SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
(Mark One) FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended September 30, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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 (I.R.S. Employer
incorporation or organization) Identification Number)
901 Moorefield Park Drive, Richmond, VA 23236
(Address of Principal Executive Offices)
Registrant's telephone number, including area code (804) 560-8400
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
--- ---
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of September 30, 1996.
Class Outstanding at October 31, 1996
Common Stock, $1.00 Par Value 3,444,586
ESKIMO PIE CORPORATION
Index
Page Number
Part I. Financial Information
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets
September 30, 1996 and December 31, 1995 1
Condensed Consolidated Statements of Income
Three and Nine Months Ended September 30, 1996 and 1995 2
Condensed Consolidated Statements of Cash Flows
Nine Months Ended September 30, 1996 and 1995 3
Notes to Condensed Consolidated Financial Statements 4
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 5
Part II. Other Information
Item 5. Other Information 8
Item 6. Exhibits and Reports on Form 8-K 8
ESKIMO PIE CORPORATION
Condensed Consolidated Balance Sheets (Unaudited)
September 30, December 31,
1996 1995
---------------------- -----------------------
(In thousands)
Assets:
Current assets:
Cash and cash equivalents $ 3,222 $ 717
Receivables 5,574 8,695
Inventories 5,543 5,323
Prepaid expenses 2,391 1,375
------------------- --------------------
Total current assets 16,730 16,110
Property, plant and equipment - net 7,791 9,055
Goodwill and other intangibles - net 18,191 18,864
Other assets 1,725 1,843
------------------- --------------------
Total assets $ 44,437 $ 45,872
=================== ====================
Liablities and Stockholders' Equity:
Current liabilities :
Short term borrowings $ - $ 1,200
Accounts payable 2,152 3,592
Accrued advertising and promotion 2,374 975
Accrued compensation and related amounts 996 430
Other accrued expenses 924 542
Income taxes - 178
Current portion of long term debt 286 -
-------------------- --------------------
Total current liabilities 6,732 6,917
Long term debt 5,714 6,000
Convertible subordinated notes 3,800 3,800
Postretirement benefits and other 3,589 3,468
Stockholders' equity :
Common stock 3,445 3,475
Additional capital 4,121 4,620
Retained earnings 17,036 17,592
-------------------- --------------------
Total stockholders' equity 24,602 25,687
Total liabilities and stockholders' equity $ 44,437 $ 45,872
==================== ====================
ESKIMO PIE CORPORATION
Condensed Consolidated Statements of Income (Unaudited)
Three months ended Nine months ended
September 30, September 30,
------------------------------------ -------------------------------------
1996 1995 1996 1995
--------------- --------------- ------------------- ---------------
(In thousands, except share data)
Net sales $ 16,898 $ 19,745 $ 61,991 $ 68,498
Cost of products sold 11,726 11,805 38,798 39,206
--------------- --------------- ------------------- ---------------
Gross profit 5,172 7,940 23,193 29,292
Advertising and sales promotion 5,741 3,397 13,357 13,378
General and administrative 3,107 2,317 8,748 7,466
--------------- --------------- ------------------- ---------------
Operating income (loss) (3,676) 2,226 1,088 8,448
Interest income 88 37 151 136
Loss on disposal of fixed assets (777) - (777) -
Interest expense and other (159) (182) (513) (607)
--------------- --------------- ------------------- ---------------
Income (loss) before income taxes (4,524) 2,081 (51) 7,977
Income taxes (1,725) 806 (17) 3,100
--------------- --------------- ------------------- ---------------
Net income (loss) $ (2,799) $ 1,275 $ (34) $ 4,877
=============== =============== =================== ===============
Per common share
Primary
Weighted average number of
common shares outstanding 3,446,216 3,475,277 3,464,612 3,475,157
Net income (loss) $ (0.81) $ 0.37 $ (0.01) $ 1.40
=============== =============== =================== ===============
Fully diluted
Weighted average number of
common shares outstanding 3,608,783 3,637,844 3,627,179 3,637,724
Net income (loss) $ (0.77) $ 0.36 $ 0.01 $ 1.36
=============== =============== =================== ===============
Cash dividends $ 0.05 $ 0.05 $ 0.15 $ 0.15
=============== =============== =================== ===============
ESKIMO PIE CORPORATION
Condensed Consolidated Statements of Cash Flows (Unaudited)
Nine months ended
September 30,
-------------------------------
1996 1995
-------------- --------------
(In thousands)
Operating activities
Net income (loss) $ (34) $ 4,877
Adjustments to reconcile net income (loss) to net cash
provided by operating activities :
Depreciation and amortization 1,894 1,865
Loss on disposal of fixed assets 777 -
Deferred income taxes and other assets (213) 248
Decrease (increase) in receivables 3,121 (744)
Increase in inventories and prepaid expenses (926) (3,239)
Increase (decrease) in accounts payable and accrued expenses 729 (413)
-------------- --------------
Net cash provided by operating activities 5,348 2,594
Investing activities
Acquisition of business and
intangible assets - net of cash acquired (161) (6,364)
Capital expenditures (552) (795)
Sale of short term investments - 345
Other 174 (320)
-------------- --------------
Net cash used in investing activities (539) (7,134)
Financing activities
Payment of cash dividends (521) (521)
Borrowings and (repayments) - net (1,200) 1,556
Repurchase of common stock (583) -
-------------- --------------
Net cash (used in) provided by financing activities (2,304) 1,035
-------------- --------------
Increase (decrease) in cash and cash equivalents 2,505 (3,505)
Cash and cash equivalents at beginning of period 717 4,797
-------------- --------------
Cash and cash equivalents at end of period $ 3,222 $ 1,292
============== ==============
ESKIMO PIE CORPORATION
Notes to Condensed Consolidated Financial Statements
NOTE A - SIGNIFICANT ACCOUNTING POLICIES, BASIS OF PRESENTATION
In the opinion of management, the accompanying unaudited consolidated
condensed financial statements reflect all adjustments necessary for a fair
presentation of the Company's financial position as of September 30, 1996 and
its results of operations for the three and nine months ended September 30,
1996 and 1995. The results of operations for any interim period are not
necessarily indicative of results for the full year. These financial
statements should be read in conjunction with the financial statements and
notes thereto contained in the Company's 1995 Annual Report.
NOTE B - INVENTORIES
Classifications of inventories are as follows:
September 30, December 31,
1996 1995
------------- ------------
(In thousands)
Finished goods $3,387 $3,802
Raw materials and packaging supplies 3,266 2,631
----- ------
Total FIFO inventories 6,653 6,433
LIFO reserves (1,110) (1,110)
----- ------
$5,543 $5,323
===== ======
NOTE C - SPECIAL THIRD QUARTER CHARGES
During the third quarter of 1996, the Company recorded special charges
not identifiable with preceding interim periods of approximately $2,398,000.
The largest of these special charges include accruals relating to severance
commitments associated with a recent change in executive management
($593,000), the disposal of certain equipment leased to one of our licensees
($725,000) and the disposal of licensee and Company held inventories which did
not sell during the quarter and appear to have no future recoverability
($920,000). After related tax benefits, the special charges reduced net income
by approximately $1,482,000.
ESKIMO PIE CORPORATION
Management's Discussion and Analysis of Financial
Condition and Results of Operations
INTRODUCTION
The Company markets, primarily through a national network of licensed
manufacturers, a broad range of frozen novelty, frozen yogurt, ice cream and
sorbet products under the ESKIMO PIE, Welch's, Weight Watchers, SnackWell's,
OREO and RealFruit brand names. The Company also manufactures and markets
ingredients and packaging to the dairy industry.
The Company's net loss for the third quarter of 1996 is primarily
attributable to the continued softening of sales in its principal markets,
related inventory and equipment write-offs and a severance accrual related to
a recent change in executive management. During the quarter, the Company also
incurred $1.0 million of additional expense associated with incremental
advertising and sales promotion activities to stimulate sales of its licensed
and sublicensed products. Exclusive of the third quarter write-offs and 1996
severance accruals, which total $1.5 million after related tax benefits, the
Company would have reported a net loss of $1.3 million ($0.36 per share on a
fully diluted basis) for the third quarter of 1996 and net income of $1.6
million ($0.44 per share on a fully diluted basis) for the nine months ended
September 30, 1996. Additional details are provided below.
RESULTS OF OPERATIONS
Net Sales And Gross Profit
The ice cream industry has had a disappointing year as a result of the
increasing cost of dairy products and reduced consumer demand due partly to
the mild summer experienced throughout most of the country. As a result, the
frozen novelty category has shown declines for the most recent 52-week period
according to Information Resources Inc. These factors continued to have a
negative impact on the Company's sale of its licensed and sublicensed
products.
Compared to the prior year, sales of the Company's licensed and
sublicensed products decreased $3.2 million (19.3%) and $7.5 million (12.7%)
for the quarter and nine month period ended September 30, 1996, respectively.
These decreases include the offsetting effect of the Nabisco SnackWell's and
OREO brand products which were introduced beginning in December 1995. In
addition to the decrease in consumer demand, comparative nine month sales were
also negatively impacted by the inclusion in 1995 of $1.7 million of Weight
Watchers finished goods which were acquired and sold by the Company upon the
execution of the respective licensing agreement.
Sales of flavors and private label packaging continue to exceed prior
year results with increases of $0.3 million (9.6%) and $1.0 million (10.7%)
for the quarter and nine month period ended September 30, 1996, respectively.
Gross profit, as a percent of sales, decreased during both the quarter
and nine month periods primarily as a result of changing product mix.
Sub-licensed brand sales, which account for a growing portion of total sales,
provide lower gross margins due primarily to the royalty costs associated with
the rights to using these brand names. During the quarter, gross margin was
also affected by $920,000 in special charges relating to the disposal of
licensee and Company owned inventories (primarily cartons) which did not sell
during the quarter and appear to have no future recoverability.
Expenses and Other Income
As anticipated, the Company continued to increase its marketing efforts
during the quarter. Although there was a decrease in the variable component of
advertising and sales promotion expenditures during the quarter, the fixed
portion of these costs increased. As noted above, the quarter and nine month
expense also includes $1 million of incremental third quarter promotions
directed specifically to consumers.
General and administrative costs increased during the quarter primarily
as a result of an executive severance accrual of $593,000 relating to the
announced resignation of David V. Clark, the Company's former President and
Chief Executive Officer. In addition to the severance accrual, the nine month
results reflect an increase over the prior year due largely to first quarter
start up costs associated with new product introductions.
The loss on disposal of fixed assets reflects, in addition to minor
recurring items, an accrual relating to the disposal of certain equipment
leased to one of the Company's licensees. Although the Company continues to
receive nominal rent on this equipment, the licensee has asked the Company to
remove the equipment and no alternate use is currently available.
OPERATING OUTLOOK
Although the Company should benefit from the conclusion of the 1996
advertising and sales promotion plan and the previously discussed third
quarter promotions, there are no plans for incremental fourth quarter spending
in what is generally the Company's slowest quarter in its seasonal business
cycle. Management believes that the continued fourth quarter spending on the
1996 promotional plan will support its brand equity and position the Company
for stronger 1997 sales. Although these expenditures are likely to result in a
net loss for the fourth quarter of 1996, management believes they are
appropriate for the long term growth of the Company and its branded products.
LIQUIDITY AND CAPITAL RESOURCES
The steps taken during the quarter, will have limited effect on the
Company's future cash flows with the exception of the executive severance
accrual which will be paid over a two year period. The Company's financial
position remains strong with an 18% growth in working capital at September 30,
1996 as compared to the same period in 1995. Cash generated from operations
and funds available under borrowing arrangements continue to provide
sufficient funds and the financial flexibility to support the Company's
ongoing business, strategic objectives and debt repayment requirements.
The Company has recently committed to the purchase of approximately
$1.7 million in updated computer technology which will enhance customer
service and improve management of the Company's operations. Management is
currently negotiating to finance this expenditure over the estimated useful
life of the equipment and expects to close on an agreement by the end of
November 1996.
On May 31, 1996, the Company's Board of Directors increased its
authorization to repurchase the common stock of the Company by 112,000 shares
which, when combined with previously approved repurchase authorizations, would
allow the Company to repurchase up to 348,000 shares or approximately 10% of
the outstanding stock. To date, the Company has repurchased 193,000 shares of
common stock under the Board authorization including 35,000 shares purchased
in 1996.
On October 18, 1996, the Company's Board of Directors declared a
quarterly cash dividend of $.05 per share, payable on January 3, 1997, to
shareholders of record on December 16, 1996. While the Company anticipates that
it will have a regular quarterly dividend, the amount and timing of any future
dividends will depend 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 of Directors.
PART II, OTHER INFORMATION
Item 5. Other Information
On September 19, 1996, David V. Clark resigned as Chairman of the
Board, President, Chief Executive Officer and a director of the Company.
Effective the same date, Arnold H. Dreyfuss, a director of the Company and
former Chairman of the Board and Chief Executive Officer of Hamilton
Beach/Proctor-Silex, Inc., was named Chairman of the Board and Chief Executive
Officer of the Company pending a search for a new President and Chief
Operating Officer.
Item 6. Exhibits and Reports on Form 8-K
a. Exhibits:
10.15 Letter Agreement dated September 19, 1996 between the Company
and David V. Clark, filed herewith.
27. Financial Data Schedules, filed herewith.
b. Reports on Form 8-K: None
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ESKIMO PIE CORPORATION
Date: November 14, 1996 By /s/ Arnold H. Dreyfuss
------------------------
Arnold H. Dreyfuss
Chairman of the Board
Date: November 14, 1996 By /s/ Thomas M. Mishoe, Jr.
--------------------------
Thomas M. Mishoe, Jr.
Chief Financial Officer
Date: November 14, 1996 By /s/ William T. Berry, Jr.
--------------------------
William T. Berry, Jr.
Director of Accounting Services