FILE NO. 0-7277
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
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FORM 10-K
ANNUAL REPORT
Pursuant to Section 13 of the Securities Exchange Act of 1934
For the Fiscal Year Ended February 28, 1997
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WSMP, INC.
Incorporated in North Carolina
CLAREMONT, NORTH CAROLINA 28610 56-0945643
(704) 459 - 7626 (I.R.S. Employer Identification No.)
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Securities filed pursuant to Section 12(g) of
the Securities Exchange Act of 1934:
COMMON STOCK, PAR VALUE $1 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 twelve months (or for such shorter period that the
registrant was required to file such report(s), 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 Regulations S-K is not contained herein and will not be contained, to the
best of the 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. [ ]
The number of shares of WSMP, Inc. Common Stock outstanding as of May 7,
1997 was 3,247,074. The aggregate market value of WSMP, Inc. Common Stock held
by nonaffiliates of WSMP, Inc. as of May 7, 1997 was $ 20,069,310.
DOCUMENTS OF WHICH PORTIONS PARTS OF FORM 10-K INTO WHICH PORTIONS
ARE INCORPORATED BY REFERENCE OF DOCUMENTS ARE INCORPORATED
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Annual Report to Shareholders for the
Fiscal Year Ended February 28, 1997 I, II
Proxy Statement for WSMP, Inc.'s Annual
Meeting of Shareholders to be held
on June 26, 1997 III
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PART I
ITEM 1. BUSINESS
BUSINESS SEGMENTS
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The Company operates in three principal business segments: restaurant
franchising, restaurant operations and food processing. Information as to
revenue, operating profit, identifiable assets, depreciation and amortization
expense, and capital expenditures, for each of the Company's business segments
for fiscal 1997 is contained on page 22 of the Company's Annual Report to
Shareholders for the fiscal year ended February 28, 1997, under the caption
"Lines of Business," and is incorporated herein by reference.
RESTAURANT FRANCHISING
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RESTAURANT FRANCHISING - WESTERN STEER. The most significant segment of the
Company's franchising operations currently centers around the Western Steer
chain of restaurants, which includes the Western Steer Family Restaurant concept
and the Western Steer - Steaks, Buffet & Bakery concept. The Western Steer
Family Restaurant concept originated in 1975 as a family oriented, reasonably
priced steakhouse restaurant, and featured a rustic western-style design, steaks
and other entrees cooked to order, and an "all-you-can-eat" buffet food bar.
Beginning in 1992, the Company began an extensive program of renovation of this
concept which included updating the buffet food bar, adding an in-house bakery
and changing the store appearance to highlight a new format. Restaurants
updated to this new format have been renamed "Western Steer - Steaks, Buffet &
Bakery."
At February 28, 1997, the Company had 53 franchised Western Steer restaurants
located in North Carolina (23), Kentucky (7), West Virginia (5), Georgia (4),
South Carolina (4), Florida (2), Virginia (4), Maryland (2) and Tennessee (2).
Of this total, 28 were operated as Western Steer - Steaks, Buffet & Bakery
restaurants, and 25 as Western Steer Family Restaurants. The Company no longer
offers the Western Steer Family Restaurant franchise, and believes that many of
the existing units will eventually elect to convert to the Western Steer -
Steaks, Buffet & Bakery format. Although the decision regarding whether to
renovate and the timing thereof rests with the franchisee, the Company
encourages its franchisees to renovate franchised restaurants and provides
assistance in doing so, primarily through consulting with franchisees regarding
the renovations and subsequent operational changes and training of franchisee
personnel. The primary costs of renovating franchised restaurants are borne by
the franchisees.
The average weekly sales volume during the fiscal year ended February 28,
1997 for franchised Western Steer - Steaks, Buffet & Bakery restaurants that
have been open for one year or more was $23,400. This represents a slight
decrease from the fiscal 1996 weekly average of $23,700. The average weekly
sales volume for fiscal 1997 for Western Steer Family Restaurant units that have
been open for one year or more was $19,900, representing an increase of 4.7%
from the average for fiscal 1996 which totaled $19,000.
The Company granted five franchises during fiscal 1997 for Western Steer -
Steaks, Buffet & Bakery restaurants which opened in North Carolina(2),
Virginia(1), and Maryland(2). The two franchise units opened in Maryland
represent units previously owned by the Company that were sold during fiscal
1997. Management anticipates the opening of approximately three additional new
franchise units during fiscal 1998.
At February 28, 1997, major shareholders of the Company had ownership
interests in 17 of the 53 franchised restaurants. See Item 13, "Certain
Relationships and Related Transactions."
RESTAURANT FRANCHISING - PRIME SIRLOIN. In 1987, the Company acquired Prime
Sirloin, Inc., a regional franchised steakhouse chain composed of seven units
and headquartered in Morristown, Tennessee. This concept, although similar to
Western Steer, was slightly more upscale, with larger building designs, building
interiors, and a higher average ticket price. Due to the success of the Western
Steer redesign, management has offered its Prime Sirloin franchise operators a
remodel and redesign program similar to the Western Steer reformat. As of
February 28, 1997, one of the original franchised units has been remodeled and
changed to "Prime Sirloin - Buffet, Bakery & Steaks."
During fiscal 1995, management of the Company introduced a new Prime Sirloin
prototype designed to capitalize on the industry's success with larger buffet
style formats. This "megasized" prototype centers around a budget steak and
buffet concept with seating for over 400 patrons. Significant alterations from
the original Prime Sirloin design include a panoramic entry, which gives
customers a view of the buffet and dining area, a "double-line" system,
directing guests to the buffet floor quickly, and a "scatter-bar" buffet design
which allows guests to visit different areas for different phases of their meal.
The new Prime Sirloin design costs approximately $2.1 million per unit, and each
unit is anticipated to gross approximately $2.3 million to $2.7 million in first
year sales. The first prototype Prime Sirloin franchise was opened in
Spartanburg, South Carolina in August of 1994. During fiscal 1996 two
additional prototype franchises were opened in Bristol, Tennessee and
Greenville, South Carolina. No new Prime Sirloin franchises were sold or
opened during fiscal 1997, and no new prototype franchise units are planned
for fiscal 1998. However, it is anticipated that a franchised Western Steer
in Maryland will convert to a franchised Prime Sirloin early in fiscal 1998.
At February 28, 1997, there were 10 franchised Prime Sirloin restaurants
located in Tennessee (5), South Carolina (2), Virginia (1), Florida (1), and
Georgia (1). Six of these are operated in the "Prime Sirloin - Buffet, Bakery
& Steaks" remodeled format. Of these, the Bristol, Tennessee location, which
opened during fiscal 1996, is operated through a joint venture in which the
Company owns 50%. See Item 13, "Certain Relationships and Related
Transactions." Major shareholders of the Company have an ownership interest in
two of the franchised Prime Sirloin restaurants.
During fiscal 1997, the average weekly sales volume for Prime Sirloin -
Buffet, Bakery & Steaks franchises open for one year or more was $35,000. This
represents a decrease from the fiscal 1996 average of $39,400.
RESTAURANT FRANCHISING - BENNETT'S SMOKEHOUSE & SALOON. In 1990, WSMP became a
subfranchisor of Denver based Bennett's Bar-B-Que, Inc., with development rights
exclusively for Tennessee, North Carolina and Virginia, and expansion rights
elsewhere in the United States, except for Colorado, Texas, and metropolitan
Atlanta, Georgia. As a sub-franchiser, the Company pays royalty fees to the
franchiser equal to 1% of revenues for each Bennett's restaurant owned or sub-
franchised by the Company.
In 1994, management redesigned the Bennett's Bar-B-Que concept into Bennett's
Smokehouse & Saloon, a Texas roadhouse theme concept merging steaks and barbecue
in a 186-seat casual dinner house. This concept represents the Company's entry
into the rapidly expanding, casual dining market. At February 28, 1997, the
Company had three franchised Bennett's restaurants, located in Tennessee (2) and
West Virginia (1).
One new West Virginia franchise was opened during fiscal 1997. Management
does not intend to actively pursue franchise expansion during fiscal 1998,
but instead, intends to focus efforts on improving operations in existing units.
RESTAURANT FRANCHISING - OTHER. WSMP has created the "Mom 'n' Pop's Buffet and
Bakery" restaurant concept, to fit existing Western Steer buildings in areas in
which competition has grown, or in which past performance necessitates other
market approaches. This restaurant concept consists of food bars from which
customers make selections. At fiscal year end, there were two franchised units
under this concept, both located in Georgia. At the present time, the Company
does not consider these restaurants or their franchising as being significant to
its overall operations.
RESTAURANT FRANCHISING - ACQUISITION OF FRANCHISED UNITS. On March 1, 1997,
WSMP entered into agreements to reacquire 15 franchised restaurants from seven
franchisees, six of which (operating 14 restaurants) were affiliated with Cecil
R. Hash, a former president of the Company. On April 26, 1997, two additional
restaurants were reacquired from a separate franchisee. The seventeen
restaurants consist of eleven Western Steer - Steaks, Buffet & Bakery
restaurants, five Western Steer Family Restaurants, and one Prime Sirloin -
Buffet, Bakery & Steaks. These restaurants are located in North Carolina (14),
Virginia (2) and Tennessee (1).
RESTAURANT FRANCHISING - FRANCHISE AGREEMENTS. The Company utilizes standard
franchise agreements for its Western Steer; Western Steer-Steaks, Buffet &
Bakery; Prime Sirloin; Prime Sirloin-Buffet, Bakery & Steaks; and Bennett's
Smokehouse & Saloon restaurants. The terms of the franchise agreement are
dependent upon when the agreement was executed.
Generally, franchise agreements executed prior to 1990 are for a period of
20 years, renewable for a period of 20 years, whereas those executed after this
date are based on 10 year terms. The initial franchise fee is $25,000. In
addition, royalty fees of 3% of the franchised restaurant's gross sales
throughout the term of the agreement are also payable to the Company. Franchise
agreements executed after 1981 require the franchisee to pay the Company an
advertising fee of 2% of each franchised restaurant's gross sales. Although the
Company reserves the right to collect this total fee, it is not currently
charging an advertising fee to its franchise units. All agreements provide for
an exclusive territory and for in-term and post-term non-competition agreements.
No single franchisee or group of franchisees under common control provides
revenues equal to 10% or more of the Company's consolidated revenues.
RESTAURANT OPERATIONS.
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RESTAURANT OPERATIONS - WESTERN STEER, PRIME SIRLOIN, AND BENNETT'S RESTAURANTS.
At February 28, 1997, the Company and certain consolidated subsidiaries owned
and operated 9 Western Steer - Steaks, Buffet & Bakery restaurants. These
restaurants are located in North Carolina (7), Florida (1), and Tennessee (1).
In addition, the Company and certain consolidated subsidiaries owned and
operated five Prime Sirloin - Buffet, Bakery & Steaks in North Carolina (4) and
South Carolina (l). One Bennett's Smokehouse & Saloon restaurant is owned
by the Company and is located in North Carolina.
By an agreement dated March 1, 1997, WSMP acquired 14 restaurants from a
group of franchisees controlled by Cecil R. Hash (the "Hash Companies"). These
restaurants, located in North Carolina(11), Virginia(2) and Tennessee(1) include
eight Western Steer - Steaks, Buffet & Bakery restaurants, five Western Steer
Family Restaurants, and one Prime Sirloin - Buffet, Bakery & Steaks restaurant.
These restaurants, as well as others acquired after February 28, 1997, are not
included in the foregoing.
The Company does not intend to build or acquire any additional wholly-owned
Western Steer, Prime Sirloin, or Bennett's restaurants during fiscal 1998.
However, should such opportunities arise, the Company will evaluate each
opportunity upon its own merits.
RESTAURANT OPERATIONS - OTHER RESTAURANTS. The Company owns two Mom 'n' Pop's
Buffet & Bakery restaurants, located in Georgia and in Florida. One other
restaurant in Morganton, North Carolina is operated in a different format. The
Company does not consider these restaurants, in total, significant to its
overall operation.
RESTAURANT OPERATIONS - FRANCHISED RESTAURANTS. WSMP operates three Western
Steer - Steaks, Buffet & Bakery restaurants in Kentucky for a franchisee, and
two Prime Sirloin - Buffet, Bakery & Steaks restaurants in South Carolina for
franchisees. The Company does not consider the operation of these restaurants,
in total, significant to its overall operation.
RESTAURANT OPERATIONS - SEASONALITY. The Company considers its restaurant
segment to be somewhat seasonal in nature, with stronger sales during the
Christmas season and during Spring, and weaker sales during the mid-summer and
late winter months.
RESTAURANT OPERATIONS - OPENINGS AND CLOSINGS. The following is a summary of
all Company-owned restaurants opened and closed during the previous three years:
Fiscal Fiscal Fiscal
1995 1996 1997(1)
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Western Steer restaurants
Opened 0 0 0
Closed 3 3 3
Total at year end 15 12 9
Prime Sirloin restaurants
Opened 1 1 0
Closed 0 1 0
Total at year end 5 5 5
Bennett's Bar-B-Que restaurants
Opened 0 0 0
Closed 0 0 0
Total at year end 1 1 1
Other restaurants
Opened 0 0 1
Closed 1 0 0
Total at year end 2 2 3
Total restaurants (at year end) 26 23 18
(1) Excludes the 17 restaurants acquired after February 28, 1997.
RESTAURANT OPERATIONS - RESTAURANT MEAL PRICES. The average meal price for
Company-owned Western Steer restaurants is $5.66 and the average meal price for
Company-owned Prime Sirloin restaurants is $6.29. Meal prices vary on
geographic location, degree of renovation, and whether the restaurant is
Company-owned or franchised.
RESTAURANT OPERATIONS - SUPPLIERS. The Company has established a purchase
program with Institutional Food House, Inc. ("IFH") of Hickory, North Carolina.
This program allows Company-owned restaurants and franchisees to obtain
substantially all staple items on a regular basis from one purchasing source and
promotes the consistency and high quality of goods delivered to its restaurants
and participating franchisees. Any purchase program is voluntary for
franchisees, and franchisees are free to buy their food from IFH or elsewhere as
long as it meets the Company's specifications. The Company does not feel that
the loss of the IFH agreement would have a material adverse effect on the
Company.
FOOD PROCESSING.
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FOOD PROCESSING - MOM 'N' POS'S COUNTRY HAM. The Company produces, through its
Smokehouse division, cured hams and ham products for the retail and
institutional markets. In the Company's modern curing facilities in Claremont,
North Carolina, the atmospheric conditions of traditional air curing of pork
hams are simulated, resulting in a curing process that fully cures raw hams in a
period of approximately 80 days. The Company cured over 8.3 million pounds of
ham during fiscal 1997 in its 55,000 square foot facility.
The Company produces whole cured hams, packaged cured ham slices, pre-
portioned ham for portion control customers, and various "side meat" products.
A portion of ham production is sold directly or through distributors to retail
supermarkets under the "Mom 'n' Pop's" brand name, primarily in North Carolina,
South Carolina, Virginia, Tennessee, Alabama and Georgia. The remainder of
production is sold to institutional food distributors. One supermarket customer
accounted for 23.5% of cured ham sales during fiscal 1997. The Company is
confident, based upon historical customer demand, that numerous other outlets
exist for these products.
Raw hams are available from numerous sources, although the Company relies
mainly upon two suppliers for most of its hams. Loss of one or both of these
suppliers would not have a material adverse effect upon the Company.
Sales for the Company's Smokehouse division are seasonal in nature, with
sales volume increases occurring around Thanksgiving, Christmas and Easter.
The Company mitigates the seasonality of its sales by continuing to buy hams in
non-peak periods and storing them until peak seasons.
FOOD PROCESSING - MOM 'N' POP'S BAKERY PRODUCTS. The Company produces through
its Mom 'n' Pop's Bakery division a variety of biscuits, yeast rolls and other
flour-based products. The Company's biscuits are processed both plain and as
sandwiches filled with items such as sausage, cheese, eggs and country ham.
These frozen products are directly marketed under the "Mom 'n' Pop's" brand name
to institutional buyers, vending companies, delicatessens and supermarkets and
are also packed for several of the Company's customers under private labels.
The Company's yeast rolls are used primarily in frozen microwavable sandwiches.
The Company packs microwavable hamburger, cheeseburger, chicken, barbecue and
other sandwiches using its own fresh baked yeast rolls for two customers under
custom manufacturing agreements. In addition, similar sandwiches are produced
under the "Mom 'n' Pop's" brand name and marketed directly to supermarkets,
vending companies and institutional buyers . The Company has also developed
several pre-mixed baking products for sale to institutional customers. These
pre-mixed products include items such as cookie dough, biscuit and roll dough,
dumplings and pizza crust, most of which are prepared simply with the addition
of water.
The ingredients used in this division's products and mixes are purchased
primarily from five vendors but alternative sources are available. Three
customers accounted for approximately 84.6% of sales during fiscal 1997. One of
these customers, Hudson Foods, Inc., accounted for approximately 75.4% of bakery
sales, and the Company has entered into a contractual arrangement to supply that
company's requirements for those products. The Company believes that a loss of
this customer would have an adverse short-term effect on the Company; however,
the long-term impact would be minimal due to the demand for the Company's food
products from other customers and potential customers.
Although the Company does not consider its Bakery division to be seasonal,
its somewhat slower sales periods typically occur in the mid-summer months.
FOOD PROCESSING - HOME MEAL REPLACEMENT. Early in fiscal 1998, the Company
announced the creation of the Home Meal Replacement Division marking the
Company's entry into this rapidly growing market. The Company has developed
extensive experience in the home meal replacement field over the last two years
as a result of other research and development efforts in the Bakery Division.
The Company is using specialized trays and barrier films in modified atmoshpere
packaging of home meal replacement items, and a test of these items was launched
with a major supermarket chain shortly before the beginning of fiscal 1998. The
Company is also negotiating with other national food companies and retailers
regarding these products.
Although this division is just getting started, it is felt that the home
meal replacement category offers much potential in light of current consumer
tastes and preferences.
FOOD PROCESSING - REVENUES. Revenues for the two divisions that make up the
Food Processing segment of the Company's business, for the past three fiscal
years, are as follows:
Fiscal Year Ended Bakery Division Ham Curing Division
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1997 $ 48,200,000 $ 10,400,000
1996 $ 38,600,000 $ 12,300,000
1995 $ 49,600,000 $ 12,800,000
EMPLOYEES.
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The Company employed 1,348 persons (1,127 full time and 221 part time) in its
operations at February 28, 1997. These included 63 administrative and
accounting personnel, 565 Bakery and Smokehouse employees, and 720 restaurant
workers. The Company offers its employees various benefits, including major
medical health insurance coverage, and participation in its cafeteria plan, its
profit-sharing retirement plan and its employee stock purchase plan.
None of the Company's employees are represented by a union. The Company has
experienced no work stoppage attributed to labor disputes and considers its
employee relations to be good.
WORKING CAPITAL.
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The Company's working capital needs in its restaurant segment do not vary
appreciably on a seasonal basis or from year to year. All Company-owned and
most franchised restaurants participate in the Company's IFH purchase program
and do not carry substantial food inventories. The Company does not provide
customers or franchisees with the right to return products, other than major
grocery store chains which it may supply, except where required under contract
law. Also, the Company does not give extended payment terms to its customers or
franchisees. The Company's food production segment working capital needs vary
with the seasonality of its revenues.
The Company does provide standard Food and Drug Administration warranties to
its retailers and distributors of ham or bakery products, concerning the
unadulterated nature of its products and their introduction into interstate
commerce.
MARKETING AND ADVERTISING.
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The Company relies upon advertising to help promote its Western Steer, Prime
Sirloin, and Bennett's restaurants. Local advertising has been the
responsibility of individual restaurant operators. The Company and its Western
Steer, Prime Sirloin and Bennett's franchisees have advertised their restaurants
primarily in newspapers and billboards and with point-of-sale materials.
Most Western Steer franchisees, through franchise agreements or supplementary
agreements, are obligated to pay the Company an advertising fee of two percent
of the gross sales of each franchised restaurant. This fee is intended to
provide funds for future national, regional and local advertising of Western
Steer restaurants.
The Company actively markets its ham and bakery products to large grocery
distributors, institutional food brokers and in some cases, directly to grocery
chains. The Company utilizes a combination of direct employees and food brokers
to market these products. The Company's Chief Executive Officer and Chief
Operating Officer are also actively involved with marketing to the largest food
manufacturing customers.
In 1990, the Company entered into an Endorsement Agreement with Dale
Earnhardt, Inc. and affiliated corporations by which the Company became an
endorsement sponsor of the Dale Earnhardt automobile racing team on the NASCAR
Winston Cup Series and the NASCAR Busch Grand National Series. This agreement
has now expired, and the Company has no immediate plans to develop similar
advertising.
COMPETITION.
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The restaurant and food manufacturing businesses are highly competitive and
are often affected by changes in tastes and eating habits of the public, and
economic conditions affecting spending habits, population and traffic patterns.
Company-operated restaurants and Western Steer and Prime Sirloin restaurants
operated by franchisees generally compete with national and regional family-
oriented restaurant chains, local establishments and fast food restaurants. The
Company believes that family-oriented steakhouses compete primarily on the basis
of consistency and quality of product, price and location of restaurants. In
marketing franchises, the Company competes with numerous other family steakhouse
and restaurant franchisers, many of which have substantially greater financial
resources and higher sales volume than the Company.
In its production of retail and institutional ham products, the Company faces
strong price competition from a variety of large meat processing concerns and
smaller local and regional operations. The Company does not believe that any
one company is dominant in the sale of ham products. The principal methods of
competition in the sale of ham products are price, quality and name recognition.
In sales of biscuit and yeast roll products, the Company competes with a number
of large bakeries in various parts of the country, as well national frozen meal
manufacturers, with competition strongest for sales to institutional food
vendors. The principal methods of competition for the sale of bakery products
are price and quality.
TRADEMARKS.
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The Company has registered the Western Steer logotype and the names "Western
Steer", "Western Steer Family Restaurant", "Western Steer - Steaks, Buffet &
Bakery", "Prime Sirloin - Buffet, Bakery & Steaks", the "Prime Sirloin" logotype
and the "Mom 'n' Pop's' logotype, and variations thereof, as well as several
distinct Western Steer menu items, as trademarks and service marks with the
United States Patent and Trademark Office. The Company actively uses these
trademarks to identify its restaurants and products and believes they are
important to its business. Generally, trademarks remain valid as long as they
are used properly for identification purposes.
REGULATION.
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The Company is subject to Federal Trade Commission regulations relating to
disclosure requirements in the sale of franchises. Many states also have laws
regulating franchise operations, including registration and disclosure
requirements in the offer and sale of franchises and the application of
statutory standards regulating franchise relationships. The Company believes it
is operating in substantial compliance with applicable laws and regulations
governing its operations.
The conduct of the Company's businesses is subject to various other federal
and state laws, including the Food, Drug and Cosmetic Act and the Occupational
Safety and Health Act. The Company is also subject to the Fair Labor Standards
Act, which governs such matters as minimum wages, overtime and other working
conditions. A significant portion of the Company's food service personnel are
paid at rates related to the Federal minimum wage, and, accordingly, future
increases in the minimum wage will increase the Company's labor cost.
The Company believes itself to be in material compliance with federal, state
and local provisions regulating the discharge of materials into the environment
or otherwise relating to the protection of the environment, and feels that such
compliance should not have a material effect on the Company's capital
expenditures, earnings and competitive position.
EXECUTIVE OFFICERS OF THE REGISTRANT.
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Officers are elected annually by the Company's Board of Directors and serve
indefinitely at the pleasure of the Board. The following table sets forth
certain information with respect to the executive officers of the Company at May
7, 1997:
Executive
Officer
Name Position Age Since
Richard F. Howard Chairman of the Board and Secretary 47 1988
James C. Richardson, Jr. Vice Chairman of the Board 48 1988
and Chief Executive Officer
David R. Clark President and Chief Operating Officer 40 1996
James M. Templeton Senior Vice President, Real Estate 60 1988
and Assistant Secretary
Ken L. Moser Senior Vice President, Restaurants 53 1984
and Franchising
Larry D. Hefner Senior Vice President, Sales 46 1991
Matthew V. Hollifield Vice President of Finance 30 1995
and Treasurer
James T. Hood Vice President, Restaurant Operations 41 1996
Bill H. Brown Vice President of Product Development 60 1997
Ken D. Breiner Vice President of Food Service 49 1997
James W. Berry Controller and Assistant Treasurer 54 1981
Prior to joining WSMP in 1996, Mr. Clark served as Executive Vice President
and Chief Operating Officer of Bank of Granite, located in Granite Falls, North
Carolina, from 1994-1996. Mr. Clark served as an executive officer of BB&T, a
bank and trust company with headquarters in Wilson, North Carolina, prior to
joining Bank of Granite. During his 13 years with BB&T, he served in various
capacities, including President of BB&T of South Carolina, and President of the
Northwest Region of North Carolina.
Mr. Hollifield was an audit manager with the accounting firm of Deloitte &
Touche LLP prior to assuming the position of Vice President of Accounting, Chief
Accounting Officer and Assistant Secretary of the Company in 1995, and had been
employed by Deloitte & Touche since 1988. In February, 1997, he was named Vice
President of Finance and Treasurer of the Company.
Mr. Hood has been an employee of WSMP since 1984. He served as Director of
Western Steer Operations from 1991-1996, and was named Vice President in 1996.
Prior to joining WSMP in 1996, Mr. Brown served as Director of Research and
Development for Shoney's Inc. from 1994-1996. For twenty-two years prior to
that, he was Director of Culinary Development for Morrison's Restaurants, Inc.
Prior to joining the Company in 1996, Mr. Breiner was President of Foods
Spectrum, Inc., an Atlanta based concept development company, from 1994 to 1996.
In addition, from 1989 to 1994, he served as Director of Purchasing and Research
and Development for RTM Restaurant Group, Arby's largest franchisee and owner of
Mrs. Winner's Chicken and Biscuits.
All other officers have been employed by the Company in their respective
positions or similar positions for more than five years.
ITEM 2. PROPERTIES.
The Company owns its principal office, warehouse, ham-curing and bakery
facilities, which are located on a 62 acre tract in Claremont, North Carolina.
The executive offices of the Company are located in a 23,000 square foot
building. The principal ham curing plant is contained in a modern 55,000 square
foot building. The Company's bakery operations occupies buildings totaling
137,460 square feet, including 18,941 square feet of freezer and cooler space.
The Company also owns various parcels of undeveloped property in North
Carolina for future development or sale. In addition, the Company owns nine
properties which were previously operated as restaurants, four of which are
vacant, and five of which are leased to others, in North Carolina (2), South
Carolina (1), Florida (3), Georgia (1), Maryland (1) and Tennessee (1).
Of the 18 restaurants owned by the Company and its wholly owned subsidiaries
as of February 28, 1997, 12 are located on property owned by the Company or its
subsidiaries in North Carolina (9), Florida (2) and Georgia (1). The six other
restaurants operated by the Company or its subsidiaries are held under long-term
leases, in North Carolina (4) South Carolina (1) and Tennessee (1). In
addition, the 14 units acquired on March 1, 1997 from the Hash Companies, as
well as the three additional units acquired since February 28, 1997, are all
held under long-term leases.
Substantially all of the Company's restaurant properties, as well as the
Company's corporate headquarters, ham curing facility and bakery facility are
pledged as collateral under long-term debt obligations. Information as to the
Company's long-term debt is contained on page 16 of the Company's Annual Report
to Shareholders for the fiscal year ended February 28, 1997, under the caption
"Long-Term Debt" and is incorporated herein by reference.
ITEM 3. LEGAL PROCEEDINGS.
WSMP, Inc. and its subsidiaries are involved in various claims and legal
proceedings in the ordinary course of their business, the resolution of which
management believes will not have a material effect on the Company's business or
financial condition. The Company intends to prosecute or defend vigorously, as
the case may be, all such matters.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not Applicable.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SECURITY HOLDER
MATTERS.
Information on the market for the Company's common stock, the range of market
prices for and the dividends declared on common stock for each of the last two
fiscal years, and the number of record holders of common stock are contained
under the caption "Market Information" on the inside back cover of the Company's
Annual Report to Shareholders for the fiscal year ended February 28, 1997, and
is incorporated herein by reference.
ITEM 6. SELECTED FINANCIAL DATA.
Selected financial data for each of the five fiscal years in the period ended
February 28, 1997, is contained under the caption "Selected Financial Data" on
page 28 of the Company's Annual Report to Shareholders for the fiscal year ended
February 28, 1997, and is incorporated herein by reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
The Company's discussion and analysis of financial condition and the results
of operations appears under the caption "Management's Discussion," on pages 4
through 7 of the Company's Annual Report to Shareholders for the fiscal year
ended February 28, 1997, and is incorporated herein by reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
An index to the financial statements and supplementary data contained in the
Company's Annual Report to Shareholders for the fiscal year ended February 28,
1997, which is incorporated herein by reference is contained on page F-1 of this
Form 10-K.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
Not Applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The name, age and background information for each of the Company's
directors is contained under the caption "Election of Directors" in the
Company's Proxy Statement for its 1997 Annual Meeting of Shareholders and is
incorporated herein by reference.
The name, age and background information for each of the Company's
executive officers is contained under the caption "Executive Officers of the
Registrant" in Item 1 of this Form 10-K.
ITEM 11. EXECUTIVE COMPENSATION.
Information on remuneration of the Company's officers and directors is
contained in the Company's Proxy Statement for its 1997 Annual Meeting of
Shareholders under the caption "Election of Directors" and is incorporated
herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
Information on security ownership of certain beneficial owners and
management is contained in the Company's Proxy Statement for its 1997 Annual
Meeting of Shareholders under the caption "Principal Shareholders and Management
Ownership" and is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Information on certain relationships and related transactions involving
the Company and its management or affiliates is contained in the Company's Proxy
Statement for its 1997 Annual Meeting of Shareholders under the caption
"Certain Transactions," and is incorporated herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS
ON FORM 8-K.
(a) 1. FINANCIAL STATEMENTS
See Index to Financial Information
2. FINANCIAL STATEMENT SCHEDULES
See Index to Financial Information
3. EXHIBITS
See Index to Exhibits
(b) REPORTS ON FORM 8-K.
A Current Report on Form 8-K was filed during the quarter ended February
28, 1997. This report, dated January 29, 1997, announced the refinancing
of the Company's Senior Note obligations, as well as the replacement of
its short-term line of credit with another financial institution.
SIGNATURES
Pursuant to the requirements of Section 13 of the Securities Exchange Act of
1934, WSMP, Inc. has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Dated May 23, 1997
WSMP, INC.
By: David R. Clark
----------------------------
President
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed by the following persons on behalf of WSMP, Inc., and in the
capacities and on the dates indicated.
SIGNATURE TITLE DATE
----------- -------------- ---------------
Richard F. Howard
- -------------------------- Chairman of the Board, May 23,1997
(Richard F. Howard) Secretary
James C. Richardson, Jr.
- -------------------------- Vice Chairman of the Board May 23,1997
(James C. Richardson, Jr.) (Principal Executive Officer)
David R. Clark
- -------------------------- President and Director May 23, 1997
(David R. Clark) (Principal Operating Officer)
Matthew V. Hollifield
- -------------------------- Vice President of Finance May 23, 1997
(Matthew V. Hollifield) and Treasurer (Principal
Accounting Officer,
Principal Financial Officer)
James M. Templeton
- -------------------------- Vice President, Real Estate, May 23, 1997
(James M. Templeton) and Director
Bobby G. Holman
- -------------------------- Director May 23, 1997
(Bobby G. Holman)
Lewis C. Lanier
- -------------------------- Director May 23, 1997
(Lewis C. Lanier)
William R. McDonald III
- -------------------------- Director May 23, 1997
(William R. McDonald III)
Richard F. Hendrickson
- -------------------------- Director May 23, 1997
(Richard F. Hendrickson)
E. Edwin Bradford
- -------------------------- Director May 23, 1997
(E. Edwin Bradford)
===============================================================================
WSMP, INC.
AND SUBSIDIARIES
__________________________________
FINANCIAL INFORMATION FOR INCLUSION
IN ANNUAL REPORT ON FORM 10-K
FISCAL YEAR ENDED FEBRUARY 28, 1997
===============================================================================
WSMP, INC. AND SUBSIDIARIES
INDEX TO FINANCIAL INFORMATION
ITEM 14 (A) (1) - (2)
REFERENCE
ANNUAL REPORT
TO SHAREHOLDERS
DATA INCORPORATED BY REFERENCE FROM
ATTACHED ANNUAL REPORT TO SHAREHOLDERS
FOR THE FISCAL YEAR ENDED FEBRUARY 28, 1997
Consolidated statements of operations for
the fiscal years ended February 28,
1997, February 23, 1996, and
February 24, 1995 8-9
Consolidated balance sheets at February
28, 1997 and February 23, 1996 10
Consolidated statements of shareholders'
equity for the fiscal years ended February
28, 1997, February 23, 1996, and February
24, 1995 11
Consolidated statements of cash flows
for the fiscal years ended February 28,
1997, February 23, 1996, and February
24, 1995 12
Notes to consolidated financial
statements 13-25
Independent auditors' report 26
All financial statement schedules have been omitted because of the absence
of conditions under which they are required.
The consolidated financial statements listed in the above index which are
included in the Annual Report to Shareholders for the fiscal year ended February
28, 1997, are hereby incorporated by reference. With the exception of the pages
listed in the above index and the items incorporated by reference in Items 1, 2,
5, 6 and 7 in this Report, the Annual Report to Shareholders for the fiscal year
ended February 28, 1997, is not to be deemed filed as part of this Report.
WSMP, INC.
AND SUBSIDIARIES
____________________________________
EXHIBITS
FOR INCLUSION IN ANNUAL REPORT
ON FORM 10-K
FISCAL YEAR ENDED FEBRUARY 28, 1997
EXHIBITS
FOR INCLUSION IN ANNUAL REPORT ON FORM 10-K
YEAR ENDED FEBRUARY 28, 1997 INDEX TO EXHIBITS
ITEM 14 (a) (3)
Sequential
Exhibit Page Number
3(a) Restated Charter of the Registrant, dated October 19, 1988, *
which is incorporated herein by reference to Exhibit 3(a) to
the Registrant's Annual Report on Form 10-K for the year
ended February 24, 1989.
3(b) Statement of Change of Registered Office and Registered Agent *
dated January 6, 1995 and filed with the Secretary of State of
the State of North Carolina on February 14, 1995.
3(c) By-Laws of the Registrant as amended to September 1990, *
which are incorporated herein by reference to Exhibit
3(b) to the Registrant's Annual Report on Form 10-K
for the year ended February 22, 1991.
4(a) Loan Agreement dated as of January 10, 1997, between WSMP, Inc. *
and SouthTrust Bank of North Carolina, pertaining to a term
loan not to exceed $5,000,000 in aggregate principal, which is
incorporated by reference to Exhibit 99(a) to the Registrant's
Form S-3 Registration Statement (Registration No. 333-22891)
filed on March 6, 1997.
4(b) Amendment to Loan Agreement dated as of January 17, 1997, *
between WSMP, Inc. and SouthTrust Bank of North Carolina, which
is incorporated by reference to Exhibit 99(b) to the
Registrant's Form S-3 Registration Statement (Registration
No. 33-22891) filed on March 6, 1997.
4(c) Financing and Security Agreement dated November 22, 1996, *
between WSMP, Inc. and National Bank of Canada, pertaining to
a revolving credit not to exceed $6,000,000 in aggregate
principal amount, which is incorporated by reference to Exhibit
99(c) to the Registrant's Form S-3 Registration Statement
(Registration No. 333-22891) filed on March 6,1997.
10(a) Management Services Agreement dated March 31, 1996, between *
the Registrant and HERTH Management, Inc., which is incorporated
by reference to Exhibit 10(a) to the Registrant's Annual
Report on Form 10-K for the year ended February 23, 1996.
10(b) Registrant's Special Stock Option Plan, dated January 26, *
1988, which is incorporated herein by reference to Exhibit
10(g) to the Registrant's Annual Report on Form 10-K for
the year ended February 26, 1988. Amendment to Special
Stock Option Plan, dated March 9, 1989, which is incorporated
herein by reference to Exhibit 10 (e)(2) to the Registrant's
Annual Report on Form 10-K for the year ended February 24,
1989.
10(c) Agreement of Purchase and Sale dated as of March 1, 1997, *
among WSMP, Inc., F & H Companies, Inc., Western Steer of North
Carolina, Inc., Northwest Food Systems, Inc., Davidson Food
Systems, Inc., Mocksville Food Systems, Inc. and CFR Foods,
Inc., which is incorporated by reference to Exhibit 4 to the
Registrant's Form S-3 Registration Statement(Registration
No. 333-22891) filed on March 6, 1997.
10(d) Non-Competition Agreement dated March 1, 1997, between Cecil *
R. Hash and WSMP, Inc., which is incorporated by reference to
Exhibit 99(f) to the Registrant's Form S-3 Registration
Statement (Registration No. 333-22891) filed on March 6, 1997.
11 Computation of per share earnings. Included
13 WSMP, Inc.'s Annual Report to Shareholders for the year ended Included
February 28, 1997.
21 Subsidiaries of WSMP, Inc. Included
23 Consent of Independent Auditors Included
- ----------------------
* Incorporated by reference.
The Registrant hereby agrees to provide to the Commission upon request
copies of long-term debt instruments omitted pursuant to Item 601 (b) (4)
(iii) (A) of Regulation S-K.
EXHIBIT 11
<TABLE>
WSMP, INC.
AND SUBSIDIARIES
<CAPTION>
Computation of Per Share Earnings (Loss)
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Computation of Earnings (Loss) Per
Common and Common Equivalent Share:
Net earnings (loss) $ 1,120,696 $ (1,494,989) $ 1,096,670
============ ============= ============
Actual outstanding shares beginning of year 2,760,338 2,660,338 2,666,588
Add (deduct) weighted average shares applicable to:
Common stock options outstanding 316,547 214,219
Treasury stock acquisitions (1,786)
Common stock options exercised 14,178 69,179
------------ ------------- ------------
Weighted average shares, as adjusted 3,091,063 2,729,517 2,879,021
============ ============= ============
Earnings (loss) per common and common
equivalent share $ .36 $ (.55) $ .38
============ ============= ============
Computation of Earnings (Loss) Per
Share - Assuming Full Dilution:
Net earnings (loss) $ 1,120,696 (1,494,989) 1,096,670
============ ============= ============
Actual outstanding shares beginning of year 2,760,338 2,660,338 2,666,588
Add (deduct) weighted average shares applicable to:
Common stock options outstanding 454,284 214,219
Treasury stock acquisitions (1,786)
Common stock options exercised 14,178 69,179
------------ ------------- ------------
Weighted average shares, as adjusted 3,228,800 2,729,517 2,879,021
============ ============= ============
Earnings (loss) per common share - assuming
full dilution $ .35 $ (.55) $ .38
============ ============= ============
</TABLE>
WSMP, Inc.
1997
Annual Report
A Food Service Company
WSMP PROFILE
- ------------
WSMP, Inc., is a North Carolina-based food manufacturing and restaurant
company. Since the mid-1960's, it has grown from humble origins in the
foothills of the Blue Ridge Mountains to become nationally recognized in the
food service industry with nearly $88 million in annual revenues. The Company
is comprised of three separate food processing divisions, one of which was
formed early in fiscal 1998, and a division that develops, owns, operates and
franchises restaurants.
The Bakery Division is the largest of WSMP's food manufacturing operations
and includes what WSMP believes is the largest single-site microwaveable
sandwich manufacturing facility in the United States. The facility in
Claremont, North Carolina, has the capacity to produce more than four million
sandwiches per week. In addition to manufacturing a wide variety of sandwiches,
including meat-filled biscuits, under private and company labels, the division
also produces buttermilk biscuits, yeast rolls and other items for institutional
and retail sales.
The Ham Curing Division is one of the largest country ham producers in the
United States, with a capacity to cure more than 500,000 hams annually. Its
products are sold under the Mom 'n' Pop's (R) brand label to both institutional
and retail markets, and are provided whole and in packages of slices for both
retail and restaurant usage and in closely controlled sliced portions for the
restaurant and fast-food industry.
The Home Meal Replacement Division is the newest of the food processing
operations of WSMP. This division was created early in fiscal 1998 and will
produce individually packaged, refrigerated meats, vegetables, desserts and
other items for sale through supermarkets.
Restaurant operations comprise 34 Company-owned units, 17 of which were
acquired from franchisees early in fiscal 1998, and 53 franchised units.
A majority of these are Western Steer (R) restaurants, including Western Steer
Steaks, Buffet and Bakery restaurants and the traditional Western Steer Family
Restaurants. Prime Sirloin (R) and Bennett's (TM) are the other two main
segments of the restaurant division. Prime Sirloin Buffet, Bakery and Steaks
restaurants are designed to directly compete with recognized leaders in the
economy steak and buffet restaurant segment. Bennett's Smokehouse and Saloon
restaurants are a result of a partnership between WSMP and Bennett's Bar-B-Que,
Inc., of Denver, Colorado, and represent the Company's entry into the Texas-
style roadhouse themed category.
CONTENTS
- --------
ANNUAL REPORT FOR THE YEAR ENDED FEBRUARY 28, 1997
Profile Inside Front Cover
Financial Highlights 1
Letter To Shareholders 2
Management's Discussion 4
Consolidated Financial Statements 8
Report of Management 26
Independent Auditors' Report 26
Unaudited Quarterly Financial Data 27
Selected Financial Data 28
Officers and Directors Inside Back Cover
Market Information Inside Back Cover
General Information Inside Back Cover
FINANCIAL HIGHLIGHTS
- --------------------
Fiscal Years ended February 28, 1997 and February 23, 1996
(in thousands, except per share amounts)
Percent
1997 1996 Change
-------- -------- --------
Operating Revenues $ 87,753 $ 79,439 10.5%
Operating Income (Loss) $ 1,626 $ (703) *
Net Earnings (Loss) $ 1,121 $ (1,495) *
Net Earnings (Loss) Per Share
Common and Common Equivalent Shares $ .36 $ (.55) *
Common Shares Assuming Full Dilution $ .35 $ (.55) *
Weighted Average Shares Outstanding
Common and Common Equivalent Shares 3,091 2,730 13.2%
Common Shares and Full Dilutive 3,229 2,730 18.3%
Total Assets $ 43,127 $ 41,634 3.6%
Long-Term Debt $ 13,720 $ 14,921 (8.0%)
Shareholder's Equity $ 18,290 $ 16,444 11.2%
Company common stock is traded on the national over-the-counter market under
the NASDAQ symbol "WSMP."
* Not meaningful
CAUTIONARY STATEMENT AS TO FORWARD LOOKING INFORMATION
- ------------------------------------------------------
Statements contained in this report as to the Company's outlook for sales,
operations, capital expenditures and other amounts, budgeted amounts and other
projections of future financial or economic performance of the Company, and
statements of the Company's plans and objectives for future operations are
"forward looking" statements, and are being provided in reliance upon the "safe
harbor" provisions of the Private Securities Litigation Reform Act of 1995.
Important factors that could cause actual results or events to differ materially
from those projected, estimated, assumed or anticipated in any such forward
looking statements include without limitation: adverse changes in economic,
weather or other conditions in the geographic area in which the Company's
restaurants are located; risks associated with the Company's creation of new
products; additional costs due to increased prices of raw hams; increased
competition; adverse changes in consumer preferences for country ham or bakery
products; adverse changes in the availability of supplies; adverse changes in
governmental regulation relating to the Company's business; the loss or
suspension of any of the Company's licenses or permits; the loss of the services
of any of the Company's key management or other personnel; and other factors
that generally effect the Company's operations and the restaurant industry in
general.
LETTER TO SHAREHOLDERS
- ----------------------
To Our Shareholders and Friends:
Your Company underwent significant changes during fiscal 1997 which led to
a number of positive and exciting occurrences within WSMP.
Most of the major activities during the fiscal year related to the adoption
of a strategic action plan. Implementation of this plan led to the hiring of a
new president, adoption of specific programs to increase revenues, restructuring
of corporate debt, implementing an operating cost reduction program, placement
of new personnel in several key positions, and the launching of a number of new
product tests.
The appointment of David R. Clark as WSMP's president and chief operating
officer was announced last June. Prior to being named to these posts, he served
as executive vice president and chief operating officer of the Bank of Granite,
Granite Falls, North Carolina. Before joining the Bank of Granite, in 1994, he
worked for 13 years for BB&T. Posts he held with that financial institution
included serving as president of BB&T of South Carolina, with headquarters in
Greenville, South Carolina, and president of the Northwest Region of North
Carolina, headquartered in Hickory, North Carolina.
The energy and excitement brought to the Company by adding a key person to
the top management team was enhanced by one of the more important achievements
for fiscal 1997 -- a return to profitability. This turnaround from the
financial results of the previous fiscal year can be credited to a number of
factors, including better operating performances.
Profitability from both the Bakery Division and Restaurant Division
improved significantly during fiscal 1997, helping account for the financial
turnaround of 91 cents in earnings per WSMP common and common equivalent share,
compared to the prior fiscal year. In addition, net income for the fiscal year
was favorably impacted by an extraordinary gain of more than $400,000, net of
income tax, as a result of the early retirement of debt. Execution of a new
debt package, including the discount that accounted for the gain, was completed
in January.
Now that we've given you a brief overview of some of the more important
achievements of fiscal 1997, we would like to provide you with information about
our individual operating segments and what our future appears to be.
Our Bakery Division showed improved profitability during the fiscal year as
a result increased sales. The loss of sales volume that occurred late in fiscal
1995 had been replaced prior to the beginning of fiscal 1997, resulting in much
stronger sales during the year. In addition, much effort has been spent during
the year on product tests and new product development which are expected to
bring benefits in fiscal 1998.
During recent months, this division has been producing about three million
mircowaveable sandwiches a week, or about 75 percent of capacity. Because of
efforts made during fiscal 1997 and continuing product tests now underway, we
feel it is possible to fill the current capacity of the bakery facility this
year.
Furthermore, early in fiscal 1998 WSMP announced the creation of the Home
Meal Replacement Division marking the Company's entry into this rapidly growing
category. WSMP has developed extensive experience in the home meal replacement
field over the last two years as a result of other research and development
efforts in the Bakery Division. We now are using specialized trays and barrier
films in modified atmosphere packaging of home meal replacement items and
launched a test of them with a major national supermarket chain shortly before
the beginning of fiscal 1998. The Company is also negotiating with other
retailers and national food companies regarding these products.
Although this division is just getting started, we feel it has excellent
potential to provide significant revenue and also contribute to operating
profits in its first year.
The Ham Curing Division experienced a lack of profitability in fiscal 1997,
resulting in a disappointing year for this division. We continue to operate
this division at capacity; however, because of the high price of fresh ham, we
could not maintain the margins for our country ham products that we normally
have had in the past. Although fresh ham prices are expected to continue to be
high, actions are being taken to improve margins and operating efficiencies
which should help this division return to profitability in fiscal 1998.
Fiscal 1997 was a good year for our Restaurant Division. Customer counts
and sales in Company-owned restaurants in fiscal 1997 were significantly ahead
of fiscal 1996, even though restaurant industry trends showed declines in
customer counts. Plans call for a continued focus on a value meal approach in
our Prime Sirloin Buffet, Bakery & Steaks and our Western Steer Steaks Buffet
and Bakery Restaurants, using menu items with strong price point and high
perceived value to stimulate customer counts and sales. We expect our
restaurants to continue to provide significant revenue and operating profits in
fiscal 1998.
In addition, since the beginning of fiscal 1998, we have acquired 16
previously franchised Western Steer restaurants and one previously franchised
Prime Sirloin, almost doubling our number of Company-owned restaurants.
Fourteen of these restaurants were acquired as a group from our single largest
franchisee. We feel these units add strength to our base of Company-owned
restaurant units due to their locations and historical operating results.
We are pleased with the progress we have made in fiscal 1997, but we are
not satisfied. Our obligation to shareholders, employees and franchisees
continues to include achieving increased operating profitability in all segments
during fiscal 1998. We are very optimistic about WSMP's future and its
opportunities for continued profitability.
As we have said before, the Company's management and Board want each of you
to feel comfortable with your investment in our modern food service corporation.
So, if you have questions or comments about anything discussed in this letter or
elsewhere in the annual report, please feel free to visit us in Claremont, North
Carolina, or telephone us directly.
As always we appreciate your continued support and confidence.
Sincerely,
James C. Richardson, Jr. David R. Clark
James C. Richardson, Jr. David R. Clark
Vice Chairman and President and
Chief Executive Officer Chief Operating Officer
MANAGEMENTS DISCUSSION
- ----------------------
RESULTS OF OPERATIONS
RESTAURANT REVENUES
Revenues from Company-owned restaurants for fiscal 1997 increased
$741,000, or 2.9%, in comparison with fiscal 1996. This change was driven by
increases in same store sales totaling $2,448,000, or 11.3%, which is
primarily the result of more efficient marketing efforts and a milder
winter than in the previous year. In addition, fiscal 1997 reflects fifty-
three weeks of sales activity compared to fifty-two weeks in fiscal 1996
(See Note 1 to the financial statements). The increase in same store sales
was offset by the effect of a net reduction in the number of Company owned
units from twenty-three at the beginning of fiscal 1996 to eighteen at
February 28, 1997.
Company-owned restaurant revenues for fiscal 1996 decreased $3.2 million,
or 11.0%, in comparison with fiscal 1995. Approximately $1.7 million of the
decrease is the result of closing seven restaurant units during these
years, three of which were closed in fiscal 1996. In addition, same stores
sales declined 5.8%, or $1.5 million, during this period. Approximately $1.0
million of the decrease in same store sales occurred in the fourth quarter
of fiscal 1996 and is attributed to the severe winter weather experienced
during January and February of 1996. The remaining decrease reflects
increased competition in certain markets where these restaurants are
located.
FOOD PROCESSING REVENUES
Revenues from the food processing segment increased $7.8 million to $58.9
million during fiscal 1997, compared to $51.1 million in fiscal 1996. This
increase was driven by improved volume in the bakery division, which
experienced an increase in revenues totaling $9.6 million in fiscal 1997 as
compared to fiscal 1996. Late in fiscal 1995, the largest customer of the
bakery discontinued one of its product lines which accounted for
approximately $13.5 million of fiscal 1995 sales. Although actions to
replace this business were put in place early in fiscal 1996, benefits from
these actions were realized at a slower pace than originally expected, and
significant improvements in bakery sales did not occur until late in the
fourth quarter of fiscal 1996. Sales in the bakery division continued to
improve during fiscal 1997 and have returned to their original level.
Offsetting this increase in the bakery division is a decrease in revenues
totaling $1.8 million, or 15.0%, in the ham curing division during fiscal
1997 as compared to fiscal 1996. This decrease in revenues is primarily
the result of a change made in the ham curing process to address a spoilage
issue discovered in fiscal 1996. This change has resulted in a longer
curing process and has reduced the number of hams which can be processed
during a year.
Revenues from the food processing segment totaled $51.1 million during
fiscal 1996 compared to $62.6 million during fiscal 1995. Approximately
$11.0 million of this decrease occurred in the bakery division which had
total revenues of $38.3 million in fiscal 1996. This decrease is the
result of the loss of the product line in late fiscal 1995, as discussed
above.
FRANCHISE, ROYALTY AND OTHER FEES
Franchise, royalty and other fees declined from $2.9 million in fiscal
1996 to $2.7 million in fiscal 1997. This decrease is primarily the result
of a reduction in the number of franchise units from seventy-five at the
beginning of fiscal 1996 to sixty-eight at the end of fiscal 1997. The
effect of this reduction in units is offset by fiscal 1997 reflecting fifty-
three weeks of activity as compared to fifty-two weeks in fiscal 1996 (See
Note 1 to the financial statements).
Franchise, royalty and other fees remained relatively constant at $2.9
million for fiscal 1996 and fiscal 1995. Although thirteen franchised
units closed during these years, the impact was offset by the opening of
nine higher volume franchise units, primarily under the Bennett's and Prime
Sirloin concepts.
COSTS AND EXPENSES
COST OF GOODS SOLD
Cost of goods sold as a percentage of food sales increased to 74.9% in
fiscal 1997 from 74.1% in fiscal 1996 due to a shift in total revenues
between the food processing segment and the restaurant segment. The food
processing segment, which by its nature experiences lower margins than the
restaurant segment, accounted for 68.9% of total food sales in fiscal 1997
compared with 66.9% in fiscal 1996. Although this shift in revenues
resulted in a decrease in margins for the overall company, margins within
the food processing segment improved during fiscal 1997. In fiscal 1997,
cost of goods sold in the food processing segment was 91.8% of that
segment's revenue, compared to 92.4% in 1996. Margins in the bakery
segment improved 1.6 basis points between fiscal 1997 and 1996 as sales
increased without corresponding increases in fixed costs. The increase in
margins in the bakery division was partially offset by a decline in margins
in the ham curing division, totaling 3.0 basis points, brought about by
increases in the average cost of raw hams during fiscal 1997 as well as the
reduction in number of hams produced. Costs of goods sold as a percentage
of revenues for the restaurant segment totaled 37.3% in fiscal 1997,
showing little change from the fiscal 1996 total of 37.9%.
Cost of goods sold as a percentage of food sales increased to 74.1% in
fiscal 1996 from 72.6% in fiscal 1995 as a result of a decline in margins
in both divisions of the food processing segment during 1996. Cost of
goods sold in the food processing segment was 92.4% of that segment's
revenues for fiscal 1996, compared to 88.2% for fiscal 1995. Margins in
the bakery declined 2.5 basis points between fiscal 1995 and 1996 due to
the decrease in sales during fiscal 1996 and the inability to reduce
certain fixed costs proportionally. The remaining decline in margins
between fiscal 1995 and 1996 occurred in the ham curing division. A
portion of this decline is attributed to a shift in the product mix during
fiscal 1996. Also contributing to this division's decrease in margins was
a $1.0 million increase in sales returns and credits during fiscal 1996
attributed primarily to an isolated deficiency in the curing process which
resulted in a recall of improperly cured ham product. Although the
Company was able to mitigate the problem by reprocessing a portion of the
returned hams, the cost of reprocessing as well as the unrecoverable cost
of damaged product disposed of by the Company and its customers impacted
total margins in the ham curing division negatively.
The decline in margins in the food processing segment during fiscal 1996,
as compared to 1995, was mitigated by a positive swing in margins in the
restaurant segment. Cost of goods sold in the restaurant segment, as a
percentage of that segment's revenues, improved to 37.9% in fiscal 1996
from 39.0% in fiscal 1995. Management attributes this positive swing to
better control over costs in fiscal 1996 as well as the closing of several
less profitable restaurant units during these years.
OPERATING EXPENSES
As discussed in note 1 to the consolidated financial statements,
operating expenses include indirect costs associated with restaurant product
sales and other revenues, which consist of franchise, royalty and other fees.
Total operating expenses, as a percentage of revenues of the restaurant and
franchising segment decreased to 40.9% in fiscal 1997 from 44.7% in fiscal
1996. This is the direct result of the improvements in same store sales
experienced during fiscal 1997 in the restaurant segment. Operating
expenses in the restaurant segment totaled $11.3 million in fiscal 1997, or
42.6% of that segment's revenues, compared to $12.1 million, or 46.9%, in
fiscal 1996. Operating expenses in the franchising segment also improved
as a percentage of that segment's revenues from 25.3% in fiscal 1996 to
24.8% in fiscal 1997 as a result of cost cutting measures taken during
fiscal 1997.
Total operating expenses, as a percentage of revenues of the restaurant
and franchising segments, totaled 44.7% in fiscal 1996 compared to 45.7%
in fiscal 1995. This decrease is primarily the result of additional operating
expense incurred in the franchising segment in fiscal 1995 as part of
designing and opening a new franchised Prime Sirloin prototype designed to
capitalize on the industry's success with larger buffet style formats, as
well as higher write-offs for uncollectible royalties in fiscal 1995.
Fiscal 1996 operating expense for the franchising segment totaled $772,000,
or 25.3% of that segment's total revenues, compared to $1.3 million, or
45.2%, for fiscal 1995. Although total operating expense in the restaurant
segment decreased from $13.2 million during fiscal 1995 to $12.1 million
during fiscal 1996, these expenses increased as a percentage of restaurant
segment revenue from 45.8% in fiscal 1995 to 46.9% in fiscal 1996.
Management attributes this percentage increase to the severe winter during
January and February of 1996 which had a significant negative impact on
fiscal 1996 sales.
SELLING, GENERAL AND ADMINISTRATIVE
Selling, general and administrative expenses remained relatively constant
between fiscal 1996 and fiscal 1997 at $7.9 million. Reductions in these
expenses occurred during fiscal 1997 in the restaurant and food processing
segments totaling $302,000 and $139,000, respectively, but were offset by
higher expenses at the corporate level for advertising and product
development.
Selling, general and administrative expenses decreased $264,000 in
fiscal 1996 compared to fiscal 1995. This decrease is primarily the result
of reductions in corporate overhead totaling $451,000 as well as reductions
in costs relating to the food processing segment, offset by an increase in
advertising and other administrative costs in the restaurant segment of
approximately $218,000.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization expense has declined for the last three
fiscal years from $2.9 million in fiscal 1995, to $2.7 million in fiscal
1996, to $2.6 million in fiscal 1997. This reduction is primarily
attributed to the closing and selling of restaurant properties that has
occurred during these years.
OTHER
The Company recorded equity in losses of affiliates totaling $107,000
in fiscal 1997 and $338,000 in fiscal 1996, compared with equity in earnings
of affiliates totaling $115,000 in fiscal 1995. Approximately $208,000 of
the equity losses recorded in fiscal 1996 is the result of write-downs in
assets by certain subsidiaries to reflect permanent impairments in value.
The remaining losses in both fiscal 1997 and 1996 are primarily due to
operating losses in two unconsolidated subsidiaries, formed late in fiscal
1995, which failed to perform as originally expected. The two restaurant
units which generated these losses were closed in fiscal 1997.
During fiscal 1997, the Company recognized a net extraordinary gain on
the early extinguishment of debt totaling $414,784, which is net of income
taxes of $250,862, when it replaced its Senior Note obligations
which were scheduled to mature on October 1, 1997, with long-term
promissory notes with two banks (see Note 7 to the financial statements).
The two life insurance companies which held the Senior Notes agreed to a
discount totaling $787,651 upon the early retirement of this debt.
Offsetting this amount were certain unamortized loan costs totaling $73,208
relating to the Senior Notes which were written off as part of the early
refinancing. In addition, offsetting the net gain resulting from the
Senior Note refinancing was a prepayment penalty totaling $48,797 which the
Company incurred upon the early payment of an SBA loan which was secured by
a restaurant property sold during fiscal 1997.
INFLATION
The effects of inflation on the costs of labor, materials and supplies,
and plant and equipment have resulted in increased costs to the Company during
the past three years. Ongoing programs of cost control and elimination of
overhead expenses have helped to offset much of the impact of inflation.
Although the Company cannot determine the precise effect of inflation on
its business, the restaurant operations are believed to be the most
susceptible to the adverse effects of inflation as compared to other
divisions of the Company. This is due to price discounting which has
prevailed in the family and fast food restaurant segments throughout the
nation for the past three years, making it difficult to cover increased
cost by increasing menu prices.
FINANCIAL CONDITION
LIQUIDITY AND CAPITAL RESOURCES
The Company had net working capital of $2,901,000 at February 28, 1997,
compared with $984,000 at February 23, 1996 and $904,000 at February 24,
1995. Approximately $733,000 of this increase is due to the refinancing
of the Senior Note obligations which occurred in fiscal 1997, and the
related reduction in current maturities of long-term debt. The remaining
increase in working capital is attributed to the improvement in operating
profits and the return to profitability which the Company experienced in
fiscal 1997.
The return to profitability also impacted the cash flow of the Company.
Net cash provided by operations totaled $2.9 million in fiscal 1997,
compared to net cash used in operations of $0.2 million in fiscal 1996.
Although net earnings for fiscal 1995 approximated the level for 1997, net
cash provided by operations only totaled $0.8 million for that year. This
is attributed to a reduction during fiscal 1995 in accounts payable to
certain vendors who provided the Company with extended credit terms in
fiscal 1994 to assist in the cash flow requirements necessary to bring a
major capital expansion of the bakery facility on line.
During fiscal 1997, the Company generated cash flow of approximately $8.1
million from the issuance of long-term debt, $6.9 million of which related
to the refinancing of the Senior Note Obligations. In addition, cash
received from the sale of assets, primarily underperforming restaurant
properties, and from the exercise of stock options totaled $2.2 million
and $0.7 million, respectively. Cash generated from these sources during
fiscal 1997 were used to fund repayments of long-term debt totaling $9.8
million and capital expenditures totaling $2.6 million.
During fiscal 1996, the Company generated cash flow of approximately $3.2
million from the sale of assets. Approximately $2.1 million resulted from
the sale of underperforming restaurant properties. The remaining $1.1
million was generated through the sale of certain notes receivable as
discussed in Note 19 to the consolidated financial statements. In
addition, the Company generated $1.0 million through short-term borrowings
and $500,000 by substituting a restaurant property as collateral for a
letter of credit previously secured by cash. Cash generated from these
sources in fiscal 1996 helped to fund principal payments on debt and
capital expenditures totaling $3.9 million and $1.6 million, respectively.
During fiscal 1995, the Company generated cash of approximately $3.7
million from the sale of assets, and used this amount to help fund
repayments of long-term debt totaling $3.4 million and capital expenditures
of approximately $1.2 million.
For fiscal 1998, management feels that continued profitable operations
and the sales of additional under performing properties will satisfy the cash
and working capital needs of the Company. At February 28, 1997, the
Company had $3.3 million in real estate held for sale. The real estate
environment in the Southeastern United States has allowed the Company to
successfully dispose of several excess properties during the past few
years, and the Company views these remaining properties as a valuable
source of future working capital. In addition, the refinancing of the
Senior Notes which occurred in fiscal 1997 has added financial flexibility
to the Company through reductions in annual principal and interest
payments.
The Company further believes that revenues from operations, together
with available sources of financing, will be sufficient to provide the
necessary long-term capital resources required to fund the Company's capital
requirements for the coming three years.
<TABLE>
WSMP, INC., AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Fiscal Years ended February 28, 1997, February 23, 1996
-------------------------------------------------------
and February 24, 1995
---------------------
<CAPTION>
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
Operating revenues:
Food sales (note 15) $85,070,341 $76,582,926 $91,231,774
Franchise, royalty and other fees
(note 19 - includes related party
transactions totaling $923,000 in 1997,
$1,079,000 in 1996, and $1,044,000 in 1995) 2,682,732 2,856,284 2,868,199
----------- ------------ -----------
Total operating revenues 87,753,073 79,439,210 94,099,973
----------- ------------ -----------
Costs and expenses:
Cost of goods sold (note 19 - includes related
party transactions totaling $513,000 in 1997,
$474,000 in 1996, and $506,000 in 1995) 63,680,524 56,743,742 66,275,140
Operating expenses (note 19 - includes related
party transactions totaling $706,000 in 1997,
$825,000 in 1996, and $883,000 in 1995) 11,924,356 12,775,983 14,530,232
Selling, general and administrative expenses
(note 19 - includes related party
transactions totaling $2,014,000 in 1997,
$2,320,000 in 1996, and $2,236,000 in 1995) 7,898,182 7,906,971 8,171,310
Depreciation and amortization 2,624,490 2,715,271 2,878,624
----------- ------------ -----------
Total costs and expenses 86,127,552 80,141,967 91,855,306
----------- ------------ -----------
Operating income (loss) 1,625,521 (702,757) 2,244,667
----------- ------------ -----------
Other income (expense):
Other income (including interest) (note 19 -
includes related party transactions
totaling $167,000 in 1997, $192,000 in 1996,
and $189,000 in 1995) 1,046,219 809,737 949,208
Net gain on dispositions of assets (net of
write-downs) (note 19 - includes gains (losses)
on sales of assets to related parties totaling
$353,000 in 1997, $(360,000) in 1996, and
$128,000 in 1995) 758,646 220,199 940,091
Net gain on sale of restricted equity securities
to related party (note 19) 541,831
Equity in earnings (loss) of affiliates (107,000) (338,366) 115,000
Interest expense (1,822,339) (2,011,567) (1,993,094)
Other expense (note 19 - includes related party
transactions totaling $99,000 in 1997, $80,000
in 1996 and $153,000 in 1995) (871,388) (688,580) (747,471)
----------- ------------ -----------
Net other expense (454,031) (2,008,577) (736,266)
----------- ------------ -----------
Earnings (loss) before income taxes and
extraordinary item 1,171,490 (2,711,334) 1,508,401
----------- ------------ -----------
Provision for income taxes (benefit) (note 10):
Current 60,401 (104,843) 490,064
Deferred 405,177 (1,111,502) (78,333)
----------- ------------ -----------
Total provision for income taxes (benefit) 465,578 (1,216,345) 411,731
----------- ------------ -----------
Earnings (loss) before extraordinary item 705,912 (1,494,989) 1,096,670
Extraordinary gain from early extinquishment of
debt (net of income taxes of $250,862) (note 7) 414,784
----------- ------------ -----------
Net earnings (loss) $ 1,120,696 $(1,494,989) $ 1,096,670
=========== ============ ===========
Earnings (loss) per common and common equivalent
share (note 1):
Earnings (loss) before extraordinary item $ .23 $ (.55) $ .38
Extraordinary gain from early extinguishment
of debt .13
----------- ----------- -----------
Net earnings (loss) $ .36 $ (.55) $ .38
=========== =========== ===========
Earnings (loss) per common share - assuming full
dilution (note 1):
Earnings (loss) before extraordinary item $ .22 $ (.55) $ .38
Extraordinary gain from early extinguishment
of debt .13
----------- ----------- -----------
Net earnings (loss) $ .35 $ (.55) $ .38
=========== =========== ===========
<FN>
See accompanying notes to consolidated financial statements.
</TABLE>
WSMP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
February 28, 1997 and February 23, 1996
- ---------------------------------------
ASSETS
- ------
1997 1996
Current Assets: ----------- -----------
Cash and cash equivalents $ 2,424,982 $ 430,311
Marketable equity securities
(at fair value; cost of:
1997 - $155,768 and 1996 - $140,555) 171,910 148,997
Accounts receivable, net:
Trade and others (notes 2 and 6) 3,206,256 3,341,871
Related party (notes 2 and 19) 254,744 484,951
Current portion of notes receivable, net:
Related party (notes 2 and 19) 563,644 772,329
Other (note 2) 409,996 639,692
Inventories (notes 3 and 6) 6,210,990 5,553,641
Prepaid expenses and other 371,267 486,128
Deferred income taxes (note 10) 454,259 518,490
----------- -----------
Total current assets 14,068,048 12,376,410
----------- -----------
Property, Plant and Equipment,
net (notes 4 and 7) 22,952,785 25,288,033
----------- -----------
Other Assets:
Properties held for sale (notes 5 and 7) 3,277,670 1,569,752
Excess of cost over fair value of net
assets of businesses acquired,
net (note 14) 628,186 662,321
Noncurrent notes receivable (note 2) 470,345 204,941
Noncurrent related party notes receivable
(notes 2 and 19) 963,117 515,944
Investment in affiliates (note 16) 374,533 381,533
Investment in restricted equity
securities (notes 16 and 19) 242,050
Other 391,916 393,390
----------- -----------
Total other assets 6,105,767 3,969,931
----------- -----------
Total assets $43,126,600 $41,634,374
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
- ------------------------------------
1997 1996
----------- -----------
Current Liabilities:
Notes payable-bank (note 6) $ 4,027,776 $ 4,000,000
Current installments of long-term
debt (note 7) 1,297,792 2,030,953
Trade accounts payable 2,879,309 2,810,229
Other accrued liabilities (note 9) 2,962,471 2,550,872
----------- -----------
Total current liabilities 11,167,348 11,392,054
Deferred franchise fees 5,000
Deferred income taxes (note 10) 1,247,504 903,639
Long-term debt, excluding current
installments (note 7) 12,422,150 12,890,060
----------- -----------
Total liabilities 24,837,002 25,190,753
----------- -----------
Commitments and Contingencies (notes 11 and 17)
Shareholders' Equity (notes 7, 13, and 20):
Preferred stock - par value $.10,
authorized 2,500,000 shares; no shares
issued
Common stock - par value $1, authorized
10,000,000 shares; issued:
1997 - 2,919,088 and 1996 - 2,760,338
shares 2,919,088 2,760,338
Capital in excess of par value 7,141,097 6,579,347
Unrealized gain on securities available
for sale 10,059 5,278
Retained earnings 8,219,354 7,098,658
----------- -----------
Total shareholders' equity 18,289,598 16,443,621
----------- -----------
Total liabilities and
shareholders' equity $43,126,600 $41,634,374
=========== ===========
See accompanying notes to consolidated financial statements
<TABLE>
WSMP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Fiscal Years Ended February 28, 1997, February 23, 1996
-------------------------------------------------------
and February 24, 1995
---------------------
<CAPTION>
Unrealized
Gain (Loss)
Capital in on Securities
Common Excess of Available Retained
Stock Par Value For Sale Earnings
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Balance at February 25, 1994 $ 2,133,489 $ 6,419,972 $ 8,030,604
Net earnings 1,096,670
Common stock purchased and
retired (5,000 shares) (note 20) (5,000) (30,625)
Five-for-four stock split effected in the form of
a 25% stock dividend (note 20):
Shares issued 531,849 (531,849)
Fractional shares payable in cash (1,778)
Unrealized loss on securities available for
sale $ (5,214)
------------- ------------- ------------- -------------
Balance at February 24, 1995 2,660,338 6,389,347 (5,214) 8,593,647
Net loss (1,494,989)
Common stock options exercised (100,000
shares) (note 13) 100,000 190,000
Unrealized gain on securities available for
sale 10,492
------------- ------------- ------------- -------------
Balance at February 23, 1996 2,760,338 6,579,347 5,278 7,098,658
Net earnings 1,120,696
Common stock options exercised (158,750
shares) (note 13) 158,750 561,750
Unrealized gain on securities available for
sale 4,781
------------- ------------- ------------- -------------
Balance at February 28, 1997 $ 2,919,088 $ 7,141,097 $ 10,059 $ 8,219,354
============= ============= ============= =============
<FN>
See accompanying notes to consolidated financial statements.
</TABLE>
<TABLE>
WSMP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Fiscal Years Ended February 28, 1997, February 23, 1996
- -------------------------------------------------------
and February 24, 1995
---------------------
<CAPTION>
1997 1996 1995
------------- ----------- -----------
<S> <C> <C> <C>
Cash Flows From Operating Activities:
Net earnings (loss) $ 1,120,696 $(1,494,989) $ 1,096,670
------------- ----------- -----------
Adjustments to reconcile net earnings (loss) to net cash
provided by (used in) operating activities:
Extraordinary gain on extinguishment of debt
(before effect of income taxes) (note 7) (665,646)
Net gain of sale of restricted equity securities to
related party (541,831)
Depreciation and amortization 2,624,490 2,715,271 2,878,624
Depreciation of properties leased to others 293,894 282,104 379,599
Deferred income taxes 405,177 (1,111,502) (78,333)
Net gain on disposition of assets (net of write-downs) (758,646) (220,199) (940,091)
Provision for losses on receivables 223,358 216,039 430,128
Equity in loss (earnings) of affiliates 107,000 338,366 (115,000)
Other non-cash adjustments to earnings (183,475) 152,598 (90,679)
Changes in operating assets and liabilities (net of
effects from purchase of restaurant companies)
providing (using) cash:
Receivables 335,383 49,830 (848,883)
Inventories (657,349) (427,306) (627,401)
Income taxes refundable, prepaid expenses
and other assets 114,862 (247,472) (4,598)
Trade accounts payable 69,080 (206,547) (1,396,535)
Other accrued liabilities 371,599 (262,280) 113,428
------------- ----------- -----------
Total adjustments 1,737,896 1,278,902 (299,741)
------------- ----------- -----------
Net cash provided by (used in ) operating activities 2,858,592 (216,087) 796,929
------------- ----------- -----------
Cash Flows From Investing Activities:
Capital expenditures to related parties (416,415) (325,210) (386,359)
Capital expenditures - other (2,232,688) (1,278,677) (807,489)
Proceeds from sale of assets to related parties 1,013,388 1,079,955 623,734
Proceeds from sales of assets to others 1,208,447 2,087,983 3,082,789
Deposits, net of refunds 47,942 (121,554) (12,581)
Decrease (increase) in marketable equity securities (15,213) (11,425) 36,528
Decrease in related party notes receivable 289,913 203,874 417,574
Decrease (increase) in other notes receivable 220,164 287,897 (1,635)
Other investing activities, net (92,322) (175,539) (292,251)
------------- ------------ -----------
Net cash provided by investing activities 23,216 1,747,304 2,660,310
------------- ------------ -----------
Cash Flows From Financing Activities:
Net proceeds (repayments) under short-term
borrowing agreements 27,776 1,000,000 (375,000)
Proceeds from issuance of long-term debt 8,125,000 85,000 250,000
Principal payments on long-term debt (9,760,413) (3,916,026) (3,364,013)
Cash restricted for secured letter of
credit (note 17) 500,000 (500,000)
Proceeds from exercise of stock options 720,500 290,000
Acquisition of treasury stock (35,625)
------------- ------------ -----------
Net cash used in financing activities (887,137) (2,041,026) (4,024,638)
------------- ------------ -----------
Net increase (decrease) in cash and cash equivalents 1,994,671 (509,809) (567,399)
Cash and cash equivalents at beginning of year 430,311 940,120 1,507,519
------------- ------------ -----------
Cash and cash equivalents at end of year $ 2,424,982 $ 430,311 $ 940,120
============= ============ ===========
<FN>
See accompanying notes to consolidated financial statements.
</TABLE>
WSMP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Fiscal Years Ended February 28, 1997, February 23, 1996, and February 24, 1995
------------------------------------------------------------------------------
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
PRINCIPLES OF CONSOLIDATION - The consolidated financial statements
include the accounts of WSMP, Inc. and subsidiaries (the Company) in which it
has an ownership percentage greater than 50%. These subsidiaries, all of
which are 100% owned, unless otherwise indicated, are as follows:
Brunswick Assoc., Inc. Price Food Systems, LLC (80%)
D&S Foods, LLC (60%) Prime Sirloin, Inc.
Elloree Foods, Inc. Seven Stars, Inc.
Georgia WSMP, Inc. South Carolina WSMP, Inc.
Greenville Food Systems, Inc. St. Augustine Foods, Inc. (80%)
Kentucky WSMP, Inc. Sunshine WSMP, Inc.
Matthews Prime Sirloin, Inc. Tennessee WSMP, Inc.
Naples Foods, Inc. (55%) Virginia WSMP, Inc.
All significant intercompany accounts and transactions are eliminated in
consolidation.
FINANCIAL STATEMENT PRESENTATION - Financial statements for fiscal 1996
and 1995 have been reclassified, where applicable, to conform to the financial
statement presentations used in fiscal 1997.
FISCAL YEAR - The Company's fiscal year ends on the last Friday in
February. Fiscal year 1997 represents a fifty-three week period. Fiscal
years 1996 and 1995 represent fifty-two week periods.
CASH AND CASH EQUIVALENTS - The Company considers all highly liquid
investments purchased with an original maturity of three months or less to be
cash equivalents.
INVESTMENTS - The Company classifies its investments in debt and equity
securities as available-for-sale. Securities classified as available-for-
sale are carried at fair market value with unrealized gains and losses
excluded from earnings but shown as a separate component of shareholders'
equity. All investments of the Company are comprised of marketable equity
securities held in broker managed accounts. Realized and unrealized gains
and losses on investments were not significant in fiscal 1997, 1996 and 1995.
INVENTORIES - Inventories are stated at the lower of cost (first-in,
first-out) or market.
PROPERTY, PLANT AND EQUIPMENT - Property, plant and equipment are stated
at cost. Expenditures for maintenance and repairs which do not significantly
extend useful lives of assets are charged to earnings whereas additions and
betterments, including interest costs incurred during construction, are
capitalized. Gains and losses on dispositions are reflected in other income
except for gains on traded properties which are reflected in the basis of the
new asset.
Depreciation of property, plant and equipment is provided over the estimated
useful lives of the respective assets on the straight-line basis. Leasehold
improvements are depreciated over the shorter of their estimated useful lives
or terms of the respective leases. Property under capital leases is
amortized in accordance with the Company's normal depreciation policy.
Depreciation on properties leased to others is combined with other expenses
related to rental income and reported as other expense.
The Company evaluates its long-lived assets used in operations for indicators
of impairment and, if found, calculates the undiscounted cash flows estimated
to be generated by those assets. If the cash flows are less than the assets'
carrying amount, the Company records an impairment loss for the difference
between the carrying amount and estimated fair value. See Note 5 with regard
to assets to be disposed of.
INTANGIBLE ASSETS - The excess of cost over fair value of net assets of
businesses acquired is being amortized on the straight-line method over
periods of fifteen and forty years ($162,113 over fifteen years and $933,100
over forty years as of February 28, 1997).
INVESTMENTS IN AFFILIATES - Investments in common stock of unconsolidated
affiliates are accounted for using the equity method.
COSTS AND EXPENSES - Cost of goods sold includes the direct and indirect
costs of tangible products sold by the food processing segment and the direct
costs of tangible products sold through restaurant operations. Operating
expenses include additional indirect costs such as labor, insurance and
occupancy costs, other than depreciation, associated with restaurant product
sales and other revenues. Selling, general and administrative expenses reflect
costs of marketing, selling and general administration not included in cost of
goods sold or operating expenses.
ADVERTISING COSTS - The Company expenses advertising costs as incurred.
Advertising expense for fiscal 1997, fiscal 1996 and fiscal 1995 was
$2,268,677, $2,183,076 and $2,175,206, respectively.
PREOPENING EXPENSES - Preopening expenses associated with new restaurant
openings are expensed as incurred.
INCOME TAXES - Income taxes are provided for temporary differences between
the tax and financial accounting basis of assets and liabilities using the
asset and liability method. The tax effects of such differences are reflected
in the balance sheet at the enacted tax rate applicable to the years when such
differences are scheduled to reverse. The effect on deferred taxes of a
change in tax rates is recognized in the period that includes the enactment
date.
FRANCHISE, ROYALTY AND OTHER FEES - Initial franchise fees are recognized
as revenue when substantially all of the services required of the Company by
the franchise agreement have been performed, which is generally the date the
franchised unit opens. Area franchise development fees are not recognized
until the developer exercises his option and opens a restaurant pursuant to
the area development agreement. At the time the Company has substantially
performed all obligations for initial service relating to the restaurant, the
Company recognizes the prorata portion of the fee allocated to the option to
develop that particular restaurant. Royalty and other fees are accrued as
earned based on franchisees' sales.
EARNINGS PER SHARE - Earnings per share is based on the weighted average
number of common shares and dilutive common equivalent shares outstanding
during each fiscal year. Common equivalent shares relate to outstanding stock
options. The weighted average number of shares used in the calculation of
earnings per common and common equivalent shares are 3,091,063 in fiscal 1997,
2,729,517 in fiscal 1996 and 2,879,021 in fiscal 1995. The weighted average
number of shares used in the calculation of earnings per common share -
assuming full dilution are 3,228,800 in fiscal 1997, 2,729,517 in fiscal 1996
and 2,953,286 in fiscal 1995.
USE OF ESTIMATES - The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date
of the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
NOTE 2 - ACCOUNTS AND NOTES RECEIVABLE:
Accounts and notes receivable are comprised of the following:
1997 1996
----------- -----------
Accounts receivable:
Trade accounts receivable (less allowance
for doubtful receivables of $35,000 in
1997 and $55,000 in 1996) $ 2,958,263 $ 3,020,818
Accounts receivable - franchisees (less
allowance for doubtful receivables of
$20,215 in 1997 and $252,814 in 1996) 247,993 321,053
Accounts receivable - related parties (less
allowance for doubtful receivables of
$62,500 in 1996) (See note 19) 254,744 484,951
----------- -----------
Total accounts receivable, net $ 3,461,000 $ 3,826,822
=========== ===========
Notes receivable - related parties; interest
rates 4.5% to 12% (See note 19) $ 1,526,761 $ 1,288,273
Less current portion 563,644 772,329
----------- -----------
Noncurrent related parties notes receivable $ 963,117 $ 515,944
=========== ===========
Notes receivable - other: interest rates 6%
to 12% (less allowance for doubtful
receivables of $58,323 in 1997 and $216,693
in 1996) $ 880,341 $ 844,633
Less current portion 409,996 639,692
----------- -----------
Noncurrent notes receivable $ 470,345 $ 204,941
=========== ===========
Noncurrent notes receivable have maturities ranging from 1997 to 2004.
Trade accounts receivable are generated by sales of the food processing
segment and have terms ranging between fourteen and thirty days. A
concentration of receivables exists relating to one Bakery customer which
accounted for 61.4% and 57.5% of the food processing segment sales in fiscal
1997 and 1996, respectively. Receivables from this customer totaled
$1,392,622 and $1,366,216 and represent 46.5% and 44.4% of the total at
February 28, 1997 and at February 23, 1996, respectively.
An analysis of the allowance for doubtful notes and accounts receivable is
as follows:
Balance at Additions Charged
Fiscal Year Beginning to Costs and (1) Balance at
Ended of Year Expenses Deductions End of Year
- ------------- ------------- ----------------- ------------- ------------
1997 $ 587,007 $ 223,358 $ 696,827 $ 113,538
1996 $ 542,000 $ 216,039 $ 171,032 $ 587,007
1995 $ 440,000 $ 430,128 $ 328,128 $ 542,000
(1) Uncollectible receivables charged against the allowance.
NOTE 3 - INVENTORIES:
A summary of inventories, by major classification, follows:
1997 1996
----------- -----------
Hams in curing process $ 1,734,178 $ 1,326,420
Other food (includes cured hams) 2,716,670 2,818,418
Supplies 1,760,142 1,408,803
----------- -----------
Totals $ 6,210,990 $ 5,553,641
=========== ===========
NOTE 4 - PROPERTY, PLANT AND EQUIPMENT:
The major components of property, plant and equipment are as follows:
Estimated
Useful Life 1997 1996
----------- ----------- -----------
Land $ 4,182,979 $ 5,204,997
Land improvements 10 years 1,095,487 1,378,849
Buildings 20-40 years 15,145,307 16,523,205
Leasehold improvements 5-20 years 1,461,722 1,274,897
Machinery and equipment 5-15 years 16,279,383 15,650,598
Machinery and equipment
under capital leases 5-15 years 972,939 1,065,925
Furniture and fixtures 5-10 years 3,838,556 3,946,543
Automotive equipment 2-5 years 597,586 626,492
Construction in progress 22,791 313,110
----------- -----------
Totals 43,596,750 45,984,616
Less accumulated depreciation 20,643,965 20,696,583
----------- -----------
Property, plant and equipment, net $22,952,785 $25,288,033
=========== ===========
Depreciation and amortization expense of property, plant and equipment
was $2,874,250, $2,960,325 and $3,198,638 for fiscal 1997, 1996 and 1995,
respectively. Accumulated depreciation applicable to property under
capital leases was $105,355, $544,391 and $445,066 for fiscal 1997, 1996
and 1995, respectively. Approximately $5,998 in interest costs were
capitalized in fiscal 1996. No interest costs were capitalized in fiscal
1997 and 1995.
NOTE 5 - PROPERTIES HELD FOR SALE:
During fiscal 1991, the Company began a restructuring of its owned
restaurant operations to improve profitability by, among other things,
updating restaurant formats and disposing of less profitable stores. As a
result of this restructuring, the Company has closed various stores and
transferred the related real properties, in addition to certain undeveloped
land holdings, from the classification of property, plant and equipment to
other assets as properties held for sale. The Company is selling these
properties as reasonable purchase offers are received. At February 28, 1997,
the Company had $3,277,670 in properties held for sale. These properties are
being carried at their estimated fair value less estimated selling costs.
NOTE 6 - SHORT -TERM NOTES PAYABLE:
On November 22, 1996, the Company entered into an agreement with a bank
to provide a $6,000,000 revolving credit facility which replaced the existing
$4,000,000 line of credit with another bank. This credit facility is secured
by a lien upon the Company's manufacturing inventory and receivables
(approximately $8,461,000 in the aggregate) and expires on November 22, 1998.
At February 28, 1997, $4,027,776 was outstanding under this facility.
The weighted average interest rate on short-term borrowings was 8.77%
and 9.36% at February 28, 1997 and February 23, 1996, respectively.
NOTE 7 - LONG-TERM DEBT:
Long-term debt is comprised of the following:
1997 1996
----------- -----------
10.0% Senior Notes payable to
insurance companies $ 9,062,249
Variable rate Industrial Revenue Bonds
maturing in 2005 $ 2,845,000 3,175,000
Prime plus 1% bank note maturing 2002 4,979,808
Prime plus 1% bank note maturing 1998 1,900,000
Prime plus 1/2% to 11/2% notes
payable to banks maturing 1998 to 2012 1,043,278 718,490
4.5% Settlement Notes maturing in 1998
(see note 19) 430,000 610,000
6.0% to 11.0% other notes payable
maturing 1998 to 2005 1,666,301 980,771
9.25% to 11.5% capitalized lease obligations
maturing in 1998 to 2004 (see note 11) 855,555 374,503
----------- -----------
Total long-term debt 13,719,942 14,921,013
Less current installments 1,297,792 2,030,953
----------- -----------
Long-term debt, excluding current
installments $12,422,150 $12,890,060
=========== ===========
The applicable prime interest rate at February 28, 1997 was 8.25%. The
variable rate payable on the Industrial Revenue Bonds at February 28, 1997
was 3.44%. At February 28, 1997, the net book value of the Company's
property, plant and equipment and properties held for sale pledged as
collateral under the above obligations was $21,301,185.
During fiscal 1997, the Company replaced its Senior Note obligations which
were scheduled to mature on October 1, 1997, with long-term note agreements
with two banks. One of the agreements provides financing in the amount of $5
million at a rate of prime plus 1% for a five year term with principal
payments to be made on a ten year amortization basis with a final balloon
payment on January 15, 2002. The second agreement provides financing of $1.9
million at a rate of prime plus 1% and is payable on December 30, 1998. The
notes are collateralized by deeds of trusts on certain real property which
previously collateralized the Senior Note obligations. In addition, the
Company is required to meet certain financial requirements regarding tangible
net worth, working capital, debt ratio and ratio of interest coverage.
During fiscal 1997, the Company recognized an extraordinary gain of
$414,784, net of income taxes of $250,862, on the early extinguishment of
debt. The two major life insurance companies which held the Senior Notes
agreed to a discount totaling $787,651 upon the early retirement of this
debt. In addition, as part of this refinancing, the Company wrote-off
unamortized loan costs relating to the Senior Notes totaling $73,208. Also
during fiscal 1997, the Company incurred a prepayment penalty totaling
$48,797 upon the early payment of an SBA loan which was secured by a
restaurant property which was sold during the year.
At February 28, 1997, the Company was not in compliance with certain
covenants relating to the Industrial Revenue Bonds and the newly acquired
term bank debt. These violations relate to the maximum amount of new debt
which can be incurred during a fiscal year. The Company has received
waivers of these violations from its lenders.
Long-term debt maturities, including capital leases (note 11), subsequent
to February 28, 1997 are as follows:
Fiscal Year Ending Amount
------------------ -----------
1998 $ 1,297,792
1999 4,069,566
2000 1,134,472
2001 1,172,281
2002 3,997,126
Later years 2,048,705
-----------
Total $13,719,942
===========
NOTE 8 - DISCLOSURES ABOUT FAIR VALUES OF FINANCIAL INSTRUMENTS:
The estimated fair values of the financial instruments listed below
have been determined by the Company using available market information and
appropriate valuation methodologies. However, considerable judgment is
necessarily required to interpret market data to develop the estimates of
fair value. Accordingly, the estimates presented herein are not necessarily
indicative of the amounts the Company could realize in a current market
exchange. The use of different market assumptions and/or estimation
methodologies may have a material effect on the estimated fair value amounts.
February 28, 1997
------------------------
Carrying
Amount Fair Value
----------- -----------
Assets:
Cash and Cash Equivalents $ 2,424,982 $ 2,424,982
Marketable Equity Securities 171,910 171,910
Accounts Receivable 3,461,000 3,461,000
Notes Receivable 2,407,102 2,524,859
Liabilities:
Accounts Payable 2,879,309 2,879,309
Short-Term Debt 4,027,776 4,027,776
Long-Term Debt (excluding
capital leases) 12,864,387 12,854,189
February 23, 1996
------------------------
Carrying
Amount Fair Value
----------- -----------
Assets:
Cash and Cash Equivalents $ 430,311 $ 430,311
Marketable Equity Securities 148,997 148,997
Accounts Receivable 3,826,822 3,826,822
Notes Receivable 2,132,906 2,047,913
Restricted Equity Securities 242,050 720,891
Liabilities:
Accounts Payable 2,810,229 2,810,229
Short-Term Debt 4,000,000 4,000,000
Long-Term Debt (excluding
capital leases) 14,546,510 14,488,742
The carrying amount of cash and cash equivalents, accounts receivable,
accounts payable, and short-term debt are a reasonable estimate of their fair
value.
Marketable equity securities are classified as available for sale and
carried at their fair value.
The fair value of notes receivable is estimated by discounting the future
cash flows using the current rates at which similar loans would be made to
borrowers with similar credit ratings and for the same remaining maturities.
The fair value of the restricted equity securities is based on the fair
value of non-restricted securities of the same class and issue which are
actively traded in the over-the-counter market.
Interest rates that are currently available to the Company for issuance of
debt with similar terms and remaining maturities are used to estimate fair
value for debt instruments using discounted cash flows.
NOTE 9 - OTHER ACCRUED LIABILITIES:
Other accrued liabilities are as follows:
1997 1996
----------- -----------
Accrued salaries and wages $ 520,388 $ 650,407
Accrued insurance claims 710,657 644,180
Taxes, other than income 426,337 323,059
Accrued interest 19,717 85,297
Gift certificates outstanding 304,185 331,955
Other 981,187 515,974
----------- -----------
Totals $ 2,962,471 $ 2,550,872
=========== ===========
NOTE 10 - INCOME TAXES:
The provision for income taxes (benefit) is summarized as follows:
1997 1996 1995
----------- ----------- -----------
Current:
Federal $ 25,616 $ (135,072) $ 421,663
State 34,785 30,229 68,401
----------- ----------- -----------
Total current 60,401 (104,843) 490,064
----------- ----------- -----------
Deferred:
Federal 377,569 (916,840) (102,544)
State 27,608 (194,662) 24,211
----------- ----------- -----------
Total deferred 405,177 (1,111,502) (78,333)
----------- ----------- -----------
Total provision for
income taxes (benefit) $ 465,578 $(1,216,345) $ 411,731
=========== =========== ===========
Actual provisions for income tax expense (benefit) are different from
amounts computed by applying a statutory federal income tax rate to earnings
(loss) before income taxes. The computed amount is reconciled to total
income tax expense (benefit) as follows:
<TABLE>
<CAPTION>
1997 1996 1995
------------------------ ------------------------ ------------------------
Percent Percent Percent
of Pretax of Pretax of Pretax
Amount Earnings Amount Loss Amount Earnings
----------- ---------- ----------- ---------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C>
Computed tax (benefit) at statutory
rate $ 398,307 34.0 $ (921,854) (34.0) $ 512,856 34.0
Tax effect resulting from:
State income taxes
net of federal tax benefit 26,826 2.3 (141,481) (5.2) 92,584 6.1
New general
business credits (net) (21,285) (1.8) (96,867) (3.6) (110,308) (7.3)
Permanent differences 32,548 2.8 9,978 .4 (8,992) (.6)
Tax benefit of pre-acquisition
(SRLY) losses utilized (22,390) (.8) (82,307) (5.4)
Other 29,182 2.4 (43,731) (1.6) 7,898 .5
----------- ---------- ----------- ---------- ----------- ----------
Provision for income taxes (benefit) $ 465,578 39.7 $(1,216,345) (44.8) $ 411,731 27.3
=========== ========== =========== ========== =========== ==========
</TABLE>
The approximate tax effect of each type of temporary difference and
carryforward that gave rise to the Company's deferred income tax assets and
liabilities for fiscal 1997 and 1996:
<TABLE>
<CAPTION>
1997 1996
--------------------------------------- ---------------------------------------
Assets Liabilities Total Assets Liabilities Total
----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Current:
Allowance for doubtful
receivables $ 42,789 $ 42,789 $ 219,994 $ 219,994
Inventory 67,226 67,226 59,904 59,904
Accrued promotional
expense 67,836 67,836 9,788 9,788
Accrued bonus 13,701 13,701
Accrued vacation pay 51,254 51,254 46,847 46,847
Reserve for returns 60,299 60,299 56,216 56,216
Installment sales $ (93,748) (93,748) $ (133,704) (133,704)
Unrealized gain on securities
available-for-sale (6,083) (6,083) (3,164) (3,164)
State loss carryforward 139,686 139,686 123,908 123,908
General business
credit carryforward 125,000 125,000 125,000 125,000
----------- ----------- ----------- ----------- ----------- -----------
Total current $ 554,090 $ (99,831) $ 454,259 $ 655,358 $ (136,868) $ 518,490
=========== =========== =========== =========== =========== ===========
1997 1996
--------------------------------------- ---------------------------------------
Assets Liabilities Total Assets Liabilities Total
----------- ----------- ----------- ----------- ----------- -----------
Noncurrent:
Property, plant and
equipment $(1,781,168) $(1,781,168) $(1,806,103) $(1,806,103)
Writedown of property
held for sale $ 54,646 54,646 $ 54,342 54,342
Earnings in
unconsolidated
subsidiaries (21,105) (21,105) 175,156 175,156
Restricted marketable
equity securities 58,269 58,269
Deferred franchise fees 1,874 1,874
General business credit
carryforward 206,351 206,351 365,732 365,732
Alternative minimum
tax credit carryforward 293,771 293,771 247,092 247,092
Federal loss
carryforward 107,668 107,668 45,033 45,033
Pre-acquisition (SRLY)
loss carryforward 57,184 57,184 89,544 89,544
State loss carryforward 335,800 335,800 393,162 393,162
Less valuation allowance (500,651) (500,651) (527,740) (527,740)
----------- ----------- ----------- ----------- ----------- -----------
Total noncurrent $ 554,769 $(1,802,273) $(1,247,504) $ 902,464 $(1,806,103) $ (903,639)
=========== =========== =========== =========== =========== ===========
Total current and
noncurrent $ 1,108,859 $(1,902,104) $ (793,245) $ 1,557,822 $(1,942,971) $ (385,149)
=========== =========== =========== =========== =========== ===========
</TABLE>
As of February 28, 1997, operating loss carryovers of approximately
$7,600,000 are available to offset future taxable income in various states.
The carryover periods range from five to fifteen years which will result in
expirations of varying amounts beginning in fiscal 1998 and continuing
through fiscal 2012.
Various credits and loss carryforwards also exist to offset future
federal income taxes. As of February 28, 1997, alternative minimum tax
credit carryovers are approximately $294,000 and general business credit
carryforwards are approximately $331,000. The general business credits will
expire in varying amounts beginning in fiscal 2007. In addition, pre-
acquisition (SRLY) loss carryforwards of approximately $57,200 are available
to offset future taxable income of certain consolidated subsidiaries and
expire in varying amounts beginning in fiscal 2002.
NOTE 11 - LEASED PROPERTIES:
Six of the Company's restaurant locations are operated in leased premises.
The related leases are classified as operating leases and their terms are
effective for varying periods until 2007, except for one lease for land which
expires in 2022. Most contain terms that provide for a modest increase in
rental payments at specified intervals within the lease term.
As of February 28, 1997, future minimum rental payments required under
these leases and under capital leases, which are for machinery and equipment,
are summarized as follows:
Operating Leases
------------------------------------
Minimum
Fiscal Year Minimum Sublease Capital
Ending Payments Receipts Total Leases Total
- ----------- ---------- ---------- ---------- ---------- ----------
1998 $ 764,902 $ 199,760 $ 565,142 $ 267,901 $ 833,043
1999 759,510 199,760 559,750 263,526 823,276
2000 616,620 199,760 416,860 215,401 632,261
2001 417,921 169,000 248,921 175,521 424,442
2002 382,300 169,000 213,300 73,407 286,707
2003-2007 1,607,583 760,583 847,000 92,378 939,378
2008-2012 150,000 150,000 150,000
2013-2017 60,000 60,000 60,000
Later years 70,150 70,150 70,150
---------- ---------- ---------- ---------- ----------
Total minimum
lease payments $4,828,986 $1,697,863 $3,131,123 1,088,134 $4,219,257
========== ========== ========== ==========
Less amount representing interest 232,579
----------
Present value of minimum lease
payments under capital leases (see note 7) $ 855,555
==========
Rental expenses charged to earnings are as follows:
` 1997 1996 1995
----------- ----------- -----------
Real estate $ 826,029 $ 923,442 $ 1,061,057
Less sublease rentals (199,760) (202,760) (227,148)
Equipment 290,312 211,349 196,673
----------- ----------- -----------
Totals $ 916,581 $ 932,031 $ 1,030,582
=========== =========== ===========
NOTE 12 - EMPLOYEE BENEFITS:
On March 1, 1994, the Company established an employee stock purchase plan
through which employees, after meeting minimum eligibility requirements, may
contribute up to 10% of their base earnings toward the purchase of the
Company's common stock. The plan provides that the Company will make
matching contributions of 25% of the employee's contribution. Participation
in the plan is voluntary and all contributions of the Company are funded
monthly and vest immediately. The Company's contributions to the plan
totaled $12,569, $17,046 and $10,091 in fiscal 1997, 1996 and 1995,
respectively. The Company also maintains a 401-k Retirement Plan for its
employees. The Plan provides that the Company will make a matching
contribution of up to 25% of an employee's voluntary contribution, limited to
the lesser of 8% of that employee's annual compensation or $9,500 for fiscal
1997. The Company's contributions to this Plan were $77,132, $71,340 and
$67,869 in fiscal 1997, 1996 and 1995, respectively. The Company also
provides employee health insurance benefits under a 501-c(9) trust
arrangement. These benefits are partially self-funded by the Company. The
Company has $45,000 per claim and $1,000,000 annual aggregate stop loss
coverage on group medical claims with an insurance carrier. A third-party
administrator handles all claims. Company contributions to this plan were
$434,648, $466,116 and $388,488 in fiscal 1997, 1996 and 1995, respectively.
Certain officers of the Company are trustees of the stock purchase plan, the
retirement plan and the employee health plan.
The Company also has two Employee Stock Option Plans as described in Note
13.
NOTE 13 - EMPLOYEE STOCK OPTIONS:
The Company's 1987 Incentive Stock Option Plan provides for the issuance
of up to 625,000 shares of common stock to key employees, including officers,
of the Company. The Company may grant Incentive Stock Options ("ISOs") or
nonqualified stock options to eligible employees.
The Company's 1987 Special Stock Option Plan, as amended, provides for the
issuance of up to 625,000 shares of common stock to key management employees,
including officers of the Company. All options granted under this Plan are
nonqualified stock options. During fiscal 1994, options for 100,000 shares
were repriced from $9.50 to the fair market value at the date of repricing.
All options must be granted at not less than 100% of the fair market
value of the common stock at the date of the grant and must be exercised no
later than ten years from the date of grant.
A summary of the changes in shares under option and the weighted-average
exercise prices for both Plans follows. The number of shares and exercise
prices give retroactive recognition of the five-for-four stock split, effected
in the form of a stock dividend declared in 1995.
<TABLE>
<CAPTION>
Incentive Stock Special Stock
Option Plan Option Plan
----------------------- -----------------------
Weighted Weighted
Average Average
Exercise Exercise
Shares Price Shares Price
----------- --------- ----------- ---------
<S> <C> <C> <C> <C>
Balance at February 25, 1994 125,000 $ 2.90 562,500 $ 3.41
Cancelled (12,500) $ 2.90
Issued 196,875 $ 4.82
----------- -----------
Balance at February 24, 1995 309,375 $ 4.12 562,500 $ 3.41
Cancelled (12,500) $ 2.90
Exercised (100,000) $ 2.90
----------- -----------
Balance at February 23, 1996 196,875 $ 4.82 562,500 $ 3.41
Cancelled (10,000) $ 5.20
Issued 50,000 $ 5.88 50,000 $ 5.88
Exercised (33,750) $ 4.31 (125,000) $ 4.60
----------- -----------
Balance at February 28, 1997 203,125 $ 5.14 487,500 $ 3.36
=========== ===========
Exercisable at February 28, 1997 42,500 $ 5.20 487,500 $ 3.36
=========== ===========
</TABLE>
A summary of the range of exercise prices and weighted average remaining
life for options outstanding under each Plan at February 28, 1997 is as
follows:
Average
Exercise Shares Remaining
Price Outstanding Life
---------- ----------- ----------
Special Stock Option Plan: $ 2.90 187,500 46 months
$ 3.20 250,000 56 months
$ 5.88 50,000 112 months
Incentive Stock Option Plan: $ 4.00 37,500 87 months
$ 5.20 115,625 96 months
$ 5.88 50,000 112 months
The Company applies APB Opinion No. 25, "Accounting for Stock Issued to
Employees," and related interpretations in accounting for its stock option
plans. Accordingly, no compensation expense has been recognized for stock-
based compensation relating to options granted in fiscal 1997 since the option
price of the stock approximated the fair market value on the date
of grant. No stock options were granted in fiscal 1996. Had compensation for
fiscal 1997 stock options granted been determined consistent with Statement of
Financial Accounting Standards No. 123 (SFAS 123), "Accounting for Stock-Based
Compensation," the Company's net earnings and earnings per common share
amounts for Fiscal 1997 would approximate the following proforma amounts:
As Reported Proforma
------------ -----------
Net Earnings $ 1,120,696 $ 987,172
Earnings per Common & Common Equivalent Share $ .36 $ .32
Earnings per Common Share - Assuming $ .35 $ .31
Full Dilution
The fair value of each option granted during Fiscal 1997 is estimated as
$3.90 on the date of grant using the Black-Scholes option-pricing model with
the following assumptions: expected volatility of 44.2%; no expected dividend
yield; risk-free interest rate of 6.65%; and and expected life of six
years. The effects of applying SFAS 123 in this proforma disclosure are not
indicative of future amounts.
NOTE 14 - OTHER INFORMATION:
Accumulated amortization of intangible assets is as follows:
1997 1996
--------- ---------
Excess of cost over fair value of net
assets of businesses acquired $ 467,028 $ 432,892
NOTE 15 - LINES OF BUSINESS:
The Company operates in three principal lines of business. Segment
information is presented as follows:
<TABLE>
<CAPTION>
1997 1996 1995
-------------------- -------------------- --------------------
Amount Percent Amount Percent Amount Percent
----------- ------- ----------- ------- ----------- -------
<S> <C> <C> <C> <C> <C> <C>
Revenues:
Restaurant operations $26,454,848 30.1 $25,714,219 32.4 $28,895,738 30.7
Food processing 58,872,627 67.1 51,085,716 64.3 62,563,395 66.5
Restaurant franchising 2,682,732 3.1 2,856,284 3.6 2,868,199 3.0
----------- ------- ----------- ------- ----------- -------
88,010,207 100.3 79,656,219 100.3 94,327,332 100.2
Elimination of inter-
segment sales (1) (257,134) (.3) (217,009) (.3) (227,359) (.2)
----------- ------- ----------- ------- ----------- -------
$87,753,073 100.0 $79,439,210 100.0 $94,099,973 100.0
=========== ======= =========== ======= =========== =======
Operating profit:
Restaurant operations $ 2,877,253 45.1 $ 1,063,137 29.2 $ 1,649,443 23.4
Food processing 1,845,188 28.9 778,407 21.4 4,110,751 58.4
Restaurant franchising 1,660,285 26.0 1,799,409 49.4 1,278,794 18.2
----------- ------- ----------- ------- ----------- -------
6,382,726 100.0 3,640,953 100.0 7,038,988 100.0
======= ======= =======
Corporate expenses (4,757,205) (4,343,710) (4,794,321)
Other income 1,368,308 2,990 1,256,828
Interest expense (1,822,339) (2,011,567) (1,993,094)
----------- ----------- -----------
Earnings (loss) before
income taxes and
extraordinary item $ 1,171,490 $(2,711,334) $ 1,508,401
=========== =========== ===========
Identifiable assets:
Restaurant operations $12,421,474 28.8 $15,423,186 37.0 $18,115,517 38.8
Food processing 22,094,616 51.2 18,809,910 45.2 19,646,658 42.0
Restaurant franchising 611,816 1.4 608,775 1.5 688,049 1.5
Corporate 7,998,694 18.6 6,792,503 16.3 8,271,177 17.7
----------- ------- ----------- ------- ----------- -------
$43,126,600 100.0 $41,634,374 100.0 $46,721,401 100.0
=========== ======= =========== ======= =========== =======
Depreciation and amortization:
Restaurant operations $ 1,131,061 43.1 $ 1,228,662 45.3 $ 1,316,636 45.7
Food processing 1,259,365 48.0 1,256,931 46.3 1,314,001 45.7
Restaurant franchising 37,149 1.4 38,079 1.4 38,082 1.3
Corporate 196,915 7.5 191,599 7.0 209,905 7.3
----------- ------- ----------- ------- ----------- -------
$ 2,624,490 100.0 $ 2,715,271 100.0 $ 2,878,624 100.0
=========== ======= =========== ======= =========== =======
Capital expenditures:
Restaurant operations $ 2,850,664 61.8 $ 950,576 50.5 $ 574,272 47.5
Food processing 1,573,575 34.1 774,615 41.1 368,497 30.5
Restaurant franchising 50,550 4.2
Corporate 185,287 4.1 157,337 8.4 214,876 17.8
----------- ------- ----------- ------- ----------- -------
$ 4,609,526 100.0 $ 1,882,528 100.0 $ 1,208,195 100.0
=========== ======= =========== ======= =========== =======
<FN>
(1) Intersegment sales are recorded based on prevailing prices and relate
solely to the food processing segment.
</TABLE>
During fiscal 1997, 1996 and 1995, a single customer of the Company's
bakery products accounted for 61%, 57% and 63%, respectively, of the food
processing segment sales and 41%, 37% and 42%, respectively, of the Company's
total operating revenues.
NOTE 16 - INVESTMENT IN AFFILIATES:
During fiscal 1997, 1996 and 1995, the Company maintained investments in
several companies which operate Prime Sirloin restaurants, Sagebrush
Steakhouse & Saloons, Mom `n' Pop's Buffet & Bakery restaurants, Western
Steer Family Restaurants and Bennett's Smokehouse & Saloons. All of the
companies are accounted for under the equity method. Names of these
companies and percentages of ownership are as follows:
<TABLE>
<CAPTION>
Percentage Owned Percentage Owned Percentage Owned
at February 28, 1997 at February 23, 1996 at February 24, 1995
-------------------- -------------------- --------------------
<S> <C> <C> <C>
Georgia Buffet Restaurants, Inc. 50% 50% 50%
Greenville Foods, Inc. --- 50% 50%
Knoxville Foods, Inc. --- --- 50%
Primo Foods, Inc. 50% 50% 50%
Sagebrush of Asheville, Inc. --- --- 50%
Sagebrush of Rock Hill, Inc. --- --- 50%
Spartanburg Foods, Inc. --- 50% 50%
Starke Foods, Inc. 50% 50% 50%
</TABLE>
Summarized financial information for the above companies is as follows:
1997 1996 1995
----------- ----------- -----------
Current Assets $ 300,576 $ 345,227 $ 476,187
Noncurrent Assets 1,419,930 2,222,646 2,181,774
Current Liabilities 597,738 1,664,067 1,559,115
Noncurrent Liabilities 415,371 185,017 76,577
Operating Revenue 5,190,358 8,640,624 9,566,779
Gross Profit 3,076,669 5,000,389 5,686,828
Net Earnings (loss) 53,469 (828,279) 173,298
Dividends received from these companies totaled $91,000 and $143,500 in
fiscal 1996 and 1995, respectively. No dividends were received in fiscal
1997.
At the beginning of fiscal 1996, the Company owned 50% of three corp-
orations (Knoxville Foods, Inc., Sagebrush of Asheville, Inc. and Sagebrush of
Rock Hill, Inc.) which operated Sagebrush Steakhouse and Saloon restaurants.
In January 1996, a reorganization was effected for these corporations
immediately prior to an initial public offering of common stock by Sagebrush,
Inc. As part of this reorganization, the Company exchanged to Sagebrush,
Inc. its shares of common stock in these three corporations for cash totaling
$87,098 and 111,983 shares of Sagebrush, Inc., common stock. These shares of
stock are designated restricted securities and their resale is subject to the
conditions and limitations of Rule 144 of the Securities Act. This
transaction was accounted for as a like-kind exchange and a gain of $59,648
was recognized based on the book value of the equity investments in the three
50% owned corporations at the transaction date, the total fair value of the
stock and cash received, and the percentage of the total proceeds received in
cash. The restricted shares of common stock in Sagebrush, Inc. are shown
separately on the face of the balance sheet at February 23, 1996 as
"Investment in restricted securities" and are carried at cost which
represents the book value of the equity investment in the three corporations
at the transaction date, adjusted for the cash proceeds received and the gain
recognized on the transaction. These securities were sold during fiscal 1997
(see note 19).
NOTE 17 - COMMITMENTS AND CONTINGENCIES:
On May 3, 1994, the Company guaranteed a loan obligation of one of its
franchisees in an amount not to exceed $322,000. The loan is collateralized by
certain restaurant equipment purchased by the franchisee.
During fiscal 1995, the Company was required to provide a secured letter of
credit in the amount of $500,000 to its insurance carrier for outstanding
worker's compensation and general liability claims. This letter of credit
was secured by $500,000 on deposit with the issuing financial institution.
Since this deposit was restricted, it was presented in other non-current
assets at February 24, 1995. During fiscal 1996, the Company gave the
financial institution a security interest in a restaurant property with a
total book value of $517,360, in lieu of the $500,000 deposit.
NOTE 18 - SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid for interest and income taxes is as follows:
1997 1996 1995
----------- ----------- -----------
Interest $ 1,887,919 $ 2,006,154 $ 2,004,431
=========== =========== ===========
Income taxes $ 414,666 $ 207,171 $ 673,500
=========== =========== ===========
The Company received accounts and notes receivable totaling $355,000,
$1,198,392 and $385,537 from the sale of property, plant and equipment in
fiscal 1997, 1996 and 1995, respectively.
The Company acquired machinery and equipment totaling $694,298 and
$278,641 through capital leases during fiscal 1997 and 1996, respectively.
In fiscal 1997, the Company purchased a restaurant property by exchanging
land with a book value of $260,236 and assuming a note payable in the amount
of $527,695.
Accounts receivable from certain franchisees totaling $84,762, $46,173 and
$110,156 in fiscal 1997, 1996 and 1995, respectively, were converted to notes
receivable.
In fiscal 1996, the Company exchanged shares representing a 50% ownership
interest in three unconsolidated subsidiaries which operate Sagebrush
Steakhouse & Saloon restaurants to Sagebrush, Inc., for $87,098 and 111,983
shares of common stock of Sagebrush, Inc. (see Note 16). In fiscal 1997, the
Company sold these shares of stock and received cash and a note receivable
totaling $78,388 and $705,493, respectively (see Note 19).
The Company transferred deposits to property, plant and equipment totaling
$14,346 for fiscal 1995.
In fiscal 1995, the Company executed a note payable and obtained a note
receivable for $92,165 relating to the settlement of certain lawsuits with
two franchisees.
NOTE 19 - TRANSACTIONS WITH RELATED PARTIES:
Related party transactions during the fiscal years ended 1997, 1996 and
1995 arose in connection with the following relationships.
Certain current and past officers, directors and principal shareholders of
the Company have ownership interests in franchisee companies as well as an
insurance company, a marketing services company and a travel agency which
transact business with the Company. In addition, immediate family members of
a director and principal shareholder have ownership interests in three
companies from which the Company purchases restaurant equipment, furnishings
and supplies.
Under a contract with a management services company owned by certain
officers and directors of the Company, the Company receives general
management services which include, among other things, the review and
supervision of financing, cost analysis services and review of franchise
relationships. Management fees paid under this contract are in lieu of
salary compensation for certain of the Company's senior executives.
Effective April 1, 1996, this contract was renewed for a three year period at
an annual maximum management fee of $1,500,000, payable quarterly in advance.
The Company has mutual leasing agreements with a partnership and
corporations which include a principal shareholder. During fiscal 1995, a
restaurant property was sold to a corporation which includes this principal
shareholder at a price of $624,000 and the Company recognized a gain on the
sale totaling $128,000. During fiscal 1997, a second restaurant property was
sold to a corporation which includes this shareholder at a price of $785,000
and the Company recognized a gain on the sale totaling $252,000.
During fiscal 1997, the Company sold a restaurant property to an
individual who is an executive officer and principal shareholder of the
Company at a sales price of $150,000, giving the Company a gain of $103,000.
During fiscal 1996, the Company advanced $43,938 to the employee stock
purchase plan to allow the plan to purchase 9,500 shares of the Company's
common shares from an outside investor. This advance was repaid in fiscal
1997 as the plan received contributions and the shares were allocated to
participant accounts.
During fiscal 1997, the Company sold certain restricted equity securities
to a corporation which is owned by two principal shareholders and executive
officers of the Company for cash totaling $78,388 and an 8.5%, two year
promissory note in the amount of $705,493. The promissory note is supported
by personal guarantees received from the two principal shareholders and
executive officers.
During fiscal 1996, the Company sold certain secured promissory notes
without recourse to an individual who is an executive officer and principal
shareholder of the Company. Most of the notes were secured by purchase money
mortgages and were generated through various sales of real estate. The
notes, which had face values totaling $1,440,000, were sold without recourse
and the Company received cash proceeds from the sale totaling $1,080,000.
Litigation involving an unrelated party holding a security interest in the
trade receivables of a bankrupt company, which was one of the Company's
significant customers and vendors, was settled in May 1993. Under the terms
of this settlement, the Company agreed to pay $1,200,000, comprised of an
initial payment of $230,000 in 1993, four annual payments of $180,000 each on
April 1 beginning in 1994 and a final payment of $250,000 on April 1, 1998.
Interest on the unpaid principal balance is payable quarterly at 4.5%. Under
the terms of a guaranty and hold harmless agreement with the Company's CEO,
who was a former principal of the bankrupt company, the Company obtained
unsecured promissory notes from the CEO in amounts sufficient to
reimburse the Company for all payments of principal and interest required by
the Settlement Agreement and to liquidate the net receivable and accrued
interest thereon arising from the initial set-off discussed above. The terms
of the promissory notes correspond to the payment terms stipulated by the
Settlement Agreement. The Company's financial statements as of February 28,
1997 reflect both the remaining settlement liability of $430,000 and the
related receivable.
The Company's related party transactions are summarized as follows:
1997 1996 1995
----------- ----------- -----------
Franchise, royalty and other fees from
related party franchisee companies $ 923,000 $ 1,079,000 $ 1,044,000
Management services expense $ 1,500,000 $ 1,500,000 $ 1,500,000
Purchases of restaurant equipment,
furnishings and construction $ 416,000 $ 325,000 $ 386,000
Purchases of other services and
supplies $ 569,000 $ 872,000 $ 632,000
Casualty insurance premiums $ 1,113,000 $ 1,334,000 $ 1,066,000
Sales of restaurant properties $ 935,000 $ 624,000
Sale of restricted equity securities $ 784,000
Sale of notes receivable $ 1,080,000
Income from leased properties $ 52,000 $ 90,000 $ 90,000
Leasing of property $ 206,000 $ 224,000 $ 334,000
Related party accounts receivable arise in the ordinary course of business
and relate to unpaid franchise, royalty and other fees as well as short-term
advances to 50% owned affiliates. Notes receivable from related parties
relate primarily to long-term advances to 50% owned affiliates, notes
generated from the sales of assets to related parties, and the settlement
notes from the Company's CEO. Related party receivables are as follows:
1997 1996
----------- -----------
Accounts receivable $ 254,744 $ 484,951
Notes receivable (interest rates ranging
from 4.5% to 12%, payable over 1 to 5
years) $ 1,526,761 $ 1,288,273
NOTE 20 - CAPITAL STOCK:
On February 22, 1995, the Board of Directors announced a five-for-four
stock split effected in the form of a 25% stock dividend. In connection
therewith, 531,849 shares of common stock and $1,778 for fractional shares were
distributed on April 11, 1995 to shareholders of record as of March 15, 1995.
During fiscal 1995, the Company acquired and retired 5,000 common shares at
a cost of $35,625.
The Company is authorized to issue 2,500,000 shares of preferred stock with
a par value of ten cents ($.10) per share in one or more series. All rights
and preferences of each series are to be established by the Company prior to
issuance. There are no issues of this class of stock at February 28, 1997.
NOTE 21 - SUBSEQUENT EVENT
On March 1, 1997, the Company acquired fourteen franchised restaurants
from various corporations predominantly owned by a former executive officer of
the Company for a total purchase price of $3,767,500 payable as follows: $500 in
cash; $309,500 in assumed current liabilities; $645,000 in assumed long-term
liabilities; $2,012,500 in common stock of the Company; and a two year 5%
promissory note in the amount of $800,000. As part of this transaction,
223,611 shares of common stock were issued to the selling corporations.
In addition, existing lease agreements for eleven of the restaurant
properties were assigned to the Company. In addition, the Company signed new
lease agreements on the remaining three properties. All of these leases are
classified as operating leases and future minimum payments are as follows:
$864,000 in fiscal 1998; $777,000 in fiscal 1999; $586,000 in fiscal 2000;
$528,000 in fiscal 2001; $476,000 in fiscal 2002; and $1,486,000 subsquent
to fiscal 2002.
Also as part of this transaction, the former executive officer, who was
also the single largest franchisee, entered into a fifteen year non-competition
agreement with the Company in exchange for 98,750 shares of common stock.
These shares are restricted securities and their resale is subject to certain
conditions.
WSMP, INC.
REPORT OF MANAGEMENT
- --------------------
The management of WSMP, Inc. is responsible for the preparation and
integrity of the consolidated financial statements of the Company. The
financial statements and notes have been prepared by the Company in
accordance with generally accepted accounting principles and, in the judgment
of management, present fairly and consistently the Company's financial
position and results of operations and cash flows. The financial information
contained elsewhere in this annual report is consistent with that in the
financial statements. The financial statements and other financial
information in this annual report include amounts that are based on
management's best estimates and judgments.
The Company maintains a system of internal accounting controls to provide
reasonable assurance that assets are safeguarded and that transactions are
executed in accordance with management's authorization and recorded properly
to permit the preparation of financial statements in accordance with
generally accepted accounting principles.
The Company's financial statements have been audited by Deloitte & Touche
LLP. Management has made available to them all of the Company's financial
records and related data, and believes that all representations made to
Deloitte & Touche LLP during this audit were valid and appropriate. Their
report provides an independent opinion upon the fairness of the financial
statements.
The Board of Directors discharges its responsibility for the Company's
financial statements through its three-member Audit Committee, all of which
are non-management directors. The Audit Committee meets periodically with
Deloitte & Touche LLP, the accounting and reporting departments and
management. Both Deloitte & Touche LLP and the reporting staff have direct
access to the Audit Committee to discuss the scope and results of their work,
the adequacy of internal accounting controls and the quality of financial
reporting.
David R. Clark
David R. Clark
President and Chief Operating Officer
Matthew V. Hollifield
Matthew V. Hollifield
Vice President of Finance and Treasurer
INDEPENDENT AUDITORS' REPORT
- ----------------------------
Shareholders and Board of Directors
WSMP, Inc.
Claremont, North Carolina
We have audited the accompanying consolidated balance sheets of WSMP, Inc.
and subsidiaries as of February 28, 1997 and February 23, 1996, and the
related consolidated statements of operations, shareholders' equity, and cash
flows for each of the three fiscal years in the period ended February 28,
1997. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of WSMP, Inc. and subsidiaries
at February 28, 1997 and February 23, 1996, and the results of their
operations and their cash flows for each of the three fiscal years in the
period ended February 28, 1997 in conformity with generally accepted
accounting principles.
Deloitte & Touche LLP
Hickory, North Carolina
May 19, 1997
WSMP, INC. AND SUBSIDIARIES
Unaudited Quarterly Financial Data
- ----------------------------------
Quarters Ended
--------------------------------------------------------
May 17, August 9, November 1, February 28,
1996 1996 1996 1997 (1)
------------ ------------ ------------ ------------
Operating revenues $ 20,379,355 $ 19,363,153 $ 20,588,022 $ 27,422,543
Gross profit $ 3,021,892 $ 2,621,951 $ 2,745,387 $ 3,758,963
Pretax earnings (loss) $ 407,058 $ (2,748) $ 289,057 $ 478,123
Provision for income
tax $ 159,159 $ (1,479) $ 110,652 $ 197,246
Extraordinary gain
(net of tax) $ 414,784
Net earnings (loss) $ 247,899 $ (1,269) $ 178,405 $ 695,661
Earnings (loss) per
common and common
equivalent share $ .08 $ (.00) $ .06 $ .22
Earnings (loss) per
share-assuming
full dilution $ .08 $ (.00) $ .06 $ .21
Quarters Ended
--------------------------------------------------------
May 19, August 11, November 3, February 23,
1995 1995 1995 1996 (1)(2)
----------- ------------ ------------ ------------
Operating revenues $18,312,533 $ 19,157,806 $ 18,549,843 $ 23,419,028
Gross profit $ 2,786,850 $ 2,496,076 $ 2,724,357 $ 1,912,202
Pretax earnings (loss) $ 11,101 $ (641,594) $ 43,805 $ (2,124,646)
Provision for income
tax $ 3,442 $ (277,706) $ 30,788 $ (972,869)
Net earnings (loss) $ 7,659 $ (363,888) $ 13,017 $ (1,151,777)
Earnings (loss) per
common and common
equivalent share $ .00 $ (.13) $ .00 $ (.42)
Earnings (loss) per
share-assuming
full dilution $ .00 $ (.13) $ .00 $ (.42)
(1) There were no material fourth quarter adjustments in fiscal 1997.
(2) The pretax loss which occurred in the fourth quarter of fiscal 1996, as
compared with the three previous quarters, is primarily the combined effect
of (i) the harsh winter weather in January and February which negatively
impacted sales in the restaurant division, (ii) losses suffered in the ham
curing division due to the issuance of credits to customers and disposal of
inventory relating to the recall of improperly cured ham product, and (iii)
equity in losses of affiliates due to the impact of weather conditions,
as well as the write-downs of certain assets by affiliates to recognize
permanent impairment.
<TABLE>
WSMP, INC. AND SUBSIDIARIES
SELECTED FINANCIAL DATA
- -----------------------
Selected Operating Data
- -----------------------
Fiscal Year Ended
<CAPTION>
February 28, February 23, February 24, February 25, February 26,
1997 (1) 1996 1995 1994 1993
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Operating revenues
Food sales (6) $ 85,070,341 $ 76,582,926 $ 91,231,774 $ 70,032,184 $ 73,503,786
Franchise, royalty and other
fees 2,682,732 2,856,284 2,868,199 3,027,252 3,418,876
------------ ------------ ------------ ------------ ------------
Total operating revenues $ 87,753,073 $ 79,439,210 $ 94,099,973 $ 73,059,436 $ 76,922,662
============ ============ ============ ============ ============
Total operating income (loss) $ 1,625,521 $ (702,757) $ 2,244,667 $ (39,049) $ 2,344,429
============ ============ ============ ============ ============
Earnings (loss) before
income taxes $ 1,171,490 $ (2,711,334) $ 1,508,401 $ (924,774) $ 1,103,008
============ ============ ============ ============ ============
Net earnings (loss) (4)(7) $ 1,120,696 $ (1,494,989) $ 1,096,670 $ (785,000) $ 670,000
============ ============ ============ ============ ============
Net earnings (loss) per
common and common equivalent
share (2,3, and 5) $ .36 $ (.55) $ .38 $ (.30) $ .23
============ ============ ============ ============ ============
Net earnings (loss) per
common share assuming
full dilution (2,3 and 5) $ .35 $ (.55) $ .38 $ (.30) $ .23
============ ============ ============ ============ ============
Dividends per share (3
and 5) $ .00 $ .00 $ .00 $ .00 $ .00
============ ============ ============ ============ ============
Book value per share (2
and 5) $ 6.27 $ 5.96 $ 6.63 $ 6.22 $ 6.73
============ ============ ============ ============ ============
Selected Balance Sheet Data
---------------------------
Total assets $ 43,126,600 $ 41,634,374 $ 46,721,401 $ 50,076,967 $ 50,284,420
============ ============ ============ ============ ============
Long-term debt $ 13,719,942 $ 14,921,013 $ 18,473,398 $ 21,495,246 $ 23,880,647
============ ============ ============ ============ ============
Shareholders' equity (2) $ 18,289,598 $ 16,443,621 $ 17,638,118 $ 16,584,065 $ 16,804,458
============ ============ ============ ============ ============
<FN>
(1) Fifty three week year.
(2) During the year ended February 28, 1997, 158,750 stock option shares were
exercised by current and former officers and employees at a gross price of
$720,500. During the year ended February 23, 1996, 100,000 stock option
shares were exercised by former officers at a gross price of $290,000.
During the year ended February 24, 1995, the Company repurchased 5,000
common shares for $35,625 and declared a five-for-four stock split, effected
in the form of a stock dividend, through which 531,849 common shares were
distributed on April 11, 1995. During the year ended February 25, 1994 the
Company repurchased 10,000 common shares for $50,004, issued 47,395 common
shares for $319,916 pursuant to a shareholder rights offering, and 100,000
stock option shares were exercised by a former officer at a gross price of
$362,500. During the year ended February 26, 1993 the Company repurchased
9,062 common shares for $71,680 and issued 62,251 common shares for $420,194
pursuant to a shareholders rights offering.
(3) Earnings (loss) per share are based on the weighted average number of
common shares and dilutive common equivalent shares outstanding during each
fiscal year. The weighted average number of shares used in the calculations
of earnings per common and common equivalent shares are 3,091,063 in 1997;
2,729,517 in 1996; 2,879,021 in 1995; 2,624,015 in 1994 and 2,875,100 in
1993. The weighted average number of shares used in the calculation of
earnings per common share - assuming full dilution are 3,228,800 in 1997;
2,729,517 in 1996; 2,953,286 in 1995; 2,624,015 in 1994 and 2,875,100
in 1993.
(4) The net loss for February 25, 1994 includes a charge against earnings
reflecting the cumulative effect of a change in accounting for income
taxes in the amount of $245,000 related to the adoption of SFAS 109
"Accounting for Income Taxes."
(5) Per share amounts give retroactive recognition of the five-for-four stock
split, effected in the form of a stock dividend declared in 1995.
(6) In December 1993, the Company entered into a new agreement with its
largest customer of bakery products whereby the Company would purchase the
meat components and the customer's brand name packaging from the customer,
produce and package the final meat-filled bakery product and sell the
finished product to the customer. Prior to this agreement, sales to this
customer consisted only of the bakery component and cost of production and
packaging. The meat component and packaging were supplied and owned by the
customer throughout the process. Purchases by the Company of the meat
component and packaging during fiscal 1995 and 1994 totaled $23,441,000 and
$4,764,000, respectively. These amounts are reported as both sales and
cost of goods sold during fiscal 1995 and 1994, and account for approxi-
mately $18,677,000 of the increase in food sales between fiscal 1994 and
1995.
(7) The net earnings for February 28, 1997 includes an extraordinary gain
from early extinguishment of debt totaling $414,784 (net of income taxes in
the amount of $250,862).
</TABLE>
OFFICERS
AND
DIRECTORS
OFFICERS
- --------
Richard F. Howard James C. Richardson David R. Clark
Chairman of the Board Chief Executive Officer and President and Chief
and Secretary Vice Chairman of the Board Operating Officer
Matthew V. Hollifield James M. Templeton Kenneth L. Moser
Vice President of Finance Senior Vice President, Senior Vice President
and Treasurer Real Estate Restaurants and
Franchising
Larry D. Hefner James W. Berry James T. Hood
Senior Vice President, Controller and Assistant Vice President,
Sales Treasurer Restaurant Operations
Bill H. Brown Kenneth D. Breiner
Vice President, Vice President
Product Development Foodservice Sales
DIRECTORS
- ---------
Richard F. Howard James C. Richardson, Jr. David R. Clark
Chairman of the Board Chief Executive Officer and President and Chief
and Secretary Vice Chairman of the Board Operating Officer
WSMP, Inc. WSMP, Inc. WSMP, Inc.
E. Edwin Bradford James M. Templeton Bobby G. Holman
President and CEO Senior Vice President, Consultant
Bradford Communications Real Estate WSMP, Inc.
WSMP, Inc.
Richard F. Hendrickson Lewis C. Lanier William R. McDonald
Vice President, Partner, Branch Manager,
York Properties, Inc. Horger, Horger, Lanier American
Culclasure & Knight LLP Pharmaceutical
Attorneys at Law Services
_______________________________________________________________
MARKET
INFORMATION
The Company's common stock trades on the NASDAQ National Market tier of the
NASDAQ stock MarketSM under the symbol: "WSMP". As of May 7, 1997, WSMP,
Inc. had approximately 1,400 shareholders based on the number of holders of
record and an estimate of the number of individual participants
represented by security position listing. The quarterly high and low
closing bid price quotations are presented below as reported by National
Association of Securities Dealers Incorporated and as adjusted for the
five-for-four stock split, effected in the form of a stock dividend, declared
February 22, 1995 and distributed April 11, 1995. These quotations represent
interdealer prices, without retail mark-up, mark-down or commissions, and
may not necessarily reflect actual transactions.
1997 1996
--------------------- ---------------------
High Low High Low
--------- --------- --------- ---------
First Quarter $ 5.375 $ 4.250 $ 5.600 $ 4.250
Second Quarter $ 6.500 $ 4.875 $ 5.000 $ 4.250
Third Quarter $ 8.000 $ 6.125 $ 5.250 $ 4.000
Fourth Quarter $ 9.500 $ 6.500 $ 5.250 $ 4.250
The closing price on May 7, 1997, was $10.00.
No cash dividends have been declared during fiscal 1997 or 1996.
GENERAL
INFORMATION
REGISTRAR AND
TRANSFER AGENT
First Citizens Bank
Raleigh, North Carolina
GENERAL COUNSEL
Simpson Aycock, P.A.
Morganton, North Carolina
AUDITORS
Deloitte & Touche LLP
Hickory, North Carolina
ANNUAL MEETING
The Annual Meeting of the Shareholders of
WSMP, Inc. will be held at 10:00 a.m. Eastern
Daylight Savings Time, June 26, 1997, at
the Gateway Center Hotel
Hickory, North Carolina
10-K REPORT
A copy of the WSMP, Inc., 10-K Report as
filed with the Securities and Exchange
Commission for Fiscal 1997 can be
obtained free of charge by writing:
Vice President of Finance & Treasurer
WSMP, Inc.
P O Box 399
Claremont, North Carolina 28610
EXECUTIVE OFFICES
WSMP, Inc.
1 WSMP Drive
Claremont, North Carolina 28610
(704) 459-7626
WSMP Inc.
1 WSMP DRIVE
P O BOX 399
Claremont, NC 28610
EXHIBIT 21
SUBSIDIARIES OF WSMP, INC.
Brunswick Associates, Inc. (Georgia)
D & S Foods, LLC (Georgia) 60% owned
Elloree Foods, Inc. (South Carolina)
Georgia Buffet Restaurants, Inc. (Georgia) 50% owned
Georgia WSMP, Inc. (Georgia)
Matthews Prime Sirloin, Inc. (North Carolina)
Naples Foods, Inc. (Florida) 55% owned
Price Food Systems, LLC (Florida) 80% owned
Prime Sirloin, Inc. (Tennessee)
Primo Food Service, Inc. (Virginia) 50% owned
Seven Stars, Inc. (Maryland)
South Carolina WSMP, Inc. (South Carolina)
Starke Foods, Inc. (Florida) 50% owned
St. Augustine Foods, Inc. (Florida) 80% owned
Sunshine WSMP, Inc. (Florida)
Tennessee WSMP, Inc. (Tennessee)
Virginia WSMP, Inc. (Virginia)
Omitted from the above list are two inactive subsidiaries which does not
constitute a significant subsidiary.
EXHIBIT 23
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in Post-Effective Amendment
No. 9 to Registration Statement No. 33-15017 on Form S-8 of our report dated May
19, 1997 appearing in and incorporated by reference in this Annual Report on
Form 10-K of WSMP, Inc. for the fiscal year ended February 28, 1997.
DELOITTE & TOUCHE LLP
Hickory, North Carolina
May 19, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from WSMP, Inc.'s
1997 10-K and is qualified in its entirety by reference to such 10-K.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> FEB-28-1997
<PERIOD-END> FEB-28-1997
<CASH> 2,424,982
<SECURITIES> 171,910
<RECEIVABLES> 2,993,263
<ALLOWANCES> 35,000
<INVENTORY> 6,210,990
<CURRENT-ASSETS> 14,068,048
<PP&E> 43,596,750
<DEPRECIATION> 20,643,965
<TOTAL-ASSETS> 43,126,600
<CURRENT-LIABILITIES> 11,167,348
<BONDS> 13,719,942
0
0
<COMMON> 2,919,088
<OTHER-SE> 15,370,510
<TOTAL-LIABILITY-AND-EQUITY> 41,316,600
<SALES> 85,070,341
<TOTAL-REVENUES> 87,753,073
<CGS> 63,680,524
<TOTAL-COSTS> 63,680,524
<OTHER-EXPENSES> 11,924,356
<LOSS-PROVISION> 223,358
<INTEREST-EXPENSE> 1,822,339
<INCOME-PRETAX> 1,171,490
<INCOME-TAX> 465,578
<INCOME-CONTINUING> 705,912
<DISCONTINUED> 0
<EXTRAORDINARY> 414,784
<CHANGES> 0
<NET-INCOME> 1,120,696
<EPS-PRIMARY> .36
<EPS-DILUTED> .35
</TABLE>
