UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB - Quarterly or Transitional Report
(Added by Rel. No. 34-30968, eff. 8/13/92, as amended)
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the quarterly period ended April 30, 1997
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[_] TRANSITION REPORT UNDER SECTION 13 OR 15(D) OF THE EXCHANGE ACT
For the transition period From ______________________to__________________
Commission file number 0-22556
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Uncle B's Bakery, Inc.
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(Exact name of small business issuer as specified in its charter)
Iowa 42-1267239
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
441 Dubuque Street, Ellsworth, Iowa 50075
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(Address of principal executive offices)
(515) 836-4000
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(Issuer's telephone number)
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(Former name, former address & former fiscal year, if changed since last report)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 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
--- ---
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS
Check whether the registrant filed all documents and reports required to be
filed by Sections 12, 13, or 15(d) of the Exchange Act after the distribution of
securities under a plan confirmed by the court. Yes _____ No _____
APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practical date: 3,656,258 shares as of May 30, 1997.
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Page 1 of 11
INDEX
UNCLE B'S BAKERY, INC.
Part I. Financial Information
Item 1. Financial Statements (Unaudited)
Condensed Balance Sheets - April 30, 1997 and July 31, 1996
Condensed Statements of Operations - Three months ended April 30, 1997 and
1996; Nine months ended April 30, 1997 and 1996.
Condensed Statements of Cash Flows - Nine months ended April 30, 1997 and
1996
Notes to Condensed Financial Statements
Item 2. Management's Discussion and Analysis
Part II. Other Information
Item 1. Legal Proceedings
Item 2. Changes in Securities
Item 3. Defaults upon Senior Securities
Item 4. Submission of Matters to a Vote of Security Holders
Item 5. Other Information
Item 6. Exhibits and Reports on Form 8-K
Signatures
Page 2 of 11
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS:
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UNCLE B'S BAKERY, INC.
Condensed Balance Sheets
April 30 July 31
1997 1996
------------ ------------
(Unaudited) (Note)
Assets
Current assets:
Cash and cash equivalents $ 331,979 $ 65,565
Accounts receivable 1,621,543 1,690,319
Inventories-Note 2 601,807 478,162
Prepaid expenses 90,175 88,307
----------- -----------
Total current assets 2,645,504 2,322,353
Property, plant and equipment 17,597,284 14,952,831
Less accumulated depreciation 3,617,786 2,854,472
----------- -----------
Net property, plant and equipment 13,979,498 12,098,359
Other assets:
Construction fund balance 261,653 952,773
Deferred costs and other, net 477,768 509,453
----------- -----------
Total other assets 739,421 1,462,226
Total assets $17,364,423 $15,882,938
=========== ===========
Liabilities and stockholders' equity
Current liabilities:
Accounts payable $ 3,184,772 $ 2,291,329
Accrued expenses 1,078,155 864,357
Long-term debt due within one year-Note 5 11,784,758 110,000
----------- -----------
Total current liabilities 16,047,685 3,265,686
Long-term debt due after one year-Note 5 --- 11,456,483
Stockholders' equity-Note 5
Common stock, $.01 par value: 40,000,000
shares authorized, 3,656,258 shares
issued and outstanding at April 30, 1997
(1996-3,545,147) 36,563 35,451
Additional paid-in capital 7,987,701 7,738,813
Deficit (6,707,526) (6,613,495)
----------- -----------
Total stockholders' equity 1,316,738 1,160,769
----------- -----------
Total liabilities and stockholders' equity $17,364,423 $15,882,938
=========== ===========
Note: The balance sheet at July 31, 1996 has been derived from the audited
financial statements at that date but does not include all of the information
and footnotes required by generally accepted accounting principles for complete
financial statements.
See notes to condensed financial statements
Page 3 of 11
UNCLE B'S BAKERY, INC.
Condensed Statements of Operations
(Unaudited)
Three Months Ended Nine Months Ended
April 30 April 30
1997 1996 1997 1996
---- ---- ---- ----
Net sales $5,330,566 $4,513,563 $17,301,458 $13,089,318
Cost of goods sold 3,752,128 2,308,266 11,253,027 6,795,505
---------- ---------- ----------- -----------
Gross profit 1,578,438 2,205,297 6,048,431 6,293,813
Distribution expense 384,401 386,137 1,313,007 1,127,099
Selling, general and
administrative expense 1,441,795 1,793,390 4,451,582 5,178,532
---------- ---------- ----------- -----------
1,826,196 2,179,527 5,764,589 6,305,631
---------- ---------- ----------- -----------
Income (loss) from operations (247,758) 25,770 283,842 (11,818)
Other income (expense):
Interest expense (136,736) (121,899) (395,290) (378,731)
Other 7,139 6,679 17,417 13,552
---------- ---------- ----------- -----------
(129,597) (115,220) (377,873) (365,179)
---------- ---------- ----------- -----------
Loss before income taxes
and cumulative effect of
accounting change (377,355) (89,450) (94,031) (376,997)
Income taxes - - - -
---------- ---------- ----------- -----------
Loss before cumulative
effect of accounting change (377,355) (89,450) (94,031) (376,997)
Cumulative effect to July 31, 1995
of accounting change-Note 3 - - - (1,406,050)
---------- ---------- ----------- -----------
Net loss $ (377,355) $ (89,450) $ (94,031) $(1,783,047)
========== ========== =========== ===========
Earnings per share:
Loss before cumulative
effect of accounting change (0.10) (0.03) (0.03) (0.10)
Cumulative effect of accounting
change - - - (0.40)
Net loss (0.10) (0.03) (0.03) (0.50)
Weighted average number of common
and common equivalent
shares outstanding 3,656,258 3,545,147 3,613,116 3,545,147
========== ========== =========== ===========
See notes to condensed financial statements
Page 4 of 11
UNCLE B'S BAKERY, INC.
Condensed Statements of Cash Flows
(Unaudited)
Nine Months Ended April 30
-----------------------------
1997 1996
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Operating activities
Net loss $ (94,031) $(1,783,047)
Cumulative effect of accounting change - 1,406,050
Depreciation and amortization 819,644 705,330
(Gain) loss on sale of equipment 14,441 (2,000)
Change in operating assets and liabilities 1,067,707 (197,283)
----------- -----------
Net cash provided by
operating activities 1,807,761 129,050
Investing activities
Net additions of property, plant
and equipment (2,718,135) (4,123,585)
Proceeds from sale of equipment 32,165 2,000
Payments for other assets (14,772) (6,240)
----------- -----------
Net cash used by investing activities (2,700,742) (4,127,825)
Financing activities
Proceeds from revolving note payable 50,000 -
Proceeds from long-term debt 250,000 4,077,304
Decrease in construction fund balance 691,120 -
Payments of long-term debt (81,725) (151,451)
Proceeds from sale of common stock 250,000 -
----------- -----------
Net cash provided by
financing activities 1,159,395 3,925,853
----------- -----------
Net increase (decrease) in cash
and cash equivalents 266,414 (72,922)
Cash and cash equivalents at beginning
of period 65,565 164,060
----------- -----------
Cash and cash equivalents at end
of period $ 331,979 $ 91,138
=========== ===========
See notes to condensed financial statements
Page 5 of 11
UNCLE B'S BAKERY, INC.
Notes to Condensed Financial Statements
(Unaudited)
Note 1 - Basis of Presentation
The accompanying unaudited condensed financial statements have been prepared in
accordance with generally accepted accounting principles for interim financial
information and with the instructions to Form 10-QSB and Item 310 of Regulation
S-B. Accordingly, they do not include all of the information and footnotes
required by generally accepted accounting principles for complete financial
statements. In the opinion of management, all adjustments (consisting of normal
recurring accruals) considered necessary for a fair presentation have been
included. Operating results for the three month and nine month periods ended
April 30, 1997 are not necessarily indicative of the results that may be
expected for the year ending July 31, 1997. For further information, refer to
the financial statements and footnotes thereto included in the Company's Annual
Report on Form 10-KSB for the year ended July 31, 1996.
Note 2 - Inventories
Inventories consist of the following:
April 30 July 31
1997 1996
-------- --------
Raw ingredients and packaging $451,888 $410,341
Finished goods 149,919 67,821
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Total inventories $601,807 $478,162
======== ========
Note 3 - Change in Accounting Method
Effective August 1, 1995, the Company changed its method of accounting for new
account allowances (fees paid to customers to obtain retail shelf or warehouse
space) from the capitalization method (with amortization over 12-36 months) to
expensing the costs as incurred. The change was made to conform with
predominant industry practice and because the new method is more practical to
account for and will reflect more conservative accounting. The change has been
applied retroactively to costs paid in prior years and results in a cumulative
effect adjustment of $1,406,050 (no income tax effect) which is included in the
net loss for the nine months ended April 30, 1997.
Note 4 - Economic Development and Training Incentives
In fiscal 1996, the Company received economic development and training
incentives from certain governmental agencies. Incentives totaling $375,000
were recorded in income for the first quarter ended October 31, 1995 as a
reduction to cost of goods sold ($275,000) and selling, general and
administrative expense ($100,000). Training incentives of $87,000 were earned
in the nine months ended April 30, 1996 and recorded as a reduction to cost of
goods sold.
Page 6 of 11
Note 5 - Long-Term Debt and Stockholders' Equity
The Company signed an agreement on November 15, 1996 increasing the availability
under its term loan by an additional $250,000. In connection with this
additional funding, an affiliate of the lender purchased 111,111 shares of
common stock for $2.25 per share, and another affiliate of the lender received
warrants to purchase 205,000 shares of preferred stock and/or common stock at an
exercise price of $2.25 per share.
Due to the effect of the third quarter net loss, as of April 30, 1997 the
Company did not meet certain financial covenants of its primary loan agreement.
Although a waiver was received from the lender for the violations as of April
30, 1997, the Company projects it will not comply with existing covenants at
July 31, 1997 and continuing for certain periods thereafter. The Company
believes that future violations will also be waived and/or satisfactory
amendments to the covenants will be made. While the lender has expressed its
intention not to call the loan, due to the lack of a more comprehensive waiver
or amendment at this time the long-term debt has been reclassified as a current
liability for financial statement reporting purposes.
Page 7 of 11
UNCLE B'S BAKERY, INC.
ITEM 2. Management's Discussion and Analysis:
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Results of Operations
Net sales increased 18.1% in the third quarter ended April 30, 1997 to
$5,330,566, an increase of $817,003 over the same period of the prior year. The
primary factor in the growth of the Company's net sales is due to the bake off
product which was introduced in the fourth quarter of last year. Year to date
net sales for the first nine months were $17,301,458, an increase of 32.2% over
the same period of the prior year.
Gross profit in the third quarter decreased 28.4% to $1,578,438 from $2,205,297
for the same period of the prior year. Gross profit as a percent of net sales
in the third quarter was 29.6% versus 48.9% in the same period of the prior
year. The decrease reflects manufacturing inefficiencies related to new
equipment installation, additional new product specification requirements, along
with the lower margin for the bake off product which comprised 32.0% of net
sales during the quarter ended April 30, 1997. The manufacturing inefficiencies
were primarily related to labor and utility costs. Gross profit for the first
nine months was $6,048,431 or 35.0% of net sales versus 48.1% for the same
period of the prior year.
For the third quarter ended April 30, 1997, distribution expense totaled
$384,401 or 7.2% of net sales versus 8.6% in the prior year. The decrease is
due to the bake off product shipping costs being absorbed by the customer.
Distribution expenses for the nine months ended April 30, 1997 was 7.6% of net
sales versus 8.6% for the same period of the prior year.
Selling, general and administrative expenses in the third quarter of 1997 were
$1,441,795, a decrease of $351,595 or 19.6%. The decrease is primarily related
to reduced advertising, trade allowances, promotion and slotting expenses which
decreased from $1,105,248 to $777,669. Selling, general and administrative
expenses as a percentage of net sales were 27.0% versus 39.7% for the same
period of the prior year. The primary reason for the decrease in this
percentage is the addition of the bake off sales (32.0% of net sales) which has
minimal selling, general and administrative expenses compared to the Company's
branded products. In the first nine months, selling, general and administrative
expenses were $4,451,582, a decrease of $726,950 from the same period of the
prior year.
As a result of the factors described above, net loss for the third quarter ended
April 30, 1997 was $377,355 compared to a net loss of $89,450 for the same
period of the prior year. The net loss for the first nine months was $94,031
compared to a loss before cumulative effect of accounting change of $376,997 for
the same period of the prior year.
Page 8 of 11
Liquidity and Sources of Capital
Cash provided by operations was $1,807,761 for the nine months ended April 30,
1997, an increase of $1,678,711 from the prior year. The improvement in income
from operations and changes in working capital accounts for a majority of this
increase.
Cash used by investing activities was $2,700,742 for the nine months ended April
30, 1997, a decrease of $1,405,450 over the same period of the prior year. The
primary uses of investment funds were equipment acquisitions and installation
related to the plant expansion program.
Cash provided by financing activities was $1,159,395 for the nine months ended
April 30, 1997, which was due to the decrease in the construction fund balance,
and proceeds from debt and sale of stock. In November 1996, the Company
received additional loan proceeds and equity financing totaling $500,000, as
described in Note 5 to the Condensed Financial Statements.
Due to a reduction in sales volume during the third quarter and projected sales
volumes over the next three quarters because of the mutual cancellation of a
contract (see Item 5. Other Information), the Company believes its short-term
liquidity will be adversely affected. As a result, the Company has implemented
various action plans in order to maintain adequate cash flow. Employment levels
have been reduced, resulting in an overall decrease in employment of
approximately 30%. In addition, various reductions in operational expenses are
being implemented. The Company is aggressively pursuing new business to replace
the lost volume. To date, the Company has acquired new business which will
replace approximately 30% of the lost sales volume. Initial shipments will
begin in late July. The Company anticipates procuring additional new business
over the next 90-120 days.
In order to manage its working capital, the Company has not made timely payments
to certain trade creditors and has routinely extended payment of trade payables
beyond standard terms. However, to date delivery of goods from suppliers has
not been adversely affected. The Company expects this to continue over the near
term.
At April 30, 1997, the Company did not meet certain financial covenants of its
primary loan agreement. The lender has subsequently waived these violations. The
Company projects it will not comply with the existing covenants at July 31, 1997
and continuing for certain periods thereafter, however, it believes that these
violations will also be waived or that satisfactory amendments to the covenants
will be made. The lender has indicated a willingness to work with the Company
during this period of cash constraint. Due to a lack of a more comprehensive
waiver or amendment at this time, the long-term debt has been reclassified as a
current liability for financial statement reporting purposes. Beginning August
1, 1997 quarterly principal payments on a term loan of $178,750 will be due. The
Company is also presently pursuing various other sources of new capital.
There can be no assurance as to the ultimate outcome of the constraint on short-
term liquidity. However, the Company believes its projected operating cash flow
and existing credit facilities, along with its expectation to defer or
restructure certain obligations and/or to obtain additional capital, will be
sufficient to maintain adequate liquidity.
Page 9 of 11
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS:
- ----------------------------
None
ITEM 2. CHANGES IN SECURITIES:
- --------------------------------
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES:
- ------------------------------------------
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS:
- --------------------------------------------------------------
None
ITEM 5. OTHER INFORMATION:
- ----------------------------
On May 28, 1997 the Company announced that the Co-Packaging Agreement
with Heinz Bakery Products, Inc. ("Heinz") had been mutually
cancelled. This was replaced with a Strategic Partner Agreement with
Heinz.
The Co-Packaging Agreement with Heinz was to produce, package and
label uncooked bagels according to specification. As a partial result
of this contract, the Company had previously estimated that sales for
the fiscal year 1997 would increase approximately 40-50%. The Company
now anticipates sales for the fiscal year will only increase in the
range of 18-20%. Both the sales and net income for the third and
fourth quarters will be adversely affected with the major sales impact
occurring in the fourth quarter.
Cancellation of the Co-Packaging Agreement was due to problems
encountered with ingredients supplied by outside suppliers which
impacted the Company's ability to deliver product. In addition, Uncle
B's believed it should not absorb the additional costs of customer
specification changes not contained in its original agreement.
The Strategic Development Partner Agreement executed by the Company
and Heinz defines their desire for Uncle B's to be its preferred
supplier of par baked and fully baked bagels. This new agreement
utilizes the Company's expertise and is for a term of three years with
no guaranteed volumes.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K:
- ------------------------------------------
(a) The following exhibits are included herein:
11 Statement re: computation of earnings per share
27 Financial Data Schedule (included in electronic filing only)
(b) The Company did not file any reports on Form 8-K during the nine
months ended April 30, 1997.
Page 10 of 11
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.
Uncle B's Bakery, Inc.
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(Registrant)
Date June 16, 1997 /s/ Wm. Howard McClennan, Jr.
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Wm. Howard McClennan, Jr.
Chief Financial Officer
Date June 16, 1997 /s/ William T. Rose, Jr.
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William T. Rose, Jr.
Chairman and CEO
Page 11 of 11