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, 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.
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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 29, 1998.
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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, 1998 and July 31, 1997
Condensed Statements of Operations - Three months ended April 30, 1998
and 1997; Nine months ended April 30, 1998 and 1997.
Condensed Statements of Cash Flows - Nine months ended April 30, 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
APRIL 30 JULY 31
1998 1997
(Unaudited) (Note)
------------ ------------
ASSETS
Current assets:
Cash and cash equivalents $ 45,033 $ 6,441
Accounts receivable 1,009,239 1,023,606
Inventories-Note 2 694,278 552,420
Prepaid expenses 301,219 137,873
------------ ------------
Total current assets 2,049,769 1,720,340
Property, plant and equipment 18,527,522 18,246,658
Less accumulated depreciation 4,599,317 3,874,816
------------ ------------
Net property, plant and equipment 13,928,205 14,371,842
Intangible assets and deferred costs, net 453,866 461,858
------------ ------------
Total assets $ 16,431,840 $ 16,554,040
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,430,368 $ 2,000,631
Accrued expenses 921,343 1,077,274
Long-term debt due within one year-Note 3 12,806,808 12,065,759
------------ ------------
Total current liabilities 15,158,519 15,143,664
Long-term debt due after one year 697,187 760,187
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 (8,239,930) (7,374,075)
------------ ------------
Total stockholders' equity 576,134 650,189
------------ ------------
Total liabilities and stockholders' equity $ 16,431,840 $ 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 NINE MONTHS ENDED
APRIL 30 APRIL 30
1998 1997 1998 1997
------------ ------------ ------------ ------------
Net sales $ 3,477,430 $ 5,330,566 $ 10,728,810 $ 17,301,458
Cost of goods sold 1,990,432 3,752,128 6,577,498 11,253,027
------------ ------------ ------------ ------------
Gross profit 1,486,998 1,578,438 4,151,312 6,048,431
Distribution expense 265,793 384,401 878,775 1,313,007
Selling, general and
administrative expense 915,388 1,441,795 3,108,386 4,451,582
1,181,181 1,826,196 3,987,161 5,764,589
------------ ------------ ------------ ------------
Income (loss) from operations 305,817 (247,758) 164,151 283,842
Other income (expense):
Interest expense (348,866) (136,736) (1,019,605) (395,290)
Other (2,144) 7,139 (10,400) 17,417
------------ ------------ ------------ ------------
(351,010) (129,597) (1,030,005) (377,873)
------------ ------------ ------------ ------------
Loss before income taxes (45,193) (377,355) (865,854) (94,031)
Income taxes -- -- -- --
------------ ------------ ------------ ------------
Net loss $ (45,193) $ (377,355) $ (865,854) $ (94,031)
============ ============ ============ ============
Net loss per share $ (0.01) $ (0.10) $ (0.24) $ (0.03)
Weighted average number of common
and common equivalent
shares outstanding 3,656,258 3,656,258 3,656,258 3,613,116
============ ============ ============ ============
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
--------------------------
1998 1997
----------- -----------
OPERATING ACTIVITIES
Net loss $ (865,854) $ (94,031)
Depreciation and amortization 888,913 819,644
Loss on sale of equipment 2,469 14,441
Change in operating assets and liabilities (1,017,032) 1,067,707
----------- -----------
Net cash provided (used) by
operating activities (991,504) 1,807,761
INVESTING ACTIVITIES
Net additions of property, plant
and equipment (326,812) (2,718,135)
Proceeds from sale of equipment 6,310 32,165
Payments for other assets (44,902) (14,772)
----------- -----------
Net cash used by investing activities (365,404) (2,700,742)
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 -- 691,120
Payments of long-term debt (154,500) (81,725)
Proceeds from sale of common stock -- 250,000
----------- -----------
Net cash provided by
financing activities 1,395,500 1,159,395
----------- -----------
Net increase in cash
and cash equivalents 38,592 266,414
Cash and cash equivalents at beginning
of period 6,441 65,565
----------- -----------
Cash and cash equivalents at end
of period $ 45,033 $ 331,979
=========== ===========
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, 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:
April 30 July 31
1998 1997
-------- --------
Raw ingredients and packaging $424,401 $414,266
Finished goods 269,877 138,154
-------- --------
Total inventories $694,278 $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.
The Company is currently in default of all debt with its principal lender. See
further discussion under "Management's Discussion and Analysis - Liquidity and
Sources of Capital."
Page 6 of 11
UNCLE B'S BAKERY, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS:
RESULTS OF OPERATIONS
Net sales decreased 34.8% in the third quarter ended April 30, 1998 to
$3,477,430, a decrease of $1,853,136 over the same period of the prior year. Net
sales for the first nine months were $10,728,810, a decrease of 38.0% over the
same period of the prior year. Most of the quarterly and nine month net sales
decrease was attributed to the mutual cancellation of a food service contract at
the end of the third quarter of the prior fiscal year.
Gross profit as a percent of net sales in the third quarter was 42.8% versus
29.6% in the same period of the prior year. The increase in gross profit as a
percent of net sales reflects the impact of the higher margin from the branded
product sales, which were a higher portion of the sales mix in fiscal 1998, and
the manufacturing cost reduction programs implemented during fiscal 1998 to
lower the Company's break-even point. Manufacturing cost reduction measures have
included employee layoffs, decreased management salaries and personnel along
with improved manufacturing efficiencies. However, due to the lower sales
volume, gross profit decreased to $1,486,998 from $1,578,438 for the same period
of the prior year. Gross profit for the first nine months was $4,151,312, or
38.7% of net sales, versus 35.0% for the same period of the prior year.
For the third quarter ended April 30, 1998, distribution expense totaled
$265,793 or 7.6% of net sales versus 7.2% in the prior year. Distribution
expense for the nine months ended April 30, 1998 was 8.2% of net sales versus
7.6% for the same period of the prior year.
Selling, general and administrative expenses in the third quarter of 1998 were
$915,388, a decrease of $526,407 or 36.5% from the same period of the prior
year. The decrease reflects reduced salaries, travel, advertising, trade
allowance, and promotions. The lower salary expense is attributed to the
reduction of executive and management salaries and decreased numbers of
management personnel. Advertising, trade allowance, promotion and slotting
expense decreased 38.0% to $482,543 from $777,669 for the same period of the
prior year, while net branded sales, which account for the majority of such
costs, remained essentially unchanged. The Company has instituted a program of
selective advertising and promotional spending that focuses on market
penetration and profitability. In the first nine months, selling, general and
administrative expenses were $3,108,386, a decrease of $1,343,196 from the same
period of the prior year.
For the third quarter ended April 30, 1998, income from operations was $305,817
as compared to a loss from operations over the same period of the prior year of
$66,519 (which excluded an inventory adjustment of $181,239 related to the food
service contract.) Income from operations for the third quarter of 1998 also
improved $270,390 from the $35,427 income from operations in the second quarter
of fiscal 1998. This reflects the continued impact of the Company's aggressive
cost reduction steps. The improvement was accomplished with sales being
approximately the same as the second quarter of the current fiscal year.
However, these results are not necessarily indicative of the results that may be
expected in the future, especially in light of the fact we are entering into the
summer months and the consumer preference is mainly for hot dog and hamburger
rolls rather than bagels.
Page 7 of 11
Interest expense in the third quarter ended April 30, 1998 increased $212,130
from $136,736 for the same period of the prior year and interest expense for the
nine months ended April 30, 1998 was $1,019,605 versus $395,290 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 nine months ended
April 30, 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 third quarter ended
April 30, 1998 was $45,193 compared to a net loss of $377,355 for the same
period of the prior year. The net loss for the first nine months was $865,854
compared to a net loss of $94,031 for the same period of the prior year.
LIQUIDITY AND SOURCES OF CAPITAL
Cash used by operating activities was $991,504 for the nine months ended April
30, 1998, compared to cash provided by operating activities of $1,807,761 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 $365,404 for the nine months ended April
30, 1998, a decrease of $2,335,338 over the same period of the prior year. The
primary uses of investment funds was payment for completing certain plant
projects.
Cash provided by financing activities was $1,395,500 for the nine months ended
April 30, 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, all advances
requested since January 1998 have been denied. All advances bear interest at
12%, of which 3% is 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
April 1998 the Company has complied with the defined cash flow covenants as set
forth by the lender.
The Company has not made scheduled monthly interest payments to the lender for
the period January through May 1998. The Company has experienced losses and
resulting cash flow difficulties which are a result of the factors described
under "Management's Discussion and Analysis - Results of Operations," primarily
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. In the third quarter of fiscal 1998 the Company did
not extend the payment terms for its major suppliers.
Page 8 of 11
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 has implemented a number of
measures to improve manufacturing, operating direct labor efficiencies, and to
reduce selling expenses, salaried personnel and salaries of corporate officers.
These measures have significantly reduced the Company's operating costs and
improved its cash flow, as noted under "Results of Operations." The Company
continues to evaluate and implement, where economically feasible, additional
programs to reduce costs. The Company also continues to work with its
consultants on exploring possible additional approaches to improving the
Company's financial situation including possible mergers and acquisitions.
The Company and its management consultant also are continuing to evaluate
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 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 which
is anticipated to be completed in the fourth quarter of fiscal 1998.
There can be no assurance as to the outcome of the current constraint on the
Company's cash flow. All advance requests since January 1998 under the over
advance note have been denied. The Company believes in the fourth quarter of
fiscal 1998 that cash flow will be more constrained due to lower sales volume
(seasonality) and increased promotion expenses, but should be sufficient to
allow the Company's liquidity needs to be met except for monthly interest
payments. At this time the Company does not intend to make any further interest
payments to its pricipal lender during the current fiscal year. The liquidity
needs include trade obligations continuing to be paid on extended payment terms
as noted above during the fourth quarter of fiscal 1998.
On May 19, 1998, the Company's lender gave written notice that the Company was
in default of its loan payments and that it would pursue its legal remedies and
the lender has demanded payment for all amounts due under the loan agreement. To
date, the lender has not attempted to implement any of its legal remedies, but
there can be no assurance it will not do so in the future.
The Company realizes that its capital structure must change and is discussing
possible approaches with its current lender. The outcome of these discussions
cannot be predicted at this time. The Company continues to evaluate and, where
appropriate, pursue other alternatives to restructure its debt, either with the
current lender or another group. However, there can be no assurance that the
Company will be successful in its efforts.
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 the period January through May 1998 the Company
did not make scheduled monthly interest payments to its lender, and the
lender has demanded payment of all amounts due under the loan documents.
The total interest arrearage at the date of this report is $483,740.
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:
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, 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 June 15, 1998 /s/Wm. Howard McClennan, Jr.
---------------------------- ---------------------------------------
Wm. Howard McClennan, Jr.
Chief Financial Officer
Date June 15, 1998 /s/William T. Rose, Jr.
---------------------------- ---------------------------------------
William T. Rose, Jr.
Chairman and CEO
Page 11 of 11