SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED MAY 31, 1996
OR
o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File No. 0-13852
GRIST MILL CO.
(Exact name of registrant as specified in charter)
Delaware 41-0974681
(State of Incorporation) (IRS Employer Identification No.)
21340 HAYES AVENUE, LAKEVILLE, MINNESOTA 55044-0430
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (612) 469-4981
Securities registered pursuant to section 12(b) of the Act: None
Securities registered pursuant to 12(g) of the Act:
TITLE OF EACH CLASS
Common Stock par value $.10 per share
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months and (2) has been subject to such filing
requirements for the past 90 days.
Yes __X__ No _____
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.
As of July 31, 1996, 6,765,577 common shares were outstanding, and the aggregate
market value of the common shares (based upon the last price of such stock as
reported by the Nasdaq National Market) of Grist Mill Co. held by non-affiliates
was approximately $37,211,000.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Annual Report to Shareholders for the fiscal year
ended May 31, 1996 are incorporated by reference in Parts II and IV.
Portions of the Proxy Statement of Registrant for its 1996 Annual Meeting of
Shareholders are incorporated by reference in Part III of this report.
PART I
ITEM I. BUSINESS
(a) GENERAL DEVELOPMENT OF BUSINESS.
Grist Mill Co. ("Grist Mill" or the "Company") manufactures and markets private
label, or store brand grocery products, as well as value priced branded food
grocery products. Most of the Company's products are targeted toward consumers
who demand "value pricing", the combination of high quality with low prices. In
the store brand market, the Company produces value-priced products for sales
under customers' store names. The Company's customers include virtually all of
the major U.S. grocery retailers and wholesalers.
The Company was incorporated in 1971 as a Delaware corporation at which time it
acquired two subsidiaries (i) Grist Mill, Inc., which had its origins as a sole
proprietorship formed around 1917 and was one of the oldest manufacturers of
natural food in the country; and (ii) Enright Natural Food Co., which had its
origins as a sole proprietorship in the specialty health food business.
Following incorporation, the Company's primary emphasis was as a manufacturer of
store branded granola cereals. The Company's product line broadened in the
1980's to include graham pie crusts, granola bars, and fruit snacks. In 1994 the
Company completed a manufacturing facility for the production of flaked
ready-to-eat cereals and has since broadened its ready-to-eat product line to
include a wide variety of ready-to-eat cereal products. In 1994 fruit filled
cereal bars were added to the Company's product offerings. And in 1996 the
Company introduced fat free fruit filled cereal bars and crisp rice bars.
Additionally, the Company contract manufactures products for other branded food
companies.
In January 1990, the Company acquired Grist Mill Confections, a Danville,
Illinois-based supplier of the Company's fruit snacks.
The Company's executive offices are located at 21340 Hayes Avenue, P.O. Box 430,
Lakeville, Minnesota 55044-0430. The corporate office telephone number is (612)
469-4981.
(b) FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS
The Company operates primarily in one business segment - the development,
production, and marketing of various food products. The same production and
distribution personnel and facilities, and the same support services are
employed in the production of all products.
(c) NARRATIVE DESCRIPTION OF BUSINESS
Many consumers are cost-conscious in their grocery purchasing decisions, yet
still demand high quality in the food products they purchase. In response to
such demand, many food retailers, particularly grocery retailers, choose to
afford to their customers value-priced products as alternatives to higher priced
brand name products. Value-priced food products offer considerable price savings
to the consumer while providing comparable taste, texture and quality to higher
priced products, which are generally sold under a manufacturer's brand name and
are supported by advertising media. Many grocery retailers provide products
under their store names as the value-priced alternative. Grocery retailers can
purchase and sell store brand products at lower prices because such products are
not generally supported by widespread media advertising, as are their branded
counterparts. In 1995, the last year for which information is available, unit
market share for store brands in U.S. grocery stores was 19.4%.
The Company's primary strategy is to identify market opportunities where
high-visibility brand name products are being sold successfully and to develop
high quality products of comparable appearance, taste, and texture for sale at
lower prices. By developing these value-priced products for existing high volume
markets, the Company avoids many of the front-end risks of product development
and the expenses associated with advertising and introducing products with
unknown demand. The Company believes it has positioned itself to take advantage
of the opportunities that the market for value-priced food products presents.
For customers offering their own label, the Company makes its products available
on a store brand basis. To the extent that grocery retailers do not offer a
store brand, the Company has provided the Grist Mill brand to be sold as a
value-priced alternative.
The Company believes that its strengths consist of superior overall product
quality, close relationships with major grocery retailers, low manufacturing
overhead, a strong national broker network, and an ability to react quickly to
changing market conditions.
CUSTOMERS
The Company's customers include national and regional supermarket retailers and
wholesalers, such as:
Acme Markets, Inc.
Albertson's, Inc.
Aldi's Nolte Co. LTD
Associated Wholesale
Grocers
Atlantic and Pacific Tea
Company
BI-LO, Inc.
Blair Distributors
Bruno's, Inc.
C&S Wholesales Grocers, Inc.
Dominick's Finer Foods
Fleming Companies, Inc.
Giant Food, Inc.
H.E. Butt Grocery Company
Jewel Food Store
King Soopers
Kroger Company
Lucky Stores, Inc.
Marsh Supermarkets, Inc.
Meijer, Inc.
OK Grocery Company
Preisco Foods
Ralph's Grocery, Inc.
Roundy's, Inc.
Safeway Stores
Seaway Foodtown, Inc.
Shaws Supermarkets
Smith's Food & Drug Centers,
Inc.
Spartan Stores, Inc.
Stop & Shop Companies
Super Store Industries
Super Valu Stores, Inc.
TOPCO Associates, Inc.
Von's Grocery Co.
Wakefern Food Corporation
Waldbaum, Inc.
Wal-Mart Supercenters
Winn Dixie, Inc.
FRUIT SNACKS
The Company's most significant grocery product line in terms of sales and
profits is fruit snacks. The Company estimates that the national store brand
fruit snack market is approximately $350 million in annual retail revenues.
Since 1985, the Company has marketed fruit snacks, first on a store brand basis
and subsequently under the Grist Mill brand and other Company-owned brand names
as value-priced alternatives to brand name products. Today the Company markets
fruit snacks in several shapes including Dinosaurs, Sharks, Pocahontas, Aladdin,
and Lion's Kingdom.
READY-TO-EAT CEREALS
The Company's most significant product line in terms of sales growth is
ready-to-eat cereal. The Company markets a line of ready-to-eat cereals
consisting of various flaked, extruded, and granola cereals. The Company
developed its business in the granola cereal market over 20 years ago by
manufacturing and marketing granola cereals in two varieties, honey oat and
honey oat with raisins.
In 1994 the Company completed installation of a new cereal production system and
introduced a total of six new cereal items. The cereal business expanded further
in 1995 with the installation of extrusion cereal processes which extended the
Company's line of pre-sweetened cereal products. The Company introduced a
variety of new cereals in fiscal 1995 and 1996 as it became a full line supplier
of ready-to-eat cereals for its store brand customers. Grist Mill's ready-to-eat
cereal offerings now include 21 flaked and extruded products which are similar
to major branded ready-to-eat cereal products. The Company also markets a line
of 5 unique premium cereals for sale to its store brand customers.
The overall U.S. ready-to-eat cereal category totals approximately $7.9 billion
in annual grocery retail sales. Store brands currently comprise approximately 6%
or $500 million of these sales. Grist Mill markets its cereal products primarily
under store brands.
WHOLESOME SNACK BARS AND PIE CRUSTS
The Company markets wholesome snack bars, including several varieties of granola
bars, low fat and non-fat fruit filled cereal bars and crisp rice bars.
The Company markets chewy and crunchy granola bars in a variety of flavors,
primarily under store brand names. Grist Mill is currently the only significant
supplier of granola bars to the store brand market.
Late in 1994 the Company made its initial shipments of Fruit & Grain bars, a
line of fruit filled cereal bars marketed exclusively under store brand names.
In 1996 a no-fat version of this bar was introduced. The Company also introduced
a crisp rice bar product in fiscal 1996. Grist Mill is the dominant private
label supplier of these products to retailers.
Grist Mill entered the preformed graham cracker pie crust market as a store
brand supplier in 1982 and, since then, the Company's sales of preformed graham
cracker pie crusts have grown to equal approximately 70% of the store brand
market for this product.
CONTRACT MANUFACTURING
The Company's reputation for being an efficient manufacturer of high quality
food products has led to opportunities for Grist Mill to contract manufacture
food products for other companies. During 1994, the Company established a
contract manufacturing relationship with another major branded packaged foods
company. Sales to this customer were 29% and 30% of consolidated sales for
fiscal 1996 and 1995, respectively.
During fiscal 1996, the Company's largest contract manufacturing customer
announced plans to self-manufacture the products which the Company had been
manufacturing for them over the last two years. Management believes this will
result in a decline in the contract manufacturing business in fiscal 1997, and
that contract manufacturing sales will not be a significant portion of sales in
fiscal 1998.
NEW PRODUCT DEVELOPMENT
The Company's development efforts center on finding niche product opportunities
that have proven consumer market appeal and are price sensitive. The Company
also works with its store brand customers responding to their new product
development needs. As these opportunities have arisen, the Company has acted
quickly to develop a comparable product which it then markets against the higher
priced competition. This strategy allows the Company to avoid many of the
front-end risks of research and development and the expenses associated with
advertising and introducing products with unknown demand.
SALES, MARKETING AND DISTRIBUTION
The Company markets its products to virtually all of the major U.S. grocery
retailers and wholesalers. The Company believes that its ability to sell
additional grocery products is enhanced by its reputation for quality,
value-priced products and its commitment to store brand and value-priced product
manufacturing and marketing.
The Company has developed for its grocery customers more than 600 labels, many
of which it believes have gained significant recognition among consumers. Such
labels are trademarks of the customers for which they were developed. The
Company believes that its ability to develop unique and recognizable packaging
of its products is a valuable service to its store brand customers.
The Company promotes its products primarily through in-store promotions with its
customers, rather than through national advertising, and assists its customers
in positioning the Company's store brand products to compete effectively with
brand name alternatives.
The Company sells its products through food brokers with which it has developed
strong relationships. The Company has a national sales force consisting of six
grocery regional sales managers. This sales force handles the relationships with
brokers. These brokers sell the Company's products to grocery store retailers
and wholesalers. The Company also receives many inquiries from potential users
of its contract manufacturing services and its value-added grain ingredients.
RAW MATERIALS
The Company purchases grains, fruit and fruit concentrates, sweeteners,
chocolate, nutmeats and packaging materials from a variety of sources.
Typically, the Company enters into three to twelve month fixed price contracts
for these items. The Company's profitability can be impacted by changes in
market prices for ingredients and packaging.
MANUFACTURING OPERATIONS AND FACILITIES
All Grist Mill products are manufactured in Company-owned and operated
facilities located in Lakeville, Minnesota and Danville, Illinois. A diverse
number of processing operations are conducted at the Lakeville facility,
including: a line for baking cereal and grain-based products; recently installed
lines for the cooking, flaking, extruding, and baking of ready-to-eat cereals;
three lines for the manufacturing of bar-type products including granola,
fruit-filled and crisp rice bars (two of these lines have the capability of
chocolate enrobing, and one has caramel manufacturing capabilities); a line for
producing pie crusts; and a number of packaging machinery lines with the
capability for form, fill and seal operations, and cartoning and casing. In
1997, the Company plans to expand its cereal manufacturing capacity at an
estimated cost of $8 million for new equipment. Additionally, it has $2 million
committed to expand office facilities in Lakeville. These capital expenditures
will be financed with long term debt. The Company owns twelve acres of land
contiguous to the Lakeville facility which could be used for further expansion.
The Company's acquisition of Grist Mill Confections, Inc. (formerly Tempo
Confections) in January 1990 enabled the Company to bring fruit snack
manufacturing in-house, increasing the flexibility of such manufacturing. Prior
to the acquisition, the Company's fruit snack products were being manufactured
by third party suppliers. The Danville facility produces product using a starch
molding process, and also has a production system for enrobing of confection
centers with sugar or other materials. The facility's packaging equipment
consists of machinery for form, fill and seal of its products in bulk.
COMPETITION
Producers of major brand name products (mostly companies much larger than the
Company) compete for shelf space with producers of value-priced products such as
the Company. The Company operates in a highly competitive and rapidly changing
environment within which there are many manufacturers of food, snack, and
confectionery products. A large portion of the Company's revenues have been
generated by the manufacture and sale of fruit snacks. General Mills, Inc.,
Farley Candy Company and Ferrerra Pan Candy Company are the Company's primary
competitors in the fruit snack area. In the ready-to-eat cereal market, Kellogg
Company and General Mills, Inc. are the overall market share leaders and Ralcorp
Holdings, Inc. and Malt-O-Meal Company are the primary competitors in store
brand ready-to-eat cereal products. Kellogg Company and The Quaker Oats Company
are the leaders in the granola cereal markets. In the granola, fruit-filled
cereal, and crisp rice bar category, Kellogg's, General Mills, Nabisco, Quaker
Oats and M&M Mars each have a significant market presence. The Company's primary
competitor in the pie crust market is Keebler Co. Other value-priced producers
competing in the Company's product lines include McKee Baking, Sovex Natural
Foods, Inc. and Brach & Brock Confections, Inc.
Contract manufacturing and grain-based ingredient sales are specialized services
which the Company provides on an order-by-order basis. The Company is aware of
other companies which have the production capabilities necessary to compete with
the Company in these areas.
EMPLOYEES
As of May 31, 1996 the Company employed 630 permanent full-time employees, of
which 170 were management, sales and administration and 460 were production.
Depending on production needs, the Company also uses temporary employees. As of
May 31, 1996, the number of temporaries fluctuated between 100 and 200. With the
exception of its collective bargaining agreement covering approximately 50
production employees through the Bakery Workers Union Local No. 455, Danville,
Illinois, the Company does not have collective bargaining agreements with its
personnel. The Company and its subsidiary each believes that its employee
relations are good.
ITEM 2. PROPERTIES
The Company's headquarters, Lakeville production and warehousing facility, and
administrative offices are located in an industrial park 20 miles south of
Minneapolis in Lakeville, Minn. The production and distribution facility in
Lakeville is 221,000 square feet. The administrative offices occupy 11,000
square feet. The Company also utilizes four third party regional distribution
centers to store its inventory.
The Danville production facility and administrative offices are located in
Danville, Ill., which is 130 miles south of Chicago, Ill. The plant has 120,000
square feet of production and administrative office space.
The Company also owns approximately 18 acres and 12 acres of vacant land
contiguous to its Danville and Lakeville facilities, respectively. Additionally,
the Company owns 22.5 acres of vacant land in Christian County, KY.
See Note D to the financial statements regarding property pledged as collateral
against mortgages payable.
ITEM 3. LEGAL PROCEEDINGS
There were no claims or pending litigation that, in the opinion of management,
would have a significant effect on the Company's financial position.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter ended May 31, 1996.
<TABLE>
<CAPTION>
EXECUTIVE OFFICERS OF THE REGISTRANT
Principal Occupation and Business
Name Age Experience for Past Five Years
- ---- --- ------------------------------
<S> <C> <C>
Ronald K. Zuckerman 54 Chairman of the Board since 1975; Chief
Executive Officer from 1975 to 1993; Chief
Financial Officer 1975 to 1992.
Glen S. Bolander 50 President and Chief Executive Officer since 1993;
President and Chief Operating Officer from 1988
to 1993; President 1987 to 1988; Executive Vice
President 1985 to 1987; Vice President-Sales and
Marketing 1982 to 1985.
Michael J. Cannon 39 Vice President-Sales since 1994; Vice President-
Core Products Group from 1993 to 1994; Vice
President-Grocery 1988 to 1993; Director of
Marketing 1988; Marketing Manager April 1987 to 1988.
Daniel J. Kinsella 38 Vice President, Chief Financial Officer and
Treasurer since 1992; Director of Finance and
Treasurer 1990 to 1992; Corporate Controller 1989 to 1990.
Thomas J. Tatoian 54 Vice President-Manufacturing since 1990; Plant
Manager 1990.
</TABLE>
All officers hold office for one year or until their successors are designated.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S SECURITIES AND RELATED STOCKHOLDER MATTERS
The information required in Item 5 is contained on page 24 of the Company's
annual report to shareholders for the year ended May 31, 1996 and is
incorporated herein by reference.
ITEM 6. SELECTED FINANCIAL DATA
The information required in Item 6 is contained on page 12 of the Company's
annual report to shareholders for the year ended May 31, 1996 and is
incorporated herein by reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The information required in Item 7 is contained on pages 13 and 14 of the
Company's annual report to shareholders for the year ended May 31, 1996 and is
incorporated herein by reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required in Item 8 is contained on pages 15 through 24 of the
Company's annual report to shareholders for the year ended May 31, 1996 and is
incorporated herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required in Item 10 is contained in the Company's definitive
proxy statement to be filed pursuant to Regulation 14A within 120 days after the
close of the fiscal year for which this report is filed and is incorporated
herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
The information required in Item 11 is contained in the Company's definitive
proxy statement to be filed pursuant to Regulation 14A within 120 days after the
close of the fiscal year for which this report is filed and is incorporated
herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required in Item 12 is contained in the Company's definitive
proxy statement to be filed pursuant to Regulation 14A within 120 days after the
close of the fiscal year for which this report is filed and is incorporated
herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required in Item 13 is contained in the Company's definitive
proxy statement to be filed pursuant to Regulation 14A within 120 days after the
close of the fiscal year for which this report is filed and is incorporated
herein by reference.
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON FORM 8-K
<TABLE>
<CAPTION>
(a) Documents filed as part of this Report:
Page
<S> <C> <C>
1. Financial statements:
Reference is made to the table of contents to financial
statements and schedules hereinafter contained 16
2. Financial schedules:
Reference is made to the table of contents to financial
statements and schedules hereinafter contained for all
other financial statement schedules 16
</TABLE>
3. Exhibits:
<TABLE>
<CAPTION>
Item No. Item Method of Filing
- ------- -------------------------------- -----------------------------
<C> <C> <C>
3(a) Certificates of Incorporation of Grist Mill Incorporated by reference to Exhibit
Co., as amended. 3(a) to Grist Mill Co.'s annual report
on Form 10-K for the year ended
May 31, 1989.
3(b) By-laws of Grist Mill Co., as amended. Incorporated by reference to Exhibit
3(b) to Grist Mill Co.'s annual report
on Form 10-K for the year ended
May 31, 1989.
4(a) $4,000,000 Revolving Credit Agreement Incorporated by reference to Exhibit
dated October 24, 1995. 4 to Grist Mill Co's. quarterly report
on Form 10-Q for the quarter ended
November 30, 1995.
4(b) $7,000,000 unsecured senior notes Incorporated by reference to the
payable agreement. Company's report on Form 8-K
dated October 23, 1989.
4(c) $4,400,000 Real Estate Mortgage and Incorporated by reference to Exhibit
Promissory Note dated August 27, 1991. 4(b) to Grist Mill Co.'s Form 10-Q for
the quarter ended November 30,
1991.
4(d) Amendment to $4,400,000 Real Estate Incorporated by reference to Exhibit
Mortgage. 4(d) to Grist Mill Co.'s annual report
on Form 10-K for the year ended May 31, 1994.
4(e) Rights Agreement dated May 22, 1996 Incorporated by reference to Exhibit
between the Company and Norwest 4 to Grist Mill Co.'s report on Form
Bank Minnesota N.A. as Rights Agent 8-A dated June 6, 1996.
10(a) Grist Mill Co. 1984 Incentive Stock Option Incorporated by reference to Exhibit
Plan 28 to Grist Mill Co.'s Form 10
Registration Statement No. 0-13852
made effective November 5, 1985.
10(b) Grist Mill Co. 1986 Non-Qualified Stock Incorporated by reference to Exhibit
Option Plan as amended December 21, 10(b) to Grist Mill Co's. Mill Co.'s
1988 to increase the number of options Form 10-K for the year ended.
that may be granted under the plan to May 31, 1989.
800,000
10(c) Amendment No. 4 to Grist Mill Co. Incorporated by reference to
1986 Non-Qualified Stock Option Plan Grist Mill Co.'s Registration
dated August 26, 1991, to increase the Statement on Form S-8 dated
number of options which may be August 29, 1996.
granted under the plan to 900,000
10(d) Amendment No. 5 to Grist Mill Co. Incorporated by reference to
1986 Non-Qualified Stock Option Plan Grist Mill Co.'s Registration
dated October 12, 1993 to increase the Statement on Form S-8 dated
number of options that may be granted August 29, 1996.
under the plan to 1,700,000
10(e) Amendment No. 6 to Grist Mill Co. Incorporated by reference to
1986 Non-Qualified Stock Option Plan Grist Mill Co.'s Registration
dated September 26, 1995 to increase the Statement on Form S-8 dated
number of options that may be granted August 29, 1996.
under the plan to 2,500,000
10(f) Grist Mill Co. Stock Appreciation Rights Incorporated by reference to
Plan. Exhibit A to Grist Mill Co.'s Proxy
Statement for the year ended May 31, 1989.
10(g) Employment Agreement with Glen S. Incorporated by reference to
Bolander. Exhibit 10(d) to Grist Mill Co.'s
annual report on Form 10-K for
the year ended May 31, 1994.
10(h) Amendment No. 1 to Employment Incorporated by reference to
Agreement with Glen S. Bolander. Exhibit 10(e) to Grist Mill Co.'s
annual report on Form 10-K for the
year ended May 31, 1994.
10(i) Split Dollar Insurance Agreement: Incorporated by reference to
Glen S. Bolander Beneficiary. Exhibit 10(f) to Grist Mill Co.'s
annual report on Form 10-K for the
year ended May 31, 1994.
10(j) Employment Agreement with Incorporated by reference to
Ronald K. Zuckerman. Exhibit 10(g) to Grist Mill Co.'s
annual report on Form 10-K for the
year ended May 31, 1994.
10(k) Employment Agreement with Incorporated by reference to
Harry E. Stephens III. Exhibit 10(h) to Grist Mill Co.'s
annual report on Form 10-K for the
year ended May 31, 1995.
11 Computation of earnings per share. Filed herewith.
13 Annual Report to Shareholders. Those portions of Annual Report to
Shareholders expressly
incorporated by reference herein,
which shall be deemed filed with
the Commission.
22 Subsidiaries of the Registrant. Filed herewith.
23 Consent of Independent Auditors. Filed herewith.
27 Financial Data Schedule Filed herewith.
</TABLE>
(b) Reports on Form 8-K:
No reports on Form 8-K were filed during the fourth quarter ended May
31, 1996.
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.
Dated: August 29, 1996 GRIST MILL CO.
/S/ GLEN S. BOLANDER
Glen S. Bolander
President, Chief Executive
Officer and a 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
dates indicated.
<TABLE>
<CAPTION>
Signature Title Dated
- --------- ----- -----
<S> <C> <C>
/s/ Ronald K. Zuckerman Chairman of the Board August 29, 1996
- -------------------------------- and a Director
Ronald K. Zuckerman
/s/ Glen S. Bolander President, Chief Executive August 29, 1996
- ---------------------------------- Officer and a Director (Principal
Glen S. Bolander Executive Officer)
Daniel J. Kinsella Vice President, Chief Financial August 29, 1996
- ---------------------------------- Officer, Secretary and Treasurer
Daniel J. Kinsella (Principal Financial and Accounting
Officer)
/s/ Charles H. Perlman Director August 29, 1996
- ----------------------------------
Charles H. Perlman
/s/ Roger L. Weston Director August 29, 1996
- -----------------------------------
Roger L. Weston
</TABLE>
GRIST MILL CO.
FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES
YEARS ENDED MAY 31, 1996, 1995 AND 1994.
<TABLE>
<CAPTION>
TABLE OF CONTENTS
Page
<S> <C>
Report of Independent Auditors. . . . . . . . . . . . . . . . . . . . . . . . (A)
Consolidated Statements of Earnings . . . . . . . . . . . . . . . . . . . . . (A)
Consolidated Statements of Financial Position . . . . . . . . . . . . . . . . (A)
Consolidated Statements of Changes in Shareholders' Equity . . . . . . . . . (A)
Consolidated Statements of Cash Flows . . . . . . . . . . . . . . . . . . . . (A)
Notes to Consolidated Financial Statements. . . . . . . . . . . . . . . . . . (A)
Schedule II - Valuation and Qualifying Accounts and Reserves . . . . . . . . 17
Exhibit 11 - Computations of Earnings Per Share . . . . . . . . . . . . . . . 18
Exhibit 22 - Grist Mill Co. List of Subsidiaries. . . . . . . . . . . . . . . 19
</TABLE>
(A) Item is contained in the Company's annual report to shareholders for
the year ended May 31, 1996 and is incorporated herein by reference.
Schedules not listed above have been omitted because they are either not
applicable or the required information has been provided in the consolidated
financial statements or notes thereto.
<TABLE>
<CAPTION>
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
GRIST MILL CO.
BALANCE AT
BEGINNING CHARGED TO CHARGED TO BALANCE AT
DESCRIPTION OF PERIOD EXPENSES OTHER DEDUCTIONS END OF PERIOD
----------- --------- -------- ----- ---------- -------------
<S> <C> <C> <C> <C> <C>
Accumulated amortization of
deferred charges, principally
package design:
Year ended May 31, 1996 $1,453,000 $605,000 $(579,000) (1) $1,479,000
Year ended May 31, 1995 988,000 479,000 (14,000) (2) 1,453,000
Year ended May 31, 1994 610,000 378,000 988,000
</TABLE>
(1) Write-off of fully amortized package design.
(2) Write-off of fully amortized trademark.
GRIST MILL CO.
EXHIBIT 11 - COMPUTATION OF EARNINGS PER SHARE
YEAR ENDED MAY 31
-----------------
1996 1995 1994
---- ---- ----
(In thousands, except per share data)
Primary earnings per share:
Net earnings applicable to common stock $3,391 $4,563 $1,208
====== ====== ======
Average number of common and common
equivalent shares outstanding:
Average common shares outstanding 6,717 6,621 7,233
Dilutive effect of stock options 145 252 134
------ ------ ------
6,862 6,873 7,367
====== ====== ======
Primary earnings per share $ 0.49 $ 0.66 $ 0.16
====== ====== ======
Fully diluted earnings per share:
Earnings for fully diluted computation $3,391 $4,563 $1,208
====== ====== ======
Average number of common and common
equivalent shares outstanding:
Average common shares outstanding 6,717 6,621 7,233
Dilutive effect of stock options 152 286 134
------ ------ ------
6,869 6,907 7,367
====== ====== ======
Fully diluted earnings per share $ 0.49 $ 0.66 $ 0.16
====== ====== ======
<TABLE>
<CAPTION>
SELECTED FINANCIAL DATA
(Dollars and shares in thousands, except per-share data)
Year ended May 31, 1996 1995 1994 1993 1992 1991
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net sales $98,429 $78,916 $56,179 $66,478 $65,917 $61,358
Earnings before income taxes $ 5,322 $ 7,130 $ 1,886 $ 6,350 $ 5,900 $ 2,847
Net earnings $ 3,391 $ 4,563 $ 1,208 $ 4,001 $ 3,717 $ 1,779
Earnings per share $ .49 $ .66 $ .16 $ .54 $ .51 $ .25
Working capital $10,778 $ 9,994 $14,934 $16,848 $14,330 $12,318
Total assets $50,186 $46,259 $45,600 $48,101 $46,882 $40,630
Long-term debt, including current
portion $ 3,164 $ 4,879 $ 8,033 $10,366 $12,607 $12,673
Shareholders' equity $35,367 $31,522 $29,381 $29,216 $23,052 $19,202
OTHER INFORMATION:
Gross profit as a percentage of
net sales 24.4% 28.2% 28.4% 38.5% 37.8% 30.6%
Operating profit as a percentage of
net sales 5.7% 9.6% 4.5% 11.1% 10.9% 6.3%
Net earnings as a percentage of
net sales 3.4% 5.8% 2.2% 6.0% 5.6% 2.9%
Net return on average shareholders'
equity 10.1% 15.0% 4.1% 15.3% 17.6% 9.5%
Common shares outstanding
at year-end 6,765 6,663 7,049 7,210 6,722 6,566
Book value per common share
outstanding $ 5.23 $ 4.74 $ 4.17 $ 4.05 $ 3.43 $ 2.92
Current ratio 2.0 2.0 2.8 3.0 2.2 2.5
</TABLE>
Share and per share amounts for 1992 and prior have been restated to reflect the
3-for-2 stock split as of October 26, 1992.
[BAR CHART}
Quarterly Sales (in millions)
1996 1995
4th Qtr 32.6 22.7
3rd Qtr 21.3 21.1
2nd Qtr 21.5 17.6
1st Qtr 23.0 17.5
[BAR CHART]
Grocery vs. Contract and Other Sales
(in millions)
1996 $98.4
1995 $78.9
1994 $56.2
1993 $66.5
1992 $65.9
PAGE 12
MANAGEMENT'S DISCUSSION AND ANALYSIS
RESULTS OF OPERATIONS
OVERVIEW: Sales in fiscal 1996 were a record $98.4 million, which represents an
increase of 25% over fiscal 1995. Earnings for the same period were $3.4
million, or $.49 per share, compared to $4.6 million, or $.66 per share a year
ago. The sales growth has been generated by a 34% increase in the Company's
grocery product sales; mostly ready-to-eat cereals and wholesome snack bars.
Earnings were negatively impacted by lower profitability from contract
manufacturing products, costs related to the Company's ready-to-eat cereal
business and start-up expenses from new snack bar products and related
equipment.
SALES: Ready-to-eat cereal was the largest component of sales growth,
increasing 88% over the previous fiscal year. The Company now has a full line of
26 ready-to-eat cereals available for its store brand customers. Grocery
retailers have shifted more of their ready-to-eat cereal purchases to Grist Mill
products. The Company has plans to expand ready-to-eat cereal production
capacity in the upcoming year to meet growing customer demands for its cereal
products. The wholesome snack bar business was up by 35% over the previous year.
The Company's fruit-filled cereal bar sales increased 188%, reflecting wide
acceptance of the product line by the Company's store brand customers. Late in
fiscal 1996 the Company began to ship two new lines of wholesome snack bars: a
fat-free fruit-filled cereal bar and crisp rice marshmallow bars. Fruit snack
sales increased 14% over the previous year, reversing a flat to slightly
declining trend.
Contract manufacturing sales increased 7% over fiscal 1995 to approximately
$31 million. The Company expects that contract manufacturing will decline
significantly in fiscal 1997 as the Company's largest customer has announced
plans to self-manufacture the products currently made by Grist Mill. Due to the
Company's focus on grocery store brand products, it is expected that by fiscal
year 1998 contract manufacturing sales will be a small percentage of total
Company sales.
Sales in fiscal 1995 were $78.9 million compared to $56.2 million in fiscal
1994. In 1995 the Company added several new products to its ready-to-eat cereal
product line, which attracted new distribution from existing customers, as well
as new customers. Additionally, the fruit-filled cereal bar was introduced at
the beginning of fiscal 1995. Contract manufacturing sales also grew
significantly in 1995 as the Company began to produce snack bars for a large
branded packaged foods customer.
GROSS MARGIN: Gross margins declined from 28.2% in 1995 to 24.4% in 1996. In
fiscal 1996, lower pricing on contract manufacturing products reduced
profitability from the Company's contract manufacturing business. Additionally,
there were start-up costs related to ready-to-eat cereal and new bar products
and related equipment. Gross profit declined slightly in 1995, from 28.4% of net
sales in 1994 to 28.2% in 1995. In 1995 a higher portion of sales came from
contract manufacturing products, which have lower gross profit margins than the
Company's grocery products. Lower margins on contract manufacturing were offset
by productivity gains and increased capacity utilization.
SELLING AND DELIVERY EXPENSES: With the growth of grocery product sales,
selling and delivery expenses increased to 13.9% of net sales in 1996 from 12.5%
in 1995. Grocery products carry higher selling and delivery costs than contract
products. Such costs include broker commissions and freight. Selling and
delivery expenses decreased from 17.1% of net sales in 1994 to 12.5% in 1995,
reflecting the higher proportion of sales of contract manufacturing products,
which generate few of these costs.
PAGE 13
GENERAL, ADMINISTRATIVE AND PRODUCT DEVELOPMENT EXPENSES: General,
administrative and product development expenses decreased from 6.1% of net sales
in 1995 to 4.7% in 1996, primarily due to lower spending on new product
development and overhead expense control. In the previous year, general,
administrative and product development expenses increased by $981,000 but
decreased as a percent of sales from 6.9% in 1994 to 6.1% in 1995. The overall
increase in general, administrative and development costs in 1995 reflected
higher levels of incentive compensation, increased resources dedicated to the
development of new products, and costs associated with hiring of new personnel.
INTEREST INCOME AND EXPENSE: Net interest expense has declined over each of
the last three years, from $629,000 in 1994 to $419,000 in 1995 and $302,000 in
the current year. Long-term debt levels have been declining over the same time
frame because of scheduled principal repayments. Additionally, in 1994 and 1995
the Company elected to prepay certain portions of its debt. Interest income
decreased to $116,000 in 1996 from $219,000 in 1995 and $374,000 in 1994. Over
the last two years, the Company has converted $9.3 million of short-term
investments to provide for capital equipment and working capital needs.
LIQUIDITY AND CAPITAL INVESTMENTS
Cash and short-term investments decreased during the last year, from $6.8
million to $1.7 million. Net cash provided by operating activities was $2.6
million in 1996 compared to $7.3 million in 1995. Cash from earnings and
non-cash items totaled $8.3 million for the year, which was used to fund
inventory and accounts receivable increases. Higher sales levels, especially in
ready-to-eat cereal, drove the increases in operating assets.
Net cash used in investing activities was $2.7 million compared to $1.4
million in 1995. In 1996 the Company converted its short-term investments and
invested $6.2 million in capital equipment. In 1995 the Company also used a
portion of its short-term investments to fund a total of $5.8 million in
equipment. In fiscal 1997 the Company expects its capital expenditures to
increase, reflecting commitments for equipment to expand the Company's
ready-to-eat cereal capacity and a corporate office expansion.
Net cash used in financing activities was $1.5 million in 1996 compared to
$5.9 million in fiscal 1995. In 1995 the Company completed a stock repurchase
plan and prepaid certain amounts of debt.
Working capital increased slightly during the year, from $10.0 million to
$10.8 million. The current ratio remained flat at 2.0 over the same period. In
addition, the Company has available a line of credit for $4.0 million. The
Company has financed its growth principally from internally generated funds,
issuance of unsecured senior notes, bank borrowing and sales of its common
stock. The Company anticipates that the capital expenditures in fiscal 1997 will
be funded by operating cash flows and through debt financing.
PAGE 14
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF EARNINGS
Year ended May 31, 1996 1995 1994
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net sales $98,429,000 $78,916,000 $56,179,000
Cost of products sold 74,437,000 56,632,000 40,217,000
- -----------------------------------------------------------------------------------------------------------------
Gross profit 23,992,000 22,284,000 15,962,000
Selling and delivery expenses 13,723,000 9,899,000 9,592,000
General, administrative and product development expenses 4,645,000 4,836,000 3,855,000
- -----------------------------------------------------------------------------------------------------------------
Operating profit 5,624,000 7,549,000 2,515,000
Interest expense (418,000) (638,000) (1,003,000)
Interest income 116,000 219,000 374,000
- -----------------------------------------------------------------------------------------------------------------
Earnings before income taxes 5,322,000 7,130,000 1,886,000
Income tax expense 1,931,000 2,567,000 678,000
- -----------------------------------------------------------------------------------------------------------------
Net earnings $ 3,391,000 $ 4,563,000 $ 1,208,000
=================================================================================================================
Earnings per share $ .49 $ .66 $ .16
=================================================================================================================
Weighted average common shares outstanding 6,869,000 6,907,000 7,367,000
=================================================================================================================
The accompanying notes are an integral part of these consolidated financial
statements.
</TABLE>
[BAR CHART]
Operating profit as a
percentage of net sales
1996 5.7%
1995 9.6%
1994 4.5%
1993 11.1%
1992 10.9%
[BAR CHART]
Equity Total Capitalization
Debt (in millions)
1996 $38.5
1995 $36.4
1994 $37.4
1993 $39.6
1992 $35.7
PAGE 15
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
At May 31, 1996 1995
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 1,654,000 $ 3,271,000
Short-term investments 3,539,000
Accounts receivable, less allowance 9,743,000 6,045,000
Inventories 10,293,000 6,877,000
Prepaids and other 393,000 458,000
- ----------------------------------------------------------------------------------------------------------------
22,083,000 20,190,000
- ----------------------------------------------------------------------------------------------------------------
Property and equipment:
Land and building 11,647,000 11,145,000
Machinery and equipment 41,989,000 36,245,000
- ----------------------------------------------------------------------------------------------------------------
53,636,000 47,390,000
Less accumulated depreciation (26,897,000) (22,371,000)
- ----------------------------------------------------------------------------------------------------------------
26,739,000 25,019,000
Deferred charges, less accumulated amortization of $1,479,000 and
$1,453,000, respectively 1,364,000 1,050,000
- ----------------------------------------------------------------------------------------------------------------
$ 50,186,000 $ 46,259,000
================================================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Drafts payable $ 2,342,000 $ 984,000
Accounts payable 4,002,000 3,701,000
Accrued compensation and commissions 1,449,000 1,760,000
Accrued marketing expenses 1,214,000 796,000
Other accrued expenses 1,505,000 1,247,000
Current maturities of long-term debt 793,000 1,708,000
- ----------------------------------------------------------------------------------------------------------------
11,305,000 10,196,000
- ----------------------------------------------------------------------------------------------------------------
Long-term debt 2,371,000 3,171,000
Deferred income taxes 1,143,000 1,370,000
Commitments and contingent liabilities
Shareholders' equity:
Common stock, par value $.10 per share -- authorized 12,000,000 shares,
issued and outstanding 6,765,000 and 6,663,000 shares at May 31, 1996
and 1995, respectively 676,000 666,000
Additional paid-in capital 9,466,000 9,022,000
Retained earnings 25,225,000 21,834,000
- ----------------------------------------------------------------------------------------------------------------
35,367,000 31,522,000
- ----------------------------------------------------------------------------------------------------------------
$ 50,186,000 $ 46,259,000
================================================================================================================
The accompanying notes are an integral part of these consolidated financial
statements.
</TABLE>
PAGE 16
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year ended May 31, 1996 1995 1994
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net earnings $ 3,391,000 $ 4,563,000 $ 1,208,000
Non-cash items included in earnings:
Depreciation and amortization 5,131,000 4,301,000 3,867,000
Deferred income taxes (205,000) (249,000) (40,000)
Common stock grants 94,000
Changes in operating assets and liabilities:
Accounts receivable (3,698,000) (1,241,000) 1,467,000
Inventories (3,416,000) (1,673,000) 2,397,000
Other assets (864,000) (680,000) (376,000)
Drafts payable 1,358,000 177,000 (159,000)
Accounts payable and other accrued expenses 883,000 2,059,000
- -------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 2,580,000 7,257,000 8,458,000
- -------------------------------------------------------------------------------------------------------------
Cash flows used in investing activities:
Proceeds from short-term investments 3,539,000 5,760,000 2,457,000
Payments for:
Short-term investments (7,660,000)
Property and equipment (6,246,000) (7,165,000) (2,980,000)
- -------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (2,707,000) (1,405,000) (8,183,000)
- -------------------------------------------------------------------------------------------------------------
Cash flows used in financing activities:
Proceeds from exercise of stock options, net 225,000 83,000 35,000
Payments for:
Long-term obligations (1,715,000) (3,154,000) ( 2,333,000)
Purchase and retirement of common stock (2,820,000) (1,172,000)
- -------------------------------------------------------------------------------------------------------------
Net cash used in financing activities (1,490,000) (5,891,000) (3,470,000)
- -------------------------------------------------------------------------------------------------------------
Decrease in cash and cash equivalents (1,617,000) (39,000) (3,195,000)
Cash and cash equivalents at beginning of year 3,271,000 3,310,000 6,505,000
- -------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 1,654,000 $ 3,271,000 $ 3,310,000
=============================================================================================================
Supplemental disclosures of cash flow information:
Interest payments $ 447,000 $ 666,000 $ 1,011,000
Income tax payments $ 1,950,000 $ 2,869,000 $ 519,000
The accompanying notes are an integral part of these consolidated financial
statements.
</TABLE>
PAGE 17
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
Common Stock
--------------------
Number of Additional Retained
Shares Amount Paid-In Capital Earnings Total
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balances at May 31, 1993 7,210,000 $ 721,000 $12,432,000 $ 16,063,000 $29,216,000
Stock options exercised and stock
grants awarded 38,000 4,000 125,000 129,000
Purchase and retirement of common
stock (199,000) (20,000) (1,152,000) (1,172,000)
Net earnings 1,208,000 1,208,000
- ---------------------------------------------------------------------------------------------------------------------
Balances at May 31, 1994 7,049,000 705,000 11,405,000 17,271,000 29,381,000
Stock options exercised 113,000 11,000 342,000 353,000
Shares surrendered for exercise and
tax payments (25,000) (3,000) (267,000) (270,000)
Tax benefits related to stock options 315,000 315,000
Purchase and retirement of common
stock (474,000) (47,000) (2,773,000) (2,820,000)
Net earnings 4,563,000 4,563,000
- ---------------------------------------------------------------------------------------------------------------------
Balances at May 31, 1995 6,663,000 666,000 9,022,000 21,834,000 31,522,000
Stock options exercised 112,000 11,000 287,000 298,000
Shares surrendered for exercise and
tax payments (10,000) (1,000) (72,000) (73,000)
Tax benefits related to stock options 229,000 229,000
Net earnings 3,391,000 3,391,000
- ---------------------------------------------------------------------------------------------------------------------
BALANCES AT MAY 31, 1996 6,765,000 $ 676,000 $ 9,466,000 $ 25,225,000 $35,367,000
=====================================================================================================================
The accompanying notes are an integral part of these consolidated financial
statements.
</TABLE>
PAGE 18
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended May 31, 1996, 1995 and 1994
NOTE A Summary of Significant Accounting Policies
DESCRIPTION OF BUSINESS: The Company is in the business of manufacturing and
distributing store brand and value priced branded food products. Principal
products are ready-to-eat cereals, fruit snacks, wholesome snack bars and graham
cracker pie crusts. The Company also contract manufactures food products for
other packaged foods companies. The Company's products are marketed in the
continental United States, Canada and Puerto Rico.
BASIS OF PRESENTATION: The consolidated financial statements include the
Company and its subsidiary, which is wholly-owned. All material intercompany
balances and transactions have been eliminated in consolidation.
USE OF ESTIMATES: The preparation of the financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results could differ from those
estimates.
CASH AND CASH EQUIVALENTS: The Company considers all highly liquid
investments with a maturity of less than 90 days when purchased to be cash
equivalents.
SHORT-TERM INVESTMENTS: Short-term investments consist of income-producing
securities with original maturities of 90 days to two years. Short-term
investments are classified as available-for-sale and stated at market value. At
May 31, 1995, market value approximated cost. The Company had no short-term
investments at May 31, 1996.
INVENTORIES: Inventories are stated at lower of cost, first-in, first-out
(FIFO) method, or market.
PROPERTY, PLANT AND EQUIPMENT AND DEPRECIATION: Property, plant and equipment
are stated at cost and are depreciated using the straight-line method over the
following estimated useful lives:
Buildings and improvements 3-30 years
Machinery and equipment 3-15 years
Accelerated depreciation is used by the Company for tax accounting purposes.
LONG-LIVED ASSETS: SFAS No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed of," requires impairment losses
to be recorded on long-lived assets used in operations when indicators of
impairment are present and the undiscounted cash flows estimated to be generated
by those assets are less than the assets' carrying amount. The Company will
adopt SFAS No. 121, which was issued in March 1995, in the first quarter of
fiscal 1997 and, based on current circumstances, does not believe the effect of
adoption will be material.
DEFERRED CHARGES: Expenditures for packaging design are recorded at cost and
amortized over an estimated useful life of up to three years. Certain
expenditures to obtain initial distribution of products, typically referred to
as slotting, are recorded at cost and amortized over a period of up to six
months.
INCOME TAXES: The provision for income taxes is based on earnings reported in
the financial statements. Deferred income taxes are provided for the tax effects
of differences between financial reporting and tax bases of assets and
liabilities.
EARNINGS PER SHARE: Earnings per share are based on weighted average number
of common shares outstanding and the dilutive effect of common stock options
during the year.
RECLASSIFICATIONS: Certain amounts in the financial statements of prior years
have been reclassified to conform to the presentation used in 1996.
PAGE 19
NOTE B Inventories
At May 31, 1996 1995
- ------------------------------------------------------------------
Finished goods $ 3,507,000 $1,594,000
Raw material and packaging 5,228,000 3,795,000
Work-in-process 1,558,000 1,488,000
- ------------------------------------------------------------------
$10,293,000 $6,877,000
==================================================================
NOTE C Credit Arrangements
The Company has a $4,000,000 line of credit arrangement with a bank which
expires October 31, 1996. Loans under the agreement bear interest at a floating
rate approximately equal to the bank's reference rate less 1 1/42%. There were
no balances outstanding at May 31, 1996 and 1995.
<TABLE>
<CAPTION>
NOTE D Long-term Debt
At May 31, 1996 1995
- -----------------------------------------------------------------------------------------------
<S> <C> <C>
9.8% unsecured senior notes payable in semi-annual
installments of $700,000 through September 1996 $ 700,000 $ 2,100,000
Mortgage payable in monthly installments of $26,000 through
November 2000. Interest at 8.75% adjusted every three years 2,464,000 2,557,000
- -----------------------------------------------------------------------------------------------
3,164,000 4,657,000
Capitalized leases 222,000
- -----------------------------------------------------------------------------------------------
3,164,000 4,879,000
Less current maturities (793,000) (1,708,000)
- -----------------------------------------------------------------------------------------------
$2,371,000 $ 3,171,000
===============================================================================================
</TABLE>
The terms of the unsecured senior notes contain requirements for maintaining
defined levels of net worth and certain financial ratios, and place limits on
total debt allowable.
The mortgage payable is collateralized by the Company's land and production
facilities with a net book value of $5,662,000.
Maturities of long-term debt during the next five fiscal years are as
follows: 1997-$793,000; 1998-$110,000; 1999-$120,000; 2000-$131,000;
2001-$2,010,000. The fair value of long-term debt approximates its carrying
value.
NOTE E Capital Stock
On May 22, 1996, the Company adopted a shareholder rights plan which is designed
to give shareholders more alternatives in the event of an unsolicited takeover
attempt. Pursuant to the plan, the Company distributed one right per common
share to each shareholder of record effective June 11, 1996. The rights will
become exercisable with the occurrence of certain events involving the
acquisition of 15% or more of the Company's stock. Upon the occurrence of such
an event, each right converts into the right to purchase, upon payment of $.10
per share of common stock, a pro rata portion of the number of shares available
to be purchased from the Company. In connection with the plan, 3.4 million
shares of common stock have been reserved. The rights expire on May 22, 2006.
PAGE 20
NOTE F Income Taxes
The components of income tax expense follow:
Year ended May 31, 1996 1995 1994
- ---------------------------------------------------------------------------
Current:
Federal $1,879,000 $2,465,000 $619,000
State 257,000 351,000 99,000
Deferred (205,000) (249,000) (40,000)
- ---------------------------------------------------------------------------
$1,931,000 $2,567,000 $678,000
===========================================================================
The following is a summary of the Company's deferred tax assets and
liabilities:
Deferred Tax
Assets (Liabilities)
- -----------------------------------------------------------------------------
At May 31, 1996 1995
- -----------------------------------------------------------------------------
Depreciation and amortization $(1,250,000) $(1,394,000)
Asset reserves 169,000 200,000
Vacation not currently deductible 116,000 121,000
Medical self-insurance 202,000 128,000
Other (58,000) (81,000)
- -----------------------------------------------------------------------------
$ (821,000) $(1,026,000)
=============================================================================
<TABLE>
<CAPTION>
A reconciliation of statutory federal income taxes to the actual income tax
expense provided on earnings is as follows:
1996 1995 1994
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Income tax at statutory rate $1,809,000 $2,424,000 $641,000
State income taxes net of federal benefit 153,000 218,000 60,000
Interest income not subject to tax (28,000) (79,000) (77,000)
Other (3,000) 4,000 54,000
- ------------------------------------------------------------------------------------------
$1,931,000 $2,567,000 $678,000
==========================================================================================
</TABLE>
NOTE G Commitments
At May 31, 1996, the Company had purchase commitments of $2 million for office
facilities expansion and $2.5 million of an $8 million planned expansion of
manufacturing capacity.
NOTE H Stock Option Plans
Under the 1986 Non-Qualified Stock Option Plan, the Company may grant options to
purchase up to 2,500,000 shares of common stock to officers, key employees,
directors and consultants. The option price and terms of exercise are determined
by the Company's board of directors. Of the options outstanding under the
Non-Qualified Plan, 488,000 and 443,000 were exercisable at May 31, 1996 and
1995, respectively. The number of shares of common stock reserved for future
grants under the Non-Qualified stock option plan was 725,000 at May 31, 1996,
and 894,000 at May 31, 1995.
Under the 1984 Incentive Stock Option Plan, the Company may grant options to
purchase up to 200,000 shares of common stock to officers and key employees at
not less than 100% of fair market value of the shares at the date of grant. No
options were outstanding under this plan at May 31, 1996.
PAGE 21
The Company also has a Stock Appreciation Rights Plan under which the Company
may grant Stock Appreciation Rights (SARs) to eligible participants of its stock
option plans. Such rights allow the stock option holder the right to receive a
cash settlement that will approximate the appreciation in the value of the stock
option through the exercise of the SAR. SARs are only exercisable following
certain defined "acceleration events." At May 31, 1996, no SARs had been
granted.
The Company follows the guidance in Accounting Principles Board Opinion 25,
"Accounting for Stock Issued to Employees" and related interpretations to
account for its stock-based plans.
Non-Qualified
Stock Options Price per Share
- -------------------------------------------------------------------------------
Balance at May 31, 1994 537,000 $2.33 to $7.88
Granted 222,000 6.25 to 9.75
Exercised (113,000) 2.33 to 7.00
Canceled or expired (7,000) 2.92 to 7.00
- -------------------------------------------------------------------------------
Balance at May 31, 1995 639,000 2.33 to 9.75
Granted 176,000 6.00 to 7.00
Canceled or expired (7,000) 2.33 to 9.00
- -------------------------------------------------------------------------------
BALANCE AT MAY 31, 1996 696,000 $5.00 to $9.75
================================================================================
NOTE I Employee Benefit Plans
The Company has an employee savings plan (Savings Plan) that qualifies as a
deferred salary arrangement under Section 401(k) of the Internal Revenue Code.
Under the Savings Plan, qualifying employees may defer a portion of their pretax
earnings, up to 15%, or the Internal Revenue Service limits, whichever is less.
The Company matches 30% of each employee's contributions up to a maximum of 7%
of the employee's earnings.
The Company's matching contributions to the Savings Plan in 1996, 1995 and
1994 were $151,000, $127,000 and $112,000, respectively.
Union employees of the Company's subsidiary participate in a multi-employer
defined benefit pension plan administered by the employees' union. Contributions
by the Company's subsidiary to this plan totaled $75,000, $61,000 and $64,000
for 1996, 1995 and 1994, respectively.
NOTE J Postretirement Health Benefits
The Company's subsidiary provides self-insured supplemental postretirement
health care coverage to substantially all union employees and their dependent
spouses. Effective June 1, 1993, the Company adopted SFAS No. 106 "Employer's
Accounting for Post retirement Benefits Other than Pensions." SFAS No. 106
requires the accrual of the expected costs of providing these benefits during
the active service period of the employee. Previously, these costs were
recognized as an expense when claims were paid. As permitted by the Statement,
the Company has elected to amortize the transition obligation over 20 years.
Employees become eligible for the benefits on retirement if they have reached
the age of 55 and have 15 years of service. In determining benefits, the plan
takes into consideration payments by Medicare and other coverages. Benefits for
existing retirees who have reached the age of 65, as well as all employees who
retire after December 31, 1992, are subject to a $10,000 lifetime benefit cap.
Employees retiring after December 31, 1992, share in the cost of the benefits.
The Company does not fund the retiree health care plan.
PAGE 22
<TABLE>
<CAPTION>
The components of retiree health costs are shown below:
1996 1995 1994
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Service cost of benefits earned $ 5,000 $ 4,000 $ 7,000
Interest cost on liability 49,000 47,000 52,000
Amortization of transition amount 34,000 33,000 34,000
- ------------------------------------------------------------------------------------------
$88,000 $84,000 $93,000
==========================================================================================
</TABLE>
<TABLE>
<CAPTION>
The accumulated postretirement benefit obligation (APBO) at May 31, 1996 and
1995, respectively, was:
1996 1995
- -------------------------------------------------------------------------------------------
<S> <C> <C>
Current retirees $ 371,000 $ 476,000
Fully eligible active employees 56,000 76,000
All other employees 99,000 103,000
- -------------------------------------------------------------------------------------------
APBO 526,000 655,000
Unrecognized net gain 203,000 62,000
Unrecognized transition obligation (581,000) (615,000)
- -------------------------------------------------------------------------------------------
Accrued postretirement benefit cost $ 148,000 $ 102,000
===========================================================================================
</TABLE>
The accumulated postretirement benefit obligation was determined using an 8%
discount rate. The health care cost trend rates were assumed to be 11.5% and
9.5% in 1996 for pre-65 and post-65 benefits, respectively, gradually declining
to 6.5% after 13 years, and remaining at that level thereafter. A 1% increase in
health care trend rate would have an insignificant effect on the accumulated
postretirement benefit obligation and the net periodic cost for the year.
NOTE K Related Party Transactions
A director and principal shareholder of the Company is a partner in a law firm
retained by the Company for its legal counsel. The Company incurred charges of
approximately $367,000, $264,000 and $274,000 in 1996, 1995 and 1994,
respectively, for services provided.
NOTE L Major Customers
Sales to a major customer accounted for 29% and 30% of consolidated net sales in
1996 and 1995, respectively.
NOTE M Quarterly Financial Information (Unaudited)
Summarized quarterly data for 1996 and 1995 is as follows:
<TABLE>
<CAPTION>
First Second Third Fourth
(In thousands, except per share data) Quarter Quarter Quarter Quarter
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1996
Net sales $23,031 $21,539 $21,275 $32,584
Gross profit $ 5,972 $ 5,576 $ 5,653 $ 6,791
Net income $ 1,208 $ 747 $ 567 $ 869
Earnings per share $ .17 $ .11 $ .08 $ .13
1995
Net sales $17,547 $17,594 $21,112 $22,663
Gross profit $ 5,513 $ 4,988 $ 5,340 $ 6,443
Net income $ 1,118 $ 775 $ 1,314 $ 1,356
Earnings per share $ .16 $ .11 $ .19 $ .20
=========================================================================================
</TABLE>
PAGE 23
REPORT OF INDEPENDENT AUDITORS
Grist Mill Co. and Subsidiary
We have audited the accompanying consolidated statements of financial position
of Grist Mill Co. and subsidiary as of May 31, 1996 and 1995, and the related
consolidated statements of earnings, changes in shareholders' equity and cash
flows for each of the three years in the period ended May 31, 1996. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Grist Mill Co. and subsidiary at May 31, 1996 and 1995, and the results of their
operations and their cash flows for each of the three years in the period ended
May 31, 1996, in conformity with generally accepted accounting principles.
/s/ Ernst & Young LLP
Minneapolis, Minnesota
July 8, 1996
STOCK PRICES AND TRADING DATA
The Company's common stock trades in the Nasdaq National Market under the symbol
GRST. The following table sets forth the high and low bid prices as reported by
the Nasdaq National Market.
Fiscal 1996 High Bid Low Bid
- -------------------------------------------------------------------------------
First quarter $11.38 $8.75
Second quarter $10.63 $8.63
Third quarter $10.25 $5.63
Fourth quarter $ 6.88 $5.63
Fiscal 1995 High Bid Low Bid
- -------------------------------------------------------------------------------
First quarter $ 7.83 $4.83
Second quarter $11.25 $7.38
Third quarter $11.13 $7.75
Fourth quarter $13.38 $8.38
===============================================================================
As of July 31, 1996, there were approximately 1,300 shareholders of record of
the Company's common stock and an estimated 4,500 additional beneficial holders
whose stock was held in street name by brokerage houses.
The Company has never paid dividends on its common stock and does not
anticipate a change in this policy in the foreseeable future. The board of
directors currently intends to retain earnings to finance the Company's growth.
PAGE 24
EXHIBIT 22
GRIST MILL CO.
LIST OF SUBSIDIARIES
MAY 31, 1996
Percentage
of Voting
State in Which Securities
Incorporated Owned
------------ -----
Grist Mill Confections, Inc. . . . . . . . Illinois 100%
Exhibit 23
Consent of Independent Auditors
We consent to the incorporation by reference in this Annual Report (Form 10-K)
of Grist Mill Company of our report dated July 8, 1996, included in the 1996
Annual Report to Shareholders of Grist Mill Company.
Our audits also included the financial statement schedule of Grist Mill Company
listed in Item 14(a). This schedule is the responsibility of the Company's
management. Our responsibility is to express an opinion based on our audits. In
our opinion, the financial statement schedule referred to above, when considered
in relation to the basic financial statements taken as a whole, presents fairly
in all material respects the information set forth therein.
We also consent to the incorporation by reference in the Registration Statement
(Form S-8 No. 33-17317) pertaining to the Grist Mill Company Employees
Retirement Savings Plan and Trust and in the related Prospectus of our report
dated July 8, 1996, with respect to the consolidated financial statements
incorporated herein by reference, and our report included in the preceding
paragraph with respect to the financial statement schedule included in this
Annual Report (Form 10-K) of Grist Mill Company.
Ernst & Young LLP
Minneapolis, Minnesota
August 26, 1996
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> MAY-31-1996
<PERIOD-END> MAY-31-1996
<CASH> 1,654,000
<SECURITIES> 0
<RECEIVABLES> 9,743,000
<ALLOWANCES> 0
<INVENTORY> 10,293,000
<CURRENT-ASSETS> 22,083,000
<PP&E> 53,636,000
<DEPRECIATION> (26,897,000)
<TOTAL-ASSETS> 50,186,000
<CURRENT-LIABILITIES> 11,305,000
<BONDS> 2,371,000
0
0
<COMMON> 676,000
<OTHER-SE> 34,691,000
<TOTAL-LIABILITY-AND-EQUITY> 50,186,000
<SALES> 98,429,000
<TOTAL-REVENUES> 98,429,000
<CGS> 74,437,000
<TOTAL-COSTS> 74,437,000
<OTHER-EXPENSES> 18,368,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 302,000
<INCOME-PRETAX> 5,322,000
<INCOME-TAX> 1,931,000
<INCOME-CONTINUING> 3,391,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,391,000
<EPS-PRIMARY> .49
<EPS-DILUTED> .49
</TABLE>
