SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-K
Annual Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the fiscal year ended December 31, 1995 Commission file number 0-15584
Alpine Lace Brands, Inc.
(Exact name of registrant as specified in its charter)
Delaware 22-2717823
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) Identification No.)
111 Dunnell Road, Maplewood, NJ 07040
(Address of principal executive office) (Zip Code)
(Registrant's telephone number, including area code) 201-378-8600
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.01 per share
Indicate by check mark whether the 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
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. x
State the aggregate market value of the voting stock held by nonaffiliates of
the registrant as of February 27, 1996:
Common stock, $.01 par value: $27,369,347
Indicate the number of shares outstanding of each of registrant's classes of
common stock, as of the close of the period covered by this report:
5,050,136 shares
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of the proxy statement to be prepared in connection with the 1996
annual meeting of shareholders are incorporated by reference into Part III.
<PAGE>
PART I
ITEM 1. BUSINESS
General
Alpine Lace Brands, Inc. (the "Company") has two principal businesses. The
Company's branded cheese business: develops, markets and distributes
nutritionally oriented cheeses under its own labels and operates a converting
and packaging facility through a wholly-owned subsidiary, Marolf Dakota Farms
Cheese, Inc. ("MDFC"), a Delaware corporation located in Sturgis, South Dakota.
Through February 17, 1994, the Company packaged and converted cheese under
private labels (through the Company's wholly-owned subsidiary, Mountain Farms,
Inc. ("MFI"), a Utah corporation), in which a 65% interest was sold on that
date. The Company's cheese and dairy products trading business is operated
through MCT Dairies, Inc. ("MCT"), a New Jersey corporation and a wholly-owned
subsidiary of the Company.
The Company was incorporated in Delaware on February 14, 1986.
Branded Cheese Business
The principal branded cheeses currently marketed by the Company are the
Alpine Lace (R) brand line of cheeses, which are generally lower in sodium and
lower in fat and cholesterol than cheeses made from whole milk, and the Alpine
Lace (R) fat free brand line of fat free cheese products. The Company generally
purchases these cheeses from independent manufacturers who utilize the Company's
proprietary recipes and markets them throughout the United States under its own
trademarks. MDFC converts and packages Alpine Lace brand dairy case sliced
cheeses for retail and club store sales. As a result of a restructuring of the
Company's operations (See Note G to the Consolidated Financial Statements) in
December of 1994, MDFC ceased producing skim milk cheese used by the Company and
terminated its MDFC product line of MDFC brand Colby, Cheddar, and Monterey Jack
cheeses marketed by the Company.
The Company's branded cheese business (excluding MDFC and MFI) had revenues
before intercompany eliminations in 1995, 1994, and 1993 of $124,933,243,
$117,258,595 and $112,063,210, respectively. MFI had revenues in 1993 before
intercompany eliminations of $57,902,040. In 1995, 1994, and 1993 MDFC had
revenues before intercompany eliminations of $14,353,026, $14,152,399, and
14,848,147, respectively.
2
<PAGE>
Alpine Lace (R) Reduced Fat and Reduced Sodium Swiss Cheese
Alpine Lace (R) reduced fat and reduced sodium Swiss cheese, a pasteurized
part- skim milk cheese, is the Company's largest selling product constituting
approximately 50% of own-label branded cheese sales. The product is offered for
sale to consumers in supermarkets, delicatessens, club stores and specialty food
stores, with most sales made in the delicatessen sections of supermarkets. It is
primarily sold in bulk quantities by the Company and is sliced or cut into
chunks for consumers at the retail store, and in retail packages sold in the
dairy case section of supermarkets, warehouse club stores and grocery stores.
Sales of this product commenced in January, 1984, and the Company currently
sells Alpine Lace (R) reduced fat and reduced sodium Swiss cheese to
approximately 1,000 customers, primarily supermarket chains, supermarket food
distributors, warehouse club stores and specialty food store distributors. The
Company's products are available for purchase in virtually all markets in the
United States.
Alpine Lace (R) Reduced Fat and Reduced Sodium American Flavor Pasteurized
Process Cheese Product, Reduced Sodium Muenster Cheese, Reduced Sodium
Mozzarella Cheese, Reduced Fat and Reduced Sodium Cheddar Cheese, Reduced Fat
and Reduced Sodium Provolone Cheese, and Reduced Fat and Reduced Sodium Colby
Cheese.
These products (aside from the American Flavor Pasteurized Process Cheese
Product) are natural cheese products which have up to 50% less sodium than their
typical cheese counterparts. Aside from the Reduced Sodium Muenster Cheese and
Reduced Sodium Mozzarella Cheese, all of these products are lower in cholesterol
and lower in fat and calories than their typical counterparts.
Alpine Lace (R) Fat Free Cheese Products
The Company introduced Alpine Lace (R) fat free cheese products for the
retail dairy case in the Summer of 1990, and currently sells the product to
about 75% of all major supermarket chains in the U.S. and to a lesser extent
into other trade channels.
Other Products
Alpine Lace (R) Fat Free Turkey Breast
Alpine Lace (R) Fat Free Turkey Breast was introduced in May, 1995 in a
test market and is now available in about 25% of the nation's supermarkets.
Besides the fat free benefit, this product also contains 63% less sodium than
regular turkey breast.
3
<PAGE>
Alpine Lace (R) Deli Hams
The Company now offers two ham products which are sold in the supermarket
deli: Alpine Lace (R) Boneless Cooked Ham and Alpine Lace (R) Honey Ham, which
was introduced in August of 1995. Both products are high quality hams and are
97% Fat Free and offer sodium reductions of 45% and 33%, respectively.
Other products introduced in late 1995 include Alpine Lace (R) Reduced Fat
Feta Cheese which contains 33% less fat than regular Feta, Alpine Lace (R) Fat
Free Shredded Parmesan, which features 60% less calories, 88% less cholesterol
and 25% less sodium than regular Parmesan cheese, and a Swiss flavor addition to
the line of Alpine Lace (R) Fat Free Cheese Singles.
The Company has been actively selling its products to the food service and
club store industries. Where appropriate, special sized packs of Alpine Lace (R)
brand cheese products have been developed.
Manufacturing
Beginning in 1995, the Company no longer manufactures any of its supply of
branded cheeses. The Company either owns or has significant rights to the
respective recipes or manufacturing processes for most of those products which
are manufactured by independent cheese manufacturers, including Alpine Lace (R)
reduced fat and reduced sodium Swiss cheese.
Alpine Lace (R) reduced fat and reduced sodium Swiss cheese is manufactured
in a privately owned facility under a contract granting the Company the
exclusive right to purchase the product (with a minor exception). The agreement
requires the manufacturer to supply the Company's requirements of the cheese
through December, 2000, with successive five year renewal periods thereafter,
unless terminated by either party. The Company may purchase, with the reasonable
consent of the manufacturer, up to 10% of its requirements for the product from
another source. As part of the agreement with the primary manufacturer, entered
into in July, 1988, the Company obtained an exclusive license to use such
manufacturer's Alpine Lace (R) reduced fat and reduced sodium Swiss cheese
recipe for the production of this cheese (subject to paying license fees based
on volume produced) if the manufacturer elects not to renew the agreement,
breaches the agreement, or undergoes a change in control. The Company also has a
limited exclusive license to produce this cheese to cover certain shortfalls in
the manufacturer's production.
At present, there are adequate supplies of raw materials, primarily milk,
used by the Company's suppliers in manufacturing the Company's products. The
average commodity market prices met the Company's expectation for all of 1995.
4
<PAGE>
Gamay Technology Acquisition
In May, 1990, the Company acquired all patents pending and technology for
fat free and low fat cheese and cultured dairy products as well as certain
assets, rights and technologies from Gamay Foods, Inc. for approximately $1.85
million in cash and the issuance of restricted special stock warrants to
purchase 75,000 shares of the Company's common stock at the stock market price
at the time of the warrants' issuance. Additionally, the Company has agreed to
pay a royalty to Gamay on future sales of products associated with the
acquisition. On February 24, 1995, the Company and Gamay modified their royalty
agreement (See Note K to the Consolidated Financial Statements). The Company has
applied this technology to create its Alpine Lace (R) fat free line of cheeses.
Marketing and Advertising
Alpine Lace (R) reduced fat and reduced sodium Swiss cheese was sold in all
70 U.S. geographic markets at the end of 1995 and was available, according to
the Company's estimates, in approximately 45,000 retail stores in those markets.
Other Alpine Lace (R) brand cheeses were sold in approximately 30,000 stores
nationwide. The Company's marketing program places substantial emphasis upon
advertising and promotion, primarily television advertising, as well as point of
sale merchandising and cooperative retailer promotions and advertisements.
Alpine Lace received Kosher certification for its line of fat free cream
cheeses and spreads and three of its deli cheeses, which represent 70% of the
Company's delicatessen business. Packages bearing the kosher symbol in the deli
case include: Alpine Lace (R) Reduced Fat and Reduced Sodium Swiss Cheese,
Reduced Sodium Mozzarella Cheese, Reduced Fat Provolone Cheese, Fat Free Cream
Cheese with Garden Vegetables, Fat Free Cream Cheese with Garlic and Herbs and
Fat Free Mexican Nacho Cheese Spread.
Alpine Lace also received Kosher approval from the Union of Orthodox Jewish
Congregations of America for industrial use of its full line of Fat Free
Cheeses. These products bearing the "O-U" label include: Alpine Lace (R) Fat
Free Cheddar, Mozzarella, Swiss and Parmesan flavor skim milk cheeses.
Distribution
The largest single customer of the Company's own-label branded cheese
business (which excludes MFI) accounted for approximately 5% of the 1995 own-
label branded cheese sales revenues, and the eight largest customers accounted
for approximately 25% of such sales revenues. Sales, whether to supermarket
chains, distributors, or others, are typically made through independent sales
agency firms (food brokers), which may also deal with cheeses manufactured or
distributed by other companies. These sales agency firms also participate in
local promotional activities and in-store merchandising for the Company's
products.
5
<PAGE>
Cheese Converting, Packaging and Manufacturing Operations
On February 17, 1994, the Company sold 65% of the outstanding shares of
common stock of its then wholly owned MFI cheese converting and packaging
subsidiary. At December 31, 1994, the Company recorded a charge of $1,517,757 to
write-down to zero the carrying value of its investment and related assets and
expenses in MFI. In addition, the Company recorded a charge of $1,070,700
relating to the cancellation of its supply agreement with MFI which is payable
over twenty-six monthly installments beginning January, 1995. In February 1995,
the Company replaced MFI's converting and packaging requirements with that of an
outside supplier (See Note F to the Consolidated Financial Statements).
In connection with the Company's restructuring plan approved in December
1994, the Company closed its skim milk cheese production facility at MDFC in
January 1995. In addition, MDFC cheese products converted and packaged at MDFC
were discontinued in December 1994. MDFC continues to convert and package the
Company's warehouse club store and dairy case sliced cheeses sold under the
Alpine Lace (R) brand.
Cheese and Dairy Products Trading Business
The Company's cheese and dairy products trading activities are performed by
its wholly owned subsidiary, MCT Dairies, Inc. This business purchases almost
always as principal, bulk packaged quantities of domestic and imported cheese
and dairy products. The size of purchases ranges generally from 3,000 to 42,000
pounds. Substantially all of the products purchased and then sold are whey,
nonfat dry milk powder, animal feed, dairy flavorings, casein and caseinates,
and buttermilk as well as bulk cheese. MCT generally purchases cheese and dairy
products to fill purchase orders received from its customers, although it will
buy limited amounts of product without specific sales commitments, to be held in
inventory for future sale (and stored in public warehouses, if necessary).
MCT also exports cheese and dairy products either directly or under the
auspices of various U.S. government assisted programs. In 1992, MCT became
active in world market trading of non-cheese dairy products. From time to time
MCT will act as a broker and receive a commission, although to date commissions
have not been significant.
In 1995, MCT sold to approximately 46 manufacturers/processors, 75
distributors, and approximately 31 cheese and dairy products trading firms. The
largest two customers accounted for approximately 11% and 4% of the Company's
cheese and dairy products trading revenues in 1995.
6
<PAGE>
Government Regulation
The Company and its suppliers are subject to extensive regulation by
various government agencies which, pursuant to statutes, rules and regulations,
prescribe quality, purity, manufacturing, advertising and labeling requirements.
Food products are often subject to "standard of identity" requirements which are
promulgated at both the Federal and state level to determine the permissible
qualitative and quantitative ingredient content of foods, and information that
must be provided on food product labels. The Federal Food and Drug
Administration ("FDA"), United States Department of Agriculture ("USDA"),
Federal Trade Commission and many states review product labels and advertising.
The Company's branded cheese products meet the current applicable FDA,
USDA, and state requirements and its advertising and labels accurately describe
its products. The Company has made changes in its advertising and labeling in
response to the new labeling laws which are in effect and complies with the new
labeling laws.
Food manufacturing, processing and packaging facilities of the Company and
its suppliers are subject to inspection by various Federal and state regulatory
authorities, and must comply with various health and safety regulations.
Trademarks and Patents
The Company or its subsidiaries owns registered trademarks for PRE MONDE
(and Design) (R), PRE MONDE ALPINE LACE (and Design) (R), PRE MONDE ALPINE LACE
FREE *** N' LEAN (and Design) (R), PRE MONDE ALPINE LACE FREE *** N' LEAN (R),
PRE MONDE (R), CHOOSE (R), CHEESE SMART (and Design) (R), and ALPINE LACE (R).
The Company was issued one U.S. patent in January of 1992, one U.S. patent
in July of 1993, and another in March of 1995 for the manufacture of fat free
and low fat cheese and cheese products which are being sold by the Company. The
Company has also obtained similar patent protection in Argentina and New
Zealand. Additionally, the Company either owns or has significant rights to the
recipes and manufacturing processes of substantially all of its Alpine Lace
(R)and fat free products.
Competition
The Company's Alpine Lace Branded products compete intensively with many
established domestic and foreign brands which are, in many cases, less expensive
than the Company's products. Many of these products are marketed by companies
with greater financial and other resources than those of the Company. The
Company believes that Alpine Lace (R) is currently one of the five largest
advertised brands of cheese in measured media in the United States. The
Company's primary cheese products have certain health-related characteristics
that the Company believes differentiate them from many other cheeses;
nevertheless, the Company faces significant competition from cheese products
with similar characteristics. The principal competitors with the Company's
products in the reduced sodium, fat free
7
<PAGE>
and/or reduced fat cheese fields are Lorraine (R) cheese, a cheese which the
Company believes resembles Swiss cheese in some respects, which is produced by
Stella Cheese Co., Inc., Kraft Healthy Favorites (R) Naturals and Kraft Free (R)
marketed by Kraft General Foods, Inc. and Healthy Choice (R) marketed by
Beatrice Cheese Co., Inc., a division of Con Agra.
The Company's cheese and dairy products trading business is subject to
intense competition from cheese and dairy products importers, distributors and
manufacturers, as well as, from other cheese trading companies. In addition,
potential purchasers' internal buyers can serve many of the functions for which
a cheese and dairy products purchaser might otherwise use a cheese and dairy
products trading company. However, cheese and dairy products trading companies
like the Company's offer the advantage of specialization, with its resulting
efficiencies.
Employees
The Company and its subsidiaries currently have 127 employees.
Business Segment Information
The Company's operations consist of two segments: (1) The branded cheese
business which develops, markets, distributes, packages and converts branded
cheeses and other specialty food products; and (2) the cheese and dairy products
trading business.
Information about the Company's operations in different industry segments
for the years ended December 31, 1995, 1994, and 1993 is disclosed in Note O to
the Consolidated Financial Statements.
ITEM 2. PROPERTIES
The Company's 6,400 gross square foot administrative offices, located in a
modern office building in Maplewood, New Jersey, are under two leases providing
for annual rentals of $42,750 and $96,200, respectively and both expiring April
30, 2000. The Company believes that this present space is sufficient for its
present business operations (excluding MDFC) for the foreseeable future.
MDFC's facilities are located within the incorporated limits of Sturgis,
South Dakota. MDFC owns 2.25 acres of land and two buildings. The buildings
consist of a 1,440 square foot truck garage and a 16,940 square foot packaging
and warehousing building where cheese is cut into consumer packaged products. An
administrative office was built atop of the packaging and warehousing building
due to the sale of the 2,812 square foot administrative office building in 1995.
The 9,370 square foot production building was also sold during 1995 due to the
closing of the skim milk cheese operation.
8
<PAGE>
ITEM 3. LEGAL PROCEEDINGS
Except for that described in the next paragraph, the Company is not a party
to, nor is any of its property the subject of, any material legal proceedings.
On March 7, 1995, the Company announced that it had received a process
patent for manufacturing low fat and fat free cheese and has filed for an
injunction against Kraft, Inc., Borden, Inc., Beatrice Cheese, Inc. and
Schreiber Foods, Inc., citing patent infringement. In papers filed on March 7,
1995, in the United States District Court, District of New Jersey, the Company
asked the court to enjoin the manufacturers from continuing to manufacture and
sell fat free American singles that are produced by use of the Company's
patented process. The Company has also sought unspecified damages. On March 21,
1996, a federal court sitting in Newark granted a motion for summary judgement
in favor of Kraft, Inc. and against Alpine Lace Brands, Inc. The basis for the
judgement was that Alpine Lace had not demonstrated that Kraft, Inc. infringed
its patent. Alpine Lace's counsel has recommended that Alpine Lace appeal the
decision to the U.S. Court of Appeals for the Federal Circuit in Washington,
D.C. The Company is considering this recommendation.
There can be no assurance that the Company will be successful in pursuing
this claim.
9
<PAGE>
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED
SECURITY HOLDER MATTERS
The Company's common stock trades on the NASDAQ stock market under the
symbol: LACE.
The NASDAQ stock market quotations set forth in the table reflect
inter-dealer prices, without retail mark-up, mark-down or commission, which may
not necessarily represent actual transactions.
COMMON
HIGH LOW
First Quarter, 1994 6.25 3.75
Second Quarter, 1994 5.75 3.38
Third Quarter, 1994 5.50 3.75
Fourth Quarter, 1994 4.75 3.06
First Quarter, 1995 7.63 3.50
Second Quarter, 1995 9.31 6.50
Third Quarter, 1995 11.50 7.63
Fourth Quarter, 1995 12.13 9.50
First Quarter, 1996 10.63 7.50
(through March 13, 1996)
As of the close of business on March 13, 1996, there were 233 registered
holders of record of the Company's common stock. The Company estimates that
there are over 2,863 beneficial owners of its common stock.
The Company has never declared cash dividends on its common stock and has
no present intention of declaring such cash dividends in the foreseeable future.
Cash dividends are restricted by the Company's bank credit facility agreement;
see Note H to the Consolidated Financial Statements.
10
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA1
Dec. 31, Dec. 31, Dec 31, Dec 31, Dec 31,
1995 1994 1993 1992 1991
Selected Data from
Statement
of Operations:
Net sales $145043395 $132354808 $180745614 $167306297 $156139241
Earnings (Loss)
before
cumulative effect
of an accounting
change &
extraordinary
item 3912028 (3122989) (4040254) 8723 782634
Extraordinary item2 103760 - - - -
Cumulative effect of
an
accounting change3 - - - (49000) -
Net earnings (loss) 4015788 (3122989) (4040254) (40277) 782634
Preferred stock
dividend 121513 - - - -
Net earnings (loss)
applicable to common
shareholders 3894275 (3122989) (4040254) (40277) 782634
Net earnings (loss) per
share
of common stock:
Earnings (Loss)
before cumulative
effect of an
accounting
change &
extraordinary item .72 (.62) (.81) --4 0.16
Extraordinary item .02 - - - -
Cumulative effect of an
accounting change3 - - - (.01) -
Net earnings (loss)
per share .74 (.62) (.81) (.01) 0.16
Selected
Balance Sheet Data5:
Current assets 20422667 22916704 28619853 24008873 22014987
Current liabilities 15363586 18751765 18949907 13401972 14398837
Working capital 5059081 4164939 9669946 10606901 7616150
Total assets 26276701 28936515 38056602 35896521 32742207
Long-term obligations
(less current
maturities) 5817868 10716233 16515189 15843190 11772243
Stockholders' equity
(deficiency) 5095247 (531483) 2591506 6651359 6571127
NOTES TO SELECTED FINANCIAL DATA
1 The comparability of the selected financial data is affected by the Company's
sale of 65% of MFI on February 17, 1994. The operations of MFI were consolidated
with that of the Company through December 31, 1993.
2 On March 27, 1995, the Company redeemed its $3,000,000 subordinated note
payable and common stock purchase warrants for $3,000,150 plus accrued interest
of $42,750. The redemption resulted in a net extraordinary gain of $103,760 to
the Company.
3 Effective January 1, 1992, the Company adopted the provisions of Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes." See Note
I.
4 Rounds to less than one cent earnings per share.
5 The comparability of the selected balance sheet data is affected by the
reclassification of net assets of MFI to Investment in and advances to MFI as of
December 31,1993. See "Business - Cheese Converting, Packaging and Manufacturing
Operations."
11
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Results of Operations
1995 versus 1994
The Company's sales increased by $12,688,587 or 9.6% from $132,354,808 in
1994 to $145,043,395 in 1995. Sales in the Branded cheese segment increased
$4,748,681 or 4.6% from $104,004,173 in 1994 to $108,752,854 in 1995. The
increase in Branded business resulted from increased sales in the Alpine Lace
Branded Division offset by a slight decrease in sales from MDFC. The Company's
cheese and dairy products trading business sales for 1995 were $36,290,541, an
increase of $7,939,906 or 28.0% from $28,350,635 in 1994 primarily due to
increased sales of commodity cheddar cheese.
As a percentage of sales, gross profit decreased from 24.8% in 1994 to
24.7% in 1995. Gross profit as a percent of sales decreased principally as a
result of the 28% sales increase in the cheese and dairy products trading
business which has lower gross profit margins than the Branded division. Gross
profit increased by $2,988,544 or 9.1% from $32,834,857 in 1994 to $35,823,401
in 1995 primarily due to the 9.6% increase in sales, along with the lower cost
to purchase cheese resulting from lower commodity prices and continuing
manufacturing efficiencies.
Operating expenses decreased by $3,850,358 from $34,321,206 in 1994 to
$30,470,848 in 1995 representing a decrease of 11.2%. The operating expense
decrease is due to the 1994 restructuring charge of $2,640,238 associated with a
plan to cease production of skim milk cheese at its MDFC subsidiary and the
termination of its supply agreement with MFI. In addition, in 1994, the Company
recorded a charge of $1,517,757 to write down the carrying value of its
investment and related assets in MFI and related expenses (See Note F to the
Consolidated Financial Statements). Selling expenses remained the same in 1995
and 1994 at $25,600,000.
Administrative expenses increased by $308,049 or 6.8% from $4,546,505 in
1994 to $4,854,554 in 1995.
Interest expense (net) decreased by $587,391 or 37.1% from $1,583,040 in
1994 to $995,649 in 1995, as a result of the Company's decreased use of its
working capital credit line and the redemption of the Company's subordinated
note payable, partially offset by higher interest rates.
On March 27, 1995, the Company redeemed its $3,000,000 subordinated note
payable and common stock purchase warrants for $3,000,150 plus accrued interest
of $42,750. The redemption resulted in a net extraordinary gain of $103,760 to
the Company.
12
<PAGE>
The provision for income taxes increased $391,276 from $53,600 in 1994 to
$444,876 in 1995. The 1994 tax provision included minimal state taxes for MCT
Dairies, Inc. due to the pre-tax loss of $3,069,389. The 1995 tax provision is
due to federal net operating loss carry-forwards utilized in 1995.
1994 versus 1993
The Company's sales (net of MFI sales of $50,924,327 in 1993, which 65% was
sold on February 17, 1994) increased by $2,533,521 or 2.0% from $129,821,287 in
1993 to $132,354,808 in 1994. Sales in the Branded cheese segment (net of MFI
sales of $50,924,327 in 1993, which 65% was sold on February 17, 1994) increased
$7,774,493 or 8.1% from $96,229,680 in 1993 to $104,004,173 in 1994. The
increase in Branded business resulted from increased sales in the Alpine Lace
Branded Division offset by a slight decrease in sales from MDFC. The Company's
cheese and dairy products trading business sales for 1994 were $28,350,635, a
decrease of $5,240,972 or 15.6% from $33,591,607 in 1993 primarily due to weak
demand for commodity products due to large inventories held by the market place
in the third quarter of 1994.
As a percentage of sales, gross profit increased from 20.0% in 1993 to
24.8% in 1994. Gross profit as a percent of sales increased principally as a
result of the exclusion of MFI gross profit in 1994, which had a gross profit of
approximately 7.4% in 1993 and therefore, the gross profit as a percent of sales
for 1993 excluding MFI would have been 24.9%. In addition, gross profit was
impacted by a change in product mix towards greater sales of the Company's deli
case products at the Company's Alpine Lace Branded Division and reduced gross
profit of $516,142 from MCT due to weak demand for commodity products as
discussed above. Gross profit decreased by $3,264,977 or 9.0% from $36,099,834
in 1993 to $32,834,857 in 1994 primarily due to the sale of MFI.
Operating expenses decreased by $5,208,899 from $39,530,105 in 1993 to
$34,321,206 in 1994, representing a decrease of 13.2%. Selling expenses
decreased by $7,610,522 or 22.9% from 1993 to 1994. The major contributor to the
decrease was the MFI selling expenses for 1993 of $2,789,000, which are no
longer included as discussed previously. In connection with the Company's first
quarter 1993 restructuring, the Company altered its marketing strategy for
coupons which resulted in a decrease in 1994 of $1,693,000 in coupon expense.
Another factor was the decrease in other selling expenses during 1994 of
$1,273,000 due principally to greater accruals of $1,280,000 for product
discounts in response to more aggressive pricing approaches taken by grocery
retailers, in the first quarter of 1993. Additional factors include the decrease
in advertising expense including co-op advertising, which decreased by $531,000
from $5,720,000 in 1993 to $5,189,000 in 1994 and the decrease in slotting
expenses of $856,000.
13
<PAGE>
Administrative expenses decreased by $1,756,372 or 27.9% from $6,302,877 in
1993 to $4,546,505 in 1994. The decrease in administrative expenses was
primarily attributable to the MFI administrative expenses for 1993 of $1,734,000
which are no longer included, as discussed previously.
The Company incurred a restructuring charge of $2,640,238 associated with a
plan to cease production of skim milk cheese at its MDFC subsidiary and the
termination of its supply agreement with MFI and as a result of the
restructuring, all cheese production will be performed at outside suppliers. In
addition, based on an evaluation of the recoverability of its investment in MFI,
the Company recorded a charge of $1,517,757 to write-down to zero the carrying
value of its investment and related assets in MFI and related expenses.
Interest expense (net) decreased by $149,837 or 8.6% from $1,732,877 in
1993 to $1,583,040 in 1994, as a result of the MFI interest expense for 1993 of
$200,000, which is no longer included, and the Company's decreased use of its
working capital credit line, partially offset by higher interest rates.
In 1994 the Company recorded $53,600 for income tax expense primarily due
to state taxes for MCT Dairies. As a result of the pre-tax loss of $5,163,148 in
1993, an income tax benefit of $1,122,894 in 1993 was generated, comprised of
federal and state tax refunds.
In 1994, the Company had a pre-tax loss of $3,069,389 and a net loss of
$3,122,989 compared with a pre-tax loss of $5,163,148 and a net loss of
$4,040,254 in 1993 as a result of the factors discussed above. As of December
31, 1994, the Company had available federal net operating loss carry-forwards
for income tax purposes of approximately $800,000, which expire in the year
2008.
Impact of New Accounting Standards
In 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-
Lived Assets and for Long-Lived Assets to Be Disposed Of" ("SFAS No. 121"),
which provides guidance on when to assess and how to measure impairment of
long-lived assets, certain intangibles and goodwill related to those assets to
be held and used, and for long-lived assets and certain identifiable intangibles
to be disposed of. The Financial Accounting Standards Board also issued
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("SFAS No. 123"), which gives companies a choice of the method of
accounting used to determine stock-based compensation. Companies may account for
such compensation either by using the intrinsic value-based method provided in
APB Opinion 25, "Accounting for Stock Issued to Employees" ("APB No. 25") or the
fair market value-based method provided in SFAS No. 123. These statements are
effective for financial statements for fiscal years beginning after December 15,
1995. The Company believes that the impact of adopting SFAS No. 121 will not
have a material effect on the Company. The Company intends to use the intrinsic
value-based method provided in APB No. 25,
14
<PAGE>
to determine stock-based compensation. The sole effect of the adoption of SFAS
No. 123 is the obligation imposed on the Company to comply with the new
disclosure requirements provided thereunder.
Inflation
The Company believes that in 1996 it will be able to pass raw material cost
increases of approximately up to 10% on to its customers, as will its
competitors. However, the Company believes that substantial price increases of
over 10% might have a negative impact on demand for all cheese purchases by
consumers and may be borne in part by the Company, thereby reducing earnings.
Liquidity; Capital Resources
The major providers of cash for 1995 came from net earnings and the
decrease in accounts receivable. On March 27, 1995, the Company redeemed its
subordinated note payable and common stock purchase warrants for $3,000,150 and
accrued interest of $42,750. The majority of the funds for the redemption came
from the issuance of $2,250,000 of 7.5% cumulative preferred stock on March 22,
1995, which resulted in net proceeds of approximately $2,000,000. The securities
are convertible into common stock of the Company at a conversion price of $7 3/8
for five years, at which time the Company must either force a conversion at
market price of the common stock or redeem the preferred stock. On March 27,
1995, the Company used the proceeds (along with cash made available through the
Company's revolving credit facility) to repurchase $3 million in subordinated
debt and 353,895 warrants.
Fixed asset acquisitions for 1995 were $995,196 mainly due to the purchase
of a high-speed slicer at the Company's MDFC facility. Proceeds from the sale of
fixed assets were $452,812 due to the sale of equipment and buildings at the
MDFC facility in connection with the closing of the skim milk cheese operation.
As of February 28, 1996 the Company had approximately $5,200,000 available
on its $15,500,000 revolving credit facility and $3,500,000 available on its
equipment credit facility which both expire in 1998. The Company expects that
this credit facility will give the Company sufficient means to finance
anticipated working capital and equipment requirements (See Note H to the
Consolidated Financial Statements.) As a result of the Company's restructuring
announced in December, 1994, the Company was in default under the revolving
credit facility. The lender waived the default as of December 31, 1994, and
modified those covenants as of January 1, 1995. The Company has been in
compliance since January 1, 1995.
The consolidated statement of cash flows for the year ended December 31,
1994 is not comparable to prior years due to the sale of 65% of MFI.
The major providers of cash for 1994 were from the sale of MFI, decreased
inventory, and income tax refunds. On February 17, 1994, the Company sold
15
<PAGE>
common stock representing 65% of the outstanding shares of MFI resulting in net
cash received of $3,530,013. The Company's inventory decreased by $2,105,000
primarily due to tighter control of inventory levels. The Company received
income tax refunds of approximately $1,015,000 due to the federal and state
carry-back claims associated with the 1993 pre-tax loss of $5,163,148. Cash
provided during 1994 decreased the borrowings of the Company by approximately
$9,000,000 in 1994.
The major uses of cash for 1993 were to fund increased accounts receivable,
inventory, property, plant and equipment and 1993 losses. These expenditures
were financed by the increase in accounts payable and net increased drawings
under the Company's bank credit line. The accounts receivable and accounts
payable increases of $5,104,710 and $5,388,186 respectively are primarily
attributable to the December, 1993 sales of $5,621,294 for MCT, as compared to
$2,247,300 in December, 1992 for MCT and purchases of $5,440,395 for MCT in
December, 1993, as compared to $2,203,151 in December, 1992 for MCT.
Additionally impacting the increased accounts receivable and accounts payable
respectively, are increased sales for the Alpine Lace Branded Division of
$1,169,951 from $7,780,297 in December, 1992 to $8,950,248 in December, 1993 and
increased purchases of $2,514,583 from $5,140,955 in December, 1992 to
$7,655,538 in December, 1993. The Company's inventory increased by $1,824,507
due primarily to the increased levels of inventory needed at club store
distribution centers and increased skim milk cheese used to produce the
Company's fat free cheese products. In 1993, the Company increased property,
plant and equipment by principally utilizing its equipment credit facility for
$520,000 and incurred capital lease obligations of $440,426. Increased drawings
under the Company's revolving credit facility provided $5,321,732 in 1993 to
finance cash needs.
16
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
ALPINE LACE BRANDS, INC.
INDEX TO FINANCIAL STATEMENTS
Page
Report of Independent Certified Public
Accountants F-2
Consolidated Financial Statements
Consolidated Balance Sheets as of
December 31, 1995 and 1994 F-3
Consolidated Statements of Operations
for the Three Years Ended
December 31, 1995, 1994 and 1993 F-5
Consolidated Statement of Stockholders'
Equity (Deficiency) for the Three Years
Ended December 31, 1995, 1994 and 1993 F-6
Consolidated Statements of Cash Flows
for the Three Years Ended
December 31, 1995, 1994 and 1993 F-7
Notes to Consolidated Financial Statements F-9
17
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information regarding directors and executive officers of the Company
contained in the Company's Proxy Statement for its Annual Meeting to be held on
May 16, 1996, to be filed within 120 days of December 31, 1995 pursuant to
Regulation 14A under the Securities Act of 1934 (the "Company's 1996 Proxy
Statement") is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
The information regarding remuneration of and transactions with management
in the Company's 1996 Proxy Statement is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The information regarding ownership of the Company's securities by
management and certain other beneficial owners in the Company's 1996 Proxy
Statement is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information regarding relationships and related transactions with
management and others in the Company's 1996 Proxy Statement is incorporated
herein by reference.
18
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS AND
REPORTS ON FORM 10-K.
(a) Financial Statements:
The following consolidated financial statements of
Alpine Lace Brands, Inc. and Subsidiaries required
by Part II, Item 8, are included in Part IV of this
report.
PAGE
- Report of Independent Certified Public
Accountants. F-2
- Consolidated Balance Sheets as of
December 31, 1995 and 1994. F-3
- Consolidated Statements of Operations
for the Three Years Ended December
31 1995, 1994 and 1993. F-5
- Consolidated Statement of Stock-
holders' Equity (Deficiency) for the
Three Years Ended December 31,
1995, 1994 and 1993. F-6
- Consolidated Statements of Cash
Flows for the Three Years Ended
December 31, 1995, 1994 and 1993. F-7
- Notes to Consolidated Financial
Statements. F-9
19
<PAGE>
Schedules other than those listed above have been omitted as not being required
or because the information required to be submitted has been included in the
financial statements or notes thereto.
(b) The Company filed the following Reports on Form 8-K during
the last quarter of 1995:
- None
(c) Exhibits:
(3.1) Certificate of Incorporation, as
amended
(3.2) By-Laws8
(4.1) (a) Loan and Security Agreement, dated
March 3, 1993, among Barclays Busi-
ness Credit, Inc., the Company,
Market Cheese Traders, Inc., and
Mountain Farms, Inc.8
(b) $1,000,000 Secured Promissory Note
(Term Loan), dated March 3, 1993,
from the Company, Market Cheese
Traders, Inc., and Mountain Farms,
Inc. to Barclays Business Credit,
Inc.8
(c) $3,500,000 Secured Promissory
Note (Equipment Loan), dated
March 3, 1993, from the Company,
Market Cheese Traders, Inc.,
and Mountain Farms, Inc. to
Barlcays Business Credit, Inc.8
(4.2) Registration Rights Agreement, dated
March 21, 1995, between the Company
and the holders designated therein10
(10.1)(a) Agreement, dated July 18, 1988,
regarding supply of PreMonde
Alpine Lace Swiss Cheese1
(b) Amendment to Agreement, dated
March 1, 1994 regarding supply of
PreMonde Alpine Lace Swiss Cheese9
20
<PAGE>
(10.2) Employment Agreement, dated
January 4, 1993, between the
Company and Carl T. Wolf8
(10.3)(a) Employment Agreement, dated
February 24, 1986, between the
Company and Kenneth E. Meyers8
(b) Amendment, dated December 10,
1986, between the Company and
Kenneth E. Meyers amending the
terms of Exhibit 10.3(a)8
(c) Second Amendment, dated as of
January 1, 1988, between the
Company and Kenneth E. Meyers
extending the term of Exhibits
10.3(a) and 10.3(b)2
(d) Third Amendment dated December
5, 1989, between the Company
and Kenneth E. Meyers extending
and amending the terms of
Exhibits 10.3(a), 10.3(b) and
10.3(c)5
(e) Amendment, dated November 8,
1991, between the Company and
Kenneth E. Meyers extending the
term of Exhibit 10.3(a), 10.3(b),
10.3(c) and 10.3(d)7
(f) Employment Agreement, dated January
1, 1995, between the Company and
Kenneth E. Meyers11
(10.4) Employment Agreement, dated
January 4, 1993, between the
Company and George Wenger8
(10.5)(a) Lease and Lease Modification, both
dated November 1, 1988, between
Dunnell Associates and First World
Cheese, Inc.4
(b) Lease dated July 31, 1990,
between Dunnell Associates and
First World Cheese, Inc.5
21
<PAGE>
(c) Lease Modification, dated December
30, 1992, between Dunnell Asso-
ciates and Alpine Lace Brands, Inc.
(Formerly First World Cheese, Inc.)8
(d) Lease Modification, dated March 23,
1995, between Dunnell Associates, and
Alpine Lace Brands, Inc.11
(10.6) 1987 Stock Option Plan (As
Amended)
(10.7) Agreement, dated July 28, 1988,
regarding recipes and tradenames
for Marolf Dakota Farms Longhorn
Cheddar Cheese and Longhorn
Colby Cheese4
(10.8) Stock Purchase Agreement, dated
as of November 7, 1989, among
Marolf Dakota Farms Cheese, Inc.,
and Michael F. Marolf, plus First
Amendment to Stock Purchase
Agreement, dated as of November
27, 1989 3
(10.9) Asset Purchase Agreement dated
April 16, 1990, as amended by
First Amendment dated May 21,
1990, between the Company,
Gamay Foods, Inc. and Dr. Aly
Gamay5
(10.10) Restricted Special Stock Warrant
dated May 21, 1990, from the
Company to Gamay Foods, Inc.5
(10.11)(a) Gamay License Agreement dated
May 21, 1990, among the
Company, Gamay Foods, Inc. and
Dr. Aly Gamay5
(b) Modification of License Agreement
dated February 24, 1995, between
the Company, Gamay Foods and
Dr. Aly Gamay10
22
<PAGE>
(c) SIM-GT License Agreement dated
November 1, 1995, among the
Company and SIM-GT Licensing
Corporation.
(10.12)(a) Independent Consulting Agreement,
dated May 21, 1990, between the
Company and Dr. Aly Gamay5
(b) Modification of Independent
Consulting Agreement, dated May
14, 1993, between the Company
and Dr. Aly Gamay9
(c) Modification of Independent
Consulting Agreement, dated
February 24, 1995, between the
Company and Dr. Aly Gamay
(See 10.12b above)10
(10.13) Restricted Special Stock Warrant,
dated May 28, 1991, from the
Company to Pleasant View Cheeses
Corporation (amended and
restated)6
(10.14)(a) Stock Purchase Agreement, dated
January 20, 1994, between the
Company and Simplot Dairy Products,
Inc.9
(b) Supply and Conversion Agreement,
dated February 17, 1994, between
the Company and Mountain Farms, Inc.9
(c) First Option to Purchase Stock, dated
February 17, 1994, between the Company
and Simplot Dairy Products, Inc.9
(d) Noncompete Agreement, dated February
17, 1994, between the Company and
Simplot Dairy Products, Inc.9
(10.15) Securities Purchase Agreement, dated
March 24, 1995, between the Company
and RFE Investment Partner IV L.P.10
(11) Computation of Earnings (Loss) per
Share of Common Stock
23
<PAGE>
(21) Subsidiaries of Registrant
(23) Consent of Independent Certified
Public Accountants
1. Indicates that the exhibit is incorporated by reference to the indicated
exhibit of Post-Effective Amendment No. 2 to the Registration Statement on Form
S- 18 of the Company, Registration No. 33-4622-NY.
2. Indicates that the exhibit is incorporated by reference to the indicated
exhibit of the Annual Report on Form 10-K of the Company, for the fiscal year
ended December 31, 1988.
3. Indicates that the exhibit is incorporated by reference to the indicated
exhibit of the Current Report on Form 8-K of the Company, dated January 10,
1990.
4. Indicates that the exhibit is incorporated by reference to the indicated
exhibit of the Annual Report on Form 10-K of the Company, for the fiscal year
ended December 31, 1989.
5. Indicates that the exhibit is incorporated by reference to the indicated
exhibit of the Annual Report on Form 10-K of the Company, for the fiscal year
ended December 31, 1990.
6. Indicates that the exhibit is incorporated by reference to the indicated
exhibit of the Quarterly Report on Form 10-Q of the Company for the quarter
ended June 30, 1991.
7. Indicates that the exhibit is incorporated by reference to the indicated
exhibit of the annual report on form 10-K of the Company, for the fiscal year
ended December 31, 1991.
8. Indicates that the exhibit is incorporated by reference to the indicated
exhibit of the annual report on form 10-K of the Company, for the fiscal year
ended December 31, 1992.
9. Indicates that the exhibit is incorporated by reference to the indicated
exhibit of the annual report on form 10-K of the Company, for the fiscal year
ended December 31, 1993.
10. Indicates that the exhibit is incorporated by reference to the indicated
exhibit of the annual report on form 10-K of the Company, for the fiscal year
ended December 31, 1994.
11. Indicates that the exhibit is incorporated by reference to the indicated
exhibit of the Quarterly Report on Form 10-Q of the Company for the quarter
ended March 31, 1995.
<PAGE>
This page left blank intentionally.
F-1
<PAGE>
REPORT OF INDEPENDENT CERTIFIED
PUBLIC ACCOUNTANTS
Board of Directors and Stockholders
Alpine Lace Brands, Inc.
We have audited the accompanying consolidated balance sheets of Alpine Lace
Brands, Inc. (a Delaware corporation) and Subsidiaries as of December 31, 1995
and 1994, and the related consolidated statements of operations, stockholders
equity and cash flows for each of the three years in the period ended December
31, 1995. These financial statements are the responsibility of the Companys
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Alpine Lace
Brands, Inc. and Subsidiaries as of December 31, 1995 and 1994, and the
consolidated results of their operations and their consolidated cash flows for
each of the three years in the period ended December 31, 1995, in conformity
with generally accepted accounting principles.
/S/Grant Thornton LLP
GRANT THORNTON LLP
Parsippany, New Jersey
February 9, 1996
F-2
<PAGE>
Alpine Lace Brands, Inc.
CONSOLIDATED BALANCE SHEETS
December 31,
ASSETS (substantially pledged - Note H) .......... 1995 1994
CURRENT ASSETS
Cash and cash equivalents (Note A-7) ......... $ 459,610 $ 438,414
Accounts receivable - net .................... 13,068,356 16,228,784
Inventories (Notes A-3 and C) ................ 6,213,256 5,447,502
Prepaid expenses and other
current assets (Note K) ...................... 681,445 802,004
Total current assets .................. 20,422,667 22,916,704
PROPERTY, PLANT AND EQUIPMENT - AT COST,
less accumulated depreciation and amortization
(Notes A-4, B and E) ......................... 2,335,654 1,928,583
ASSETS HELD FOR SALE (Note G) .................... 265,800
OTHER ASSETS
Note receivable -
Mountain Farms, Inc.(Note F) ................. 1,675,948 1,675,948
Trademarks, trade names and technology,
less accumulated amortization of
$865,061 and $709,802 in 1995 and 1994,
respectively ............................... 1,556,240 1,709,451
Notes receivable (Note J) .................... 16,035 30,420
Other ........................................ 270,157 409,609
3,518,380 3,825,428
$26,276,701 $28,936,515
The accompanying notes are an integral part of these statements.
F-3
<PAGE>
Alpine Lace Brands, Inc.
CONSOLIDATED BALANCE SHEETS
December 31,
LIABILITIES AND STOCKHOLDERS EQUITY ............ 1995 1994
CURRENT LIABILITIES
Current maturities of long-term
debt (Note H) ............................... $ 1,385,846
Accounts payable ............................ $ 12,844,895 14,610,852
Accrued expenses and other .................. 1,995,784 2,565,802
Income taxes payable (Note I) ............... 379,824 10,450
Current maturities of obligations under
capital leases (Note E) ..................... 143,083 178,815
Total current liabilities ............ 15,363,586 18,751,765
LONG-TERM OBLIGATIONS, less current maturities
Long-term debt (Note H) ..................... 5,325,945 9,547,581
Obligations under capital leases (Note E) ... 409,561 592,121
Other long-term liability (Note G) .......... 82,362 576,531
5,817,868 10,716,233
COMMITMENTS AND CONTINGENCIES (Notes J, K,
L, M and N)
STOCKHOLDERS EQUITY (DEFICIENCY)
(Notes A-5, M and N)
Preferred stock, par value $.01 per share;
authorized 1,000,000 shares; 45,000
shares issued and outstanding in 1995;
at liquidation amount of $50 per share .. 2,250,000
Common stock, par value $.01 per share;
authorized 10,000,000 shares; issued and
outstanding, 5,050,136 shares in 1995 and
5,012,419 in 1994 ....................... 50,501 50,124
Additional paid-in capital ................. 2,611,966 3,129,888
Retained earnings (deficit) ................ 182,780 (3,711,495)
5,095,247 (531,483)
$ 26,276,701 $ 28,936,515
The accompanying notes are an integral part of these statements.
F-4
<PAGE>
Alpine Lace Brands, Inc.
CONSOLIDATED STATEMENTS OF OPERATIONS
Year ended December 31,
1995 1994 1993
Net sales (Notes J and O) ........ 145,043,395 $ 132,354,808 $ 180,745,614
Cost of goods sold (Notes J and O) 109,219,994 99,519,951 144,645,780
Gross profit ........... 35,823,401 32,834,857 36,099,834
Operating expenses
Selling ....................... 25,616,294 25,616,706 33,227,228
Administrative ................ 4,854,554 4,546,505 6,302,877
Restructuring charge (Note G) . 2,640,238
Write-down of Mountain Farms,
Inc. (Note F) .......... 1,517,757
30,470,848 34,321,206 39,530,105
Operating profit (loss) .. 5,352,553 (1,486,349) (3,430,271)
Interest expense - net (Note P) .... 995,649 1,583,040 1,732,877
Earnings (loss) before
income tax provision
(benefit) and
extraordinary item .. 4,356,904 (3,069,389) (5,163,148)
Income tax provision (benefit)
(Notes A-6 and I) ........ 444,876 53,600 (1,122,894)
Earnings (loss) before
extraordinary item ..... 3,912,028 (3,122,989) (4,040,254)
Extraordinary item
Gain from extinguishment of debt,
net of income
taxes of $7,451 (Note H) .... 103,760
NET EARNINGS (LOSS) ..... 4,015,788 (3,122,989) (4,040,254)
Preferred stock dividends ......... 121,513
Net earnings (loss) applicable
to common shareholders $ 3,894,275 $ (3,122,989) $ (4,040,254)
Earnings (loss) per share of
common stock (Note A-5)
Earnings (loss) before
extraordinary item ......... $ .72 $ (.62) $ (.81)
Extraordinary item ......... .02 -- --
Net earnings (loss)
per share ........... $ .74 $ (.62) $ (.81)
Weighted average number of
common and common
equivalent shares
outstanding ............... 5,289,275 5,012,419 5,012,419
The accompanying notes are an integral part of these statements.
F-5
<PAGE>
Alpine Lace Brands, Inc.
CONSOLIDATED STATEMENT OF STOCKHOLDERS EQUITY (DEFICIENCY)
Years ended December 31, 1995, 1994 and 1993
Additional Retained
Preferred Common stock paid-in earnings
stock Shares Amount capital (deficit) Total
Balance at
December 31, 1992 5012419 $ 50124 $ 3149487 $ 3451748 $6651359
Stock issuance expense (19599) (19599)
Net loss for the year
ended December 31,
1993 (4040254)(4040254)
Balance at December 31,
1993 5012419 50124 3129888 (588506) 2591506
Net loss for the year
ended December 31,
1994 (3122989)(3122989)
Balance at December 31,
1994 5012419 50124 3129888 (3711495) (531483)
Proceeds from preferred
stock offering, net
of offering costs of
$234,768 $ 2250000 (234768) 2015232
Warrants received on debt
repurchase (212337) (212337)
Reduction in nonemployee
stock option (275386) (275386)
Exercise of stock options,
including income
tax benefit of $29,000 37717 377 204569 204946
Preferred stock dividends (121513) (121513)
Net earnings for the year
ended December 31, 1995 4015788 4015788
Balance at December 31,
1995 $ 2250000 $ 5050136 $ 50501 $ 2611966 $ 182780 $5095247
The accompanying notes are an integral part of this statement.
F-6
<PAGE>
Alpine Lace Brands, Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year ended December 31,
1995 1994 1993
Cash flows from operating activities
before the reclassification
of the net assets of Mountain
Farms, Inc. at December 31,
1993 (Notes A-1 and F)
Net earnings (loss) $ 4,015,788 $(3,122,989) $(4,040,254)
Adjustments to reconcile net
earnings (loss) to net cash
used in operating activities
Write-down of Marolf Dakota
Farms fixed assets 1,251,618
Write-down of investment
in Mountain Farms, Inc.
and escrow accounts receivable 1,333,696
Write-down of Marolf Dakota
Farms trademark 243,680
Extraordinary item (103,760) -- --
Depreciation and amortization 566,251 824,369 1,035,930
Deferred taxes (139,629)
Provision for losses
on accounts receivable 200,884 150,956 33,448
(Gain) loss on sale of fixed assets 24,233 (3,718) 1,574
Changes in operating assets and
liabilities
Accounts receivable 2,959,544 (1,107,663) (5,104,710)
Inventories (765,754) 2,104,792 (1,824,507)
Prepaid expenses and
other current assets 120,559 112,546 1,117,409
Refundable income taxes -- 1,014,795 (887,550)
Other assets 139,452 184,425 412,298
Accounts payable (1,765,957) 1,519,095 5,388,186
Accrued expenses and other (570,018) 1,139,589 115,739
Income taxes payable 369,374 30,430 23,010
Other long-term liability (494,169) 576,531
680,639 9,375,141 171,198
Net cash provided by (used in)
operating activities 4,696,427 6,252,152 (3,869,056)
Cash flows from investing activities
Proceeds from notes receivable 14,385 12,907 11,577
Proceeds from sale of Mountain Farms, Inc. -- 3,530,013
Purchase of property, plant and equipment (995,196) (275,701) (1,045,664)
Payments for trademarks, trade names
and technology (2,047) (56,281) (81,495)
Proceeds from sale of fixed assets 452,812 30,200
Net cash (used in) provided by
investing activities (530,046) 3,210,938 (1,085,382)
F-7
<PAGE>
Alpine Lace Brands, Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
Year ended December 31,
1995 1994 1993
Cash flows from financing activities
Payment of obligations under
capital leases $ (218,292) $ (191,943) $ (200,773)
Costs from issuance or reduction
of common stock,
options and warrants (275,386) (19,599)
Preferred stock dividends (121,513)
Payments of notes payable (5,721,172) (9,071,670) (10,591,458)
Proceeds from exercise of stock
options 175,946
Net proceeds from issuance of
preferred stock 2,015,232
Net borrowings under long-term
agreement 15,913,190
Net cash (used in) provided
by financing activities (4,145,185) (9,263,613) 5,101,360
NET INCREASE IN CASH AND
CASH EQUIVALENTS 21,196 199,477 146,922
Cash and cash equivalents at
beginning of year 438,414 238,937 149,430
Cash and cash equivalents at
end of year $ 459,610 $ 438,414 $ 296,352
Supplemental disclosures of cash
flow information:
Cash paid during the year for
Interest $ 1,177,079 $ 1,602,511 $ 1,580,394
Income taxes $ 59,549 $ 103,246 $ 31,296
In connection with the sale of 65% of the outstanding shares of Mountain
Farms, Inc. in February 1994, the Company has a note receivable in the amount of
$1,675,948 (Note F).
Capital lease obligations of $61,466, and $440,426 were incurred for the
purchase of equipment in 1994 and 1993, respectively (Note E).
Cash and cash equivalents at the beginning of 1994 excludes $57,415 of cash
relating to MFI.
The accompanying notes are an integral part of these statements.
F-8
<PAGE>
Alpine Lace Brands, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1995 and 1994
NOTE A - SUMMARY OF ACCOUNTING POLICIES
A summary of the significant accounting policies consistently applied in
the preparation of the accompanying consolidated financial statements follows:
1. Business and Principles of Consolidation
The consolidated financial statements include the accounts of Alpine Lace
Brands, Inc. (the Company) and its wholly-owned subsidiaries, MCT Dairies,
Inc. (MCT) and Marolf Dakota Farms Cheese, Inc. (MDFC). Included in the 1993
statement of operations were the accounts of Mountain Farms, Inc. (MFI). On
February 17, 1994, the Company sold 65% of MFI. All material intercompany
accounts and transactions have been eliminated.
The Company is engaged in the development, marketing and distribution of
branded cheeses and other specialty food products. Sales of these products are
primarily to supermarket chains, food distributors and delicatessens located
throughout the United States. MCT is engaged in cheese and dairy products
commodity trading. Prior to 1995, MDFC produced skim milk cheese used by the
Company in its fat free product line. In addition, MDFC converted and packaged
MDFC brand Colby, Cheddar, and Monterey Jack cheeses marketed by the Company.
MDFC currently converts and packages Alpine LaceR brand dairy case sliced
cheeses. As a result of a restructuring of the Companys operations (Note G) in
December 1994, MDFC no longer produces skim milk cheese used by the Company and
terminated its MDFC product line.
2. Revenue Recognition
Sales and related cost of sales are recognized upon shipment of products.
Promotional allowances are charged to selling expense.
3. Inventories
Inventories consisting primarily of bulk cheese, cheese products held for
resale, raw materials and packaging supplies are stated at the lower of cost or
market. Cost is determined using the first-in, first-out method.
F-9
<PAGE>
Alpine Lace Brands, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
December 31, 1995 and 1994
NOTE A (continued)
4. Property, Plant and Equipment
Property, plant and equipment are depreciated over periods sufficient to
relate the cost of such assets to operations over the following estimated
service lives:
Building and improvements ....... 25-31 years
Leasehold improvements .......... 3-20 years
Furniture, fixtures and equipment 3-10 years
The straight-line method of depreciation is followed for substantially all
assets for financial reporting purposes; but accelerated methods are generally
used for tax purposes.
5. Earnings (Loss) Per Share of Common Stock
Earnings (loss) per share of common stock was computed by dividing net
earnings (loss) after deducting preferred dividend requirements, by the weighted
average number of shares of common stock and common equivalent shares
outstanding during the period, including the dilutive effect of warrants and
stock options outstanding, if applicable.
6. Income Taxes
The Company and its wholly-owned subsidiaries file a consolidated Federal
income tax return. Deferred income taxes are recognized in the accompanying
financial statements because of differences between financial and tax reporting.
7. Cash and Cash Equivalents
For purposes of the statement of cash flows, the Company considers all
highly liquid debt instruments purchased with an original maturity of three
months or less to be cash equivalents.
F-10
<PAGE>
Alpine Lace Brands, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
December 31, 1995 and 1994
NOTE A (continued)
8. Slotting Fees
Through December 31, 1992, the Company deferred and amortized, over a
one-year period, the one-time costs that its customers charged to include a new
product in their distribution system (slotting fees). The Company restructured
its branded cheese division during the first quarter of 1993 and in connection
with the restructuring altered its marketing strategy and ceased deferring and
amortizing slotting fees. The effect of this change in estimate was to increase
the pretax loss for the year ended December 31, 1993 by approximately $286,000.
Slotting fees expensed in 1995, 1994 and 1993 were approximately $542,000,
$410,000 and $1,271,000, respectively.
9. Capital Leases
Capital leases are recorded at the present value of future lease payments.
These leases are amortized over their primary term.
10. Other Assets
The costs of patents, trademarks, trade names and technology acquired are
amortized by the straight-line method over their estimated useful lives, up to
20 years.
11. Use of Estimates
In preparing financial statements in conformity with generally accepted
accounting principles, management is required to make estimates and assumptions
that affect the reported amounts of assets and liabilities and the disclosure of
contingent assets and liabilities at the date of the financial statements and
revenues and expenses during the reporting period. Actual results could differ
from those estimates.
12. Fair Value of Financial Instruments
Based on borrowing rates currently available to the Company for bank loans
with similar terms and maturities, the fair value of the Companys long-term
debt approximates the carrying value. Furthermore, the carrying value of all
other financial instruments potentially subject to valuation risk (principally
consisting of cash and cash equivalents, accounts receivable and accounts
payable) also approximate fair value.
F-11
<PAGE>
Alpine Lace Brands, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
December 31, 1995 and 1994
NOTE B - PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are summarized as follows:
1995 1994
Leasehold improvements ....................... $ 106,176 $ 45,914
Furniture, fixtures and equipment ............ 2,389,337 1,541,200
Equipment under capital lease ................ 973,795 1,052,544
Land, building and improvements .............. 289,314 346,000
3,758,622 2,985,658
Less accumulated depreciation and amortization (1,422,968) (1,057,075)
$ 2,335,654 $ 1,928,583
See Note G as to MDFC plant and equipment write-downs which are shown as
reductions to the costs of the assets.
NOTE C - INVENTORIES
Inventories are summarized as follows:
1995 1994
Cheese inventory . $5,880,513 $4,986,691
Packaging supplies 332,743 460,811
$6,213,256 $5,447,502
In connection with the purchase of cheese for anticipated manufacturing
requirements, the Company purchases cheese futures and options as deemed
appropriate to reduce the risk of future cheese price increases. These futures
and options are accounted for as hedges. Under hedge accounting, gains and
losses are deferred and recognized in the cost of goods sold as part of the
product cost. The Company can be exposed to losses in the event of
nonperformance by the other parties to the futures or options. However, the
Company does not anticipate nonperformance by the parties. At December 31, 1995,
the Company did not own any futures and options contracts.
F-12
<PAGE>
Alpine Lace Brands, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
December 31, 1995 and 1994
NOTE D - NEW ACCOUNTING STANDARDS NOT YET ADOPTED
In 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 121, Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of (SFAS No. 121),
which provides guidance on when to assess and how to measure impairment of
long-lived assets, certain intangibles and goodwill related to those assets to
be held and used, and for long-lived assets and certain identifiable intangibles
to be disposed of. The Financial Accounting Standards Board also issued
Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based
Compensation (SFAS No. 123), which gives companies a choice of the method of
accounting used to determine stock-based compensation. Companies may account for
such compensation either by using the intrinsic value-based method provided in
APB Opinion 25, Accounting for Stock Issued to Employees (APB No. 25) or the
fair market value-based method provided in SFAS No. 123. These statements are
effective for financial statements for fiscal years beginning after December 15,
1995. The Company believes that the impact of adopting SFAS No. 121 will not
have a material effect on the Company. The Company intends to use the intrinsic
value-based method provided in APB No. 25, to determine stock-based
compensation. The sole effect of the adoption of SFAS No. 123 is the obligation
imposed on the Company to comply with the new disclosure requirements provided
thereunder.
NOTE E - CAPITALIZED LEASES
The following is a schedule by years of future minimum lease payments under
capital leases, together with the present value of the net minimum lease
payments as of December 31, 1995:
Year ended December 31,
1996 $183,215
1997 169,105
1998 163,345
1999 122,583
2000 9,164
Net minimum lease payments ................ 647,412
Less amount representing interest ......... 94,768
Present value of net minimum lease payments $552,644
Current portion ........................... $143,083
Noncurrent portion ........................ 409,561
$552,644
F-13
<PAGE>
Alpine Lace Brands, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
December 31, 1995 and 1994
NOTE E (continued)
Accumulated amortization of equipment under the capital leases at December
31, 1995 and 1994 approximated $421,000 and $436,000, respectively.
NOTE F - MOUNTAIN FARMS, INC.
On February 17, 1994, the Company sold common stock representing 65% of the
outstanding shares of MFI. After the sale, MFI owed the Company $1,675,948,
which is evidenced by an unsecured note payable due ten years from closing with
accrued interest at LIBOR plus 1/4%. The sales proceeds, net of expenses,
approximated the Companys proportionate investment in MFI at December 31, 1993.
In addition, the Company entered into a three-year supply agreement with MFI
whereby MFI was to convert products for the Company in an amount not less than
3,000,000 pounds annually.
In December 1994, in connection with a restructuring of the Companys
operations (Note G), the Company terminated the supply agreement with MFI. In
addition, based on an evaluation of the recoverability of its investment in MFI,
the Company recorded a charge of $1,517,757 to write down to zero the carrying
value of its investment and certain related assets in MFI and related expenses.
During 1995, MFI continued to incur operating losses and the Company was
notified that MFI was closing its production facility and restructuring its
business (including converting cheese at an affiliate of MFI) in an attempt to
improve operations. Although MFI has taken steps that it believes will improve
operations, there can be no assurance that they will be successful and it is
reasonably possible that, in the near term, the Company may incur a loss on the
MFI note of $1,675,948. The Company is pursuing its alternatives in receiving
full value of the note.
The following summarizes certain selected data of MFI for the year ended
December 31, 1993:
Net sales .............. $ 50,924,327
Operating loss ......... $ (1,043,876)
Loss before income taxes $ (1,244,132)
F-14
<PAGE>
Alpine Lace Brands, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
December 31, 1995 and 1994
NOTE G - RESTRUCTURING CHARGE
In December 1994, the Company approved a restructuring plan in connection
relating to its Alpine Lace fat free products. In addition, MDFC cheese products
converted and packaged at MDFC were discontinued in December 1994. In connection
with the restructuring, the Company, in January 1995, closed its skim milk
cheese production facility at MDFC and terminated its supply agreement with MFI,
and will utilize other manufacturers to perform these functions. As a result of
the restructuring, all cheese production is performed at outside suppliers.
Included in the restructuring charge is a write-down of the MDFC plant and
equipment of $1,252,000, the write-down of the MDFC trademark of $244,000,
termination pay obligations of $55,000, an accrual of $1,070,700 relating to the
cancellation of the supply agreement with MFI which is payable in 26 monthly
installments commencing January 1995 and other items of $18,000. In 1995, the
Company sold the assets of MDFC not used at their carrying value.
NOTE H - LONG-TERM DEBT
Long-term debt at December 31, 1995 and 1994 consists of:
1995 1994
Notes payable to bank (a) ............................ $ 5,325,945 $ 6,995,218
Subordinated note payable (less unamortized debt
discount of $70,429) (b) ......................... 2,929,571
Note payable to bank (repaid in April 1995) .......... 396,551
Note payable to bank (repaid in April 1995) .......... 593,024
Obligations payable, principally to various MDFC
creditors, payable in various quarterly and annual
payments with a final payment in 1995 ............ 19,063
5,325,945 10,933,427
Less current maturities .............................. -- 1,385,846
$ 5,325,945 $ 9,547,581
As of December 31, 1995, the outstanding long-term debt matures in 1998.
F-15
<PAGE>
Alpine Lace Brands, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
December 31, 1995 and 1994
NOTE H (continued)
(a) The bank credit facility provides for revolving credit loans up to
$15,500,000 through March 1998 subject to availability of eligible accounts
receivable and inventory; and the availability of up to $3,500,000 to purchase
equipment subject to certain limitations through March 1998. The credit facility
contains certain covenants and restrictions on capital expenditures,
indebtedness, the declaration of future dividends and maintenance of certain
financial ratios, including working capital, adjusted tangible net worth,
current ratio and cash flow. Interest on the revolving credit loan is payable
monthly at the banks base rate (8.5% at December 31, 1995) plus 1/2%, and a
facility fee of 3/16% is payable on the unused balance. The borrowings are
collateralized by all assets of MCT and the Company. In connection with the sale
of 65% of MFI on February 17, 1994, the Company paid to the bank approximately
$3,653,000 from the proceeds from the sale of MFI and the bank released its
security interest in the assets of MFI.
(b) On March 27, 1995, the Company redeemed its $3,000,000 subordinated
note payable and common stock purchase warrants for $3,000,150 plus accrued
interest of $42,750. The redemption resulted in a net extraordinary gain of
$103,760 to the Company. A portion of the funds for the redemption came from the
issuance of $2,250,000 of convertible preferred stock (Note N) on March 22,
1995.
NOTE I - INCOME TAXES
Income tax expense (benefit) for the years ended December 31, 1995, 1994
and 1993 consists of:
1995 1994 1993
Current
Federal ....................... $ 405,654 $ 10,000 $ (941,736)
State ......................... 46,673 43,600 (41,529)
452,327 53,600 (983,265)
Deferred income taxes
Federal ....................... (119,449)
State ...................... .. (20,180)
(139,629)
$452,327(a) $ 53,600 $(1,122,894)
(a) Includes $7,451 net in extraordinary item.
F-16
<PAGE>
Alpine Lace Brands, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
December 31, 1995 and 1994
NOTE I (continued)
The Companys income tax benefit for the year ended December 31, 1993 is
comprised of Federal and state carryback claims to prior years resulting in a
refund of $983,265 and the reversal of $139,629 of prior year deferred income
taxes which were reversed due to available income tax carryforwards. During the
year ended December 31, 1995, income tax expense was reduced by approximately
$414,000 resulting from the benefit of utilizing net operating loss
carryforwards.
The Company accounts for income taxes in accordance with the provisions of
Statement of Financial Accounting Standards No. 109, Accounting for Income Taxes
(SFAS No. 109). SFAS No. 109 requires recognition of deferred tax liabilities
and assets for the expected future tax consequences of events that have been
included in the financial statements or tax returns. Under this method, deferred
tax liabilities and assets are determined based on the difference between the
financial statement and tax bases of assets and liabilities using enacted tax
rates in effect for the year in which the differences are expected to reverse.
Deferred tax assets and liabilities at December 31, 1995 and 1994 consist
of the following:
1995 1994
Deferred tax assets
Allowance for doubtful accounts ........... $ 17,210 $ 79,465
Capitalized inventory costs ............... 8,638 6,949
Capitalized package design cost ........... 72,328 81,991
Alternative minimum tax credit carryforward 27,828 60,993
Charitable contributions .................. 12,768 --
Net operating loss carryforward ........... 26,602 362,223
Cancellation of contract .................. 10,063 428,280
Write-down of assets ...................... -- 446,602
Inventory reserve ......................... 96,918 97,276
Patent amortization ....................... 88,484 82,344
Other ..................................... -- 8,410
(carried forward) ..................... 360,839 1,654,533
F-17
<PAGE>
Alpine Lace Brands, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
December 31, 1995 and 1994
NOTE I (continued)
1995 1994
(brought forward) ....................... $ 360,839 $ 1,654,533
Deferred tax liabilities
Depreciation of property, plant and equipment 149,156 390,694
Deferred inventory profit ................... 22,893 52,052
172,049 442,746
Net deferred tax asset .......................... 188,790 1,211,787
Less valuation allowance ........................ (188,790) (1,211,787)
$ - $ -
During the year ended December 31, 1995, the change in the valuation
allowance was approximately $1,023,000.
The differences (expressed as a percentage of pretax income) between the
statutory Federal income tax rate and the effective income tax rate as reflected
in the accompanying consolidated statements of earnings are as follows:
1995 1994 1993
Statutory Federal income tax rate ........ 34.0% (34.0)% (34.0)%
State income taxes, net of Federal benefit .7 .9 (1.1)
Permanent differences .................... .6 (1.1) .7
Write-down of investment in MFI .......... -- 16.5
Alternative minimum tax credit ........... (1.1) .3
Change in deferred tax valuation allowance (22.9) 19.3 12.0
Other .................................... (1.2) (.2)
Effective tax rate ....................... 10.1% 1.7% (22.4)%
F-18
<PAGE>
Alpine Lace Brands, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
December 31, 1995 and 1994
NOTE J - RELATED PARTY TRANSACTIONS
Market Finders Brokerage, Inc. (MFBI) is a company 100%-owned by a Director
and Vice President of the Company and wife of the President and principal
stockholder of the Company. MFBI and the Director introduced the Company to a
broker and receives a percentage commission from the broker (subject to a
specified minimum and maximum) based on commissions generated by this business.
During the years ended December 31, 1995, 1994 and 1993, the Company made
purchases of $126,729, $181,742 and $233,706, respectively, from MFBI. In
addition, during the years ended December 31, 1995, 1994 and 1993, the Company
had sales of $115,632, $155,210 and $205,574, respectively, to MFBI. Commissions
paid to the purchaser of MFBIs commission brokerage business amounted to
$231,370, $215,258 and $309,602, respectively, during the years ended December
31, 1995, 1994 and 1993.
In December 1991, MCT loaned its current president $65,000 which will be
repaid over five years at an interest rate of 11%. As a condition of the loan
the president purchased all the outstanding common stock of Herbloc Inc.
(Herbloc) for $60,000, and entered into a five-year supply agreement through
December 31, 1996 with MCT, which is automatically renewed for an additional
five years unless MCT elects to terminate. The supply agreement guarantees that
each year MCT will either purchase at least 86% of Herblocs "quota share" for
cheese and cheese products, or notify Herbloc by September 15 of such year of
the amount of each "quota share" which MCT does not yet plan to purchase during
such year imported by Herbloc. MCT has guaranteed Herbloc an aggregate mark-up
of $18,000 per year during the initial five-year term. The Company estimates its
purchase commitment for 1996 amounts to approximately $350,000.
NOTE K - COMMITMENTS AND CONTINGENCIES
The Company leases administrative offices for annual rentals totalling
approximately $139,000 and expiring on April 30, 2000. The lease provides for
escalation charges for operating expenses and real estate property taxes.
The Company had a one-year agreement with a public warehouse to provide
refrigerated warehouse space for a minimum monthly fee of $20,000 which expired
on January 22, 1996. The Company is currently renegotiating this arrangement.
The Company is a party to an agreement for the manufacture of Alpine LaceR
reduced fat swiss cheese. The initial term of the agreement continues to
December 31, 2000, with five-year renewal
F-19
<PAGE>
Alpine Lace Brands, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
December 31, 1995 and 1994
NOTE K (continued)
periods thereafter unless terminated by either party. The price to be paid
by the Company is based on a specified commodity block market price on the date
the product is manufactured plus a fixed premium (subject to periodic adjustment
by mutual agreement). Although the manufacturer is to be the primary source of
supply of this product, the Company is not obligated to purchase any specific
quantities of the product. As part of the cheese manufacture agreement, the
Company made a $300,000 advance to the manufacturer, which the manufacturer may
use at any time to credit the Companys current obligation. The $300,000 advance
must be maintained at all times during the duration of this agreement.
The Company has an employment agreement with its President providing for a
minimum annual base salary of $275,000. The term of the agreement is through
January 4, 1999. The Company has two agreements with officers that expire in
April and December 1996, respectively, and four agreements with officers that
expire January 4, 1997. The terms of the agreements provide for minimum salaries
totalling $753,000. The agreements automatically renew at the end of the period,
in the absence of specified advance notice of intention not to renew and
automatically renew upon a change in control of the Company.
The Company is a party to a consulting agreement expiring on November 7,
1999. The consulting fee is based upon varying rates per pound produced, by or
for the Company or any of its affiliates, of certain of the Companys cheese
products up to a maximum of $375,000 per year. The minimum payment required in
the agreement is $132,000 per year.
The Company has a two-year consulting agreement with a former officer of
the Company expiring in October 1996. The consulting fee is $50,000 per year.
In connection with the acquisition of certain rights and technology from
Gamay Foods, Inc. (Gamay), the Company entered into a consulting agreement
with the principal shareholder of Gamay for an initial term of ten years
expiring on May 21, 2000. The consulting fee is $200,000 per year. The Company
also pays Gamay a royalty based on pounds sold of its Fat Free and Low-Fat
cheese products. On February 24, 1995, the Company and Gamay modified this
agreement as follows: (i) the consulting agreement was extended for another
four-year term expiring on May 20, 2004 at a fee of $100,000 per year; (ii) the
royalty payments were extended for a four-year term from the original
fifteen-year period; (iii) in the event the Company receives any licensing
revenues, the Company shall pay to Gamay a licensing royalty of 25% of the
Companys net licensing revenue; and (iv) the Company has a call option whereby,
upon the sale of the Companys branded division, the Company can cancel all
agreements with Gamay and the Company shall pay to Gamay the greater of 7% of
the sales proceeds or $6,000,000.
F-20
<PAGE>
Alpine Lace Brands, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
December 31, 1995 and 1994
NOTE K (continued)
The Company has marketing commitments through December 31, 1997. These
commitments provide for the Company to make payments on a quarterly basis
totalling $200,000 and $225,000 per year in 1996 and 1997, respectively. The
Company has the right to cancel the 1997 commitment after giving proper
notification.
NOTE L - RETIREMENT PLAN
The Company has a deferred contribution 401(k) plan. Eligible participants
may contribute a fixed weekly dollar amount or a percentage of their basic
annual salary as contributions. The Company may contribute to the Plan at the
discretion of the Board of Directors. The Company has not made any contributions
to the Plan.
NOTE M - STOCK OPTION PLAN
The Company has a stock option plan (the Plan) for its employees and
directors. Under the Plan, 1,000,000 shares of the Companys common stock are
reserved for issuance. The options issued to date generally become exercisable
over three years commencing one year after the date of grant and upon the
occurrence of certain corporate transactions the options become immediately
exercisable. The following table summarizes the options granted under the plan:
Weighted
average
Shares price
Outstanding at December 31, 1992 ................. 194,000 $ 5.08
Options granted .................................. 109,650 4.93
Options expired .................................. (7,000) 5.11
Outstanding at December 31, 1993 ................. 296,650 5.02
Options granted .................................. 121,000 3.72
Options expired .................................. (53,632) 4.74
Outstanding at December 31, 1994 (carried forward) 364,018 4.63
F-21
<PAGE>
Alpine Lace Brands, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
December 31, 1995 and 1994
NOTE M (continued)
Weighted
average
Shares price
Outstanding at December 31, 1994 (brought forward) .. 364,018 $ 4.63
Options granted ..................................... 179,700 9.94
Options expired ..................................... (3,200) 3.88
Option exercised .................................... (36,717) 4.68
Outstanding at December 31, 1995 .................... 503,801 6.53
Exercisable at December 31, 1995 .................... 222,099 4.82
NOTE N - STOCKHOLDERS EQUITY
During the years ended December 31, 1995, 1994 and 1993, warrants and
nonemployee stock options to purchase 30,500 shares, 5,000 shares, and 160,000
shares of common stock at an average of $7.47, $4.50 and $4.75 per share,
respectively, were issued, subject to customary terms and conditions. During
1995, the 160,000 nonemployee stock options were reduced by 40,000, and the
Company made a payment of $240,000 which was recorded as a reduction of
additional paid-in capital.
The following table summarizes shares of common stock reserved for issuance
in connection with the warrants and nonemployee options at December 31, 1995:
Number of shares issuable 245,752
Weighted average price .. $ 6.60
Exercisable ............. 245,752
The warrants have varying expiration dates through December 15, 2005.
F-22
<PAGE>
Alpine Lace Brands, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
December 31, 1995 and 1994
NOTE N (continued)
On January 1, 1995, the President of MCT obtained an option to purchase 20%
of MCT for approximately $97,000. Thirty percent of the option vested
immediately and the remaining seventy percent vests over three and one-half
years. Upon a change in control (as defined), the President of MCT will have the
option to put the shares back to the Company at a premium of approximately
$95,500 at December 31, 1995.
On March 22, 1995, the Company completed a private placement of $2,250,000
of 7.5% cumulative convertible preferred stock, resulting in net proceeds to the
Company of approximately $2 million. The securities are convertible into common
stock of the Company at a conversion price of $7-3/8 for five years, at which
time the Company must either force a conversion at market price of the common
stock or redeem the preferred stock. In the event of a change in control (as
defined), the Company is required to make an offer to purchase the convertible
preferred stock.
NOTE O - BUSINESS SEGMENT INFORMATION
The Companys operations consist of two segments: (1) the marketing,
distributing, packaging, converting and manufacturing of branded cheeses and
other specialty food products and (2) cheese and dairy products trading.
Operating profit is total revenue less operating costs and expenses related
to each segment net of certain unallocated corporate expenses. Identifiable
assets are those used in each segment. One customer, principally of MFI (of
which 65% of the Companys interest was sold in February 1994, see Notes A-1 and
F), in the cheese marketing, distributing, packaging, converting and
manufacturing of branded cheeses and other specialty food products segment
accounted for approximately 10% of net sales for that segment during 1993. For
consolidated purchases, two suppliers accounted for 52%, 37% and 27% of total
purchases in 1995, 1994 and 1993, respectively, and one supplier of MFI
accounted for 7% of total purchases in 1993.
During 1995, 1994 and 1993, cheese and dairy products trading had
inter-segment sales of $5,640,794, $6,483,344 and $3,788,515 to cheese
marketing, distributing, packaging, converting and manufacturing of branded
cheeses and other specialty food products. During 1995, 1994 and 1993, cheese
marketing, distributing, packaging, converting and manufacturing of branded
cheese and other specialty food products had intersegment sales of $108,729,
$172,131 and $548,652 to cheese and dairy products trading, respectively.
F-23
<PAGE>
Alpine Lace Brands, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
December 31, 1995 and 1994
NOTE O (continued)
Information about the Companys operations in different business segments
for the years ended December 31, 1995, 1994 and 1993 is as follows:
1995 1994 1993
Net sales
Marketing, distributing, packaging,
manufacturing and converting of
branded cheeses and other speci-
alty food products ................ $ 108861583 $ 104145329 $ 147702659
Cheese and dairy products
trading ........................... 41931335 34864953 37380122
Elimination of intersegment
sales ............................. (5749523) (6655474) (4337167)
Total net sales ............... $ 145043395 $ 132354808 $ 180745614
Operating profit (loss)
Marketing, distributing, packaging,
manufacturing and converting of
branded cheeses and other speci-
alty food products ................ $ 5805840 $ (1195974) $ (3388561)
Cheese and dairy products
trading ........................... 275615 359350 707590
Operating profit (loss) ....... 6081455 (836624) (2680971)
Corporate expenses ...................... (728902) (649725) (749300)
Interest income ......................... 2122 8406 8042
Interest expense ........................ (997771) (1591446) (1740919)
Earnings (loss) before income
taxes and extraordinary item $ 4356904 $ (3069389) $ (5163148)
F-24
<PAGE>
Alpine Lace Brands, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
December 31, 1995 and 1994
NOTE O (continued)
1995 1994 1993
Identifiable assets
Marketing, distributing, packaging,
converting and manufacturing of
branded cheeses and other
specialty food products ........ $ 21828300 $ 21783851 $ 30596962
Cheese and dairy products
trading ........................ 4448401 7152664 7459640
Total assets ............... $ 26276701 $ 28936515 $ 38056602
Depreciation and amortization
Marketing, distributing, packaging,
converting and manufacturing of
branded cheeses and other speci-
alty food products ............. $ 566251 $ 824369 $ 1035930
Capital expenditures
Marketing, distributing, packaging,
converting and manufacturing of
branded cheeses and other speci-
alty food products ............. $ 995196 $ 317917 $ 1486090
NOTE P - INTEREST EXPENSE - NET
1995 1994 1993
Interest expense - net
Interest expense .................. $ 997771 $ 1591446 $ 1740919
Interest income ................... (2122) (8406) (8042)
$ 995649 $ 1583040 $ 1732877
F-25
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> DEC-31-1995
<CASH> 459,610
<SECURITIES> 0
<RECEIVABLES> 13,111,382
<ALLOWANCES> 43,026
<INVENTORY> 6,213,256
<CURRENT-ASSETS> 20,422,667
<PP&E> 3,758,622
<DEPRECIATION> 1,422,968
<TOTAL-ASSETS> 26,276,701
<CURRENT-LIABILITIES> 15,363,586
<BONDS> 5,817,868
<COMMON> 50,501
0
2,250,000
<OTHER-SE> 2,794,746
<TOTAL-LIABILITY-AND-EQUITY> 26,276,701
<SALES> 145,043,395
<TOTAL-REVENUES> 145,043,395
<CGS> 109,219,994
<TOTAL-COSTS> 139,690,842
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 995,649
<INCOME-PRETAX> 4,356,904
<INCOME-TAX> 444,876
<INCOME-CONTINUING> 3,912,028
<DISCONTINUED> 0
<EXTRAORDINARY> 103,760
<CHANGES> 0
<NET-INCOME> 4,015,788
<EPS-PRIMARY> .74
<EPS-DILUTED> .74
</TABLE>
