
10.10* Salaried Retirement Plan dated as of April 6, 1992, as amended,
filed herewith.
10.11* Executive Retirement Plan and Trust dated as of April 6, 1992, as
amended, incorporated herein by reference to Exhibit 10.11 to the
Company's Annual Report on Form 10-K for the year ended December
31, 1998.
36
10.12 Master License Agreement between the Company and Welch Foods Inc.
dated as of August 1, 1998, incorporated herein by reference to
Exhibit 10.1 to the Company's Report on Form 10-Q for the quarter
ended September 30, 1998.
10.13 (a) Letter Agreement, dated March 20, 1998, for a $10,000,000
revolving line of credit between the Company and Crestar Bank,
incorporated herein by reference to Exhibit 10.15 to the Company's
Annual Report on Form 10-K for the year ended December 31, 1998.
(b) Letter Agreement, dated May 20, 1999, between the Company and
Crestar Bank, incorporated herein by reference to Exhibit 10.1 to
the Company's Report on Form 10-Q for the quarter ended June 30,
1999.
10.14 (a) Credit Agreement, dated as of May 5, 1994, between the Company
and First Union National Bank of Virginia, incorporated herein by
reference to Exhibit 10.12 to the Company's Annual Report on Form
10-K for the year ended December 31, 1995.
(b) Amendment No. 1, dated as of April 18, 1997, to the Credit
Agreement, dated as of May 5, 1994, between the Company and First
Union National Bank of Virginia, incorporated herein by reference
to Exhibit 10.16(b) to the Company's Annual Report on Form 10-K for
the year ended December 31, 1998.
(c) Amendment No. 2, dated as of April 28, 1998, to the Credit
Agreement, dated as of May 5, 1994, between the Company and First
Union National Bank of Virginia, incorporated herein by reference
to Exhibit 10.16(c) to the Company's Annual Report on Form 10-K for
the year ended December 31, 1998.
10.15 Agreement dated February 17, 1992 between the Company and Reynolds
Metals Company, incorporated herein by reference to Exhibit 10.17
to the Company's Registration Statement on Form S-1 (Registration
No. 33-45852).
10.16 Form of Reimbursement Agreement dated as of February 17, 1992
between the Company and Reynolds Metals Company, incorporated
herein by reference to Exhibit 10.18 to the Company's Registration
Statement on Form S-1 (Registration No. 33-45852).
10.17* Eskimo Pie Corporation Savings Plan and Trust, as amended, filed
herewith.
10.18* Eskimo Pie Corporation Employee Stock Purchase Plan, as amended,
incorporated herein by reference to Exhibit 10.20 to the Company's
Annual Report on Form 10-K for the year ended December 31, 1998.
21. Subsidiaries of the Registrant.
23. Consent of Independent Auditors, Ernst & Young LLP.
24. Powers of Attorney.
27. Financial Data Schedules.
* Exhibits are Management Contracts or Compensatory Plans or Arrangements.
________________________________________
37
In accordance with the Securities and Exchange Commission's requirements, we
will furnish copies of the exhibits listed for a copying fee of 10 cents per
page. Please direct your request to:
Corporate Secretary
Eskimo Pie Corporation
P.O. Box 26906
Richmond, Virginia 23261-6906
Phone No. (804) 560-8400
38