<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended April 3, 1998
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 Number)
900 PROPRIETORS ROAD, WORTHINGTON, OH 43085
------------------------------------- -----
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (614) 885-9511
Not Applicable
---------------------------------------------------------------
(Former name, former address and formal fiscal year, if changed
from last report.)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such
shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90
days. Yes |X| No |_|
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
Class Outstanding at May 12, 1998
--------------------------- ---------------------------
Common shares, no par value 11,664,692
Exhibit Index at Page 13
Page 1 of 15
<PAGE> 2
WORTHINGTON FOODS, INC. AND SUBSIDIARY
INDEX
<TABLE>
<CAPTION>
Page No.
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<S> <C>
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets -
April 3, 1998 and December 31, 1997 3-4
Condensed Consolidated Statements of Income -
For the three month periods ended April 3, 1998 and April 4, 1997 5
Condensed Consolidated Statements of Cash Flows -
For the three month periods ended April 3, 1998 and April 4, 1997 6
Notes to Condensed Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 8-10
Item 3. Quantitative and Qualitative Disclosures About Market Risk 10
PART II OTHER INFORMATION 11
Item 1. Legal Proceedings 11
Item 2. Changes in Securities and Use of Proceeds 11
Item 3. Defaults Upon Senior Securities 11
Item 4. Submission of Matters to a Vote of Security Holders 11
Item 5. Other Information 11
Item 6. Exhibits and Reports on Form 8-K 11
Signature 12
Exhibit Index 13
Exhibit 11 - Computation of Earnings Per Share 14
Exhibit 27 - Financial Data Schedule 15
</TABLE>
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<PAGE> 3
ITEM 1.
FINANCIAL STATEMENTS
WORTHINGTON FOODS, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
4/3/98 12/31/97
------ --------
(UNAUDITED) (AUDITED)
(000'S OMITTED)
<S> <C> <C>
ASSETS
Current Assets
Cash ............................................. $ 1,531 $ 714
Accounts receivable less allowance ............... 8,693 9,755
(1998 - $124; 1997 - $100)
Inventories:
Finished goods ................................. 15,990 13,875
Work in process ................................ 1,265 1,038
Raw materials .................................. 5,679 3,453
Packaging materials and supplies ............... 2,171 1,668
------- -------
25,105 20,034
Income taxes refundable .......................... -- 1,230
Prepaid expenses and other ....................... 3,168 3,387
------- -------
Total Current Assets ........................... 38,497 35,120
Property, Plant and Equipment
Land ........................................... 781 781
Building and improvements ...................... 26,103 25,712
Machinery and equipment ........................ 54,555 53,677
Furniture and fixtures ......................... 2,729 2,714
Construction in progress ....................... 2,076 1,768
------- -------
86,244 84,652
Less accumulated depreciation and amortization.. 26,940 25,640
------- -------
59,304 59,012
Goodwill ........................................... 594 675
Other intangible assets ............................ 664 679
------- -------
1,258 1,354
TOTAL ASSETS ............................. $99,059 $95,486
======= =======
</TABLE>
The accompanying notes are an integral part of the condensed consolidated
financial statements.
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<PAGE> 4
WORTHINGTON FOODS, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
4/3/98 12/31/97
------ --------
(UNAUDITED) (AUDITED)
(000'S OMITTED)
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Accounts payable (including outstanding checks $1,813 in 1998
and $1,292 in 1997) ...................................... $ 4,860 $ 4,731
Accrued compensation ........................................... 518 513
Other accrued expenses ......................................... 2,945 2,262
Current portion of long-term debt and capital lease obligations 2,286 2,501
Income taxes ................................................... 5 --
------- -------
Total Current Liabilities .................................. 10,614 10,007
Long-Term Liabilities
Long-term debt and capital lease obligations ................... 23,133 22,333
Deferred income taxes .......................................... 6,833 6,730
------- -------
Total Long-Term Liabilities ................................ 29,966 29,063
Shareholders' Equity
Preferred shares, no par value, authorized 2,000,000 shares,
none issued ................................................... -- --
Common shares, $1.00 stated value, authorized 30,000,000 shares,
issued 11,664,692 shares in 1998 and 11,580,507 in 1997 ....... 11,665 11,580
Additional paid-in capital ..................................... 10,237 10,165
Retained earnings .............................................. 36,577 34,671
------- -------
58,479 56,416
------- -------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY ................. $99,059 $95,486
======= =======
</TABLE>
The accompanying notes are an integral part of the condensed consolidated
financial statements.
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<PAGE> 5
WORTHINGTON FOODS, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
THREE MONTHS ENDED
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4/3/98 4/4/97
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(UNAUDITED)
(000'S OMITTED, EXCEPT PER SHARE DATA)
<S> <C> <C>
Net sales.............................................................. $31,310 $26,489
Cost of goods sold..................................................... 17,963 15,555
------- -------
Gross profit........................................................ 13,347 10,934
Selling and distribution expenses...................................... 7,889 6,149
General and administrative expenses.................................... 959 892
Research and development expenses...................................... 392 373
------- -------
9,240 7,414
------- -------
Income from operations................................................. 4,107 3,520
Interest expense....................................................... 451 376
------- -------
Income before income taxes............................................. 3,656 3,144
Provision for income taxes............................................ 1,499 1,289
------- -------
Net income............................................................. $ 2,157 $ 1,855
======= =======
Earnings per share:
Basic............................................................. $ 0.19 $ 0.16
======= =======
Diluted........................................................... $ 0.18 $ 0.16
======= =======
Dividends per share.................................................... $ .0215 $ 0.02
======= =======
Weighted average number of common and common equivalent
shares used in computing earnings per share
Basic............................................................. 11,644,570 11,459,442
Diluted........................................................... 11,960,015 11,956,581
</TABLE>
Note: 1997 share amounts have been adjusted to reflect the four-for-three share
split in December, 1997.
The accompanying notes are an integral part of the condensed consolidated
financial statements.
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<PAGE> 6
WORTHINGTON FOODS, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
------------------
4/3/98 4/4/97
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(UNAUDITED)
(000'S OMITTED)
<S> <C> <C>
Operating activities:
Net income .................................................. $ 2,157 $ 1,855
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation ............................................. 1,309 1,011
Deferred income taxes .................................... 103 140
Amortization of intangible assets ........................ 89 138
Cash provided by (used for) current assets and liabilities:
Accounts receivable ..................................... 1,062 1,109
Inventories ............................................. (5,070) (4,865)
Prepaid expenses and other .............................. 219 (1,154)
Accounts payable and accrued expenses ................... 817 (1,446)
Income taxes ............................................ 1,235 1,106
Decrease (increase) in other assets ...................... 7 (9)
------- --------
Net cash provided by (used for) operating activities ........ 1,928 (2,115)
Investing activities:
Purchases of property, plant and equipment, net ............. (1,601) (3,872)
------- --------
Net cash used for investing activities ...................... (1,601) (3,872)
Financing activities:
Proceeds from long-term borrowings .......................... 8,350 16,399
Payments on long-term borrowings ............................ (7,766) (10,627)
Proceeds from the issuance of common shares ................. 156 353
Dividends paid .............................................. (250) (216)
------- --------
Net cash provided by financing activities ................... 490 5,909
Net increase (decrease) in cash ............................... 817 (78)
Cash at beginning of period ................................... 714 811
------- --------
Cash at end of period ......................................... $ 1,531 $ 733
======= ========
</TABLE>
The accompanying notes are an integral part of the condensed consolidated
financial statements.
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<PAGE> 7
WORTHINGTON FOODS, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. The accompanying condensed consolidated financial statements (unaudited)
include the accounts of Worthington Foods, Inc. and Subsidiary.
The information furnished reflects all adjustments (all of which were of a
normal recurring nature) which are, in the opinion of management, necessary
to fairly present the condensed consolidated financial position, results of
operations, and cash flows on a consistent basis. Operating results for the
three month period ended April 3, 1998 are not necessarily indicative of
the results that may be expected for the year ended December 31, 1998.
The accompanying condensed consolidated financial statements (unaudited)
are presented in accordance with the requirements for Form 10-Q and
consequently do not include all the disclosures normally required by
generally accepted accounting principles. Reference should be made to the
Company's Form 10-K for the fiscal year ended December 31, 1997 (File No.
0-19887) for additional disclosures including a summary of the Company's
accounting policies, which have not significantly changed. The Company's
policy is that each fiscal year includes four, thirteen week periods.
2. The Board of Directors at its April 21, 1998 meeting declared a $0.0215 per
share dividend payable July 31, 1998 to shareholders of record June 19,
1998.
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<PAGE> 8
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
The following table sets forth selected items from the Company's Consolidated
Statements of Income expressed as a percentage of net sales for the periods
indicated.
Three Months Ended
------------------
4/3/98 4/4/97
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Net sales ................................ 100.0% 100.0%
Cost of goods sold ....................... 57.4 58.7
----- -----
Gross profit ........................... 42.6 41.3
Selling and distribution expenses ........ 25.2 23.2
General and administrative expenses ...... 3.0 3.4
Research and development expenses ........ 1.3 1.4
----- -----
29.5 28.0
----- -----
Income from operations ................... 13.1 13.3
Interest expense ......................... 1.4 1.4
----- -----
Income before income taxes ............... 11.7 11.9
Provision for income taxes ............... 4.8 4.9
----- -----
Net income ............................... 6.9% 7.0%
===== =====
Provision for income taxes as a percentage
of income before income taxes ........... 41.0% 41.0%
===== =====
FIRST QUARTER OF 1998 COMPARED TO 1997
Net sales for the first quarter ended April 3, 1998 increased approximately
$4,821,000 or 18.2% over the similar prior year period. Net sales in the first
quarter of 1998 to the Company's Specialty Markets (Seventh-day Adventist,
Health Food, and International) increased approximately $1,269,000 or 16.0% over
the similar prior year period. This increase is attributable to strong sales in
both the Seventh-day Adventist and International markets which increased
approximately $372,000 and $745,000 or 8.7% and 60.7% over the similar prior
year period. The majority of these increases can be attributed to the timing of
orders as some customers bought prior to the Company's moderate price increase
that went into affect on April 1, 1998.
Net sales to Foodservice operations for the first quarter of 1998 increased
approximately $991,000 or 32.0% over the similar prior year period. This
increase is the result of sales gains to existing accounts combined with several
new customers. Specific growth strategies for the foodservice category which
were developed at the beginning of 1997 continue to be implemented.
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<PAGE> 9
Net sales of Morningstar Farms(R) products to supermarkets in the first quarter
of 1998 increased approximately $2,561,000 or 16.6% over the similar prior year
period. Net sales of Morningstar Farms meat alternative products in the first
quarter of 1998 increased approximately $3,061,000 or 24.3% over the similar
prior year period. This sales gain is the result of increased retail movement,
increased distribution in supermarkets, and solid acceptance of new and existing
products. America's Original Veggie Dog(TM), which was introduced earlier this
year, is currently available in approximately 33% of the nation's supermarkets
and initial acceptance has been very positive for this item. The Company's entry
into the refrigerated meat case began in the first quarter of 1998 with the
rollout of five refrigerated products in Modified Atmosphere Packaging (MAP).
Three regional sales managers were recently hired to focus specifically on
expanding market penetration for these innovative products. The Company expects
these MAP items to contribute to sales growth in 1998 and beyond. Net sales of
Morningstar Farms frozen egg substitutes for the first quarter of 1998 decreased
approximately $500,000 or 17.5% from the similar prior year period.
Gross profit as a percentage of net sales for the first quarter of 1998
increased from 41.3% in 1997 to 42.6% in 1998. The improved gross profit
percentage is the result of higher production levels, contributions from ongoing
programs to control variable costs, and additional manufacturing efficiencies
gained at both the Worthington and Zanesville facilities.
Selling and distribution expenses for the first quarter of 1998 increased as a
percentage of net sales from 23.2% in 1997 to 25.2% in 1998. Aggressive
marketing and advertising expenditures were made during the first quarter of
1998 to leverage the Company's market leadership position in meat alternative
products. Several significant marketing programs will be implemented in the
second quarter of 1998 to attempt to raise the awareness of the Company's
products among consumers and also reach the Company's target market in the most
efficient manner. General and administrative expenses for the first quarter of
1998 decreased as a percentage of net sales from 3.4% in 1997 to 3.0% in 1998,
and is a result of efficiencies gained through higher sales volume. Research and
development expenses were comparable to prior year percentages.
Interest expense for the first quarter of 1998 increased approximately $75,000
or 19.9% over the similar prior year period due to higher average borrowing
levels associated with increased inventory levels to support future sales growth
and the $11,500,000 capital expansion project at Zanesville which was completed
during September, 1997.
Net income for the first quarter of 1998 increased approximately $302,000 or
16.3% over the similar prior year period. This increase is primarily
attributable to increased sales and an increased gross profit percentage,
partially offset by higher selling, general and administrative expenses as a
percentage of net sales.
LIQUIDITY AND CAPITAL RESOURCES
The Company relies on cash generated from operations and a $25,000,000 revolving
credit facility as its principal sources of liquidity. As of May 12, 1998,
$6,850,000 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.
As of May 12, 1998, the additional $6,000,000 expansion at the Zanesville
facility, which will allow the Company to produce America's Original Veggie Dog
and future refrigerated products had not begun. The project is still expected to
be completed by October, 1998, and will be funded through cash generated from
operations and the revolving credit facility.
Net cash provided by operating activities during the first quarter of 1998
increased from the similar prior year period, primarily due to an increase in
net income and changes in operating assets and liabilities.
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<PAGE> 10
Net cash used for investing activities during the first quarter of 1998
decreased from the similar prior year period, primarily due to lower
expenditures for property, plant and equipment at Zanesville. In the first
quarter of 1997, the Company had begun the $11,500,000 expansion at the
Zanesville facility.
Net cash provided by financing activities during the first quarter of 1998
decreased from the similar prior year period, primarily due to lower capital
expenditures for property, plant and equipment which was partially offset by
higher inventory levels to support future sales growth.
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.
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.
YEAR 2000
The Company has developed preliminary plans to address the possible exposures
related to the impact on its computer and operating systems of the year 2000.
Key financial and operational systems are being assessed and plans are being
developed to address system modifications required by December 31, 1999. The
Company expects that these modifications will be addressed and completed by
January 1, 1999. The Company has also established a preliminary plan to
determine the significance of its suppliers in addressing year 2000 compliance.
The financial impact of making the required changes is not expected to be
material to the Company's consolidated financial position, results of operations
or cash flows.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Certain statements in this Form 10-Q which are not historical fact are
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform 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, price competition, the ability to deliver products
with acceptable profit margins, risks inherent in International development,
success of the Company's new user marketing strategy, capital expenditure
amounts, uninsured product liability, unforeseen technological issues associated
with Year 2000, and other factors described in detail in the Company's filings
with the Securities and Exchange Commission and communication to shareholders.
ITEM 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not Applicable
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<PAGE> 11
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Not Applicable
Item 2. Changes in Securities and Use of Proceeds
Not Applicable
Item 3. Defaults Upon Senior Securities
Not Applicable
Item 4. Submission of Matters to a Vote of Security Holders
On April 21, 1998, the Annual Meeting of Shareholders was
held. The following directors were elected:
<TABLE>
<CAPTION>
For Withheld Votes Not Cast Broker Non-Votes
--- -------- -------------- ----------------
<S> <C> <C> <C> <C>
Roger D. Blackwell 9,430,560 36,326 2,196,508 --
Donald G. Orrick 9,426,115 40,771 2,196,508 --
Dale E. Twomley 9,434,753 32,133 2,196,508 --
</TABLE>
The following directors continued their term of office:
Emil J. Brolick, Allan R. Buller, George T. Harding, IV,
Francisco J. Perez, William D. Parker, and Donald B.
Shackelford.
Item 5. Other Information
Not Applicable
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit 11. Computation of Earnings Per Share
Exhibit 27. Financial Data Schedule
(b) No report on Form 8-K was filed during the fiscal
quarter ended April 3, 1998.
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<PAGE> 12
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
WORTHINGTON FOODS, INC.
-----------------------
(Registrant)
Date: May 14, 1998 By: /S/ WILLIAM T. KIRKWOOD
----------------- ---------------------------
William T. Kirkwood
Executive Vice President and
Chief Financial Officer
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<PAGE> 13
EXHIBIT INDEX
Filed with Worthington Foods, Inc. Quarterly Report on Form 10-Q for the Quarter
Ended April 3, 1998.
Exhibit No. Page No.
----------- --------
11 Computation of Earnings Per Share 14
27 Financial Data Schedule 15
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<PAGE> 1
EXHIBIT 11
WORTHINGTON FOODS, INC.
COMPUTATION OF EARNINGS PER SHARE
<TABLE>
<CAPTION>
Three Months Ended
------------------
4/3/98 4/4/97
------ ------
<S> <C> <C>
Basic:
Weighted average number of common shares outstanding ........... 11,644,570 11,459,442
=========== ===========
Net income ..................................................... $ 2,157,000 $ 1,855,000
=========== ===========
Earnings per share ............................................. $ 0.19 $ 0.16
=========== ===========
Diluted:
Weighted average number of common shares outstanding ........... 11,644,570 11,459,442
Net effect of dilutive stock options based on the treasury stock
method using the average market price for the period .......... 315,445 497,139
----------- -----------
Weighted average number of common and common equivalent
shares used in computing earnings per share ................... 11,960,015 11,956,581
=========== ===========
Net income ..................................................... $ 2,157,000 $ 1,855,000
=========== ===========
Earnings per share ............................................. $ 0.18 $ 0.16
=========== ===========
</TABLE>
Note: 1997 share amounts have been adjusted to reflect the four-for-three share
split in December, 1997.
- 14 -
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> APR-03-1998
<CASH> 1,531
<SECURITIES> 0
<RECEIVABLES> 8,693
<ALLOWANCES> 124
<INVENTORY> 25,105
<CURRENT-ASSETS> 38,497
<PP&E> 86,244
<DEPRECIATION> 26,940
<TOTAL-ASSETS> 99,059
<CURRENT-LIABILITIES> 10,614
<BONDS> 0
0
0
<COMMON> 11,665
<OTHER-SE> 46,814
<TOTAL-LIABILITY-AND-EQUITY> 99,059
<SALES> 31,310
<TOTAL-REVENUES> 31,310
<CGS> 17,963
<TOTAL-COSTS> 27,203
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 451
<INCOME-PRETAX> 3,656
<INCOME-TAX> 1,499
<INCOME-CONTINUING> 4,107
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,157
<EPS-PRIMARY> 0.19
<EPS-DILUTED> 0.18
</TABLE>
