<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
(X) QUARTERY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended March 31, 1999
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Transition Period From ______ to ______
Commission File Number 000-24007
BALANCE BAR COMPANY
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(Exact Name of Registrant as Specified in its Charter)
<TABLE>
<S> <C>
Delaware 77-0306617
- --------------------------------------- ----------------------------
(State of Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification Number)
1015 Mark Avenue
Carpinteria, California 93013
- --------------------------------------- ----------------------------
(Address of Principal Executive Office) (Zip Code)
</TABLE>
(805) 566-0234
----------------------------------------------------
(Registrant's Telephone Number, Including Area Code)
Indicate by check mark whether 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 ( )
At April 29, 1999, the registrant had 11,793,343 shares of its common stock
outstanding.
<PAGE>
Balance Bar Company
Index To Form 10-Q
Quarter Ended March 31, 1999
<TABLE>
<CAPTION>
Index Page
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<S> <C>
PART I. - FINANCIAL INFORMATION
Item 1. Financial Statements
Balance Sheets 3
Income Statements 4
Statements of Cash Flows 5
Notes to Financial Statements 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 8
Item 3. Quantitative and Qualitative Disclosures About Market Risk 11
PART II. - OTHER INFORMATION
Item 1. Legal Proceedings 12
Item 6. Exhibits and Reports on Form 8-K 12
SIGNATURES 13
</TABLE>
2
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Balance Bar Company
Balance Sheets
(amounts in 000's, except par value)
<TABLE>
<CAPTION>
March 31, 1999 December 31, 1998
-------------- -----------------
(unaudited) (audited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 6,986 $ 6,475
Marketable securities --- 697
Accounts receivable, net 10,181 10,686
Inventories 5,322 5,002
Prepaid and other 1,684 2,362
Deferred taxes 580 624
------- -------
Total current assets 24,753 25,846
------- -------
Property and equipment, net 1,372 1,105
Other assets 33 30
------- -------
Total assets $26,158 $26,981
======= =======
Current liabilities:
Accounts payable $ 3,347 $ 5,080
Accrued payroll 280 1,069
Accrued commissions 396 404
Other accrued liabilities 784 501
------- -------
Total current liabilities 4,807 7,054
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Commitments and contingencies
Stockholders' equity:
Common stock, $0.01 par value
Authorized - 24,000 shares
Issued and outstanding - 11,789 in 1999
and 11,339 in 1998 118 113
Additional paid-in capital 13,574 13,115
Retained earnings 7,659 6,699
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Total stockholders' equity 21,351 19,927
------- -------
Total liabilities and equity $26,158 $26,981
======= =======
</TABLE>
The accompanying notes are an integral part of these balance sheets.
3
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Balance Bar Company
Income Statements
(amounts in 000's, except per share data)
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
1999 1998
---- ----
<S> <C> <C>
Sales $20,837 $17,457
Cost of sales 10,767 9,014
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Gross profit 10,070 8,443
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Expenses:
Advertising 2,321 1,630
Selling and marketing 4,784 3,522
General and administrative 1,417 1,057
Interest (income) expense (79) 58
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Total expenses 8,443 6,267
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Income before income taxes 1,627 2,176
Income taxes 667 892
------- -------
Net income $ 960 $ 1,284
======= =======
Earnings per share:
Basic $ 0.08 $ 0.13
======= =======
Diluted $ 0.07 $ 0.11
======= =======
Weighted shares outstanding:
Basic 11,697 9,599
======= =======
Diluted 12,967 11,683
======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
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Balance Bar Company
Statements of Cash Flows
(amounts in 000's)
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
1999 1998
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 960 $ 1,284
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization 123 149
Compensation expense in connection
with stock options 35 68
Changes in operating assets and liabilities:
Accounts receivable 505 (2,333)
Inventories (320) (1,495)
Prepaid and other 643 (161)
Accounts payable (1,733) (377)
Accrued liabilities (748) 127
Income taxes 667 893
------- -------
Net cash provided by (used in) operating activities 132 (1,845)
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (390) (310)
Maturity of marketable securities 697 ---
------- -------
Net cash flows provided by (used in)
investing activities 307 (310)
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase in short-term and other borrowings --- 2,277
Proceeds from exercise of stock options 72 52
Initial public offering costs --- (174)
------- -------
Net cash flows provided by financing activities 72 2,155
------- -------
INCREASE IN CASH AND CASH EQUIVALENTS 511 ---
CASH AND CASH EQUIVALENTS, beginning of period 6,475 89
------- -------
CASH AND CASH EQUIVALENTS, end of period $ 6,986 $ 89
======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
5
<PAGE>
Balance Bar Company
Notes to Financial Statements
March 31, 1999
Note 1. Accounting Policies
Basis of Presentation
These financial statements have been prepared in accordance with
generally accepted accounting principles for interim financial information and
with the instructions for Form 10-Q and Article 10 of Regulation S-X.
Accordingly, they do not include all of the information and note disclosures
required by generally accepted accounting principles for complete financial
statements. All adjustments (which include only normal recurring adjustments)
considered necessary for a fair presentation have been included. These
unaudited financial statements should be read in conjunction with the financial
statements and notes thereto included in the Company's 1998 Annual Report on
Form 10-K. The results of operations for these interim periods are not
necessarily indicative of the operating results for a full year.
Inventories
Inventories consist of the following at March 31, 1999 and December
31, 1998 (in 000's):
<TABLE>
<CAPTION>
March 31, 1999 December 31, 1998
-------------- -----------------
<S> <C> <C>
Balance Bars $3,689 $3,555
Total Balance 437 ---
Powdered drink mix 349 486
Packaging material and other 847 961
------ ------
$5,322 $5,002
====== ======
</TABLE>
Earnings Per Share
Earnings per share are based on the weighted average number of shares
outstanding for the period plus the dilutive effect of stock options. The
weighted average number of shares outstanding for the three months ended March
31, 1999 and 1998 was 11,697,000 and 9,599,000, respectively. The dilutive
effect of stock options for the three months ended March 31, 1999 and 1998 was
1,270,000 and 2,084,000, respectively. Excluded from the calculation of
earnings per share for the three months ended March 31, 1999 were 166,000 stock
options because these stock options were anti-dilutive.
Note 2. Commitments and Contingencies
In April 1998, a competitor sued the Company seeking damages as a
result of allegedly false and misleading advertising. The competitor also
alleged that the Company, with one of the Company's sales executives who
previously worked for the competitor, misappropriated trade secrets. In August
1998, the Company sued the competitor seeking damages as a result of allegedly
false and misleading advertising. In January 1999, the Company and the
competitor settled all litigation. The Company paid the competitor $140,000 and
the Company and the competitor each agreed to not make certain advertising
claims in the future.
Note 3. Stockholders' Equity
During the three months ended March 31, 1999, 450,302 shares of common
stock were issued in connection with the exercise of stock options. Additional
paid-in capital increased by $357,000 in the three months ended March 31, 1999
as a result of the tax benefit realized on the exercise of certain stock
options.
6
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Note 4. Significant Customers
During the three months ended March 31, 1999, the Company had sales to
two customers that represented approximately 22% and 15%, respectively, of
sales. During the three months ended March 31, 1998, the Company had sales to
four customers that represented approximately 21%, 16%, 13% and 11%,
respectively, of sales.
7
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Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The Company has made and will continue to make oral and written
forward-looking statements. Certain forward-looking statements are contained in
"Management's Discussion and Analysis of Financial Condition and Results of
Operations", including the expected adequacy of available funds to meet
foreseeable needs and expectations about seasonality of sales. Except for the
historical information contained herein, the following discussion and analysis
contains certain forward-looking statements that involve risks and
uncertainties, such as statements of the Company's plans, objectives,
expectations and intentions. These statements can be identified by the use of
forward-looking terminology such as "believes", "expects", "intends" or
comparable terminology. These risks include developing and selling new
products, maintaining acceptance in new distribution channels, avoiding
volatility in sales and earnings, anticipating changes in dietary trends,
avoiding adverse publicity, maintaining sales to significant customers and other
risk factors. The Company's actual results could differ materially from those
discussed here. Factors that could cause or contribute to such differences
include those discussed in the Company's 1998 Annual Report on Form 10-K, as
well as those discussed elsewhere herein.
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, certain
income statement data expressed as a percentage of sales:
<TABLE>
<CAPTION>
Three Months Ended
March 31,
1999 1998
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<S> <C> <C>
Sales 100.0% 100.0%
Cost of sales 51.7 51.6
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Gross profit 48.3 48.4
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Expenses:
Advertising 11.1 9.3
Selling and marketing 23.0 20.2
General and administrative 6.8 6.1
Interest (income) expense (0.4) 0.3
----- -----
Total expenses 40.5 35.9
----- -----
Income before income taxes 7.8 12.5
Income taxes 3.2 5.1
----- -----
Net income 4.6% 7.4%
===== =====
</TABLE>
Sales increased 19% to $20.8 million in the three months ended March
31, 1999 from $17.5 million in the same period of 1998. The increase was
primarily attributable to increased sales at mass merchandise, club and grocery
stores. Sales also increased at natural foods stores. Several significant
customers ran special sales promotions in the three months ended March 31, 1999
and 1998 and approximately $700,000 and $2.8 million, respectively, of the
increase was due to increased sales to those customers. The addition of three
new nutraceutically-enhanced Balance+/TM/ flavors in the fourth quarter of 1998
favorably impacted sales in the three months ended March 31, 1999. Sales of the
Balance+ brand were 14% of sales in the first quarter of 1999. The Company also
discontinued three Balance Bar flavors in the first quarter of 1999. The
Company decided to discontinue the three flavors based in part on the success of
three Balance+ flavors. Two of the Balance+ flavors are variations of the
discontinued flavors. The three discontinued flavors were 7% of 1998 sales of
Balance Bars. The introduction of Total Balance, The Complete Nutritional Drink
in late-March 1999 had a minimal impact on sales during the three months
8
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ended March 31, 1999. Total Balance was made available for sale to the western
one-third of the United States in late-March 1999 and the Company intends to
make Total Balance available for sale to the rest of the United States in June
1999.
Sales to customers in the natural foods channel were 38% of sales in
the three months ended March 31, 1999, compared to 59% in the three months ended
March 31, 1998. Sales to the Company's six largest 1999 customers were 64% of
sales in the three months ended March 31, 1999, compared to 60% in the three
months ended March 31, 1998. Sales to Costco Wholesale and Trader Joe's for the
three months ended March 31, 1999 were 22% and 15%, respectively, of sales.
Sales to Trader Joe's, Costco Wholesale, United Natural Foods and McLane
Distribution Services for the three months ended March 31, 1998 were 21%, 16%,
13% and 11%, respectively, of sales. Sales to customers in the United States
were 99% of sales for the three months ended March 31, 1999 and 1998. Sales of
the Balance Bar product line were 96% of sales in the three months ended March
31, 1999, compared to 90% in the three months ended March 31, 1998.
Gross profit dollars increased to $10.1 million in the three months
ended March 31, 1999 from $8.4 million in the same period of 1998. The gross
profit margin decreased to 48.3% in the three months ended March 31, 1999 from
48.4% in the same period of 1998. The decrease in gross profit margin was due
to a $130,000 provision for packaging and other costs related to the
discontinuance of three Balance Bar flavors offset by a decrease in the purchase
price of certain Balance Bar products from the Company's two contract
manufacturers.
Advertising expenses increased to $2.3 million in the three months
ended March 31, 1999 from $1.6 million in the same period of 1998. Most of the
advertising in the three months ended March 31, 1999 and 1998 was print
advertising. The Company intends to increase advertising expenses in the second
and third quarters of 1999 to support the launch of Total Balance and to launch
new Balance Bar television commercials.
Selling and marketing expenses increased to $4.8 million in the three
months ended March 31, 1999 from $3.5 million in the same period of 1998. The
increase was due to higher broker commission and marketing support expenses
related to the increase in sales, costs to launch Total Balance and slotting of
Balance Bar products. The increase was also due to increases in special events
and product sampling to build customer awareness of the Company's products.
Selling and marketing expenses as a percentage of sales increased to 23.0% of
sales in the three months ended March 31, 1999 from 20.2% in the same period of
1998.
General and administrative expenses increased to $1.4 million in the
three months ended March 31, 1999 from $1.1 million in the same period of 1998.
The increase was due to higher payroll costs to support the Company's increased
sales and higher research and development costs. General and administrative
expenses as a percentage of sales increased to 6.8% of sales in the three months
ended March 31, 1999 from 6.1% in the same period of 1998.
Interest (income) expense increased to $79,000 of interest income in
the three months ended March 31, 1999 from $58,000 of interest expense in the
same period of 1998. The interest income in 1999 was from the investment of a
portion of the net proceeds from the June 1998 initial public offering of common
stock. The interest expense in 1998 was due to borrowings under the Company's
line of credit and term loan agreements.
The effective tax rate in the three months ended March 31, 1999 and
1998 was 41.0%.
9
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LIQUIDITY AND CAPITAL RESOURCES
The primary source of cash flows for both periods has been from
Balance Bar product line sales. For the three months ended March 31, 1999 and
1998, cash generated from operations was not sufficient to fund increases in
accounts receivable and inventory, prepaid advertising expenses and purchase
property and equipment. The Company entered into credit agreements that were
used to finance the shortfall in 1998. In June 1998, the Company sold 1,003,372
shares of common stock and raised $9,478,000 and the proceeds were used to repay
outstanding short and long-term debt and fund working capital needs.
The decrease in accounts receivable, inventory and prepaid advertising
expenses of $922,000 in the three months ended March 31, 1999 was offset by a
decline in accounts payable of $1.7 million. The increase in accounts
receivable, inventory and prepaid advertising expenses of $4.2 million in the
three months ended March 31, 1998 was increased by a decline in accounts payable
of $377,000. Cash flow provided by (used in) operating activities was $132,000
and $(1.8) million in the three months ended March 31, 1999 and 1998,
respectively.
Cash used in investing activities was for the purchase of property and
equipment, net of the maturity of marketable securities. Purchases of property
and equipment in the three months ended March 31, 1999 and 1998 were $390,000
and $310,000, respectively. The 1999 capital investments were for a trade show
booth and computer hardware and software. A portion of the initial public
offering proceeds was used to purchase marketable securities and $697,000 of
marketable securities matured in the three months ended March 31, 1999. Cash
flow provided by (used in) investing activities was $307,000 and $(310,000) in
the three months ended March 31, 1999 and 1998, respectively.
Cash provided by financing activities was from short-term borrowings,
and the proceeds from the exercise of stock options, net of the payment of
initial public offering costs. In the three months ended March 31, 1998, the
Company borrowed $2.3 million under a revolving line of credit. This revolving
line of credit was repaid from the proceeds of the initial public offering of
common stock. During the three months ended March 31, 1999 and 1998, 450,302
and 338,844 shares, respectively, of common stock were issued in connection with
the exercise of stock options. Cash flow provided by financing activities was
$72,000 and $2.2 million in the three months ended March 31, 1999 and 1998,
respectively.
The Company intends to enter into a formal supply agreement with a
company that owns two ready-to-drink manufacturers. These manufacturers use
formulations owned by the Company to manufacture Total Balance. These
manufacturers supply the Company's products at a fixed price per unit. The
prices are subject to increase upon 75 - 90 days notice if raw material prices,
labor rates or exchange rates rise. The Company provides no raw materials or
product packaging to these contract manufacturers. The consumer demand for
Total Balance is uncertain at this time due to the recent introduction of this
new product. If consumer demand exceeds the capacity of these contract
manufacturers to produce Total Balance, the Company will attempt to qualify a
new contract manufacturer. Due to the uncertainties of any new product launch,
there can be no assurances that Total Balance will achieve consumer acceptance
or that manufacturing capacity will support consumer demand. The Company
increased inventories by purchasing an additional $437,000 of Total Balance in
the three months ended March 31, 1999.
As of March 31, 1999, the Company had a $15 million revolving line of
credit of which $8.1 million was available (based upon 80% of eligible accounts
receivable and 25% of eligible inventories), none of which was outstanding. The
line of credit is secured by all of the Company's assets. The line of credit
bears interest at the bank's prime rate (7.75% at March 31,1999) and expires in
April 2001.
To date, the Company has had discussions about the acquisition of or
investment in several companies, but no purchase transactions have occurred. In
the future, the Company may consider making an investment in or acquiring
companies or product lines that complement the Company's existing product lines.
The Company is not able to predict when a prospective acquisition candidate
might become available, the terms of the financing, or when any transaction
might be closed or the effect of any acquisition on the Company's business,
results of operations or financial condition.
10
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The Company expects to use the net proceeds from the initial public
offering, over the next two to three quarters, to fund increases in accounts
receivable, inventory, prepaid advertising expenses and purchase property and
equipment. When the net proceeds are expended, the Company expects to fund
increases in accounts receivable, inventory, prepaid advertising expenses and
purchase property and equipment from borrowings under the revolving line of
credit. The Company believes that it has adequate capital resources and
liquidity to meet anticipated cash needs for working capital and capital
expenditures for at least the next 12 months.
SEASONALITY OF SALES
The Company did not observe seasonality in sales in 1998 due to the
significant expansion of distribution and resulting sales increase. The Company
believes it experienced a seasonal decline in sales in the first quarter of 1999
due to retailers' emphasis on diet foods in that quarter. The Company had
expected a seasonal increase in the first quarter of 1999, but one diet bar
brand experienced most of the consumer interest in diet energy bars. The
Company believes that there may be some seasonally reduced sales in the fourth
quarter due to retailers' emphasis on holiday foods in that quarter. In
addition, the Company believes that there may be seasonally increased sales in
the second and third quarters due to retailers' emphasis on fitness foods with
increased outdoor activities in those quarters.
YEAR 2000 COMPLIANCE
The Company has installed a new sales, inventory and accounting system
that the vendor has represented to be Year 2000 compliant. The Company does not
anticipate any significant expenses with Year 2000 compliance problems. The
Company's two nutrition bar and powdered drink mix contract manufacturers have
informed the Company that they are each Year 2000 compliant. The Company has
requested information from its two ready-to-drink contract manufacturers and
from certain of its major distributors and retailers about Year 2000 compliance
issues, if any, they are facing. The responding customers have plans to address
the business risks they face. The process of obtaining this information is
ongoing. The Company is also exposed, as are all companies, to Year 2000
compliance issues facing the banking system, the stock exchange, advertisers and
other significant vendors used by the Company. The Company intends to modestly
increase inventory levels late in 1999 to create a contingent supply of
inventory. This step is being taken to mitigate the risk of an unforeseen
disruption in the supply of inventories.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
There were no significant changes to the information reported in the 1998 Annual
Report on Form 10-K.
11
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
On April 8, 1998, PowerBar, Inc. ("PowerBar") filed a complaint
against the Company and its Senior Vice President of Sales and Marketing in U.S.
District Court for the Northern District of California. The complaint alleged,
in general, that the Company engaged in false advertising, unfair competition,
and, with its Senior Vice President of Sales and Marketing who previously worked
for PowerBar, misappropriated trade secrets. PowerBar also alleged that the
sales executive interfered with PowerBar's business relationships by inducing
distributors, brokers, athletes and sponsors to terminate their business
relationships with PowerBar.
On August 18, 1998, the Company filed a complaint against PowerBar in
U.S. District Court for the Northern District of California. The complaint
alleged that PowerBar engaged in false advertising about its own products and
those of the Company's and in unfair competition. The Company sought, among
other things, injunctive relief prohibiting the allegedly false advertising,
corrective advertising in various print media, compensatory damages in an
unspecified amount, disgorgement of the company's profits, and treble and
punitive damages as to certain claims and attorneys' fees.
In January 1999, the Company and PowerBar settled both suits. In
early-March 1999, the Company paid PowerBar $140,000 and the Company and
PowerBar each agreed to not make certain advertising claims in the future.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
27.1 Financial Data Schedule - March 31, 1999
(b) There were no reports on Form 8-K for the three months ended March 31,
1999.
12
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has caused this report to be signed on its behalf by the undersigned
thereunto duly authorized.
Balance Bar Company
-------------------
(Registrant)
Date: April 29, 1999 By /s/ Thomas J. Flahie
--------------------------------------
Thomas J. Flahie
Senior Vice President of Finance and
Administration (Principal Financial
and Accounting Officer)
13
<PAGE>
Exhibit Index
Exhibit No. Description
27.1 Financial Data Schedule
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> MAR-31-1999
<CASH> 6,986
<SECURITIES> 0
<RECEIVABLES> 10,261
<ALLOWANCES> 80
<INVENTORY> 5,322
<CURRENT-ASSETS> 24,753
<PP&E> 1,920
<DEPRECIATION> 548
<TOTAL-ASSETS> 26,158
<CURRENT-LIABILITIES> 4,807
<BONDS> 0
0
0
<COMMON> 118
<OTHER-SE> 21,233
<TOTAL-LIABILITY-AND-EQUITY> 26,158
<SALES> 20,837
<TOTAL-REVENUES> 20,918
<CGS> 10,767
<TOTAL-COSTS> 10,767
<OTHER-EXPENSES> 8,524
<LOSS-PROVISION> 50
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 1,627
<INCOME-TAX> 667
<INCOME-CONTINUING> 960
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 960
<EPS-PRIMARY> 0.08
<EPS-DILUTED> 0.07
</TABLE>
