Annual Reports | Quarterly Filings | News | Prospectuses | Proxies | Mergers & Acquisitions | Initial Public Offerings

TCBY ENTERPRISES INC
10-Q, 1999-10-12
ICE CREAM & FROZEN DESSERTS

Previous: PROVIDENT MUTUAL VARIABLE GROWTH SEPARATE ACCOUNT, S-6/A, 1999-10-12

Next: TCBY ENTERPRISES INC, 10-Q, 1999-10-12

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended August 29, 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 1-10046

TCBY ENTERPRISES, INC.

(Exact name or registrant as specified in its charter)

Delaware                                                                                                         71-0552115
(State of other jurisdiction of                                                                           (I.R.S. Employer
incorporation or organization)                                                                          Identification No.)

425 West Capitol Avenue                              Little Rock,                                 Arkansas 72201
(Address of principal executive offices)                                                               (Zip Code)

(501) 688-8229
(Registrant's telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 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 __

On September 30, 1999 there were 22,887,174 shares of the registrant's common stock outstanding.

Sequential Page No. 1

TABLE OF CONTENTS

PART I.		FINANCIAL INFORMATION
				Page
Item 1.		Financial Statements (Unaudited)
		Consolidated Balance Sheets
		August 29, 1999 and November 29, 1998		3
		Consolidated Statements of Operations
		Quarter ended and nine months ended
		August 29, 1999 and August 30, 1998		5
		Consolidated Statements of Cash Flows
		Nine months ended August 29, 1999 and
		August 30, 1998		6
		Notes to Consolidated Financial Statements
		August 29, 1999		7
Item 2.		Management's Discussion and Analysis of Financial
		Condition and Results of Operations		10
Item 3.		Quantitative and Qualitative Disclosures About Market Risk		17
PART II.		OTHER INFORMATION
Item 1.		Legal Proceedings		18
Item 6.		Exhibits and Reports on Form 8-K		18
SIGNATURES				19

Sequential Page No. 2

PART 1

FINANCIAL INFORMATION

ITEM 1 FINANCIAL STATEMENTS (UNAUDITED)

TCBY ENTERPRISES, INC.

CONSOLIDATED BALANCE SHEETS (UNAUDITED)

		August 29, 1999			November 29, 1998
ASSETS
CURRENT ASSETS:
Cash and cash equivalents	$	14,212,229		$	16,924,143
Short-term investments		4,121,535			2,967,135
Receivables:
Trade accounts		15,306,165			10,078,733
Notes		1,602,367			1,695,429
Allowance for doubtful accounts
and impaired notes		(480,773)			(439,223)
		16,427,759			11,334,939
Refundable income taxes		-			156,951
Deferred income taxes		692,712			1,204,197
Inventories		13,719,166			12,554,875
Prepaid expenses and other assets		1,424,231			1,540,971
Assets held for sale		150,000			150,000
TOTAL CURRENT ASSETS		50,747,632			46,833,211
PROPERTY, PLANT, AND EQUIPMENT:
Land		2,154,307			2,534,307
Buildings		19,925,338			22,763,194
Furniture, vehicles, and equipment		47,552,162			46,637,567
Leasehold improvements		3,312,134			3,603,219
Construction in progress		363,036			-
Allowance for depreciation		(40,333,781)			(39,546,174)
NET PROPERTY, PLANT, AND EQUIPMENT		32,973,196			35,992,113
OTHER ASSETS:
Notes receivable, less current portion (less allowance
for doubtful and impaired notes of $7,731,586 in
1999and $8,029,658 in 1998)		3,952,713			4,525,970
Intangibles (less amortization of $2,013,150 in 1999
and $2,226,511 in 1998)		4,104,683			4,250,684
Other		3,593,496			2,850,906
TOTAL OTHER ASSETS		11,650,892			11,627,560
TOTAL ASSETS	$	95,371,720		$	94,452,884
See notes to consolidated financial statements.

Sequential Page No. 3

TCBY ENTERPRISES, INC.

CONSOLIDATED BALANCE SHEETS (UNAUDITED)

		August 29, 1999			November 29, 1998
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable	$	3,654,904		$	2,130,430
Accrued expenses		5,068,471			6,682,371
Income taxes payable		539,885			-
Current portion of long-term debt		2,471,268			3,171,448
TOTAL CURRENT LIABILITIES		11,734,528			11,984,249
LONG-TERM DEBT, less current portion		1,265,272			2,952,634
DEFERRED INCOME TAXES		3,302,747			3,319,847
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Preferred stock, par value $.10 per share;
authorized 2,000,000 shares		-			-
Common stock, par value $.10 per share;
authorized 50,000,000 shares; issued -
1999 - 27,908,646; 1998 - 27,759,021		2,790,865			2,775,902
Additional paid-in capital		30,824,676			30,098,602
Retained earnings		77,989,487			74,751,431
		111,605,028			107,625,935
Less treasury stock, at cost (5,012,472 shares
in 1999 and 4,839,952 shares in 1998)		(32,535,855)			(31,429,781)
TOTAL STOCKHOLDERS' EQUITY		79,069,173			76,196,154
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY	$	95,371,720		$	94,452,884
See notes to consolidated financial statements.

Sequential Page No. 4

TCBY ENTERPRISES, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)

	Quarter Ended						Nine Months Ended
		August 29, 1999			August 30, 1998			August 29, 1999			August 30, 1998
Sales	$	30,019,442		$	28,791,737		$	76,007,381		$	72,604,389
Cost of Sales		21,569,040			18,765,675			53,762,114			48,197,198
GROSS PROFIT		8,450,402			10,026,062			22,245,267			24,407,191
Franchising revenues:
Initial franchise and license fees		414,375			490,986			1,866,331			1,851,841
Royalty income		3,182,511			3,585,705			7,757,168			8,518,313
		3,596,886			4,076,691			9,623,499			10,370,154
		12,047,288			14,102,753			31,868,766			34,777,345
Selling, general, and
administrative expenses		7,763,940			7,797,861			22,206,308			22,421,305
INCOME FROM
OPERATIONS		4,283,348			6,304,892			9,662,458			12,356,040
Other income (expense):
Interest expense		(78,287)			(128,220)			(261,102)			(433,535)
Interest income		229,872			254,254			662,039			872,021
Other income		20,292			2,169,178			198,272			2,273,085
		171,877			2,295,212			599,209			2,711,571
INCOME BEFORE
INCOME TAXES		4,455,225			8,600,104			10,261,667			15,067,611
Income tax expense		1,559,328			2,924,037			3,591,584			5,122,988
NET INCOME	$	2,895,897		$	5,676,067		$	6,670,083		$	9,944,623
Earnings per share:
Basic	$	0.13		$	0.25		$	0.29		$	0.43
Diluted	$	0.13		$	0.24		$	0.29		$	0.41
Weighted Average Shares
Outstanding:
Basic		22,896,175			23,130,874			22,879,979			23,289,571
Diluted		23,114,942			23,872,098			23,223,795			24,064,802
Cash Dividends Paid Per Share	$	0.05		$	0.05		$	0.15		$	0.15

See notes to consolidated financial statements.

Sequential Page No. 5

TCBY ENTERPRISES, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

	Nine Months Ended
		August 29, 1999			August 30, 1998
OPERATING ACTIVITIES
Net income	$	6,670,083		$	9,944,623
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation		2,973,197			3,102,444
Amortization of intangibles		186,686			196,214
Provision for doubtful accounts and impaired notes		85,170			49,497
Deferred income taxes		494,385			(372,083)
Tax benefit from stock options		-			760,000
Loss (gain) on sales of property and equipment		55,687			(2,140,740)
Changes in operating assets and liabilities:
Receivables		(5,274,622)			(5,514,077)
Inventories		(1,164,291)			(2,706,487)
Prepaid expenses		116,740			142,292
Intangibles and other assets		(858,512)			(277,050)
Accounts payable and accrued expenses		(89,426)			(56,263)
Income taxes		696,836			1,891,907
NET CASH PROVIDED BY OPERATING ACTIVITIES		3,891,933			5,020,277
INVESTING ACTIVITIES
Purchases of property, plant, and equipment		(1,726,905)			(1,546,343)
Proceeds from sales of property and equipment		1,792,176			4,826,288
Origination of notes receivable		(204,092)			(436,204)
Principal collected on notes receivable		873,980			1,220,160
Purchases of short-term investments		(3,287,671)			(1,455,648)
Proceeds from maturity of short-term investments		2,133,271			734,079
NET CASH (USED IN) PROVIDED BY
INVESTING ACTIVITIES		(419,241)			3,342,332
FINANCING ACTIVITIES
Proceeds from sale of Common Stock options		741,037			3,357,480
Dividends paid		(3,432,027)			(3,506,316)
Treasury stock transactions		(1,106,074)			(9,551,457)
Principal payments on long-term debt		(2,387,542)			(2,552,512)
NET CASH USED IN FINANCING ACTIVITIES		(6,184,606)			(12,252,805)
DECREASE IN CASH AND CASH EQUIVALENTS		(2,711,914)			(3,890,196)
Cash and cash equivalents at beginning of period		16,924,143			19,693,693
CASH AND CASH EQUIVALENTS AT END OF PERIOD	$	14,212,229		$	15,803,497

See notes to consolidated financial statements.

Sequential Page No. 6

TCBY ENTERPRISES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

August 29, 1999

NOTE A -- FINANCIAL STATEMENT PRESENTATION

The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. 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 quarter and nine months ended August 29, 1999 are not necessarily indicative of the results that may be expected for the year ended November 28, 1999. For further information, refer to the consolidated financial statements and footnotes thereto included in the Company's annual report on Form 10-K for the year ended November 29, 1998.

NOTE B -- NEW PRONOUNCEMENTS

In June 1997, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards No. 130 ("SFAS No. 130"), "Reporting Comprehensive Income." SFAS No. 130, which is effective for fiscal 1999, establishes standards for the reporting and display of comprehensive income and its components. Comprehensive income is defined as the change in equity of a business enterprise during a period from transactions and other events and circumstances from non-owner sources. Comprehensive income for the quarter and nine months ended August 29, 1999 and August 30, 1998 was equal to net income as reported.

In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," which is effective for years beginning after June 15, 2000 and requires that all derivatives be recognized on the balance sheet at fair value. SFAS No. 133 establishes "special accounting" for fair value hedges, cash flow hedges, and hedges of foreign currency exposures of net investments in foreign operations. Derivatives that are not hedges must be adjusted to fair value through income. If the derivative is a hedge, depending on the nature of the hedge, changes in the fair value of derivatives will either be offset against the change in fair value of the assets, liabilities, or firm commitments through earnings or recognized in other comprehensive income until the hedged item is recognized in earnings. The ineffective portions of a derivative's change in fair value will be immediately recognized in earnings. The adoption of SFAS No. 133 is not expected to have a material impact on the Company's financial condition or results of operations.

Sequential Page No. 7

NOTE C -- EARNINGS PER SHARE

The following table sets forth the computation of basic and diluted earnings per share:

	Quarter Ended						Nine Months Ended
		August 29, 1999			August 30, 1998			August 29, 1999			August 30, 1998
Numerator:
Net Income	$	2,895,897		$	5,676,067		$	6,670,083		$	9,944,623
Denominator:
Denominator for basic earnings per share -- weighted average shares		22,896,175			23,130,874			22,879,979			23,289,571
Potential dilutive effect of
employee stock options		218,767			741,224			343,816			775,231
Denominator for diluted
earnings per share -- weighted-
average shares and assumed
conversions		23,114,942			23,872,098			23,223,795			24,064,802
Basic earnings per share	$	0.13		$	0.25		$	0.29		$	0.43
Diluted earnings per share	$	0.13		$	0.24		$	0.29		$	0.41
Anti-dilutive employee stock
options excluded		1,048,485			59,771			642,528			62,804

NOTE D -- INVENTORIES

	August 29, 1999			November 29, 1998
Manufacturing materials and supplies	$	6,115,483		$	5,088,456
Finished yogurt and other food products		4,842,950			4,526,777
Equipment and other products		2,760,733			2,939,642
	$	13,719,166		$	12,554,875

Sequential Page No. 8

NOTE E -- ACCRUED EXPENSES

Accrued expenses consist of the following:

	August 29, 1999			November 29, 1998
Rent	$	541,813		$	602,272
Compensation		1,911,519			2,234,893
Other		2,615,139			3,845,206
	$	5,068,471		$	6,682,371

NOTE F -- CONTINGENCIES

There is no material litigation pending against the Company. A small number of legal and administrative proceedings are pending against the Company which are incidental to the business of the Company. The ultimate legal and financial liability of the Company in connection with such proceedings cannot be estimated with certainty, but the Company believes, based upon its examination of these matters, its experience to date, and its discussions with legal counsel, that resolution of these proceedings will have no material adverse effect upon the Company's financial condition, either individually or in the aggregate; of course, any substantial loss pursuant to any litigation might have a material adverse impact upon results of operations in the quarter or year in which it were to be incurred, but the Company cannot estimate the range of any reasonably possible loss.

Sequential Page No. 9

ITEM 2

MANAGEMENT'S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The Company's sales for the third quarter and first nine months of 1999 increased four percent and five percent, respectively, over the same periods in 1998. This increase results from improved sales of specialty products as described below, which offset decreases of product and equipment sales to TCBY locations. The following table sets forth sales by category within the Company's primary segments (food products and equipment) of operation:

(dollars in thousands)

	Quarter Ended										Nine Months Ended
	August 29, 1999					August 30, 1998					August 29, 1999					August 30, 1998
		Sales		%			Sales		%			Sales		%			Sales		%
Food Products:
TCBY frozen
products sales for
distribution to TCBY
locations	$	13,737		46%		$	15,021		52%		$	36,035		47%		$	37,829		52%
Sales of specialty
products		11,821		39%			9,005		32%			27,888		37%			21,152		29%
		25,558		85%			24,026		84%			63,923		84%			58,981		81%
Equipment:
Sales by the Company's
equipment distributor		4,129		14%			4,357		15%			10,918		14%			12,424		17%
Other		332		1%			409		1%			1,166		2%			1,199		2%
Total Sales	$	30,019		100%		$	28,792		100%		$	76,007		100%		$	72,604		100%

Sales from the Company's food products segment include (i) wholesale sales of frozen yogurt and ice cream products to AmeriServe Food Distribution Inc. (formerly ProSource Distribution Services) and other foodservice distributors, which distribute frozen yogurt, ice cream, and other products to TCBY stores and non-traditional locations, and sales to international master franchisees of frozen products and proprietary ingredients for the manufacture of frozen products in the countries that produce locally, and (ii) sales of TCBY frozen packaged products and other specialty dairy food products to customers including supermarkets, convenience stores, dairies, foodservice distributors, club stores, and private label suppliers.

Wholesale sales of frozen yogurt and ice cream products to TCBY locations decreased nine percent and five percent during the third quarter and first nine months of 1999, respectively, due to a reduction in the number of domestic traditional TCBY stores and a decline in yogurt purchases by existing TCBY locations. These decreases have significantly impacted the Company's earnings compared to the prior year. The decrease in store sales will result in additional closings of existing locations, but the Company cannot reasonably estimate the number. The Company will continue its effort to improve sales in existing units. These efforts will include continued emphasis on neighborhood store marketing programs and expansion of participation by franchisees, continued focus on operational standards at TCBY locations through increased store visits by Company associates and representatives, and working with franchisees to relocate

Sequential Page No. 10

marginal stores or pursue co-branding opportunities to provide additional dayparts. In addition, the Company has worked with an international design firm to develop enhancements to the current store format. A prototype location opened late in the third quarter. All of these efforts are intended to improve our customers' experience and ultimately sales volumes in the TCBY locations. However, barriers have been encountered in implementing some of the above strategies, including financial capability and willingness of existing franchisees to participate, lack of availability of co-branded partners due to existing encroachment problems within their chains, size of TCBY stores, lease restrictions, and limitations of corporate resources. The Company is operating in a highly competitive environment where consumers have many alternatives. Therefore, the future results of any of the above strategies is unknown, and even with the successful implementation of these programs, store sales may decline and store closings may continue. The Company will continue to develop additional TCBY non-traditional locations with over 300 TCBY locations under agreement for development as of August 29, 1999. Most of the TCBY locations under development will be co-branded locations with petroleum or other food operations. The revenue from new co-branded locations may not offset the revenue lost from store closings and lower purchases by existing units in future periods.

The following table sets forth TCBY and Juice Works location activity for the third quarter and first nine months of 1999 and 1998.

									International				Non-traditional				Total
	Franchised Stores				Company Stores				Locations				Locations				Locations
	1999		1998		1999		1998		1999		1998		1999		1998		1999		1998
For the third quarter:
Locations open at
beginning of period	986		1,091		2		2		230		217		1,817		1,605		3,035		2,915
Opened	10		10		-		-		27		8		96		108		133		126
Closed	(27)		(31)		-		-		-		(8)		(42)		(38)		(69)		(77)
Locations open at end
of period	969		1,070		2		2		257		217		1,871		1,675		3,099		2,964

	Franchised Stores				Company Stores				International Locations				Non-traditional Locations				Total Locations
	1999		1998		1999		1998		1999		1998		1999		1998		1999		1998
For the first nine months:
Locations open at
beginning of period	1,031		1,110		2		2		216		229		1,711		1,467		2,960		2,808
Opened	28		30		-		-		46		21		263		284		337		335
Closed	(90)		(70)		-		-		(5)		(33)		(103)		(76)		(198)		(179)
Locations open at end
of period	969		1,070		2		2		257		217		1,871		1,675		3,099		2,964

During the first nine months of 1999, significantly more TCBY non-traditional locations than traditional locations opened. The Company believes this trend will continue during the remainder of 1999. The non-traditional locations may include sites at airports, travel plazas, colleges, hospitals, theme parks, and stadiums but more likely will include locations in conjunction with petroleum stores and other food concepts (co-branded locations). The majority of the 263 non-traditional openings in the first nine months of 1999 were TCBY co-branded locations. The rate of development of non-traditional locations is partially determined by co-branding partners, who must approve each location in a process not controlled by the Company, and in

Sequential Page No. 11

some cases, delays have been experienced while the Company and the prospective TCBY franchisee awaited such approval; new development may also be slowed when existing TCBY franchisees express their concerns regarding new TCBY locations; and the desire of the Company to maintain good relationships with all TCBY franchisees in the markets under consideration results in occasional delays in development while those concerns are addressed. During the first nine months of 1999, 103 non-traditional locations were closed. Most of these locations generally purchased low volumes of yogurt from the Company. However, the cumulative effect of the total closings does have a negative impact on the Company's profitability. The Company expects that there may be additional closings of low volume non-traditional locations as they are not efficient for the Company to service or the franchisee to operate.

During the first nine months of 1999, a total of 90 franchised stores were permanently closed by franchisees. Each store closed is the result of the franchisee's evaluation of its financial condition, cash flow, lease expiration, profitability and store operations, among other things. Of the locations closed, 52 operated for a portion of the first nine months of 1999, with the remainder having originally closed for relocation in prior years. Therefore, some stores shown as closed did not make any contribution to sales during the periods presented. Included in the franchised store information are 47 and 79 TCBY stores closed for relocation or for the season at August 29, 1999 and August 30, 1998, respectively. Closings of traditional stores could accelerate as the franchisees have experienced lower unit volumes during 1999.

Sales of specialty products increased 31 percent and 32 percent during the third quarter and first nine months of 1999, respectively, as compared to the same periods in 1998. These increases are attributed primarily to increased sales of private label products. The Company continues to pursue private label opportunities to utilize the available capacity at its manufacturing facility in Dallas. The Company has capacity available for additional manufacturing opportunities and the current capacity can be expanded with reasonable capital investments and staffing increases should they be warranted. The time frames required to make these capital investments and staffing increases could limit the Company's growth abilities on certain product lines in the short term.

Sales in the Company's equipment segment include sales from the distribution of equipment to TCBY locations as well as regional distribution to other food operations. Sales in the equipment segment decreased five percent and 12 percent during the third quarter and first nine months of 1999, respectively, compared to the same periods in 1998. The decreased sales are due to operators of new non-traditional TCBY locations electing in some cases to purchase equipment from other sources.

As a percent of sales, cost of sales for the third quarter and first nine months of 1999 and 1998 for the Company and its two primary segments are presented below:

	Third Quarter		First Nine Months
	1999	1998	1999	1998
Food Products Segment	71%	64%	70%	65%
Equipment Segment	79%	76%	77%	77%
Company Total	72%	65%	71%	66%

Sequential Page No. 12

The increase in the food products segment cost of sales percentage is due to two primary factors. First, sales of specialty products, which generally have a higher cost of sales percentage than the other food segment categories, are a larger component of the food products segment sales in the third quarter and first nine months of 1999 compared to the same periods in the prior year. (See earlier discussion related to sales.) Secondly, higher labor expenses and start up costs associated with the production of new products at the Company's manufacturing facility during 1999 have resulted in additional overhead expenses being applied to cost of sales during the year. Although dairy costs, which are a significant portion of the segment's cost of sales, were higher than the prior year for the quarter and the first nine months of 1999, the effect of the higher costs were negated by the dairy surcharge (see discussion below) implemented by the Company during a portion of 1999 and by the structure of much of the Company's private label business which results in a pass-through of dairy ingredient costs to the customers.

On March 31, 1999 the U.S. Department of Agriculture (USDA) released the Federal Milk Marketing Order Reform. The reform will expand the classes of milk from three to four and eliminate the basic formula price (BFP). The price of each class will be determined monthly and is intended to better reflect the value of milk components (butterfat, nonfat solids, etc.). The reform was scheduled to be effective October 1, 1999. However, lawsuits were brought that challenged the new rules and a federal district judge has granted a temporary restraining order that forbid the USDA from implementing the milk order reforms on October 1. According to USDA information, the reform would not have resulted in significant change in average milk cost to the Company over the past five years. However, greater fluctuations in milk cost may be experienced under the reform should it be implemented in the future.

The Company has historically minimized pricing adjustments to TCBY franchisees based on short-term changes in pricing of dairy components, however, due to the record levels of costs incurred during the latter half of 1998 and continuing into 1999, effective March 15, the Company implemented a dairy surcharge as noted above. The surcharge was delayed to lessen the impact to franchisees during the low point of their business seasonality. The surcharge was terminated by the Company on July 31. The Company collected approximately $1 million from the additional surcharge.

Franchising revenues consist of initial franchise and license fees and royalty income. In the third quarter of 1999, initial franchise and license fees decreased 16 percent and royalty income decreased 11 percent from the same period in 1998. For the first nine months of 1999, initial franchise and license fees increased one percent while royalty income decreased nine percent from the same period in 1998. The fluctuations in initial franchise and license fees is related to the timing of franchise fees between quarters for each respective year. On a year-to-date basis, these fees slightly exceed the prior year. The decreases in royalty income are due primarily to fewer traditional TCBY stores and decreased purchases by existing TCBY locations. See previous discussion on the sales trends of TCBY locations.

Operating expenses were approximately the same in the third quarter of 1999 and decreased one percent for the first nine months of 1999 compared to 1998. The decrease for the nine month period is due to a reduction in various corporate operating costs. As a percentage of combined sales and franchising revenues, operating expenses were 23 percent and 24 percent for the third quarter of 1999 and 1998, respectively. For the first nine months of 1999 and 1998, operating

Sequential Page No. 13

expenses as a percentage of combined sales and franchising revenues were 26 percent and 27 percent, respectively.

During the third quarter of 1999, the Company's former executive office building being leased to third parties was sold for cash to the Company's Chairman and Chief Executive Officer. The sales price approximated the Company's book value, and exceeded the current appraised value.

During the third quarter of 1998, the Company's aircraft was sold to a third party which resulted in a gain of approximately $2.1 million which is included in Other Income on the Income Statement. The after-tax gain on the sale of the Company assets was approximately $1.4 million or $.06 per share (basic and diluted). The Company contemporaneously entered into an agreement whereunder an aircraft owned by the Chairman and Chief Executive Officer could be made available to the Company from time-to-time at an hourly rate consistent with the cost of operating the aircraft it divested; this hourly rate is substantially below the fair market rate which normally would be charged to the Company for use of a similar aircraft. Under the new arrangement, any use of the aircraft which is charged to the Company is reviewed by the Board of Directors of the Company on a regular basis.

The forward-looking statements included herein are based on certain assumptions regarding U.S. and foreign economic conditions, no significant disruptions of business due to the Year 2000 issue, competition, costs of raw materials, unit openings and closings, sales volumes per unit, other manufacturing opportunities, no changes in governmental regulation of the food industry, and no material event which would impact the reputation of the Company's manufacturing facility or the Company's ability to utilize that facility. Should the Company's performance differ materially from the assumptions regarding these areas, actual results could vary significantly from the performance noted in the forward-looking statements. Thus, the Company cautions readers not to place undue reliance on any forward-looking statements, which speak only as of the date made.

LIQUIDITY AND CAPITAL RESOURCES

The Company has historically generated cash from operations sufficient to meet its normal operating requirements. The Company's cash and short-term investments decreased approximately $1.6 million during the first nine months of 1999. This decrease resulted primarily from (i) an increase in trade accounts receivable and inventory attributed to normal seasonal increases, (ii) cash dividends, (iii) principal payments of debt, and (iv) payment of an incentive allowance. The incentive allowance related to the signing of a seven-year agreement with a customer that distributes large quantities of frozen dessert products. The agreement contains minimum annual volumes and any shortfalls in the volumes results in payments to the Company including the unamortized portion of the incentive allowance which was determined on a per unit basis. The incentive allowance was recorded in Other Assets and will be amortized as products are sold to the customer. The Company's foreseeable cash needs for operations and capital expenditures are expected to be met through cash flows from operations; however, the Company has available a $5 million unsecured credit line to meet seasonal cash needs.

In December, 1997, the Board of Directors of the Company authorized the repurchase of two million shares of its outstanding stock. As of August 29, 1999, 625,403 shares have been

Sequential Page No. 14

purchased under this authorization. During the first nine months of 1999, the Company has purchased 172,520 shares of common stock at a cost of $1,106,074. All repurchases have been funded with cash flows from operations. Future repurchases may be funded with cash flows from operations or long-term financing.

The following summarizes statistics related to the Company's financial position:

		August 29, 1999		November 29, 1998
Current Ratio		4.3 to 1.0		3.9 to 1.0
Working Capital (in millions)		39.0		34.8
Long-Term Debt to Equity Ratio		.02 to 1.0		.04 to 1.0
Tangible Net Worth (in millions)		75.0		71.9

On September 17, 1999, the Company's Board of Directors declared a five cents per share dividend payable on October 8, 1999 to the stockholders of record on September 28, 1999. The Company will consider adjustments to the dividend rate after giving consideration to return to stockholders, profitability expectations and financing needs.

YEAR 2000

The worldwide "Year 2000 problem" has arisen due to the fact that many computer hardware and software systems along with components of certain automated equipment utilize only the last two digits of a date to refer to the year, failing to distinguish dates within the twentieth century from those of the twenty-first century.

The Company's primary hardware platform is Year 2000 compliant. The Company has completed a review of its inventory of personal computers (PC's) and has remediated or replaced those PC's found not to be compliant. Additionally, a review of automated equipment other than computer systems has been performed. Remediation of this equipment has been completed.

The Company's primary manufacturing and accounting software is sourced from an external vendor and has been independently certified as being Year 2000 compliant. The Company has performed testing that supports this certification. Software developed internally along with other purchased software has been reviewed for compliance and has been remediated where necessary. The Company's cost to remediate both its Year 2000 hardware and software was approximately $250,000. The Company will continue testing its systems throughout the fourth quarter of 1999.

The Year 2000 issues may have an impact on certain of the Company's material business partners, potentially causing disruptions in the supply of raw materials, services and/or the ability of customers to take delivery of products which could in turn have a material effect upon the Company's results of operation. The degree of this effect is uncertain. The Company has developed a structured methodology for evaluating the Year 2000 readiness of its material

Sequential Page No. 15

business partners which was completed during the third quarter of 1999. Most of these business partners indicate they are taking steps they deem appropriate to address the Year 2000 issue; however, they will provide no assurances in regard to the global impact of the Year 2000. In terms of a contingency plan, the Company, where practical, has identified alternative sources of raw materials, packaging, and other manufacturing supplies should the Company's primary vendors experience business interruptions as a result of the Year 2000 issue. The Company has no assurance the alternate vendors can meet the supply needs on a timely basis. The Company will allow reasonable inventory levels to provide for short-term disruptions in the supply chain.

The forward-looking statements contained herein with regard to the timing and overall cost estimates of the Company's efforts to address the Year 2000 problem are based upon the Company's experience thus far in this effort. Should the Company encounter unforeseen difficulties either in the continuing testing of its computerized systems, their ultimate remediation, or changes in the responses of its business partners, the actual results could vary significantly from the estimates contained in these forward-looking statements.

Sequential Page No. 16

ITEM 3

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The Company is exposed to market risk from changes in interest rates and changes in commodity prices.

The primary commodities purchased by the Company are dairy products. See earlier discussion for information regarding the market for dairy products. As part of its risk management strategy, the Company began purchasing exchange traded milk future contracts during the first quarter of 1999 to manage its exposure to changes in milk prices. The milk future contracts obligate the Company to make or receive a payment equal to the net change in value of the contract at its maturity. Such contracts are designated as hedges of the Company's projected purchases, are short-term in nature to correspond to the projection period, and are effective in hedging the Company's exposure to changes in milk prices during the cycle. The Company hedged approximately 75% of its milk purchases for TCBY branded products during 1999. Due to the changes of the USDA's Federal Milk Marketing Order Reform, the Company has closed its hedging contracts and the Company's ability to hedge against milk prices may be limited in the short term. The Company has not purchased milk future contracts for private label products as the customers generally bear the risk of increased commodity prices.

Milk future contracts are marked to market with unrealized gains and losses deferred and recognized in earnings when the contracts close as an adjustment to cost of goods sold (the deferral accounting method).

This market risk discussion contains forward-looking statements. Actual results may differ materially from this discussion based upon general market conditions and changes in domestic and global financial markets.

Sequential Page No. 17

PART II. OTHER INFORMATION

ITEM 1.		LEGAL PROCEEDINGS
There are no changes from previously reported litigation.
ITEM 6.		EXHIBITS AND REPORTS ON FORM 8-K
		a)		Exhibits
27(a)				Article 5, Financial Data Schedule for the Third Quarter 1999 Form 10-Q
99(a)				Press release, dated September 17, 1999, "TCBY Reports Operating Results for First Nine Months of 1999"
		b)		The Company did not file any reports on Form 8-K during the three periods ended August 29, 1999.

Sequential Page No. 18

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.

                                                               TCBY ENTERPRISES, INC.

Date: 10/11/99                                      /s/ Frank D. Hickingbotham
                                                             Frank D. Hickingbotham,
                                                             Chairman of the Board and
                                                             Chief Executive Officer

Date: 10/11/99                                      /s/ Gene H. Whisenhunt
                                                             Gene H. Whisenhunt
                                                             Executive Vice President
                                                             Chief Financial Officer
                                                            

 

Sequential Page No. 19

FAQ | Privacy | Terms Of Service | Contact