<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-----------------------
FORM 10-Q
-----------------------
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 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 000-18908
-----------------------
WHOLESOME & HEARTY FOODS, INC.
(Exact name of registrant as specified in its charter)
Oregon 93-0886359
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
1411 SW Morrison Street, Suite 400 97205
Portland, Oregon (Zip Code)
(Address of principal executive offices)
Registrant's telephone number, including area code: 503-205-1500
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
----- -----
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Common stock without par value 8,566,456
(Class) (Outstanding at April 30, 1997)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
WHOLESOME & HEARTY FOODS, INC.
FORM 10-Q
INDEX
PART I - FINANCIAL INFORMATION PAGE
- ------------------------------ ----
Item 1. Financial Statements
Balance Sheets - March 31, 1997 and December 31, 1996 2
Statements of Operations - Quarters Ended March 31, 1997 and 1996 3
Statements of Cash Flows - Quarters Ended March 31, 1997 and 1996 4
Notes to Financial Statements 5
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 6
PART II - OTHER INFORMATION
- ---------------------------
Item 4. Submission of Matters to a Vote of Security Holders 8
Item 6. Exhibits and Reports on Form 8-K 8
Signatures 9
1
<PAGE>
PART 1 - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
------- --------------------
WHOLESOME AND HEARTY FOODS, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
March 31, December 31,
1997 1996
-------------- --------------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 4,019,000 $ 7,755,000
Accounts receivable, net of allowances of
$196,000 and $177,000 3,944,000 2,800,000
Inventories, net 5,427,000 4,790,000
Prepaid expenses 827,000 378,000
Income taxes receivable 823,000 653,000
Deferred income tax benefit 470,000 470,000
-------------- --------------
Total Current Assets 15,510,000 16,846,000
Property, Plant and Equipment, net of accumulated
depreciation of $1,435,000 and $1,220,000 7,774,000 6,814,000
Other Assets, net of accumulated amortization of
$154,000 and $122,000 1,237,000 1,274,000
-------------- --------------
Total Assets $ 24,521,000 $ 24,934,000
-------------- --------------
-------------- --------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 1,978,000 $ 2,173,000
Payroll and related liabilities payable 435,000 458,000
Accrued employee bonuses 309,000 221,000
Accrued relocation 59,000 178,000
Accrued brokers' commissions 272,000 199,000
Other current liabilities 345,000 224,000
-------------- --------------
Total Current Liabilities 3,398,000 3,453,000
Deferred Income Tax Liability 502,000 502,000
Commitments and Contingencies - -
Shareholders' Equity:
Preferred Stock, no par value, 5,000,000 shares
authorized; none issued - -
Series A Junior Participating Preferred Stock,
no par value, 250,000 shares authorized;
none issued - -
Common Stock, no par value, 25,000,000
shares authorized; shares issued and
outstanding: 8,566,456 8,468,000 8,468,000
Additional paid-in capital 4,139,000 4,139,000
Retained earnings 8,014,000 8,372,000
-------------- --------------
Total Shareholders' Equity 20,621,000 20,979,000
-------------- --------------
Total Liabilities and Shareholders' Equity $ 24,521,000 $ 24,934,000
-------------- --------------
-------------- --------------
</TABLE>
The accompanying notes are an integral part of these balance sheets
2
<PAGE>
WHOLESOME AND HEARTY FOODS, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Three months ended March 31,
1997 1996
-------------- --------------
<S> <C> <C>
Net sales $ 10,010,000 $ 9,164,000
Cost of goods sold 5,188,000 4,641,000
-------------- --------------
Gross margin 4,822,000 4,523,000
Operating expenses:
Sales and marketing 4,369,000 2,933,000
General and administrative 1,114,000 1,000,000
Acquired in-process research & development - 612,000
-------------- --------------
5,483,000 4,545,000
-------------- --------------
Operating loss (661,000) (22,000)
Other income (expense):
Interest income 67,000 113,000
Other, net (4,000) (1,000)
-------------- --------------
63,000 112,000
-------------- --------------
Income (loss) before provision for (benefit from) income taxes (598,000) 90,000
Provision for (benefit from) income taxes (243,000) 32,000
-------------- --------------
Net income (loss) $ (355,000) $ 58,000
-------------- --------------
-------------- --------------
Net income (loss) per share $ (0.04) $ 0.01
-------------- --------------
-------------- --------------
Shares used in per share calculations 8,566,456 8,894,408
-------------- --------------
-------------- --------------
</TABLE>
The accompanying notes are an integral part of these financial statements
3
<PAGE>
WHOLESOME AND HEARTY FOODS, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Three Months Ended March 31,
1997 1996
-------------- --------------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ (355,000) $ 58,000
Effect of exchange rate on operating accounts (3,000) -
Adjustments to reconcile net income to net cash flows
used in operating activities:
Depreciation and amortization 247,000 110,000
Other non-cash expense 5,000 -
Loss on sale of fixed assets 4,000 -
Acquired in-process research and development, net of tax - 386,000
(Increase) decrease in:
Accounts receivable, net (1,144,000) (865,000)
Inventories, net (637,000) (858,000)
Prepaid expenses (449,000) (95,000)
Income taxes receivable (170,000) (1,805,000)
Increase (decrease) in:
Accounts payable (195,000) 169,000
Payroll and related liabilities payable (23,000) (29,000)
Accrued liabilities and other 163,000 (141,000)
Deferred income taxes - (10,000)
-------------- --------------
Net cash used in operating activities (2,557,000) (3,080,000)
Cash flows from investing activities:
Payments for purchase of property and equipment (1,156,000) (626,000)
Proceeds from sale of equipment -
Cash paid for Gorilla Foods and Whole Food Marketing - (419,000)
Other assets, net (23,000) (58,000)
-------------- --------------
Net cash used in investing activities (1,179,000) (1,103,000)
Cash flows from financing activities:
Proceeds from exercise of common stock options
and warrants - 625,000
Income tax benefit of non-qualified stock option exercises
and disqualifying dispositions - 1,389,000
-------------- --------------
Net cash provided by financing activities - 2,014,000
-------------- --------------
Decrease in cash and cash equivalents (3,736,000) (2,169,000)
Cash and cash equivalents:
Beginning of period 7,755,000 9,247,000
-------------- --------------
End of period $ 4,019,000 $ 7,078,000
-------------- --------------
-------------- --------------
</TABLE>
The accompanying notes are an integral part of these financial statements
4
<PAGE>
WHOLESOME & HEARTY FOODS, INC.
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1. BASIS OF PRESENTATION
The financial information included herein for the quarterly periods ended March
31, 1997 and 1996 and the financial information as of March 31, 1997 is
unaudited; however, such information reflects all adjustments consisting only of
normal recurring adjustments which are, in the opinion of management, necessary
for a fair presentation of the financial position, results of operations and
cash flows for the interim periods. The financial information as of December
31, 1996 is derived from Wholesome & Hearty Foods, Inc.'s (the Company's) 1996
Annual Report Form 10-K. The interim financial statements should be read in
conjunction with the financial statements and the notes thereto included in the
Company's 1996 Annual Report on Form 10-K.
The results of operations for the interim periods presented are not necessarily
indicative of the results to be expected for the full year.
NOTE 2. INVENTORIES
Inventories are valued at standard cost, which approximates the lower of cost
(using the first-in, first-out (FIFO) method), or market, and include materials,
labor and manufacturing overhead.
March 31, 1997 December 31, 1996
-------------- -----------------
Raw materials $ 526,000 $ 670,000
Supplies 223,000 243,000
Finished goods 4,678,000 3,877,000
-------------- -----------------
$5,427,000 $4,790,000
-------------- -----------------
-------------- -----------------
NOTE 3. SUPPLEMENTAL CASH FLOW INFORMATION AND NON-CASH ACTIVITY
Supplemental disclosure of cash flow information is as follows:
Quarterly periods ended March 31,
1997 1996
----------- -----------
Cash paid during the period for income taxes $ 3,600 $ 1,094,000
Issuance of common stock in exchange for the
assets of Gorilla Foods, Inc. - $ 990,000
NOTE 4. EARNINGS PER SHARE
In March 1997, the Financial Accounting Standards Board issued Statement 128,
EARNINGS PER SHARE ("SFAS 128"), superseding Opinion 15. SFAS is required to be
adopted for periods ending after December 15, 1997. Pro forma effects of
applying SFAS 128 are as follows:
Three Months Ended: March 31, 1997 March 31, 1996
- -------------------------------- -------------- --------------
Primary EPS as reported $ (0.04) $ 0.01
Effect of SFAS 128 0.00 0.00
-------------- --------------
Basic EPS as restated $ (0.04) $ 0.01
-------------- --------------
-------------- --------------
Fully diluted EPS as reported $ (0.04) $ 0.01
Effect of SFAS 128 0.00 0.00
-------------- --------------
Diluted EPS as restated $ (0.04) $ 0.01
-------------- --------------
-------------- --------------
5
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Net sales increased 9.2 percent to $10.0 million for the first quarter of 1997
from $9.2 million for the first quarter of 1996. The Company has increased its
sales levels in each of its major channels, including food service, retail and
club stores, such as PriceCostco. Such increases are primarily a result of
increased marketing and public relations activities, which have increased
awareness of the Company's products throughout its channels of distribution.
Gross margins increased to $4.8 million (48.2 percent of net sales) for the
first quarter of 1997 from $4.5 million (49.4 percent of net sales) for the
first quarter of 1996. The decrease in gross margins as a percentage of net
sales is primarily a result of increased prices on certain of the Company's raw
materials, partially offset by process improvements at the Company's
manufacturing plant.
Sales and marketing expenses increased to $4.4 million (43.6 percent of net
sales) for the first quarter of 1997 from $2.9 million (32.0 percent of net
sales) for the first quarter of 1996, primarily as a result of costs associated
with the Company's plan to aggressively grow its retail grocery business in 1997
and increased promotional activities, in general, to support and promote the
growth of the Company.
General and administrative expenses remained relatively stable at $1.1 million
(11.1 percent of net sales) for the first quarter of 1997 compared to $1.0
million (10.9 percent of net sales) for the first quarter of 1996, primarily as
a result of increases related to additional personnel to support the growth of
the Company and increased bonus accruals in 1997, offset by a decrease in
litigation costs as the suit it was defending in the first quarter of 1996 was
settled in the fourth quarter of 1996 and a related insurance refund of $240,000
was received in the first quarter of 1997.
In connection with the acquisition of Gorilla Foods, Inc., the Company recorded
a one-time pretax charge of $612,000 ($386,000 net of taxes) related to acquired
in-process research and development costs in the first quarter of 1996. The
value assigned to the in-process research and development was determined by an
independent appraisal and represents those efforts in process at the acquisition
date that had not yet established feasibility and that had no alternative future
uses. Accounting rules require that such costs be charged to expense as
incurred. The Company currently believes that these research and development
efforts will result in commercially viable products within the next several
years.
Operating loss increased to $661,000 (6.6 percent of net sales) for the first
quarter of 1997 from $22,000 (0.2 percent of net sales) for the first quarter of
1996 as a result of the individual line item changes discussed above.
6
<PAGE>
Income taxes are based on an estimated rate of 40.6 percent, which is consistent
with the 40.6 percent rate used for 1996.
Net loss was $355,000 (3.5 percent of net sales) for the first quarter of 1997
compared to net income of $58,000 (0.6 percent of net sales) for the first
quarter of 1996. Loss per share was $0.04 (on 8,566,456 shares) for the first
quarter of 1997 compared to earnings per share of $0.01 (on 8,894,408 shares)
for the first quarter of 1996.
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 1997 working capital was $12.1 million, including $4.0 million of
cash and cash equivalents. In the first quarter of 1997, working capital
decreased by $1.3 million compared to December 31, 1996 and the current ratio
decreased to 4.6:1 from 4.9:1.
Cash and cash equivalents decreased $3.7 million from December 31, 1996
primarily due to $2.6 million used in operations and $1.2 million for the
purchase of property and equipment.
Accounts receivable increased $1.1 million to $3.9 million at March 31, 1997
from $2.8 million at December 31, 1996 due primarily to growth of the business
and significant sales at the end of the quarter. Days sales outstanding
increased to 34 at March 31, 1997 from 32 at December 31, 1996. Accounts 80
days or more past due represented approximately 2 percent of accounts receivable
at March 31, 1997 and December 31, 1996.
Inventories increased $637,000 to $5.4 million at March 31, 1997 from $4.8
million at December 31, 1996 due primarily to the building of finished goods
inventory in order to help ensure the Company's ability to meet anticipated
demand during the second quarter of 1997. Inventory turned 4.1 times on an
annualized basis for the first quarter of 1997 compared to 5.1 times for all of
1996.
Capital expenditures of $1.2 million during the first quarter of 1997 primarily
resulted from a capacity expansion project at one of the Company's production
facilities, including building improvements and new processing equipment.
Future capital requirements, other than normal operating expenses, could
include, among other things, the possible construction or purchase of a new
manufacturing facility, the purchase of manufacturing equipment to equip such
facility or a co-packing facility and the funding of regional or national
marketing campaigns. If the Company obtains a new manufacturing facility, it
would expect such a facility to cost between $15 and $20 million, including all
production equipment. The Company is currently researching funding options
including various combinations of cash, conventional debt and lease financings.
At March 31, 1997, the Company had firm obligations of $120,000 related to such
facility.
7
<PAGE>
PART II - OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The annual meeting of the shareholders of the Company was held on April 22,
1997, at which the following action was taken:
1. A majority of the shareholders elected the six nominees for director to
the Board of Directors of the Company. The six directors elected and the voting
results follow:
DIRECTOR NAME SHARES VOTED FOR SHARES WITHHELD
------------- ---------------- ---------------
Lyle G. Hubbard 7,970,598 37,417
Ralph M. Kovel 7,970,596 37,419
Mary O. McWilliams 7,970,598 37,417
Michael L. Ray 7,970,598 37,417
E. Kay Stepp 7,969,098 38,917
Paul F. Wenner 7,969,598 38,417
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) The exhibits filed as a part of this report are listed below:
EXHIBIT NO.
11 Calculations of Net Income Per Share
27 Financial Data Schedule
(b) Reports on Form 8-K Filed During the Quarter:
There were no reports on Form 8-K filed during the quarter ended March 31,
1997.
8
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: April 30, 1997 WHOLESOME & HEARTY FOODS, INC.
By: /s/ LYLE G. HUBBARD
------------------------------------------
Lyle G. Hubbard
Director, President and Chief Executive Officer
(Principal Executive Officer)
By: /s/ RICHARD C. DIETZ
------------------------------------------
Richard C. Dietz
Executive Vice President,
Chief Financial Officer Treasurer and Secretary
(Principal Financial and Accounting Officer)
9
<PAGE>
EXHIBIT 11
WHOLESOME AND HEARTY FOODS, INC.
CALCULATIONS OF NET INCOME PER SHARE
<TABLE>
<CAPTION>
Three Months Ended March 31,
-----------------------------------------------------------------------
1997 1996
-------------------------------- --------------------------------
Primary Fully Diluted Primary Fully Diluted
-------------------------------- --------------------------------
<S> <C> <C> <C> <C>
Weighted Average Shares
Outstanding for the Period 8,566,456 8,566,456 8,120,687 8,120,687
Dilutive Common Stock
Options Using the Treasury
Stock Method - - 773,721 780,739
-------------------------------- --------------------------------
Total Shares Used for Per
Share Calculations 8,566,456 8,566,456 8,894,408 8,901,426
-------------------------------- --------------------------------
-------------------------------- --------------------------------
Net Income (Loss) $ (355,000) $ (355,000) $ 58,000 $ 58,000
-------------------------------- --------------------------------
-------------------------------- --------------------------------
Net Income (Loss) Per Share $ (0.04) $ (0.04) $ 0.01 $ 0.01
-------------------------------- --------------------------------
-------------------------------- --------------------------------
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> MAR-31-1997
<CASH> 4,019,000
<SECURITIES> 0
<RECEIVABLES> 3,944,000
<ALLOWANCES> 196,000
<INVENTORY> 5,427,000
<CURRENT-ASSETS> 15,510,000
<PP&E> 7,774,000
<DEPRECIATION> 1,435,000
<TOTAL-ASSETS> 24,521,000
<CURRENT-LIABILITIES> 3,398,000
<BONDS> 0
0
0
<COMMON> 8,468,000
<OTHER-SE> 12,153,000
<TOTAL-LIABILITY-AND-EQUITY> 24,521,000
<SALES> 10,010,000
<TOTAL-REVENUES> 10,010,000
<CGS> 5,188,000
<TOTAL-COSTS> 5,188,000
<OTHER-EXPENSES> 5,483,000
<LOSS-PROVISION> 25,000
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (598,000)
<INCOME-TAX> (243,000)
<INCOME-CONTINUING> (355,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (355,000)
<EPS-PRIMARY> (0.04)
<EPS-DILUTED> (0.04)
</TABLE>
