SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
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(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended September 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission file number 0-19867
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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)
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Registrant's phone number, including area code:
(804) 560-8400
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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.
Class Outstanding at October 31, 1998
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Common Stock, $1.00 Par Value 3,458,597
ESKIMO PIE CORPORATION
Index
Page
Number
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Part I. Financial Information
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Statements of Income
Three and Nine Months Ended September 30, 1998 and 1997 1
Condensed Consolidated Balance Sheets
September 30, 1998; December 31, 1997 and September 30, 1997 2
Condensed Consolidated Statements of Cash Flows
Nine Months Ended September 30, 1998 and 1997 3
Notes to Condensed Consolidated Financial Statements 4
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 6
Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K 10
ESKIMO PIE CORPORATION
Condensed Consolidated Statements of Income (Unaudited)
Three months ended Nine months ended
September 30, September 30,
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1998 1997 1998 1997
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(In thousands, except per share data)
Net sales $ 15,179 $ 13,124 $ 51,324 $ 55,038
Cost of products sold 9,025 7,964 29,578 32,095
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Gross profit 6,154 5,160 21,746 22,943
Advertising and sales promotion expenses 4,106 3,445 12,983 13,927
Selling, general and administrative expenses 1,803 1,864 6,293 7,311
Income from restructuring activities - 488 - 488
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Operating income 245 339 2,470 2,193
Interest income 26 48 128 142
Interest expense and other - net 167 179 511 533
Gain on disposal of fixed assets - 57 - 182
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Income before income taxes 104 265 2,087 1,984
Income tax expense 39 101 772 755
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Net income $ 65 $ 164 $ 1,315 $ 1,229
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Per common share
Basic and diluted:
Weighted average number of
common shares outstanding 3,458,598 3,458,006 3,458,326 3,455,565
Net income $ 0.02 $ 0.05 $ 0.38 $ 0.36
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Cash dividends $ 0.05 $ 0.05 $ 0.15 $ 0.15
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1
ESKIMO PIE CORPORATION
Condensed Consolidated Balance Sheets (Unaudited)
Sept. 30, December 31, Sept. 30,
As of 1998 1997 1997
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(In thousands, except share data)
Assets
Current assets:
Cash and cash equivalents $ 1,302 $ 3,353 $ 3,400
Receivables 6,470 5,321 6,305
Inventories 6,830 4,342 5,998
Prepaid expenses 717 1,617 944
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Total current assets 15,319 14,633 16,647
Property, plant and equipment - net 7,862 7,892 7,731
Goodwill and other intangibles 17,796 17,588 17,828
Other assets 1,340 1,467 1,394
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Total assets $ 42,317 $ 41,580 $ 43,600
======================================================
Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable $ 3,726 $ 3,386 $ 2,981
Accrued advertising and promotion 2,059 1,389 1,852
Accrued compensation and related amounts 170 530 617
Other accrued expenses 824 698 737
Current portion of long term debt 1,317 1,317 1,317
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Total current liabilities 8,096 7,320 7,504
Long term debt 4,230 5,218 5,547
Convertible subordinated notes 3,800 3,800 3,800
Postretirement benefits and other liabilities 3,281 3,161 3,444
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, 3,458,597 issued and outstanding in
1998, 3,458,002 at December 31, 1997 and 3,458,006
at September 30, 1997 3,458 3,458 3,458
Additional capital 4,385 4,353 4,283
Retained earnings 15,067 14,270 15,564
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Total shareholders' equity 22,910 22,081 23,305
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Total liabilities and shareholders' equity $ 42,317 $ 41,580 $ 43,600
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2
ESKIMO PIE CORPORATION
Condensed Consolidated Statements of Cash Flows (Unaudited)
Nine months ended September 30, 1998 1997
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(in thousands)
Operating activities
Net income $ 1,315 $ 1,229
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization 1,896 1,884
Gain on disposal of fixed assets - (1,181)
Change in deferred income taxes and other assets (40) (43)
Change in postretirement benefits and other liabilities 80 (37)
Change in receivables (1,149) (2,255)
Change in inventories and prepaid expenses (1,588) 2,924
Change in accounts payable and accrued expenses 777 (2,578)
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Net cash provided by (used in) operating activities 1,291 (57)
Investing activities
Acquisition of intangible assets (944) (573)
Capital expenditures (1,092) (907)
Proceeds from disposal of fixed assets - 1,992
Other 199 457
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Net cash (used in) provided by investing activities (1,837) 969
Financing activities
Cash dividends (517) (519)
Borrowings - 1,150
Principal payments on long term debt (988) (286)
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Net cash (used in) provided by financing activities (1,505) 345
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Change in cash and cash equivalents (2,051) 1,257
Cash and cash equivalents at the beginning of the year 3,353 2,143
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Cash and cash equivalents at the end of the quarter $ 1,302 $ 3,400
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3
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 condensed consolidated financial statements reflect all adjustments
(consisting of only normal recurring accruals) necessary for a fair presentation
of the Company's financial position as of September 30, 1998 and its results of
operations for the three and nine months ended September 30, 1998 and 1997. 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 1997 Annual Report.
Accounting Changes: In June 1997, the Financial Accounting Standards
Board (FASB) issued Statement No. 131, "Disclosures about Segments of an
Enterprise and Related Information", which will be effective for both interim
and annual reporting beginning with the Company's December 31, 1998 annual
financial statements. Statement No. 131 redefines how operating segments are
determined and requires disclosure of certain descriptive and financial
information about a company's operating segments. In February 1998, the FASB
issued Statement No. 132, "Employers' Disclosures about Pensions and Other
Postretirement Benefits", which is also effective beginning with the Company's
December 31, 1998 financial statements. Statement No. 132 changes the disclosure
requirements relating to pension and other postretirement benefit obligations.
The adoption of Statements No. 131 and 132 will not affect the Company's
financial position, results of operations or cash flows as the impact of the
Statements is limited to the form and content of financial statement disclosure.
In June 1998, the FASB issued Statement No. 133, "Accounting for
Derivative Instruments and Hedging Activities", which is effective for the
Company beginning January 1, 2000. Statement No. 133 requires "fair value"
reporting of derivative instruments with changes in fair values to be recorded
in earnings unless specific hedge criteria are met. Given that the Company's
only derivative financial instrument, an interest rate swap as described in Note
E to the Company's 1997 Financial Statements, expires in December 1998, the
Company does not anticipate any impact from this Statement.
In March 1998, the American Institute of Certified Public Accountants
(AICPA) issued Statement of Position (SOP) 98-1, "Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use". SOP 98-1 requires the
capitalization of certain software development costs when purchasing and
developing computer software for internal use. The Company has followed the
guidance of SOP 98-1 (and the related exposure drafts prior to the final
issuance of SOP 98-1) to account for the costs associated with the
implementation of its new management information system.
In April 1998, the AICPA issued SOP 98-5, "Reporting on the Costs of
Start-Up Activities", which requires start-up activities and organization costs
to be expensed as incurred. Management does not expect the adoption of SOP 98-5,
which is effective for the Company beginning January 1, 1999, to have a material
effect on the Company's consolidated financial position, results of operations
or cash flows.
Reclassifications: Certain amounts in the prior year financial
statements have been reclassified to conform with current presentation.
4
NOTE B - INVENTORIES Inventories are classified as follows:
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September 30, 1998 December 31, 1997 September 30, 1997
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(In thousands)
Finished goods $ 4,762 $ 2,943 $ 3,984
Raw materials and packaging supplies 2,999 2,330 3,065
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Total FIFO inventories 7,761 5,273 7,049
LIFO reserves (931) (931) (1,051)
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$ 6,830 $ 4,342 $ 5,998
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NOTE C - CONVERTIBLE SUBORDINATED NOTES
The Company's convertible subordinated notes mature in February 1999 if
not previously converted to common stock. These notes remain classified with
long term debt in accordance with the Company's intention and ability to
refinance the notes on a long term basis (through April 2000) under the
available $10 million committed line of credit
NOTE D - EARNINGS PER SHARE
All stock options granted to date and the effect of the assumed
conversion of the convertible subordinated notes were excluded from the earnings
per share calculations as the assumed conversions to common stock would be
anti-dilutive.
5
ESKIMO PIE CORPORATION
Management's Discussion and Analysis of Financial Condition
and Results of Operations
Eskimo Pie Corporation markets a broad range of frozen novelties, ice
cream and sorbet products under the Eskimo Pie, RealFruit, Welch's, Weight
Watchers, 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.
Eskimo Pie Corporation also manufactures soft serve yogurt and premium ice cream
products for sale to the Foodservice industry. The Company also sells a full
line of quality flavors and ingredients for use in private label dairy products
in addition to the national brands it licenses.
RESULTS OF OPERATIONS
Net income for the quarter ended September 30, 1998 was $65,000 or
$0.02 per share as compared with $164,000 or $0.05 per share for the comparable
period in 1997. For the nine month period ending September 30, 1998, net income
was $1,315,000 or $0.38 per share as compared with $1,229,000 or $0.36 per share
in 1997. As discussed below, the third quarter 1997 results include net gains
from restructuring activities, relating primarily to the sale of the Los Angeles
Flavors Plant, and the disposal of other fixed assets which total $545,000 or
$0.10 per share after related tax effects. In addition, the second quarter 1997
results include a gain of $125,000 resulting from the disposal of other fixed
assets which, when combined with the third quarter gains, amounted to $670,000
or $0.12 per share after related tax effects for the nine month period ending
September 30, 1997. Exclusive of these gains, profitability improved during both
the quarter and nine month periods ending September 30, 1998 when compared with
the comparable periods in 1997.
It is not the Company's intent to imply that alternate measures of
performance are more meaningful than net income as determined in accordance with
generally accepted accounting principles. However, management believes that
investors should consider the above information concerning the effects of 1997
activities to gauge the impact of those activities on on-going operations.
Additional information is provided below.
Net Sales and Gross Profit
For the third quarter of 1998, total Company sales increased 15.7% as
compared with the third quarter of 1997. Much of the sales growth came from the
National Brands Division which grew by 22.5%. Increases in Eskimo Pie and
Welch's brand product sales were exceptionally strong and are largely
attributable to the change in the timing of promotional spending. As previously
reported, the 1998 promotional calendar was not as front loaded as in 1997 and
as such, promotional spending and the resulting sales were more evenly spread
throughout the year. National brands sales increases also reflect the expanded
distribution of Eskimo Pie into the Northeast markets, the successful
introduction of OREO brand ice cream novelties and the Company's entry into the
single serve impulse market. Sales from the Foodservice and Flavors Divisions
also increased for the quarter (9.7% and 6.0%, respectively) reflecting the
results of focused emphasis in these businesses by dedicated personnel assigned
to the respective divisions as part of the corporate restructuring completed in
late 1997.
6
The third quarter increases were not, however, large enough to fully
mitigate the revenue declines from the first half of 1998. During the first half
of the year, sales of the Company's nationally branded products were
significantly affected by unseasonably cool and wet weather in some of the
Company's strongest markets as well as by consumer movement to less expensive
private label products. In addition, sales of the Company's SnackWell's and
RealFruit brands continue to decline. The Company is in the process of testing
new products and expanding distribution of successful 1998 tests to offset the
expected SnackWell's and RealFruit declines. Several opportunities exist within
the Foodservice industry which the Company believes it can develop to offset the
negative sales trend resulting from declining soft serve yogurt consumption.
Gross profit, as a percent of sales, increased during both the quarter
and nine month periods as a result of an improved product mix (which includes a
higher percentage of Eskimo Pie and other National Brands products), the impact
of the third quarter 1997 Flavors consolidation and the full year benefit of
1997's initiatives to obtain more favorable pricing on key materials and
ingredients.
Significant market attention has been focused on recent increases in
butterfat prices which have increased by approximately 150% from the levels of a
year ago. As a licensing company, Eskimo Pie Corporation is not directly
impacted by the increased cost of this commodity. However, some of the Company's
licensees have increased the price of the Company's licensed ice cream and
novelty products as a result of their butterfat cost increases which may
ultimately affect 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 these operations traditionally account for less than
1% of consolidated cost of goods sold.
Expenses and Other Income
As compared with the prior year, advertising and promotion expense
increased during the third quarter due to the previously discussed change in
timing of the promotional programs. The 1997 promotional plan included heavy
"pre-season" spending whereas 1998 spending is more evenly spread throughout the
year. Promotional spending has been reduced on a year to date basis in response
to the decline in sales. A large portion of the Company's promotional spending
is volume based trade support and as sales decline, spending against promotional
commitments declines as well.
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 a $1,000,000 gain from the sale of
the plant assets offset primarily by approximately $300,000 of employee
severances. In addition, $200,000 of severances and other non-recurring costs
associated with 1997 restructuring activities were also offset against the
income recognized from the flavors consolidation. As of September 30, 1998 all
severance costs have been paid to former employees with the exception of
approximately $35,000 which will be paid by December 31, 1998.
The 1997 gain on disposal of fixed assets relates primarily to
equipment which was written off in the third quarter of 1996 when no alternate
use appeared available. The equipment was being leased to one of the Company's
licensees who had asked to have the equipment removed. The 1997 gain equals the
proceeds received from the sale of the equipment which had no book value at the
beginning of 1997.
Selling, general and administrative expenses continue to trend at the
levels achieved in late 1997 as a result of management's cost control
initiatives and restructuring activities. Interest income and expense, as well
as the effective income tax rate, remain consistent with the prior year.
7
LIQUIDITY, CAPITAL RESOURCES AND OTHER MATTERS
During the third quarter, the Company extended its licensing agreement
with Welch Foods, Inc. (Welch's). Under the agreement, the Company will continue
to provide sales, marketing, product development 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 $1,500,000 of license fees payable over the term of the license.
Although management expects the license to remain in effect through the term of
the agreement, 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.
The Company's financial position remains strong. In addition to the
investment in the Welch's license discussed above, the Company has also made
approximately $1,092,000 in capital investments (primarily related to computer
technology and New Berlin plant improvements) and $988,000 in scheduled debt
payments during 1998. 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.
On October 23, 1998, the Company's Board of Directors declared a
quarterly cash dividend of $.05 per share, payable on January 2, 1999, to
shareholders of record on December 16, 1998. 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.
IMPACT OF YEAR 2000
Recently, considerable attention has been given to the Year 2000 (Y2K)
Problem which stems 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 consists of three main
components; the implementation of a new management information system, review of
other internal systems and equipment, and inquiries of external trading partners
(key licensees, customers, suppliers, service providers).
The Company is in the process of implementing a new management
information system that will, among other benefits which extend well beyond Y2K
Problems, address the Company's Y2K Problems relating to financial and
operational management information. The new information system is installed and
implementation is complete in over half of the Company's operations. The
remaining operations are expected to be implemented by mid-1999. Project
expenditures relating to the new management information system approximate
$1,200,000 through September 30, 1998 and the Company expects to incur an
additional $250,000 to complete the project. The costs of the new management
information system 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.
The Company is also in the process of reviewing other internal systems
and equipment to assess their exposure to the Y2K Problem. Most of the Company's
plant and office equipment is mechanical in nature and therefore, may not be
subject to the Y2K Problem. The Company has begun its review of operations and
will develop remedies and contingency plans to address problems if and when they
are identified. The Company expects to complete its review of other internal
systems and equipment during the second quarter of 1999. At this time,
management does not believe that the costs to remedy Y2K Problems associated
with other internal systems and equipment will be material, however, no
guarantee can be made that problems will not be identified that require material
costs to remedy.
8
Finally, the Company expects to begin inquiries with its external
trading partners by December 31, 1998. Such inquiries will result in the
collection and appraisal of voluntary statements made by external parties with
limited opportunity for independent factual verification. Although the Company
will undertake reasonable efforts to determine the readiness of its trading
partners, no assurance can be given to the validity or reliability of
information obtained. Prior to June 30, 1999, the Company expects to develop
initial contingency plans to address the potential failure of its key trading
partners to be Y2K compliant. Management believes, based on past experience,
that it could locate suitable replacements if any partners were lost due to Y2K
Problems. However, the Company can not reliably predict the readiness of all of
its partners (as well as the readiness of their respective external trading
partners) and as such, the Company could be affected by the disruption of other
business interests outside of the Company's control.
The Company believes its approach to the Y2K Problem is adequate to
maintain the continuation of its business operations with limited financial or
operational impact. However, the Y2K Problem has many aspects and potential
consequences, some of which may not be reasonably anticipated, and there can be
no assurance that unforeseen consequences will not arise.
FORWARD LOOKING STATEMENTS
Statements contained in this Report on Form 10-Q regarding the
Company's future plans and expected performance are forward looking statements
within the meaning of federal securities laws and are based upon management's
current expectations and beliefs about future events and their effect upon
Eskimo Pie Corporation. There can be no assurance that future developments will
mirror those currently anticipated by management. These forward looking
statements involve risks and uncertainties including but not limited to, the
level of consumer interests in the Company's products, product costing, the
weather, performance of the Company's management team, the Company's
relationships with its licensees and licensors, the highly competitive nature of
the frozen dessert market, as well as government regulation and the Y2K Problem.
The risks and uncertainties are further discussed in the Company's Annual Report
on Form 10-K as filed with the Securities and Exchange Commission for the year
ended December 31, 1997. Actual results may vary materially from those included
herein and the Company assumes no responsibility for updating these statements.
9
PART II, OTHER INFORMATION
Item 6. Exhibits and Report on Form 8-K
(a) Exhibits:
10.1 Master License Agreement between the Company and
Welch Foods, Inc. dated as of August 1, 1998,
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 12, 1998 By /s/ David B. Kewer
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David B. Kewer
President and Chief Executive Officer
Date: November 12, 1998 By /s/ Thomas M. Mishoe, Jr.
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Thomas M. Mishoe, Jr.
Chief Financial Officer, Vice President,
Treasurer and Corporate Secretary
Date: November 12, 1998 By /s/ William T. Berry, Jr.
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William T. Berry, Jr.
Assistant Vice President, Controller
10