Item 1. BUSINESS.
INTEGRATED BRANDS INC., together with its subsidiaries (collectively, "INTEGRATED" or the "Company") markets, sells and distributes a variety of branded frozen dessert products to supermarkets, grocery stores, club stores, gourmet shops, delicatessens and convenience stores. The Company pursuant to long-term exclusive license agreements markets, sells and distributes Tropicana(R) frozen desserts, Yoplait(R) and Colombo(R) ready to eat frozen yogurt products, Betty Crocker(R) frozen desserts, individual and multipack Trix(R) frozen novelties, individual and multipack YooHoo(R) frozen novelties and Sweet 'N Low(R) fat free ice cream. The Company's products include prepackaged "Chilly Things"(R), "Great American", "Tropical" and "Bullet" frozen novelties. The Company, directly and through subsidiaries, also operates, franchises and licenses Steve's, Swensen's and triple trademark frozen dessert stores throughout the United States and certain foreign countries.
The Company was incorporated in New Jersey on September 27, 1985 and commenced operations on December 23, 1985 as Steve's Homemade Ice Cream, Inc. In July 1995, the Company changed its name to INTEGRATED BRANDS INC. to more appropriately reflect the breadth of the Company's business. Its principal offices are located at 4175 Veterans Highway, Ronkonkoma, New York 11779 and its telephone number is (516) 737-9700.
In July 1992, the Company and General Mills, Inc. executed the initial license for TRIX(R) frozen dessert novelties and a sublicense for Yoplait(R) ready to eat frozen yogurt. A new long-term license agreement for Trix frozen dessert products was executed in August 1995, which will terminate on December 31, 2015 and is renewable by the Company for an additional five year term if a cash payment is made. Also in August 1995, the Company and General Mills agreed to extend the term of the Yoplait Sublicense to December 31, 2015, with an option to renew by the Company for an additional five year term if a cash payment is made. In August 1995, the Company and General Mills, Inc. executed license agreements for Colombo(R) prepackaged frozen dessert products, Betty Crocker(R) prepackaged frozen dessert products and Count Chocula(R) and Lucky Charms(R) prepackaged frozen dessert products. These new agreements expire December 31, 2015, 2010 and 2015, respectively, and are renewable by the Company for an additional five years if cash payments are made. In December 1996, the Company and Tropicana Products, Inc. executed a license agreement for Tropicana prepackaged novelty products. The license agreement terminates December 31, 2011.
The Company owns, operates, develops and franchises Swensen's restaurants and ice cream stores in four formats: full
food service, limited food service, ice cream only stores and specialty stores. Steve's franchises are operated primarily as dessert only stores. Steve's and Swensen's stores are also offered as "triple trademark" franchises featuring independent sections of Steve's or Swensen's ice cream, David's cookies and Heidi's frozen yogurt.
At December 28, 1996, there were 22 franchised Steve's stores, 263 franchised Swensen's stores, four Company-owned and operated Swensen's stores, and one Jerry Tucci's Brick Oven Pizzeria, a new full service restaurant concept being developed by the Company. In addition, a Schrafft's ice cream store operating as a joint venture opened in Las Vegas, Nevada January 1997.
In February 1989, the Company, through a wholly-owned subsidiary, acquired approximately 85% of the outstanding stock of Heidi's Frogen Yozurt Shoppes, Inc. ("Heidi's"). At December 28, 1996, Heidi's has 18 franchised frozen yogurt stores predominately located in California with stores also in Arizona and Texas. On April 9, 1993, Heidi's and its subsidiary filed a voluntary petition under Chapter 11 of the United States Bankruptcy Code to reorganize. The Company has entered into agreements with Heidi's pursuant to which the Company has received a license from Heidi's to (i) use the Heidi's trademark in the manufacture of frozen dessert products, (ii) offer Heidi's products in its Steve's and Swensen's stores and (iii) sell Heidi's franchises.
Wholesale Products and Sales
The Company's products for wholesale sale include: Betty Crocker(R)lowfat and no fat frozen novelties,Yoplait(R)ready to eat frozen yogurt products; Colombo(R)ready to eat frozen yogurt and sorbet products, Trix(R)frozen novelties, and a variety of other novelties, including those sold under the "Great American", "Tropical", "Chilly Things" and "Bullet" trademarks, American Glace(R)no fat, no cholesterol low calorie frozen dessert and Sweet 'N Low(R)fat free ice cream products. Betty Crocker(R), Yoplait(R), Colombo(R), YooHoo(R), American Glace(R)and Sweet 'N Low(R)products appeal to the healthier consumer lifestyle and eating trends toward lower and no fat and lower and no cholesterol products. The Company is developing additional products to be marketed under the Betty Crocker(R)trademarks. In the beginning of 1997, the Company began introducing frozen dessert novelties under the Tropicana(R) trademark. The Company anticipates incurring significant expenses to obtain shelf space in connection with the introduction of its new products. The initial response by chain-store buyers to the Tropicana products has been favorable.
The Company sells its variety of prepackaged products to distributors and various retail establishments including supermarkets, grocery stores, club stores, gourmet shops, delicatessens and convenience stores.
The Company purchases packaging and ingredients for its products directly from unaffiliated suppliers. The Company then sells the ingredients and cartons to unaffiliated manufacturers. Certain of these manufacturers also manufacture other ice cream and related frozen dessert products for other companies, including companies affiliated with Richard E. Smith, who is a significant shareholder and Chairman of the Board of the Company. The manufacturers produce the Company's products according to the Company's specifications and formulas under quality control supervision by the Company. The Company then purchases the finished products from the manufacturers for distribution at a formula price based upon the manufacturers' actual cost of ingredients and packaging plus an agreed upon processing fee which includes a profit for the manufacturers. The Company believes there are many alternative ice cream and novelty manufacturers available on comparable terms.
In November 1992, the Company entered into two distribution agreements with Edy's Grand Ice Cream ("Edy's") and Dreyer's Grand Ice Cream, Inc. ("Dreyer's") relating to the distribution of the Company's products. Pursuant to one agreement (the "Local Distribution Agreement"), Edy's and Dreyer's agreed to distribute essentially all of the Company's products to the New York metropolitan area supermarkets. Pursuant to the second agreement (the "National Distribution Agreement"), Edy's and Dreyer's agreed to distribute the Company's TRIX(R) and Yoplait(R) prepackaged products and other novelty items nationwide. The National Distribution Agreement is exclusive with respect to certain areas of the country and non-exclusive with respect to others. The term of the National Distribution Agreement is five years with either party having the right to terminate it upon twelve months notice during the initial five year period. During 1995 and 1996, several areas which were previously distributed exclusively by Dreyer's and Edy's were handled by other distributors or chain store warehouses. The Local Distribution Agreement is for a term of five years and automatically renews unless terminated by one party on at least six months prior notice.
The Company's products are distributed in the New York Metropolitan region to customers primarily other than supermarket chains by Calip Dairies, Inc. ("Calip") of which Richard E. Smith is Chairman of the Board and Mr. Smith and his family are the sole stockholders. The distribution agreement with Calip is terminable upon thirty (30) days notice by either party.
Markets and Customers
The Company's products are distributed nationwide. Sales to Sunstreet Foods Corporation, a distributor of the Company's bulk and prepackaged products, accounted for 10%, 10% and 14% of total revenues for 1996, 1995 and 1994, respectively. Sales to Dreyer's and Edy's accounted for 10%, 11% and 20% of total revenues for 1996, 1995 and 1994, respectively.
Franchise and Licensing Program
As of December 28, 1996, the Company had 22 franchised Steve's stores, most of which are located in five states; and 263 franchised Swensen's Stores in 19 states, the District of Columbia, and 12 foreign countries.
As of December 28, 1996, five additional franchisee-operated stores were under construction.
Franchises
In late 1989, the Company began offering "triple-trademark" franchises, featuring independent sections of Steve's or Swensen's ice cream, David's cookies and Heidi's frozen yogurt. The Company, pursuant to an arrangement with Specialty Foods Management, Inc. ("David's"), offers its franchisees David's cookies as an approved product with David's retaining the right to manufacture the cookie mix. The "triple-trademark" franchise is offered under, at the franchisee's election, either a Steve's or Swensen's franchise agreement, with David's cookies being deemed "approved products" which are permitted to be sold by the franchise and Heidi's frozen yogurt being licensed to the franchisee. The initial franchise fee for a Swensen's or Steve's "triple trademark store" is $25,000. Beginning in April 1997, the initial franchise fee for ice cream only stores will be reduced to $5,000 in an effort to sell and open additional domestic franchise stores. The "triple-trademark" concept was developed in response to the high real estate costs likely to be incurred by prospective franchisees. The concept allows franchisees to offer a range of dessert products while dividing the real estate costs and overhead between three synergistic businesses.
Where conditions do not permit a triple trademark franchise operation, the Company franchises one basic Steve's store type, an ice cream only store, and four basic Swensen's store types in the following formats:
1. Full-Service Food Store, old fashioned ice cream family-style restaurants with full service and food, featuring Swensen's ice cream and fountain products.
2. Ice-Cream-Only Store, with the same decor and featuring only Swensen's ice cream and ice cream related products.
3. Modified Full-Service Store, offering partial self-service of a limited food menu, having approximately 1,800 to 2,000 square feet and generally 50 to 60 seats.
4. Specialty Stores, which include kiosks or other approved types of outlets of a special nature.
The Company also offers, where permitted, existing Steve's and Swensen's franchises the right to sell Heidi's frozen yogurt and existing Heidi's franchises the right to sell Steve's or Swensen's ice cream.
The current form of franchise agreement for Steve's stores is for a ten-year term with an option to the franchisee to renew for a second ten-year term, upon the payment of the then current franchise fee. The agreements grant the franchisees an exclusive area and, since the commencement of the Company's operations, require the franchisee to purchase ice cream and certain other products exclusively from the Company. Franchisees pay an initial franchise fee, currently $25,000 and a royalty fee equal to 6% of gross sales. Beginning in April 1997, the initial franchise fee will be reduced to $5,000 in an effort to sell and open additional domestic franchise stores. Earlier franchise agreements, which are still in effect, have different terms. The current weighted average royalty rate for Steve's franchises is approximately 4.9%. The Company currently does not collect advertising fees from Steve's franchisees although it has the right to do so pursuant to the existing franchise agreements.
Swensen's standard franchise agreements provide for initial twenty and ten year terms for food menu and ice cream-only stores, respectively, and options to renew for up to the same periods. The agreements grant the franchisee the right to use the Swensen's name, goodwill and trade secrets, and to develop and operate the store in accordance with the Swensen's system. Initial franchise fees are $25,000. Beginning in April 1997, the initial franchise fee for ice cream only stores will be reduced to $5,000 in an effort to sell and open additional domestic franchise stores. In addition, the current franchise agreement requires domestic franchises to pay Swensen's a royalty of 6% of gross sales, and foreign franchisees to pay 3% (in U.S. Dollars) of their gross sales as royalties. Since franchise agreements entered into before 1980 called for a lower royalty, the current weighted average royalty rate is 3.2% for domestic franchises and 2% for foreign franchises. Swensen's current franchise agreement provides that domestic franchisees must contribute, depending on store type, 1/2% to 1% of gross sales to a fund which is used for national advertising.
The Company markets its franchises through magazine and newspaper advertisements, by attending new business opportunity conventions and through franchise brokers, as well as by responding to inquiries from potential franchisees who have seen the Company's product or one of its franchise stores.
All franchisees are required to purchase their ice cream and yogurt products from the Company or approved affiliates or suppliers and to purchase other proprietary products from Company-approved sources. The Steve's bulk ice cream is offered in approximately 24 flavors, the Swensen's bulk ice cream is offered in approximately 46 flavors, and the Heidi's yogurt mix is offered
in approximately 45 flavors (6 base mixes plus flavoring syrups). The number of flavors actually available at any one time varies. The Company also offers a variety of flavors of Swensen's no sugar added, low fat and no fat ice creams and Swensen's frozen yogurt products to the Swensen's franchised stores. American Glace frozen dessert soft serve mixes are offered to all of the Company's franchises.
Most Swensen's franchises purchase their ice cream through local distributors who act as consignees of Swensen's or from Sunstreet Foods Corporation, which purchases Swensen's ice cream for distribution. Three original franchisees that do not purchase centrally manufactured ice cream purchase ice cream mix from vendors approved by Swensen's.
Steve's franchisees purchase their ice cream from the Company through local distributors, some of whom purchase directly from the Company and some of whom act as consignees of the Company.
In 1996 six Steve's double trademark franchise stores were opened. In 1995 three Steve's franchise stores were opened and in 1994 one Steve's franchise triple trademark store was opened. In 1996 two Steve's stores were closed. In 1995 four Steve's stores were closed and in 1994 no Steve's stores closed. The average sales for Steve's franchise stores opened at least one year were $292,000 in 1996, $253,000 in 1995 and $309,000 in 1994. In 1996, 1995 and 1994 there were 35 (including 28 international), 60 (substantially all international) and 21 Swensen's stores opened, respectively, and 32 (including 21 international), 38 (substantially all domestic) and 17 Swensen's stores closed, respectively. The average sales for all Swensen's stores was $393,000, $354,000 and $308,000 in 1996, 1995 and 1994, respectively. The above sales amounts have been supplied by the franchisees, have not been verified by the Company, are average sales results and may not be indicative of actual or future results.
Area Development Agreements
Steve's Ice Cream, Inc. ("SIC, Inc."), the predecessor of the Company, had entered into area development agreements which the Company assumed in the acquisition of the assets of SIC, Inc. Similarly, Swensen's, prior to its acquisition by the Company had entered into area development agreements. While the Company does not generally intend to enter into additional domestic area development agreements, it intends to enter into international area development agreements from time to time in the future.
The area development agreements generally provide that the area developer is required to open and operate a specified number of franchises in a designated territory within a certain time period and that the area developer has the exclusive right to open Steve's or Swensen's franchises, as the case may be, in that
territory. Generally, if the specified number of franchises are not opened within that period, the area developer loses his exclusive territory. Area developers generally pay a development fee based on the number of franchises to be opened, which is credited against the initial franchise fees payable for the opening of each store.
At December 28, 1996 there were two international Steve's area development agreements and thirteen international Swensen's area development agreements in effect. The Company is currently negotiating several Steve's and Swensen's international area development agreements. There can be no assurances that these agreements will be entered into.
International
The Company received approximately $865,000, $623,000 and $872,000 in royalties and franchise fees from international franchisees for the years ended December 28, 1996, December 30, 1995 and December 31, 1994, respectively.
The Company also had sales of products and supplies to international franchisees and licensees of $668,000 in 1996, $477,000 in 1995 and $385,000 in 1994.
Company-owned Stores
As of December 28, 1996, the Company owned and operated four Swensen's stores, of which two are located in Arizona, one in Las Vegas, Nevada and one in California. In March 1996, the Company opened Jerry Tucci's Brick Oven Pizzeria, a prototype Italian restaurant located in Paradise Valley, Arizona. In addition, a Schrafft's ice cream store operating as a joint venture opened in January 1997 in Las Vegas, Nevada.
Competition
The ice cream, frozen yogurt and frozen dessert and related novelty market is highly competitive and the Company faces substantial competition in connection with the marketing and sales of its products. Among its competitors are Haagen-Dazs, Inc., owned by The Pillsbury Company, Klondike, Popsicles, Breyer's and Sealtest, owned by Unilever PLC, Eskimo Pie, Nestle's, Ben & Jerry's Homemade Ice Cream, Inc., Dreyer's Ice Cream and other numerous regional ice cream companies. Many of such competitors are well-established and have substantially greater financial and other resources than the Company.
While the ice cream and frozen yogurt manufacturing and distribution business is relatively easy to enter due to low entry cost, achieving wide distribution may be more difficult because of the high cost of a national marketing program and limitations on space available in retail freezer compartments. The Company's
products may also be considered to be competing with all ice cream and other frozen desserts for discretionary food dollars.
Steve's and Swensen's stores compete directly with local, regional and national retail ice cream and frozen dessert establishments and restaurants, including nationwide chains such as Friendly's, Baskin & Robbins, TCBY and with other businesses catering to the food and dessert market. Many of these businesses are much larger and have substantially greater capital and resources than does the Company. The ability of the Company and its franchisees to maintain and increase their share of the market will be dependent upon many factors, among which are the quality and price of their products, location and attractiveness of facilities, advertising, quality of service, and availability of capital for expansion and remodeling.
Trademarks and Patents
The Company currently has registered trademarks and service marks for Steve's, Swensen's and American Glace. It has also obtained trademarks for the names of certain ice cream flavors. In addition, the Company has filed applications for certain other trademarks and service marks in the United States and certain foreign countries.
The Company also has proprietary rights in numerous items, such as tradedress (store design, decors and layout), menu formats, advertising designs, ice cream formulas and flavors and in recipes, know-how, processes, products and other data, techniques and information.
Employees
As of December 28, 1996 the Company had 65 full-time employees and 135 part-time employees. Of these, 18 full-time and 134 of the part-time employees were employed in Company-owned/operated stores. None of the Company's employees are covered by collective bargaining agreements. The Company believes that its employee relations are good.
Seasonality
The ice cream industry generally experiences its highest volume during the spring and summer months and its lowest volume in the winter months.
Governmental Regulations
The Company is subject to regulation by federal, state and local governmental authorities regarding the distribution and sale of food products and the operation of retail food establishments. Although the Company believes that it currently has all material governmental permits, licenses, qualifications and
approvals for its operations, there can be no assurance that the Company will be able to maintain its existing licenses and permits or to obtain any future licenses, permits, qualifications or approvals which may be required for the operation of its business.
In addition, the Company's franchise programs are subject to regulation by the Federal Trade Commission relating to the information required to be disclosed to investors prior to their investment in a franchise, as well as similar rules in a number of states in which the Company does offer or may offer franchises, some of which involve substantive review of the Company's franchise disclosure documents. To the extent that the Company is unable to comply with the franchise regulations of a particular state, the Company will be unable to offer and sell franchises in such state.
Item 2.
Item 2. PROPERTIES.
The Company's executive offices and Swensen's corporate headquarters are located at 4175 Veterans Highway, Ronkonkoma, New York, 11779. These offices are provided to the Company at no additional cost by Calip pursuant to the terms of a Management Agreement between the Company and Calip.
One Company-owned and operated store is located in a building owned by the Company located in Paradise Valley, Arizona. The building is subject to a ground lease which expires on December 31, 2005 and contains four five-year renewal options. The building was remodeled and was reopened as Jerry Tucci's Brick Oven Pizzeria, a prototype Italian restaurant concept, in March 1996. In December 1996 the carrying amount of the building's value was written down to an amount which approximates market value. The remaining four Company-owned stores are leased for terms ranging through 2005.
Swensen's is also the lessee or guarantor of approximately 19 stores subleased from Swensen's or leased directly by franchisees from landlords, which leases expire through 2002. As of December 28, 1996, these leases had an aggregate future base rental liability, without regard to percentage rentals or consumer price index increases, of approximately $1,608,000.
The Company's current policy is not to lease or sublease premises nor to provide guarantees on leases in any manner with respect to its franchisees and it has not done so except for renewals and in special circumstances.
Item 3.
Item 3. LEGAL PROCEEDINGS.
On April 9, 1993, Heidi's Frogen Yozurt Shoppes, Inc. ("Heidi's") and its subsidiary, and LaSalle/Silver Sleigh Distribution, Inc., the wholly-owned subsidiary of the Company which purchased the shares of Heidi's from Heidi Miller and Brian
Pallas, each filed a voluntary petition under Chapter 11 of the United States Bankruptcy Code to reorganize. The Company believes it is unlikely that these bankruptcy actions will have a material adverse effect on the Company's financial position.
Swensen's is primarily liable on 19 of its franchisees' leases, which, upon default by the franchisee, have resulted in litigation between Swensen's and the lessors. Swensen's has been successful in defending such cases in the past and management believes that current litigation will have no material adverse effect on Swensen's financial position.
The Company and its subsidiaries are involved in other disputes with certain of its and their franchisees and is a party to various other lawsuits in the ordinary course of business, none of which it believes is material to its business.
Item 4.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
PART II -------
Item 5.
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The Company's Common Stock is traded in the over-the-counter market. The following table sets forth, for the periods indicated, the closing high and low bid prices for the Company's Common Stock as reported by the NASDAQ Stock Market. These amounts, which have been rounded to the nearest sixteenth, represent quotations between dealers (not actual transactions), do not include retail markups, markdowns or commissions and may not necessarily reflect actual transactions.
COMMON STOCK ------------
As of December 28, 1996 there were approximately 1,500 holders of record of the Company's Common Stock.
The payment by the Company of dividends, if any, in the future rests within the discretion of its Board of Directors and will depend upon the Company's earnings, its capital requirements (including working capital needs) and its financial condition, as well as other relevant factors. The Company has not paid any dividends on its Common Stock since its inception. The Board of Directors does not presently intend to declare any dividends on its Common Stock in the foreseeable future.
Item 6.
Item 6. SELECTED FINANCIAL DATA.
The following information has been summarized from the Company's financial statements and should be read in conjunction with such financial statements and the related notes thereto:
Summary of Consolidated Statements of Operations
Summary of Balance Sheets
Item 7.
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
FOR THE YEAR ENDED DECEMBER 28, 1996 VERSUS THE YEAR ENDED DECEMBER 30, 1995
Total revenues for the year ended December 28, 1996 increased to $42,853,000 from $37,969,000 for the year ended December 30, 1995. Prepackaged frozen dessert sales increased to $30,081,000 for the year ended December 28, 1996 from $25,806,000 for the year ended December 30, 1995. The increase in revenues and in prepackaged and frozen dessert sales was primarily due to the increase in new product authorizations in retail outlets and an increase in sales promotions. The increase in revenue from store operations was primarily due to the reopening of the company-owned store as a Jerry Tucci's Brick Oven Pizzeria.
The following table sets forth the sales of prepackaged frozen desserts, the sales of bulk frozen desserts to franchised and licensed stores, and other sales for the years ended December 28, 1996 and December 30, 1995, respectively.
Year Ended ------------------------------ December 28, December 30, 1996 1995 ------------ ------------ Prepackaged Frozen Dessert Sales $30,081,000 $25,806,000 Bulk Frozen Dessert Sales 5,577,000 5,521,000 Other sales 1,210,000 1,055,000 ----------- ----------- Total sales $36,868,000 $32,382,000 =========== ===========
The gross profit percentage was 37.6% and 37.4% for the years ended December 28, 1996 and December 31, 1995, respectively.
Selling, general and administrative expenses increased to $17,904,000 for the year ended December 28, 1996 as compared to $12,863,000 for the year ended December 30, 1995. This increase is primarily attributable to the increase in product support and selling expenses, including an increase of product introductory expenses incurred in connection with new licensed and sublicensed products introduced during 1996 in excess of such expenses for 1995, and offset by lower legal expenses as a result of a litigation settlement in 1995. The Company anticipates significant but materially decreased spending in 1997 for product introductory expenses as a result of focusing its new products introduction efforts on the recently acquired Tropicana license.
Net loss for the year ended December 28, 1996 was ($2,928,000) as compared to net income of $713,000 for the year
ended December 30, 1995. The decline in operating results was primarily attributable to the increase in product support and selling expenses and losses associated with the operation of the Company-owned Jerry Tucci's restaurant offset in part by the increased gross profit dollars realized as a result of increased sales volume and lower administrative expenses in 1996 as a result of a litigation settlement in 1995.
FOR THE YEAR ENDED DECEMBER 30, 1995 VERSUS THE YEAR ENDED DECEMBER 31, 1994.
Total revenues for the year ended December 30, 1995 increased to $37,969,000 from $33,776,000 for the year ended December 31, 1994. Prepackaged frozen dessert sales increased to $25,806,000 for the year ended December 30, 1995 from $18,587,000 for the year ended December 31, 1994. The increase in revenues and in prepackaged and frozen dessert sales was primarily due to the increase in new product authorizations in retail outlets, an increase in sales promotions and the acquisition of the Colombo hard pack rights in August 1995. The reduction in bulk frozen dessert sales was a result of the decline in the number of domestic franchise stores in operation, and the expiration in late 1994 of an agreement with a licensee regarding bulk products. The decrease in revenue from store operations of $1,184,000 was primarily due to the closing of one Company-owned store.
The following table sets forth the sales of prepackaged frozen desserts, the sales of bulk frozen desserts to franchised and licensed stores and other sales for the years ended December 30, 1995 and December 31, 1994, respectively.
Year Ended ----------------- December 30, 1995 December 31, 1994 ----------------- -----------------
Prepackaged Frozen Dessert Sales $25,806,000 $18,587,000 Bulk Frozen Dessert Sales 5,521,000 7,099,000 Other sales 1,055,000 1,174,000 ----------- ----------- Total sales $32,382,000 $26,860,000 =========== ===========
The gross profit percentage was 37% for the years ended December 30, 1995 and December 31, 1994.
Selling, general and administrative expenses increased to $12,863,000 for the year ended December 30, 1995 as compared to $10,080,000 for the year ended December 31, 1994. This increase is primarily attributable to the increase in product
support and selling expenses, including an increase of product introductory expenses incurred in connection with new licensed and sublicensed products introduced during 1995 in excess of such expenses for 1994, and higher administrative expenses as a result of a litigation settlement. The Company anticipated increased spending in 1996 for product introductory expenses in an effort to increase revenues and market share. Such an increase in spending adversely affected net income for the year ending December 29, 1996.
Net income for the year ended December 30, 1995 was $713,000 as compared to $1,035,000 for the year ended December 31, 1994. The decrease was primarily attributable to the increase in product support and selling expenses and a litigation settlement offset in part by the increased gross profit dollars realized as a result of increased sales volume.
Liquidity and Capital Resources
Net cash used in operating activities was $2,273,000 for the year ended December 28, 1996, compared with net cash used in operating activities of $1,427,000 for the year ended December 30, 1995. The increase in net cash used in operating activities resulted primarily from the net loss offset partially by the decline in cash flows from operating assets and liabilities in 1996 as compared to 1995.
Working capital on December 28, 1996 was $2,939,000. The Company believes this working capital plus internally generated funds and the funds available from its credit line will be sufficient to meet its cash and working capital requirements for its established operations for the current fiscal year. In addition, the Company has a $7,500,000 revolving credit facility expiring June 30,1998. On March 8, 1996, the Loan Agreement was amended and the Company refinanced $4,500,000 in existing revolving credit loans with a five-year term loan with the $7,500,000 revolving credit facility remaining in place. At December 28, 1996, $3,975,000 remains available to the Company under such credit line. The Company intends to refinance approximately $2,000,000 in existing revolving credit loans with a five year term loan but no assurances can be given that the Company will be successful in obtaining such refinancing.
Payment Requirements
Pursuant to the terms of the amended term loan and revolving credit facility, the Company is obligated to repay the outstanding principal amount of the revolving credit facility at maturity and of the term loan in 19 quarterly principal installments beginning April 1, 1996 of $140,000 each and the remaining principal amount of the term loan is due on January 1, 2001. Interest on the term loan and revolving credit facility is payable monthly.
Impact of Inflation
Inflation can significantly impact ice cream and packaging costs. In 1997, the Company believes that it will be able to pass on any price increases in the normal course of business within a relatively short period of time. However, the ability of the Company to pass on price increases will depend, to some extent, on whether its competitors have also done so. The Company believes that, in the past, its competitors have passed on price increases in a relatively short period of time.
Safe Harbor Statement Under the Private Securities Litigation Reform Act of 1995
The statements which are not historical facts contained in this Form 10-K are forward looking statements that involve risks and uncertainties, including, but not limited to, risks associated with the Company's future growth and profitability and the effects of general economic conditions.
Item 8.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
See Exhibit I
Item 9.
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
Not Applicable
PART III --------
Item 10, 11, 12 and 13.
The information called for by Item 10
Item 11 (Executive Compensation), Item 12
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a) The following documents are filed as part of this Annual Report on Form 10-K:
The following Financial Statements and Schedule are included in Item 8 of this Form 10-K:
1. Consolidated Financial Statements
- Report of Independent Certified Public Accountants.
- Consolidated balance sheets: December 28, 1996 and December 30,
- Consolidated financial statements for the years ended December 28, 1996, December 30, 1995 and December 31, 1994:
Statement of operations
Statement of Stockholders' equity
Statements of cash flows
Notes to consolidated financial statements
2. Consolidated Financial Statement Schedule
- Schedule II - Valuation and Qualifying Accounts and Reserves
3. The following documents are filed as exhibits to this Annual Report on Form 10-K:
3.1 Amendment to Certificate of Incorporation****
3.2 Amendment to By-laws of the Company****
4.3 Form of Common Stock Certificate*
10.7 Form of Steve's Homemade Ice Cream, Inc. Franchise Agreement*
10.8 1996 Incentive Stock Option Plan
10.21 Management Agreement between the Company and Calip Dairies, Inc.++
10.22 Distribution Agreement among the Company and Calip Dairies, Inc.*
10.24 Credit Agreement between Steve's Homemade Ice Cream, Inc. and Chase Manhattan Bank+
10.28 Form of Swensen's Ice Cream Company Franchise Agreement***
10.30 Sublicense Agreement, dated July 29, 1992 between General Mills, Inc. and the Company+++
10.31 License Agreement, dated August 15, 1995 between General Mills, Inc. and the Company*****
10.32 License Agreement, dated August 15, 1995 between General Mills, Inc. and the Company*****
10.33 License Agreement, dated August 15, 1995 between General Mills, Inc. and the Company*****
10.34 License Agreement, dated August 15, 1995 between General Mills, Inc. and the Company*****
10.35 Asset Purchase Agreement, dated August 15, 1995 by and between General Mills, Inc. and the Company*****
10.36 Second Amendment, dated March 8, 1996 to Credit Agreement with Chase Manhattan Bank*****
10.37 License Agreement, dated December 26, 1996, between Tropicana and the Company++++
22.1 List of the Company's subsidiaries
- ----------
* Previously filed as an exhibit to the Company's Registration Statement on Form S-18, File No. 33-4957-NY, declared effective by the Securities and Exchange Commission on July 22, 1986, and incorporated herein by reference.
+ Previously filed as an exhibit to the Company's Annual Report on Form 10K for the year ended December 31, 1994 filed with the Securities and Exchange Commission on April 15, 1995.
++ Previously filed as an exhibit to the Company's Annual Report on Form 10-K for the year ended December 29, 1990, filed with the Securities and Exchange Commission on April 13, 1991.
+++ Previously filed as an exhibit to the Company's Annual Report on Form 10-K for the year ended January 2, 1993, filed with the Securities and Exchange Commission on April 17, 1994.
++++ Pursuant to Rule 24b-2 promulgated under the Securities and Exchange Act of 1934, as amended, confidential treatment has been requested for certain portions of this agreement. Such confidential information has been (i) omitted from this agreement, (ii) marked with asterisks (**) and (iii) filed separately with the Securities and Exchange Commission.
** Previously filed as an exhibit to the Company's Registration Statement on Form S-4, File No. 33-20105, declared effective by the Securities and Exchange Commission on July 20, 1988 and incorporated herein by reference.
*** Previously filed as an exhibit to Swensen's Registration Statement on Form S-1, File No. 2-85983, declared effective by the Securities and Exchange Commission on November 11, 1985, and incorporated herein by reference.
**** Previously filed as an exhibit to the Company's Current Report on Form 8-K, File No. 0-15942, filed with the Securities and Exchange Commission on March 6, 1989, and incorporated herein by reference.
***** Previously filed as an exhibit to the Company's Annual Report on Form 10-K for the year ended December 30, 1995, filed with the Securities and Exchange Commission on April 12, 1996.
(b) During the last quarter of the period covered by this report, the Company did not file any reports on Form 8-K.
(c) See item 14(a)(3).
(d) See item 14(a)(2).
INTEGRATED BRANDS INC.
Consolidated Financial Statements Form 10-K Three Years Ended December 28, 1996
INTEGRATED BRANDS INC.
Contents
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Report of independent certified public accountants
Consolidated balance sheets: December 28, 1996 and December 30, 1995 -
Consolidated financial statements for the years ended December 28, 1996, December 30, 1995 and December 31, 1994: Statements of operations Statements of stockholders' equity Statements of cash flows -
Notes to consolidated financial statements -
Report of Independent Certified Public Accountants
To the Board of Directors and Shareholders of INTEGRATED BRANDS INC. Ronkonkoma, New York
We have audited the consolidated balance sheets of INTEGRATED BRANDS INC. as of December 28, 1996 and December 30, 1995 and the related consolidated statements of operations, stockholders' equity, and cash flows for each of the three years in the period ended December 28, 1996. 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 presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of INTEGRATED BRANDS INC. at December 28, 1996 and December 30, 1995 and the results of its operations and cash flows for each of the three years in the period ended December 28, 1996 in conformity with generally accepted accounting principles.
BDO Seidman, LLP
Mitchel Field, New York March 27, 1997
INTEGRATED BRANDS INC.
Consolidated Balance Sheets
See accompanying notes to consolidated financial statements.
INTEGRATED BRANDS INC.
Consolidated Balance Sheets
See accompanying notes to consolidated financial statements.
INTEGRATED BRANDS INC.
Consolidated Statements of Operations
See accompanying notes to consolidated financial statements.
INTEGRATED BRANDS INC.
Consolidated Statements of Stockholders' Equity
See accompanying notes to consolidated financial statements.
INTEGRATED BRANDS INC.
Consolidated Statements of Cash Flows
INTEGRATED BRANDS INC.
Consolidated Statements of Cash Flows
See accompanying notes to consolidated financial statements.
INTEGRATED BRANDS INC.
Notes to Consolidated Financial Statements
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1. Organization, Business and Summary of Accounting Policies
Organization and business
The Company was incorporated in September 1985 and commenced operations on December 23, 1985 as Steve's Homemade Ice Cream, Inc. In August 1988, the Company completed the acquisition of Swensen's Inc. ("Swensen's") and it's wholly-owned subsidiaries. In August 1990, the Company acquired a sixty percent interest in American Glace, Inc. In July 1995, the Company changed its name to INTEGRATED BRANDS INC. to more appropriately reflect the breadth of the Company's business. INTEGRATED BRANDS INC. and its subsidiaries, are collectively referred to herein as the "Company".
The Company markets, distributes and sells a variety of branded frozen dessert products to supermarkets, grocery stores, club stores, gourmet shops, delicatessens and convenience stores. The Company currently franchises ice cream parlors, dip shoppes and family style restaurants throughout the United States and certain foreign countries. Total revenues from foreign sources are not material.
Principles of consolidation
The accompanying consolidated financial statements include the accounts of the Company and its subsidiaries except Heidi's Frogen Yozurt Shoppes, Inc. ("Heidi's"). All material intercompany balances and transactions have been eliminated in consolidation. On April 9, 1993, Heidi's and its subsidiary filed voluntary petitions under Chapter 11 of the Bankruptcy Code with the United States Bankruptcy Court. The Company's investment in Heidi's is stated at amortized cost because of the uncertainty of the future control of Heidi's. Prior to April 9, 1993, Heidi's was not consolidated because control was considered likely to be temporary.
Fiscal year
The Company utilizes a 52/53 week financial year which ends on the Saturday closest to December 31.
INTEGRATED BRANDS INC.
Notes to Consolidated Financial Statements
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Single Store Franchise Income
A portion of single store franchise fees are paid upon application for a franchise, which amount becomes nonrefundable, and the balance is payable sixty days prior to the opening of the store. Single store franchise fees are recorded as revenue when the franchise application is approved, cash payments are received, and substantially all services required under the agreement are performed.
Concentrations of Credit Risk
Financial instruments which potentially subject the Company to considerations of credit risk consist principally of cash and accounts receivable. At times such cash in banks are in excess of the FDIC insurance limit. The Company attempts to minimize credit risk with respect to accounts receivable by reviewing customers' credit history before extending credit, and by monitoring customers' credit exposure regularly. The Company establishes an allowance for accounts receivable based upon factors surrounding the credit risk of specific customers, historical trends and other information. See Note 11 for concentrations of sales to major customers.
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. Actual results could differ from those estimates.
Inventories
Inventories consist primarily of ice cream and frozen dessert products, food supplies and packaging. Inventories are stated at the lower of average cost (which approximates the first-in, first-out method) or market.
INTEGRATED BRANDS INC.
Notes to Consolidated Financial Statements
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Product Introductory Costs
The Company capitalizes certain marketing and promotional costs incurred to develop a market for new as well as existing products throughout the United States. These costs are amortized over a twelve-month period. Amortization expenses of product introductory cost was $5,913,000, $2,504,000 and $1,008,000 for fiscal 1996, 1995 and 1994, respectively.
Improvements and equipment
Depreciation of equipment and amortization of leasehold improvements are provided on a straight-line basis over estimated useful lives of the assets or the lease term, whichever is shorter.
Intangible assets
The Company amortizes trademarks and license, franchise and territorial agreements on a straight-line basis over periods ranging primarily from 8 to 40 years. Management evaluates the continuing realizability of the intangible assets by assessing future value associated with these intangibles based upon the projected undiscounted future cash flows.
Per Share Data
Earnings (loss) per share of common stock were computed by dividing net income (loss) by the weighted average number of shares of common stock outstanding during each of the periods presented. Common equivalent shares were anti-dilutive for 1996 and were excluded from the loss per common share calculations. Common equivalent shares were included in the weighted average number of shares outstanding for 1995 and 1994. The common equivalent shares result from issuance upon the assumed exercise of warrants and options under the treasury stock method.
INTEGRATED BRANDS INC.
Notes to Consolidated Financial Statements
================================================================================
Cash Flows
The Company considers all highly liquid instruments with a maturity of three months or less when purchased to be cash equivalents.
Accounting for the Impairment of Long-Lived Assets
Effective December 31, 1995, the Company adopted Statement of Financial Accounting Standards Number 121 "Accounting for the Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed Of" ("SFAS Number 121"). The impact of adopting SFAS Number 121 was not material.
Accounting for Stock Based Compensation
In 1996, the Company adopted Statement of Financial Accounting Standard Number 123 "Accounting for Stock-Based Compensation" ("SFAS Number 123"). The Company has elected not to implement the fair value based accounting method for employee stock options, but has elected to disclose the pro forma impact on net income and earnings per share as if the fair value-based method had been applied.
New Accounting Standard
On March 3, 1997, the FASB issued Statement of Financial Accounting Standards No, 128, "Earnings Per Share". This pronouncement provides for the calculation of Basic and Diluted earnings per share which is different from the current calculation of Primary and Fully Diluted earnings per share. The effect of adopting this new standard is not expected to be material.
INTEGRATED BRANDS INC.
Notes to Consolidated Financial Statements
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2. Acquisitions
(a) In August 1995, the Company purchased the rights to Colombo brand prepackaged frozen dessert product line from General Mills for $4,500,000, plus certain inventory. The Company also entered into long-term exclusive license agreements for the United States and Canada for the use of the Colombo, Trix, Count Chocula and Lucky Charms trademarks which expire December 31, 2015 and for the Betty Crocker trademark for frozen products containing ice cream or frozen yogurt for prepackaged goods for all sizes, prepackaged novelties such as pops, bars and sandwiches and prepackaged frozen dessert specialties such as ice cream cakes, pies and brownie sundaes which expire December 31, 2010. Each agreement is renewable for an additional five years if a cash payment is made.
(b) In June 1994, the Company acquired certain assets of DCA Food Industries, Inc. for a total consideration of up to $1,140,000. The consideration is payable in annual installments in each of the six years ending May 31, 2000 based upon annual sales of the products in connection with the acquired assets. The present value of this estimated payable, $361,000 and $424,000, is included in long-term debt at December 28, 1996 and December 30, 1995, respectively.
INTEGRATED BRANDS INC.
Notes to Consolidated Financial Statements
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3. Receivables
Receivables consist of the following:
1996 1995 - -------------------------------------------------------------------------------- (In thousands)
Trade accounts receivable $6,066 $4,681
Notes receivable, current maturities 120 260 - -------------------------------------------------------------------------------- 6,186 4,941
Less: allowance for doubtful accounts 574 525 - -------------------------------------------------------------------------------- $5,612 $4,416 ================================================================================
4. Improvements and
Improvements and equipment consist of the following: Equipment
Depreciable life 1996 1995 in years - -------------------------------------------------------------------------------- (in thousands)
Improvements $ 230 $ 230 25
Machinery and equipment 1,470 1,163 3 - 10
Leasehold improvements 1,260 684 3 - 10
Capitalized leases 145 145 20 - -------------------------------------------------------------------------------- 3,105 2,222
Less: accumulated depreciation and amortization 1,437 1,119 - -------------------------------------------------------------------------------- $1,668 $1,103 ================================================================================
INTEGRATED BRANDS INC.
Notes to Consolidated Financial Statements
================================================================================
5. Intangible Assets
Intangible assets consist of the following:
Estimated useful 1996 1995 lives in years - -------------------------------------------------------------------------------- (in thousands)
Trademarks $6,800 $6,800 8 - 40
Franchise agreements 1,299 1,299 4 - 40
Territorial agreements 746 945 10 - 20 - -------------------------------------------------------------------------------- 8,845 9,044 Less: Accumulated amortization 3,105 2,967 - -------------------------------------------------------------------------------- $5,740 $ 6,077 ================================================================================
6. Long-Term Debt
Long-term debt consists of the following:
1996 1995 - -------------------------------------------------------------------------------- (in thousands)
Revolving credit, unsecured $3,252 $4,825
Term loan, unsecured 4,080 --
Present value of estimated acquisition debt, unsecured (Note 2 (b)) 361 424
Other, unsecured 212 323 - -------------------------------------------------------------------------------- 8,178 5,572
Less current maturities 666 576 - -------------------------------------------------------------------------------- $7,512 $4,996 ================================================================================
INTEGRATED BRANDS INC.
Notes to Consolidated Financial Statements
================================================================================
Under a revolving credit facility entered into December 1994, the Company can borrow up to $7,500,000 through June 30, 1998. As of December 28, 1996 and December 30, 1995, the Company borrowed $3,525,000 and $4,825,000, respectively. Interest is payable monthly on the unpaid principal balance of borrowings under this facility at the bank's prime rate plus 1/2%. The Company has agreed to pay a fee of 1/8% per annum on the unused portion of the commitment. As of December 28, 1996, the Company had available credit of $3,975,000 under the revolving credit facility.
The Company also borrowed $4,500,000 under a new five year term loan. The term loan is payable in 19 quarterly principal installments of $140,000 beginning April 1, 1996, and the remaining principal balance is due on January 1, 2001. Interest is payable monthly on the unpaid principal balance of this term loan at the banks prime rate plus 1/2%. As of December 28, 1996, the term loan balance was $4,080,000.
All borrowings under the above agreement are unsecured. The agreement contains restrictions relating to the payment of dividends, acquisition of the Company's capital stock, rental obligations, liens, mergers and dispositions of properties, changes in nature of business and indebtedness. In addition, the Company must maintain financial ratios and minimum amounts of working capital, stockholders' equity and investments in subsidiaries. As of December 28, 1996, the Company was not in compliance with certain financial covenants and had obtained waivers from its lender.
Current maturities of long-term liabilities are $666,000 in 1997; $4,185,000 in 1998; $654,000 in 1999; $648,000 in 2000; $1,893,000 in 2001 and $132,000 in later years.
INTEGRATED BRANDS INC.
Notes to Consolidated Financial Statements
================================================================================
7. Commitments and Contingencies
(a) Legal proceedings
The Company is a party to legal proceedings and disputes with franchisees, former franchisees and others which arose in the ordinary course of business. In the opinion of the Company, it is unlikely that the liabilities, if any, arising from the legal proceedings and disputes will have a material adverse effect on the Company or its operations.
(b) Contingent lease liabilities
The Company holds master leases or has guaranteed leases, expiring at varying dates to 2002, covering franchised locations. Where the Company holds the master lease, these premises have been subleased to franchisees under terms and rentals rates substantially the same as those in master leases. In a majority of these instances, franchisees make all lease payments directly to the landlords. The Company provides an estimated liability for lease terminations in the event of a default by a franchisee based on the expected costs of releasing or settlement with the landlord. The liability was $198,000 and $352,000 at December 28, 1996 and December 30, 1995, respectively. Aggregate minimum future rental payments under these leases approximated $1,379,000 at December 28, 1996.
8. Stockholders' Equity
During the fiscal year ended December 31, 1994, the Company repurchased 2,000,000 shares of stock for $1,450,000.
During fiscal 1995, the Company settled certain litigation and charged operations for the cost of the settlement of approximately $753,000. The settlement included the issuance of 250,000 shares of common stock.
During fiscal 1996, the Company repurchased 100,000 shares of stock for $107,000.
As of December 28, 1996, the Company has a commitment to repurchase 100,000 shares of stock for $200,000 in 1997.
INTEGRATED BRANDS INC.
Notes to Consolidated Financial Statements
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9. Stock Options
In 1986, the Board of Directors of the Company approved a Stock Option Plan under which non-transferrable options to purchase up to 1,070,000 shares of Common Stock at a fair market value as determined by the Board of Directors may have been granted to employees of the Company, including officers and directors, consultants and others. As of December 28, 1996, all options granted under this plan were forfeited.
In 1996, the stockholders of the Company approved the Company's 1996 Stock Option Plan under which options to purchase up to 1,070,000 shares of Common Stock maybe granted. Options granted under the 1996 Plan may be incentive stock options, as defined in the Internal Revenue Code or nonqualified stock options. Incentive stock options may be granted to employees of the Company. Non-qualified stock options may be granted to any person, including, but not limited to employees independent agents, consultants and attorneys. The exercise price for all incentive options shall not be less than fair market value. In the case of non-qualified options, the purchase price shall not be less than the par value of a share of common stock.
The Company applies APB Opinion 25, "Accounting for Stock Issued to Employees" and related Interpretations in accounting for the 1996 and 1986 Plans. Under APB 25, for options granted to employees at exercise prices equal to fair market value of the underlying common stock at the date of grant, no compensation cost is recognized.
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS No. 123") requires the Company to provide, beginning with 1995 grants, pro forma information regarding net income and net income per common share as if compensation costs for the Company's stock option plans had been determined in accordance with the fair value method prescribed in SFAS No. 123. Such pro forma information has not been presented because management has determined that the compensation cost associated with options granted in 1996 and 1995 are not material to net income (loss) or net income (loss) per share.
INTEGRATED BRANDS INC.
Notes to Consolidated Financial Statements
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A summary of status of the Company's 1986 stock option plan as of December 28, 1996, December 30, 1995 and December 31, 1994, and changes during the years ending on those dates is presented below (shares in thousands):
A summary of the status of the Company's 1996 stock option plan as of December 28, 1996 and changes during the year is presented below (shares in thousands):
Weighted Average Exercise Shares Price ------ ----- Outstanding beginning of the year -0- $0.00
Granted 459 $ .90 ----
Outstanding end of year 459 $ .90 ====
Options exercisable at year end 453 ====
INTEGRATED BRANDS INC.
Notes to Consolidated Financial Statements
================================================================================
The following table summarizes information about stock options outstanding under the 1996 Plan at December 28, 1996 (shares in thousands):
Options Outstanding Options Exercisable -------------------------------------- ------------------------- Weighted Weighted Range of Outstanding Remaining Average Average Exercise at Contractual Exercise Exercisable at Exercise Price 12/28/96 Life Price 12/28/96 Price -------- ----------- ----------- -------- -------------- --------
$.72 - 1.25 459 9.5 $.90 453 $.88
10. Related Party Transactions
(a) Calip Dairies, Inc. ("Calip"), an ice cream distributor owned by the Chairman and principal stockholder of the Company, has entered into a management agreement with the Company which terminates on April 15, 1998. Under the agreement, Calip provides office facilities, management, administrative and other personnel, as required, for the operation of the Company's business for an annual fee of 10% of $5,000,000 in gross revenues and 2% of gross revenues thereafter. The management fees were $999,000 in 1996, $891,000 in 1995 and $751,000 in 1994.
The Company also has a distribution agreement with Calip for the distribution of the Company's products in the New York Metropolitan region to customers primarily other than supermarket chains. The distribution agreement is terminable by either party on 30 days' notice. Sales of ice cream to Calip were $2,333,000 in 1996, $2,751,000 in 1995 and $1,695,000 in 1994. The majority of receivables from affiliates represent receivables from Calip.
(b) The Company has acquired a substantial portion of Heidi's outstanding liabilities and claims, including certain bank notes payable by Heidi's, subsequent to its 85% purchase of the outstanding common stock of Heidi's in 1989. From 1989 to 1994, the Company acquired liabilities of and claims against Heidi's of $2,452,000. These claims against Heidi's are carried at the Company's cost of $627,000 at December 28, 1996 and December 30, 1995.
INTEGRATED BRANDS INC.
Notes to Consolidated Financial Statements
================================================================================
The Company also paid or advanced funds for legal fees, other litigation expenses and certain operating expenses on behalf of Heidi's. The amounts owed to the Company for expenses incurred are payable under collateralized notes receivable bearing interest at 12%. At December 28, 1996 and December 30, 1995, the Company's net secured notes receivable from Heidi's are $741,000 and $753,000.
The Company files consolidated tax returns with Heidi's. The tax benefit of Heidi's loss to the consolidated group is treated as a reduction of the investment in Heidi's.
The above net receivables and investment in Heidi's totaled $1,464,000 and $1,590,000 as of December 28, 1996 and December 30, 1995, respectively. The Company has a secured interest in the Heidi's trademark and all other assets. In management's opinion, such interest and the underlying revenues anticipated to be generated from the trademark provides sufficient collateral to justify the carrying amount of the Company's receivables and its investment in Heidi's at amortized cost.
INTEGRATED BRANDS INC.
Notes to Consolidated Financial Statements
================================================================================
11. Concentrations of Sales to Major Customers
In November 1992, the Company entered into two distribution agreements with Edy's Grand Ice Cream ("Edy's") and Dreyer's Grand Ice Cream, Inc. ("Dreyers") relating to the distribution of the Company's products. Pursuant to one agreement (the "Local Distribution Agreement"), Edy's and Dreyer's agreed to distribute essentially all of the Company's products to the New York metropolitan area supermarkets. In addition, pursuant to a national distribution agreement (the "National Distribution Agreement"), Edy's and Dreyer's agreed to distribute the Company's TRIX(R) and Yoplait(R) products and other novelty items nationwide. The National Distribution Agreement is exclusive with respect to certain areas of the country and non-exclusive to others. The term of the National Distribution Agreement is five years with either party having the right to terminate it upon twelve months notice during the initial five year period. During 1995 and 1996, several areas which were previously distributed exclusively by Dreyer's and Edy's were handled by other distributors or chain store warehouses. The Local Distribution Agreement is also for a term of five years and automatically renews unless terminated by one party on at least six months prior notice. Sales to Edy's and Dreyer's amounted to approximately $3,935,000, $4,231,000 and $6,720,000 for the years 1996, 1995 and 1994. Accounts receivable from this customer were $326,000 and $472,000 at December 30, 1996 and 1995, respectively.
Sales to one other major customer accounted for approximately 10%, 10% and 14% of total revenues in 1996, 1995 and 1994, respectively. Accounts receivable balances from this customer are approximately $171,000 and $144,000 at December 30, 1996 and 1995, respectively.
INTEGRATED BRANDS INC.
Notes to Consolidated Financial Statements
================================================================================
12. Income Tax Expense (Benefit)
The components of income tax expense (benefit) were:
1996 1995 1994 - -------------------------------------------------------------------------------- (in thousands) Current provision:
Federal $ (465) $ 339 $ 813
State and local 52 73 125
Foreign 78 67 108 - -------------------------------------------------------------------------------- $ (335) $ 479 $1,046 ================================================================================
The following reconciles the income tax expenses (benefit) at federal statutory rate with the Company's income tax provision:
1996 1995 1994 - -------------------------------------------------------------------------------- (in thousands) Income tax expense (benefit) at federal statutory rate $(1,109) $ 405 $ 708 Expenses not deductible for tax purposes 154 108 168 Prior year under (over) accrual (98) (47) 65 Effective tax rate of tax benefit differ from statutory rate 666 -- -- State and local taxes, net of federal benefit 52 48 83 Tax benefits of foreign tax credit -- (71) (41) Other -- 36 63 - -------------------------------------------------------------------------------- $ (335) $ 479 $ 1,046 ================================================================================
INTEGRATED BRANDS INC.
Notes to Consolidated Financial Statements
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Swensen's preacquisition net operating loss carryfoward of $2,450,000 is available to reduce Swensen's future taxable income at a rate of approximately $490,000 per year through 2000. The carrying amount of trademarks and other non-current intangible assets will be reduced when the benefit is realized.
The Company's net operating loss carryforwards expire in the following years:
1997 $980,000
1998 490,000
1999 490,000
2000 490,000
2011 367,000 - -------------------------------------------------------------------------------- $2,817,000 ================================================================================
The components of the deferred tax assets and liabilities as of December 28, 1996 and December 30, 1995 were as follows:
1996 1995 ================================================================================ Deferred tax asset: (in thousands)
Benefits of net operating loss carryforwards $ 125 $ --
Franchise deposits 273 209
Allowance for doubtful accounts 231 221
Tax credits 476 --
Depreciation 96 --
Lease termination liability 42 106 - -------------------------------------------------------------------------------- 1,243 536
Valuation allowance (857) (191) - -------------------------------------------------------------------------------- 386 345
Deferred Tax Liabilities
Product development (386) (294)
Depreciation -- (51) - -------------------------------------------------------------------------------- Net 0 0 ================================================================================
The net deferred tax asset is offset fully by a valuation allowance because of the uncertainty as to future realization mainly relating to the utilization of certain tax credits prior to expiration.
INTEGRATED BRANDS INC.
Notes to Consolidated Financial Statements
================================================================================
13. Supplemental Cash Flow Information
(a) Supplemental disclosures of cash flow information:
1996 1995 1994 - -------------------------------------------------------------------------------- (in thousands)
(1) Interest paid $646 $223 $ 99
(2) Income taxes paid $646 267 240
(b) Supplemental disclosures of non-cash investing activities:
In 1994, the Company acquired certain assets of DCA Food Industries, Inc. for a total consideration of up to $1,140,000. The estimated present value of this payable is recorded as long-term liabilities (Note 2(b)).
INTEGRATED BRANDS INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENT SCHEDULE
==================================================
Report of Independent Certified Public Accountants on Financial Statement Schedule S-2
Schedule II - Valuation and qualifying accounts S-3
S-1
Report of Independent Certified Public Accountants On Financial Statement Schedule
To the Board of Directors and Shareholders of INTEGRATED BRANDS INC. Ronkonkoma, New York
The audits referred to in our report dated March 27, 1997 relating to the consolidated financial statements of INTEGRATED BRANDS INC., which is contained in Item 8 of this Form 10-K, included the audit of the accompanying Schedule of Valuation and Qualifying Accounts. This financial statement schedule is the responsibility of the Company's management. Our responsibility is to express an opinion on this financial statement schedule based upon our audits.
In our opinion, this financial statement schedule presents fairly, in all material respects, the information set forth therein.
BDO SEIDMAN, LLP
Mitchel Field, New York March 27, 1997
S-2
INTEGRATED BRANDS INC.
Schedule II - Valuation and Qualifying Accounts
================================================================================
(1) Reclassification to allowance for doubtful accounts for current receivables from allowance for doubtful accounts for noncurrent receivables.
S-3
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.
INTEGRATED BRANDS INC.
March __, 1997 By: ---------------------------------- Richard E. Smith Chairman of the Board, Chief Executive Officer and Director
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons in the capacities and on the date indicated:
- -------------------------- Richard E. Smith Chairman of the Board, March __, 1997 (Principal Executive Officer) Chief Executive Officer and Director
- -------------------------- Gary P. Stevens President, Treasurer March __, 1997 (Principal Financial Officer)
- -------------------------- Gerard M. Tucci Vice President, March __, 1997 Secretary and Director
- -------------------------- Karl Eller Director March __, 1997
- -------------------------- Benjamin Raphan Director March __, 1997
- -------------------------- David M. Smith Vice President March __, 1997 Director
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.
STEVE'S HOMEMADE ICE CREAM, INC.
March 28, 1997 By: /s/ Richard E. Smith ------------------------------- Richard E. Smith Chairman of the Board, Chief Executive Officer and Director
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons in the capacities and on the date indicated:
/s/ Richard E. Smith - -------------------------- Richard E. Smith Chairman of the Board, March 28, 1997 (Principal Executive Officer) Chief Executive Officer and Director
/s/ Gary P. Stevens - -------------------------- Gary P. Stevens President, Treasurer March 28, 1997 (Principal Financial Officer)
/s/ Gerard M. Tucci - -------------------------- Gerard M. Tucci Vice President, March 28, 1997 Secretary and Director /s/ Karl Eller - -------------------------- Karl Eller Director March 28, 1997
/s/ Benjamin Raphan - -------------------------- Benjamin Raphan Director March 28, 1997
/s/ David M. Smith - -------------------------- David M. Smith Vice President and March 28, 1997 Director