SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 ---------------------- FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Quarterly Period Ended December 31, 2000 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to ------- ------- Commission file number 0-23048 LINCOLN SNACKS COMPANY (exact name of registrant as specified in its charter) Delaware 47-0758569 (State or other jurisdiction (IRS Employer Identification No.) of incorporation or organization) 30 Buxton Farm Road, Stamford, Connecticut 06905 (Address of principal executive offices) (zip code) (Registrant's telephone number, including area code) (203) 329-4545 Not Applicable (Former name, former address and former fiscal year, if changed since last report) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes X No ------- ------- The number of shares of the issuer's Common Stock, $.01 par value, outstanding on February 6, 2001 was 6,331,790 shares. LINCOLN SNACKS COMPANY INDEX TO FORM 10-Q PAGE ---- Part I. FINANCIAL INFORMATION --------------------- Item 1. FINANCIAL STATEMENTS Balance Sheets as of December 31, 2000 and June 30, 2000 3-4 Statements of Operations for the three months ended December 31, 2000 and December 31, 1999 5 Statements of Operations for the six months ended December 31, 2000 and December 31, 1999 6 Statements of Changes in Stockholders' Equity for the six months ended December 31, 2000 and December 31, 1999 7 Statements of Cash Flows for the six months ended December 31, 2000 and December 31, 1999 8 Notes to Financial Statements 9-12 Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 13-15 Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK 15 Part II. OTHER INFORMATION ----------------- Item 1. LEGAL PROCEEDINGS 16 Item 2. CHANGES IN SECURITIES 16 Item 3. DEFAULTS UPON SENIOR SECURITIES 16 Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 16 Item 5. OTHER INFORMATION 16 Item 6. EXHIBITS AND REPORTS ON FORM 8-K 16 SIGNATURES 17 - 2 - LINCOLN SNACKS COMPANY BALANCE SHEETS ASSETS AS OF DECEMBER 31, 2000 AND JUNE 30, 2000 December 31, June 30, 2000 2000 ------------ ------------ ASSETS (Unaudited) CURRENT ASSETS: Cash ..................................... $ 10,578,803 $ 9,731,679 Accounts receivable (net of allowance for doubtful accounts and cash discounts of $433,843 and $396,326, respectively) .. 3,938,342 1,527,740 Inventories .............................. 1,732,839 2,522,311 Prepaid and other current assets ......... 58,200 946 ------------ ------------ Total current assets ....................... 16,308,184 13,782,676 PROPERTY, PLANT AND EQUIPMENT: Land ..................................... 370,000 370,000 Building and leasehold improvements ...... 1,792,352 1,792,352 Machinery and equipment .................. 4,856,937 4,856,937 Construction in process .................. 942,603 507,848 ------------ ------------ 7,961,892 7,527,137 Less: accumulated depreciation and amortization ........................ (4,134,815) (3,797,491) ------------ ------------ 3,827,077 3,729,646 INTANGIBLE AND OTHER ASSETS, (net of accumulated amortization of $1,247,154 and $1,135,522, respectively) ... 3,441,616 3,388,735 ------------ ------------ TOTAL ASSETS ............................... $ 23,576,877 $ 20,901,057 ============ ============ The accompanying notes to financial statements are an integral part of these balance sheets. - 3 - LINCOLN SNACKS COMPANY BALANCE SHEETS LIABILITIES AND STOCKHOLDERS' EQUITY AS OF DECEMBER 31, 2000 AND JUNE 30, 2000 December 31, June 30, 2000 2000 ------------ ------------ LIABILITIES AND STOCKHOLDERS' EQUITY (Unaudited) CURRENT LIABILITIES: Accounts payable ......................... $ 706,216 $ 770,851 Accrued expenses ......................... 1,843,275 1,741,319 Accrued trade promotions ................. 2,679,067 1,988,394 Deferred gain-short term ................. 13,434 13,434 Short Term Debt .......................... 5,000,000 -- ------------ ------------ Total current liabilities .................. 10,241,992 4,513,998 LONG TERM DEBT ............................. -- 5,000,000 Deferred Gain .............................. 70,558 77,019 ------------ ------------ TOTAL LIABILITIES .......................... 10,312,550 9,591,017 ------------ ------------ COMMITMENTS STOCKHOLDERS' EQUITY: Common stock, $0.01 par value, 20,000,000 shares authorized, 6,450,090 shares issued at December 31, 2000 and June 30, 2000 ..... 64,501 64,501 Special stock, $0.01 par value, 300,000 shares authorized, none outstanding ..... -- -- Additional paid-in capital ............... 18,010,637 18,010,637 Accumulated deficit ...................... (4,784,785) (6,739,072) Less: cost of common stock in treasury 118,300 shares ................. (26,026) (26,026) ------------ ------------ TOTAL STOCKHOLDERS' EQUITY ................. 13,264,327 11,310,040 ------------ ------------ TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY ....................... $ 23,576,877 $ 20,901,057 ============ ============ The accompanying notes to financial statements are an integral part of these balance sheets. - 4 - LINCOLN SNACKS COMPANY STATEMENTS OF OPERATIONS FOR THE THREE MONTHS ENDED DECEMBER 31, 2000 AND DECEMBER 31, 1999 2000 1999 ----------- ----------- (Unaudited) (Unaudited) NET SALES ............................. $12,171,898 $ 8,958,884 COST OF SALES ......................... 6,505,158 5,378,967 ----------- ----------- Gross profit ........................ 5,666,740 3,579,917 SELLING, GENERAL AND ADMINISTRATIVE EXPENSES ............... 4,436,897 3,025,300 ----------- ----------- Income from operations .............. 1,229,843 554,617 Interest income, net .................. 68,933 15,129 Other expenses ........................ -- (17,622) ----------- ----------- Income before provision for income taxes ................... 1,298,776 552,124 PROVISION FOR INCOME TAXES ............ 101,000 10,000 ----------- ----------- Net income .......................... $ 1,197,776 $ 542,124 =========== =========== BASIC NET INCOME PER SHARE ............ $ 0.19 $ 0.09 =========== =========== DILUTED NET INCOME PER SHARE .......... $ 0.13 $ 0.06 =========== =========== Weighted Average Number of Shares Outstanding Basic ............................... 6,331,790 6,331,790 =========== =========== Diluted ............................. 10,089,237 9,982,963 =========== =========== Theaccompanying notes to financial statements are an integral part of these statements. - 5 - LINCOLN SNACKS COMPANY STATEMENTS OF OPERATIONS FOR THE SIX MONTHS ENDED DECEMBER 31, 2000 AND DECEMBER 31, 1999 2000 1999 ------------ ------------ (Unaudited) (Unaudited) NET SALES ............................. $ 21,359,018 $ 17,128,030 COST OF SALES ......................... 11,611,401 10,456,294 ------------ ------------ Gross profit ........................ 9,747,617 6,671,736 SELLING, GENERAL AND ADMINISTRATIVE EXPENSES ............... 7,790,063 5,972,459 ------------ ------------ Income from operations .............. 1,957,554 699,277 Interest income, net .................. 129,733 18,031 Other expenses ........................ -- (17,622) ------------ ------------ Income before provision for income taxes ................... 2,087,287 699,686 PROVISION FOR INCOME TAXES ............ 133,000 20,000 ------------ ------------ Net income .......................... $ 1,954,287 $ 679,686 ============ ============ BASIC NET INCOME PER SHARE ............ $ 0.31 $ 0.11 ============ ============ DILUTED NET INCOME PER SHARE .......... $ 0.21 $ 0.08 ============ ============ Weighted Average Number of Shares Outstanding Basic ............................... 6,331,790 6,331,790 ============ ============ Diluted ............................. 10,093,490 9,990,892 ============ ============ Theaccompanying notes to financial statements are an integral part of these statements. - 6 - LINCOLN SNACKS COMPANY STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY FOR THE SIX MONTHS ENDED DECEMBER 31, 2000 AND DECEMBER 31, 1999 (UNAUDITED)

~~September~~Common ~~29,~~Special ~~June~~Paid ~~30,~~In ~~2000~~Accumulated ~~2000~~Treasury Stock Stock Capital Deficit Stock ----------- -------- ----------- ----------- ~~ASSETS~~----------- ~~(Unaudited)~~June ~~CURRENT~~30, ~~ASSETS:~~1999 ~~Cash~~......... $ 864,~~344,457~~501 $ ~~9,731,679~~-- ~~Accounts receivable (net of allowance for doubtful accounts and cash discounts of~~ $~~433~~18,~~538~~010,637 ~~and~~ $~~396~~(7,~~326 respectively~~811,176) ~~3,523,676~~$ 1(26,~~527,740~~026) ~~Inventories~~Net ~~3,379,759~~income ~~2,522,311~~............ ~~Prepaid~~-- ~~and~~-- ~~other~~-- ~~current assets 76~~679,~~203~~686 ~~946~~-- ----------- -------- ----------- ----------- ~~Total~~----------- ~~current~~December ~~assets 15~~31,~~324,095~~ ~~13,782,676~~1999 ~~PROPERTY,~~.................. ~~PLANT~~$ ~~AND~~64,501 ~~EQUIPMENT:~~$ ~~Land~~-- ~~370~~$18,~~000~~010,637 ~~370~~$(7,~~000~~131,490) ~~Building~~$ ~~and~~(26,026) ~~leasehold~~=========== ~~improvements~~======== ~~1,792,352~~=========== 1=========== =========== June 30,~~792,352~~ ~~Machinery~~2000.......... ~~and~~$ ~~equipment~~64,501 4-- $18,~~856~~010,~~937~~637 4$(6,~~856~~739,~~937~~072) ~~Construction~~$ in(26,026) ~~process~~Net ~~714,577~~income ~~507,848~~............ -- -- -- 1,954,287 --~~----~~ ------------ ~~7,733,866 7,527,137 Less: accumulated depreciation and amortization (3,964,469) (3,797,491)~~ --------~~----~~ ------------ ~~3,769,397 3,729,646 INTANGIBLE AND OTHER ASSETS, net of accumulated amortization of $1,191,338 and $1,135,522 3,322,432 3,388,735~~ ------------ ------------ ~~TOTAL~~December ~~ASSETS~~31, 2000 .................. $ 2264,~~415,924~~501 $ 20-- $18,~~901~~010,~~057~~637 $(4,784,785) $ (26,026) =========== ======== =========== =========== ===========

The accompanying notes to financial statements are an integral part of these statements. - 7 - LINCOLN SNACKS COMPANY STATEMENTS OF CASH FLOWS FOR THE SIX MONTHS ENDED DECEMBER 31, 2000 AND DECEMBER 31, 1999

~~September 29, June 30,~~ 2000 ~~2000~~1999 ------------- ------------ ~~LIABILITIES~~(Unaudited) ~~AND STOCKHOLDERS' EQUITY~~ (Unaudited) ~~CURRENT~~CASH ~~LIABILITIES~~FLOWS FROM OPERATING ACTIVITIES: ~~Accounts~~Net ~~payable~~income .................................... $ 1,~~239~~954,~~835~~287 $ ~~770~~679,~~851~~686 ~~Accrued~~Adjustments ~~expenses~~to 1reconcile net income to cash provided by operating activities: Depreciation and amortization ............... 448,~~603~~956 402,~~887~~467 1Allowance for doubtful accounts and cash discounts,~~741~~ net ........................ 37,~~319~~517 ~~Accrued~~28,095 ~~trade~~Changes ~~promotions~~in Assets and Liabilities: (Increase) decrease in accounts receivable ............................. (2,~~418~~448,~~429~~119) 1,~~988~~321,~~394~~130 ~~Deferred~~Decrease ~~gain-short~~in ~~term~~inventories 13...................... 789,~~434~~472 13351,~~434~~089 ~~------------~~(Increase) ~~------------~~in ~~Total~~prepaid and other current ~~liabilities~~assets 5................... (46,~~275,585~~767) 4(29,~~513,998~~250) ~~LONG~~Increase ~~TERM~~in ~~DEBT~~accounts ~~5,000,000~~payable ~~5,000,000~~and ~~Deferred~~accrued ~~Gain~~expenses 73.............. 721,~~788~~533 77140,~~019~~965 ------------ ------------ ~~TOTAL~~Net ~~LIABILITIES~~cash 10provided by operating activities ......................... 1,~~349~~456,~~373~~879 92,~~591~~894,~~017~~182 ------------ ------------ ~~COMMITMENTS~~CASH ~~STOCKHOLDERS'~~FLOWS ~~EQUITY~~FROM INVESTING ACTIVITIES: ~~Common~~Acquisition ~~stock,~~payment $0.01........................ ~~par value~~(175,000) 20(175,000~~,000~~) ~~shares~~Capital ~~authorized,~~expenditures ~~6,450,090 shares issued at September 29, 2000 and June 30, 2000 64,501 64,501 Special stock, $0~~.01....................... ~~par value~~(434,755) ~~300~~(199,~~000~~338) ~~shares authorized, none outstanding~~ ------------ ------------ ~~Additional~~Net ~~paid-in~~cash ~~capital~~used ~~18,010,637~~in ~~18,010,637~~investing ~~Accumulated~~activities ~~deficit~~......... ( 5609,~~982,561~~755) ( 6374,~~739,072~~338) ~~Less:~~------------ ~~cost~~------------ ofCASH ~~common~~FLOWS ~~stock~~FROM inFINANCING ~~treasury~~ACTIVITIES ~~118,300~~............ ~~shares~~-- ~~(26,026)~~-- ~~(26,026)~~ ------------ ------------ ~~TOTAL~~Net ~~STOCKHOLDERS'~~increase ~~EQUITY~~in 12cash .......................... 847,~~066~~124 2,~~551~~519,844 11CASH,~~310~~ beginning of period ....................... 9,~~040~~731,679 6,781,556 ------------ ------------ ~~TOTAL~~CASH, ~~LIABILITIES~~end ~~AND~~of ~~STOCKHOLDERS'~~period ~~EQUITY~~............................. $ 2210,~~415~~578,~~924~~803 $ 209,~~901~~301,~~057~~400 ============ ============ SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Interest paid ................................. $ 151,535 $ 152,370 ============ ============ Income taxes paid ............................. $ 36,460 $ 20,630 ============ ============

The accompanying notes to financial statements are an integral part of these statements. - 8 - LINCOLN SNACKS COMPANY ---------------------- NOTES TO FINANCIAL STATEMENTS ----------------------------- DECEMBER 31, 2000 ----------------- (Unaudited) (1) The Company: ------------ Lincoln Snacks Company ("Lincoln" or the "Company") is a Delaware corporation and is a majority-owned subsidiary of Brynwood Partners III L.P. ("Brynwood"). Lincoln is engaged in the manufacture and marketing of caramelized pre-popped popcorn and glazed popcorn/nut mixes. Sales of the Company's products are subject to seasonal trends with a significant portion of sales occurring in the last four months of the calendar year. (2) Basis of Presentation: ---------------------- The balance sheet as of December 31, 2000, and the related statements of operations, changes in stockholders' equity and cash flows for the three and six months ended December 31, 2000 and December 31, 1999, have been prepared by the Company without audit. In the opinion of management, all adjustments necessary to present fairly the financial position, results of operations and cash flows at and for periods ended December 31, 2000 and December 31, 1999 have been made. During the interim periods presented, the accounting policies followed are in conformity with generally accepted accounting principles and are consistent with those applied for annual periods and described in the Company's Annual Report on Form 10-K for the twelve months ended June 30, 2000 filed with the Securities and Exchange Commission on September 22, 2000 (the "Annual Report"). Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been omitted. It is suggested that these financial statements be read in conjunction with the financial statements included in the Annual Report. The results of operations for the three and six months ended December 31, 2000 and December 31, 1999 are not necessarily indicative of the operating results for the full year. (3) Net income per share: --------------------- The Company follows the provisions of Statement of Financial Accounting Standards No. 128 ("SFAS No. 128"). This statement establishes standards for computing and presenting basic and diluted earnings per share. Below is a reconciliation of the numerators and denominators of the basic and diluted earnings per share computations: - 9 - Three Months Ended ----------------------------- December 31, December 31, 2000 1999 ----------- ----------- Basic earnings per share weighted average number of shares outstanding ..... 6,331,790 6,331,790 Dilutive effect: Stock options ............................ 107,812 1,538 Convertible debt ......................... 3,649,635 3,649,635 ----------- ----------- Diluted earnings per share weighted average number of shares outstanding ..... 10,089,237 9,982,963 =========== =========== Net income ................................. $ 1,197,776 $ 542,124 Effect of assumed conversion of convertible debt ...................... 72,000 72,000 ----------- ----------- Net income plus assumed conversion of convertible debt ........... $ 1,269,776 $ 614,124 =========== =========== Basic earnings per share ................... $ 0.19 $ 0.09 =========== =========== Diluted earnings per share ................. $ 0.13 $ 0.06 =========== =========== Six Months Ended ----------------------------- December 31, December 31, 2000 1999 ----------- ----------- Basic earnings per share weighted average number of shares outstanding ..... 6,331,790 6,331,790 Dilutive effect: Stock options ............................ 112,065 9,467 Convertible debt ......................... 3,649,635 3,649,635 ----------- ----------- Diluted earnings per share weighted average number of shares outstanding ..... 10,093,490 9,990,892 =========== =========== Net income ................................. $ 1,954,287 $ 679,686 Effect of assumed conversion of convertible debt ...................... 144,000 144,000 ----------- ----------- Net income plus assumed conversion of convertible debt ........... $ 2,098,287 $ 823,686 =========== =========== Basic earnings per share ................... $ 0.31 $ 0.11 =========== =========== Diluted earnings per share ................. $ 0.21 $ 0.08 =========== =========== - 10 - Options to purchase 737,000 shares of common stock were outstanding at December 31, 2000 and included in the computation of diluted earnings per share for the three and six months ended December 31, 2000. Additional options to purchase approximately 187,000 shares of common stock were not included in the computation of diluted earnings per share because the options' exercise price was greater than the average market price of the common shares. In addition, diluted earnings per share reflect the issuance of 3,649,635 shares upon the assumed conversion of the Brynwood Debenture (see Note 5). Options to purchase approximately 43,000 shares of common stock were outstanding at December 31, 1999 and included in the computation of diluted earnings per share for the three and six months ended December 31, 1999. Additional options to purchase 625,000 shares of common stock were not included in the computation of diluted earnings per share because the options' exercise price was greater than the average market price of the common shares. In addition, diluted earnings per share reflect the issuance of 3,649,635 shares upon the assumed conversion of the Brynwood Debenture (see Note 5). (4) Debt Facility: -------------- In April 2000, the Company entered into a three-year revolving credit facility ("credit facility") which provides for up to $4 million in revolver borrowings. Borrowings under the credit facility are limited to a percentage of eligible receivables and inventory. The credit facility bears interest at prime and has a commitment fee of 0.25% on the unused portion of the facility. The credit facility is collateralized by substantially all of the Company's assets. There were no amounts outstanding under the credit facility at December 31, 2000. (5) Brynwood Convertible Subordinated Debenture: -------------------------------------------- On April 1, 1999, the Company executed and delivered a Convertible Subordinated Debenture (the "Brynwood Debenture") in favor of Brynwood, in the principal amount of $5,000,000. The Brynwood Debenture bears interest at the rate of 6% per annum, matures on December 31, 2001 and is convertible, at the option of Brynwood, for shares of common stock of the Company at any time after a Convertability Event (as defined in the Brynwood Debenture). The note is convertible at $1.37 per share into shares of common stock. Interest is payable quarterly. (6) Inventory: ---------- Inventory consists of the following: December 31, June 30, 2000 2000 ---------- ---------- Raw materials and supplies ............. $1,026,260 $1,686,028 Finished Goods ......................... 706,579 836,283 ---------- ---------- $1,732,839 $2,522,311 ========== ========== - 11 - (7) Acquisition: ------------ In 1998, the Company acquired certain assets of Iroquois Popcorn Company ("Iroquois"), a private label manufacturer of caramelized popcorn, for approximately $1,300,000, of which $800,000 was paid in cash and $500,000 in a non-interest bearing note. Additionally the agreement with Iroquois provided for two contingent payments of $175,000 to be paid on December 31, 1999 and December 31, 2000. The payments were to be paid if the Company maintained 70% of the sales volume to Iroquois' largest customer during each twelve-month period respectively. The Company paid the first contingent payment of $175,000 in December 1999 and the second contingent payment of $175,000 in December 2000. The payments were accounted for as additions to the excess of purchase price over net assets acquired and are being amortized over the remaining life of the asset (originally 10 years). - 12 - ITEM 2. - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND ------- --------------------------------------------------------------- RESULTS OF OPERATIONS (UNAUDITED) --------------------------------- Results of Operations: ---------------------- Introduction ------------ The Company's net sales are subject to significant seasonal variation, with results from operations fluctuating due to these trends. This seasonality is due principally to customers' buying patterns of Poppycock during the traditional holiday season. As a result, third and fourth calendar quarter sales account for a significant portion of the Company's annual sales. Three months ended December 31, 2000 versus December 31, 1999 ------------------------------------------------------------- Overall net sales increased 36% or $3.21 million to $12.17 million for the three months ended December 31, 2000 versus $8.96 million in the corresponding period of 1999 due to increased product distribution. Branded sales increased to 91% of net sales versus 83% a year ago. Gross profit increased $2.09 million to $5.67 million for the three months ended December 31, 2000 versus $3.58 million in the corresponding period of 1999. The improvement in gross profit is due to an increase in overall net sales particularly those products with higher gross margins. Selling, general and administrative expenses increased 47% or $1.41 million to $4.44 million for the three months ended December 31, 2000 versus $3.03 million for the same period in 1999. The increase is primarily due to variable selling costs associated with increases in branded sales, increases in consumer marketing programs and slotting fees for new distribution of branded products. Interest income, net increased to $.07 million for the three months ended December 31, 2000 due to higher cash balances and higher interest rates. Provision for income taxes represents estimated taxes due after giving effect to the utilization of the Company's NOL carryforwards. The quarter net income of $1.20 million versus $.54 million in the same period in 1999 represents an increase in earnings of $.66 million. The improvement in earnings is attributable to increases in branded sales which were partially offset by higher marketing costs. Six months ended December 31, 2000 versus December 31, 1999 ----------------------------------------------------------- Overall net sales increased 25% or $4.23 million to $21.36 million for the six months ended December 31, 2000 versus $17.13 million in the corresponding period of 1999 due to increased product distribution. Branded sales increased to 89% of net sales versus 79% a year ago. Gross profit increased $3.08 million to $9.75 million for the six months ended December 31, 2000 versus $6.67 million in the corresponding period of 1999. The improvement in gross profit is due to an increase in overall net sales particularly those products with higher gross margins. - 13 - Selling, general and administrative expenses increased 30% or $1.82 million to $7.79 million for the six months ended December 31, 2000 versus $5.97 million for the same period in 1999. The increase is primarily due to variable selling costs associated with increases in branded sales, increases in consumer marketing programs and slotting fees for new distribution of branded products. Interest income, net increased to $.13 million for the six months ended December 31, 2000 due to higher cash balances and higher interest rates. Provision for income taxes represents estimated taxes due after giving effect to the utilization of the Company's NOL carryforwards. The year to date net income of $1.95 million versus $.68 million in the same period in 1999 represents an increase in earnings of $1.27 million. The improvement in earnings is attributable to increases in branded sales which were partially offset by higher marketing costs. Liquidity and Capital Resources ------------------------------- As of December 31, 2000, the Company had working capital of $6.07 million compared to a working capital of $9.27 million at June 30, 2000 (the Company's fiscal year end), a decrease in working capital of $3.20 million. The decrease in working capital is primarily attributable to the transfer of the Brynwood Debenture from long term to short term debt based on its maturity date of December 31, 2001, partially offset by the Company's net income of $1.95 million. On April 1, 1999, the Company executed and delivered a Convertible Subordinated Debenture in favor of Brynwood Partners III L.P. in the principal amount of $5,000,000. The Debenture bears interest at the rate of 6% per annum, matures on December 31, 2001 and is convertible, at the option of Brynwood, into shares of Common Stock of the Company at any time after a Convertability Event (as defined in the Debenture). The note is convertible at $1.37 per share into shares of common stock. The Company currently meets its short-term liquidity needs from its cash on hand. The Company also has a revolving credit facility which is secured by a first priority, perfected security interest in substantially all of the Company's existing and after-acquired assets. There were no amounts outstanding under the revolving credit facility as of December 31, 2000. Management continues to focus on increasing product distribution and continues to review all operating costs with the objective of increasing profitability and ensuring future liquidity. However, there can be no assurance that any of these objectives will be achieved in future periods. The Company's short-term liquidity is affected by seasonal increases in inventory and accounts receivable levels, and seasonality of sales. Inventory and accounts receivable levels increase substantially during the latter part of the third calendar quarter and during the remainder of the calendar year. As of July 1, 2000, the Company has approximately $2.4 million in NOL carryforwards. A valuation allowance has been recorded due to the uncertainty of realizing certain loss carryforwards and other deferred tax assets because of the Company's brief operating history and limitations on the ability to use the carryforwards resulting from Brynwood's purchase in 1998. - 14 - The following chart represents the net funds provided by or used in operating, financing and investment activities for each period as indicated: Six Months Ended ------------------------- December 31, December 31, 2000 1999 ----------- ---------- (in thousands) Net cash provided by operating activities ....... $ 1,457 $ 2,894 Net cash used in investing activities ........... (610) (374) Net cash used in financing activities ........... -- -- Net cash provided by operating activities decreased $1.44 million to cash provided of $1.46 million during the six months ended December 31, 2000 compared to cash provided of $2.89 million in 1999. The decrease in cash provided by operating activities is primarily due to the timing of accounts receivable and inventory increases partially offset by the increase in net income of $ 1.27 million. Net cash used in investing activities increased $.24 million to $.61 million for the six months ended December 31, 2000 compared to the same period in 1999. Net cash used in investing activities for both periods represents capital expenditures and payments under the short term note related to the Iroquois acquisition. New Accounting Pronouncements Not Yet Effective ----------------------------------------------- In July 2000, the Financial Accounting Standards Board's Emerging Issues Task Force (EITF) reached a consensus on Issue No. 00-14, "Accounting for Certain Sales Incentives." This issue addresses the recognition, measurement, and income statement classification for various types of sales incentives including discounts, coupons, rebates and free products. The Company will adopt this consensus in the fourth quarter of 2001. While the impact of this consensus on the Company's financial statements is still being evaluated, it is expected to only impact revenue and expense classifications and not change reported net income. Forward Looking Statement ------------------------- This Quarterly Report on Form 10-Q contains, in addition to historical information, certain forward-looking statements regarding future financial condition and results of operations. The words "expect," "estimate," "anticipate," "predict," "believe," and similar expressions are intended to identify forward-looking statements. Such statements involve certain risks and uncertainties. Should one or more of these risks or uncertainties materialize, actual outcomes may vary materially from those indicated. ITEM 3. - QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK ------- --------------------------------------------------------- Not Applicable. - 15 - PART II. OTHER INFORMATION ----------------- Item 1. Legal Proceedings Not Applicable ----------------- Item 2. Changes in Securities Not Applicable --------------------- Item 3. Defaults Upon Senior Securities Not Applicable ------------------------------- Item 4. Submission of Matters to a Vote of Security Holders ----------------------------- The Annual Meeting of the Stockholders of the Registrant was held on November 30, 2000, pursuant to notice, at which meeting the following persons were elected directors of the Registrant to hold office until the next Annual Meeting of Stockholders and until their respective successors are duly elected and qualified, and who received the number of votes indicated opposite their names: NUMBER ABSTENTIONS NUMBER OF OF VOTES AND BROKER NAME: VOTES FOR: WITHHELD: NON-VOTES: ----- ---------- --------- ---------- John T. Gray 5,967,224 200 NONE Hendrik J. Hartong, Jr. 5,967,224 200 NONE Hendrik J. Hartong III 5,967,224 200 NONE C. Alan MacDonald 5,967,224 200 NONE Ian B. MacTaggart 5,967,124 300 NONE Robert Zwartendijk 5,967,124 300 NONE Item 5. Other Information Not Applicable ----------------- Item 6. Exhibits and Reports on Form 8-K -------------------------------- a Exhibits (27) Financial Data Schedule b Reports on Form 8-K Not Applicable - 16 - SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. February 7, 2001 Lincoln Snacks Company (Registrant) By: /s/Hendrik J. Hartong III ------------------------------------ Name: Hendrik J. Hartong III Title: President and Chief Executive Officer; Director (Principal Executive Officer) By: /s/Joanne W. Prier ------------------------------------ Name: Joanne W. Prier Title: Vice President and Chief Financial Officer, Secretary and Treasurer (Principal Financial Officer and Principal Accounting Officer) - 17 -

2000 1999 ------------ ------------ (Unaudited) (Unaudited) NET SALES $ 9,187,121 $ 8,169,147 COST OF SALES 5,106,248 5,077,332 ------------ ------------ Gross profit 4,080,873 3,091,815 SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 3,353,165 2,947,161 ------------ ------------ Income from operations 727,708 144,654 INTEREST INCOME, NET 60,803 2,908 ------------ ------------ Income before provision for income taxes 788,511 147,562 PROVISION FOR INCOME TAXES 32,000 10,000 ------------ ------------ Net income $ 756,511 $ 137,562 ============ ============ BASIC NET INCOME PER SHARE $ 0.12 $ 0.02 ============ ============ DILUTED NET INCOME PER SHARE $ 0.08 $ 0.02 ============ ============ Weighted Average Number of Shares Outstanding Basic 6,331,790 6,331,790 ============ ============ Diluted 10,097,742 9,998,820 ============ ============

(UNAUDITED) Common Special Paid In Accumulated Treasury Stock Stock Capital Deficit Stock ------- ------- ----------- ------------ -------- June 30, 1999 $64,501 -- $18,010,637 ($ 7,811,176) ($26,026) Net income -- -- -- 137,562 -- ------- ------- ----------- ------------ -------- September 30, 1999 $64,501 $ -- $18,010,637 ($ 7,673,614) ($26,026) ======= ======= =========== ============ ======== June 30, 2000 $64,501 -- $18,010,637 ($ 6,739,072) ($26,026) Net income -- -- -- 756,511 -- ------- ------- ----------- ------------ -------- September 29, 2000 $64,501 $ -- $18,010,637 ($ 5,982,561) ($26,026) ======= ======= =========== ============ ========

2000 1999 ------------ ------------ (Unaudited) (Unaudited) CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 756,511 $ 137,562 Adjustments to reconcile net income to cash provided by operating activities: Depreciation and amortization 222,794 201,233 Allowance for doubtful accounts and cash discounts 37,213 41,483 Changes in Assets and Liabilities: Increase in accounts receivable (2,033,149) (1,202,241) Increase in inventories (857,448) (156,395) Increase in prepaid and other current assets (64,770) (46,970) Increase in accounts payable and accrued expenses 758,356 888,662 ----------- ----------- Net cash used in operating activities (1,180,493) (136,666) ----------- ----------- CASH FLOWS FROM INVESTING ACTIVITIES: Capital expenditures (206,729) (103,130) ----------- ----------- Net cash used in investing activities (206,729) (103,130) ----------- ----------- CASH FLOWS FROM FINANCING ACTIVITIES --- --- ----------- ----------- Net increase (decrease) in cash (1,387,222) (239,796) CASH, beginning of period 9,731,679 6,781,556 ----------- ----------- CASH, end of period $ 8,344,457 $ 6,541,760 =========== =========== SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Interest paid $ --- $ 76,185 =========== =========== Income taxes paid $ 3,500 $ 10,680 =========== ===========

September 29, September 30, 2000 1999 ------------- ------------- Basic earnings per share weighted average number of shares outstanding 6,331,790 6,331,790 Dilutive effect: Stock options 116,317 17,395 Convertible debt 3,649,635 3,649,635 ----------- ----------- Diluted earnings per share weighted average number of shares outstanding 10,097,742 9,998,820 =========== =========== Net income $ 756,511 $ 137,562 Effect of assumed conversion of convertible debt 72,000 72,000 ----------- ----------- Net income plus assumed conversion of convertible debt $ 828,511 $ 209,562 =========== =========== Basic earnings per share $.12 $.02 =========== =========== Diluted earnings per share $.08 $.02 =========== ===========

Inventory consists of the following: September 29, June 30, 2000 2000 ------------- ----------- Raw materials and supplies $ 1,495,681 $ 1,686,028 Finished Goods 1,884,078 836,283 ------------- ----------- $ 3,379,759 $ 2,522,311 ============= ===========

Three Months Ended -------------------------------- September 29, September 30, 2000 1999 ------------- ------------- (in thousands) Net cash used in operating activities $(1,180) $ (137) Net cash used in investing activities $( 207) (103) Net cash used in financing activities --- ---

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