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 JANUARY 31, 1998
-----------------
[ ] 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.
(Exact name of small business issuer as specified in its charter)
IOWA 42-1267239
- ------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
441 DUBUQUE STREET, ELLSWORTH, IOWA 50075
-----------------------------------------
(Address of principal executive offices)
(515) 836-4000
----------------------------
(Issuer's telephone number)
- --------------------------------------------------------------------------------
(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 FEBRUARY 27
1998.
Page 1 of 11
INDEX
UNCLE B'S BAKERY, INC.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Condensed Balance Sheets - January 31, 1998 and July 31, 1997
Condensed Statements of Operations - Three months ended January 31, 1998
and 1997; Six months ended January 31, 1998 and 1997.
Condensed Statements of Cash Flows - Six months ended January 31, 1998 and
1997
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:
UNCLE B'S BAKERY, INC.
CONDENSED BALANCE SHEETS
JANUARY 31 JULY 31
1998 1997
(Unaudited) (Note)
------------- ------------
ASSETS
Current assets:
Cash and cash equivalents $ -- $ 6,441
Accounts receivable 1,044,232 1,023,606
Inventories-Note 2 465,132 552,420
Prepaid expenses 173,181 137,873
------------ ------------
Total current assets 1,682,545 1,720,340
Property, plant and equipment 18,568,757 18,246,658
Less accumulated depreciation 4,342,469 3,874,816
------------ ------------
Net property, plant and equipment 14,226,288 14,371,842
Intangible assets and deferred costs, net 467,147 461,858
------------ ------------
Total assets $ 16,375,980 $ 16,554,040
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,741,274 $ 2,000,631
Accrued expenses 515,694 1,077,274
Long-term debt due within one year-Note 3 13,497,686 12,065,759
------------ ------------
Total current liabilities 15,754,654 15,143,664
Long-term debt due after one year -- 760,187
Stockholders' equity
Common stock, $.01 par value: 40,000,000
shares authorized, 3,656,258 shares
issued and outstanding 36,563 36,563
Stock purchase warrants-Note 3 791,800 --
Additional paid-in capital 7,987,701 7,987,701
Deficit (8,194,738) (7,374,075)
------------ ------------
Total stockholders' equity 621,326 650,189
------------ ------------
Total liabilities and stockholders' equity $ 16,375,980 $ 16,554,040
============ ============
Note: The balance sheet at July 31, 1997 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 SIX MONTHS ENDED
JANUARY 31 JANUARY 31
1998 1997 1998 1997
------------ ------------ ------------ ------------
Net sales $ 3,399,781 $ 5,589,613 $ 7,251,380 $ 11,970,892
Cost of goods sold 2,103,335 3,565,080 4,587,067 7,500,899
------------ ------------ ------------ ------------
Gross profit 1,296,446 2,024,533 2,664,313 4,469,993
Distribution expense 286,406 367,016 612,982 928,606
Selling, general and
administrative expense 974,613 1,519,303 2,192,998 3,009,787
------------ ------------ ------------ ------------
1,261,019 1,886,319 2,805,980 3,938,393
------------ ------------ ------------ ------------
Income (loss) from operations 35,427 138,214 (141,667) 531,600
Other income (expense):
Interest expense (343,530) (134,916) (670,739) (258,554)
Other (6,126) 12,032 (8,256) 10,278
------------ ------------ ------------ ------------
(349,656) (122,884) (678,995) (248,276)
------------ ------------ ------------ ------------
Income (loss) before income taxes (314,229) 15,330 (820,662) 283,324
Income taxes -- -- -- --
------------ ------------ ------------ ------------
Net income (loss) $ (314,229) $ 15,330 $ (820,662) $ 283,324
============ ============ ============ ============
Net income (loss) per share $ (0.09) $ 0.00 $ (0.22) $ 0.08
Weighted average number of common
and common equivalent
shares outstanding 3,656,258 3,670,605 3,656,258 3,644,987
============ ============ ============ ============
See notes to condensed financial statements.
Page 4 of 11
UNCLE B'S BAKERY, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
SIX MONTHS ENDED JANUARY 31
---------------------------
1998 1997
----------- -----------
OPERATING ACTIVITIES
Net income (loss) $ (820,662) $ 283,324
Depreciation and amortization 575,810 544,048
Loss on sale of equipment 2,469 14,441
Change in operating assets and liabilities (789,584) 190,400
----------- -----------
Net cash provided (used) by
operating activities (1,031,967) 1,032,213
INVESTING ACTIVITIES
Net additions of property, plant
and equipment (368,048) (1,745,655)
Proceeds from sale of equipment 6,310 32,165
Payments for other assets (39,736) (14,772)
----------- -----------
Net cash used by investing activities (401,474) (1,728,262)
FINANCING ACTIVITIES
Proceeds from revolving note payable -- 50,000
Proceeds from long-term debt and warrants 1,550,000 250,000
Decrease in construction fund balance -- 485,067
Payments of long-term debt (123,000) (81,725)
Proceeds from sale of common stock -- 250,000
----------- -----------
Net cash provided by
financing activities 1,427,000 953,342
----------- -----------
Net increase (decrease) in cash
and cash equivalents (6,441) 257,293
Cash and cash equivalents at beginning
of period 6,441 65,565
----------- -----------
Cash and cash equivalents at end
of period $ -- $ 322,858
=========== ===========
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 six month periods ended
January 31, 1998 are not necessarily indicative of the results that may be
expected for the year ending July 31, 1998. 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, 1997.
NOTE 2 - INVENTORIES
Inventories consist of the following:
January 31 July 31
1998 1997
---------- --------
Raw ingredients and packaging $412,719 $414,266
Finished goods 52,413 138,154
-------- --------
Total inventories $465,132 $552,420
======== ========
NOTE 3 - LONG - TERM DEBT AND WARRANTS
In August 1997, the Company obtained an additional term loan from its principal
senior lender with cash proceeds of $750,000. The new term loan bears interest
at 3% payable in-kind and is due in August 2002. In connection with this
transaction, the Company also issued warrants and repriced certain existing
warrants held by the lender. The total cash proceeds received were allocated
based on fair value to the new term loan and the related warrants, resulting in
a warrant value and equivalent debt discount of $609,900. The related debt
discount is amortized over the loan term.
In December 1997, the Company obtained an over-advance note of its revolving
credit facility under which the Company may borrow up to an additional
$1,300,000. Each advance under the new facility is subject to the lender's prior
approval. To date, the Company has drawn $800,000 however, further advances have
been denied. All advances will bear interest at 12% of which 3% will be payable
monthly in arrears and 9% may either be paid monthly or, at the Company's
option, deferred and paid (with interest on the deferred amount) at maturity.
All principal and unpaid interest is due December 17, 1999. The Company also
repriced certain existing warrants held by the lender which increased the
warrant value and related debt discount by $181,900.
Page 6 of 11
UNCLE B'S BAKERY, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS:
RESULTS OF OPERATIONS
Net sales decreased 39.2% in the second quarter ended January 31, 1998 to
$3,399,781, a decrease of $2,189,832 over the same period of the prior year.
Almost all of the net sales decrease was attributed to the mutual cancellation
of a food service contract in the third quarter of the prior fiscal year. Year
to date net sales for the first six months were $7,251,380, a decrease of 39.4%
over the same period of the prior year.
Gross profit in the fiscal 1998 second quarter decreased to $1,296,446 from
$2,024,533 for the same period of the prior year. The decrease in gross profit
for the second quarter reflects lower sales volume. Gross profit as a percent of
net sales in the second quarter was 38.1% versus 36.2% in the same period of the
prior year. This improvement reflects the impact of the higher margin from the
branded product sales, which was a higher portion of the sales mix in fiscal
1998, and cost reduction efforts implemented to lower the Company's break-even
point. Gross profit for the first half was $2,664,313 or 36.7% of net sales
versus 37.3% for the same period of the prior year.
For the second quarter ended January 31, 1998, distribution expense totaled
$286,406 compared to $367,016 in the prior year or 8.4% of net sales versus 6.6%
in the prior year. The decrease in distribution expenses is primarily due to
decreased warehouse costs resulting from the cancellation of the food service
contract described above. Distribution expenses for the six months ended January
31, 1998 were 8.5% of net sales versus 7.8% for the same period of the prior
year.
Selling, general and administrative expenses in the second quarter of 1998 were
$974,613, a decrease of $544,690 or 35.9% from the same period of the prior
year. The decrease reflects reduced salary, travel, advertising, trade
allowances and promotions. The lower salary expense is attributed to the
reduction of executive and management salaries and management personnel.
Advertising, trade allowances, promotion and slotting expenses decreased 40.1%
to $526,559 from $879,375 for the same period of the prior year, while net
branded sales, which account for the majority of such costs, remained unchanged.
The Company has instituted a program of selective advertising and promotional
spending that focuses on market penetration and profitability. First half fiscal
1998 selling, general and administrative expenses were $2,192,998, a decrease of
$816,789 from the same period of the prior year. The decrease is primarily due
to the factors previously mentioned.
Income from operations for the second quarter of 1998 was $35,427, compared to a
loss from operations of $177,094 in the first quarter, an improvement of
$212,521. This reflects the successful impact of the Company's aggressive cost
reduction steps taken as discussed above.
Interest expense in the second quarter ended January 31, 1998 increased $208,614
from $134,916 for the same period of the prior year and interest expense for the
six months ended January 31, 1998 was $670,739 versus $258,554 for the same
period of the prior year. The principal reason for the increase is due to the
fact that there was no interest capitalized for the three and six months ended
January 31, 1998, whereas, in the prior year interest was capitalized due to the
plant expansion project.
As a result of the factors described above, net loss for the second quarter
ended January 31, 1998 was $314,229 compared to a net income of $15,330 for the
same period of the prior year. The net loss for the first six months was
$820,662 compared to a net income of $283,324 for the same period of the prior
year.
Page 7 of 11
LIQUIDITY AND SOURCES OF CAPITAL
Cash used by operating activities was $1,031,967 for the six months ended
January 31, 1998, compared to cash provided by operations of $1,032,213 for the
same period of the prior year. The net loss and impact of an increase in working
capital accounts for this change.
Cash used by investing activities was $401,474 for the six months ended January
31, 1998, a decrease of $1,326,788 over the same period of the prior year. The
primary uses of investment funds were paying for completing certain plant
projects.
Cash provided by financing activities was $1,427,000 for the six months ended
January 31, 1998, primarily representing the proceeds from long term debt and
warrants.
In December 1997, the Company entered into agreements with its principal lender
pursuant to which (a) the lender waived all existing defaults under the credit
agreements, (b) the financial covenants were amended by removing existing
covenants and substituting a covenant requiring the Company to maintain certain
monthly levels of cash flow, and (c) the lender established a new credit
facility pursuant to which the Company may borrow up to an additional
$1,300,000. Each advance under the new facility is subject to the lender's prior
approval. To date, the Company has drawn $800,000 however, further advances have
been denied. All advances will bear interest at 12%, of which 3% will be payable
monthly in arrears and 9% may either be paid monthly or, if not paid,
deferred and paid (with interest on the deferred amount) at maturity. All
principal and unpaid interest is due on December 17, 1999. Through February 1998
the Company has complied with the defined cash flow covenants as set forth by
the lender.
The Company did not make a scheduled monthly interest payment to the lender for
January and February 1998 accrued interest. The Company has experienced losses
and resulting cash flow difficulties as a result of the factors described under
"Management's Discussion and Analysis - Results of Operations," including the
reduction in sales as a result of the mutual cancellation of a substantial food
service contract during the third quarter of fiscal 1997.
In order to manage its working capital, the Company has routinely extended
payment of certain trade creditors and trade payables beyond standard terms. To
date, this practice has not adversely affected the delivery of goods from
suppliers. The Company expects to continue the practice of extending payment of
payables over the near term. However, the Company projects it will able to
reduce the aging of past due payables over the balance of the fiscal year.
The Company has implemented a number of steps to maintain adequate cash flow as
reported in Form 10-KSB for the year ended July 31, 1997. The Company has
engaged a management consulting firm to review and recommend ways to improve
performance and cash flow. As a result, the Company is continuing to implement
additional steps which include improving manufacturing and direct labor
efficiencies along with further reduction in selling expenses, salaried
personnel and salaries of corporate officers. The Company has also retained the
services of investment banking firms to advise on and explore possible
additional approaches to improving the Company's financial situation including
possible mergers and acquisitions.
Page 8 of 11
As mentioned above, the Company has engaged a management consulting firm and
has implemented a number of actions to assist in improving profitability and
cash flow. The Company and the consultant are presently evaluating various
possible alternatives to maximize the use and value of the Company's capital and
other assets. This review, when complete, could result in the sale and/or
possible write down of certain assets. If necessary, appropriate adjustments to
long-lived assets in accordance with FASB Statement 121, or any other necessary
accounting adjustments, would be recognized upon completion of the review.
There can be no assurance as to the outcome of the current constraint on the
Company's cash flow. The last two advance requests under the over advance note
have been denied. The Company believes that while cash flow will be constrained,
it expects it should be sufficient to meet the Company's liquidity needs except
for monthly interest payments for the remainder of fiscal 1998. At this time the
Company does not intend to make any further interest payments during the fiscal
year. The liquidity needs include trade obligations being paid on extended
payment terms as noted above.
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:
As described under Management's Discussion and Analysis "Liquidity and
Sources of Capital," in January and February 1998 the Company did not
make scheduled monthly interest payments to its lender. The amount of
the January interest payment was $78,667, and the total arrearage at
the date of this report is $149,827.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS:
None
ITEM 5. OTHER INFORMATION:
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K:
(a) The following exhibits are included herein:
10.21 Waiver and Fourth Amendment to Loan and Security Agreement with
Creditanstalt American Corporation, dated December 17, 1997.
10.22 Third Amendment to Warrant Agreement, dated December 17, 1997.
10.23 Over Advance Agreement, dated December 17, 1997
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
six months ended January 31, 1998.
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.
-------------------------------------
(Registrant)
Date MARCH 17, 1998 /S/ WM. HOWARD MCCLENNAN, JR.
------------------------- -----------------------------------------
Wm. Howard McClennan, Jr.
Chief Financial Officer
Date MARCH 17, 1998 /S/ WILLIAM T. ROSE, JR.
------------------------- -----------------------------------------
William T. Rose, Jr.
Chairman and CEO
Page 11 of 11