<PAGE> 1
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, 1997
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 25, 1998, there were outstanding 11,659,658 of the
Registrant's common shares, 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 common shares held by non-affiliates of the Registrant (based on the
closing price for the common shares on the NASDAQ-National Market System on
February 25, 1998) was $132,948,840.
Documents Incorporated by Reference
-----------------------------------
Portions of the Registrant's Annual Report to Shareholders for the fiscal
year ended December 31, 1997 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 21, 1998 are incorporated by reference into Part III.
THIS REPORT CONTAINS 63 PAGES OF WHICH THIS IS PAGE 1. THE EXHIBIT INDEX
BEGINS AT PAGE 18.
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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 nearly 60 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(R) brand name,
a line of products targeting health-conscious consumers. The Company sells
these products nationwide, primarily to supermarkets and grocery stores, and is
rapidly increasing its presence in foodservice operations. 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 is the recognized market leader of meat alternatives, found in more than
96% 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. The primary brand
positioning of MORNINGSTAR FARMS continues to be good-tasting, convenient,
healthier alternatives to meat, particularly red meat, and pork.
Products sold nationally under the WORTHINGTON(R) and LOMA LINDA(R)
(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(R) 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 will endeavor 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, SCRAMBLERS(R) and
BETTER'N EGGS, will enable it to maintain its number two position in the frozen
egg substitute market.
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 $118,000,000 in 1997. 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.
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.
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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 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. Studies have also
suggested that 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 19,000,000 vegetarians in the
United States in 1997, 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. The
market for vegetarian foods is projected to reach $662 million by 2000 as 42%
of grocery shoppers are eating meatless meals at least once a week and 15% of
shoppers are including meat substitutes at least once 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. These 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.
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 an
alternative to coffee.
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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>
<CAPTION>
Years Ended December 31,
--------------------------------------------------
1997 1996 1995
--------------- --------------- --------------
<S> <C> <C> <C> <C> <C> <C>
Morningstar Farms...... $ 82,281 70% $ 73,645 68% $58,006 64%
Worthington ........... 21,439 18 21,617 20 20,428 22
Loma Linda ............ 9,299 8 8,828 8 8,327 9
Natural Touch.......... 4,925 4 4,985 4 4,314 5
-------- ---- -------- ---- ------- ----
Total................ $117,944 100% $109,075 100% $91,075 100%
======== ==== ======== ==== ======= ====
</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. While these four baseline
products were introduced in the early 1970's, distribution for these items
continues to grow. Together, they accounted for approximately $29,179,000,
$27,294,000 and $24,178,000 or 24.7%, 25.0%, and 26.5% of net sales in 1997,
1996 and 1995, respectively.
In early 1993, the Company began test marketing four new MORNINGSTAR FARMS
meat alternatives: GARDEN VEGGIE-PATTIES, PRIME PATTIES, CHIK PATTIES(R) 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 GRILLE(R) were also introduced during
1995 with strong trade acceptance. In late 1995, GROUND MEATLESS, a fat-free
soy based ingredient to be used in place of cooked ground beef in tacos, sauces
and casseroles was introduced. During 1996, the Company introduced under the
MORNING-STAR FARMS brand, three new BREAKFAST SANDWICHES. These sandwiches are
made from the Company's fat-free SCRAMBLERS egg product, meatless BREAKFAST
PATTIES and fat-free cheese. During 1997, the Company continued to introduce
new products. BURGER STYLE RECIPE CRUMBLES and SAUSAGE STYLE RECIPE CRUMBLES,
which are low-fat, soy based ingredients to be used in place of cooked ground
beef or sausage in tacos, sauces, casseroles or pizza toppings, were
introduced. These initial quick frozen (IQF) items are more convenient than
GROUND MEATLESS, but are not meant to replace that item. CHIK NUGGETS, a
delicious chicken-like nugget with 75% less fat than nuggets made of real
chicken, was also introduced in 1997 and has already become one of the
Company's top selling products. In late 1997, the Company introduced
AMERICA'S ORIGINAL VEGGIE DOG which will replace DELI FRANKS. The taste and
texture of VEGGIE DOGS are very close to the full-fat meat hot dogs which have
over $1.5 billion in retail sales annually. VEGGIE DOGS are already on the
shelves of 15% of the U.S. supermarkets and the Company has targeted to be in
one-half of all supermarkets by May, 1998. Together, the new MORNINGSTAR FARMS
brand products introduced since 1993 accounted for approximately $30,286,000,
$25,080,000 and $15,015,000 or 25.7%, 23.0% and 16.5% of net sales in 1997,
1996, and 1995, respectively.
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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 $8,537,000, $9,076,000
and $10,260,000 or 7.2%, 8.3% and 11.3% of net sales in 1997, 1996, and 1995,
respectively. Although the Company does not anticipate growth in the frozen
egg substitute category or 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.
In 1997, a successful test market was completed on three refrigerated
items in "modified atmosphere packaging," or MAP, and provided convincing
evidence that this concept is one the Company must aggressively pursue in 1998.
Due to the success of the test market, the Company will roll-out five
refrigerated products into other selected areas of the country in early 1998.
These products include GARDEN VEGGIE PATTIES, SPICY BLACK BEAN BURGERS, PRIME
PATTIES, CHIK NUGGETS and BREAKFAST PATTIES.
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, the Company 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. In 1997, the Company continued to
emphasize the low-fat products within its specialty brands. Much of this was a
continuation of the development work with fat replacers pioneered the previous
year. In addition, hydrogenated fats were removed from more than two dozen
products. Low-fat versions of BIG FRANKS, REDIBURGER, SLICED CHIK and DICED
CHIK were introduced in 1997. This brings to nearly 50 the number of
WORTHINGTON and LOMA LINDA items that are labeled with a low-fat claim.
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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, mixes and beverages. Products include:
OKARA PATTIE, made from organic soybeans; GARDEN VEGGIE PATTIE, made from
garden vegetables and LENTIL RICE LOAF and NINE BEAN LOAF, which are unique
products that combine the nutritious benefits of legumes as a convenient,
easy-to-prepare entree. 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.
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, 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. In 1998, the Company will add three
additional regional sales managers to direct the introduction of Modified
Atmosphere Products (MAP) into the refrigerated meatcase.
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, the 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 Company anticipates continued growth in International Sales
and plans to focus on this in 1998 by employing a full-time individual to serve
this market.
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The Foodservice Division of the Company has expanded over the past six
years and now includes five regional sales managers, 43 independent food brokers
and approximately 700 independent distributors. As a result of increased
consumer interest and product availability, restaurants represent more than half
of the Company's Foodservice sales, and the list of national and regional chains
featuring a MORNINGSTAR FARMS veggie burger continues to grow. In 1997, Planet
Hollywood joined the list with prior restaurants, such as Subway, Chili's,
Blimpie's and Pizzeria Uno who are featuring a MORNINGSTAR FARMS product on
their menu. Until recently, the majority of sales in this category were made to
universities, hospitals, hotels and other institutions. With the increased
awareness and demand for vegetarian food items, 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.
The following table sets forth the Company's net sales to its principal
markets for each of the years indicated:
<TABLE>
<CAPTION>
Years Ended December 31,
-----------------------------------------------
1997 1996 1995
--------------- --------------- -------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Supermarkets and grocery stores .......... $ 68,021 58% $ 62,280 57% $51,217 56%
Seventh-day Adventist retail facilities .. 19,374 16 19,427 18 18,626 21
Health/natural food stores ............... 10,724 9 9,792 9 8,142 9
Foodservice (institutional)* ............. 13,486 12 11,875 11 8,354 9
Export Sales 6,339 5 5,701 5 4,736 5
-------- ----- -------- ----- ------- ----
Total .................................. $117,944 100% $109,075 100% $91,075 100%
======== ===== ======== ===== ======= ====
</TABLE>
* Includes sales to Seventh-day Adventist institutions
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, Gardenburger, 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 $158,000,000 in 1997. Due to the high growth in the meat
alternative category over the past few years, the Company expects the category
to remain competitive, as existing competition increases advertising support
and new competition enters the category. Based on industry data, the Company's
retail market share for its meat alternative products was approximately 55%,
56% and 58% for 1997, 1996, and 1995, respectively.
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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 Fleishmann's and Healthy
Choice sold by ConAgra. Based on industry data, SCRAMBLERS and frozen BETTER'N
EGGS accounted for approximately 27%, 27% and 25% of the market for frozen egg
substitute products during 1997, 1996 and 1995, respectively. The Company's egg
substitute competitors mentioned above are considerably larger, have greater
financial resources and enjoy wider recognition for their branded products.
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. The Company believes that competition will
increase the awareness of the category, and in turn help increase the sales of
the Company's products.
Research and Development
The Company has been a leader in developing and commercializing vegetable
protein products for the past 59 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 20
full-time employees at February 25, 1998. Research and development expenses
for the fiscal years ended December 31, 1997, 1996 and 1995 were approximately
$1,413,000, $1,280,000 and $1,227,000, respectively. In 1998, the Company
expects to increase its commitment to developing new technology and products.
Two new positions will be added to research and development during 1998 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 1998 to be
consistent with prior years.
During 1997, the Company introduced seventeen 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.
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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.
The Company has numerous patents relating to its vegetable protein and egg
substitute products that expire at various dates from 1998 through 2007.
During the next five years, no patents that are material to the Company's
business are scheduled to expire. 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 25, 1998, the Company had 569 employees, including 166
corporate salaried employees and 403 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 which are not historical fact 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, 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, and other factors described
in detail in this Form 10-K for the year ended December 31, 1997, other filings
with the Securities and Exchange Commission, and communication to shareholders.
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MANAGEMENT
ITEM 1A EXECUTIVE OFFICERS OF THE REGISTRANT
The executive officers of Worthington Foods, Inc. are as follows:
<TABLE>
<CAPTION>
Name Age Position(s)
---- --- -----------
<S> <C> <C>
Allan R. Buller 80 Chairman of the Board, Treasurer and Director
Dale E. Twomley 58 President, Chief Executive Officer and Director
Donald B. Burke 50 Executive Vice President of Marketing and Sales
William T. Kirkwood 49 Executive Vice President and Chief Financial Officer
Ronald L. McDermott 47 Vice President of Research and Technology
Jay L. Robertson 59 Vice President of Sales
</TABLE>
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 from May, 1989 to February, 1996, 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.
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.
- 10 -
<PAGE> 11
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:
<TABLE>
<CAPTION>
Type of Building Square Footage
---------------- --------------
<S> <C>
Production Facility and Annex ................. 109,000
Warehouse...................................... 38,300
Research and Development Facility.............. 17,400
Office Building................................ 6,100
Retail Store .................................. 4,800
</TABLE>
ZANESVILLE FACILITY
The Company owns a second production facility in Zanesville, Ohio, which is
located on twenty-eight acres approximately 60 miles east of the Company's
Worthington offices. In October of 1996, the Company began an $11,500,000
capital spending project to install a second production line to produce meat
alternatives and to finish additional warehouse space for dry storage. This
expansion project was completed in September, 1997, on-time and on-budget, and
was funded through cash generated from operations and the Company's revolving
credit facility. On February 3, 1998, the Company's Board of Directors
authorized a $6,000,000 expansion at the Zanesville facility. This additional
expansion will allow the Company to produce AMERICA'S ORIGINAL VEGGIE DOG and
future refrigerated products in-house, thus eliminating the need for a contract
manufacturer. This project is expected to be completed by October, 1998 and
will be funded through cash generated from operations and the Company's
revolving credit facility.
The following table provides certain information regarding the building at the
Zanesville facility:
<TABLE>
<CAPTION>
Square Footage
--------------
<S> <C>
Production Process and Mechanicals............. 92,000
Distribution Center............................ 74,000
Administrative Offices......................... 9,000
Unfinished Production Process.................. 19,000
</TABLE>
WAREHOUSE AND DISTRIBUTION FACILITIES
The following table provides certain information regarding the Company's
principal warehouse and distribution facilities:
<TABLE>
<CAPTION>
Date Acquired
or first Termination
Square Occupied by Date of Lease
Location Footage Interest the Company with Renewals
- -------- ------- -------- ------------- -------------
<S> <C> <C> <C> <C>
Columbus, Ohio .......... 54,000 Leased 1992 2001
Riverside, California ... 19,000 Leased 1994 2008
Zanesville, Ohio ........ 74,000 Owned 1996 --
</TABLE>
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 Fogelsville, Pennsylvania.
- 11 -
<PAGE> 12
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> 13
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, 1997.
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, 1997.
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, 1997.
ITEM 7A QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not Applicable
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, 1997.
ITEM 9 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
- 13 -
<PAGE> 14
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 21, 1998, 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 21, 1998, 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 21, 1998, 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 21, 1998,
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
Not Applicable
- 14 -
<PAGE> 15
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, 1997.
<TABLE>
<CAPTION>
Page No. of
Annual Report
-------------
<S> <C>
Report of Independent Auditors............................... 19
Consolidated Balance Sheets as of December 31, 1997 and 1996. 12
Consolidated Statements of Income for the Three Years Ended
December 31, 1997........................................... 13
Consolidated Statements of Shareholders' Equity for the Three
Years Ended December 31, 1997............................... 13
Consolidated Statements of Cash Flows for the Three Years
Ended December 31, 1997..................................... 14
Notes to Consolidated Financial Statements................... 15-18
</TABLE>
(a)(2) Financial Statement Schedules
For the three years in the period ended December 31, 1997:
<TABLE>
<CAPTION>
Page No. of this
Form 10-K
----------------
<S> <C>
Schedule II - Valuation and Qualifying Accounts 63
</TABLE>
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> 16
EXECUTIVE COMPENSATION PLANS AND ARRANGEMENTS
<TABLE>
<CAPTION>
Exhibit
No. Description Location
- ------- ----------- --------
<S> <C> <C>
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. 1998 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) Form of Agreements dated August 28, 1995, between Worthington Foods, Inc. and
Donald B. Burke, William T. Kirkwood, Ronald L. McDermott, Jay L. Robertson
and Dale E. Twomley Pages 21-28
10(g) Worthington Foods, Inc. 1993 Stock Option Plan for Non-Employee Directors (reflects
share splits and amendments through April 22, 1997) **
</TABLE>
* 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 S-8 filed May 12,
1995. (Registration No. 33-92222) (Exhibit 4)
** Incorporated by reference to the Registrant's Form S-8 filed August
7, 1997. (Registration No. 333-33041)
(b) Reports on Form 8-K
A report on Form 8-K was filed on November 6, 1997, regarding Item 5,
Other Events. This Form 8-K reported the Company's four-for-three share
split declared by the Board of Directors of the Company on October 14,
1997 and distributed on December 5, 1997; and the resulting adjustment in
the Preferred Stock Purchase Rights in accordance with the terms of the
Rights Agreement, dated as of June 13, 1995, between Worthington Foods,
Inc. and National City Bank as Rights Agent.
(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> 17
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 27, 1998
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.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
ALLAN R. BULLER*
- -----------------------
Allan R. Buller Chairman of the Board, Treasurer and Director 3/27/98
DALE E. TWOMLEY*
- -----------------------
Dale E. Twomley President, Chief Executive Officer and Director 3/27/98
/S/ WILLIAM T. KIRKWOOD
- -----------------------
William T. Kirkwood Executive Vice President, Chief Financial Officer 3/27/98
ROGER D. BLACKWELL*
- -----------------------
Roger D. Blackwell Director 3/27/98
EMIL J. BROLICK*
- -----------------------
Emil J. Brolick Director 3/27/98
GEORGE T. HARDING, IV*
- -----------------------
George T. Harding, IV Director 3/27/98
DONALD G. ORRICK*
- -----------------------
Donald G. Orrick Director 3/27/98
WILLIAM D. PARKER*
- -----------------------
William D. Parker Director 3/27/98
FRANCISCO J. PEREZ*
- -----------------------
Francisco J. Perez Director 3/27/98
DONALD B. SHACKELFORD*
- -----------------------
Donald B. Shackelford Director 3/27/98
* By /S/ WILLIAM T. KIRKWOOD 3/27/98
-------------------------------------
William T. Kirkwood, Attorney in Fact
</TABLE>
- 17 -
<PAGE> 18
WORTHINGTON FOODS, INC.
ANNUAL REPORT ON FORM 10-K
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit No. Description Location
- ----------- ----------- ---------
<S> <C> <C>
3(a) Amended and Restated Articles of Incorporation of Worthington Foods, Inc. (as filed with the Ohio
Secretary of State on February 25, 1992) *
3(b) Certificate of Amendment to Amended and Restated Articles of Incorporation of Worthington Foods, Inc.
(as filed with the Ohio Secretary of State on June 13, 1995) **
3(c) Certificate of Amendment by Directors of Worthington Foods, Inc. (as filed with the Ohio Secretary of
State of May 6, 1997 **
3(d) Certificate of Amendment by Shareholders to the Amended and Restated Articles of Incorporation of
Worthington Foods, Inc. (as filed with the Ohio Secretary of State of May 6, 1997) **
3(e) Amended and Restated Articles of Incorporation of Worthington Foods, Inc. (reflecting amendments
through May 6, 1997) [For purposes of SEC reporting compliance only; not filed with Ohio Secretary
of State] **
4(a) $25,000,000 Revolving Note with The Huntington National Bank dated May 13, 1997 ****
4(b) First Amendment to Loan Participation Agreement between The Huntington National Bank and
National City Bank of Columbus dated May 13, 1997 ****
4(c) Second Amendment to Second Amended and Restated Loan Agreement between Worthington Foods, Inc.
and The Huntington National Bank dated May 13, 1997 ****
4(d) 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 =
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. 1998 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) Form of Agreements dated August 28, 1995, between Worthington Foods, Inc. and Donald B. Burke,
William T. Kirkwood, Ronald L. McDermott, Jay L. Robertson and Dale E. Twomley Pages 21-28
10(g) Worthington Foods, Inc. 1993 Stock Option Plan for Non-Employee Directors (reflects share split
and amendments through April 22, 1997 **
10(j) Amended and Restated License Agreement between Worthington Foods, Inc. and Specialty Foods
Investment Company *
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
including 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 *
10(l) $10,000,000 9.75% Senior Secured Note, dated January 16, 1990, issued to Principal Mutual Life
Insurance Company *
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 *
10(n) Security Agreement between Worthington Foods, Inc. and Principal dated January 15, 1990 including
First Amendment to Security Agreement dated February 24, 1992 *
</TABLE>
- 18 -
<PAGE> 19
<TABLE>
<CAPTION>
Exhibit
No. Description Location
- ------- ----------- --------
<S> <C> <C>
10(o) First Amended and Restated Loan Agreement between Worthington Foods, Inc. and Huntington National
Bank dated February 24, 1992 *
10(p) First Amendment to Second Amended and Restated Loan Agreement between Worthington Foods, Inc.
and Huntington National Bank dated October 31, 1995 +
10(r) Worthington Foods, Inc. Incentive Stock Purchase Plan for Eligible Employees -
10(x) Collateral Assignment of License Agreement between Worthington Foods, Inc. and Huntington National
Bank dated January 15, 1990 *
10(ab) Rights Agreement, dated as of June 13, 1995, between Worthington Foods, Inc. and National City Bank,
as Rights Agent +++
10(ac) Certificate of Adjustment of Preferred Stock Purchase Rights ++++
10(ad) Certificate of Adjustment of Preferred Stock Purchase Rights --
10(ae) Certificate of Adjustment of Preferred Stock Purchase Rights ---
11 Statement Regarding Computation of Earnings Per Share Page 29
13 Annual Report to Shareholders Pages 30-52
22 Subsidiary of the Registrant *
23 Consent of Ernst & Young LLP Page 53
24 Power of Attorney Page 54
27 Financial Data Schedules Page 55 - 62
</TABLE>
* 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.
= Incorporated by reference to the Registrant's Form 10-K filed March 17,
1994. (File No. 0-19887)
++ Incorporated by reference to the Registrant's Form S-8 filed May 12,
1995. (Registration No. 33-92222) (Exhibit 4)
+++ Incorporated by reference to the Registrant's Form 8-K filed June 14,
1995. (File No. 0-19887) (Exhibit 1)
++++ Incorporated by reference to the Registrant's Form 8-K filed December
11, 1995. (File No. 0-19887) (Exhibit 99(a))
+ Incorporated by reference to the Registrant's Form 10-K filed March
28, 1996. (File No. 0-19887) (Exhibit number herein is the same as in
Form 10-K filed March 28, 1996.)
- Incorporated by reference to the Registrant's Form S-8 filed March 29,
1996. (Registration No. 333-2904) (Exhibit 4)
-- Incorporated by reference to the Registrant's Form 8-K filed October 31,
1996. (File No. 0-19887) (Exhibit 99(a))
** Incorporated by reference to the Registrant's Form S-8 filed August
7, 1997. (Registration No. 333-33041)
**** Incorporated by reference to the Registrant's Form 10-Q filed August 15,
1997. (File No. 0-19887) (Exhibit numbers herein are the same as those
in Form 10-Q filed August 15, 1997.)
--- Incorporated by reference to the Registrant's Form 8-K filed November 6,
1997. (File No. 0-19887) (Exhibit 99(a))
- 19 -
<PAGE> 1
EXHIBIT 10(C)
SUMMARY DESCRIPTION OF THE WORTHINGTON FOODS, INC.
1998 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 1998. 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> 1
EXHIBIT 10(f)
AGREEMENT
THIS AGREEMENT is made this 28th day of August, 1995 (the Commencement
Date") by and between ___________________ (the "Executive") and Worthington
Foods, Inc., an Ohio corporation (the "Corporation").
BACKGROUND
In order to induce the Executive to remain in the employ of the
Corporation, the Corporation wishes to provide the Executive with certain
severance benefits in the event his employment with the Corporation terminates
subsequent to a change in control of the Corporation under the circumstances
described herein.
NOW, THEREFORE, the parties hereto, intending to be legally bound, agree
as follows:
1. DEFINITIONS. For purposes of this Agreement, the following terms shall
have the following meanings unless otherwise expressly provided in this
Agreement:
(i) Change in Control. A "Change in Control" shall be deemed to have
occurred if (A) any "person" (as that term is used in Section 13(d)
and Section 14(d) of the Securities Exchange Act of 1934, as
amended (the "Exchange Act") on the date hereof), including any
"group" as such term is used in Section 13(d)(3) of the Exchange
Act on the date hereof (an "Acquiring Person"), shall hereafter
acquire (or disclose the previous acquisition of) beneficial
ownership (as that term is defined in Section 13(d) of the Exchange
Act and the rules thereunder on the date hereof) of shares of the
outstanding stock of any class or classes of the Corporation which
results in such person or group possessing more than 20% of the
total voting power of the Corporation's outstanding voting
securities ordinarily having the right to vote for the election of
directors of the Corporation; or (B) as the result of, or in
connection with, any tender or exchange offer, merger or other
business combination, sale of assets or contested election, or any
combination of the foregoing transactions ("Transaction"), the
persons who were directors of the Corporation immediately before
the Transaction shall cease to constitute a majority of the Board
of Directors of the Corporation or any successor to the
Corporation. Notwithstanding the foregoing, a "Change in Control"
shall not be deemed to have occurred for purposes of this Agreement
(a) in the event of a sale, exchange, transfer or other disposition
of substantially all of the assets of the Corporation to, or a
merger, consolidation or other reorganization involving the
Corporation and the Executive, alone or with other officers of the
Corporation, or any entity in which the Executive (alone or with
other officers) has, directly or indirectly, a substantial equity
or ownership interest or (b) in a transaction otherwise commonly
referred to as a "management leveraged buyout."
(ii) Disability. The Executive's employment shall be deemed to have
been terminated for "Disability" if, as a result of his incapacity
due to physical or mental illness, he shall have been absent from
his duties with the Corporation on a full-time basis for the entire
period of four consecutive months, and within 30 days after written
notice of termination is given (which may occur before or after the
end of such four-month period) he shall not have returned to the
full-time performance of his duties.
- 21 -
<PAGE> 2
(iii) Effective Period. The "Effective Period" means the 36-month period
following any Change in Control (even if such 36-month period shall extend
beyond the term of this Agreement or any extension thereof).
(iv) Termination for Cause. The Corporation shall have "Cause" to
terminate the Executive's employment hereunder upon (A) the willful and
continued refusal by the Executive substantially to perform his duties with the
Corporation (other than any such refusal resulting from his incapacity due to
physical or mental illness), after a demand for substantial performance is
delivered to the Executive by the Corporation which specifically identifies the
manner in which it is believed that the Executive has refused substantially to
perform his duties, (B) willful failure of Executive to comply with any
applicable law or regulation affecting the Corporation's business, (C) the
commission by Executive of an act of fraud upon or an act evidencing dishonesty
toward the Corporation, (D) conviction of Executive of any felony or
misdemeanor involving moral turpitude, (E) the wrongful misappropriation by
Executive of any funds, property, or rights of the Corporation, or (F)
Executive's breach of any of the provisions of this Agreement.
(v) Termination For Good Reason. "Good Reason" shall mean, unless the
Executive shall have consented in writing thereto, termination by the Executive
of his employment because of any of the following:
(a) a reduction in Executive's title, duties, responsibilities or
status, as compared to such title, duties, responsibilities or status
immediately prior to the Change in Control or as the same may be increased after
the Change in Control;
(b) the assignment to the Executive of duties inconsistent with the
Executive's office on the date of the Change in Control or as the same may be
increased after the Change in Control;
(c) a reduction by the Corporation in the Executive's base salary as
in effect immediately prior to the Change in Control or as the same may be
increased after the Change in Control or a reduction by the Corporation after a
Change in Control in the Executive's total compensation (including bonus) so
that the Executive's total cash compensation in a given calendar year is less
than 90% of Executive's total compensation for the prior calendar year;
(d) a requirement that the Executive relocate anywhere not mutually
acceptable to the Executive and the Corporation or the imposition on the
Executive of business travel obligations substantially greater than his business
travel obligations during the year prior to the Change in Control;
(e) the relocation of the Corporation's principal executive offices to
a location outside the greater Columbus, Ohio area;
- 22 -
<PAGE> 3
(f) the failure by the Corporation to continue in effect any material
fringe benefit or compensation plan, retirement plan, life insurance plan,
health and accident plan or disability plan in which the Executive is
participating at the time of a Change in Control (or plans providing the
Executive with substantially similar benefits), the taking of any action by the
Corporation which would adversely affect the Executive's participation in or
materially reduce his benefits under any of such plans or deprive him of any
material fringe benefit enjoyed by him at the time of the Change in Control, or
the failure by the Corporation to provide him with the number of paid vacation
days to which he is then entitled on the basis of years of service with the
Corporation in accordance with the normal vacation policy in effect immediately
prior to the Change in Control; or
(g) any breach of this Agreement on the part of the Corporation.
(vi) Termination for Retirement. Termination by the Corporation of the
Executive's employment based on "Retirement" shall mean termination in
accordance with the Corporation's normal retirement policy applicable to its
salaried employees as in effect immediately prior to the Change in Control or
in accordance with any retirement arrangement established with the Executive's
consent with respect to the Executive.
(vii) Notice of Termination. A "Notice of Termination" shall mean a
notice which shall set forth in reasonable detail the facts and circumstances
claimed to provide a basis for termination of the Executive's employment.
(viii) Date of Termination. "Date of Termination" shall mean (A) if this
Agreement is terminated for Disability, 30 days after a Notice of Termination is
given (provided that the Executive shall not have returned to the performance of
his duties on a full-time basis during such 30-day period), (B) if the
Executive's employment is terminated for Cause, the date specified in the Notice
of Termination, (C) if the Executive's employment is terminated by death, the
date of death, and (D) if the Executive's employment is terminated for any other
reason, the date on which a Notice of Termination is given, or, if the
Corporation terminates the Executive's employment without giving a Notice of
Termination, the date on which such termination is effective.
2. TERM. Unless sooner terminated as herein provided, the term of this
Agreement shall commence on the date hereof and shall continue until the third
anniversary of the Commencement Date (the "Termination Date"); provided,
however, that commencing on the Termination Date and on each anniversary date
thereof the term of this Agreement shall automatically be extended for one
additional year beyond the then existing term unless, not later than one hundred
twenty (120) days immediately preceding the termination date of the existing
term, the Corporation shall have given the Executive notice that it wishes to
terminate this Agreement in which case the Agreement shall terminate at the end
of the then existing term. The Corporation may not give such notice at any time
while it has knowledge that any third person has taken steps or announced an
intention to take steps reasonably calculated to effect a Change in Control,
unless and until such third party has, in the reasonable opinion of the Board,
abandon its
- 23 -
<PAGE> 4
efforts or intention to effect a Change in Control. It is understood that no
amounts or benefits shall be payable under this Agreement unless (i) there
shall have been a Change in Control during the term of this Agreement and (ii)
the Executive's employment is terminated at any time during the Effective
Period as provided in Section 5 hereof. It is further understood that the
Corporation may terminate the Executive's employment at any time after a Change
in Control, subject to the Corporation providing, if required to do so in
accordance with the terms hereof, the severance payments and benefits
hereinafter specified, which payments and benefits shall only be available if a
Change in Control has occurred prior to such termination. Prior to a Change in
Control, this Agreement shall terminate immediately if Executive's employment
with the Corporation is terminated for any reason, and Executive shall be
entitled to no payments or benefits hereunder.
3. SERVICES DURING CERTAIN EVENTS. In the event any person (as that term
is used in Section 1(i) above) commences a tender or exchange offer,
distributes proxy materials to the Corporation's shareholders or takes other
steps to effect a Change in Control, the Executive agrees he will not
voluntarily terminate his employment with the Corporation other than by reason
of his retirement at normal retirement age, and will continue to serve as a
full-time employee of the Corporation until such efforts to effect a Change in
Control are abandoned or terminated or until a Change in Control has occurred.
4. TERMINATION FOLLOWING A CHANGE IN CONTROL. Any termination of
Executive's employment by the Corporation for Cause, Disability or otherwise or
by the Executive for Good Reason, which, in any case, occurs at any time during
the Effective Period, shall be communicated by written Notice of Termination to
the other party.
5. COMPENSATION UPON TERMINATION FOLLOWING A CHANGE IN CONTROL. The
Executive shall be entitled to the severance benefits provided in Section 5
hereof if his employment is terminated within the Effective Period following a
Change in Control of the Corporation (even if such Effective Period shall
extend beyond the term of this Agreement or any extension thereof) unless his
termination is (i) because of his death or Retirement, (ii) by the Corporation
for Cause or Disability or (iii) by the Executive other than for Good Reason.
(i) For Cause. If, at any time during the Effective Period, the
Executive's employment shall be terminated for Cause, the Corporation shall pay
the Executive his full base salary through the Date of Termination at the rate
in effect at the time Notice of Termination is given and the Corporation shall
not have any further obligations to the Executive under this Agreement.
(ii) Death, Disability or Retirement. If, at any time during the
Effective Period, the Executive's employment is terminated by reason of the
Executive's death, Disability or Retirement, the Corporation shall pay to the
Executive or his legal representative his full base salary through the Date of
Termination, and the Corporation shall have no further obligation to the
Executive or his legal representative under this Agreement after the Date of
Termination.
- 24 -
<PAGE> 5
(iii) For Good Reason or Without Cause. If the Executive's employment
is terminated by the Corporation for any reason other than for Cause,
Disability, Retirement or death, or by the Executive for Good Reason, in either
case at any time during the Effective Period, then:
(a) The Corporation shall pay to the Executive, not later than 30
days following the Date of Termination, the Executive's accrued but unpaid base
salary through the Date of Termination plus compensation for current and
carried-over unused vacation and compensation days in accordance with the
applicable personnel policy.
(b) The Corporation shall pay to the Executive, not later than 30
days following the Date of Termination, an amount in cash equal to the product
of (x) the average annual bonus paid to the Executive for the last three full
fiscal years ending prior to the Date of Termination or, if the Executive has
been employed by the Corporation for less than three full fiscal years prior to
the Date of Termination, the average annual bonus paid to the Executive for the
entire period of the Executive's employment prior to the Date of Termination and
(y) the fraction obtained by dividing (i) the number of days between the Date of
Termination and the last day of the last full fiscal year ending prior to such
date and (ii) 365.
(c) In lieu of any further payments of salary to the Executive
after the Date of Termination, the Corporation shall pay to the Executive, not
later than thirty (30) days following the Date of Termination and
notwithstanding any dispute between the Executive and the Corporation as to the
payment to the Executive of any other amounts under this Agreement or otherwise,
a lump sum cash severance payment (the "Severance Payment") equal to 2.99 times
the average annual compensation which was payable to the Executive by the
Corporation (or any other corporation (an "Affiliate") affiliated with the
Corporation within the meaning of Section 1504 of the Internal Revenue Code of
1986, as amended (the "Code")) and includable in the Executive's gross income
for federal income tax purposes for the five taxable years ending prior to the
date on which a Change in Control of the Corporation occurred (or such portion
of such period during which the Executive performed personal services for the
Corporation or an Affiliate). Compensation payable to the Executive by the
Corporation or an Affiliate shall include every type and form of compensation
includable in the Executive's gross income for federal income tax purposes in
respect of the Executive's employment by the Corporation or an Affiliate.
(iv) If any portion of the aggregate payments under Subsection 5(iii)
hereof which are considered "parachute payments" within the meaning of Section
280G(b)(2) of the Internal Revenue Code of 1986, as amended (the "Code"), shall
be determined by the Corporation's independent auditors to be nondeductible to
the Corporation, then the aggregate present value of all of the amounts payable
to the Executive under Subsection 5(iii) hereof shall be reduced to the maximum
amount which would cause all of the payments under Subsection 5(iii) to be
deductible and in such event the Executive shall have the option, but not the
obligation, to designate or select those kinds of payments which shall be
reduced and the order of such reductions, but failure of the Executive to make
such selections within a period of 30 days following notice of the determination
that a reduction is necessary will result in a reduction of all such payments,
pro rata. If the Executive disagrees with the determination of the reduced
amount by the Corporation's auditors, he may contest that determination by
giving notice of such contest
- 25 -
<PAGE> 6
within 30 days of learning of the determination and may use an accountant of his
choice in connection with such contest. The Corporation shall pay all of the
Executive's costs in connection with such contest if the ultimate determination
by the two accountants (that of the Corporation and that of the Executive) in
consultation with each other, or by a third accountant jointly chosen by the two
first-named accountants in the event the first two cannot agree, represents a
lesser reduction in the amounts payable under Subsection 5(iii) hereof than the
Corporation's independent auditors established in the first instance.
Otherwise, the Executive shall pay his own and any additional costs incurred by
the Corporation in contesting such determination. If there is a final
determination by the Internal Revenue Service or a court of competent
jurisdiction that the Corporation overpaid amounts under Section 280G, the
amount of the overpayment shall be treated as a loan to the Executive and shall
be repaid immediately, together with interest on such amount at the prime rate
of interest at Huntington National Bank, Columbus, Ohio, or any successor
thereto, in effect from time to time. If the Internal Revenue Service or a
court of competent jurisdiction finally determines, or if the Code or the
regulations thereunder shall change such that the Corporation underpaid the
Executive under Section 280G, the Corporation shall pay the difference to the
Executive with interest as specified above.
(v) The Executive's right to receive payments under this Agreement
shall not decrease the amount of, or otherwise adversely affect, any other
benefits payable to the Executive under any plan, agreement or arrangement
relating to employee benefits provided by the Corporation.
(vi) The Executive shall not be required to mitigate the amount of any
payment provided for in this Section 5 by seeking other employment or otherwise,
nor shall the amount of any payment provided for in this Section 5 be reduced by
any compensation earned by the Executive as the result of employment by another
employer or by reason of the Executive's receipt of or right to receive any
retirement or other benefits after the date of termination of employment or
otherwise.
6. SUCCESSORS; BINDING AGREEMENT.
(i) The Corporation will require any successor (whether direct or
indirect, by purchase, merger, consolidation or otherwise) to all or
substantially all of the business and/or assets of the Corporation and its
subsidiaries to expressly assume and agree to perform this Agreement in the same
manner and to the same extent that the Corporation would be required to perform
it if no succession had taken place. Failure of the Corporation to obtain such
agreement prior to the effectiveness of any such succession shall be a breach of
this Agreement and shall entitle the Executive to compensation in the same
amount and on the same terms as he would be entitled hereunder if he terminated
his employment for Good Reason during the Effective Period, except that for
purposes of implementing the foregoing, the date on which any such succession
becomes effective shall be deemed the Date of Termination. As used in this
Agreement, "Corporation" shall mean the Corporation as defined above and any
successor to its business and/or assets as aforesaid which executes and delivers
the agreement provided for in this Section 6 or which otherwise becomes bound by
all the terms and provisions of this Agreement by operation of law. Nothing
contained in this Section 6 shall be construed to modify or affect the
definition of a "Change in Control" contained in Section 1 hereof.
- 26 -
<PAGE> 7
(ii) This Agreement shall inure to the benefit of and be enforceable
by the Executive's personal or legal representatives, executors, administrators,
successors, heirs, distributees, devisees and legatees.
7. ARBITRATION. Any dispute or controversy arising out of or relating to
this Agreement, or any breach thereof, shall be settled by arbitration in
accordance with the rules of the American Arbitration Association. The award
of the arbitrator shall be final, conclusive and nonappealable and judgment
upon such award rendered by the arbitrator may be entered in any court having
jurisdiction thereof. The arbitrator shall be an arbitrator qualified to serve
in accordance with the rules of the American Arbitration Association and one
who is approved by both the Corporation and the Executive. In the absence of
such approval, each party shall designate a person qualified to serve as an
arbitrator in accordance with the rules of the American Arbitration Association
and the two persons so designated shall select the arbitrator from among those
persons qualified to serve in accordance with the rules of the American
Arbitration Association. The arbitration shall be held in Columbus, Ohio or
such other place as may be agreed upon at the time by the parties to the
arbitration.
8. NOTICES. For the purpose of this Agreement, notices and all other
communications provided for in the Agreement shall be in writing and shall be
deemed to have been duly given when delivered or mailed by United States
registered mail, return receipt requested, postage prepaid, addressed in the
case of the Executive, to
___________________________
___________________________
___________________________
and in the case of the Corporation, to the principal executive offices of the
Corporation, provided that all notices to the Corporation shall be directed to
the attention of the Corporation's Chief Executive Officer with copies to the
Secretary of the Corporation and to its Board of Directors, or to such other
address as either party may have furnished to the other in writing in
accordance herewith, except that notices of change of address shall be
effective only upon receipt.
9. MISCELLANEOUS. No provisions of this Agreement may be modified, waived
or discharged unless such waiver, modification or discharge is agreed to in
writing signed by the Executive and a duly authorized officer of the
Corporation. No waiver by either party hereto at any time of any breach by the
other party hereto of, or compliance with, any condition or provision of this
Agreement to be performed by such other party shall be deemed a waiver of
similar or dissimilar provisions or conditions at the same or at any prior or
subsequent time. No agreements or representations, oral or otherwise, express
or implied, with respect to the subject matter hereof have been made by either
party which are not set forth expressly in this Agreement. The validity,
interpretation, construction and performance of this Agreement shall be
governed by the laws (but not the law of conflicts of laws) of the State of
Ohio.
- 27 -
<PAGE> 8
10. VALIDITY. The invalidity or unenforceability of any provisions of
this Agreement shall not affect the validity or enforceability of any other
provisions of this Agreement, which shall remain in full force and effect.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the date and year first above written.
WORTHINGTON FOODS, INC.
By: ______________________________
Title: ____________________________
___________________________________
Executive
- 28 -
<PAGE> 1
EXHIBIT 11
WORTHINGTON FOODS, INC.
COMPUTATION OF EARNINGS PER SHARE
<TABLE>
<CAPTION>
Years Ended December 31,
1997, 1996 and 1995
--------------------------------------
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Basic:
Weighted average number of common shares outstanding....... 11,515,851 11,331,961 11,246,156
========== ========== ==========
Net income $8,007,000 $7,393,000 $5,231,000
========== ========== ==========
Earnings per share $0.70 $0.65 $0.47
========== ========== ==========
Diluted:
Weighted average number of common shares outstanding........ 11,515,851 11,331,961 11,246,156
Net effect of dilutive stock options based on treasury
stock method using average market price..................... 499,701 469,961 306,285
---------- ---------- ----------
Weighted average number of common and common equivalent
shares used in computing earnings per share................. 12,015,552 11,801,922 11,552,441
========== ========== ==========
Net income.................................................. $8,007,000 $7,393,000 $5,231,000
========== ========== ==========
Earnings per share.......................................... $0.67 $0.63 $0.45
========== ========== ==========
</TABLE>
Note: All per share amounts have been adjusted to reflect the four-for-three
share splits distributed in December, 1997 and December, 1996, and also
the five-for-four share split distributed in December, 1995.
- 29 -
<PAGE> 1
1997 Annual Report Worthington Foods, Inc.
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> 2
Table of Contents
Financial Highlights 1
Shareholders' Letter 2-3
Historical Perspective & Company Overview 4
Retail Grocery 5
Specialty Markets 6
Foodservice 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> 3
Worthington Foods, Inc. Financial Highlights
1997 1996
------------ ------------
Net Sales $117,943,832 $109,075,223
Gross Profit $ 48,720,909 $ 43,121,188
Income From Operations $ 14,013,028 $ 12,847,308
Income Before Income Taxes $ 12,541,528 $ 11,682,955
Income Taxes $ 4,535,000 $ 4,290,000
Net Income $ 8,006,528 $ 7,392,955
Earnings Per Share (Diluted) $ 0.67 $ 0.63
Weighted Average Shares Outstanding (Diluted) 12,015,552 11,801,922
Total Assets $ 95,486,460 $ 80,738,046
<PAGE> 4
February 16, 1998
To Our Shareholders, Employees and Other Friends
1997 was a year of record earnings, record sales, and record cash flow for
Worthington Foods. A number of significant Research and Technology developments
and operational improvements strengthened our foundation for future growth.
Although net sales and earnings for the fourth quarter of 1997 were below our
expectations and affected our performance for the full-year, we believe there
were significant achievements during 1997 that provide a stronger base for the
future.
FINANCIAL RESULTS FOR 1997
Net sales increased 8.1% to $117.9 million for the twelve months ended December
31, 1997 versus 1996. Net sales of Morningstar Farms retail products rose 9.2%
for the twelve months ended December 31, 1997 versus 1996, benefiting from new
product introductions and expanded distribution. At year-end 1997, Worthington
Foods' grocery market share of meat alternatives exceeded 55%, approximately the
same as it was at the end of 1996.
Foodservice sales rose 13.6% for the twelve month period ended December 31, 1997
compared to 1996. An expanding number of national restaurant chains are
featuring Morningstar Farms products on their menus. Specialty Markets sales
improved 4.3% for the full-year 1997, including an increase of 9.5% in Health
Foods and over 11% in our small, but growing, International business.
1997 Seventh-day Adventist sales approximated 1996 sales.
Gross margin improved nearly two percentage points in 1997 to 41.3% of net sales
from 39.5% a year ago. This improvement was due primarily to reduced material
prices and direct labor efficiency gains. Several initiatives were implemented
during the year to achieve further operating efficiencies and additional savings
from ongoing cost control programs. Net income for the year increased 8.3% to $8
million. The per share amounts reflect a four-for-three share split distributed
on December 5, 1997, our third stock-split in the past three years.
BUILDING FOR THE FUTURE
As we look back on 1997, we believe that we have established a firm foundation
for improved performance in 1998. Many of our 17 new products introduced during
1997 began moving into the marketplace during the second half of the year with
substantial new distribution gains expected in 1998. The introduction of Chik
Nuggets was a major success and has already become one of our top selling
products.
The test market sales of Morningstar Farms refrigerated products in the meat
case provided convincing evidence that this concept is one we must aggressively
pursue during 1998 and beyond. Accordingly, we are beginning a rollout of five
refrigerated products into other selected markets, supported with increased
advertising and sales personnel. We expect to have our new refrigerated products
in at least 25% of the U.S. supermarkets by the beginning of the 1998 summer
cookout season. In February, 1998, the Board of Directors authorized a $6
million expansion at the Zanesville Plant to provide additional capacity and
improved efficiency for our refrigerated products.
The two-year development of America's Original Veggie Dog has all the makings of
a break-out product. Veggie Dogs are already on the shelves of 15% of the U.S.
supermarkets and we have targeted to be in one-half of all supermarkets by May,
1998. The taste and texture of Veggie Dogs are very close to the full-fat meat
hot dogs with over $1.5 billion in retail sales alone. We believe our Veggie
Dogs will be the first comparable meatless hot dog into this category.
Our efforts during 1997 to develop important relationships within the
Foodservice market are expected to yield significant growth in 1998. Recently
our Garden Grille(R) replaced one of our competitor's products on the menus of
Planet Hollywood. We are confident that we will have other restaurants, like
Planet Hollywood, feature our Morningstar Farms products on their menus. The
Health Food market continues to show strong growth and continued opportunities.
International market expansion, particularly in the United Kingdom and Northern
Europe, will receive increased allocation of resources in 1998 to capitalize on
our opportunities there. Our added production capacity makes it possible to
aggressively expand into the International market during 1998.
<PAGE> 5
OUR PLANS FOR 1998
We believe that we are the category leader in both quality and innovation and,
importantly, the low-cost producer. We are a very determined competitor and this
will be evident in 1998. We expect 1998 will be another year of sales growth and
increased profitability and will be in line with our annual objectives of 15%
sales growth and 20% growth in earnings. We are optimistic about improved
performance during this year for the following reasons:
o Continued growth in the "healthy eating" category
o Increased Supermarket sales from new products, particularly Veggie Dogs and
Refrigerated products
o Expanded distribution and increased sales from existing products in
Supermarkets
o Launch of major International growth initiative
o Stronger relationships developed within the Foodservice Market
o Gradual improvement in gross margin
We are committed to being the leader in all of our current markets and are
determined to use aggressive strategies to develop new markets. We will not,
however, abandon our objective of balancing growth with profitability.
RETURNS TO SHAREHOLDERS
At our Board of Directors meeting held on February 3, 1998, the Board authorized
a cash dividend of 2.15 cents per share payable to shareholders of record as of
March 27, 1998. Over the past three fiscal years, the Board of Directors has
increased your cash dividends by 58% while the market price for our common
shares has appreciated by 277%.
OUR COMMITMENTS AND GOALS
The Board of Directors and Management are firmly dedicated to the vision of
healthful foods for the world, just as we were 59 years ago. We have grown
stronger and believe we now have the resources to achieve our goal of $200
million in sales by the year 2000. We remain dedicated to the values established
and embraced by our predecessors --Good Taste with Good Nutrition; Respect for
our Employees; Integrity; and the belief our employees are whole beings.
Innovative Research and Technology is one of the keys to maintaining leadership
in the marketplace and we are determined to extend our lead over the competition
with the continued introduction of new and improved products. We have been a
publicly traded company for only 6 years, but we understand and are committed to
the concept of building shareholder value.
We believe 1998 and the years beyond will be exciting and rewarding years for
all of us. We have the opportunities, the resources and the people with the
ability and passion to reach new peaks of achievement.
Thank you for your interest and support of Worthington Foods.
Allan R. Buller
Chairman of the Board
Dale E. Twomley
President and Chief Executive Officer
<PAGE> 6
Historical Perspective & Company Overview
Worthington Foods, Inc. 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 $300 million category for meat alternatives.
Worthington Foods' sales for 1997 totaled a record $117.9 million, up 8.1% 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.
Seventeen new items--nearly all low-fat or fat-free--were introduced into the
grocery, specialty and foodservice markets during 1997. This clearly
demonstrates the Company's commitment to growth, innovation and continued
category leadership.
In order to meet the continued demand for meat alternatives, Worthington Foods
completed an $11.5 million capital expansion project at its Zanesville facility
to accommodate additional hot air oven and fry line capacity. This project also
included finishing additional warehouse space for dry storage, and was completed
in September of 1997. Production on this new line began in October, 1997, and
now provides the Company with $30 million of additional production capability
annually.
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 substitute 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 primarily offering nutritious canned
and frozen 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.
<PAGE> 7
Retail Grocery
Morningstar Farms is the recognized market leader of meat alternatives in
supermarkets. This category was up 25% in 1997 over the previous year,
representing more than $158 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 96% 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.
With increased competition in 1997, Morningstar Farms maintained a 50% share of
the meat alternative category. Additionally, Morningstar Farms items contributed
nearly 47% of the incremental retail sales growth in the sale of meat
alternatives during 1997.
A key contributor to this growth was the introduction of new items, including:
Burger and Sausage Crumbles - low-fat, soy-based ingredients to be used in place
of cooked ground beef or sausage in tacos, sauces, casseroles or pizza toppings.
Chik Nuggets - introduced in 1997 as the first Morningstar Farms "finger food,"
generating nearly $3 million in retail sales.
In addition to the new items, significant levels of distribution were obtained
on items initially introduced in previous years. Products posting major volume
gains included Garden Veggie Patties, Spicy Black Bean Burgers and Chik
Patties(R). 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.
A successful test market was completed in 1997 on three refrigerated items in
"modified atmosphere packaging," or MAP. Because product sales in the meat case
are dramatically higher than in the frozen case, these MAP items have the
potential to add significantly to retail sales.
The new user marketing strategy initiated in 1995 was continued with much
success in 1997. The objective was to attract product trial among
health-motivated consumers through brand equity-building print advertising in
highly targeted special interest magazines and cents-off coupons targeted at
users of competitive products.
<PAGE> 8
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 food 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 the Worthington and Loma Linda brands, which offer
the broadest assortment of great-tasting meatless items. These are available as
canned, dry and frozen products.
The category for all health and natural foods continued to demonstrate strong
double-digit growth in 1997. Frozen alternatives to meat were an important part
of this increase.
Worthington Foods serves this market segment with its Natural Touch brand. The
Company has taken steps in recent years to strengthen its foothold in this
market 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 nearly 10% over the past year.
In 1997, Worthington Foods continued to emphasize the low-fat products within
its specialty brands, contributing to an overall growth of 4.3% in this mature
market segment. Much of this was a continuation of the development work with fat
replacers pioneered the previous year. In addition, hydrogenated fats were
removed from more than two dozen products.
Low-fat versions of Big Franks, RediBurger, Sliced Chik and Diced Chik were
introduced in 1997. This brings to nearly 50 the number of Worthington and Loma
Linda items that are labeled with a low-fat claim.
<PAGE> 9
Foodservice
Over the past six years, Worthington Foods' sales to Foodservice accounts have
been the Company's fastest growing market segment. In 1997, Foodservice sales
topped $13.4 million.
The Morningstar Farms brand has often received considerable media attention as
an increasing number of restaurants offer one or more of our products. Meatless
sandwiches and entrees are becoming standard fare for all meal occasions and
Morningstar Farms is the only brand that offers products for every meal of the
day.
As a result of increased consumer interest and product availability, restaurants
now represent more than half of our Foodservice sales, and the list of national
and regional chains 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. Increasingly,
Morningstar Farms is becoming recognized as the brand of choice by major
restaurant chains.
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 $60
million in 1997 and growing substantially. Continued Company success in
Foodservice 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.
<PAGE> 10
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 each of the five years
ended December 31, 1997 have been audited by Ernst & Young LLP, independent
public accountants. 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 splits in December, 1997 and December, 1996, and also
the five-for-four share split in December, 1995.
<TABLE>
<CAPTION>
Years Ended December 31,
1997 1996 1995 1994 1993
---------------------------------------------------------
(In thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Statement of Income Data:
Net sales $117,944 $109,075 $91,075 $88,220 $79,298
Cost of goods sold 69,223 65,954 54,893 55,575 50,077
-------- -------- ------- ------- -------
Gross profit 48,721 43,121 36,182 32,645 29,221
Selling and distribution expenses 29,936 25,752 21,736 20,945 21,319
General and administrative expenses 3,359 3,242 3,289 2,889 2,564
Research and development expenses 1,413 1,280 1,227 1,370 1,421
-------- -------- ------- ------- -------
Total expenses 34,708 30,274 26,252 25,204 25,304
Gain from sale of refrigerated egg assets -- -- -- 1,578 --
-------- -------- ------- ------- -------
34,708 30,274 26,252 23,626 25,304
-------- -------- ------- ------- -------
Income from operations 14,013 12,847 9,930 9,019 3,917
Interest expense 1,471 1,164 1,138 1,811 979
-------- -------- ------- ------- -------
Income before income taxes 12,542 11,683 8,792 7,208 2,938
Provision for income taxes 4,535 4,290 3,561 2,876 1,144
-------- -------- ------- ------- -------
Net income $ 8,007 $ 7,393 $ 5,231 $ 4,332 $ 1,794
======== ======== ======= ======= =======
Earnings per share
Basic $ 0.70 $ 0.65 $ 0.47 $ 0.39 $ 0.16
======== ======== ======= ======= =======
Diluted $ 0.67 $ 0.63 $ 0.45 $ 0.39 $ 0.16
======== ======== ======= ======= =======
Dividends per share $ 0.08 $ 0.07 $ 0.06 $ 0.05 $ 0.05
======== ======== ======= ======= =======
Weighted average number of common and common
equivalent shares used in computing earnings per share
Basic 11,516 11,332 11,246 11,202 11,184
Diluted 12,016 11,802 11,552 11,238 11,201
Balance Sheet Data (at year end):
Working capital $ 25,112 $ 20,130 $16,987 $15,182 $17,245
Total assets 95,486 80,738 69,933 61,578 68,270
Total long-term debt 22,333 17,960 12,790 13,646 24,048
Total shareholders' equity 56,416 48,730 41,968 37,098 33,276
</TABLE>
<PAGE> 11
Exhibit 13
Worthington Foods, Inc.
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 period.
<TABLE>
<CAPTION>
Percentage
Percentage of Net Sales Increase(Decrease)
Years Ended December 31, ----------------------
--------------------------------- 1997 OVER 1996 Over
1997 1996 1995 1996 1995
--------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net sales 100.0% 100.0% 100.0% 8.1% 19.8%
Cost of goods sold 58.7 60.5 60.3 5.0 20.2
----- ----- -----
Gross profit 41.3 39.5 39.7 13.0 19.2
Selling and distribution expenses 25.4 23.6 23.9 16.2 18.5
General and administrative expenses 2.8 3.0 3.6 3.6 (1.4)
Research and development expenses 1.2 1.1 1.3 10.4 4.3
----- ----- -----
Total expenses 29.4 27.7 28.8 14.6 15.3
----- ----- -----
Income from operations 11.9 11.8 10.9 9.1 29.4
Interest expense 1.3 1.1 1.3 26.4 2.3
----- ----- -----
Income before income taxes 10.6 10.7 9.6 7.4 32.9
Provision for income taxes 3.8 3.9 3.9 5.7 20.5
----- ----- -----
Net income 6.8% 6.8% 5.7% 8.3 41.3
===== ===== =====
</TABLE>
RAW MATERIAL COST FLUCTUATIONS: Certain Company products are sensitive to
changes in raw material costs. As a result, operating results for comparative
periods may vary significantly. The cost of several of the Company's principal
raw materials, such as liquid and dried egg whites, dry vital gluten, vegetable
oils and caseinates are primarily dependent upon broadly and sometimes rapidly
fluctuating agricultural commodity markets. When these fluctuations occur, the
Company's resultant costs in raw materials may also fluctuate. For example,
liquid and dried egg whites are primarily dependent upon fresh shell egg prices,
yolk prices and feed costs, and can fluctuate significantly. Quoted market
prices for liquid egg decreased from $0.57 per pound in late 1989 to $0.28 per
pound in December, 1997. Similarly, quoted market prices for dried egg whites
decreased from $5.20 per pound in late 1989 to $2.79 in December, 1997.
From time to time, the Company has entered into fixed price contracts for the
purchase of some or all of these raw ingredients to minimize the potential
negative impact of unfavorable price fluctuations. Such contracts can also
reduce the benefits of favorable price fluctuations. For example, during 1997
the Company purchased all 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 under average market prices.
As of December 31, 1997, the Company was not a party to any fixed price
contracts for delivery of any of its principal raw materials in 1998. The
Company expects to either negotiate fixed price contracts for its principal raw
materials or purchase these materials at market prices prevailing at the time of
purchase.
1997 COMPARED TO 1996: Net sales in 1997 increased approximately $8,869,000 or
8.1% over 1996. Net sales in 1997 to the Company's Specialty Markets
(Seventh-day Adventist, Health Food and International) increased approximately
$1,517,000 or 4.3% over 1996. This increase in sales was driven by an increase
in Health Food sales of approximately $932,000 or 9.5%, and an increase in
International sales of approximately $639,000 or 11.2%. The Company anticipates
continued growth in International sales and plans to focus on this in 1998 by
employing a full time individual to serve this market. Net sales to the
Seventh-day Adventist market in 1997 were comparable with 1996, a trend the
Company expects to continue.
Net sales to Foodservice accounts in 1997 increased approximately $1,610,000 or
13.6% over 1996. While the growth rate in this category is less than prior
years, the Company continues to diligently build this business through national
account acceptance, and in 1997 added several additional marquee accounts to its
growing list of customers. The Company anticipates continued growth in
Foodservice in 1998.
<PAGE> 12
Net sales of Morningstar Farms products to supermarkets in 1997 increased
approximately $5,741,000 or 9.2% over 1996. Net sales of Morningstar Farms meat
alternative products in 1997 increased approximately $6,840,000 or 13.3% over
1996. The increase in sales in 1997 is attributable to new products such as
Burger Style Recipe Crumbles, Sausage Style Recipe Crumbles, and Chik Nuggets as
well as expanded distribution of existing items. During 1997 the Company began
test marketing three Morningstar Farms items in the refrigerated meatcase. This
test provided convincing evidence that this concept is one the Company must
aggressively pursue during 1998. Accordingly, the Company is beginning a rollout
of five refrigerated products into additional markets which will be supported
with increased advertising and sales personnel. Additionally, in late 1997 the
Company introduced America's Original Veggie Dog, which contains only one-half
gram of fat and closely resembles the texture and flavor of the best selling hot
dogs. This product is already in 15% of the U.S. supermarkets and trade
acceptance has been exceptional. The Company expects these new items to
contribute to sales growth in 1998 and beyond.
Gross profit as a percentage of net sales increased from 39.5% in 1996 to 41.3%
in 1997. The improved gross profit percentage is the result of focused efforts
to reduce variable costs, reductions in material prices, improved operating
efficiencies at the Company's two manufacturing facilities, the elimination of a
number of contract manufacturers, and a modest price increase that went into
effect in January, 1997. During the fourth quarter of 1997, gross profit was
adversely impacted by lower than anticipated sales and production which resulted
in higher fixed costs as a percentage of net sales. The Company anticipates that
gross profit for 1998 will approximate the 42.6% of net sales achieved for the
first nine months of 1997.
Selling and distribution expenses increased as a percentage of net sales from
23.6% in 1996 to 25.4% in 1997. The Company expanded certain marketing and
advertising programs to further strengthen and broaden its position in the meat
alternative category, and to support new product introductions, as well as the
expanded distribution of its existing products. General and administrative
expenses as a percentage of net sales decreased from 3.0% in 1996 to 2.8% in
1997, primarily due to efficiencies gained through increased sales volume.
Research and development expenses as a percentage of net sales remained
comparable, increasing slightly from 1.1% in 1996 to 1.2% in 1997.
Interest expense in 1997 increased approximately $307,000 or 26.4% over 1996
primarily due to higher average borrowing levels associated with the Company's
capital expansion at the Zanesville facility, and higher inventory levels to
support future sales growth.
Net income in 1997 increased approximately $614,000 or 8.3% over 1996, primarily
due to increased sales, increased gross profit, and a lower income tax rate,
partially offset by higher selling, general and administrative expenses as well
as higher interest costs. In 1997 the Company benefited from a one-time
Investment Tax Credit from the State of Ohio in the amount of $782,000, related
to the purchase of property, plant and equipment at its Zanesville facility.
This credit reduced the Company's provision for income taxes from approximately
42.4% to 36.2%. The Company also benefited from a similar credit during 1996 in
the amount of $500,000.
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, continued 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.
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.
Gross profit as a percentage of net sales decreased slightly from 39.7% in 1995
to 39.5% in 1996. This decrease was 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
a number of contract manufacturers, 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.
<PAGE> 13
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.
LIQUIDITY AND CAPITAL RESOURCES: On May 19, 1997, the Company increased its
revolving credit facility from $20,000,000 to $25,000,000. The Company relies on
cash generated from operations and the $25,000,000 revolving credit facility as
its principal sources of liquidity. As of February 25, 1998, $6,125,000 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 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
expansion project was completed in September, 1997, on-time and on-budget.
Production on this line began in October, 1997, and now provides the Company
with $30,000,000 of additional production capability annually. The total Company
production capacity is now at approximately $155,000,000, with $100,000,000
coming from the Worthington facility and $55,000,000 from Zanesville. Currently,
the Company still has enclosed space remaining in Zanesville for expansion. The
$11,500,000 capital expansion project at Zanesville was funded through cash
generated from operations and the Company's revolving credit facility.
On February 3, 1998, the Company's Board of Directors authorized a $6,000,000
expansion at the Zanesville facility. This additional expansion will allow the
Company to produce America's Original Veggie Dog and future refrigerated
products in-house, thus eliminating the need for a contract manufacturer. This
project is expected to be completed by October, 1998, and will be funded through
cash generated from operations and the Company's revolving credit facility. As
of February 25, 1998, none of the $6,000,000 has been spent.
Net cash provided by operating activities increased in both 1997 and 1996
primarily due to an increase in net income, partially offset by changes in
operating assets and liabilities.
Net cash used for investing activities increased in both 1997 and 1996 due to
purchases of property, plant, and equipment related to the capital expansion
projects completed at the Company's Zanesville facility. This includes the
$11,500,000 project completed in October, 1997, and the $9,000,000 project
completed in April, 1996.
Net cash provided by financing activities increased in both 1997 and 1996
primarily due to increased borrowings to finance the $11,500,000 and the
$9,000,000 capital expansion projects completed at the Company's Zanesville
facility.
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.
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
<PAGE> 14
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
Annual Report to Shareholders which are not historical fact 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, 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,
and other factors described in detail in the Company's Form 10-K for the year
ended December 31, 1997, other filings with the Securities and Exchange
Commission, and communication to shareholders.
<PAGE> 15
Worthington Foods, Inc.
Consolidated Balance Sheets
December 31, 1997 and 1996
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash $ 714,034 $ 810,988
Accounts receivable, less allowance of $100,000 in 1997 and 1996 9,754,521 8,664,152
Inventories:
Finished goods 13,874,478 11,618,182
Work in process 1,038,109 830,152
Raw materials 3,453,424 3,169,660
Packaging materials and supplies 1,668,111 1,800,940
----------- -----------
20,034,122 17,418,934
Income taxes refundable 1,229,808 128,186
Prepaid expenses and other 3,387,130 2,330,409
----------- -----------
Total Current Assets 35,119,615 29,352,669
PROPERTY, PLANT AND EQUIPMENT:
Land 781,217 817,452
Buildings and improvements 25,711,953 22,745,989
Machinery and equipment 53,676,850 40,831,521
Furniture and fixtures 2,714,307 1,692,942
Construction in progress 1,767,617 5,081,772
----------- -----------
84,651,944 71,169,676
Less accumulated depreciation
and amortization 25,639,338 21,608,078
----------- -----------
59,012,606 49,561,598
OTHER ASSETS:
Goodwill 674,520 996,792
Other intangible assets 679,719 826,987
----------- -----------
1,354,239 1,823,779
----------- -----------
TOTAL ASSETS $95,486,460 $80,738,046
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable (including outstanding checks of
$1,292,000 in 1997 and $767,000 in 1996) $ 4,730,664 $ 4,608,521
Accrued compensation 512,276 1,435,383
Other accrued expenses 2,262,729 1,548,617
Current portion of long-term debt and capital lease obligations 2,501,572 1,630,129
----------- -----------
Total Current Liabilities 10,007,241 9,222,650
LONG-TERM LIABILITIES:
Long-term debt and capital lease obligations 22,333,333 17,959,905
Deferred income taxes 6,730,000 4,825,000
----------- -----------
Total Long-Term Liabilities 29,063,333 22,784,905
SHAREHOLDERS' EQUITY:
Preferred shares, with no par value, authorized 2,000,000 shares -- --
Common shares, $1.00 stated value, authorized 30,000,000 shares,
issued 11,580,507 shares in 1997 and 11,392,901 shares in 1996 11,580,507 11,392,901
Additional paid-in capital 10,165,266 9,776,556
Retained earnings 34,670,113 27,561,034
----------- -----------
56,415,886 48,730,491
----------- -----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $95,486,460 $80,738,046
=========== ===========
</TABLE>
See Notes to Consolidated Financial Statements.
<PAGE> 16
Worthington Foods, Inc.
Consolidated Statements of Income
Years Ended December 31, 1997, 1996, and 1995
<TABLE>
<CAPTION>
1997 1996 1995
------------ ------------ -----------
<S> <C> <C> <C>
Net sales $117,943,832 $109,075,223 $91,075,493
Cost of goods sold 69,222,923 65,954,035 54,893,776
------------ ------------ -----------
Gross profit 48,720,909 43,121,188 36,181,717
Selling and distribution expenses 29,935,584 25,751,508 21,736,044
General and administrative expenses 3,359,715 3,242,480 3,288,144
Research and development expenses 1,412,582 1,279,892 1,227,212
------------ ------------ -----------
Total expenses 34,707,881 30,273,880 26,251,400
Income from operations 14,013,028 12,847,308 9,930,317
Interest expense 1,471,500 1,164,353 1,138,708
------------ ------------ -----------
Income before income taxes 12,541,528 11,682,955 8,791,609
Provision for income taxes:
Currently payable (refundable):
Federal 2,880,000 3,325,000 2,385,000
State and local (250,000) 305,000 492,000
Deferred 1,905,000 660,000 684,000
------------ ------------ -----------
4,535,000 4,290,000 3,561,000
------------ ------------ -----------
Net income $ 8,006,528 $ 7,392,955 $ 5,230,609
============ ============ ===========
Earnings per share
Basic $ 0.70 $ 0.65 $ 0.47
============ ============ ===========
Diluted $ 0.67 $ 0.63 $ 0.45
============ ============ ===========
Weighted average number of common and common
equivalent shares used in computing earnings per share
Basic 11,515,851 11,331,961 11,246,156
Diluted 12,015,552 11,801,922 11,552,441
</TABLE>
<PAGE> 17
Consolidated Statements of Shareholders' Equity
Years Ended December 31, 1997, 1996, and 1995
<TABLE>
<CAPTION>
Common Shares
---------------------------
Number Additional Retained Deferred
of Shares Amount Paid-in Capital Earnings Compensation
---------- ----------- ----------- ------------ --------
<S> <C> <C> <C> <C> <C>
BALANCES AT JANUARY 1, 1995 11,218,520 $11,218,520 $ 9,542,830 $ 16,370,697 $(33,720)
Net income -- -- -- 5,230,609 --
Exercise of options at $3.10 - $5.06 per share 75,940 75,940 170,364 -- --
Restricted share award at $0.045 per share 6,666 6,666 19,209 -- (25,575)
Amortization of deferred compensation -- -- -- -- 38,500
Dividends at $0.06 per share -- -- -- (646,028) --
---------- ----------- ----------- ------------ --------
BALANCES AT DECEMBER 31, 1995 11,301,126 11,301,126 9,732,403 20,955,278 (20,795)
Net income -- -- -- 7,392,955 --
Exercise of options at $3.10 - $5.06 per share 91,775 91,775 44,153 -- --
Amortization of deferred compensation -- -- -- -- 20,795
Dividends at $0.07 per share -- -- -- (787,199) --
---------- ----------- ----------- ------------ --------
BALANCES AT DECEMBER 31, 1996 11,392,901 11,392,901 9,776,556 27,561,034 --
Net income -- -- -- 8,006,528 --
Exercise of options at $3.10 - $8.72 per share 187,606 187,606 388,710 -- --
Dividends at $0.08 per share -- -- -- (897,449) --
---------- ----------- ----------- ------------ --------
BALANCES AT DECEMBER 31, 1997 11,580,507 $11,580,507 $10,165,266 $ 34,670,113 $ --
========== =========== =========== ============ ========
</TABLE>
See Notes to Consolidated Financial Statements.
<PAGE> 18
Worthington Foods, Inc.
Consolidated Statements of Cash Flows
Years Ended December 31, 1997, 1996 and 1995
<TABLE>
<CAPTION>
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income $ 8,006,528 $ 7,392,955 $ 5,230,609
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 4,526,327 3,804,291 2,956,120
Deferred income taxes 1,905,000 660,000 684,000
Amortization of intangible assets 362,024 357,024 357,024
Deferred compensation -- 20,795 38,500
Cash provided by (used for) current assets and liabilities
Accounts receivable (1,090,369) (1,228,263) (1,208,898)
Inventories (2,615,188) 573,241 (2,859,933)
Prepaid expenses and other (1,056,721) (724,148) (404,331)
Accounts payable and accrued expenses (86,852) (1,738,136) 4,285,987
Income taxes (1,101,622) (226,814) (807,798)
Decrease (increase) in other assets 107,516 (59,739) 128,418
------------ ------------ ------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 8,956,643 8,831,206 8,399,698
INVESTING ACTIVITIES
Purchases of property, plant and equipment, net (13,977,335) (13,550,520) (7,343,275)
------------ ------------ ------------
NET CASH USED FOR INVESTING ACTIVITIES (13,977,335) (13,550,520) (7,343,275)
FINANCING ACTIVITIES
Proceeds from long-term borrowings 61,999,000 48,025,000 25,725,000
Payments on long-term borrowings (56,754,129) (42,806,126) (26,401,682)
Proceeds from issuance of common shares 576,316 135,928 246,604
Dividends paid (897,449) (787,199) (646,028)
------------ ------------ ------------
NET CASH PROVIDED BY (USED FOR) FINANCING ACTIVITIES 4,923,738 4,567,603 (1,076,106)
NET DECREASE IN CASH (96,954) (151,711) (19,683)
Cash at beginning of year $ 810,988 962,699 982,382
------------ ------------ ------------
CASH AT END OF YEAR $ 714,034 $ 810,988 $ 962,699
============ ============ ============
</TABLE>
See Notes to Consolidated Financial Statements.
<PAGE> 19
Worthington Foods, Inc.
Notes to Consolidated Financial Statements
December 31, 1997
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, 1997 and 1996.
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
$259,000 and $328,000 higher than reported at December 31, 1997 and 1996,
respectively.
Labor and overhead conversion costs are determined by the first-in, first-out
method. Conversion costs are $7,341,000 and $5,838,000 of the reported inventory
values at December 31, 1997 and 1996, 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,
1997 or 1996. Advertising expense was approximately $14,278,000, $11,248,000 and
$8,999,000 for the years ended December 31, 1997, 1996 and 1995, 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 amount deferred at December 31, 1997 and 1996 was $1,641,000
and $1,063,000, respectively. Slotting costs expensed were $2,391,000,
$1,528,000 and $1,206,000 for the years ended December 31, 1997, 1996 and 1995,
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, 1997 and 1996 is $7,592,000 of equipment under capital
lease obligation. Amortization of capital lease assets is included in
depreciation expense. Accumulated amortization was $4,852,000 and $4,219,000 at
December 31, 1997 and 1996, 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 $2,571,000 and $2,249,000 at December 31, 1997 and 1996, 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
$1,110,000 and $877,000 at December 31, 1997 and 1996, 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 expense when the exercise price of its employee stock options is
equal to the fair market value of the stock at the grant date.
<PAGE> 20
NOTE B -- CREDIT ARRANGEMENTS
Long-term debt consists of the following:
DECEMBER 31
1997 1996
----------- -----------
9.75% notes due
January 15, 2004 $ 5,733,333 $ 6,533,333
Bank credit agreement,
variable rates (weighted average
of 6.88% at December 31, 1997) 17,400,000 10,525,000
6.10% capital lease obligation
due October 31, 1998 1,701,572 2,531,701
----------- -----------
24,834,905 19,590,034
Less current maturities (2,501,572) (1,630,129)
----------- -----------
Total long-term debt $22,333,333 $17,959,905
=========== ===========
The bank credit agreement provides for $25,000,000 total borrowings and extends
through October 31, 2002. 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 (8.50% at December 31,
1997). 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 $7,600,000 at December 31, 1997. 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
($5,105,000 available at December 31, 1997). The Company may not prepay its
9.75% notes until January 15, 1999, without incurring a prepayment penalty.
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. 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: 1998--$2,502,000; 1999--$800,000; 2000--$800,000; 2001--$833,000;
2002--$18,233,000 and thereafter --$1,667,000.
Interest expense of $430,000, $245,000 and $47,000 was capitalized during 1997,
1996 and 1995, respectively, in connection with the Company's construction
activities. Interest paid during 1997, 1996 and 1995 was $1,913,000, $1,419,000
and $1,209,000, 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 $909,000, $1,244,000 and $1,577,000 for
1997, 1996 and 1995, respectively. At December 31, 1997 future minimum lease
payments are: 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.
<PAGE> 21
The following sets forth the Plan's funded status as of October 1, 1997 and 1996
(the dates of the actuarial valuations):
OCTOBER 1
1997 1996
---------- ----------
Plan assets at fair market value,
primarily bank common trust
funds and insurance contract $3,749,355 $2,848,645
Projected benefit obligation for
service rendered to date
(including vested benefits of
1997--$2,563,718;
1996--$1,952,010) 2,875,672 2,185,369
---------- ----------
Plan assets in excess of projected
benefit obligation 873,683 663,276
Unrecognized net asset at
transition date, net of
amortization (90,807) (109,530)
Unrecognized net gain from
past experience different
from that assumed (634,986) (497,306)
Unrecognized prior service cost 5,062 5,713
---------- ----------
Prepaid pension cost included in
prepaid expenses $ 152,952 $ 62,153
========== ==========
The components of net periodic pension cost for the years ended December 31,
1997, 1996 and 1995 are as follows:
1997 1996 1995
--------- --------- ---------
Service cost-benefits
earned during the period $ 248,804 $ 282,660 $ 198,578
Interest cost on projected
benefit obligation 156,956 141,085 114,685
Actual return on plan assets (712,723) (367,550) (360,531)
Net amortization and deferral 450,700 162,260 186,258
--------- --------- ---------
Net periodic pension expense $ 143,737 $ 218,455 $ 138,990
========= ========= =========
The actuarial assumptions used in these calculations are as follows:
1997 1996 1995
----- ----- -----
Weighted-average discount rate 6.50% 7.25% 6.25%
Expected rate of return on assets 7.75% 7.75% 7.75%
Salaried employees are covered by a 401(k) plan and an employee stock ownership
plan (ESOP). The Company contributes to the 401(k) plan 50% of the employee's
contribution, up to 2.0% of the employee's annual salary. Additional
contributions may be made on behalf of the employees at the discretion of the
Company. During 1997, the Company elected to discontinue contributions to the
ESOP. The ESOP owns 804,229 common shares of the Company, all of which are
allocated to participants as of December 31, 1997. The Company recognizes as
expense during the year the plan contributions and any administrative expenses
related to the plans.
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. There was no contribution to the SERP during 1997.
The Company's expense applicable to the above plans, including administrative
expenses, is as follows:
1997 1996 1995
-------- -------- --------
Pension plan $176,000 $247,000 $166,000
ESOP 29,000 245,000 225,000
401(k) 460,000 168,000 144,000
SERP -- 92,000 87,000
-------- -------- --------
$665,000 $752,000 $622,000
======== ======== ========
<PAGE> 22
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, 1997 and 1996
are as follows:
1997 1996
---------- ----------
Deferred tax liabilities:
Property, plant and equipment $6,305,000 $4,649,000
State and local taxes 293,000 221,000
Slotting 667,000 411,000
Other 47,000 21,000
---------- ----------
Total deferred tax liabilities $7,312,000 $5,302,000
---------- ----------
Deferred tax assets:
Inventory $ 255,000 $ 221,000
Accrued expenses 286,000 217,000
Other 41,000 39,000
---------- ----------
Total deferred tax assets $ 582,000 $ 477,000
---------- ----------
Net deferred tax liabilities $6,730,000 $4,825,000
========== ==========
The Company's provisions for income taxes differ from the amounts computed by
applying the federal statutory rate due to the following:
1997 1996 1995
---------- ---------- ----------
Expected tax $4,264,000 $3,972,000 $2,989,000
State and local taxes 129,000 241,000 425,000
Goodwill 110,000 110,000 110,000
Other 32,000 (33,000) 37,000
---------- ---------- ----------
Provision for
income taxes $4,535,000 $4,290,000 $3,561,000
========== ========== ==========
Taxes paid during 1997, 1996 and 1995 were $3,732,000, $3,857,000 and
$3,713,000, respectively.
During 1997 and 1996, the Company earned Investment Tax Credits from the State
of Ohio in the amounts of $782,000 and $500,000, respectively.
NOTE F -- SHAREHOLDERS' EQUITY
On October 14, 1997, the Board of Directors declared a four-for-three share
split that was distributed to shareholders of record as of November 14, 1997. On
October 22, 1996, the Board of Directors declared a four-for-three share split
to shareholders of record as of November 15, 1996. 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-hundredths 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% or more of Worthington Foods common shares, or (ii) announces a
tender offer that would, if consummated, result in ownership of 30% 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 .0045 Preferred Shares for a purchase price of $92.00
NOTE G -- STOCK OPTION PLANS
In 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 324,237
additional options reserved for issuance under the 1995 Plan.
On April 22, 1997, the shareholders approved an amendment to the Worthington
Foods, Inc. 1993 Stock Option Plan for Non-Employee Directors. The amended plan
provides that each Non-Employee Director is granted an option at the beginning
of each term for which they are
<PAGE> 23
elected or re-elected as a director to purchase 10,000 common shares of the
Company at the fair market value of the common shares on the date the option is
granted. Each option will be for a term of five years and will become
exercisable with respect to one-third of the grant on each anniversary of the
grant date. The Company has 270,000 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 of 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.
1997 1996
---------- ----------
Pro forma net income $7,554,000 $7,184,000
========== ==========
Pro forma earnings per share
Basic $ 0.66 $ 0.63
========== ==========
Diluted $ 0.63 $ 0.61
========== ==========
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:
1997 1996
------------- -------------
Expected dividend yield 0.57% 0.50%
Expected stock price volatility 0.432 0.370
Risk free interest rate 5.38% to 6.63% 5.88% to 6.25%
Expected life of options 2 to 5 years 3 to 5 years
A summary of the Company's stock option activity during 1997, 1996 and 1995, and
related information follows:
<TABLE>
<CAPTION>
1997 1996 1995
WEIGHTED-AVERAGE Weighted-Average Weighted-Average
OPTIONS EXERCISE PRICE Options Exercise Price Options Exercise Price
--------- -------------- --------- -------------- ------- --------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding-beginning of year 1,138,182 $ 7.61 860,493 $ 5.80 630,259 $3.78
Granted 53,333 14.27 427,898 13.00 315,554 4.94
Exercised (202,941) 4.21 (116,045) 3.97 (83,099) 3.64
Forfeited (8,888) 13.36 (34,164) 5.10 (2,221) 3.10
--------- --------- -------
Outstanding-end of year 979,686 $ 8.62 1,138,182 $ 7.61 860,493 $5.80
========= ========= =======
Exercisable at end of year 607,738 $11.59 579,452 $ 4.55 429,440 $4.17
========= ========= =======
Weighted-average fair value
of options granted during the year $ 5.68 $ 4.06 $1.33
</TABLE>
Exercise prices for options outstanding as of December 31, 1997 ranged from
$3.10 to $14.53. The weighted-average remaining contractual life of those
options is 2 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 -- 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.
Income Earnings
Net Gross From Net Per Share
Sales Profit Operations Income (Diluted)
--------------------------------------------------------------
(000's omitted except per share data)
1997
First quarter $ 26,489 $10,934 $ 3,520 $1,855 $.16
Second quarter 31,398 13,451 4,645 2,535 .21
Third quarter 28,805 12,546 4,321 2,359 .19
Fourth quarter 31,252 11,790 1,527 1,258 .11
-------- ------- ------- ------ ----
$117,944 $48,721 $14,013 $8,007 $.67
======== ======= ======= ====== ====
1996
First quarter $ 24,353 $ 9,284 $ 2,419 $1,287 $.11
Second quarter 27,548 10,781 3,300 1,991 .17
Third quarter 27,259 10,971 3,371 1,913 .16
Fourth quarter 29,915 12,085 3,757 2,202 .19
-------- ------- ------- ------ ----
$109,075 $43,121 $12,847 $7,393 $.63
======== ======= ======= ====== ====
1995
First quarter $ 20,921 $ 7,972 $ 2,107 $1,062 $.09
Second quarter 22,902 9,504 2,608 1,359 .12
Third quarter 22,256 9,045 2,521 1,327 .11
Fourth quarter 24,996 9,661 2,694 1,483 .13
-------- ------- ------- ------ ----
$ 91,075 $36,182 $ 9,930 $5,231 $.45
======== ======= ======= ====== ====
Fourth quarter 1997 results were adversely affected by advertising costs and
inventory variances which reduced net income by $600,000 or $.05 per share.
<PAGE> 24
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, 1997 and 1996 and the related
consolidated statements of income, shareholders' equity, and cash flows for each
of the three years in the period ended December 31, 1997. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, 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, 1997 and 1996 and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1997 in conformity with generally
accepted accounting principles.
Columbus, Ohio
January 30, 1998
<PAGE> 25
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
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
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
Francisco J. Perez*
President and Chief Executive Officer,
Kettering Medical Center
Director, 1997
Donald B. Shackelford*
Chairman, State Savings Bank
Director, 1991
* Member of Audit Committee
** Member of Executive Compensation Committee
<PAGE> 26
Worthington Foods, Inc.
Shareholder Information
MARKET INFORMATION FOR COMMON SHARES
The Company's common shares trade 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 splits in December, 1997 and December, 1996
and the five-for-four share split in December, 1995.
1997 1996 1995
----------- ----------- -----------
High Low High Low High Low
---- ---- ---- ---- ---- ---
First Quarter 16.3 13.3 9.3 7.2 5.3 3.8
Second Quarter 18.8 12.8 9.7 8.2 8.1 5.1
Third Quarter 18.4 15.0 14.6 9.0 8.3 6.7
Fourth Quarter 18.4 12.8 14.9 11.9 7.9 6.8
As of February 25, 1998, there were approximately 623 holders of record of
common shares, 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.
Dividends of approximately $897,000 and $787,000, or $0.08 and $0.07 per common
share were paid during 1997 and 1996, respectively. On February 3, 1998, the
Company's Board of Directors declared a $0.0215 per common share dividend
payable on April 30, 1998 to shareholders of record as of March 27, 1998.
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, 1997
was approximately $5,105,000. 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 25,
1998, include the following:
ADAM
Adams Harkness & Hill, Inc.
BRAD
J.C. Bradford & Co.
BTAB
BT Alex Brown Inc.
HRZG
Herzog, Heine, Geduld, Inc.
MASH
Mayer & Schweitzer, Inc.
MDLD
McDonald & Company
Securities, Inc.
NAWE
Nash Weiss
<PAGE> 27
OHIO
The Ohio Company
PIPR
Piper Jaffray Companies Inc.
RHCO
Robinson Humphrey Co., Inc.
SHWD
Sherwood Securities Corp.
TSCO
Troster Singer Corporation
WBLR
William Blair & Company L.L.C.
WEDB
Wedbush Morgan Securities, Inc.
GENERAL COUNSEL
VORYS, SATER, SEYMOUR and PEASE LLP
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,
1997 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 accessed on the internet at
www.investquest.com.
NOTICE OF ANNUAL MEETING
Shareholders are cordially invited to attend the Worthington Foods, Inc. 1998
Annual Meeting on April 21, 1998. The meeting will convene at 11:00 a.m. at the
Worthington Hills Country Club, 920 Clubview Boulevard, Worthington, Ohio.
<PAGE> 28
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
<PAGE> 1
EXHIBIT 23
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 30,
1998, included in the 1997 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, in the Registration
Statement (Form S-8 No. 333-2904) pertaining to the Incentive Stock Purchase
Plan for Eligible Employees, in the Registration Statement (Form S-8 No.
333-33041) pertaining to the Amended and Restated Articles of Incorporation,
and in the Registration Statement (Form S-8 No. 333-36841) pertaining to the
Tax Savings and Profit Sharing Plan of our report dated January 30, 1998, 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 26, 1998
<PAGE> 1
EXHIBIT 24
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, 1997, 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 3rd day of
February, 1998.
Roger D. Blackwell Emil J. Brolick
- ------------------ ------------------------------
Roger D. Blackwell Emil J. Brolick
Allan R. Buller George T. Harding, IV
- ------------------ ------------------------------
Allan R. Buller George T. Harding, IV
Francisco J. Perez Donald B. Shackelford
- ------------------ ------------------------------
Francisco J. Perez Donald B. Shackelford
Donald G. Orrick William D. Parker
- ------------------ ------------------------------
Donald G. Orrick William D. Parker
Dale E. Twomley William T. Kirkwood
- ------------------ ------------------------------
Dale E. Twomley William T. Kirkwood
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 714
<SECURITIES> 0
<RECEIVABLES> 9,755
<ALLOWANCES> 100
<INVENTORY> 20,034
<CURRENT-ASSETS> 35,120
<PP&E> 84,652
<DEPRECIATION> 25,639
<TOTAL-ASSETS> 95,486
<CURRENT-LIABILITIES> 10,007
<BONDS> 0
<COMMON> 11,581
0
0
<OTHER-SE> 44,835
<TOTAL-LIABILITY-AND-EQUITY> 95,486
<SALES> 117,944
<TOTAL-REVENUES> 117,944
<CGS> 69,223
<TOTAL-COSTS> 103,931
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,471
<INCOME-PRETAX> 12,542
<INCOME-TAX> 4,535
<INCOME-CONTINUING> 14,013
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 8,007
<EPS-PRIMARY> 0.07
<EPS-DILUTED> 0.67
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<RESTATED>
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> OCT-03-1997
<CASH> 1,120
<SECURITIES> 0
<RECEIVABLES> 8,854
<ALLOWANCES> 175
<INVENTORY> 23,072
<CURRENT-ASSETS> 36,907
<PP&E> 82,501
<DEPRECIATION> 24,354
<TOTAL-ASSETS> 96,511
<CURRENT-LIABILITIES> 9,971
<BONDS> 0
<COMMON> 8,662
0
0
<OTHER-SE> 46,701
<TOTAL-LIABILITY-AND-EQUITY> 96,511
<SALES> 86,692
<TOTAL-REVENUES> 86,692
<CGS> 49,761
<TOTAL-COSTS> 74,206
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,143
<INCOME-PRETAX> 11,343
<INCOME-TAX> 4,594
<INCOME-CONTINUING> 12,486
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 6,749
<EPS-PRIMARY> 0.78
<EPS-DILUTED> 0.75
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<RESTATED>
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> JUL-04-1997
<CASH> 1,054
<SECURITIES> 0
<RECEIVABLES> 10,732
<ALLOWANCES> 149
<INVENTORY> 22,676
<CURRENT-ASSETS> 38,159
<PP&E> 78,888
<DEPRECIATION> 23,494
<TOTAL-ASSETS> 95,129
<CURRENT-LIABILITIES> 11,731
<BONDS> 0
<COMMON> 8,643
0
0
<OTHER-SE> 44,427
<TOTAL-LIABILITY-AND-EQUITY> 95,129
<SALES> 57,887
<TOTAL-REVENUES> 57,887
<CGS> 33,502
<TOTAL-COSTS> 49,722
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 787
<INCOME-PRETAX> 7,378
<INCOME-TAX> 2,988
<INCOME-CONTINUING> 8,165
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,390
<EPS-PRIMARY> 0.51
<EPS-DILUTED> 0.49
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<RESTATED>
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> APR-04-1997
<CASH> 733
<SECURITIES> 0
<RECEIVABLES> 7,555
<ALLOWANCES> 126
<INVENTORY> 22,284
<CURRENT-ASSETS> 34,057
<PP&E> 75,041
<DEPRECIATION> 22,619
<TOTAL-ASSETS> 88,174
<CURRENT-LIABILITIES> 8,754
<BONDS> 0
<COMMON> 8,634
0
0
<OTHER-SE> 42,089
<TOTAL-LIABILITY-AND-EQUITY> 88,174
<SALES> 26,489
<TOTAL-REVENUES> 26,489
<CGS> 15,555
<TOTAL-COSTS> 22,969
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 376
<INCOME-PRETAX> 3,144
<INCOME-TAX> 1,289
<INCOME-CONTINUING> 3,520
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,855
<EPS-PRIMARY> 0.22
<EPS-DILUTED> 0.21
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<RESTATED>
<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
<COMMON> 8,545
0
0
<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> 0.87
<EPS-DILUTED> 0.83
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<RESTATED>
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> SEP-27-1996
<CASH> 447
<SECURITIES> 0
<RECEIVABLES> 8,038
<ALLOWANCES> 158
<INVENTORY> 17,962
<CURRENT-ASSETS> 28,898
<PP&E> 67,790
<DEPRECIATION> 20,641
<TOTAL-ASSETS> 78,020
<CURRENT-LIABILITIES> 9,335
<BONDS> 0
<COMMON> 6,389
0
0
<OTHER-SE> 40,286
<TOTAL-LIABILITY-AND-EQUITY> 78,020
<SALES> 79,160
<TOTAL-REVENUES> 79,160
<CGS> 48,124
<TOTAL-COSTS> 70,070
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 927
<INCOME-PRETAX> 8,163
<INCOME-TAX> 2,972
<INCOME-CONTINUING> 9,090
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5,191
<EPS-PRIMARY> 0.82
<EPS-DILUTED> 0.78
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<RESTATED>
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> JUN-28-1996
<CASH> 690
<SECURITIES> 0
<RECEIVABLES> 7,688
<ALLOWANCES> 135
<INVENTORY> 17,512
<CURRENT-ASSETS> 28,296
<PP&E> 64,869
<DEPRECIATION> 19,705
<TOTAL-ASSETS> 75,440
<CURRENT-LIABILITIES> 9,817
<BONDS> 0
<COMMON> 6,367
0
0
<OTHER-SE> 38,587
<TOTAL-LIABILITY-AND-EQUITY> 75,440
<SALES> 51,901
<TOTAL-REVENUES> 51,901
<CGS> 31,836
<TOTAL-COSTS> 46,182
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 586
<INCOME-PRETAX> 5,133
<INCOME-TAX> 1,855
<INCOME-CONTINUING> 5,719
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,278
<EPS-PRIMARY> 0.52
<EPS-DILUTED> 0.50
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<RESTATED>
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> MAR-29-1996
<CASH> 57
<SECURITIES> 0
<RECEIVABLES> 6,542
<ALLOWANCES> 100
<INVENTORY> 18,853
<CURRENT-ASSETS> 27,688
<PP&E> 61,336
<DEPRECIATION> 18,786
<TOTAL-ASSETS> 72,250
<CURRENT-LIABILITIES> 8,136
<BONDS> 0
<COMMON> 6,365
0
0
<OTHER-SE> 36,770
<TOTAL-LIABILITY-AND-EQUITY> 72,250
<SALES> 24,353
<TOTAL-REVENUES> 24,353
<CGS> 15,069
<TOTAL-COSTS> 21,934
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 237
<INCOME-PRETAX> 2,182
<INCOME-TAX> 895
<INCOME-CONTINUING> 2,419
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,287
<EPS-PRIMARY> 0.20
<EPS-DILUTED> 0.20
</TABLE>
<PAGE> 1
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
WORTHINGTON FOODS, INC. AND SUBSIDIARY
<TABLE>
<CAPTION>
Additions
------------------------------
Balance 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> <C>
Year ended December 31, 1997:
Deducted from asset accounts:
Allowance for doubtful accounts .. $100,000 $ 9,772 $ 9,772 A $100,000
Reserve for obsolete inventory .... 150,000 645,712 645,712 B 150,000
-------- -------- -------- --------
$250,000 $655,484 $655,484 $250,000
======== ======== ======== ========
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
======== ======== ======== ========
</TABLE>
Note A - Uncollectible accounts written off, net of recoveries.
Note B - Obsolete inventory written off during the year.
