<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
(Mark One)
XX Annual Report pursuant to section 13 or 15(d) of the Securities Exchange
- ---- Act of 1934 for the fiscal year ended July 31, 1996 or
Transition report pursuant to section 13 or 15(d) of the Securities
- ---- Exchange Act of 1934 for the transition period from _______________ to
________________.
For the fiscal year ended July 31, 1996
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Commission file number 0-22556
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UNCLE B'S BAKERY, INC.
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(Exact name of small business issuer as specified in its charter)
Iowa 42-1267239
- --------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
441 Dubuque Street, Ellsworth, Iowa 50075
- ----------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
Issuer's telephone number: (515) 836-4000
Securities registered pursuant to Section 12(b) of the Exchange Act:
Title of each class Name of each exchange on which registered
_____________________________ ___________________________________________
_____________________________ ___________________________________________
Securities registered under Section 12(g) of the Exchange Act:
Common Stock, $.01 Par Value
____________________________
(Title of class)
____________________________
(Title of class)
Check whether the issuer (1) 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 Issuer 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-B is not contained herein, and will not be contained, to the
best of issuer's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB. [ ]
State issuer's revenues for its most recent fiscal year: $17,404,528
-----------
The aggregate market value of the voting stock held by non-affiliates of the
issuer as of September 30, 1996, was approximately $7,976,576 (based on the
closing price of such stock as reported by NASDAQ on such date).
The number of shares outstanding of each of the issuer's classes of common
stock, as of September 30, 1996 was: Common Stock, $.01 par value; 3,545,147
shares.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the issuer's definitive Proxy Statement for its 1996 Annual Meeting
of Shareholders are incorporated by reference into Part III, as specifically set
forth in said Part III.
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PART I
Unless the context indicates otherwise, all references to the "Company,"
"Uncle B's" or "Registrant" in this Annual Report on Form 10-KSB relates to
Uncle B's Bakery, Inc. The following United States trademarks owned by the
Company appear in this Form 10-KSB: Uncle B's(R), Millspring(TM) and RESEALABLE
ZIP STRIP(TM).
Item 1. Description of Business.
-----------------------
GENERAL
Uncle B's Bakery, Inc. is a commercial baker whose "Uncle B's" and
"Millspring" brands of fresh-tasting, never frozen bagels are displayed and sold
through supermarket refrigerated dairy cases and supermarket bread aisles and
deli departments. The Company's products, an alternative to frozen bagels, are
currently available in approximately 11,000 supermarkets in 43 states, including
locations in 44 of the top 50 food market territories in the United States. The
Company's packaging process permits Uncle B's bagels to be stocked by grocers
for up to four months in the refrigerated dairy case and Millspring bagels up to
twenty-one days in the bread aisle and deli department without appreciable loss
of quality.
The Company entered into an agreement with a national food service company
dated March 22, 1996 pursuant to which the Company agreed to produce, package,
and label bagels according to specifications. The agreement was amended on May
10, 1996 to provide a minimum of 900,000 cases during the 18 months beginning
June 1, 1996. The Company estimates that sales for the fiscal year 1997 will
increase approximately 40-50% over fiscal year 1996, primarily as a result of
this contract.
Uncle B's was formed by William T. Rose, Jr. in 1985 as a retail bagel
bakery and restaurant. In 1987, the Company began experiencing demand for its
bagels from supermarkets in the Ames, Iowa area. The Company closed its retail
operations in early 1993 to focus exclusively on commercial baking. In 1989, Mr.
Rose developed the Company's production and packaging process, and in 1992 the
Company began the widespread distribution of its fresh-tasting, never frozen
bagels. In 1996, the Company was the first in the industry to introduce a
consumer friendly RESEALABLE ZIP STRIP bagel package.
PRODUCTS
The Company currently produces its fresh-tasting, never frozen bagels under
two brands, Uncle B's and Millspring. The Uncle B's product is the Company's
refrigerated bagel with a four month shelf life provided by the Company's
proprietary packaging process. The Millspring product is the Company's bread
aisle/deli department bagel with a 21-day shelf life due to this proprietary
process.
The Company's branded bagels are not only packaged in a proprietary manner
to retain the freshness and taste of a traditional, fresh, "water" bagel, but
the Company also utilizes quality ingredients, production and baking processes
to produce what management believes are the highest quality commercially baked
bagels in the nation.
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The "bake off" product is produced according to the specifications of the
food service company buyer but utilizes some of the Company's proprietary
production methods. The bake off product does not use the Company's recipes or
packaging process.
PRODUCT MARKET
The history of the bagel dates back to 1683, when a Viennese coffee shop
owner created a roll in the shape of the King of Poland's stirrup in honor of
the King's actions to end a siege by the Turks. Since 1683, the shape of bagels
has evolved from a stirrup to a circle and the availability has evolved from
coffee shops and bakeries to include supermarkets. The popularity of the bagel
has been firmly established for many years on the United States East and West
Coasts.
The American Bagel Association reports that at least 75% of all Americans
are familiar with bagels as compared to less the 20% in the 1980's. According to
Modern Baking, the total United States bagel market now exceeds 2.6 billion
dollars annually. Bakery Production and Marketing in March 1996 reported that
croissants and bagels as a category contribute an average of 9.6% to supermarket
bakery sales.
Consumption and sale of all bagel products (fresh, refrigerated and
frozen), according to A.C. Nielsen's Scantrack, grew approximately 9.2% for the
52 weeks ended July 31, 1996. Refrigerated bagels increased 24.6% for the
period, fresh bagels grew 24.7% for the same period, and frozen bagels decreased
5.9%.
These sales trends show a consumer preference for fresh and refrigerated
bagels which are the markets targeted by the Company's refrigerated Uncle B's
product and its fresh-tasting bread aisle/deli department Millspring product.
The Company continues to be the market leader with a 42.2% share of the
refrigerated bagel market.
Management believes that the Company's future growth will be from (1)
increasing Uncle B's market penetration and same store market share within the
markets currently served; (2) expanding the distribution of Uncle B's
refrigerated bagels into remaining top 50 food market territories within the
United States; (3) growing the Millspring label both through license
arrangements for bread aisle distribution and through direct sales in the deli
department bagel category (see "Sales and Marketing" below); and (4) producing
bagels for strategic alliances with food service companies, supermarkets and
convenience stores. The degree of growth from these strategies and the manner in
which they will be pursued will depend upon the opportunities for enhancing
shareholder value.
SALES AND MARKETING
The Company sells its products to supermarket chains and independent
wholesalers primarily through food brokers. The brokers, which are independent
contractors, coordinate product promotions in their geographic areas and are
compensated on a percentage of net sales. As of July 31, 1996, the Company had
an active network of 60 food brokers.
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The Company has four regional sales managers and one territory sales
manager who provide assistance to the food brokers in the major markets served
by Uncle B's in the eastern, southeastern, midwestern and western United States.
Each of the managers has an extensive background and experience with large,
national food companies. The Company's Executive Vice President provides
direction and policy development for the Company's regional managers and food
brokers.
The Company introduced a fresh-tasting, never frozen bread aisle bagel
product in March of 1994. The bagel utilizes the Company's proprietary packaging
process which provides the bread aisle/deli product with a 21-day shelf life.
Millspring, the Company's bread aisle/deli bakery bagel, is currently
distributed under a licensing agreement with Metz Baking Company ("Metz") of
Sioux City, Iowa, a large regional commercial bakery. Metz handles the sales,
marketing and distribution of the product which is displayed in the bread aisle
and deli departments of retail supermarkets. By the end of fiscal 1996, Metz
carried the Millspring product in 11 midwestern states.
The Company currently has accounts with supermarket chains selling one or
both of the branded products in approximately 11,000 stores in 44 of the top 50
food market territories in the United States, which are:
Los Angeles Richmond Columbus
New York Baltimore Salt Lake City
Chicago Minneapolis Memphis
Houston Tampa Nashville
Philadelphia Seattle Orlando
Dallas Phoenix Louisville
Detroit Cleveland Birmingham
Washington DC San Diego Albany
Miami New Orleans Des Moines
Boston Milwaukee Grand Rapids
St. Louis San Antonio New Haven/Hartford
Pittsburgh Kansas City Jacksonville
Denver Omaha Little Rock
Atlanta Charlotte Syracuse
Raleigh/Durham Portland
The Company expects over time to expand its sales coverage to each of the 50
largest food market territories in the continental United States.
The Company's marketing strategy is to meet consumer demands in the
refrigerated and bread aisle/deli department bagels along with food service
segments of the bagel industry. The Company has positioned the Uncle B's and
Millspring products as new brand categories (dairy case and bread aisle/deli
bagels) in order to satisfy consumer preference and further develop brand name
recognition. The refrigerated dairy case, bread aisle and deli departments are
high volume areas of a grocery store which offer high visibility and facilitate
impulse buying. The Company believes it is the only national bagel producer to
provide the consumer with high quality, fresh-tasting, never frozen bagels. The
Company's Uncle B's and Millspring logos are distinctive and are intended to
promote sales, brand identity and name recognition.
The Company's other marketing techniques include display racks, billboards,
point of purchase promotions, end of aisle bunkers, in-store banners, and
similar in-store
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advertising. The Company employs in-store sampling and uses a special training
manual to develop knowledgeable, well-trained product demonstrators. The Company
also uses radio and specialized regional television advertisements.
BAGEL PRODUCTION
Uncle B's production methods closely follow the traditional "water bagel"
recipes and methods of production. The Company has custom designed its
production line equipment to permit use of the traditional methods on a mass
production scale.
Uncle B's bagels are prepared and baked using a proprietary, seven step
process:
. Mixing high quality ingredients in a custom built mixer, which also
kneads the dough.
. Cutting individual portions of dough and forming them into balls with
a motion that simulates hand rolling. The dough is then allowed to
"relax" for a few minutes before being machine formed into the
recognizable bagel shape.
. Holding the bagels in a warm, humid environment that activates the
yeast.
. Cooling the bagels in a holding cooler in a process calling
"retarding." While this step is costly, it is necessary to produce a
superior product with a distinctive, rich flavor. Most mass producing
bagel companies skip this time consuming and capital intensive step.
. Boiling the bagels in water which results in the shiny crust and chewy
texture which is characteristic of traditional "water" bagels. Some
manufacturers use steam injunction ovens to eliminate the boiling
step.
. Baking the bagel in a four-stage tunnel oven which duplicates the
baking effect of stone hearths and results in an authentic,
traditional, "water" bagel.
. Packing the bagels in heat sealed, tamper evident bags which are date-
coded and kept in storage until shipment to supermarket warehouses.
The bagels are never frozen. The Uncle B's product is kept in
refrigerated storage until shipment, while the Millspring product is
kept in unrefrigerated storage until shipment to the customer. The
Company believes that all other nationally distributed bagel products
are frozen at some point in the production or distribution process.
Eight varieties of Uncle B's bagels are presently available: Plain, Onion,
Honey Wheat, Cinnamon Raisin, Sourdough, Egg, Blueberry and Italian Herb.
Millspring bagels are available in the same flavors, except Egg and Sourdough.
Uncle B's and Millspring bagels, depending on flavor, contain on average 210
calories each. They contain approximately 9 grams of protein, 1.0 gram of fat,
44 grams of carbohydrates, and approximately 300 milligrams of sodium. The
Company's bagels are currently available in a 14 ounce, five bagel package.
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PRODUCTION AND PACKAGING PROCESS
The Company's production and packaging process gives Uncle B's bagels
either a four month refrigerated or twenty-one day non-refrigerated shelf life
without freezing. In the process, a modified atmosphere is sealed into a plastic
package made to the Company's specifications. Management believes that the
Company's production and packaging process is a significant improvement over
other preservation techniques, including freezing.
A traditional, unfrozen bagel with no artificial preservatives has an
expected shelf life of one to three days and, if refrigerated, of up to 10 days.
The Company's product has a non-refrigerated shelf life in an unopened bag of
approximately 21 days and a refrigerated shelf life of four months. Frozen
bagels begin to deteriorate in 7 to 10 days after being placed in the
refrigerator. Use of the Company's technology significantly reduces product
returns. The Company has filed a patent application to protect its ownership of
the production and packaging process as applied to bagels. See "Business -
Patent and Trademarks."
The Company continues to explore enhancements in its production and
packaging techniques in an effort to extend the shelf life and improve the taste
of its products. The Company introduced in April 1996 a RESEALABLE ZIP STRIP bag
which will ensure continued freshness and flavor to the customers. The Company
also intends to introduce new bagel varieties when justified by market demand,
and it continues to study new bakery products that can be marketed using its
technology.
COMPETITION
Management believes that the Company is the first to offer, on a widespread
basis, never frozen refrigerated and bread aisle/deli bagels with an extended
shelf life. Management is not aware of any other never frozen bagel marketed
from the dairy case on a national basis or of any other fresh-tasting, never
frozen bagel marketed in the bread aisle or deli department of a supermarket on
a national basis.
The Company's products compete primarily with frozen bagels, and with fresh
bagels from supermarkets' in-store bakeries. Some frozen bagel producers have
turned to the "slacked-out" approach whereby a frozen bagel is thawed prior to
display and purchased by the consumer. The Company believes such thawed bagels
are inferior in quality to the Company's never frozen bagels. The Company
believes that the manufacturers of "slacked-out" bagel products are attempting
to capture a portion of the Company's success without the quality product and
packaging technology.
There are two major producers of bagels who have nationwide distribution:
Lenders', a division of Kraft General Foods, Inc., and Sara Lee Corporation.
Sara Lee is reported to have test marketed fresh bagels in three areas. The
Company believes that Lenders, in certain markets, is distributing a frozen
bagel that is thawed and sold either as a refrigerated or unrefrigerated bagel.
The Company's bagels are competitive with these national brands in product
weight and retail price. Additionally, management believes the Company's
products are superior in terms of freshness and flavor due to the high quality
production and proprietary packaging process. The remainder of the bagel market
is fragmented in term of brand names for the consumer.
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KOSHER CERTIFICATION
The Company has received a "Circle U" designation from the Union of
Orthodox Jewish Congregations of America. The "Circle U" is the highest level
of Kosher certification and requires that the Company comply with specific
manufacturing procedures and standards.
SUPPLIERS
The Company uses a number of suppliers for essential raw materials. It is
not dependent on any one supplier for its food ingredients. Flour, the primary
ingredient, is a commodity that fluctuates in price. The Company has a bulk
flour storage facility and purchases flour by the ton on a fixed-price contract
basis. Other ingredients are also purchased by bulk, on a competitive basis.
The Company has developed a new and improved higher quality bag with a
RESEALABLE ZIP STRIP which can be supplied by different suppliers. The
suppliers are believed to be capable of meeting the Company's anticipated demand
for packaging material.
The Company purchased approximately $5.2 million of raw materials in fiscal
1996. The primary purchases in order of magnitude include: flour, bags and
boxes.
DISTRIBUTION
The Company utilizes contract carriers with refrigerated trucks to
distribute its products directly to the supermarket warehouses. The warehouses
then deliver the bagels to their stores. Uncle B's plant location in central
Iowa, one-quarter mile off Interstate 35 and 50 miles north of Interstate 80,
provides distribution efficiencies to all parts of the continental United
States.
The Company, through Metz Baking Company, Sioux City, Iowa, performs DSD
(Direct Store Distribution) distribution of its Millspring bagel in selected
markets in the midwest.
Distribution of the bake off product is performed by a national food
service company.
GOVERNMENT REGULATION
The Company is subject to licensing and regulation by various state and
federal agencies, including those dealing with health, sanitation, environment,
building, planning, safety and fire. These agencies include, but are not
limited to, the Iowa Public Health Department, the Environmental Protection
Agency, the Department of Labor, the Food and Drug Administration, the Consumer
Product Safety Commission, and the Occupational Safety and Health
Administration. The failure of the Company to comply with laws and regulations
applicable to it could result in sanctions and penalties which could materially
and adversely affect the Company's business.
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Management does not believe that compliance with federal, state and local
laws and regulations relating to the discharge of materials into the
environment, or otherwise relating to the protection of the environment, will
have a material effect on the Company's capital expenditures, earnings or
competitive position. However, the use of non-recyclable food packaging is
receiving increased attention by various state governments. The Company's
proprietary film packaging is not easily recyclable, and the Company could be
materially adversely affected if jurisdictions including its major marketing
areas adopted such regulations.
The Company's products currently comply with the Food and Drug
Administration's ("FDA") manufacturing and labeling requirements. No assurance
can be given that the FDA or other regulatory agencies will not enact new, or
change existing, regulations that would adversely affect the Company.
PATENTS AND TRADEMARKS
The Company has applied for a patent covering its packaging technology
invented by William T. Rose, Jr. and Dr. Ricardo Molins. Mr. Rose and Dr.
Molins assigned their rights to the technology to the Company. The patent
application discloses the invention of a refrigerated bagel which has an
extended four month shelf life without freezing through the use, in combination,
of a specially-designed package, a modified atmosphere and a bagel composite.
The claims in the patent application may be refused, and thus, not issued as a
patent, or may be significantly reduced in scope before a patent issues.
Consequently, there is no assurance that the patent application will result in
the issuance of a patent or, if issued, will provide significant protection.
The Company also relies upon trade secret protection for its confidential
and proprietary information. There is no assurance that others have not
developed, or will not develop, substantially equivalent production and
packaging techniques or otherwise gain access to the Company's trade secrets or
technology, or that the Company can protect its trade secrets. The Company
requires its employees, consultants, and advisors to execute confidentiality
agreements upon the commencement of an employment or consulting relationship
with the Company. Each agreement provides that all confidential information
developed or made known during the course of the relationship will be kept
confidential and not disclosed to any third parties except in specified
circumstances. There can be no assurance, however, that these agreements will
provide meaningful protection, or adequate remedies, for the Company's trade
secrets in the event of unauthorized use of disclosure of such information.
The Company has filed and received a federal trademark registration for the
wordmark "Uncle B's." The Company has also filed a trademark application for
the Uncle B's logo, which has been approved for publication by the United States
Patent and Trademark Office. The Company has filed an application with the U.S.
Patent and Trademark for the mark "Millspring." This application is pending.
EMPLOYEES
As of July 31, 1996, the Company has 198 full-time employees, 25 of whom
fill administrative, sales, and clerical positions, and 173 of whom are engaged
in production and maintenance.
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All employees are required to sign a Non compete/Confidentially Agreement.
There have been no management-labor disputes and the Company is not a party to
any collective bargaining agreement. Employees receive Company provided health
insurance and 401(K) benefits after a specified period of employment. The cost
of this benefit is shared by both the employee and the Company. Employment
contracts with Mr. William T. Rose, Jr. and Mr. William T. Rose, Sr. provide for
such company-paid benefits. In addition, the Company has established a vacation
and paid holiday policy. All employees receive stock options after one year of
employment. Further, production and sales employees participate in monthly and
quarterly gain-sharing programs.
PRODUCT LIABILITY
The Company maintains $1,000,000 of product liability coverage per event
and $2,000,000 in the aggregate, with an additional $7,000,000 in umbrella
coverage in either circumstance.
Item 2. Description of Property.
-----------------------
The Company's 70,000 square foot baking plant is located in Ellsworth,
Iowa, approximately 50 miles north of Des Moines, Iowa, and approximately one-
quarter mile west of Interstate Highway 35. This facility was purchased in
March 1990 with the proceeds from an industrial development revenue bond
offering. The plant has been modified and additional equipment has been added
since the 1990 acquisition. In fiscal 1997, the Company expects to complete an
expansion project begun in fiscal 1996. The plant is located on six acres and
includes several maintenance and storage buildings totaling 8,000 square feet.
The facility includes 227,000 cubic feet of refrigerated storage.
At current operating capacity, the Company's plant can produce an average
of approximately 28,000 Uncle B's or Millspring bagels per hour based on a
twenty two hour day. When the expansion is complete, the capacity will be
doubled. Capacity could change depending upon customer product specifications
and product mix. The Company expects to incur approximately $1,700,000 in
additional machinery and equipment purchases during fiscal 1997 to complete the
expansion project. The plant is in good condition and management believes the
Company is adequately protected by fire and casualty insurance.
Item 3. Legal Proceedings.
-----------------
The Company is not a party to any material litigation and is not aware of
any threatened litigation that would have a material adverse effect on the
Company.
Item 4. Submission of Matters to a Vote of Security Holders.
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None.
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PART II
Item 5. Market for Common Equity and Related Stockholder Matters.
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The Company completed its initial public offering on October 13, 1993. The
Company's Common Stock is traded on the NASDAQ Small-Cap Market/sm /under the
symbol "UNCB." As of October 18, 1996, the number of holders of record of the
Company's Common Stock was approximately 1346.
The following table, based on the NASD monthly statistical report, sets
forth the range of high and low closing prices, and the closing price on the
last trading day of the quarter, per share of Common Stock. Such quotations
reflect inter-dealer prices, without retail mark-up, mark-down or commission,
and may not necessarily represent actual transactions.
<TABLE>
<CAPTION>
High Low Close
----- ----- -----
Fiscal 1995
- -------------
<S> <C> <C> <C> <C>
1st Quarter Ending October 31, 1994 3 1/4 2 3/4 3
2nd Quarter Ending January 31, 1995 3 1/2 2 3/4 3 1/4
3rd Quarter Ending April 30, 1995 3 1/8 2 5/8 2 5/8
4th Quarter Ending July 31, 1995 2 7/8 1 3/4 2 1/8
Fiscal 1996
- -------------
1st Quarter Ending October 31, 1995 3 2 1/8 2 1/8
2nd Quarter Ending January 31, 1996 3 1/8 2 1/8 2 1/2
3rd Quarter Ending April 30, 1996 3 5/8 2 3/8 2 3/4
4th Quarter Ending July 31, 1996 4 3/4 2 5/8 3 5/8
</TABLE>
No dividends have been paid on the Company's Common Stock since the
Company's inception. The Company intends to retain future earnings to reduce
outstanding indebtedness and to finance growth, and, accordingly, it is
anticipated that no cash dividends will be paid for the foreseeable future. In
addition, the Company's outstanding industrial revenue bonds and the Company's
agreement with its lender both prohibit the Company from paying dividends unless
certain conditions are satisfied.
The Company's transfer agent and registrar is American Stock Transfer and
Trust Company, New York, New York.
Item 6. Management's Discussion and Analysis
------------------------------------
GENERAL
Uncle B's Bakery, Inc. manufactures and distributes Uncle B's brand
refrigerated bagels which are displayed and sold in supermarket dairy cases and
Millspring brand fresh-tasting, never frozen bagels which are displayed and sold
in supermarket bread aisles or deli departments. The Company's products are
sold in over 11,000 supermarkets and in 44 of the top 50 food market territories
in the United States. The Company enhanced its position as a branded product
innovator with the introduction of a consumer friendly RESEALABLE ZIP STRIP
bagel package in April 1996. At the same time, the Company also began
producing a bake off bagel for a national food service company. The Company
anticipates sales will increase approximately 40-50% in fiscal 1997 as a result
of the new bake off product.
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The loss in fiscal year 1996 was primarily the result of greater than planned,
yet necessary, expenses associated with the plant expansion, new packaging
processes, the start up of production and development of the new bake off line
of bagels, and increased sales and marketing expenses associated with
supermarket promotions for its Uncle B's brand. The plant expansion, along with
the implementation of the new packaging and the introduction of the new product,
also temporarily reduced the plant's output. This resulted in lower than
expected sales volume, primarily in the fourth quarter.
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, information derived
from the Statements of Operations and the percentage of net sales represented by
each item.
<TABLE>
<CAPTION>
$ Amount Percentage of Net Sales
Year Ended July 31 Year Ended July 31
1996 1995 1996 1995
------------ ------------ --------- ---------
<S> <C> <C> <C> <C>
Net sales $17,404,528 $15,318,526 100.0% 100.0%
Cost of goods sold:
Materials & ingredients 5,209,372 4,469,124 29.9% 29.2%
Labor & manufacturing overhead 4,676,592 3,926,444 26.9% 25.6%
----------- ----------- ----- -----
Total cost of goods sold 9,885,964 8,395,568 56.8% 54.8%
----------- ----------- ----- -----
Gross profit 7,518,564 6,922,958 43.2% 45.2%
Distribution expense 1,562,552 1,313,114 9.0% 8.6%
Selling, general &
administrative expense 7,634,379 5,461,005 43.8% 35.6%
----------- ----------- ----- -----
Income (loss) from operations (1,678,367) 148,839 (9.6%) 1.0%
Other income (expense):
Interest expense (503,301) (299,816) (2.9%) (2.0%)
Other 10,388 8,116 0.1% 0.1%
----------- ----------- ----- -----
Loss before income
taxes, extraordinary gain and
cumulative effect of
accounting change (2,171,280) (142,861) (12.4%) (0.9%)
Income taxes __ __ __ __
----------- ----------- ------ -----
Loss before
extraordinary gain and
cumulative effect of
accounting change (2,171,280) (142,861) (12.4%) (0.9%)
Extraordinary gain on refinancing
of long term debt 522,922 3.4%
Cumulative effect on prior years
of change in accounting for new
account allowances (1,406,050) -- (8.1%) --
----------- ----------- ------ -----
Net income (loss) $(3,577,330) $ 380,061 (20.5%) 2.5%
=========== =========== ----- -----
</TABLE>
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The Company's net sales in fiscal 1996 increased 13.6% to $17,404,528 as
compared to $15,318,526 in fiscal 1995. The sales growth represents both unit
volume and increased sales prices. Bagel sales increased to 1,804,000 cases in
fiscal 1996 from 1,702,000 cases shipped in fiscal 1995. This growth is less
than the Company had expected. The principal reasons for this are: The plant
expansion, along with the implementation of the new packaging and the
introduction of the new product, also temporarily reduced the plant's output.
This resulted in lower than expected sales volume, primarily in the fourth
quarter.
Material and ingredient costs at $5,209,372 were 29.9% of net sales in
fiscal 1996 as compared to 29.2% in fiscal 1995. Increased purchasing
efficiencies were not sufficient to offset increases in ingredient (principally
flour) and packaging costs.
Labor and manufacturing costs were $4,676,592 (26.9% of net sales) in
fiscal 1996 as compared to $3,926,444 (25.6% of net sales) in fiscal 1995. This
increase reflects delays in the start up of the new production line, packaging
issues associated with the introduction of the RESEALABLE ZIP STRIP and
manufacturing inefficiencies and start up costs related to the initial
production of the new bake off product.
Gross profit in 1996 increased $595,606 to $7,518,564. However, as a result
of the factors discussed above, gross profit was 43.2% of net sales in fiscal
1996 as compared to 45.2% in fiscal 1995. Gross profit in fiscal year 1996 was
reduced by approximately $483,000, or 2.8% of net sales, due to the bake off
product.
Distribution expenses at $1,562,552, were 9.0% of net sales in fiscal 1996
as compared to 8.6% of net sales in fiscal 1995. Shipments of Uncle B's branded
refrigerated bagels were impacted by low inventory and decreased volumes of
cases shipped per truck in the fourth quarter.
Selling, general and administrative expenses increased $2,173,374 to
$7,634,379 or 43.8% of net sales in fiscal 1996, as compared to 35.6% in fiscal
1995. This increase is principally attributable to promotions in supermarkets to
promote and support the Uncle B's branded refrigerated bagels. This resulted in
trade allowance and advertising expenditures increasing $2,621,252 to
$5,026,382, or 28.9% of net sales in fiscal 1996 as compared to 15.7% of net
sales in fiscal 1995. These expenditures were also affected by the change in the
accounting method discussed in Note 1 to the Financial Statements.
Interest expense in fiscal 1996 increased 67.9% to $503,301 from $299,816
for fiscal year 1996. This increase is a result of the Industrial Development
Revenue Bond interest rate increasing 1% as required by the agreement, a full
year of interest on borrowings under the revolving credit loan and a full year
of amortizing loan fees for the financing which closed in July 1995.
Net loss in fiscal 1996 was $3,577,330 versus a net income of $380,061 in
fiscal 1995. Before the cumulative effect of accounting change the Company had a
loss of $2,171,280 in fiscal 1996 versus a loss before extraordinary gain of
$142,861 in fiscal 1995. The Company's net loss in fiscal 1996 is a result of
the factors identified above.
The Company anticipates that net sales will increase approximately 40 - 50%
in fiscal 1997 primarily due to the sales of the new bake off product. Gross
margin, as a percent of net sales, will decrease in fiscal 1997 as compared to
fiscal 1996 because of the lower margin for the bake off product. However, there
will be little, if any, product
12 of 33
<PAGE>
development, distribution, sales and marketing promotional costs related to the
bake off product.
LIQUIDITY AND CAPITAL RESOURCES
As indicated above, in fiscal 1996 the Company experienced a lower than
expected sales increase and higher than expected costs. For these reasons,
working capital needs increased. In addition, the Company purchased $5,359,514
of new equipment and machinery during fiscal 1996.
The necessary funds for expansion purposes was provided by $5,302,438 in
term loan proceeds. Repayment of the term loan begins in August 1997. During
fiscal 1996 the Company also had drawn $150,000 on the revolving credit loan
bringing the balance to $1,350,000. Management believes this will remain
outstanding throughout fiscal 1997. The revolving credit loan is scheduled to
expire in July 2000. Finally, of the $3,232,000 outstanding Industrial Revenue
Bonds, $110,000 is scheduled to mature in fiscal 1997.
The Company projects cash provided by operations for fiscal 1997 to be
approximately $1,200,000. The Company also expects to expend approximately
$1,700,000 during fiscal 1997 to complete its expansion program. Term loan
proceeds of approximately $1,273,000 were drawn prior to July 31, 1996, and are
to be utilized for payment of expansion expenditures.
The Company believes that the anticipated cash flows from operations,
together with bank loans and commitments made by its current lender subsequent
to July 31, 1996, will provide it with adequate resources for its working
capital and capital expenditure needs during fiscal 1997. Subsequent to July 31,
1996 the current lender amended certain financial covenants due to the loss
incurred in fiscal 1996. For further information see Note 3 to the financial
statements on page 24.
CASH FLOWS FOR YEAR ENDED JULY 31, 1996
Net cash used by operating activities during fiscal 1996 was $637,603. The
cash used by operating activities was primarily related to the reduction in net
income and a decrease in working capital.
Net cash used by investing activities during fiscal 1996 was $5,094,537 due
primarily to purchases of property, plant and equipment to continue with the
plant expansion.
Net cash provided by financing activities during fiscal 1996 was
$5,633,645. The primary source of financing was the net proceeds from the term
loan.
SEASONALITY AND INFLATION
The Company believes that there are certain seasonal trends in bagel sales.
December and January are months which reflect the lowest levels of sales during
the year. This is believed due to the Christmas holidays in which consumers and
supermarkets have concentrations on seasonal products. In July and August,
sales are lower due to more buns being consumed for hamburgers and hot dogs
instead of bagels.
13 of 33
<PAGE>
Flour is a primary ingredient in the Company's products. Fluctuations in
flour's cost are due to factors beyond the control of the Company. After
considering competitive pressures in its market place, the Company would attempt
to offset the increased cost impact through increased sales prices. However,
this is not always possible.
The Company does not anticipate inflation will have a major impact on
future operations. However, the Company would attempt to either pass along
increases in its costs through increased sales prices or offset any such
increases by improved operating efficiencies and purchasing practices.
Item 7. Financial Statements.
--------------------
<TABLE>
<CAPTION>
Page Number
-----------
<S> <C>
Report of Independent Auditors 15
Balance Sheets 16
Statements of Operation 18
Statements of Stockholders' Equity 19
Statements of Cash Flows 20
Notes to Financial Statements 21
</TABLE>
14 of 33
<PAGE>
Report of Independent Auditors
The Board of Directors and Shareholders
Uncle B's Bakery, Inc.
We have audited the accompanying balance sheets of Uncle B's Bakery, Inc. as of
July 31, 1996 and 1995, and the related statements of operations, stockholders'
equity and cash flows for the years then ended. These financial statements are
the responsibility of the Company's 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 financial position of Uncle B's Bakery, Inc. at
July 31, 1996 and 1995, and the results of its operations and its cash flows for
the years then ended in conformity with generally accepted accounting
principles.
As discussed in Note 1 to the financial statements, in 1996 the Company changed
its method of accounting for new account allowances.
ERNST & YOUNG LLP
Des Moines, Iowa
September 27, 1996,
except for the last paragraph of
Note 3, as to which the date is
October 28, 1996
15 of 33
<PAGE>
Uncle B's Bakery, Inc.
Balance Sheets
<TABLE>
<CAPTION>
JULY 31
1996 1995
--------------------------
<S> <C> <C>
ASSETS (Note 3)
Current assets:
Cash and cash equivalents (Note 3) $ 65,565 $ 164,060
Accounts receivable 1,690,319 1,043,440
Inventories (Note 2) 478,162 614,148
Prepaid expenses 88,307 140,240
--------------------------
Total current assets 2,322,353 1,961,888
Property, plant and equipment,
at cost (Note 4):
Land 16,000 16,000
Building and improvements 2,375,297 1,930,644
Machinery and equipment 8,108,900 7,124,054
Construction in progress 4,452,634 541,535
--------------------------
14,952,831 9,612,233
Less accumulated depreciation 2,854,472 1,977,338
--------------------------
12,098,359 7,634,895
Other assets:
Construction fund balance (Note 3) 952,773 --
Deferred financing costs,
net of amortization of 468,734 491,729
$103,510 ($44,670 - 1995)
New account allowances,
net of amortization of
$1,453,878 in 1995 (Note 1) -- 1,406,050
Other 40,719 40,719
----------- -------------
1,462,226 1,938,498
--------------------------
Total assets $15,882,938 $11,535,281
==========================
</TABLE>
16 of 33
<PAGE>
<TABLE>
<CAPTION>
JULY 31
1996 1995
-------------------------
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 2,291,329 $ 1,545,108
Accrued expenses 864,357 307,854
Long-term debt due within on year
(Note 3) 110,000 100,000
-------------------------
Total current liabilities 3,265,686 1,952,962
Long-term debt due after one year
(Note 3) 11,456,483 4,844,220
Commitments and contingent liability
(Notes 4 and 9)
Stockholders' equity (Notes 6 and 7):
Preferred stock, $.01 par value;
10,000,000 shares authorized,
none issued - -
Common stock, $.01 par value;
40,000,000 shares authorized,
3,545,147 shares issued and
outstanding 35,451 35,451
Additional paid-in capital 7,738,813 7,738,813
Deficit (6,613,495) (3,036,165)
-------------------------
Total stockholders' equity 1,160,769 4,738,099
Total liabilities and stockholders' -------------------------
equity $15,882,938 $11,535,281
=========================
</TABLE>
See accompanying notes.
17 of 33
<PAGE>
Uncle B's Bakery, Inc.
Statements of Operations
<TABLE>
<CAPTION>
YEAR ENDED JULY 31
1996 1995
-------------------------
<S> <C> <C>
Net sales $17,404,528 $15,318,526
Cost of goods sold:
Materials and ingredients 5,209,372 4,469,124
Labor and manufacturing overhead 4,676,592 3,926,444
-------------------------
Total cost of goods sold 9,885,964 8,395,568
-------------------------
Gross profit 7,518,564 6,922,958
Distribution expense 1,562,552 1,313,114
Selling, general and administrative expense 7,634,379 5,461,005
-------------------------
Income (loss) from operations (1,678,367) 148,839
Other income (expense):
Interest expense (503,301) (299,816)
Other 10,388 8,116
-------------------------
(492,913) (291,700)
-------------------------
Loss before income taxes, extraordinary gain and
cumulative effect of accounting change (2,171,280) (142,861)
Income taxes (Note 5) - -
-------------------------
Loss before extraordinary gain and cumulative effect of
accounting change (2,171,280) (142,861)
Extraordinary gain on refinancing of long-term debt
(Note 3) - 522,922
Cumulative effect on prior years of change in accounting
for new account allowances (Note 1) (1,406,050) -
-------------------------
Net income (loss) $(3,577,330) $ 380,061
=========================
Per share:
Loss before extraordinary gain and cumulative effect
of accounting change $ (.61) $ (.04)
Extraordinary gain - $ .15
Cumulative effect of accounting change $ (.40) -
Net income (loss) $ (1.01) $ .11
Pro forma amounts assuming the new accounting method
is applied retroactively:
Loss before extraordinary gain $(2,171,280) $ (632,220)
Per share $ (.61) $ (.18)
Net income (loss) $(2,171,280) $ (109,298)
Per share $ (.61) $ (.03)
Weighted average number of common and common
equivalent shares outstanding 3,545,147 3,558,107
</TABLE>
See accompanying notes.
18 of 33
<PAGE>
Uncle B's Bakery, Inc.
Statements of Stockholders' Equity
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL TOTAL
------------------ PAID-IN STOCKHOLDERS'
SHARES AMOUNT CAPITAL DEFICIT EQUITY
-------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance, July 31, 1994 3,545,147 $35,451 $7,738,813 $(3,416,226) $4,358,038
Net income - - - 380,061 380,061
-------------------------------------------------------------
Balance, July 31, 1995 3,545,147 35,451 7,738,813 (3,036,165) 4,738,099
Net loss - - - (3,577,330) (3,577,330)
-------------------------------------------------------------
Balance, July 31, 1996 3,545,147 $35,451 $7,738,813 $(6,613,495) $1,160,769
=============================================================
</TABLE>
See accompanying notes.
19 of 33
<PAGE>
Uncle B's Bakery, Inc.
Statements of Cash Flows
<TABLE>
<CAPTION>
YEAR ENDED JULY 31
1996 1995
------------------------
<S> <C> <C>
Operating Activities
Net income (loss) $(3,577,330) $ 380,061
Adjustments to reconcile net income (loss) to net cash
provided (used) by operating activities:
Extraordinary gain on refinancing of long-term debt - (522,922)
Cumulative effect of accounting change 1,406,050 -
Depreciation 896,050 658,685
Amortization 58,840 936,103
Changes in operating assets and liabilities:
Accounts receivable (646,879) (269,954)
Inventories 135,986 (49,924)
Prepaid expenses 51,933 (59,031)
Accounts payable 481,244 31,295
Accrued expenses 556,503 23,285
------------------------
Net cash provided (used) by operating activities (637,603) 1,127,598
Investing Activities
Purchases of property, plant and equipment (5,094,537) (1,419,563)
Proceeds from sale of property and equipment - 87,183
Payments for new account allowances and other assets - (1,319,179)
------------------------
Net cash used by investing activities (5,094,537) (2,651,559)
Financing Activities
Proceeds from long-term debt 6,809,920 2,644,814
Increase in construction fund balance (952,773) -
Payments on long-term debt (187,657) (1,301,373)
Payments for deferred financing costs (35,845) (409,293)
Decrease in revenue bond cash reserves - 409,500
------------------------
Net cash provided by financing activities 5,633,645 1,343,648
------------------------
Net decrease in cash and cash equivalents (98,495) (180,313)
Cash and cash equivalents at beginning of year 164,060 344,373
------------------------
Cash and cash equivalents at end of year $ 65,565 $ 164,060
========================
Supplemental Disclosures
Interest paid (net of amount capitalized) $ 276,349 $ 298,268
Noncash investing activity-accounts payable
for property and equipment additions $ 264,977 -
</TABLE>
See accompanying notes.
20 of 33
<PAGE>
Uncle B's Bakery, Inc.
Notes to Financial Statements
July 31, 1996
1. SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
Uncle B's Bakery, Inc. (the Company) was incorporated as an Iowa corporation in
1985. The Company's fiscal year ends on July 31. The Company is a commercial
bakery which manufactures and distributes bagels throughout the United States.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
Actual results could differ from those estimates.
CASH EQUIVALENTS
The Company considers all highly liquid investments with a maturity of three
months or less to be cash equivalents.
INVENTORIES
Inventories are stated at the lower of cost (first-in, first-out method) or
market.
PROPERTY, PLANT AND EQUIPMENT
Depreciation of property, plant and equipment is provided over the estimated
useful lives of the assets using the straight-line method for financial
reporting.
Interest of approximately $361,000 and $74,000 was capitalized in fiscal 1996
and 1995, respectively. The capitalized interest is recorded as part of the
asset to which it relates and is amortized over the asset's estimated useful
life.
In 1996, the Company adopted the provisions of Statement of Financial Accounting
Standards No. 121, Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of. There was no effect on the financial
statements from the initial adoption of the new standard.
NEW ACCOUNT ALLOWANCES
Prior to August 1, 1995, the Company capitalized fees paid to customers to
obtain retail shelf or warehouse space. These costs were amortized on a
straight-line basis over the estimated benefit periods of 12 and 36 months. If a
customer was lost, unamortized fees were written off.
21 of 33
<PAGE>
Uncle B's Bakery, Inc.
Notes to Financial Statements (continued)
1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Effective August 1, 1995, the Company changed its method of accounting for new
account allowances from the capitalization method to expensing the costs as
incurred. The change was made to conform with predominant industry practice and
because the new method is more practical to account for and will reflect more
conservative accounting. The change has been applied retroactively to costs paid
in prior years and results in a cumulative effect adjustment in fiscal 1996 of
$1,406,050 (no income tax effect). The effect of the change was to decrease the
loss before extraordinary gain and cumulative effect of accounting change for
1996 by approximately $969,000 ($.27 per share) and to increase the net loss by
approximately $437,000 ($.12 per share). The pro forma amounts reflect the
effect of the retroactive application of the change in the year ended July 31,
1995, had the new method been in effect during that period.
ADVERTISING COSTS
Advertising costs are expensed as incurred by the Company. Advertising expense
was approximately $789,000 and $509,000 in fiscal 1996 and 1995, respectively.
DEFERRED FINANCING COSTS
Deferred financing costs are amortized over the term of the related debt.
INCOME TAXES
The Company uses the liability method of accounting for income taxes. Under
this method, deferred income tax assets and liabilities are determined based on
the difference between financial reporting and income tax bases of assets and
liabilities using the enacted marginal tax rates. Deferred income tax expenses
or credits are based on changes in the asset or liability from period to period.
FAIR VALUE OF FINANCIAL INSTRUMENTS
Financial instruments include cash equivalents, accounts receivable, accounts
payable, and long-term debt. Management believes the fair value of each of
these financial instruments approximate their carrying value in the balance
sheet as of each balance sheet date.
INCOME (LOSS) PER SHARE
Income or loss per share amounts are computed based on the income or loss
divided by the weighted average number of shares of common stock and common
stock equivalents outstanding. The dilutive effect of common stock options and
warrants is determined using the treasury stock method.
RECLASSIFICATIONS
Certain amounts in the 1995 financial statements have been reclassified to
conform to the 1996 presentation.
22 of 33
<PAGE>
Uncle B's Bakery, Inc.
Notes to Financial Statements (continued)
2. INVENTORIES
The components of inventories are as follows:
<TABLE>
<CAPTION>
JULY 31
1996 1995
-------------------------
<S> <C> <C>
Raw ingredients and packaging $410,341 $445,614
Finished goods 67,821 168,534
-------------------------
$478,162 $614,148
=========================
</TABLE>
3. LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
JULY 31
1996 1995
-------------------------
<S> <C> <C>
Industrial Development Revenue Bonds, due in varying
semiannual principal payments through January 15,
2011, interest payable semiannually at 8.5% (adjustable
every three years beginning July 1998), secured by
certain property, plant and equipment. (A) $ 3,232,000 $3,332,000
Revolving credit loan, due July 11, 2000, interest payable
quarterly at the base lending rate plus 1.5% (9.75% at
July 31, 1996). (B) 1,350,000 1,200,000
Term loan, interest payable quarterly at the base lending
rate plus 2% (10.25% at July 31, 1996), principal
payable in quarterly installments of $172,500 beginning
August 1997, balance due May 1, 2002. (B) 6,900,000 324,563
Other 84,483 87,657
-------------------------
11,566,483 4,944,220
Less amounts due within one year 110,000 100,000
-------------------------
Long-term debt due after one year $11,456,483 $4,844,220
=========================
</TABLE>
(A) Under the terms of various Industrial Development Revenue Bond financing
agreements, the Company is subject to various restrictive covenants which,
among other things, require it to maintain certain financial covenants as
defined in the agreements.
(B) The revolving credit loan and term loan were made pursuant to a Loan and
Security Agreement and are secured by a first or second security interest
in essentially all assets of the Company now owned or subsequently
acquired. The agreement has an interest rate option based on either a
defined base lending rate or quoted Eurodollar rate. The agreement allows
revolving loans up to the lesser of $1,500,000 or a defined borrowing base
determined by accounts receivable and inventory. At July 31, 1996, maximum
available borrowings on the revolving loan were approximately $1,480,000.
23 of 33
<PAGE>
Uncle B's Bakery, Inc.
Notes to Financial Statements (continued)
3. LONG-TERM DEBT (CONTINUED)
Borrowings up to the maximum of $6,900,000 could be drawn under the term
loan through July 12, 1996, subject to the conditions in the agreement, and
generally for property and equipment purchases. Term loan proceeds of
$1,273,056 were held in a construction fund of which $952,773 was
classified as noncurrent at July 31, 1996, and are to be utilized for
payment of property and equipment purchases. The Company is required to pay
a commitment fee of .5% per annum on the unused amount of the revolving
credit and term loans. The agreement also provides for future interest rate
reductions ranging from .25% to 1%, dependent on meeting certain leverage
ratios.
The agreement contains various restrictive covenants, including
restrictions on capital expenditures, payment of dividends and additional
debt. The Company is also required to maintain certain defined financial
amounts and ratios including tangible net worth, interest coverage,
leverage and indebtedness/cash flow.
In July 1995, in conjunction with the establishment of the long-term debt
financing described above, the Company refinanced the Industrial Development
Revenue Bonds at a 15% discount. The discount of $588,000, less certain
unamortized deferred financing costs of $65,078, has been reflected as an
extraordinary gain of $522,922 ($.15 per share) in fiscal 1995 (no income tax
effect).
Aggregate maturities of long-term debt for each of the four years after July 31,
1997 are as follows:
<TABLE>
<CAPTION>
<S> <C>
1998 $ 899,483
1999 825,000
2000 2,185,000
2001 855,000
Thereafter 6,692,000
-----------
$11,456,483
===========
</TABLE>
Due to the effect of the loss incurred by the Company in fiscal 1996, in October
1996 the lender amended certain financial covenants of the Loan and Security
Agreement. In addition, the Company obtained a commitment from the lender
whereby additional proceeds on the term loan of $250,000 would be provided
(total of $7,150,000), and the lender at closing shall have the right to
purchase common stock of $250,000 and will receive common stock warrants for
205,000 shares, both at an exercise price per share to be determined based on an
average market price. The commitment is subject to certain terms and conditions
and closing is expected to occur on or before November 29, 1996.
4. COMMITMENTS AND RELATED PARTY TRANSACTIONS
In connection with a plant expansion, at July 31, 1996 the Company had
commitments for additional purchases of property, plant and equipment totaling
approximately $1.7 million.
24 of 33
<PAGE>
Uncle B's Bakery, Inc.
Notes to Financial Statements (continued)
4. COMMITMENTS AND RELATED PARTY TRANSACTIONS (CONTINUED)
The Company leases certain equipment under the terms of various operating
leases. Rental expense was approximately $39,000 for fiscal 1996 and 1995. At
July 31, 1996, future minimum lease payments under operating leases were not
material.
The Company periodically enters into forward fixed-price purchase commitments
with market risk. Management believes such commitments are routinely settled in
the ordinary course of business and will have no adverse impact on the Company.
The Company has employment agreements with two officers for terms through July
1998, renewable annually thereafter. The agreements provide for a base salary
with annual adjustments, as well as various insurance and other benefits. The
agreements also provide certain registration rights for common shares held by
the individuals, which entitle each officer to one company-paid registration,
subject to certain restrictions.
In fiscal 1996 and 1995, the Company purchased equipment totaling approximately
$2,347,000 and $55,000, respectively, which was sold or arranged by a bakery
equipment distributor which is affiliated with a director of the Company.
5. INCOME TAXES
At July 31, 1996, net operating loss (NOL) carryforwards for income tax purposes
were approximately $7.7 million, expiring in 2005 through 2011. Due to various
capital transactions occurring in prior years, the Company will have annual
limitations of approximately $323,000 on the utilization of approximately $4
million of the NOL carryforwards under Section 382 of the Internal Revenue Code.
The remaining NOL carryforwards of approximately $3.7 million at July 31, 1996
are available without limitation.
Due to existing NOL carryforwards and a related valuation allowance, the Company
has no net deferred tax asset or liability at July 31, 1996 or 1995. Components
of the net deferred balance are as follows:
<TABLE>
<CAPTION>
JULY 31
1996 1995
--------------------------
<S> <C> <C>
Deferred tax assets:
NOL carryforwards $2,600,000 $1,608,000
Accounting for new account allowances 373,000 38,000
Other 67,000 -
Deferred tax liability - tax depreciation in excess of
financial statement amounts (907,000) (720,000)
Net deferred tax asset 2,133,000 926,000
Valuation allowance (2,133,000) (926,000)
--------------------------
Net deferred balance $ - $ -
==========================
</TABLE>
25 of 33
<PAGE>
Uncle B's Bakery, Inc.
Notes to Financial Statements (continued)
5. INCOME TAXES (CONTINUED)
A reconciliation of income tax expense (benefit) with the amount computed by
applying the statutory federal income tax rate to the pre-tax income or loss
is as follows:
<TABLE>
<CAPTION>
1996 1995
----------------------
<S> <C> <C>
Expense (benefit) based on federal statutory rate (1,216,000) 129,000
Deferred benefit not recognized due to deferred tax
valuation allowance 1,216,000 -
Benefit from utilization of NOL carryforward - (129,000)
----------------------
Income tax expense (benefit) $ - $ -
======================
</TABLE>
6. COMMON STOCK OPTIONS AND WARRANTS
At July 31, 1996, the Company had the following warrants outstanding for the
purchase of common stock, all of which are currently exercisable. The warrants
for 215,000 shares issued in July 1995 may be exercised for the purchase of
either common stock or Series 1 convertible preferred stock, at the option of
the holder. No warrants had been exercised as of July 31, 1996.
<TABLE>
<CAPTION>
NUMBER OF EXERCISE PRICE
ISSUE DATE SHARES PER SHARE EXPIRATION
- -------------------------------------------------------------
<S> <C> <C> <C>
June 1993 283,500 $2.81 June 1998
October 1993 160,300 $3.75 October 1998
July 1995 215,000 $3.125 July 2005
-----------
658,800
===========
</TABLE>
The Company has established stock option plans pursuant to which options for up
to 650,000 shares may be granted to employees and certain non-employees and
50,000 shares may be granted to directors. At July 31, 1996, options for an
aggregate of 579,250 shares had been granted as shown below. The options become
exercisable and vest based on the below vesting schedules. Vesting and
exercisability under the employee plan representing 218,250 shares may be
accelerated upon achieving certain profitability goals of the Company. Certain
officer options also become fully vested in the event of a change in control of
the Company. At July 31, 1996, no options had been exercised. The Company
accounts for stock options in accordance with APB Opinion No. 25, and no
compensation expense has been recorded in 1996 or 1995 related to stock options.
26 of 33
<PAGE>
Uncle B's Bakery, Inc.
Notes to Financial Statements (continued)
6. COMMON STOCK OPTIONS AND WARRANTS (CONTINUED)
<TABLE>
<CAPTION>
NUMBER OF SHARES EXERCISE
------------------------- PRICE
PLAN OUTSTANDING EXERCISABLE PER SHARE VESTING SCHEDULE EXPIRATION
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Employee 335,000 335,000 $2.86 - 3.25 All currently vested 2008 - 2009
Employee 218,250 45,095 $2.75 - 3.25 33-1/3% each in third, eighth and
ninth anniversary of grant 2003 - 2005
Director 16,000 10,000 $2.75 - 3.00 20% annually or at grant date 2003 - 2004
Non-employee 10,000 10,000 $2.86 All currently vested 2010
--------------------------
579,250 400,095
==========================
</TABLE>
7. STOCKHOLDERS' EQUITY
The Company's articles of incorporation provide for authorization of 10,000,000
shares of preferred stock. The board of directors may determine the
preferences, rights and other terms of any preferred stock. At July 31, 1996,
215,000 shares of Series 1 convertible preferred stock had been authorized (none
issued). The Series 1 preferred stock generally has no voting rights, has
dividend rights ratable and on a parity with common stock, and is convertible
into common stock on a share-for-share basis.
8. EMPLOYEE BENEFIT PLAN
The Company has a profit-sharing and 401(k) plan covering substantially all
full-time employees. Under the terms of the plan, participants may contribute
up to 20% of their salary to the plan. Provisions of the plan also allow the
Company to contribute annual amounts at the discretion of the Company's Board of
Directors. Expense related to the plan was not material in 1996 or 1995.
9. ECONOMIC DEVELOPMENT AND TRAINING INCENTIVES
In October 1995, the Company received economic development incentives from
certain governmental agencies totaling $500,000 in cash, including a $375,000
direct incentive and a $125,000 forgivable loan. The $375,000 was recorded in
income as a reduction to the related expenses. The $125,000 loan is forgiven if
certain additional employment levels are met in the future. The forgivable loan
was initially recorded as long-term debt and is amortized to income as the
related employment levels are achieved (approximately $41,000 recognized through
July 31, 1996). In connection with these incentive awards, the Company is
contingently liable to repay a portion of the incentive if its employment level
declines below a specified number prior to January 1998.
27 of 33
<PAGE>
Uncle B's Bakery, Inc.
Notes to Financial Statements (continued)
9. ECONOMIC DEVELOPMENT AND TRAINING INCENTIVES (CONTINUED)
In January 1996, the Company was also awarded a new jobs training incentive with
potential training cost reimbursements totaling approximately $134,000. Through
July 31, 1996, approximately $83,000 of the incentive had been earned and was
recorded as a reduction of the related expenses.
10. QUARTERLY FINANCIAL DATA (UNAUDITED)
Summarized unaudited quarterly financial information for the fiscal years ended
July 31, 1996 and 1995 is as follows:
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER TOTAL
---------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1996
Net sales $ 4,034,981 $4,540,774 $4,513,563 $ 4,315,210 $17,404,528
Gross profit 2,024,109 2,064,407 2,205,297 1,224,751 7,518,564
Income (loss) before cumulative
effect of accounting change 150,202 (437,740) (89,450) (1,794,292) (2,171,280)
Net loss (1,255,848) (437,740) (89,450) (1,794,292) (3,577,330)
Per share:
Income (loss) before
cumulative effect of
accounting change $ .04 $ (.12) $ (.03) $ (.51) $ (.61)
Net loss $ (.35) $ (.12) $ (.03) $ (.51) $ (1.01)
Weighted average number of
common and common
equivalent shares outstanding 3,545,147 3,545,147 3,545,147 3,545,147 3,545,147
1995
Net sales $ 3,776,678 $3,381,492 $4,023,180 $ 4,137,176 $15,318,526
Gross profit 1,734,961 1,593,953 1,875,024 1,719,020 6,922,958
Income (loss) before
extraordinary gain 120,745 38,519 57,796 (359,921) (142,861)
Net income 120,745 38,519 57,796 163,001 380,061
Per share:
Income (loss) before
extraordinary gain $ .03 $ .01 $ .02 $ (.10) $ (.04)
Net income $ .03 $ .01 $ .02 $ .05 $ .11
Weighted average number of
common and common
equivalent shares outstanding 3,600,474 3,587,551 3,545,249 3,545,147 3,558,107
</TABLE>
28 of 33
<PAGE>
Item 8. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure.
None.
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance With Section 16(a) of the Exchange Act.
The information contained under the heading "Election of Directors,"
"Executive Officers of the Company" and "Certain Relationships and Related
Transactions" of the Company's definitive Proxy Statement for its Annual Meeting
of Shareholders (the "Proxy Statement"), which the Company will file within 120
days after the close of the Company's fiscal year, is hereby incorporated by
reference.
Item 10. Executive Compensation.
The information under the heading "Executive Compensation" in the Proxy
Statement is hereby incorporated by reference.
Item 11. Security Ownership of Certain Beneficial Owners and Management.
The information contained under the heading "Security Ownership of Certain
Beneficial Owners and Management" in the Proxy Statement is hereby incorporated
by reference.
Item 12. Certain Relationships and Related Transactions.
The information contained under the heading "Certain Relationships and
Related Transactions" in the Proxy Statement is hereby incorporated by
reference.
Item 13. Exhibits and Reports on Form 8-K.
(a) Exhibits
29 of 33
<PAGE>
<TABLE>
<CAPTION>
Exhibit Sequentially
Number Description Numbered Page
- ------- ----------- -------------
<S> <C> <C>
3.1 Restated Articles of Incorporation *
3.2 Restated Bylaws *
3.3 Articles of Amendment dated July 12, 1995 ***
4.3 Form of Warrants issued to
Series 1993 Debenture Holders *
4.4 Industrial Development Revenue Bond Loan
Agreement and Security Agreement *
4.7 Supplemental Indenture No. 3 to Indenture
of Trust **
4.8 Amendment No. 2 to Loan Agreement **
4.9 Reissuance Tax Certificate
Industrial Development Revenue Bonds **
4.10 Amended and Restated Loan Agreement
dated July 1, 1995 ***
4.11 Amended and Restated Indenture of Trust
dated July 1, 1995 ***
4.12 Warrant Agreement with Creditanstalt Corporate
Finance Inc. dated July 12, 1995 ***
9.1 Voting Agreement Between William T. Rose,
Jr. and William T. Rose, Sr. *
10.1 Employment Agreement for William T. Rose, Jr. *
10.2 Employment Agreement for William T. Rose, Sr. *
10.3 1993 Stock Option Plan *
10.4 Form of Incentive Stock Option Agreement *
10.5 Non-Employee Director Stock Option Plan *
10.6 Form of Non-Employee Option Agreement *
10.7 Non-Qualified Stock Option Agreement
for William T. Rose, Jr. *
10.8 Non-Qualified Stock Option Agreement
for William T. Rose, Sr. *
10.10 Bakery License Agreement -
Metz Baking Company **
10.11 Employment Agreement dated April 20, 1995
for William Rose, Jr. ***
10.12 Employment Agreement dated April 20, 1995
for William Rose, Sr. ***
10.13 Non-Qualified Stock Option Agreement dated
October 18, 1994 for William Rose, Jr. ***
10.14 Non-Qualified Stock Option Agreement dated
October 18, 1994 for William Rose, Sr. ***
10.15 Loan and Security Agreement with
Creditanstalt Corporate Finance Inc. dated
July 12, 1995 ***
10.16 Purchase Order Dunbar Systems, Inc. ***
11 Statement Re: Computation of Earnings per Share 33
</TABLE>
30 of 33
<PAGE>
* Incorporated by Reference from Registrant's SB-2
** Incorporated by Reference from the Company's 1994 Form 10-KSB
*** Incorporated by Reference from the Company's 1995 Form 10-KSB
(b) Reports on Form 8-K
None.
31 of 33
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
UNCLE B'S BAKERY, INC.
Dated: October 28, 1996 By: /s/ William T. Rose, Jr.
---------------- -------------------------------------
William T. Rose, Jr.
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Name Title Date
/s/ William T. Rose, Jr. Chairman, President, October 28, 1996
- ----------------------------- Chief Executive Officer ----------------
William T. Rose, Jr. (Principal Executive Officer)
and Director
/s/ Wm. Howard McClennan, Jr. Chief Financial Officer October 28, 1996
- ----------------------------- (Principal Financial and ----------------
Wm. Howard McClennan, Jr. Accounting Officer)
/s/ William T. Rose, Sr. Vice Chairman, Executive October 28, 1996
- ----------------------------- Vice President & Director ----------------
William T. Rose, Sr.
/s/ Edward L. Campbell Director October 28, 1996
- ----------------------------- ----------------
Edward L. Campbell
32 of 33
<PAGE>
EXHIBIT 11
STATEMENT RE: COMPUTATION OF EARNINGS PER SHARE
<TABLE>
<CAPTION>
YEAR ENDED JULY 31
1996 1995
---- ----
<S> <C> <C>
Average common shares outstanding 3,545,147 3,545,147
Net effect of dilutive common stock
equivalents-based on treasury stock method -0- 12,107
----------- ----------
Total weighted average common and
common equivalent shares outstanding 3,545,147 3,558,107
=========== ==========
Loss before extraordinary gain and
cumulative effect of accounting change $(2,171,280) $ (142,861)
Extraordinary gain on refinancing
of long-term debt $ - $ 522,922
Cumulative effect on prior years of
change in accounting for new
account allowances $(1,406,050) $ -
Net income (loss) $(3,577,330) $ 380,061
Per share:
Loss before extraordinary gain and
cumulative effect of accounting change $ (0.61) $ (0.04)
Extraordinary gain $ - $ 0.15
Cumulative effect of accounting change $ (0.40) $ -
Net income (loss) $ (1.01) $ 0.11
</TABLE>
33 of 33
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND> This schedule contains summary financial information extracted from
Fiscal 1996 Financial Statements and is qualified in its entirety by reference
to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUL-31-1996
<PERIOD-START> AUG-01-1995
<PERIOD-END> JUL-31-1996
<CASH> 65,565
<SECURITIES> 0
<RECEIVABLES> 1,690,319
<ALLOWANCES> 0
<INVENTORY> 478,162
<CURRENT-ASSETS> 2,322,353
<PP&E> 14,952,831
<DEPRECIATION> 2,854,472
<TOTAL-ASSETS> 15,882,938
<CURRENT-LIABILITIES> 3,265,686
<BONDS> 11,456,483
<COMMON> 35,451
0
0
<OTHER-SE> 1,125,318
<TOTAL-LIABILITY-AND-EQUITY> 15,882,938
<SALES> 17,404,528
<TOTAL-REVENUES> 17,404,528
<CGS> 9,885,964
<TOTAL-COSTS> 9,885,964
<OTHER-EXPENSES> 1,562,552
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 503,301
<INCOME-PRETAX> (2,171,280)
<INCOME-TAX> 0
<INCOME-CONTINUING> (2,171,280)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> (1,406,050)
<NET-INCOME> (3,577,330)
<EPS-PRIMARY> (1.01)
<EPS-DILUTED> (1.01)
<FN>
Effective August 1, 1995, the Company changed its method of accounting for new
account allowances from the capitalization method to expensing the costs as
incurred. The change has been applied retroactively and results in a cumulative
effect adjustment.
</FN>
</TABLE>
