UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-K
(Mark One)
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 1996
OR
| | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 For the transition period from ________ to ________
Commission file number 0-19887
WORTHINGTON FOODS, INC.
(Exact name of Registrant as specified in its charter)
OHIO 31-0733120
(State of Incorporation) (IRS Employer Identification No.)
900 PROPRIETORS ROAD
WORTHINGTON, OH 43085
(Address of principal executive offices)
Registrant's telephone number, including area code: (614) 885-9511
Securities registered pursuant to Section 12(b) of the Act:
NONE
Securities registered pursuant to 12(g) of the Act:
COMMON SHARES, NO PAR VALUE
(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes |X| No |_|
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. |X|
As of February 27, 1997, there were outstanding 8,592,562 shares of the
Registrant's common stock, no par value, which is the only class of common or
voting stock of the Registrant. As of that date, the aggregate market value of
the shares of common stock held by non-affiliates of the Registrant (based on
the closing price for the common stock on the NASDAQ-NMS on February 27, 1997)
was $151,079,480.
Documents Incorporated by Reference
Portions of the Registrant's Annual Report to Shareholders for the fiscal
year ended December 31, 1996 are incorporated by reference into Part I and Part
II. Portions of the definitive proxy statement furnished to shareholders of the
Registrant in connection with the annual meeting of shareholders to be held on
April 22, 1997 are incorporated by reference into Part III.
This report contains 48 pages of which this is page 1.
The Exhibit Index begins at page 18.
<PAGE>
ITEM 1 BUSINESS
The Company
Worthington Foods, Inc. develops, produces and markets high-quality, zero
cholesterol, vegetarian and other healthful food products for consumers seeking
healthful food choices. Offering more than 150 products, the Company is one of
the leading independent producers of healthier alternatives to meat, egg and
dairy products. For more than 50 years, the Company has been dedicated to
producing meat alternative products which simulate the taste and texture of meat
and which are made primarily from soy and wheat proteins. Since the 1970's, the
Company has produced egg substitute products made primarily from liquid egg
whites.
The Company produces and sells, under the MORNINGSTAR FARMS brand name, a
line of products targeting health-conscious consumers. The Company sells these
products nationwide, primarily to supermarkets and grocery stores. The principal
products in this line are frozen meat alternatives, including BREAKFAST LINKS,
BREAKFAST PATTIES, BREAKFAST STRIPS and GRILLERS, and five newer frozen meat
alternatives, including PRIME PATTIES, DELI FRANKS, CHIK Patties, GARDEN VEGE
PATTIES and BETTER'N BURGERS. BETTER'N BURGERS, a fat-free, zero cholesterol
hamburger replacement, was introduced in October of 1994 and SPICY BLACK BEAN
BURGERS, GARDEN GRAIN PATTIES and GROUND MEATLESS were introduced in 1995. SPICY
BLACK BEAN BURGERS contain one gram of fat, are cholesterol free and contain a
zesty blend of hearty black beans, peppers and spices. GARDEN GRAIN PATTIES are
low in fat and cholesterol, and contain a wholesome blend of brown rice, rolled
oats and bulgur wheat, with mushrooms and cheese. GROUND MEATLESS, introduced in
late 1995, is a frozen, fat-free cooked hamburger replacement that is ready for
use in chili, spaghetti sauce, lasagna or as a pizza topping. The national
roll-out of this product occurred during 1996. During 1996, the major products
introduced under the MORNINGSTAR FARMS brand were three varieties of BREAKFAST
SANDWICHES. These sandwiches are made from our fat-free SCRAMBLERS egg product,
meatless BREAKFAST PATTIES and fat-free cheese, creating great-tasting, low-fat,
eat-on-the-run breakfast items. The Company also produces and sells under the
MORNINGSTAR FARMS brand, frozen egg substitutes, including frozen SCRAMBLERS and
frozen BETTER'N EGGS.
Products sold nationally under the WORTHINGTON and LOMA LINDA (formerly
LaLOMA) brand names, consisting primarily of frozen and canned meat
alternatives, are targeted primarily to vegetarians and members of the
Seventh-day Adventist Church. The Company produces and sells nationally, under
the NATURAL TOUCH brand name, all natural, additive-free foods and beverages
targeted to health/natural food consumers.
The Company's business strategy is to continue to capitalize on the dietary
trend toward the consumption of healthful, vegetarian food products, primarily
those with zero cholesterol, and zero fat, or low fat claims. Through its
existing product line and the development of new products and production
processes, the Company expects to maintain its leading share of the market for
meat alternatives and to capture the growing number of vegetarians and
semi-vegetarians who are increasingly consuming such products. The Company
believes its frozen egg substitute products, BETTER'N EGGS and SCRAMBLERS, will
enable it to maintain its number two position in the frozen egg substitute
market. Over the past four years, the Company has directed additional resources
to the expansion of its foodservice (institutional) business.
The Company's origin dates to 1939 when its predecessor ("Old Worthington")
was organized to produce nutritional, vegetarian foods for members of the
Seventh-day Adventist Church. Miles Laboratories purchased Old Worthington in
1970. The Company, in a management-led buyout, acquired the business and assets
of Old Worthington in 1982. Since regaining its independence, the Company's net
sales have grown from approximately $24,000,000 in 1983 to approximately
$109,000,000 in 1996. In January, 1990, the Company acquired LaLoma Foods, Inc.,
including the LOMA LINDA brand (formerly LaLOMA brand), from the General
Conference of Seventh-day Adventists.
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<PAGE>
In November 1994, the Company sold substantially all of the manufacturing
equipment, inventory and intangible assets (including the BETTER'N EGGS
trademark) used by it in the manufacturing of refrigerated egg substitute
products. As a part of this transaction, the Company agreed that it will not
re-enter the refrigerated egg substitute business for five years. The Company
obtained from the purchaser of its refrigerated egg assets a royalty-free,
perpetual license to use the BETTER'N EGGS trademark in the manufacturing and
sale of frozen egg substitute products.
The Company was incorporated in July, 1967 under the laws of the State of
Ohio and maintains its executive offices at 900 Proprietors Road, Worthington,
Ohio 43085, and its telephone number is (614) 885-9511. As used in this Form
10-K, the term "Company" refers to Worthington Foods, Inc., its subsidiary and
its predecessors, unless the context otherwise requires.
Business
The Company is one of the leading independent food companies dedicated
solely to developing, producing and marketing vegetarian, meat alternatives,
frozen egg substitutes and other healthful food products. The Company offers a
diverse line of food and beverage products designed to meet the needs of today's
health-conscious consumers.
Industry
The market for healthful foods has grown significantly over the past
several years. Based on recommendations from various United States governmental
agencies and medical organizations aimed at reducing the risk of heart and other
diseases, consumers in the United States have increasingly sought healthier
diets through reduced consumption of meat, shell eggs and other foods containing
significant amounts of cholesterol and fat. Soy, one of the Company's principal
raw materials, has received the Food and Drug Administration's highest possible
rating in terms of protein quality. Studies have suggested that soy can reduce,
control or prevent the incidence of certain types of colon, breast, lung,
prostate and stomach cancers. Soy protein helps the body retain calcium, thus
reducing the risk of osteoporosis.
Market research studies indicate that consumers in the United States have
changed their diets in recent years by selecting healthful foods. More than 100
million American adults are now watching their fat intake and 90 million are
monitoring their dietary cholesterol. More than half of grocery shoppers rate
health as their primary concern in making food selections. 75 million American
adults are actively reducing their red meat consumption, while 90% of shoppers
practice some level of health-motivated behavior when they are grocery shopping.
In addition, there were an estimated 18,000,000 vegetarians in the United States
in 1996, more than an eight-fold increase over a decade ago. That number is
growing at a rate of nearly 20,000 new vegetarians a week.
Products
The Company produces and markets more than 150 different food and beverage
products intended to promote good health and nutrition. The Company's products
are made primarily from vegetable proteins, soy and egg whites, have zero
cholesterol and typically are lower in fat, saturated fat and calories than
their meat and egg counterparts. Its products are intended to satisfy the needs
of consumers who are seeking to reduce or eliminate their consumption of meat,
fresh shell eggs, poultry and fish.
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<PAGE>
The Company's principal food product lines consist of meat alternative
products and frozen egg substitute products. The Company's meat alternatives are
made from vegetable proteins and simulate the taste and texture of meat, poultry
and fish. The egg substitute products, the major ingredient of which is liquid
egg whites, are designed to replace fresh shell eggs for consumers who seek to
control their consumption of cholesterol and fat. They can be used for most
breakfast applications and substituted for fresh shell eggs in most other
recipes. The Company's beverage products include powdered soy milk and two
alternatives to coffee.
The Company's products are marketed under four brand names: MORNINGSTAR
FARMS, WORTHINGTON, LOMA LINDA (formerly LaLOMA) and NATURAL TOUCH. The
following table sets forth the Company's net sales ($000's) by brand name for
each of the years indicated:
<TABLE>
Years Ended December 31,
__________________________________________________________________________
1996 1995 1994
___________________ _________________ ________________
<S> <C> <C> <C> <C> <C> <C>
Morningstar Farms.............. $ 72,765 67% $57,479 63% $55,891o 63%
Worthington.................... 22,497 21 20,955 23 20,485 23
Loma Linda..................... 8,828 8 8,327 9 7,913 9
Natural Touch.................. 4,985 4 4,314 5 3,931 5
----- - ------ -- ------ --
Total..................... $109,075 100% $91,075 100% $88,220 100%
======== ==== ======= ==== ======= ====
o The Company's net sales include $7,935,000 of refrigerated egg product in
1994.
(See Note H of the Company's Consolidated Financial Statements included in
the Company's Annual Report to Shareholders for the fiscal year ended
December 31, 1996)
Note: 1994 net sales amount has been adjusted slightly due to the method in
which the Company allocates sales deductions.
</TABLE>
MORNINGSTAR FARMS
Introduced in the early 1970's, MORNINGSTAR FARMS brand products offer a
full line of zero cholesterol alternatives to processed meats and fresh shell
eggs that appeal to the consumer who is seeking a healthier diet. These products
are distributed nationally through supermarkets, grocery stores and other retail
outlets. The Company markets four principal meat alternative products under the
MORNINGSTAR FARMS brand name -- BREAKFAST LINKS, BREAKFAST PATTIES, BREAKFAST
STRIPS and GRILLERS. These products simulate the taste and texture of sausage
links, sausage patties, bacon strips and hamburger, respectively. They are
completely free of meat, meat by-products and animal fat and have zero
cholesterol. They are comparable in protein to their meat counterparts but are
lower in calories and total fats and have the benefit of a higher ratio of
polyunsaturated to saturated fats. Together, they accounted for $27,294,000,
$24,178,000, and $22,475,000 or 25.0%, 26.5%, and 25.5% of net sales in 1996,
1995 and 1994, respectively.
In early 1993, the Company began test marketing four new MORNINGSTAR FARMS
meat alternatives: GARDEN VEGE-PATTIES, PRIME PATTIES, CHIK PATTIES and DELI
FRANKS. Due to favorable trade and consumer acceptance, the Company decided in
1993 to expand the availability of these products. In October, 1994, the Company
introduced BETTER'N BURGERS, a fat-free, zero cholesterol hamburger replacement,
and continued with the national roll-out of this product during 1995. SPICY
BLACK BEAN BURGERS and GARDEN GRAIN PATTIES were introduced during 1995 and
distribution for these two items continued to grow in 1996. In late 1995, GROUND
MEATLESS, a frozen, fat free hamburger replacement that is ready for use in
chili, spaghetti sauce, lasagna or as a pizza topping, was introduced. In 1996,
the major products introduced under the MORNINGSTAR FARMS brand were the three
new BREAKFAST SANDWICHES. These sandwiches are made from fat-free SCRAMBLERS egg
product, meatless BREAKFAST PATTIES and fat-free cheese. Together, the new
MORNINGSTAR FARMS brand products introduced since 1993 accounted for
approximately $25,080,000, $15,015,000 and $8,306,000 or 23.0%, 16.5% and 9.4%
of net sales in 1996, 1995, and 1994, respectively.
- 4 -
<PAGE>
The MORNINGSTAR FARMS brand product line also includes two frozen egg
substitute products, SCRAMBLERS and BETTER'N EGGS. SCRAMBLERS is a frozen
product that contains approximately 99% liquid egg whites, zero cholesterol,
zero fat and contains half the calories of fresh shell eggs. SCRAMBLERS, which
was developed to duplicate the taste and texture of scrambled eggs, has a
distinctive, buttery taste. Frozen SCRAMBLERS is the Company's largest selling
single product and accounted for approximately $9,076,000, $10,260,000, and
$11,636,000 or 8.3%, 11.3% and 13.2% of net sales in 1996, 1995, and 1994,
respectively. Although the Company does not anticipate growth in the sales of
SCRAMBLERS, the Company believes that the taste profile of SCRAMBLERS will allow
it to maintain a loyal consumer following.
BETTER'N EGGS, which is offered by the Company only in frozen form,
contains approximately 98% liquid egg whites, zero cholesterol and zero fat.
BETTER'N EGGS, as its name suggests, is marketed as a product nutritionally
superior to fresh shell eggs (two-thirds fewer calories than fresh shell eggs)
with a taste very similar to fresh shell eggs. With the sale of its refrigerated
BETTER'N EGGS assets in late 1994, the Company has discontinued the manufacture
and sale of refrigerated egg substitute products. Refrigerated BETTER'N EGGS is
now being produced by the purchaser of these assets. The Company's net sales of
refrigerated egg substitute products were $7,935,000 in 1994. See Note H of the
Company's Consolidated Financial Statements included in the Company's Annual
Report to Shareholders for the fiscal year ended December 31, 1996.
WORTHINGTON and LOMA LINDA
WORTHINGTON brand products have been sold in the marketplace since 1939 and
LOMA LINDA brand products, sold formerly under the LaLOMA brand name, have been
available since 1906. Both brands were originally developed to meet the dietary
preferences of members of the Seventh-day Adventist Church, but now are also
being targeted to the growing market of vegetarians and others desiring to
reduce their consumption of cholesterol and fat.
These brands include approximately 90 frozen, canned and dry products that
are intended to provide healthier, vegetarian alternatives to meat products,
such as hamburger, hot dogs, sausage, bacon and luncheon slices, and to chicken
and fish. They contain no meat or animal fat and, because they are made
primarily from soy and wheat proteins, have zero cholesterol and are low in
saturated fats.
In 1996, Worthington Foods provided low-fat alternatives to three of the
WORTHINGTON brands most popular items: FRICHIK, VEJA-LINKS and CHILI. These
three low-fat items contributed 6% growth in unit volume among retailers serving
the Seventh-day Adventist market. The Company plans additional low-fat offerings
in 1997.
NATURAL TOUCH
The NATURAL TOUCH brand was introduced in 1984 to meet the dietary needs of
health/natural food consumers looking for vegetarian products that do not
contain artificial ingredients or flavors. Since its introduction, Natural Touch
has been a leading brand in the natural food category.
The NATURAL TOUCH brand consists of 18 frozen entrees and mixes such as
OKARA PATTIE, made from organic soybeans; GARDEN VEGGIE PATTIE, made from garden
vegetables and VEGGIE BURGER KITS, where the consumer simply adds the fresh
vegetables they like for a fresh veggie burger in minutes. KAFFREE ROMA is the
number one selling coffee alternative in the natural food retail channel. It is
made from malted barley and chicory and contains no caffeine or tannic acids.
Recently, ROMA CAPPUCCINO was introduced as a companion product that will appeal
to consumers looking for specialty beverages.
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<PAGE>
In late 1994, the Company began to develop a natural food broker network
that was completed in 1996. These brokers have increased product penetration and
ensure the efficient execution of marketing programs developed for natural food
retailers and consumers. Additionally, the brokers have provided a higher level
of retail service that is benefiting the distributors, retailers and ultimately,
the consumer.
Customers, Markets and Distribution
MORNINGSTAR FARMS brand products are sold primarily to supermarkets,
grocery stores and distributors located throughout the United States, including
virtually all of the major supermarkets and distributors. MORNINGSTAR FARMS
brand products are also sold to foodservice (institutional) markets, including
health care and educational facilities and restaurants.
Supermarket and grocery store sales of MORNINGSTAR FARMS brand products are
made through a network of 58 independent food brokers who are managed by the
Company's six regional sales managers. The Company ships these products by
common carrier from its Zanesville distribution facility to the customer's
warehouse or to a public warehouse.
WORTHINGTON and LOMA LINDA brand products are primarily sold to facilities
operated by Seventh-day Adventists such as book stores, supermarkets, hospitals
and schools. These products are increasingly sold to retail supermarkets that
are not operated by Seventh-day Adventists but are located in areas where the
Seventh-day Adventist population is concentrated, and to health/natural food
stores. NATURAL TOUCH brand products are primarily sold to health/natural food
stores and distributors, although they are also sold to the same market base as
the WORTHINGTON and LOMA LINDA brand products.
Sales of WORTHINGTON, LOMA LINDA, and NATURAL TOUCH brand products are made
by the Company's five-employee field sales force and four inside sales persons.
The Company ships these products by common carrier, in some cases, directly to
the customer, and in other cases, to the Company's field warehouse facilities
for delivery by the Company's local delivery trucks to the trade customer or to
the distributor's warehouse.
The Company exports its branded products throughout the world to such
countries and areas as Taiwan, Singapore, Malaysia, Hong Kong, the Caribbean,
Canada, Mexico, United Kingdom, Panama, and Italy. The Company uses export
facilitators and distributors as required. Due to health concerns worldwide
regarding the consumption of meat, more consumers are looking for vegetarian
alternatives.
The Foodservice Division of the Company has expanded over the past four
years and now includes five regional sales managers, 42 independent food brokers
and over 530 distributors. During 1995, sales agreements were signed with over
4,000 new restaurant locations, including Subway, Chili's, Pizzera Uno, and
Marie Callender's. With the increased awareness and demand for vegetarian food
items as well as egg substitutes in restaurants, institutions and health care
facilities, the Company is well positioned to benefit from increased sales to
foodservice operations with its full-line of vegetarian food products for
breakfast, lunch and dinner.
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<PAGE>
The following table sets forth the Company's net sales to its principal
markets for each of the years indicated:
<TABLE>
Years Ended December 31,
____________________________________________________________________
1996 1995 1994
____________________ _________________ ________________
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Supermarkets and grocery stores......... $ 62,280 57% $51,217 56% $51,950o 59%
Seventh-day Adventist retail facilities. 19,427 18 18,626 21 18,697 21
Health/natural food stores.............. 9,792 9 8,142 9 7,430 8
Foodservice (institutional)*............ 11,875 11 8,354 9 6,194 7
Export Sales............................ 5,701 5 4,736 5 3,949 5
----- - ------ -- ----- --
Total.............................. $109,075 100% $91,075 100% $88,220 100%
======== ==== ======= ==== ======= ====
* Includes sales to Seventh-day Adventist institutions
o The Company's net sales include $7,935,000 of refrigerated egg product in
1994. (See Note H of the Company's Consolidated Financial Statements
included in the Company's Annual Report to Shareholders for the fiscal year
ended December 31, 1996)
Note: 1994 net sales amounts have been reclassified due to customer
reclassifications.
</TABLE>
The Company supports its MORNINGSTAR FARMS brand products with price
discounts, advertising allowances, national print ads, direct mail, display
incentives, coupon promotions and trade show and convention promotions. The
Company supports its WORTHINGTON, LOMA LINDA and NATURAL TOUCH brand products
with trade promotions to retailers and distributors and with print advertising
in Seventh-day Adventist periodicals and health food/vegetarian oriented
magazines.
Competition
The markets in which the Company sells its products are highly competitive.
The Company competes in the sale of its products on the basis of their healthful
attributes, taste, price, quality and convenience.
The Company's meat alternative products are sold in competition with
comparable meat items and, to this extent, compete with meat packing houses. The
Company's meat alternative products also compete with similar vegetable protein
products marketed by other companies. Until recently, most of the Company's
competitors which market meat alternative products have been relatively small
firms which have not established national distribution systems for their
products as extensive as the Company's distribution system. In recent years,
however, Wholesome & Hearty, Inc. (Gardenburger), Archer Daniels Midland Co.,
and Pillsbury (Green Giant Harvest Burger) have become major competitors that
market meat alternative products. Due to the entry of some of the companies
mentioned above into the meat alternative category, total retail sales in the
category have grown from approximately $39,000,000 in 1993 to approximately
$126,000,000 in 1996. Based on industry data, the Company's retail market share
for its meat alternative products was approximately 56%, 58% and 52% for 1996,
1995, and 1994, respectively.
The Company's frozen egg substitute products are sold in competition with
refrigerated egg substitute products and fresh shell eggs. In addition, several
major egg packagers are developing processes to reduce the cholesterol content
of whole eggs. If any of such products are successfully developed and
introduced, they would compete with the Company's frozen egg substitute
products. The Company's SCRAMBLERS and BETTER'N EGGS frozen products also
compete against frozen and refrigerated products manufactured and sold by a
number of other firms, including Egg Beaters sold by Fleischmann's and Healthy
Choice sold by ConAgra. Based on industry data, during 1996, SCRAMBLERS and
frozen BETTER'N EGGS accounted for approximately 27% of the market for frozen
egg substitute products. The Company's egg substitute competitors mentioned
above are considerably larger, have greater financial resources and enjoy wider
recognition for their branded products.
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<PAGE>
In recent years, a number of large companies in the package food industry
have introduced new food products for persons who are concerned about their
consumption of fat and cholesterol. Their products are targeted to some extent
toward the same consumer base which purchases products of the Company, insofar
as they both rely on health-oriented claims. These companies have significantly
greater resources available for advertising and product development than the
Company.
Research and Development
The Company has been a leader in developing and commercializing vegetable
protein products for the past 58 years and has pioneered various textured
protein processes, including the process of spinning soy protein into edible
fibers providing the texture of various meat products. This leadership has been
important in the development of the Company's meat alternative products, as well
as its egg substitute and other products.
The Company's research and development department consisted of 21 full-time
employees at February 27, 1997. Research and development expenses for the fiscal
years ended December 31, 1996, 1995 and 1994 were approximately $1,280,000,
$1,227,000 and $1,370,000, respectively. In 1997, the Company expects to
increase its commitment to developing new technology and products. Four new
positions will be added to research and development during 1997 to increase the
Company's effort to stay ahead of the competition. As a result of the Company's
ongoing development of new technologies and products, its continued effort to
ensure product quality and other regulatory requirements, the Company expects
its research and development expenses in 1997 to be consistent with prior years.
During 1996, the Company introduced a record twenty-one new products. All
of these products met the Company's criteria for new products: good taste, low
or reduced fat, and convenience. In addition, the Company has continued to
reformulate existing products to lower their fat and sodium content.
Government Regulations
The Company is subject to various laws and regulations relating to the
operations of its production facilities, the production, packaging, labeling and
marketing of its products, and pollution control which are administered by
federal, state and other governmental agencies. The Company's production
facilities are regularly inspected by the United States Food and Drug
Administration and the Ohio Department of Agriculture. The Company believes that
it complies in all material respects with the health, environmental and other
laws and regulations applicable to it and believes that its continued compliance
with existing standards will not have a material effect on its results of
operations or financial condition.
Trademarks and Patents
The Company has numerous federally registered and/or common law trademarks
covering its products which the Company considers important as an indication of
the source of origin of its products. The most important trademarks, all of
which are federally registered, are MORNINGSTAR FARMS with design, MORNINGSTAR
FARMS SCRAMBLERS, WORTHINGTON with "Flower W", LOMA LINDA and NATURAL TOUCH. The
federally registered trademarks, when renewed at ten year intervals and
continuously used, have an indefinite term.
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<PAGE>
The Company has numerous patents relating to its vegetable protein and egg
substitute products that expire at various dates from 1997 through 2007. During
the next five years, only one patent that is material to the Company's business
is scheduled to expire. That patent, which expires in October, 1997, relates to
a process by which the Company prepares textured protein concentrate. Currently,
however, the Company more commonly emphasizes and relies on trade secrets and
proprietary methods, rather than on statutory protections, in formulating and
producing its products.
The Company's trademarks and patents are owned and licensed to the Company
by Specialty Foods Investment Company, a wholly-owned subsidiary of the Company.
Employees
As of February 27, 1997, the Company had 577 employees, including 170
corporate salaried employees and 407 manufacturing employees. The Company's
Worthington manufacturing employees are represented by the United Industrial
Workers, AFL-CIO, and are covered by a collective bargaining agreement which
expires on September 30, 1998. The Company has never had a work stoppage and
considers its employee relations to be good.
Potential Product Liability
The sale of food products for human consumption involves the risk of injury
to consumers as a result of product contamination or spoilage, including the
presence of foreign objects, substances, chemicals, aflatoxin and other agents,
or residues introduced during the growing, storage, handling or transportation
phases. While the Company maintains rigid quality control standards and
inspection procedures, no assurance can be given that some food products sold by
the Company may not contain or develop harmful substances. The Company maintains
product liability insurance in an amount which the Company believes to be
adequate.
Special Note Regarding Forward-Looking Statements
Certain statements in this Form 10-K are forward looking statements within
the meaning of the Private Securities Litigations Act of 1995. Such statements
involve known and unknown risks, uncertainties and other factors that may cause
actual results to differ materially. Such risks, uncertainties and other factors
include, but are not limited to, changes in general economic conditions,
fluctuation in interest rates, increases in raw material costs, level of
competition, market acceptance of new and existing products, uninsured product
liability and other factors described in detail in this Form 10-K for the year
ended December 31, 1996.
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<PAGE>
MANAGEMENT
ITEM 1a EXECUTIVE OFFICERS OF THE REGISTRANT
The Company's executive officers are as follows:
Name Age Position(s)
-------- ------- ---------------
Allan R. Buller 79 Chairman of the Board, Treasurer and Director
Dale E. Twomley 57 President, Chief Executive Officer and Director
Donald B. Burke 49 Executive Vice President of Marketing and Sales
William T. Kirkwood 48 Executive Vice President and Chief Financial Officer
Ronald L. McDermott 46 Vice President of Research and Technology
James C. Remer 57 Vice President of Manufacturing
Jay L. Robertson 58 Vice President of Sales
Allan R. Buller has been Chairman of the Board since November 1, 1990, a
director since August, 1982, and Treasurer since April, 1986, and served as
President and Chief Executive Officer from October, 1982 through December, 1985.
Dale E. Twomley has been President and Chief Executive Officer since
January, 1986, a director since April, 1985, and held various other management
positions with the Company from July, 1983 through December, 1985.
Donald B. Burke has been Executive Vice President of Marketing and Sales
since November, 1994. Mr. Burke previously was employed as Vice President of
Marketing for T. Marzetti Company from 1986 to November of 1994.
William T. Kirkwood has been Executive Vice President and Chief Financial
Officer since February 1996. Prior to that, Mr. Kirkwood was Vice President of
Finance and Chief Financial Officer since May, 1989, and served as Controller
and Assistant Treasurer from October, 1982 through May, 1989.
Ronald L. McDermott has been Vice President of Research and Technology
since June, 1989.
James C. Remer has been Vice President of Manufacturing since July, 1990,
and was Director of Manufacturing from November, 1986 through July, 1990.
Jay L. Robertson has been Vice President of Sales since July, 1990, and
served as National Sales Manager for the Company's MORNINGSTAR FARMS brand from
September, 1985 through July, 1990.
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<PAGE>
ITEM 2 PROPERTIES
Worthington Facility
The Company's executive offices and production facility in Worthington,
Ohio are owned by the Company and are located on approximately ten acres of land
in Worthington, Ohio, a suburb of Columbus. The following table provides certain
information regarding the buildings at the Worthington facility:
Type of Building Square Footage
---------------- --------------
Production Facility and Annex...................... 109,000
Warehouse.......................................... 38,300
Research and Development Facility.................. 17,400
Office Building.................................... 6,100
Retail Store....................................... 4,800
Zanesville Facility
The Company began construction in mid-1989 of a 140,000 square foot
production facility in Zanesville, Ohio, located approximately 60 miles east of
the Company's Worthington offices. The original purpose of the facility was to
increase production capacity to meet the then-growing demand for frozen
SCRAMBLERS. Due to the negative impact that escalating egg white prices had on
sales of SCRAMBLERS, the Company decided in the fourth quarter of 1989 to halt
construction of the Zanesville facility. Prior to halting such construction, the
Company had expended $4,176,000 for land acquisition, architectural and
construction costs.
The Company resumed construction at the Zanesville location during the
second quarter of 1992 and completed Phase I during the second quarter of 1993.
Phase I is a 44,000 square foot facility which was used to produce refrigerated
BETTER'N EGGS and refrigerated SCRAMBLERS until these product lines were sold as
described below. The cost to complete and equip the 44,000 square foot facility
was approximately $15,000,000.
On November 22, 1994, the Company sold substantially all of the
manufacturing equipment, inventory and intangible assets used in the
manufacturing and selling of its refrigerated egg product. This transaction
resulted in a gain of $1,578,000, which is net of a $2,000,000 write-off of
costs related to the design of the Zanesville, Ohio plant for use as a
refrigerated egg processing plant. With the sale of the refrigerated egg assets,
the Zanesville facility became available for additional production capacity. Due
to projected increases in sales volume and continued capacity constraints at the
Worthington facility, the Company began a $9,000,000 expansion of the Zanesville
facility in June, 1995. This expansion project was completed within the
$9,000,000 budget and became operational April 1, 1996. This project included
$5,500,000 for new meat alternative production equipment; $3,500,000 for a new
37,000 square foot frozen foods warehouse, and the completion of 22,000 square
feet of the existing building for dry storage. This enabled the Company to
reduce capacity constraints at the Worthington facility, eliminate or reduce the
need for contract manufacturers, and allowed the Company to consolidate its
plant finished goods inventory and distribution functions at the Zanesville
site. On October 22, 1996, the Board of Directors approved an $11,500,000
capital spending project at Zanesville to install a second production line to
produce meat alternatives and to finish additional warehouse space for dry
storage. This project is expected to be completed by the end of September, 1997
and is expected to be funded from cash generated from operations and the
revolving credit facility.
- 11 -
<PAGE>
Warehouse and Distribution Facilities
The following table provides certain information regarding the Company's
principal warehouse and distribution facilities:
Date Acquired
or first Termination
Square Occupied by Date of Lease
Location Footage Interest the Company with Renewals
-------- ------- -------- ------------- -------------
Columbus, Ohio ........... 54,000 Leased 1992 2001
Riverside, California ... 19,000 Leased 1994 2008
Zanesville, Ohio ......... 59,000 Owned 1996 --
In addition, the Company leases space in eight public warehouse facilities in
Atlanta, Georgia; Chicago, Illinois; Fort Worth, Texas (2); Denver, Colorado;
Sante Fe Springs, California; Portland, Oregon; and Hatfield, Pennsylvania.
ITEM 3 LEGAL PROCEEDINGS
The Company is not a party to any material litigation nor is it aware of
any litigation threatened against it which, if commenced and adversely
determined, would likely have a material adverse effect upon the business or
financial condition of the Company.
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
- 12 -
<PAGE>
PART II
ITEM 5 MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
The information required by this Item 5 is incorporated by reference herein
from page 20 of the Worthington Foods, Inc. Annual Report to Shareholders for
the year ended December 31, 1996.
ITEM 6 SELECTED FINANCIAL DATA
The information required by this Item 6 is incorporated by reference herein
from page 8 of the Worthington Foods, Inc. Annual Report to Shareholders for the
year ended December 31, 1996.
ITEM 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The information required by this Item 7 is incorporated by reference herein
from pages 9 through 11 of the Worthington Foods, Inc. Annual Report to
Shareholders for the year ended December 31, 1996.
ITEM 8 FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by this Item 8 is incorporated by reference herein
from pages 12 through 19 of the Worthington Foods, Inc. Annual Report to
Shareholders for the year ended December 31, 1996.
ITEM 9 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
None
- 13 -
<PAGE>
PART III
ITEM 10 DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information regarding directors of Worthington Foods, Inc. is set forth in
the Worthington Foods, Inc. definitive Proxy Statement for the annual meeting of
shareholders to be held on April 22, 1997, under the caption "ELECTION OF
DIRECTORS," and is in accordance with Instruction G(3) incorporated herein by
reference. Information regarding executive officers of Worthington Foods, Inc.
is set forth under the caption "Executive Officers of the Registrant" in Item 1a
hereof. No facts exist which would require disclosures herein pursuant to Item
405 to Regulation S-K.
ITEM 11 EXECUTIVE COMPENSATION
Information regarding executive compensation is set forth in the
Worthington Foods, Inc. definitive Proxy Statement for the annual meeting of
shareholders to be held on April 22, 1997, under the captions "ELECTION OF
DIRECTORS," and "COMPENSATION OF EXECUTIVE OFFICERS AND DIRECTORS," and is in
accordance with Instruction G(3) incorporated herein by reference. Neither the
Report on Executive Compensation nor the Performance Graph included in the
Worthington Foods, Inc. definitive Proxy Statement for the annual meeting of
shareholders to be held April 22, 1997, shall be deemed to be incorporated
herein by reference.
ITEM 12 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
Information regarding security ownership of certain beneficial owners and
management is set forth in the Worthington Foods, Inc. definitive Proxy
Statement for the annual meeting of shareholders to be held April 22, 1997,
under the captions "SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS," and
"SECURITY OWNERSHIP OF CERTAIN OFFICERS AND DIRECTORS," and is in accordance
with Instruction G(3) incorporated herein by reference.
ITEM 13 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information regarding certain relationships and related transactions is set
forth in the Worthington Foods, Inc. definitive Proxy Statement for the annual
meeting of shareholders to be held April 22, 1997, and is in accordance with
Instruction G(3) incorporate herein by reference.
- 14 -
<PAGE>
PART IV
ITEM 14 EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS
ON FORM 8-K
(a)(1) Financial Statements
The following Consolidated Financial Statements of Worthington Foods,
Inc. are incorporated by reference in Item 8 of this Form 10-K from
the pages set forth below of the Worthington Foods, Inc. Annual
Report to Shareholders for the year ended December 31, 1996.
<TABLE>
Page No. of Page No. of this
Annual Report Form 10-K
------------- -----------------
<S> <C> <C>
Report of Independent Auditors.................................. 19 42
Consolidated Balance Sheets as of December 31, 1996 and 1995.... 12 35
Consolidated Statements of Income for the Three Years Ended
December 31, 1996............................................. 13 36
Consolidated Statements of Shareholders' Equity for the Three
Years Ended December 31, 1996.................................. 13 36
Consolidated Statements of Cash Flows for the Three Years
Ended December 31, 1996....................................... 14 37
Notes to Consolidated Financial Statements ..................... 15-18 38-41
</TABLE>
(a)(2) Financial Statement Schedules
For the three years in the period ended December 31, 1996:
Page No. of this
Form 10-K
----------------
Schedule II - Valuation and Qualifying Accounts 48
The other schedules for which provision is made in Regulation S-X are
not required under the instructions contained therein, are
inapplicable, or the information is included in the Notes to the
Consolidated Financial Statements.
(a)(3) Exhibits
Exhibits filed with this Annual Report on Form 10-K are attached
hereto. For a list of such exhibits see the "Exhibit Index" at pages
18 and 19 of this Form 10-K. The following table provides certain
information concerning the executive compensation plans and
arrangements required to be filed as exhibits to this Annual Report
on Form 10-K.
- 15 -
<PAGE>
EXECUTIVE COMPENSATION PLANS AND ARRANGEMENTS
Exhibit No. Description Location
- ----------- --------------- --------
10(a) Worthington Foods, Inc. 1995 Stock Option Plan ***
10(b) Worthington Foods, Inc. Supplemental Executive Retirement Plan *
10(c) Summary Description of the Worthington Foods, Inc.
1997 Executive Bonus Plan Page 20
10(d) Worthington Foods, Inc. Group Life Insurance Plan *
10(e) Split Dollar Insurance Policy for Dale E. Twomley *
10(f) Restricted Stock Agreement between Worthington Foods, Inc.
and Dale E. Twomley *
10(g) Restricted Stock Agreement between Worthington Foods, Inc.
and William T. Kirkwood *
10(h) Restricted Stock Agreement between Worthington Foods, Inc.
and Jay L. Robertson *
10(i) Restricted Stock Agreement between Worthington Foods, Inc.
and James C. Remer *
10(aa) Restricted Stock Agreement between Worthington Foods, Inc.
and Donald B. Burke **
______________________
* Incorporated by reference to the Registrant's S-1 registration statement
filed February 26, 1992. (Registration No. 33-45945) Exhibit numbers herein
are the same as those in the S-1 Registration Statement
** Incorporated by reference to the Registrant's Form 10-K filed March 28,
1995. (File No. 0-19887) (Exhibit 10(aa))
*** Incorporated by reference to the Registrant's Form S-8 filed May 12, 1995.
(Registration No. 33-92222) (Exhibit 4)
(b) Reports on Form 8-K
A report on Form 8-K was filed on October 31, 1996, regarding Item 5,
Other Events. The information contained in this 8-K reported the
Company's four-for-three share split declared by the Board of
Directors of the Company on October 22, 1996; and the resulting
adjustment in the stock purchase rights under the Shareholder Rights
Plan.
(c) Exhibits filed with this Annual Report on Form 10-K are attached
hereto. For a list of such exhibits see the "Exhibit Index" at pages
18 and 19 hereof.
- 16 -
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
Dated: March 28, 1997
WORTHINGTON FOODS, INC.
(Registrant)
By: /S/ WILLIAM T. KIRKWOOD
_________________________________________
William T. Kirkwood
Executive Vice President and
Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Signature Title Date
________________________________________________________________________________
ALLAN R. BULLER*
___________________________
Allan R. Buller Chairman of the Board, Treasurer
and Director 3/28/97
DALE E. TWOMLEY*
___________________________
Dale E. Twomley President, Chief Executive Officer
and Director 3/28/97
/S/ WILLIAM T. KIRKWOOD
___________________________
William T. Kirkwood Executive Vice President,
Chief Financial Officer 3/28/97
ROGER D. BLACKWELL*
___________________________
Roger D. Blackwell Director 3/28/97
EMIL J. BROLICK
___________________________
Emil J. Brolick Director 3/28/97
THEODORE A. HAMER*
___________________________
Theodore A. Hamer Director 3/28/97
GEORGE T. HARDING, IV*
___________________________
George T. Harding, IV Director 3/28/97
DONALD G. ORRICK*
___________________________
Donald G. Orrick Director 3/28/97
DONALD B. SHACKELFORD*
___________________________
Donald B. Shackelford Director 3/28/97
* By /S/ WILLIAM T. KIRKWOOD 3/28/97
___________________________
William T. Kirkwood, Attorney in Fact
- 17 -
<PAGE>
WORTHINGTON FOODS, INC.
ANNUAL REPORT ON FORM 10-K
FOR THE YEAR ENDED DECEMBER 31, 1996
EXHIBIT INDEX
<TABLE>
Exhibit No. Description Location
________________________________________________________________________________________________
<S> <C> <C>
3a Amended and Restated Articles of Incorporation (1)
3b Amended Regulations (1)
10(a) Worthington Foods, Inc. 1995 Stock Option Plan (5)
10(b) Worthington Foods, Inc. Supplemental Executive Retirement Plan (1)
10(c) Summary Description of the Worthington Foods, Inc. 1997 Executive Bonus
Plan Page 20
10(d) Worthington Foods, Inc. Group Life Insurance Plan (1)
10(e) Split Dollar Insurance Policy for Dale E. Twomley (1)
10(f) Restricted Stock Agreement between Worthington Foods, Inc. and Dale E.
Twomley (1)
10(g) Restricted Stock Agreement between Worthington Foods, Inc. and William T.
Kirkwood (1)
10(h) Restricted Stock Agreement between Worthington Foods, Inc. and Jay L.
Robertson (1)
10(i) Restricted Stock Agreement between Worthington Foods, Inc. and James C.
Remer (1)
10(j) Amended and Restated License Agreement between Worthington Foods, Inc. and
Specialty Foods Investment Company (1)
10(k) Note Agreement between Worthington Foods, Inc. and Principal Mutual Life
Insurance Company, dated January 1, 1990 for $10,000,000 Principal Amount
9.75% Senior Secured Notes Due January 15, 2004 included Amendment to Note
Agreement dated March 1, 1990, Second Amendment to Note Agreement dated
June 1, 1990, Third Amendment to Note Agreement dated August 1, 1991,
Fourth Amendment to Note Agreement dated January 1, 1992, and Fifth
Amendment to the Note Agreement dated as of February 1, 1992 (1)
10(l) $10,000,000 9.75% Senior Secured Note, dated January 16, 1990 (1)
10(m) Open-End Mortgage, dated January 15, 1990, on Worthington and Zanesville
Facilities including first Amendment to Open-End Mortgage dated February
24, 1992 (1)
10(n) Security Agreement between Worthington Foods, Inc. and Principal dated
January 15, 1990 including First Amendment to Security Agreement dated
February 24, 1992 (1)
10(o) First Amended and Restated Loan Agreement between Worthington Foods, Inc.
and Huntington National Bank dated February 24, 1992 (1)
10(p) First Amendment to Second Amended and Restated Loan Agreement between
Worthington Foods, Inc. and Huntington National Bank dated October 31,
1995 (8)
10(q) $20,000,000 Revolving Note with Huntington National Bank dated October 31,
1995 (8)
10(r) Worthington Foods, Inc. Incentive Stock Purchase Plan for Eligible
Employees (9)
10(x) Collateral Assignment of License Agreement between Worthington Foods, Inc.
and Huntington National Bank dated January 15, 1990 (1)
10(y) Worthington Foods, Inc. 1993 Stock Option Plan for Non-Employee Directors (2)
10(z) Second Amended and Restated Loan Agreement between Worthington Foods, Inc.
and Huntington National Bank dated June 15, 1993, including The Related
Second Amendment to Intercreditor Agreement dated June 15, 1993 (3)
- 18 -
<PAGE>
Exhibit No. Description Location
________________________________________________________________________________________________
10(aa) Restricted Stock Agreement between Worthington Foods, Inc. and Donald B.
Burke (4)
10(ab) Rights Agreement, dated as of June 13, 1995, between Worthington Foods,
Inc. and National City Bank, as Rights Agent (6)
10(ac) Certificate of Adjustment of Preferred Stock Purchase Rights (7)
10(ad) Certificate of Adjustment of Preferred Stock Purchase Rights (10)
11 Statement Regarding Computation of Earnings Per Share Page 21
13 Annual Report to Shareholders Pages 22-44
22 Subsidiary of the Registrant (1)
23 Consent of Ernst & Young LLP Page 45
24 Power of Attorney Page 46
27 Financial Data Schedule Page 47
________________________
(1) Incorporated by reference to the Registrant's S-1 registration statement
filed February 26, 1992. (File No. 0-19887, Registration No. 33-45945) -
Exhibit numbers herein are the same as those in the S-1 Registration
Statement.
(2) Incorporated by reference to the Registrant's Form S-8 filed August 12,
1993. (Registration No. 33-67290) (Exhibit 4)
(3) Incorporated by reference to the Registrant's Form 10-K filed March 17,
1994. (File No. 0-19887)
(4) Incorporated by reference to the Registrant's Form 10-K filed March 28,
1995. (File No. 0-19887) (Exhibit 10(aa))
(5) Incorporated by reference to the Registrant's Form S-8 filed May 12, 1995.
(Registration No. 33-92222) (Exhibit 4)
(6) Incorporated by reference to the Registrant's Form 8-K filed June 14, 1995.
(File No. 0-19887) (Exhibit 1)
(7) Incorporated by reference to the Registrant's Form 8-K filed December 11,
1995. (File No. 0-19887) (Exhibit 99(a))
(8) Incorporated by reference to the Registrant's Form 10-K filed March 28,
1996. (File No. 0-19887)
(9) Incorporated by reference to the Registrant's Form S-8 filed March 29,
1996. (Registration No. 333-2904) (Exhibit 4)
(10) Incorporated by reference to the Registrant's Form 8-K filed October 31,
1996. (File No. 0-19887) (Exhibit 99(a))
</TABLE>
- 19 -
SUMMARY DESCRIPTION OF THE WORTHINGTON FOODS, INC.
1997 EXECUTIVE BONUS PLAN
The Board of Directors of the Company adopted an incentive compensation
program for the President and the Vice Presidents of the company which began in
1993. Under this plan, such executives are eligible to receive year end cash
bonuses. These bonuses are tied to the Company's financial plan for 1997. The
bonuses are designed to place the executives' compensation at approximately the
mid-point of total compensation paid to executives of similar sized companies
(based upon a survey conducted by William Mercer & Company) when the Company
reaches its financial plan. When the Company exceeds its financial plan, the
cash bonuses to be paid increases up to a maximum of 60% of the base salaries of
the Company's Vice Presidents, 90% of the base salary for the Company's
Executive Vice Presidents and 120% of the base salary of the Company's
President. At the maximum, the total compensation paid the executives is
approximately the 75th percentile of comparable companies.
The exact amount of the bonus paid to each executive is also tied to
specific performance goals established for each executive. The Compensation
Committee of the Board evaluates the performance of the President, and the
President evaluates the performance of the Executive Vice Presidents and Vice
Presidents.
-20-
<PAGE>
<TABLE>
WORTHINGTON FOODS, INC.
COMPUTATION OF EARNINGS PER SHARE
Years Ended December 31, 1996, 1995 and 1994
Years Ended December 31, 1996, 1995 and 1994
_________________________________________________
1996 1995 1994
--------- --------- ---------
<S> <C> <C> <C>
Primary:
Weighted average number of common shares outstanding .............. 8,498,971 8,434,617 8,401,273
Net effect of dilutive stock options based on treasury stock
method using average market price .................................. 343,009 229,714 27,074
---------- ---------- ----------
Weighted average common and common equivalent shares ............... 8,841,980 8,664,331 8,428,347
========== ========== ==========
Net income ......................................................... $7,393,000 $5,231,000 $4,332,000
========== ========== ==========
Net income per common share ........................................ $ 0.84 $ 0.60 $ 0.51
========== ========== ==========
Fully diluted:
Weighted average number of common shares outstanding ............... 8,498,971 8,434,617 8,401,273
Net effect of dilutive stock options based on treasury
stock method using market price at end of period if
greater than average market price during the period ............... 424,978 301,609 27,074
---------- ---------- ----------
Weighted average common and common equivalent shares ............... 8,923,949 8,736,226 8,428,347
========== ========== ==========
Net income ......................................................... $7,393,000 $5,231,000 $4,332,000
========== ========== ==========
Net income per common share ........................................ $ 0.83 $ 0.60 $ 0.51
========== ========== ==========
Note: All per share amounts have been adjusted to reflect the four-for-three
share split distributed in December, 1996, and the five-for-four share
split distributed in December, 1995.
</TABLE>
- 21 -
WORTHINGTON FOODS
1996 ANNUAL REPORT
OUR MISSION
WORTHINGTON FOODS IS SOLELY DEDICATED TO PRODUCING
AND MARKETING VEGETARIAN AND OTHER HEALTHFUL FOODS.
OUR VISION
WE ENVISION "VEGGIE BURGERS" BECOMING A
BILLION DOLLAR MAINSTREAM FOOD CATEGORY
WITHIN THE NEXT TEN YEARS, WITH OUR COMPANY
CONTINUING TO BE THE LEADER.
OUR VALUES
MORE THAN JUST AN ORGANIZATION TO MAKE MONEY, WORTHINGTON FOODS HOLDS,
WITHOUT COMPROMISE, OUR CORE VALUES SUMMARIZED IN G.R.I.P.
GOOD TASTE GOOD NUTRITION. For nearly 60 years,Worthington Foods has been
"Putting Good Taste Into Good Nutrition." We will continue our tradition of
producing the best meatless products. We believe we can be a part of our
customers' healthful living by producing and marketing an expanding range of
good tasting, nutritious foods.
RESPECT FOR OUR EMPLOYEES. We believe our employees are our greatest asset. By
consistently demonstrating respect and concern for our employees, we believe our
employees respond with their best efforts for the continued good and success of
the Company.
INTEGRITY IS MORE IMPORTANT THAN PROFITS. Honesty and Integrity are hallmarks of
Worthington Foods. We depend on our employees to carry out these values in all
phases and levels of the organization. We do not want, nor will we permit, our
employees to be a part of any Company transaction that is less than 100 percent
honest and honorable.
PEOPLE ARE WHOLE BEINGS. We believe people are whole beings that require a
balance among mind, body and spirit. Through our employee programs, we assist
our employees' efforts to be whole beings-- capable of giving their best to
their God, families, friends, and Worthington Foods.
We believe that because we are focused on our mission, inspired by our vision
and guided by our values, we will achieve our objectives.
<PAGE>
TABLE OF CONTENTS
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS............................................... 1
SHAREHOLDERS' LETTER............................................... 2-3
HISTORICAL PERSPECTIVE & COMPANY OVERVIEW.......................... 4
RETAIL GROCERY SEGMENT............................................. 5
SPECIALTY MARKETS SEGMENT.......................................... 6
FOODSERVICE SEGMENT................................................ 7
SELECTED CONSOLIDATED FINANCIAL DATA............................... 8
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS............................. 9-11
CONSOLIDATED BALANCE SHEETS........................................ 12
CONSOLIDATED STATEMENTS OF INCOME.................................. 13
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY.................... 13
CONSOLIDATED STATEMENTS OF CASH FLOWS.............................. 14
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS......................... 15-18
REPORT OF INDEPENDENT AUDITORS..................................... 19
OFFICERS AND DIRECTORS............................................. 19
SHAREHOLDER INFORMATION............................................ 20
<PAGE>
WORTHINGTON FOODS, INC. FINANCIAL HIGHLIGHTS
1996 1995
------------ ------------
Net Sales $109,075,223 $ 91,075,493
Gross Profit $ 43,121,188 $ 36,181,717
Income From Operations $ 12,847,308 $ 9,930,317
Income Before Income Taxes $ 11,682,955 $ 8,791,609
Income Taxes $ 4,290,000 $ 3,561,000
Net Income $ 7,392,955 $ 5,230,609
Total Assets $ 80,738,046 $ 69,933,457
-1-
<PAGE>
TO OUR SHAREHOLDERS, EMPLOYEES AND OTHER FRIENDS:
FEBRUARY 27, 1997
We are very pleased to report another year of record sales and earnings for the
year ended December 31, 1996. Net sales increased 20 percent over 1995 to $109
million and net income increased 41 percent to $7,393,000. The increased sales
were primarily driven by Morningstar Farms meat alternative products in retail
supermarkets and foodservice operations. Additionally, sales through the natural
food distribution channel and the Seventh-day Adventist markets were very strong
in 1996. For each of the past seven quarters, retail sales of Morningstar Farms
meat alternatives have exceeded sales of prior year quarters by 25 percent,
while foodservice sales grew at a rate exceeding 40 percent for the past year.
Capital Expenditures
The $9 million project to equip the Zanesville Plant was completed
on-time/on-budget and opened April 1, 1996, with 23 employees to operate the new
VEGGIE BURGERS facility. The new Distribution Center, part of this project and
attached to the Zanesville Plant, began operations at the same time. The
Zanesville Plant expanded to a second shift in July, 1996, with 75 employees
working around the clock, five (or more) days per week. In October, 1996, the
Board of Directors approved $11.5 million in capital spending at Zanesville to
install a second high-speed production line and additional dry warehouse space.
With the completion of the second production line in September, 1997, the
Zanesville Plant will have capacity for approximately $45 million in sales. The
Zanesville Plant has space for two additional lines which will be added as
necessary to meet future sales demands.
New Products
Worthington Foods introduced a record 21 new products this year. All of these
products meet our criteria for new products: good taste, low or reduced fat, and
convenience. Products introduced in the past three years accounted for 40
percent of Morningstar Farms sales during 1996. Worthington Foods continues to
be the "innovator" in good tasting, healthful alternatives to meat. CHIK
NUGGETS, an absolutely delicious chicken-like nugget with 75 percent less fat
than nuggets made of real chicken, was introduced in February, 1997. We believe
this has the potential to be a high-volume finger-food for adults and children.
Several other new products are scheduled for introduction in each of our markets
during 1997.
Our Employees
We believe the primary reason Worthington Foods continues to be the leader in
"Veggie Burgers" is that we have the best employees in the "Veggie Burger"
business. Over the past 58 years, we have developed a corporate culture of
honesty, creativity, hard-work and caring for our employees. We have summarized
our Company's core values in G.R.I.P. and reinforced the importance of
maintaining these values during the year.
Many of our employees have been a part of our Company for many years. As of
December, 1994, 20 percent of our employees had worked at Worthington Foods for
20 years or more. During the past two years we have hired 193 employees, yet we
still have over 76 of our 575 employees with 20 years or more at our Company.
Incentive plans have recently been developed for our employees which resulted in
every employee of Worthington Foods being appropriately rewarded with a bonus
payment for their efforts in 1996. This is the first time everyone shared in the
success of the Company. If the non-executive employees elect to use their bonus
payments to purchase WFDS stock, there is a match provided by Worthington Foods.
We believe employees think and work differently when they are shareholders.
We believe we now have the strongest Management team we have ever had at
Worthington Foods. The Company's strong results stem from a competent and
committed management group that is profit-minded. Our most recent addition to
the management group joined us on January 2, 1997; Mr. Chip Newton is our new
Director of Foodservice. Chip has over 20 years of foodservice experience where
he has established important relationships in the trade. We expect he will help
us aggressively develop this important growth market of our Company.
-2-
<PAGE>
Financial Performance
Your Company's financial position is strong, and getting stronger. At December
31, 1996, working capital was over $20 million, $5 million higher than at the
end of fiscal 1994. Current assets were 3.2 times current liabilities. During
the past two years, shareholders' equity has increased by nearly $12 million to
$48.7 million. Over the past two years, capital spending has been three times
our depreciation, totaling $21.3 million, and our quarterly cash dividend has
increased 39 percent. Even with the past two years of aggressive capital
spending and increased cash dividends, long-term debt as of December 31, 1996 is
$18 million, 37 percent of total capital compared to 72 percent of total capital
at the end of fiscal year 1993. The Board of Directors declared two stock splits
during the past two years; a 5:4 split in November, 1995 and a 4:3 split in
October, 1996. On February 18, 1997, your Board of Directors declared a regular
cash dividend of 2.5(cent) per share. The dividend is to be paid on April 25,
1997, to shareholders of record as of March 28, 1997. The market value of
Worthington Foods common stock has appreciated 322 percent during the past three
years. Part of our strategy in building for the future is to invest in expansion
capital, new product introductions and technology, and to increase employee
ownership.
Building for the Future
For several years now, we have had the objective of increasing sales by 15
percent and net income by 20 percent annually. In 1996, we achieved both our
objectives as sales increased 20% and net income increased 41%. Our vision for
the future targeted "$200 million in sales by the year 2000." Not only do we now
believe this is possible, we have set this as our four-year sales objective.
Recent studies indicate between 40 and 60 percent of the United States adult
population are modifying their diet to reduce fat and cholesterol intake. We
estimate that less than five percent of United States adults purchase our
Morningstar Farms products in retail stores. This is an uncommon opportunity. We
believe our sales will continue strong growth as the result of 1) providing good
taste in nutritious products, 2) the wide and innovative range of meatless
products now offered, 3) the increased shelf space we have developed, and 4)
targeted new-user marketing strategies we continue to refine.
Research and Technology has long been a strength of Worthington Foods. For 58
years we have developed the best alternatives to meat and still enjoy over 50
percent market share in the retail supermarkets. However, we believe we must
increase our support to developing new technology and products. Four new
positions will be added to our Research & Technology Department as we increase
our efforts to stay ahead of all competitors -- today's and those that will come
later.
The Zanesville Plant is the state-of-the-art frozen food production facility.
Depending on product mix, our two plants will be capable of producing
approximately $160 million in sales when the new line is operational this fall.
We expect to continue aggressive capital spending in coming years, and expect to
fund this growth with cash generated from operations.
To increase sales and reduce expenses are the objectives of Worthington Foods
and every other growth-oriented business. Our variable costs are the focus of
operations for 1997. We intend to solidify stronger relations with fewer
suppliers as we partner with the best to share the benefits of growth.
Similarly, fixed costs will be reduced as a percentage of sales due to increased
volume. We intend to intensify our efforts to control expenses in all areas as
we attempt to improve margins.
We are excited by the challenges and opportunities in the marketplace; we are
also excited about the opportunities for our employees. But best of all, our
employees are excited!! Excited employees with financial incentives, focused on
uncommon opportunities and driven by a solid business plan is an awesome
combination. We are committed to making 1997 another record year.
Thank you for your continued interest in and support of Worthington Foods.
Allan R. Buller
Chairman of the Board
Dale E. Twomley
President and Chief Executive Officer
-3-
<PAGE>
HISTORICAL PERSPECTIVE & COMPANY OVERVIEW
Worthington Foods is the world's largest company dedicated solely to the
manufacture and marketing of vegetarian foods and other healthful items. Since
its start in 1939, Worthington Foods has become the market leader in quality and
innovation in the rapidly growing $250-million category for meat alternatives.
Worthington Foods' sales for 1996 totaled a record $109-million, up 20% from the
previous year. The growth is a direct result of health-motivated consumers who
are reducing their consumption of processed meats in favor of good-tasting,
convenient, lower-fat, vegetable-based products.
Twenty-one new items - nearly all low-fat or fat-free - were introduced into the
grocery, specialty and foodservice segments during 1996. This was by far the
largest number of new products launched by the Company in a single year.
In order to meet the growing demand, Worthington Foods completed a $5.5-million
expansion to accommodate hot air oven production of its BETTER'N BURGERS, SPICY
BLACK BEAN BURGERS and other fat-free items at the manufacturing facility in
Zanesville, Ohio. This has allowed the Company to eliminate many of its contract
manufacturers.
A new $3.5-million Distribution Center was also constructed at the Zanesville
location. With 37,000 square-feet of frozen storage and another 22,000
square-feet of dry storage for canned items, Worthington Foods can better supply
the markets for its four national brands:
MORNINGSTAR FARMS
is the #1 brand of meat alternatives available in retail supermarkets, and is
rapidly increasing its presence in foodservice operations. The line also
includes the #2 brand in the frozen egg category, SCRAMBLERS(R).
WORTHINGTON
brand satisfies the preferences of consumers seeking a wide variety of canned
and frozen meat alternatives. It is sold primarily through Seventh-day Adventist
owned stores and health food stores.
LOMA LINDA
brand complements the Worthington line by offering primarily nutritious canned
meat alternatives to Seventh-day Adventist and other specialty food shoppers.
NATURAL TOUCH
brand addresses the stricter requirements of health food shoppers seeking
vegetarian products free of artificial additives, flavors or colors, and is sold
primarily in natural food stores.
-4-
<PAGE>
RETAIL GROCERY
Morningstar Farms is the recognized market leader of meat alternatives in
supermarkets. This category was up 23% in 1996 over the previous year,
representing more than $126-million in retail sales.
Worthington Foods was the first to introduce a line of frozen egg substitutes
and meatless breakfast items into retail grocery stores during the 1970's.
Today, Morningstar Farms items are found in more than 95% of the nation's
supermarkets.
The Morningstar Farms brand offers approximately two dozen frozen food items to
replace whole eggs and processed meats for all meal occasions. Most of these
meat alternatives are made from soy protein; consequently, they are either
low-fat or fat-free. Virtually all are cholesterol-free; and many provide a good
source of fiber. Moreover, an increasing body of medical evidence has linked the
consumption of soy protein with reduced risk of cardiovascular disease, certain
types of cancer and osteoporosis in women. However, the primary brand
positioning of Morningstar Farms continues to be good-tasting, convenient,
healthier alternatives to meat, particularly red meat and pork.
In spite of increased competition in 1996, Morningstar Farms maintained a 55%
share of the meat alternative category volume, up 2 share points from 1995.
Additionally, Morningstar Farms items contributed nearly two-thirds of the
incremental growth in the sale of meat alternatives during 1996.
A key contributor to the growth was the introduction of new items, including:
GROUND MEATLESS - a fat-free, soy-based ingredient to be used in place of cooked
ground beef in tacos, sauces and casseroles.
BREAKFAST SANDWICHES - fat-free Scramblers egg product, meatless Breakfast
Patties and fat-free cheese are combined to create three varieties of
great-tasting, low-fat, eat-on-the-run breakfast items.
In addition to the new items, significant levels of distribution were obtained
on items initially introduced in 1994 and 1995. Products posting major volume
gains included BETTER'N BURGERS, GARDEN VEGGIE PATTIES, SPICY BLACK BEAN BURGERS
and CHIK PATTIES. Also significant is that items in distribution for many years
realized volume gains, indicating that the newer items are not merely trading
out sales from the existing line.
Efforts continued in 1996 to focus on improving the flavor and texture of the
products while also reducing the fat content. For example, PRIME PATTIES were
restaged as low-fat burgers, and the quality was improved dramatically.
The new user marketing strategy initiated in 1995 was continued with much
success in 1996. The objective was to attract product trial among
health-motivated consumers through equity-building print advertising in highly
targeted special interest magazines and cents-off coupons targeted at users of
competitive products.
-5-
<PAGE>
SPECIALTY MARKETS
The Specialty Markets segment consists of two distinct, but related categories.
One is a mature, stable market and represents the core of Worthington Foods'
heritage. The other segment is comprised of natural foods stores, which
represent an area of continuing sales growth.
The mature market consists largely of some 60 high-volume, direct accounts
serving members of the Seventh-day Adventist Church, many of whom follow
vegetarian dietary practices. They are frequently second and third generation
consumers who are loyal to Worthington and Loma Linda brands, which offer the
broadest assortment of great-tasting meatless items. These are available as
canned, dry and frozen products.
In 1996, Worthington Foods provided low-fat alternatives to some of the brand's
most popular items: FRICHIK, VEJA-LINKS and CHILI. Additional low-fat offerings
are planned for 1997. These low-fat items contributed to 6% growth in unit
volume among retailers serving the SDA market, after several years of flat to
declining sales.
The category for health and natural foods demonstrated strong growth in 1996.
The retail category for all natural foods was up more than 20% in 1996 to
register sales of approximately $9 billion. Frozen meat alternatives increased
28% during that same period.
Worthington Foods serves the natural foods market with its Natural Touch brand.
The company has taken steps in recent years to strengthen its foothold in this
market segment through the appointment of a broker network with national
coverage. This increased attention in the natural foods retail environment has
helped to increase Natural Touch volume by more than 20% over the past year.
In addition, Natural Touch launched five new items during 1996:
SPICY BLACK BEAN BURGERS - a zesty blend of black beans, spices and peppers in
convenient, ready-to-heat patties.
VEGAN CRUMBLES - free of egg and dairy, this all-natural, soy-based recipe
ingredient comes in two flavors: Burger and Sausage.
ROASTED SOYBUTTER - this tasty replacement for peanut butter contains one-third
less fat than peanut spreads and provides a good source of soy protein. It also
allows the satisfaction of eating peanut butter for consumers who are allergic
to nuts because it contains no nuts of any kind.
KAFFREE ROMA CAPPUCCINO - this addition to the #1 brand of coffee substitutes in
natural foods stores provides a quick, satisfying alternative to the milk-based
specialty coffees.
-6-
<PAGE>
FOODSERVICE
Over the past five years, Worthington Foods' sales to Foodservice accounts have
been the Company's fastest growing market. Posting sales gains of more than 40%
in 1996, our Foodservice sales topped $12-million.
The Morningstar Farms brand has often received considerable media attention as
an increasing number of restaurants offer one or more of our products. In fact,
members of the National Restaurant Association in response to consumer demands
have focused on the creation of new vegetarian entrees as well as a wide variety
of low fat and meatless options.
As a result of increased consumer interest and product availability, restaurants
now represent more than 40% of our Foodservice sales, and the list of regional
chains and local restaurants featuring a Morningstar Farms VEGGIE BURGER
continues to grow. Until recently the majority of the sales in this category
were made to universities, hospitals, hotels and other institutions.
Worthington Foods' Foodservice success is the result of positioning the Company
as the category leader in quality, innovation and variety. Additionally, the
Foodservice sales team reached full strength for the first time at the end of
1996, including a nationwide network of brokers and more than 500 distributors.
While there is no clear measure of the current size of the category for meat
alternatives in Foodservice, it is estimated to have been approximately
$50-million in 1996 and growing substantially. Continued success in Foodservice
by Worthington Foods will be based on sustained category growth, expanded
distribution of current products, the introduction of new items, and a category
leadership position by the Morningstar Farms brand in conjunction with our
national network of distributors, brokers and multi-unit restaurant partners.
-7-
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The following table summarizes certain selected consolidated financial data for
the periods indicated and is derived from the Consolidated Financial Statements
of the Company. The Consolidated Financial Statements for the five years ended
December 31, 1996 have been audited by Ernst & Young LLP, independent auditors.
The data presented below should be read in conjunction with the Company's
Consolidated Financial Statements and the notes thereto included elsewhere in
this Report. All per share amounts have been adjusted to reflect the
four-for-three share split distributed in December, 1996, and the five-for-four
share split distributed in December, 1995.
<TABLE>
Years Ended December 31,
----------------------------------------------------------------
1996 1995 1994 1993 1992
(In thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Statement of Income Data:(1)
Net sales $109,075 $ 91,075 $ 88,220 $ 79,298 $ 76,464
Cost of goods sold 65,954 54,893 55,575 50,077 46,268
-------- -------- -------- -------- --------
Gross profit 43,121 36,182 32,645 29,221 30,196
Selling and distribution expenses 25,752 21,736 20,945 21,319 20,998
General and administrative expenses 3,242 3,289 2,889 2,564 2,411
Research and development expenses 1,280 1,227 1,370 1,421 1,174
-------- -------- -------- -------- --------
Total expenses 30,274 26,252 25,204 25,304 24,583
Gain from sale of refrigerated egg assets -- -- 1,578 -- --
-------- -------- -------- -------- --------
30,274 26,252 23,626 25,304 24,583
-------- -------- -------- -------- --------
Income from operations 12,847 9,930 9,019 3,917 5,613
Interest expense 1,164 1,138 1,811 979 1,009
-------- -------- -------- -------- --------
Income before income taxes 11,683 8,792 7,208 2,938 4,604
Provision for income taxes 4,290 3,561 2,876 1,144 1,815
-------- -------- -------- -------- --------
Net income $ 7,393 $ 5,231 $ 4,332 $ 1,794 $ 2,789
======== ======== ======== ======== ========
Earnings per share
Primary $ 0.84 $ 0.60 $ 0.51 $ 0.21 $ 0.36
======== ======== ======== ======== ========
Fully diluted $ 0.83 $ 0.60 $ 0.51 $ 0.21 $ 0.36
======== ======== ======== ======== ========
Dividends per share $ 0.09 $ 0.08 $ 0.07 $ 0.07 $ 0.07
======== ======== ======== ======== ========
Weighted average common and common equivalent
shares used in computing earnings per share
Primary 8,842 8,664 8,428 8,401 7,767
Fully diluted 8,924 8,736 8,428 8,401 7,767
Balance Sheet Data (at year end):1
Working capital $ 20,130 $ 16,987 $ 15,182 $ 17,245 $ 14,467
Total assets 80,738 69,933 61,578 68,270 52,724
Total long-term debt 17,960 12,790 13,646 24,048 11,344
Total shareholders' equity 48,730 41,968 37,098 33,276 31,962
(1) Data for 1994 reflects the sale of the refrigerated egg assets. (See Note H
of the Company's Notes to the Consolidated Financial Statements.)
</TABLE>
-8-
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Results of Operations: The following table sets forth for the years indicated
information derived from the Company's Consolidated Statements of Income
expressed as a percentage of net sales and the percentage change in the dollar
amount of such items compared to the prior year.
<TABLE>
Percentage
Percentage of Net Sales Increase (Decrease)
Years Ended December 31, ------------------------
----------------------------- 1996 Over 1995 Over
1996 1995 1994 1995 1994
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net sales 100.0% 100.0% 100.0% 19.8% 3.2%
Cost of goods sold 60.5 60.3 63.0 20.2 (1.2)
----- ----- -----
Gross profit 39.5 39.7 37.0 19.2 10.8
Selling and distribution expenses 23.6 23.9 23.7 18.5 3.8
General and administrative expenses 3.0 3.6 3.3 (1.4) 13.8
Research and development expenses 1.1 1.3 1.6 4.3 (10.4)
----- ----- -----
Total expenses 27.7 28.8 28.6 15.3 4.2
Gain from sale of refrigerated egg assets -- -- (1.8) * *
----- ----- -----
27.7 28.8 26.8 15.3 11.1
----- ----- -----
Income from operations 11.8 10.9 10.2 29.4 10.1
Interest expense 1.1 1.3 2.0 2.3 (37.2)
----- ----- -----
Income before income taxes 10.7 9.6 8.2 32.9 22.0
Provision for income taxes 3.9 3.9 3.3 20.5 23.8
----- ----- -----
Net income 6.8% 5.7% 4.9% 41.3 20.8
===== ===== =====
_________________________
* Not meaningful
</TABLE>
Raw Material Cost Fluctuations: Because certain Company products are sensitive
to changes in raw material costs, operating results for comparative periods may
vary significantly. The cost of the Company's principal raw materials, liquid
and dried egg whites, are primarily dependent upon fresh shell egg prices, yolk
prices and feed costs, and can fluctuate significantly. For example, quoted
market prices for liquid egg decreased from $0.57 per pound in late 1989 to
$0.32 per pound in December, 1996. Similarly, quoted market prices for dried egg
whites decreased from $5.20 per pound in late 1989 to $2.86 in December, 1996.
From time to time, the Company has entered into fixed price contracts for the
purchase of egg whites to minimize the potential negative impact of unfavorable
price fluctuations. Such contracts can also reduce the benefits of favorable
price fluctuations. During 1996, the Company purchased approximately 36% of its
dried egg white requirements under such contracts. As a result, the Company was
able to purchase its egg white requirements at an average price per pound
slightly under average market prices.
As of December 31, 1996, the Company was not a party to fixed price contracts
for delivery of dried egg whites in 1997. The Company expects to either
negotiate fixed price contracts or purchase its egg white requirements at market
prices prevailing at the time of purchase.
1996 Compared to 1995: Net sales for 1996 increased approximately $18,000,000 or
19.8% over 1995. Net sales in 1996 to the Company's Specialty Markets
(Seventh-day Adventist, Health Food and International) increased approximately
$3,416,000 or 10.8% over 1995. Sales to the Health Food market were strong in
1996 posting an increase of approximately $1,650,000 or 20.3% over 1995. The
broker network, which was established in early 1996 for sales to Natural Food
stores, continues to increase the distribution of the Company's Natural Touch
brand of products. International sales for 1996 increased approximately $965,000
or 20.4% while sales to the Seventh-day Adventist market increased approximately
$801,000 or 4.3% over 1995.
Foodservice sales for 1996 increased approximately $3,521,000 or 42.1% over
1995. Growth continues to be particularly strong in the restaurant portion of
this category due to improved acceptance among national chains and strong
re-orders.
Net sales of Morningstar Farms brand products to supermarkets in 1996 increased
approximately $11,062,000 or 21.6% over 1995. Net sales of Morningstar Farms
meat alternative products in 1996 increased approximately $12,401,000 or 31.8%
over 1995. During 1996, Morningstar Farms sales benefited from an expanded line
of products, increased distribution of existing products, and targeted new user
strategies. During 1996, eleven new products were introduced into the mass
market.
-9-
<PAGE>
Gross profit as a percentage of net sales decreased slightly from 39.7% in 1995
to 39.5% in 1996, and is attributable to the following factors: First, contract
manufacturing arrangements for certain Morningstar Farms products were needed
during the first quarter of 1996, as the Worthington plant was out of capacity
and the Zanesville facility did not become operational until April 1, 1996. Two
other factors that resulted in lower gross profit percentages were increased
material costs and the start-up of the Zanesville facility. With the Zanesville
facility becoming operational, the Company was able to eliminate contract
manufacturing, thus enabling gross profit to improve. During the third and
fourth quarters of 1996, gross profit increased to 40.2% and 40.4%,
respectively, improving from the 38.1% reported in the first quarter of 1996.
The Company expects gross profit as a percentage of net sales to improve as the
Worthington and Zanesville plants become more efficient.
Selling and distribution expenses decreased as a percentage of net sales from
23.9% in 1995 to 23.6% in 1996. The Company's marketing programs which began in
1995, remained very focused in 1996 as the Company employed targeted new user
strategies to help achieve the reported sales growth. General and administrative
expenses as a percentage of net sales decreased from 3.6% in 1995 to 3.0% in
1996, as total dollars spent remained constant, allowing the Company to gain the
efficiencies of higher sales volume. Research and development expenses as a
percentage of net sales decreased from 1.3% in 1995 to 1.1% in 1996.
Interest expense in 1996 increased approximately $26,000 or 2.3% over 1995,
primarily due to higher average borrowing levels.
Net income in 1996 increased approximately $2,162,000 or 41.3% over 1995,
primarily due to increased sales and gross profit, lower selling, general, and
administrative expenses as a percentage of net sales, and a lower income tax
rate. In 1996, the Company received a one-time Investment Tax Credit from the
State of Ohio for $500,000, related to its purchase of property, plant and
equipment.
1995 Compared to 1994: Net sales for 1995 increased approximately $10,790,000 or
13.4% over 1994, after adjusting 1994 for the sale of refrigerated egg products,
which the Company no longer sells. (See Note H of the Company's Notes to the
Consolidated Financial Statements.) Net sales in 1995 to the Company's Specialty
Markets (Seventh-day Adventist, Health Food, and International) increased
approximately $1,427,000 or 4.7% over 1994. Health Food sales increased
approximately $711,000 or 9.6% over 1994, while sales to the Seventh-day
Adventist and International markets increased approximately $716,000 or 3.2%
over 1994.
Foodservice sales continued to show strong growth during 1995 as sales increased
approximately $2,160,000 or 34.9% over 1994. In late 1995, sales agreements were
entered into with over 4,000 new restaurants including Subway, Chili's, Pizzeria
Uno and Marie Callender's. The Company continued to benefit from the strong
foodservice broker and distributor networks which were established in 1994.
Net sales of Morningstar Farms brand products increased approximately $7,202,000
or 16.4% over 1994. This increase is calculated after deducting 1994 sales of
refrigerated egg product, which the Company no longer sells. Net sales of
Morningstar Farms meat alternative products increased approximately $8,391,000
or 27.4% over 1994. This increase was primarily due to the expanded distribution
of GARDEN VEGGIE PATTIES, the continued rollout of BETTER'N BURGERS, the
introduction of GARDEN GRAIN PATTIES and SPICY BLACK BEAN BURGERS, and the
steady growth of the established Morningstar Farms breakfast and burger
products.
Gross profit as a percentage of net sales increased from 37.0% in 1994 to 39.7%
in 1995. This increase in gross profit reflects modest increases in selling
prices, increased sales volumes and cost reduction programs which were initiated
in 1994 and continued throughout 1995. In the fourth quarter of 1995, gross
profit was 38.6% compared to 37.9% for the same period in 1994. Gross profit in
the fourth quarter of 1995 was slightly below the second and third quarter of
1995 due to contract manufacturing arrangements for certain Morningstar Farms
products and increased material costs. During the first quarter of 1996, the
Company implemented modest price increases to help offset increased material
costs. The Zanesville production facility became operational April 1, 1996,
which allowed the Company to resume production of all of its products, thus
eliminating the need for contract manufacturers.
Selling and distribution expenses increased slightly as a percentage of net
sales from 23.7% in 1994 to 23.9% in 1995. During 1995 the Company's marketing
programs were more focused and targeted, and were effective in helping the
Company to achieve the reported sales growth. General and administrative
expenses as a percentage of net sales increased from 3.3% in 1994 to 3.6% in
1995, primarily due to increased compensation expense. Research and development
expenses as a percentage of net sales decreased from 1.6% in 1994 to 1.3% in
1995.
Interest expense in 1995 decreased approximately $673,000 or 37.2% from 1994 due
to lower average borrowing levels, which were slightly offset by higher interest
rates.
-10-
<PAGE>
Net income in 1995 increased approximately $899,000 or 20.8% over 1994,
primarily due to increased sales and gross profit percentages and lower interest
costs, which were partially offset by higher selling expenses.
Liquidity and Capital Resources: The Company relies on cash generated from
operations and a $20,000,000 revolving credit facility as its principal sources
of liquidity. As of February 27, 1997, $5,025,000 of this credit facility was
unused. The Company believes that this borrowing capability plus internally
generated funds will be adequate to finance current growth levels into the
foreseeable future.
On November 22, 1994, the Company sold substantially all of its refrigerated egg
assets, which generated cash proceeds of approximately $7,753,000, net of
related expenses. These proceeds were used to reduce outstanding debt. This sale
gave the Zanesville facility additional capacity to produce meat alternative
products. On July 27, 1995, the Company's Board of Directors approved a
$9,000,000 expansion of the Zanesville, Ohio facility for the production of meat
alternative products. This expansion project was completed within the $9,000,000
budget and became operational April 1, 1996. This project included $5,500,000
for new meat alternative production equipment; $3,500,000 for a new 37,000
square foot frozen foods warehouse, and the completion of 22,000 square feet of
the existing building for dry storage. This enabled the Company to reduce
capacity constraints at the Worthington facility, eliminate or reduce the need
for contract manufacturers, and allowed the Company to consolidate its plant
finished goods inventory and distribution functions at the Zanesville site. The
$9,000,000 project represented the majority of the $13,550,000 of capital
expenditures during 1996. On October 22, 1996, the Board of Directors approved
an $11,500,000 capital spending project at Zanesville to install a second
production line to produce meat alternatives and to finish additional warehouse
space for dry storage. This project is expected to be completed by the end of
September, 1997 and is expected to be funded from cash generated from operations
and the revolving credit facility. As of February 27, 1997, $2,800,000 of the
$11,500,000 has been spent.
Net cash provided by operating activities was strong both in 1996 and 1995
primarily due to increases in net income.
Net cash used for investing activities increased in both 1996 and 1995 due to
purchases of property, plant and equipment related to the completed $9,000,000
Zanesville expansion project. The Company expects this trend in capital spending
to continue in 1997 due to the $11,500,000 project approved for the second
production line at Zanesville.
Net cash provided by financing activities increased in 1996 primarily due to
increased borrowings to finance capital expenditures for the completed
$9,000,000 Zanesville expansion project. Net cash used for financing activities
decreased in 1995 as the Company began to borrow money to help fund the
$9,000,000 expansion project at Zanesville.
Inflation: Although inflation has slowed in recent years, the Company continues
to seek ways to moderate any inflationary impact. To the extent possible based
on competitive conditions, the Company passes increased costs on to its
customers by increasing sales prices over time. As discussed previously, the
cost of egg whites has fluctuated in the past and the Company recognizes that
such volatility may occur in the future.
The Company uses the LIFO method of accounting for raw materials, packaging
materials and the materials content of work-in-process and finished goods. Under
this method, the cost of products sold reported in the financial statements
approximates current costs.
Compliance With Environmental Protection Regulations: The Company does not
anticipate that compliance with federal, state, and local regulations with
respect to the discharge of materials into the environment, or otherwise
relating to the protection of the environment, will have a material effect on
capital expenditures, earnings or the competitive position of the Company.
Special Note Regarding Forward-Looking Statements: Certain statements in this
Annual Report to Shareholders are forward looking statements within the meaning
of the Private Securities Litigation Act of 1995. Such statements involve known
and unknown risks, uncertainties and other factors that may cause actual results
to differ materially. Such risks, uncertainties and other factors include, but
are not limited to, changes in general economic conditions, fluctuation in
interest rates, increases in raw material costs, level of competition, market
acceptance of new and existing products, uninsured product liability and other
factors described in detail in the Company's Form 10-K for the year ended
December 31, 1996.
-11-
<PAGE>
<TABLE>
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1996 AND 1995
1996 1995
------------ ------------
<S> <C> <C>
ASSETS
Current Assets:
Cash $ 810,988 $ 962,699
Accounts receivable, less allowance of
$100,000 in 1996 and 1995 8,664,152 7,435,889
Inventories:
Finished goods 11,618,182 10,403,295
Work in process 830,152 769,389
Raw materials 3,169,660 4,919,788
Packaging materials and supplies 1,800,940 1,899,703
------------ ------------
17,418,934 17,992,175
Income taxes 128,186 --
Prepaid expenses and other 2,330,409 1,606,261
------------ ------------
Total Current Assets 29,352,669 27,997,024
Property, Plant and Equipment:
Land 817,452 817,452
Buildings and improvements 22,745,989 16,620,684
Machinery and equipment 40,831,521 33,490,425
Furniture and fixtures 1,692,942 1,088,576
Construction in progress 5,081,772 5,818,979
------------ ------------
71,169,676 57,836,116
Less accumulated depreciation
and amortization 21,608,078 18,020,747
------------ ------------
49,561,598 39,815,369
Other Assets:
Goodwill 996,792 1,319,064
Other intangible assets 826,987 802,000
------------ ------------
1,823,779 2,121,064
------------ ------------
TOTAL ASSETS $ 80,738,046 $ 69,933,457
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable (including outstanding checks
of $767,000 in 1996 and $1,597,000 in 1995) $ 4,608,521 $ 6,575,447
Accrued compensation 1,435,383 1,208,053
Other accrued expenses 1,548,617 1,547,157
Income taxes -- 98,628
Current portion of long-term debt and capital
lease obligations 1,630,129 1,581,126
------------ ------------
Total Current Liabilities 9,222,650 11,010,411
Long-Term Liabilities:
Long-term debt and capital lease obligations 17,959,905 12,790,034
Deferred income taxes 4,825,000 4,165,000
------------ ------------
Total Long-Term Liabilities 22,784,905 16,955,034
Shareholders' Equity:
Preferred shares, with no par value,
authorized 2,000,000 shares -- --
Common shares, $1.00 stated value,
authorized 15,000,000 shares,
issued 8,544,676 shares in 1996
and 8,475,845 shares in 1995 8,544,676 8,475,845
Additional paid-in capital 12,624,781 12,557,684
Retained earnings 27,561,034 20,955,278
Less deferred compensation -- (20,795)
------------ ------------
48,730,491 41,968,012
------------ ------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 80,738,046 $ 69,933,457
============ ============
See Notes to Consolidated Financial Statements.
</TABLE>
-12-
<PAGE>
<TABLE>
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 1996, 1995, AND 1994
1996 1995 1994
------------ ------------ ------------
<S> <C> <C> <C>
Net sales $109,075,223 $ 91,075,493 $ 88,220,375
Cost of goods sold 65,954,035 54,893,776 55,575,678
------------ ------------ ------------
Gross profit 43,121,188 36,181,717 32,644,697
Selling and distribution expenses 25,751,508 21,736,044 20,945,185
General and administrative expenses 3,242,480 3,288,144 2,889,088
Research and development expenses 1,279,892 1,227,212 1,369,615
------------ ------------ ------------
Total expenses 30,273,880 26,251,400 25,203,888
Gain from sale of refrigerated egg assets -- -- 1,578,451
------------ ------------ ------------
30,273,880 26,251,400 23,625,437
------------ ------------ ------------
Income from operations 12,847,308 9,930,317 9,019,260
Interest expense 1,164,353 1,138,708 1,811,583
------------ ------------ ------------
Income before income taxes 11,682,955 8,791,609 7,207,677
Provision (benefit) for income taxes:
Currently payable:
Federal 3,325,000 2,385,000 2,781,000
State and local 305,000 492,000 619,000
Deferred 660,000 684,000 (524,000)
------------ ------------ ------------
4,290,000 3,561,000 2,876,000
------------ ------------ ------------
Net income $ 7,392,955 $ 5,230,609 $ 4,331,677
============ ============ ============
Earnings per share
Primary $ 0.84 $ 0.60 $ 0.51
============ ============ ============
Fully diluted $ 0.83 $ 0.60 $ 0.51
============ ============ ============
Weighted average number of common and
common equivalent shares used in computing
earnings per share
Primary 8,841,980 8,664,331 8,428,347
Fully diluted 8,923,949 8,736,226 8,428,347
</TABLE>
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1996, 1995, AND 1994
<TABLE>
Common Shares
-----------------------------
Number Additional Retained Deferred
of Shares Amount Paid-in Capital Earnings Compensation
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Balances at January 1, 1994 8,392,026 $ 8,392,026 $ 12,314,703 $ 12,644,188 $ (75,000)
Net income -- -- -- 4,331,677 --
Exercise of options at $4.86 -
$5.21 per share 21,864 21,864 32,757 -- --
Amortization of deferred compensation -- -- -- -- 41,280
Dividends at $0.07 per share -- -- -- (605,168) --
------------ ------------ ------------ ------------ ------------
Balances at December 31, 1994 8,413,890 8,413,890 12,347,460 16,370,697 (33,720)
Net income -- -- -- 5,230,609 --
Exercise of options at $4.13 - $6.75
per share 56,955 56,955 189,349 -- --
Restricted share award at $0.06 per share 5,000 5,000 20,875 -- (25,575)
Amortization of deferred compensation -- -- -- -- 38,500
Dividends at $0.08 per share -- -- -- (646,028) --
------------ ------------ ------------ ------------ ------------
Balances at December 31, 1995 8,475,845 8,475,845 12,557,684 20,955,278 (20,795)
Net income -- -- -- 7,392,955 --
Exercise of options at $4.13 - $6.75
per share 68,831 68,831 67,097 -- --
Amortization of deferred compensation -- -- -- -- 20,795
Dividends at $0.09 per share -- -- -- (787,199) --
------------ ------------ ------------ ------------ ------------
Balances at December 31, 1996 8,544,676 $ 8,544,676 $ 12,624,781 $ 27,561,034 $ 0
============ ============ ============ ============ ============
See Notes to Consolidated Financial Statements.
</TABLE>
-13-
<PAGE>
<TABLE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
1996 1995 1994
---------- ----------- ----------
OPERATING ACTIVITIES
<S> <C> <C> <C>
Net income $ 7,392,955 $ 5,230,609 $ 4,331,677
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 3,804,291 2,956,120 3,301,707
Deferred income taxes 660,000 684,000 (524,000)
Amortization of intangible assets 357,024 357,024 351,972
Gain from sale of refrigerated egg assets -- -- (1,578,451)
Deferred compensation 20,795 38,500 41,280
Cash provided by (used for) current assets
and liabilities
Accounts receivable (1,228,263) (1,208,898) (83,641)
Inventories 573,241 (2,859,933) 1,703,357
Prepaid expenses and other (724,148) (404,331) 83,381
Accounts payable and accrued expenses (1,738,136) 4,285,987 (736,513)
Income taxes (226,814) (807,798) 2,317,626
(Increase) decrease in other assets (59,739) 128,418 (185,870)
------------ ------------ ------------
Net cash provided by operating activities 8,831,206 8,399,698 9,022,525
INVESTING ACTIVITIES
Purchases of property, plant and equipment, net (13,550,520) (7,726,710) (4,601,944)
Proceeds from sale of assets, net of expenses
of $947,053 in 1994 -- 383,435 7,752,947
------------ ------------ ------------
Net cash (used for) provided by investing activities (13,550,520) (7,343,275) 3,151,003
FINANCING ACTIVITIES
Proceeds from line of credit and long-term borrowings 48,025,000 25,725,000 40,950,000
Payments on line of credit and long-term borrowings (42,806,126) (26,401,682) (51,960,783)
Proceeds from issuance of common shares 135,928 246,604 54,621
Dividends paid (787,199) (646,028) (605,168)
------------ ------------ ------------
Net cash provided by (used for) financing activities 4,567,603 (1,076,106) (11,561,330)
Net (decrease) increase in cash (151,711) (19,683) 612,198
Cash at beginning of year 962,699 982,382 370,184
------------ ------------ ------------
CASH AT END OF YEAR $ 810,988 $ 962,699 $ 982,382
============ ============ ============
See Notes to Consolidated Financial Statements.
</TABLE>
-14-
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996
NOTE A -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Segment Information: Worthington Foods, Inc. (the Company) is one of the leading
food companies dedicated solely to developing, producing and marketing
vegetarian, egg substitute and other healthful food products. The Company
markets its products nationwide to a wide variety of customers, including
supermarkets, specialty stores and other institutional facilities. The Company
operates in only one business segment and no single customer represents more
than 10% of the Company's net sales.
Principles of Consolidation: The consolidated financial statements include the
accounts of Worthington Foods, Inc. and its wholly-owned subsidiary, Specialty
Foods Investment Company. All intercompany balances and transactions are
eliminated in consolidation.
Use of Estimates in the Preparation of Financial Statements: The preparation of
financial statements in conformity with generally accepted accounting principles
requires management to make estimates and assumptions that affect the amounts
reported in the financial statements and accompanying notes. Actual results
could differ from those estimates.
Fair Value of Financial Instruments: The fair value of the Company's cash,
accounts receivable, accounts payable, accrued compensation, other accrued
expenses and long-term debt and capital lease obligations approximate the
carrying values at December 31, 1996 and 1995.
Inventories: Inventories are stated at the lower of cost or market. Cost is
determined by the last-in, first-out method (LIFO) for raw materials, packaging
materials and the materials content of work in process and finished goods. If
current costs had been used, the aforementioned inventories would have been
$328,000 and $427,000 higher than reported at December 31, 1996 and 1995,
respectively.
Labor and overhead conversion costs are determined by the first-in, first-out
method. Conversion costs are $5,838,000 and $5,661,000 of the reported inventory
values at December 31, 1996 and 1995, respectively.
Advertising Costs: Advertising costs are expensed as incurred, on an annual
basis, thus there are no advertising costs recorded as assets at December 31,
1996 or 1995. Advertising expense was approximately $11,248,000, $8,999,000 and
$7,933,000 for the years ended December 31, 1996, 1995 and 1994, respectively.
Slotting Costs: Slotting costs associated with new products or new territories
are deferred and amortized over the twelve month period following the initial
introduction. The amounts deferred at December 31, 1996 and 1995 were $1,063,000
and $750,000, respectively. Slotting costs expensed were $1,528,000, $1,206,000,
and $1,179,000 for the years ended December 31, 1996, 1995 and 1994,
respectively.
Property and Depreciation: Property, plant and equipment are carried at cost and
depreciated using the straight-line method over the estimated useful lives of
the assets. Assets under construction or not fully operational are not
depreciated until placed in service. Expenditures for maintenance and repairs
are charged to operations as incurred. Included in property, plant and equipment
at both December 31, 1996 and 1995 is $7,592,000 of equipment under capital
lease obligation. Amortization of capital lease assets is included in
depreciation expense. Accumulated amortization of capital lease assets was
$4,219,000 and $3,586,000 at December 31, 1996 and 1995, respectively.
Goodwill: Goodwill acquired in the purchase of La Loma Foods, Inc. is being
amortized over 10 years using the straight-line method. Accumulated amortization
was $2,249,000 and $1,927,000 at December 31, 1996 and 1995, respectively.
Other Intangible Assets: Other intangible assets are primarily debt issuance
costs and package design costs. Debt issuance costs are being amortized using
the straight-line method over the life of the debt. Package design costs are
being amortized over a maximum of five years. Accumulated amortization was
$892,000 and $666,000 at December 31, 1996 and 1995, respectively.
Earnings Per Share: The Company calculates earnings per share based upon the
weighted average number of common shares outstanding and common share
equivalents derived from dilutive stock options and restricted share awards.
Research and Development Costs: Research and development costs are expensed as
incurred.
Stock-Based Compensation: In accordance with the provisions of Statement of
Financial Accounting Standard No. 123, "Accounting for Stock-Based
Compensation", the Company applies Accounting Principles Board No. 25,
"Accounting for Stock Issued to Employees" and related Interpretations in
accounting for its employee stock options and, accordingly, does not recognize
compensation costs when the exercise price of its employee stock options is
equal to the fair market value of the stock at the grant date.
NOTE B -- CREDIT ARRANGEMENTS Long-term debt consists of the following:
December 31
1996 1995
------------ -------------
9.75% notes due
January 15, 2004 $ 6,533,333 $ 7,333,333
Bank credit agreement,
variable rates (weighted average
of 6.80% at December 31, 1996) 10,525,000 3,725,000
6.10% capital lease obligation
due October 31, 1998 2,531,701 3,312,827
------------ ------------
19,590,034 14,371,160
Less current maturities (1,630,129) (1,581,126)
------------ ------------
Total long-term debt $ 17,959,905 $ 12,790,034
============ ============
The bank credit agreement provides for $20,000,000 total borrowings and extends
through October 31, 2001. On each anniversary date, the Company may request an
extension of one year of the termination date. Under the agreement, the Company
borrows at an interest rate not to exceed the prime rate (8.25% at December 31,
1996). The Company is required to pay a fee of 1/5% per annum on the unused
portion of the credit agreement. Available borrowings under this credit
agreement were $9,475,000 at December 31, 1996. The bank credit agreement and
the 9.75% notes are secured by accounts receivable and inventory.
The Company's credit arrangements provide for, among other things, the
maintenance of certain minimum financial requirements and restrictions on
investments, acquisitions, purchases and borrowings. In addition, the credit
agreement limits payments of dividends and purchases of common shares to
$1,500,000 plus 25% of net income earned subsequent to December 31, 1989
($4,001,000 available at December 31, 1996). The Company may not prepay its
9.75% notes until January 15, 1999, without incurring a prepayment penalty.
-15-
<PAGE>
During 1993, the Company entered into a sale-leaseback transaction with a
financing company. This transaction resulted in no gain or loss being
recognized. The lease term is for 60 months and is secured by the related
equipment. At the end of the lease term, the Company shall purchase the
equipment under lease for approximately $970,000. The lease is being treated as
a capital lease. During 1994, the equipment securing the capital lease
obligation was sold (see Note H). The Company substituted other equipment as
security for the obligation.
Maturities of long-term debt and capital lease obligations during the next five
years are: 1997--$1,630,000; 1998--$2,502,000; 1999--$800,000; 2000--$800,000;
2001--$11,358,000; and thereafter --$2,500,000.
Interest expense of $245,000 and $47,000 was capitalized during 1996 and 1995,
respectively, in connection with the Company's construction activities. No
interest costs were capitalized during 1994. Interest paid during 1996, 1995 and
1994 was $1,424,000, $1,209,000, and $1,840,000, respectively.
NOTE C -- OPERATING LEASES
The Company rents warehouse space for distribution of its finished products. In
addition, the Company leases certain equipment and motor vehicles for use in its
operations. Rental expense amounted to $1,244,000, $1,577,000 and $1,600,000 for
1996, 1995 and 1994, respectively. At December 31, 1996 future minimum lease
payments are: 1997--$202,000; 1998--$182,000; 1999--$162,000; 2000--$162,000;
and 2001--$68,000.
NOTE D -- PENSION PLANS
The Company has a defined benefit pension plan covering substantially all of its
hourly employees. The Plan provides retirement benefits that are based on length
of service and age. The Company's funding policy is to contribute annually the
minimum amount required by applicable regulations.
The following sets forth the Plan's funded status as of October 1, 1996 and 1995
(the date of the actuarial valuation):
October 1
1996 1995
----------- -----------
Plan assets at fair market value,
primarily bank common trust
funds and insurance contract $ 2,848,645 $ 2,341,644
Projected benefit obligation for
service rendered to date
including vested benefits of
(1996--$1,952,010; 1995--$1,363,728) 2,185,369 2,245,848
----------- -----------
Plan assets in excess of projected
benefit obligation 663,276 95,796
Unrecognized net asset at
transition date, net of
amortization (109,530) (128,253)
Unrecognized net (gain)/loss
from past experience
different from that assumed (497,306) 125,714
Unrecognized prior service cost 5,713 6,364
----------- -----------
Prepaid pension cost included in
prepaid expenses $ 62,153 $ 99,621
=========== ===========
The components of net periodic pension cost for the years ended December 31,
1996, 1995 and 1994 are as follows:
<TABLE>
1996 1995 1994
---------- --------- ---------
<S> <C> <C> <C>
Service cost-benefits
earned during the period $ 282,660 $ 198,578 $ 263,408
Interest cost on projected
benefit obligation 141,085 114,685 101,123
Actual return on plan assets (367,550) (360,531) (27,403)
Net amortization and deferral1 62,260 186,258 (117,462)
--------- --------- ---------
Net periodic pension expense $ 218,455 $ 138,990 $ 219,666
========= ========= =========
The actuarial assumptions used in these calculations are as follows:
1996 1995 1994
---------- --------- ---------
Weighted-average discount rate 7.25% 6.25% 7.25%
Expected rate of return on assets 7.75% 7.75% 7.75%
</TABLE>
Salaried employees are covered by an employee stock ownership plan (ESOP).
Annual Company contributions to the ESOP are at the discretion of the Board of
Directors. The Company recognizes expense during the year for the contribution
determined by the Board of Directors and administrative expense that is related
to the ESOP. The ESOP owns 640,728 common shares of the Company, of which 100%
of the shares are allocated to participants as of December 31, 1996. In
addition, all salaried employees participate in a 401(k) plan. The Company
contributes 50% of the employee's contribution, up to 1.5% of the employee's
annual salary. Additional contributions may be made on behalf of the employees
at the discretion of the Company.
The Company also provides additional retirement benefits to selected key
employees through a supplemental executive retirement plan (SERP). Contributions
to the plan are based on an amount projected to fund targeted benefits under the
provisions of the plan.
The Company's expense applicable to the above plans, including administrative
expenses, is as follows:
1996 1995 1994
-------- -------- --------
Pension plan $247,000 $166,000 $247,000
ESOP 245,000 225,000 191,000
401(k) 168,000 144,000 151,000
SERP 92,000 87,000 89,000
-------- -------- --------
$752,000 $622,000 $678,000
======== ======== ========
-16-
<PAGE>
NOTE E -- INCOME TAXES
The liability method is used in accounting for income taxes. Under this method,
deferred tax assets and liabilities are determined based on differences between
financial reporting and tax bases of assets and liabilities and are measured
using the enacted tax rates and laws that will be in effect when the differences
are expected to reverse.
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
and the amounts used for income tax purposes. Significant components of the
Company's deferred tax liabilities and assets as of December 31, 1996 and 1995
are as follows:
1996 1995
---------- ----------
Deferred tax liabilities:
Property, plant and equipment $4,649,000 $4,124,000
State and local taxes 221,000 137,000
Slotting 411,000 289,000
Other 21,000 24,000
---------- ----------
Total deferred tax liabilities $5,302,000 $4,574,000
---------- ----------
Deferred tax assets:
Inventory $ 221,000 $ 227,000
Accrued expenses 217,000 144,000
Other 39,000 38,000
---------- ----------
Total deferred tax assets $ 477,000 $ 409,000
---------- ----------
Net deferred tax liabilities $4,825,000 $4,165,000
========== ==========
The Company's provisions for income taxes differ from the amounts computed by
applying the federal statutory rate due to the following:
1994 1993 1992
----------- ----------- -----------
Expected tax $ 3,972,000 $ 2,989,000 $ 2,451,000
State and local taxes 241,000 425,000 341,000
Goodwill 110,000 110,000 110,000
Other (33,000) 37,000 (26,000)
----------- ----------- -----------
Provision for
income taxes $ 4,290,000 $ 3,561,000 $ 2,876,000
=========== =========== ===========
Taxes paid during 1996, 1995 and 1994 were $3,857,000, $3,713,000, and
$1,079,000, respectively.
During 1996, the Company qualified for and recorded a one-time $500,000
Investment Tax Credit from the State of Ohio
NOTE F -- SHAREHOLDERS' EQUITY
On October 22, 1996, the Board of Directors declared a four-for-three share
split to shareholders of record as of November 15, 1996. Also on November 27,
1995, the Board of Directors declared a five-for-four share split to
shareholders of record as of December 11, 1995. All references to number of
shares and per share information in the accompanying financial statements have
been adjusted to reflect the share splits on a retroactive basis.
On June 13, 1995, the Company's Board of Directors adopted a shareholders rights
plan by declaring a special distribution of one right to purchase one
one-hundredth of a share of Worthington Foods Series A Junior Participating
Preferred Shares (the "Preferred Shares") for each outstanding common share of
Worthington Foods for a purchase price of $92.00, subject to adjustment. The
rights were distributed on June 26, 1995, to shareholders of record as of the
close of business on that date but generally will become exercisable only if a
person or group, without the prior approval of the Board of Directors, (i)
acquires 15 percent or more of Worthington Foods common shares, or (ii)
announces a tender offer that would, if consummated, result in ownership of 30
percent or more of its common shares.
In accordance with the terms of the rights agreement, the above-mentioned share
splits caused an adjustment in the number of Preferred Shares purchasable upon
exercise of the rights. As so adjusted, each common share is now accompanied by
one right to purchase six one-thousandths of a share of the Preferred Shares for
a purchase price of $92.00
NOTE G -- STOCK OPTION PLANS
On April 25, 1995, the shareholders approved the Worthington Foods, Inc. 1995
Stock Option Plan (1995 Plan) for full-time key employees of the Company. The
plan authorizes the granting of either incentive stock options or other stock
options. Incentive stock options are granted at exercise prices not less than
the fair market value of the common shares at the date of the grant while other
stock options may be granted at an exercise price of not less than $1.00. The
Company has 216,320 additional options reserved for issuance under the 1995
Plan.
In 1993, the shareholders approved the Worthington Foods, Inc. 1993 Stock Option
Plan for Non-Employee Directors. This plan provides that each Non-Employee
Director is granted an option to purchase 16,666 common shares of the Company at
the fair market value of the common shares on the date the option is granted.
Each option becomes exercisable six months after the grant date and is for a
term of five years. The Company has 50,000 additional options reserved for
issuance under this plan.
In 1996, the Company adopted Statement of Financial Accounting Standards (SFAS)
No. 123, "Accounting for Stock-Based Compensation." In accordance with the
provisions of SFAS No. 123, the Company applies Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees" and related
Interpretations in accounting for its employee stock options and, accordingly,
does not recognize compensation costs when the exercise price of its employee
stock options is equal to the fair market value of the stock at the grant date.
If the Company had elected to recognize compensation cost based on the fair
value of the options granted at grant date as prescribed by SFAS No. 123, net
income and earnings per share would have been reduced to the pro forma amounts
indicated in the table below.
1996 1995
---------- ----------
Pro forma net income $7,184,000 $5,148,000
========== ==========
Pro forma earnings per share
Primary $ 0.81 $ 0.59
========== ==========
Fully diluted $ 0.81 $ 0.59
========== ==========
The estimated fair value of the options is amortized into expense over the
options' vesting period. The fair value for these options was estimated at the
date of grant using the Black-Scholes option pricing model with the following
assumptions.
1996 1995
------------ ------------
Expected dividend yield 0.50% 0.50%
Expected stock price volatility 0.370 0.364
Risk free interest rate 5.88% to 6.25% 5.25% to 5.75%
Expected life of options 3 to 5 years 1 to 5 years
-17-
<PAGE>
A summary of the Company's stock option activity during 1996, 1995 and 1994, and
related information follows:
<TABLE>
1996 1995 1994
Weighted-Average Weighted-Average Weighted-Average
Options Exercise Price Options Exercise Price Options Exercise Price
------- -------------- ------- -------------- ------- --------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year 645,370 $ 7.73 472,694 $ 5.04 612,798 $ 5.18
Granted 320,969 17.33 236,666 6.58 41,666 5.14
Exercised ( 87,034) 5.36 ( 62,324) 4.85 (104,550) 5.11
Forfeited ( 25,623) 6.81 ( 1,666) 4.13 ( 77,220) 4.70
------- ------ -------
Outstanding at end of year 853,682 $10.15 645,370 $ 7.73 472,694 $ 5.04
======= ======= =======
Exercisable at end of year 434,589 $ 6.07 322,080 $ 5.56 302,250 $ 5.55
======= ======= =======
Weighted-average fair value
of options granted during the year $ 5.41 $ 1.77 N/A
</TABLE>
Exercise prices of options outstanding as of December 31, 1996 range from $4.13
to $17.81. The weighted-average remaining contractual life of those options is
4.1 years.
The financial effects of applying SFAS No. 123 are not likely to be
representative of the effects on reported net income for future years.
NOTE H -- SALE OF ASSETS
On November 22, 1994, the Company sold substantially all of the manufacturing
equipment, inventory and intangible assets used in the manufacturing and selling
of its refrigerated egg product. The selling price was $9,000,000 and the
transaction resulted in a gain of $1,578,000. The gain is net of a $2,000,000
write-off of design fees related to the design of the Zanesville, Ohio plant for
use as a refrigerated egg processing plant. The Company's net sales for the year
ended December 31, 1994 included $7,935,000 relating to refrigerated egg
product. During the last half of 1995, the Company commenced a $9,000,000
expansion and construction project at the Zanesville plant in order to utilize
it as a meat alternative producing facility and frozen distribution center. The
Zanesville plant resumed such operations during April, 1996. The Company
recently commenced an additional $11,500,000 construction project at the
Zanesville plant, which consists of a new manufacturing line and additional
warehouse space. The project is expected to be completed by the end of
September, 1997.
NOTE I -- QUARTERLY FINANCIAL DATA (UNAUDITED)
The following table sets forth certain financial data of the Company for each
thirteen week period. The financial data for each of these quarters is unaudited
but includes all adjustments, consisting of only normal recurring adjustments,
which the Company believes to be necessary for a fair presentation. These
operating results, however, are not necessarily indicative of results for any
future period.
<TABLE>
Income
Net Gross From Net Earnings
Sales Profit Operations Income Per Share
- ----------------------------------------------------------------------------------------------
(000's omitted except per share data)
<S> <C> <C> <C> <C> <C>
1996
First quarter $ 24,353 $ 9,284 $ 2,419 $ 1,287 $ .15
Second quarter 27,548 10,781 3,300 1,991 .22
Third quarter 27,259 10,971 3,371 1,913 .21
Fourth quarter 29,915 12,085 3,757 2,202 .25
-------- -------- -------- -------- --------
$109,075 $ 43,121 $ 12,847 $ 7,393 $ .83
======== ======== ======== ======== ========
1995
First quarter $ 20,921 $ 7,972 $ 2,107 $ 1,062 $ .12
Second quarter 22,902 9,504 2,608 1,359 .16
Third quarter 22,256 9,045 2,521 1,327 .15
Fourth quarter 24,996 9,661 2,694 1,483 .17
-------- -------- -------- -------- --------
$ 91,075 $ 36,182 $ 9,930 $ 5,231 $ .60
======== ======== ======== ======== ========
1994
First quarter $ 21,340 $ 7,362 $ 1,449 $ 593 $ .07
Second quarter 23,022 8,672 1,822 816 .10
Third quarter 21,392 8,096 1,823 814 .09
Fourth quarter 22,466 8,515 3,925 2,109 .25
-------- -------- -------- -------- --------
$ 88,220 $ 32,645 $ 9,019 $ 4,332 $ .51
======== ======== ======== ======== ========
</TABLE>
Fourth quarter 1994 results were positively affected by the sale of the
Company's refrigerated egg assets which increased net income by $949,000 or $.15
per share.
-18-
<PAGE>
REPORT OF INDEPENDENT AUDITORS Board of Directors Worthington Foods, Inc.
We have audited the accompanying consolidated balance sheets of Worthington
Foods, Inc. and Subsidiary as of December 31, 1996 and 1995, and the related
consolidated statements of income, shareholders' equity, and cash flows for each
of the three years in the period ended December 31, 1996. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Worthington Foods, Inc. and Subsidiary at December 31, 1996 and 1995 and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1996, in conformity with generally
accepted accounting principles.
Ernst + Young LLP
Columbus, Ohio
January 31, 1997
OFFICERS AND DIRECTORS
Allan R. Buller
Chairman of the Board, Treasurer and Director
Dale E. Twomley
President, Chief Executive Officer and Director
Donald B. Burke
Executive Vice President of Marketing and Sales
William T. Kirkwood
Executive Vice President and Chief Financial Officer
Ronald L. McDermott
Vice President of Research and Technology, Secretary
James C. Remer
Vice President of Manufacturing
Jay L. Robertson
Vice President of Sales
Joan M. Lieb
Assistant Secretary
Roger D. Blackwell**
Professor of Marketing, The Ohio State University
Director, 1992
Emil J. Brolick
Senior Vice President, Strategic Planning, Research and
New Product Marketing, Wendy's International, Inc.
Director, 1997
Theodore A. Hamer*
Retired Director of Transportation, Mead Corporation
Director, 1983
George T. Harding, IV*
Chairman, Board of Trustees, Harding
Director, 1982
Donald G. Orrick**
Retired Dentist
Director, 1983
William D. Parker*
Retired President of Kroger Columbus, Ohio
Director, 1995
Donald B. Shackelford*
Chairman, State Savings Bank
Director, 1991
* Member of Audit Committee
** Member of Executive Compensation Committee
-19-
<PAGE>
SHAREHOLDER INFORMATION
Market Information for Common Stock
The Company's common stock trades on the Nasdaq National Market tier of The
Nasdaq Stock Market under the Symbol "WFDS." The following table sets forth, for
the quarterly periods shown, the high and low sale price per share as reported
on the NASDAQ-National Market System. All per share amounts have been adjusted
to reflect the four-for-three share split distributed in December, 1996 and the
five-for-four share split distributed in December, 1995.
1996 1995 1994
---------------- --------------- --------------
High Low High Low High Low
------ ----- ------ ----- ------ -----
First Quarter 12.4 9.6 7.1 5.0 6.2 4.2
Second Quarter 12.9 10.9 10.8 6.8 6.0 5.1
Third Quarter 19.5 12.0 11.1 8.9 6.6 5.7
Fourth Quarter 19.9 15.8 10.5 9.0 6.5 4.7
As of February 27, 1997, there were approximately 547 holders of record of
common stock, without determination of the number of individual participants in
security positions.
Dividends
The Company has paid quarterly cash dividends on its common shares since 1983.
The annual rate was $0.09 and $0.08 per common share or approximately $787,000
and $646,000 during 1996 and 1995, respectively. On February 18, 1997, the
Company's Board of Directors declared a $0.025 per common share dividend payable
on April 25, 1997 to shareholders of record on March 28, 1997.
The payment of cash dividends in the future will depend on the Company's
earnings, financial condition, capital requirements, loan agreement restrictions
and other factors considered relevant by the Board of Directors. There can be no
assurance that the Company will in the future pay any cash dividends. The
Company's loan agreements restrict its ability to pay dividends. The amount
available and unrestricted for the payment of dividends as of December 31, 1996
was approximately $4,001,000. See Note B of the Company's notes to the
Consolidated Financial Statements.
Market Makers
Firms making a primary market in Worthington Foods, Inc. shares at February 27,
1997, include the following:
ADAM OHIO
Adams Harkness & Hill, Inc. The Ohio Company
BRAD RHCO
J.C. Bradford & Co. Robinson Humphrey Co., Inc.
BTSC SHWD
BT Securities Corp. Sherwood Securities Corp.
HRZG TSCO
Herzog, Heine, Geduld, Inc. Troster Singer Corporation
MASH WBLR
Mayer & Schweitzer, Inc. William Blair & Co. L.L.C.
MDLD
McDonald & Company Sec., Inc.
GENERAL COUNSEL
VORYS, SATER, SEYMOUR and PEASE
Columbus, Ohio
CERTIFIED PUBLIC ACCOUNTANTS
ERNST & YOUNG, LLP
Columbus, Ohio
TRANSFER AGENT
NATIONAL CITY BANK
Stock Transfer Department
P.O. Box 92301
Cleveland, OH 44193-0900
(800) 622-6757
FORM 10-K
A copy of the Annual Report on Form 10-K for the fiscal year ended December 31,
1996 is available without charge to any shareholder upon written request
directed to Joan Lieb at Worthington Foods, Inc., 900 Proprietors Road,
Worthington, Ohio 43085 or can be found on the internet at www.investquest.com.
NOTICE OF ANNUAL MEETING
Shareholders are cordially invited to attend the Worthington Foods, Inc. 1997
Annual Meeting on April 22, 1997. The meeting will convene at 11:00 am at the
Worthington Hills Country Club, 920 Clubview Boulevard, Worthington, Ohio.
-20-
<PAGE>
WORTHINGTON FOODS PRODUCES MORE THAN 150 DIFFERENT ITEMS
TO PROVIDE HEALTHIER ALTERNATIVES TO MEAT, EGGS AND DAIRY PRODUCTS.
THESE FOOD ITEMS ARE FREE OF MEAT, ANIMAL FAT AND CHOLESTEROL.
WORTHINGTON FOODS MARKETS ITS PRODUCTS
NATIONALLY UNDER FOUR BRAND NAMES:
The Morningstar Farms(R) brand offers healthier alternatives to processed meats
and whole eggs. The line enables health motivated consumers to reduce fat and
dietary cholesterol through its "low-fat" and "fat-free" offerings. Morningstar
Farms is distributed nationally through supermarkets and foodservice operations
and has become the #1 brand of meat alternatives.
The Worthington brand satisfies the preferences of consumers seeking premium
quality meat alternatives. The line is sold in health and specialty food stores.
The Loma Linda(R) brand complements the Worthington products by offering
nutritious meat alternatives to health and specialty food shoppers.
The Natural Touch(R) brand meets the needs of health food shoppers seeking
products free of artificial additives, flavors or colors. These products are
made from all-natural ingredients with minimal processing.
WORTHINGTON FOODS, INC.
NASDAQ Symbol-WFDS
900 Proprietors Road
Worthington, Ohio 43085
614/885-9511
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in this Annual Report (Form
10-K) of Worthington Foods, Inc. and Subsidiary of our report dated January 31,
1997, included in the 1996 Annual Report to Shareholders of Worthington Foods,
Inc. and Subsidiary.
Our audit also included the financial statement schedule of Worthington
Foods, Inc. and Subsidiary listed in Item 14(a)(2). This schedule is the
responsibility of the Company's management. Our responsibility is to express an
opinion based on our audits. In our opinion, the financial statement schedule
referred to above, when considered in relation to the basic financial statements
taken as a whole, presents fairly in all material respects the information set
forth therein.
We also consent to the incorporation by reference in the Registration
Statement (Form S-8 No. 33-55842) pertaining to the 1985 Stock Option Plan, in
the Registration Statement (Form S-8 No. 33-67290) pertaining to the 1993 Stock
Option Plan for Non-Employee Directors, in the Registration Statement (Form S-8
No. 33-92222) pertaining to the 1995 Stock Option Plan and in the Registration
Statement (Form S-8 No. 333-2904) pertaining to the Incentive Stock Purchase
Plan for Eligible Employees of our report dated January 31, 1997, with respect
to the consolidated financial statements incorporated herein by reference, and
our report included in the preceding paragraph with respect to the financial
statement schedule included in this Annual Report (Form 10-K) of Worthington
Foods, Inc. and Subsidiary.
ERNST & YOUNG LLP
Columbus, Ohio
March 27, 1997
- 45 -
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned officers and/or
directors of Worthington Foods, Inc., an Ohio corporation, which is about to
file with the Securities and Exchange Commission, under the provisions of the
Securities Exchange Act of 1934, an Annual Report on Form 10-K for the fiscal
year ended December 31, 1996, hereby constitutes and appoints William T.
Kirkwood and Dale E. Twomley, and each of them, his true and lawful
attorneys-in-fact and agents with full power of substitution and resubstitution,
for him and in his name, place and stead, in any and all capacities, to sign
such Annual Report on Form 10-K and to file the same with all exhibits and
financial statements and schedules thereto, and other documents in connection
therewith, including any amendment thereto, with the Securities and Exchange
Commission, granting unto said attorneys-in-fact and agents, and each of them,
full power and authority to do and perform each and every act and thing
requisite and necessary to be done in and about the premises, as fully to all
intents and purposes as he might or could do in person, hereby ratifying and
confirming all that said attorneys-in-fact and agents or either of them or their
or his substitute or substitutes may lawfully do or cause to be done by virtue
hereof.
IN WITNESS WHEREOF, the undersigned has set his hand this 18th day of
February, 1997.
Allan R. Buller Roger D. Blackwell
____________________________ ____________________________
Allan R. Buller Roger D. Blackwell
George T. Harding, IV Theodore A. Hamer
____________________________ ____________________________
George T. Harding, IV Theodore A. Hamer
Donald B. Shackelford Donald G. Orrick
____________________________ ____________________________
Donald B. Shackelford Donald G. Orrick
William D. Parker Dale E. Twomley
____________________________ ____________________________
William D. Parker Dale E. Twomley
William T. Kirkwood
____________________________
William T. Kirkwood
- 46 -
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<CASH> 811
<SECURITIES> 0
<RECEIVABLES> 8,664
<ALLOWANCES> 100
<INVENTORY> 17,419
<CURRENT-ASSETS> 29,353
<PP&E> 71,170
<DEPRECIATION> 21,608
<TOTAL-ASSETS> 80,738
<CURRENT-LIABILITIES> 9,223
<BONDS> 0
0
0
<COMMON> 8,545
<OTHER-SE> 40,186
<TOTAL-LIABILITY-AND-EQUITY> 80,738
<SALES> 109,075
<TOTAL-REVENUES> 109,075
<CGS> 65,954
<TOTAL-COSTS> 96,228
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,164
<INCOME-PRETAX> 11,683
<INCOME-TAX> 4,290
<INCOME-CONTINUING> 12,847
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 7,393
<EPS-PRIMARY> 0.84
<EPS-DILUTED> 0.83
</TABLE>
<TABLE>
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
WORTHINGTON FOODS, INC. AND SUBSIDIARY
Additions
_____________________________
Charged to Charge to
at Beginning Costs and Other Accounts Deductions Balance at
of Period Expenses - Describe - Describe End of Period
------------ ---------- -------------- ---------- -------------
<S> <C> <C> <C> <C>
Year ended December 31, 1996:
Deducted from asset accounts:
Allowance for doubtful accounts $100,000 $ 18,421 $ 18,421 A $100,000
Reserve for obsolete inventory 150,000 630,083 630,083 B 150,000
-------- -------- ---------- --------
$250,000 $648,504 $ 648,504 $250,000
======== ======== ========== ========
Year ended December 31, 1995:
Deducted from asset accounts:
Allowance for doubtful accounts $100,000 $ 49,403 $ 49,403 A $100,000
Reserve for obsolete inventory 191,107 421,333 462,440 B 150,000
-------- -------- ---------- --------
$291,107 $470,736 $ 511,843 $250,000
======== ======== ========== ========
Year ended December 31, 1994:
Deducted from asset accounts:
Allowance for doubtful accounts $ 90,423 $ 47,519 $ 37,942 A $100,000
Reserve for obsolete inventory 85,965 540,531 435,389 B 191,107
-------- -------- ---------- --------
$176,388 $588,050 $ 473,331 $291,107
======== ======== ========== ========
Note A - Uncollectible accounts written off, net of recoveries.
Note B - Obsolete inventory written off during the year.
</TABLE>
