SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C.
20549
FORM 10-K
ANNUAL REPORT UNDER SECTION 13 OR 15 (d) OF
THE SECURITIES EXCHANGE ACT OR 1934
For the fiscal year ended May 31, 1997
Commission File No. 0-15696
PIEMONTE FOODS, INC.
(Exact name of registrant as specified in its charter)
South Carolina 57-0626121
(State of other jurisdiction of I. R. S. Employer
incorporation of Organization) Identification
400 Augusta Street, Greenville, South Carolina 29604
(Address of principal executive offices)
Registrant's telephone number, including area code: (864) 242-0424
Securities registered pursuant to Section 12(b) of the Act:
Common Stock
(Title of Class)
NASDAQ (Small Cap)
Name of exchange on which registered
Securities registered pursuant to Section 12 (g) of the Act:
NONE
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 _______
Aggregate market value of the voting stock (which consist solely of
shares of Common Stock) held by non-affiliates of the registrant as of August
25, 1997, computed by reference to the closing price of the registrant's Common
Stock: $4,651,284.
The number of shares of common stock outstanding as of August 25, 1997
was 1,550,428.
PART I
ITEM 1. BUSINESS
Piemonte Foods, Inc. is a South Carolina Corporation with its principal
offices located at 400 Augusta Street, Greenville, South Carolina. As used
herein, the terms "Company" and "Piemonte" include Piemonte Foods, Inc. and its
wholly owned subsidiaries, Piemonte Foods of Indiana, Inc. and Origena, Inc.
Piemonte Foods, Inc. develops, produces and markets pizza-related food
products. The product line consists of a wide variety of manufactured pre-baked
pizza crusts, specialty meat toppings and completed pizza. The Company also
distributes pizza sauces, pizza cheeses, vegetable pizza toppings and related
packaging material under "Piemonte" brand name.
The Company's products are sold in the wholesale food market to
supermarket delicatessens foodservice distributors, national accounts and
specialty fundraising programs for the public and private sector.
The Company's products are sold through its own sales force as well as
a network of regional food brokers and sales agents.
As part of the Company strategy to restore profitability, by
concentrating on its core pizza business, the following major changes were
executed in 1997:
(bullet) On April 15, 1997, the Company sold its 50% interest in Piemonte
Beheer MIJ B.V., a Holland corporation.
(bullet) On May 31, 1997, the Company sold its cake decorating business with
selected assets.
(bullet) As of May 31, 1997, the restructuring of organization was completed
with an overall reduction of 70 full-time employees including the
cake operation.
(bullet) On August 11, 1997, Salem Carriers will be integrating the Company
refrigerated delivery trucks into their network.
BUSINESS OPERATIONS
WHOLESALE FOOD SALES
Foodservice/National Accounts
The Company sells its total line of pizza related products through
national and regional distributors that maintain central warehouses,
institutional and industrial customers, convenience stores and certain
governmental agencies. The Company produces Piemonte brand products and private
label products from confidential recipes for large national accounts. Sales to
the Foodservice/National accounts accounted for approximately 58%, 54% and 58%
of the Company's revenues during 1995, 1996, and 1997.
Supermarkets
The company sells two types of products through the supermarket
delicatessens; (1) a branded Italian flat bread under the Piemonte Focaccia
label, packed to be shelf-stable for an extended period of time and designed to
be used as either a base for gourmet pizza or bread product and (2) a complete
line of Piemonte pizza components which are used by supermarket personnel to
prepare a fresh, already prepared pizza to be displayed in the delicatessen
refrigerated display cases.
Supermarket pizza related sales accounted for 27%, 28% and 30% of the
Company's revenue during 1995, 1996, and 1997.
As stated earlier, the cake decorating business was sold at year end.
Supermarket cake sales accounted for 4%, 8% and 10% of the Company's
revenue during 1995, 1996 and 1997.
FUNDRAISING PROGRAM
The Company supplies pizza products to schools and other organizations
for fundraising purposes. Piemonte provides pre-packaged pizza kits which can be
sold at a profit by schools or sponsored organizations. The kits offer a wide
variety of pizza toppings, crusts, sauces and real cheeses. Consumers assemble
the ingredients and bake.
Piemonte experienced a major setback during 1997 as some former
employees and agents started a competitive fundraising business. Piemonte has
instituted litigation concerning this matter.
Sales of the Company's products to various fund raising programs
accounted for approximately 11%, 10% and 3% of the Company's revenues in 1995,
1996 and 1997.
The Distribution Network
The Company distributes Piemonte brand and private label products to
its wholesale customers from its manufacturing facilities as well as a
centralized warehouse in Simpsonville, SC. Shipments are made promptly by the
Company after receipt and acceptance of orders; therefore, there is no
significant backlog of unfilled orders.
MAJOR CUSTOMERS
The Company's business is not dependent on any single customer, but one
Company, Kroger at 11% and 19% at May 31, 1997 and June 1, 1996, respectively,
did account for more than 10% of the Company's consolidated revenues.
SOURCES AND AVAILABILTY OF RAW MATERIALS
Flour, oils, meat, tomatoes, cheese, packaging materials and other
related products are essential to the business of the Company. The Company has
not experienced any shortages of these items essential to its operations. The
Company currently has several sources of supply. Flour, meat, cheese, and other
products used in production or for resale are subject to price fluctuations
related to the commodities market.
The Company has not experienced any adverse effect on its operations as
a result of energy and fuel shortages. However, severe shortages of either in
the future could have an adverse effect on the Company's business.
PATENTS, TRADEMARKS
The name "Piemonte" is a registered trademark. The brand name enjoys a
significant amount of brand equity among not only trade customers but consumers
as well.
SEASONAL AND CYCLICAL NATURE OF BUSINESS
As a result of a number of factors, the pizza business, and therefore,
the business of the Company, experiences a period of lower activity in the
summer months. The Company's operations are geared to the expectation of this
annual seasonal decline.
COMPETITIVE CONDITIONS
All segments of the pizza business are extremely competitive. Primary
competition in the wholesale pre-baked pizza crust business includes Virga, TNT,
and a number of small regional processors. Competition for supermarket deli
sales includes Crestar Foods, Gilardi's and a number of regional pizza
processors. In the specialty meat topping market, competition includes Doskocil
Sausage Co., Capitol Wholesale Meats, H & M Meats, Arco Meats and many other
national and regional packers. Our most important goal is to produce products
that are superior in taste to our competition, and then support our customers
through merchandising, marketing, service, and value.
REGULATIONS
The Company is subject to various Federal, State and local laws
affecting its business, including various health, environment, sanitation, and
safety regulations. Our Frankfurt, IN facility operates under the United States
Department of Agriculture (USDA) supervision. The Company believes its
operations comply in all material respects with applicable laws and regulations.
EMPLOYEES
The Company has 227 full and part-time employees.
ITEM 2. PROPERTIES
The following table sets forth information concerning the Company's
facilities:
Date Leased Exp. Of Approx.
or Acquired Lease Term Square
Location Description Footage
Greenville, SC 1974 Corporate Headquarters, Bakery, 1998 67,000
Distribution
Simpsonville, SC 1983 Warehousing and Distribution 1998 40,000
Chicago, IL 1990 Bakery & Distribution 1999 30,000
Frankfort, IN 1988 USDA Meat Production and Regional Owned 55,000
Distribution
Nashville, TN 1996 Future Bakery and Distribution 2001 26,000
The Company's manufacturing facilities were designed specifically for
the operations they support. The facilities are adequate for current production
and distribution needs.
ITEM 3. LEGAL PROCEEDINGS
Piemonte has instituted litigation against certain former employees and
agents arising out of the establishment of a competitive fundraising
business.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Matters subject to a vote at the regularly scheduled meeting are addressed in
the Proxy mailed to all security holders.
PART II
ITEM 5. MARKET PRICE AND DIVIDENDS ON THE REGISTRANT'S COMMON EQUITY
AND RELATED STOCKHOLDER MATTERS
PRICE RANGE OF STOCK
The Company's common stock trades on the NASDAQ Small-cap under the
symbol PIFI. The shares have been traded since 1969. The prices shown below
represent high and low bid prices exclusive of commissions and may not represent
actual transactions.
1996 High Low
1st $5.75 $4.00
2nd $6.00 $4.00
3rd $5.25 $4.50
4th $5.125 $4.50
1997 High Low
1st $5.125 $2.50
2nd $2.625 $0.875
3rd $1.50 $1.00
4th $3.25 $0.5625 *
*No trading on Nasdaq from April 26, 1997 - July 28, 1997.
The principal market makers of the Company's shares are Carr Securities
in New York, New York, Hill, Thompson, Magid & Co. in Jersey City, New Jersey,
Paragon Capital Corporation in New York, New York, and Sherwood Securities in
New York, New York.
APPROXIMATE NUMBER OF EQUITY SECURITIES HOLDERS
Approximate Number of Record Holders
as of May 31, 1997
Common Stock, No Par Value 400
DIVIDEND HISTORY
The following table sets forth information concerning cash dividends
per share paid during fiscal years 1995, 1996 and 1997.
1995 5% stock dividend (August 1994)
1996 None
1997 None
There were 1,544,428 shares of common stock outstanding as of May 31,
1997.
Bank covenants restrict the declaration of dividends only to the extent
such dividends would cause an Event of Default.
ITEM 6. SELECTED FINANCIAL DATA
1997 1996 1995 1994 1993
Net Sales 23,943,328 31,148,458 30,483,161 29,874,548 24,072,414
(Loss) Income
from continuing
operations (1,943,665) (638,599) 105,719 449,422 684,513
(Loss) Income from
continuing
operations
Per common
share (1.30) (.42) 0.07 0.32 0.49
Total Assets 9,397,383 12,360,925 11,226,223 10,817,273 9,326,636
Long Term
Liabilities 2,124,134 3,329,524 1,357,224 889,510 1,335,070
Dividends per
Share (1) (2)
(1) 5% Stock Dividend (August 1994)
(2) 5% Stock Dividend (August 1993)
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
LIQUIDITY AND CAPITAL RESOURCES
On May 31, 1997, working capital was $1,205,009 versus $3,496,515 for
the end of fiscal 1996. The $2,291,506 working capital reduction reflects cash
operating losses, planned capital expenditures of $443,000 and management's
decision to prepay $1,000,000 of current and long term debt immediately
following the fiscal year end (Note 5 Consolidated Financial Statement). Working
capital remains at an acceptable level and exceeds our lender requirement of
maintaining a $1,000,000 minimum working capital. The company has an available
line of credit of $500,000 (Note 5 Consolidated Financial Statement) and cash of
$591,000 is adequate. There has been no additional borrowing during the year. In
the 4th quarter principal payments were suspended with our lender's cooperation.
The principal payments were resumed June 15, 1997 in addition to the $1,000,000
principal prepayment on June 27, 1997 (Note 5 Consolidated Financial Statement).
With the conclusion of the restructuring and refocus of the Company
that began 6 months ago, the 50% interest in the Holland joint-venture was sold
for $865,000 on April 15, 1997. The cake decorating business in Nashville with
selected assets were sold for $120,000 on May 31, 1997.
1996 compared to 1995
Revenues for 1996 were $31.1 million, an increase of 2% versus $30.5
million in the previous year. Sales gains in the Retail Supermarket were
partially offset by losses in Food Service. Retail gains were across numerous
supermarkets, but were most highly focused within accounts purchasing cakes that
are iced by the expanding Nashville business. Cake sales doubled between
business years. Fundraising sales remained relatively flat.
Gross margin declined to $6.4 million or 20.5% of sales, reflecting a
4.5% reduction in gross margin or a 18.0% decline versus last year's gross
margin percent. Raw material increases in flour, corrugated, and cheese were not
immediately passed on to the customers, partially due to competitive pressures
as well as strong gain in lower margin cake business. Management has implemented
measures to improve future profitability.
Continued focus on selling, general, and administrative expenses
resulted in costs of $6,676 thousand for the business year, or $566 thousand
lower than the previous year.
Financial performance for the Company's joint venture pizza crust
facility in Holland lowered the full year earnings by $261 thousand, which was
recognized in the Fourth Quarter. The joint venture losses are 50% of the total
losses through May 31, 1996, reflecting facility construction and initial
start-up phases. These costs were recognized in Holland as operational losses
rather than capitalized start-up costs.
Otherwise, Fourth Quarter earnings were low in the U.S. as well. Net
income was a loss of $371 thousand or $293 thousand unfavorable versus prior
year. $213 thousand of the loss represented numerous accounting adjustments;
$153 thousand of it recognizing fixed assets that had been previously disposed.
Due to the negative earnings recognized in the Fourth Quarter, the
Company was in default of its bank covenants for the fiscal year-end testing.
The Bank agreed to waive those covenant violations and new covenants have been
agreed upon within which the Company is in compliance.
IMPACT OF INFLATION
The Company does not believe that inflation has had a material effect
on revenues or expenses for the previous three years. Inflation in raw material
and labor costs do, however, shrink company margins, particularly in consonance
with raw material market volatility.
RESULTS OF OPERATIONS
1997 compared to 1996
Revenues for 1997 were $23.9 million, a decrease of $7.2 million versus
the previous year. The losses were spread across all three business units, due
to the loss of three major customer, the transfer of production to Holland,
demphasizing cake sales and the establishment of a competitive fundraising
business.
Gross margin declined to $3.5 million or 14.8% of sales as a result of
lower volume, partially offset by a stable raw material market and an aggressive
second half cost reduction program.
Selling, general and administrative expenses were $5.9 million or a
reduction of $800,000. This is due to volume, offset in part by the investment
of a new computer system.
In 1997 management has made major changes in all areas of the business
to restore the Company to profitability; (1) the sale of low and unprofitable
business units, (2) refocusing on our base pizza business and (3) a
re-organization and upgrade of the company workforce. The re-organization of the
workforce will net a $2 million annual savings.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA
The response to this item is submitted in a separate section
of this report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
NONE
PART III
A definitive proxy statement, which will be filed with the Securities and
Exchange Commission pursuant to regulation 14A of the Securities Exchange Act of
1934 within 120 days of the end of the registrant's fiscal year ended May 31,
1997 is incorporated herein by reference.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
EXECUTIVE OFFICERS OF THE REGISTRANT
The following is a list of names and ages of all the executive officers
of the registrant, indicating all positions and offices with the Company held by
each such person and each such person's principal occupation or employment
during the past five years.
Name Title Age
Ronald T. Huth Past Chairman & Director 64
Virgil L. Clark Chairman,President,CEO & Director 58
T. Patrick Costello COO & Director 54
David B. Ward Secretary 56
Ronald T. Huth has served as a Director since 1984. He served as
Chairman of the Board from February, 1993 to July, 1997. Mr. Huth is a
practicing CPA and Senior Partner of Ronald T. Huth & Co. in Lafayette, Indiana.
Virgil L. Clark has served as Director since 1986. He was elected Chief
Executive Officer in October, 1992 and Chairman of the Board in July, 1997.
Prior to1992, Mr. Clark was Chairman of M & S Chemicals, Inc. in Greenville,
South Carolina.
T. Patrick Costello was the President and sole shareholder of Origena,
Inc. since its founding in 1990.Origena was acquired by Piemonte in October,
1993. Mr. Costello previously was employed with Sara Lee Bakery, most recently
as Senior Vice-President and General Manager of two divisions.
David B. Ward was elected Secretary in September, 1985. Mr. Ward is a
practicing attorney with Horton, Drawdy, Ward & Johnson, P. A. in Greenville,
South Carolina.
Such information as required by the Securities and Exchange Commission
in Regulation S-K is contained in the Company's definitive Proxy Statement in
connection with its Annual Meeting to be held October 22, 1997.
ITEM 11. EXECUTIVE COMPENSATION
The information with respect to executive compensation and transactions
is hereby incorporated by reference from the Company's definitive proxy
statement to be filed with the Securities and Exchange Commission pursuant to
Regulation 14A of the Securities Exchange Act of 1934.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The information with respect to security ownership of certain
beneficial owners and management is hereby incorporated by reference from the
Company's definitive proxy statement to be filed with the Securities and
Exchange Commission pursuant to Regulation 14A of the Securities and Exchange
Act of 1934.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
NONE
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES, REPORTS ON 8-K
(a)(1) and (2) Financial Statements
The response to this portion of Item 14 is submitted as a
separate section of this report - See Page F-2.
(a) (3) EXHIBITS
The Exhibits listed on the accompanying index to Exhibits are
filed as a part of this report.
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the fourth quarter
of the fiscal year ended May 31, 1997.
ANNUAL REPORT ON FORM 10-K
ITEM 8, 14(a)(1) AND (2), (c) AND (d)
LIST OF FINANCIAL STATEMENTS
FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
CERTAIN EXHIBITS
YEAR ENDED MAY 31, 1997
PIEMONTE FOODS, INC. AND SUBSIDIARIES
GREENVILLE, SOUTH CAROLINA
F-1
Form 10-K - Item 14(a)(1) and (2)
Piemonte Foods, Inc. and Subsidiaries
Index of Financial Statements
The following financial statements of Piemonte Foods, Inc. and Subsidiaries
are included in Item 8:
Report of Independent Auditors
Consolidated Balance Sheet - May 31, 1997 and June 1, 1996
Consolidated Statements of Operations - Years ended May 31, 1997,
June 1, 1996 and June 3, 1995
Consolidated Statements of Stockholders' Equity - Years ended May
31, 1997, June 1, 1996 and June 3, 1995
Consolidated Statements of Cash Flows - Years ended May 31, 1997,
June 1, 1996 and June 3, 1995
Notes to Consolidated Financial Statements - May 31, 1997
The following consolidated financial statement schedule of Piemonte Foods, Inc.
and subsidiaries are included in Item 14(d):
Schedule II - Valuation and qualifying accounts
All other schedules for which provision is made in the applicable accounting
regulation of the Securities and Exchange Commission are not required under the
related instructions or are inapplicable and therefore have been omitted.
F-2
Report of Independent Auditors
Board of Directors
Piemonte Foods, Inc.
We have audited the accompanying consolidated balance sheet of Piemonte Foods,
Inc. as of May 31, 1997 and the related consolidated statement of operations,
stockholders' equity and cash flows for the year then ended. Our audit also
included the financial statement schedule listed in the index at Item 14(a) for
the year ended May 31, 1997. These financial statements and schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements and schedule based on our audit.
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 audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Piemonte Foods,
Inc. at May 31, 1997 and the consolidated results of its operations and its cash
flows for the year then ended in conformity with generally accepted accounting
principles. Also, in our opinion, the related financial statement schedule for
the year ended May 31, 1997, when considered in relation to the basic financial
statements taken as a whole present fairly, in all material respects, the
information set forth therein.
ERNST & YOUNG LLP
Greenville, South Carolina
July 28, 1997
F-3
Independent Auditors' Report
The Board of Directors
Piemonte Foods, Inc.
Greenville, South Carolina
We have audited the accompanying consolidated balance sheet of Piemonte Foods,
Inc. and Subsidiaries as of June 1, 1996 and the related consolidated statements
of operations, stockholders' equity and cash flows for the years ended June 1,
1996 and June 3, 1995. 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 general accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statement 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 financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Piemonte Foods,
Inc. and Subsidiaries as of June 1, 1996 and the consolidated results of its
operations and its cash flows for the years ended June 1, 1996 and June 3, 1995
in conformity with generally accepted accounting principles.
Pope, Smith, Brown & King
Certified Public Accountants
Greenville, South Carolina
July 26, 1996
F-4
Piemonte Foods, Inc. and Subsidiaries
Consolidated Balance Sheets
May 31, June 1,
1997 1996
-------------- -------------
Assets
Current assets:
Cash $ 591,153 $ 1,658,514
Accounts receivable, less allowance for doubtful
accounts of $97,000 (1997) and $170,000 (1996) (Note 5) 1,930,050 2,265,873
Inventories (Notes 2 and 5) 855,121 1,210,154
Refundable income taxes (Note 6) 415,572 288,897
Deferred income taxes (Note 6) -- 36,000
Prepaid expenses and other current assets 123,320 193,500
----------- -----------
Total current assets 3,915,216 5,652,938
Property, plant and equipment, net (Notes 3 and 5) 4,744,761 5,089,452
Excess of cost over fair value of net assets acquired, net
of accumulated amortization of $355,119 (1997) and $322,167 (1996)
737,406 770,358
Investment in European joint venture (Note 10) -- 794,913
Other -- 53,264
----------- -----------
$ 9,397,383 $12,360,925
=========== ===========
F-5
May 31, June 1,
1997 1996
------------- -------------
Liabilities and stockholders' equity
Current liabilities:
Current portion of long-term debt (Note 5) $ 373,009 $ 502,857
Prepayment of long-term debt subsequent to May 31, 1997
(Note 5) 1,000,000 --
Accounts payable 748,793 1,091,045
Accrued expenses (Note 4) 588,405 562,521
----------- -----------
Total current liabilities 2,710,207 2,156,423
Long-term debt, less current portion (Note 5) 2,124,134 3,329,524
Deferred income taxes (Note 6) -- 437,000
Stockholders' equity (Note 9):
Common stock, no par value - authorized 5,000,000
shares, issued and outstanding 1,544,428 and
1,477,022 in 1997 and 1996, respectively 15,444 14,770
Capital in excess of stated value of common stock 2,868,360 2,800,305
Retained earnings 1,679,238 3,622,903
----------- -----------
Total stockholders' equity 4,563,042 6,437,978
----------- -----------
Total liabilities and stockholders' equity $ 9,397,383 $12,360,925
=========== ===========
See accompanying notes.
F-6
Piemonte Foods, Inc. and Subsidiaries
Consolidated Statements of Operations
Years Ended
May 31, June 1, June 3
1997 1996 1995
----------------- ------------------- -------------------
(52 weeks) (52 weeks) (53 weeks)
Net sales $23,943,328 $31,148,458 $30,483,161
Operating expenses:
Cost of sales 20,399,788 24,771,803 22,871,329
Selling, general and administrative expenses 5,911,436 6,676,123 7,241,706
----------------- ------------------- -------------------
26,311,224 31,447,926 30,113,035
----------------- ------------------- -------------------
Operating (loss) income (2,367,896) (299,468) 370,126
Other income (expense):
Interest expense (285,730) (200,451) (153,190)
Loss on disposal of property, plant and equipment (27,766) (182,807) (98,980)
Equity in loss on investment in European joint venture
(Note 10) (408,545) (261,016) -
Gain on sale of investment in European
joint venture (Note 10) 190,784 - -
Interest income 58,842 45,724 39,421
Other income 79,646 33,419 49,342
----------------- ------------------- -------------------
(392,769) (565,131) (163,407)
----------------- ------------------- -------------------
(Loss) income before income taxes (2,760,665) (864,599) 206,719
(Credit) provision for income taxes (Note 6) (817,000) (226,000) 101,000
----------------- ------------------- -------------------
Net (loss) income $ (1,943,665) $ (638,599) $ 105,719
================= =================== ===================
Net (loss) earnings per common share $(1.30) $(0.42) $0.07
================= =================== ===================
See accompanying notes.
F-7
Piemonte Foods, Inc. and Subsidiaries
Consolidated Statement of Stockholders' Equity
Capital in
Common Excess of Stated Retained Treasury
Stock Value Earnings Stock Total
-------------- ------------------ ----------------- ---------------- -----------------
Balance at May 28, 1994 $14,369 $2,688,726 $ 4,155,783 $(23,751) $ 6,835,127
Treasury stock canceled (100) (23,651) - 23,751 -
Common stock issued 212 79,863 - - 80,075
Net income - - 105,719 - 105,719
-------------- ------------------ ----------------- ---------------- -----------------
Balance at June 3, 1995 14,481 2,744,938 4,261,502 - 7,020,921
Common stock issued 289 55,367 - - 55,656
Net (loss) - - (638,599) - (638,599)
-------------- ------------------ ----------------- ---------------- -----------------
Balance at June 1, 1996 14,770 2,800,305 3,622,903 - 6,437,978
Common stock issued 674 68,055 - - 68,729
Net (loss) - - (1,943,665) - (1,943,665)
-------------- ------------------ ----------------- ---------------- -----------------
Balance at May 31, 1997 $15,444 $2,868,360 $ 1,679,238 $ - $ 4,563,042
============== ================== ================= ================ =================
See accompanying notes.
F-8
Piemonte Foods, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
Years Ended
May 31, June 1, June 3
1997 1996 1995
------------------ ---------------- ------------------
(52 weeks) (52 weeks) (53 weeks)
Cash flows from operating activities
Net (loss) income $(1,943,665) $ (638,599) $ 105,719
Adjustments to reconcile net loss to net cash provided by
operating activities:
Depreciation 743,433 709,688 722,000
Amortization 32,952 32,952 29,722
Equity in loss on investment in European
joint venture 408,545 261,016 -
Gain on sale of investment in European joint venture (190,784) - -
Deferred income taxes (401,000) (80,000) (21,000)
Loss on disposal of property, plant and equipment 27,766 182,807 98,988
Changes in operating assets and liabilities:
Accounts receivable 335,823 (487,100) 387,058
Refundable income taxes (126,675) (288,897) -
Prepaid expenses and other assets 123,444 193,450 (10,713)
Inventories 355,033 698,950 (481,209)
Accounts payable (342,252) (288,043) 243,058
Accrued liabilities 25,884 123,390 (151,299)
------------------ ---------------- ------------------
Net cash (used in) provided by operating activities (951,496) 419,614 922,324
Cash flow from investing activities
Purchases of property, plant and equipment (443,033) (572,820) (1,319,203)
Proceeds from the sale of property, plant and equipment 16,525 10,000 90,100
Investment in European joint venture (288,000) (1,005,929) (50,000)
Cash proceeds from sale of investment in European joint
venture 865,152 - -
------------------ ---------------- ------------------
Net cash provided by (used in) investing activities 150,644 (1,568,749) (1,279,103)
F-9
Piemonte Foods, Inc. and Subsidiaries
Consolidated Statements of Cash Flows (continued)
Years Ended
May 31, June 1, June 3
1997 1996 1995
------------------ ---------------- ------------------
(52 weeks) (52 weeks) (53 weeks)
Cash flows from financing activities
Proceeds from issuance of long-term debt $ - $ 4,000,000 $ 1,145,000
Proceeds from issuance of common stock 68,729 55,656 80,478
Net repayments on line of credit - - (500,000)
Principal payments on long-term debt (335,238) (2,133,974) (513,715)
------------------ ---------------- ------------------
Net cash (used in) provided by financing activities (266,509) 1,921,682 211,763
------------------ ---------------- ------------------
Net (decrease) increase in cash (1,067,361) 772,547 (145,016)
Cash at beginning of year 1,658,514 885,967 1,030,983
------------------ ---------------- ------------------
Cash at end of year $ 591,153 $ 1,658,514 $ 885,967
================== ================ ==================
Supplemental information
Interest payments $ 285,730 $ 200,451 $ 153,190
Income tax payments (refunds) (307,264) 48,292 301,932
See accompanying notes.
F-10
Piemonte Foods, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
May 31, 1997
1. Summary of Significant Accounting Policies
Description of the Company
Piemonte Foods, Inc. develops, produces and markets pizza-related foods,
primarily pre-baked pizza crusts and specialty meat toppings. The Company's
products are sold to pre-made and frozen pizza makers, distributors and
supermarket delicatessens.
Principles of Consolidation
The consolidated financial statements include the accounts of Piemonte Foods,
Inc. (the "Company"), and its two wholly-owned subsidiaries, Piemonte Foods of
Indiana, Inc. and Origena, Inc. All significant intercompany accounts and
balances have been eliminated.
Cash Equivalents
The Company considers all highly liquid investments with a maturity of three
months or less when purchased to be cash equivalents.
Use of Estimates
The preparation of the 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.
Reclassifications
For comparative purposes, certain amounts in the 1996 and 1995 financial
statements have been reclassified to conform with the 1997 presentation.
Advertising Costs
The Company expenses advertising costs as incurred. The Company incurred
advertising costs of approximately $213,000, $238,000 and $233,000 for fiscal
years 1997, 1996 and 1995, respectively.
Accounting Period
The Company's fiscal year ends on the Saturday nearest to May 31. Fiscal years
1997, 1996 and 1995 ended on May 31, 1997, June 1, 1996 and June 3, 1995,
respectively and included 52 weeks, 52 weeks and 53 weeks, respectively.
F-11
Piemonte Foods, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
1. Summary of Significant Accounting Policies (continued)
Concentration of Credit Risk
The amount of cash on deposit at certain banks exceeded the limit on insured
deposits. Amounts in excess of insured limits were $467,000 and $1,162,000 at
May 31, 1997 and June 1, 1996, respectively.
Substantially all of the Company's accounts receivable are due from companies
located in the eastern United States. The Company performs periodic credit
evaluations of its customers financial condition and generally does not require
collateral. In 1997 and 1996, one customer accounted for approximately 11% and
19% of total sales, respectively. In 1995, two customers each accounted for
approximately 10% of sales.
Inventories
Inventories are stated at the lower of cost, determined by the first-in,
first-out method, or market.
Property, Plant and Equipment
Property, plant and equipment are stated at cost. Maintenance and repairs are
charged to expense as incurred. Depreciation of property, plant and equipment is
computed using the straight-line method over the estimated useful lives of the
property.
Excess of Cost over Fair Value of Net Assets Acquired
Excess cost over fair value of net assets acquired arises from the acquisition
of Piemonte Foods of Indiana, Inc. in 1984 and Origena, Inc. in 1993 The amounts
are amortized on the straight-line method over an estimated useful life of 40
years for Piemonte Foods of Indiana, Inc. and 25 years for Origena, Inc.
Net Income (Loss) Per Share
Net income (loss) per share is computed using the weighted average shares of
common stock and dilutive common stock equivalents (options) outstanding during
the respective periods.
Fair Value of Financial Instruments
The carrying value of cash, cash equivalents and long-term debt approximate
their fair values. The fair value of the Company's long-term debt is estimated
using discounted cash flow analyses, based on the Company's current incremental
borrowing rates for similar types of borrowing arrangements.
F-12
Piemonte Foods, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
1. Summary of Significant Accounting Policies (continued)
New Accounting Standards
In March 1995, the Financial Accounting Standards Board issued Statement No.
121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed of" ("FAS 121"), which became effective beginning in
fiscal 1997. The Company adopted FAS 121 in June 1996, and the effect of
adoption was not material as the Company's existing accounting policies provided
for similar accounting treatment.
In February 1997, the Financial Accounting Standards Board issued Statement No.
128, "Earnings per Share", ("FAS 128") which is required to be adopted on
December 31, 1997. At that time, the Company will be required to change the
method currently used to compute earnings per share and to restate all prior
periods. Under the new requirements for calculating primary earnings per share,
the dilutive effect of stock options will be excluded. The impact of FAS 128 on
the calculation of earnings per share is not expected to be material.
2. Inventories
Inventories at May 31, 1997 and June 1, 1996 include the following:
1997 1996
---------- ----------
Raw materials $ 371,423 $ 478,351
Finished goods 483,698 731,803
---------- ----------
$ 855,121 $1,210,154
========== ==========
F-13
Piemonte Foods, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
3. Property, Plant and Equipment
Property, plant and equipment include the following:
May 31, June 1,
1997 1996
----------- -----------
Land $ 25,000 $ 25,000
Buildings 2,014,254 1,972,157
Equipment 7,706,523 7,220,228
Vehicles 188,862 188,862
Furniture and fixtures 331,313 328,245
Leaseholds 552,781 536,190
Construction in progress 14,261 182,639
----------- -----------
Total 10,832,994 10,453,321
Less accumulated depreciation and amortization 6,088,233 5,363,867
----------- -----------
Net property, plant and equipment $ 4,744,761 $ 5,089,452
=========== ===========
4. Accrued Expenses
Accrued expenses include the following:
May 31, June 1,
1997 1996
-------- --------
Promotional allowance $ 61,078 $ 76,163
Compensation and payroll taxes 265,487 143,084
Property taxes 74,108 70,075
Other 187,732 273,199
-------- --------
$588,405 $562,521
======== ========
F-14
Piemonte Foods, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
5. Long-Term Debt
The Company has the following notes payable under its loan agreement with a
bank:
1997 1996
---------- ----------
Note payable to bank in monthly installments of
$28,571 plus interest through October 2000 $2,057,143 $2,285,714
Note payable to bank in monthly installments of
$13,333 plus interest through October 2000 1,440,000 1,546,667
---------- ----------
3,497,143 3,832,381
Less current portion of long-term debt,
including prepayment of
long-term debt subsequent to
May 31, 1997 1,373,009 502,857
---------- ----------
$2,124,134 $3,329,524
========== ==========
The notes payable are collateralized by the accounts receivable, inventory and
property, plant and equipment of the Company. Under the loan agreement, the
notes payable are cross collateralized and cross defaulted.
During the year, the Company stopped making payments on the notes payable and
violated certain loan covenants which were Events of Default as defined in the
loan agreement. Subsequent to May 31, 1997, the bank waived all covenants
through June 30, 1997 and amended certain covenants resulting in the Company
being in compliance with all covenants. The covenants require, among other
matters, minimum levels of working capital, net worth and debt coverage ratio.
The covenants also restrict dividends if such dividends result in an event of
default under any other covenants; however, the Company has no present intention
to pay dividends during the year ending May 31, 1998. The Company expects to be
in compliance with the loan covenants through May 31, 1998.
On June 27, 1997, the Company paid $1,000,000 on the $1,440,000 note payable. In
connection with this payment, the Bank agreed to allow the Company to make
interest only payments on this note for six months. Principal payments will
resume on January 15, 1998 in monthly installments of $4,539 with the remaining
principal due at maturity. Principal payments resumed on the $2,057,143 note
payable in June 1997. Principal payments not made during the year will be paid
upon maturity of the notes.
On June 27, 1997, the Bank provided the Company with a line of credit that
provides for borrowings up to $500,000. Borrowings under the line of credit
cannot exceed the lesser of the maximum commitment or the borrowing base. The
borrowing base, as defined in the credit agreement, is determined by specified
percentages of accounts receivable, inventory and property, plant and equipment.
F-15
Piemonte Foods, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
5. Long-Term Debt (continued)
On June 27, 1997, the interest rate on all amounts outstanding under the loan
agreement was increased from the LIBOR base rate plus 150 basis points to the
LIBOR base rate plus 225 basis points.
Long-term debt maturities, adjusted for the changes in the loan agreement
subsequent to year-end, are as follows:
Long-term debt maturities are as follows:
Year Ended
- -------------------------
1998 $1,373,009
1999 397,325
2000 397,325
2001 1,329,484
----------------
$3,497,143
================
During the year, the Company entered into an interest rate swap agreement to
manage interest rate risks. The agreement provides a fixed interest rate of
7.98% on a notional amount of $2.1 million. The notional amount declines ratably
through October 31, 2000.
F-16
Piemonte Foods, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
6. Income Taxes
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the Company's deferred tax assets and liabilities are as follows:
1997 1996
--------- ---------
Deferred tax assets:
Allowance for doubtful accounts $ 35,000 $ 65,000
Accrued vacation 44,000 3,000
Product development costs 102,000 29,000
Other 9,000 8,000
Net operating loss and AMT credit carryforwards 580,000 74,000
--------- ---------
Total deferred tax assets 770,000 179,000
Valuation allowance for deferred tax assets (136,000) (143,000)
--------- ---------
Net deferred tax assets 634,000 36,000
Deferred tax liability:
Tax over book depreciation (634,000) 437,000
--------- ---------
$ -- $(401,000)
========= =========
Federal net operating loss carryforwards available at May 31, 1997 total
approximately $1.3 million and expire in 2011. State net operating losses total
approximately $1.9 million and expire in 2010 and 2011. The Company has AMT
credit carryforwards of approximately $43,000 available for carryover to reduce
future regular Federal income taxes. Under the current income tax code, the AMT
credits have no expiration date.
The valuation allowance increased by $136,000 in 1996.
Significant components of the provision for income taxes attributable to
continuing operations are as follows:
1997 1996 1995
--------- --------- ---------
Current
Federal $(416,000) $(167,000) $ 88,000
State -- 21,000 34,000
--------- --------- ---------
Total current provision (416,000) (146,000) 122,000
Deferred (401,000) (80,000) (21,000)
--------- --------- ---------
Provision (benefit) for income taxes $(817,000) $(226,000) $ 101,000
========= ========= =========
F-17
Piemonte Foods, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
6. Income Taxes (continued)
The reconciliation of income tax attributable to continuing operations computed
at the U.S. Federal statutory tax rates to income tax expense is:
1997 1996 1995
Amount Percent Amount Percent Amount Percent
--------------- ------------ ---------------- ------------ -------------- ------------
Tax at U.S. statutory rates $(939,000) 34.0% $(294,000) 34.0% $ 70,000 34.0%
State income taxes,
net of Federal tax
benefit (110,000) 4.0% 14,000 (1.6)% (11,000) (5.3)%
Valuation allowance for
deferred tax assets (7,000) .3% 16,000 (1.9)% - -
Other, net 239,000 (8.7)% 38,000 (4.4)% 42,000 20.2%
--------------- ------------ ---------------- ------------ -------------- ------------
$(816,631) 29.6% $(226,000) 26.1% $101,000 48.9%
=============== ============ ================ ============ ============== ============
Refundable income taxes result from the carryback to prior taxable years of a
portion of net operating loss incurred in 1997 and all of the net operating loss
incurred in 1996.
7. Operating Leases
The Company leases its bakery manufacturing plants, distribution center,
automotive fleet, computer and various equipment under arrangements accounted
for as operating leases. Such leases expire at various times over the next seven
fiscal years. The approximate minimum annual commitments under these leases are
as follows:
Year Ending
----------------
1998 $421,000
1999 260,000
2000 213,000
2001 151,000
2002 96,000
Thereafter 149,000
F-18
Piemonte Foods, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
7. Operating Leases (continued)
Subsequent to year-end, the Company assigned the truck leases to a trucking
company. The trucking company will provide transportation services for the
Company. Accordingly, the minimum annual commitments do not include the truck
leases.
Rent expense for operating leases totaled approximately $930,000 and $862,000
and $793,000 in 1997, 1996 and 1995, respectively.
8. Employees' Savings Plan 401(k)
The Company has adopted a 401(k) savings plan covering substantially all
employees. Full-time employees with at least one year of service may elect to
contribute up to 10% of annual compensation to the plan. The Company contributes
50% of such employee contributions up to 6% of current compensation. Company
contributions totaled approximately $68,000, $68,000 and $54,000 in 1997, 1996
and 1995, respectively.
9. Stock Options
On June 1, 1996, the Company adopted the provisions of Financial Accounting
Standards Board Statement No. 123, "Accounting for Stock-Based Compensation
("FAS 123"). This standard applies to all transactions in which an entity
acquires goods and services by issuing equity instruments, such as stock
options, to employees or others. Under FAS 123, the Company has a choice in the
method of accounting used for stock-based compensation. The method chosen can be
either the intrinsic value based method currently used by the Company within the
scope of Accounting Principles Board (APB) Opinion 25, or the fair value method
introduced by SFAS No.123 that might involve the recognition of compensation
expense. The Company has elected to account for the Company's stock option plan
under APB Opinion 25. If compensation cost for the Company's stock option plan
had been determined based on the provisions of SFAS 123, using the Black-Scholes
method, there would be no effect on net income.
The Company's 1994 Stock Option Plan authorized the grant of options to
management personnel for up to 450,000 shares of the Company's common stock.
In February 1997, the Board of Directors adopted the 1997 Stock Option Plan and
rescinded the 1994 plan. The 1997 plan authorizes the grant of 120,000 options
to management at an exercise price of $1.25 per share. The options vest in three
equal tiers when the market price of the Company's common stock reaches certain
levels. The options expire at the end of 10 years.
F-19
Piemonte Foods, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
9. Stock Options Outstanding (continued)
A summary of the Company's stock option activity and related information for the
years ended May 31, 1997, June 1, 1996 and June 3, 1995 follows:
1997 1996 1995
Weighted- Weighted- Weighted-
Average Average Average
Options Exercise Options Exercise Options Exercise
(000) Price (000) Price (000) Price
------------- --------------- ------------ ------------- ------------ ---------------
Outstanding at beginning
of year 253 $4.99 232 $4.92 227 $4.88
Canceled (134) 6.43
Granted 91 1.28 33 4.45 5 6.75
Exercised - - (11) 2.04 - -
Forfeited (68) 2.04 - - - -
------------- ------------ ------------
Outstanding at end of year 142 $2.67 253 $4.99 232 $4.92
============= ============ ============
Exercisable at end of year 51 $5.15 194 $4.80 173 $2.80
Weighted average fair value
of options granted during
year $ 1.28 $4.45 $6.75
Exercise prices for options outstanding as of May 31, 1997 ranged from $1.25 to
$8.33. The weighted average remaining contractual life of those options is 3.1
years.
10. Investment in European Joint Venture
The Company owned a 50% interest in Piemonte Beheer MIJ B.V. ("Joint Venture")
located in Breda, Holland. The Joint Venture was formed in 1994. The Joint
Venture had no activities during the year ended June 31, 1995. The Company
accounted for its 50% investment in the Joint Venture using the equity method.
F-20
Piemonte Foods, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
10. Investment in European Joint Venture (continued)
On April 15, 1997, the Company sold its 50% interest in the Joint Venture to
Sabatasso Pizza Products, which owned the other 50% interest in the Joint
Venture for approximately $865,000. At the time of the sale, the Company's
investment in the joint venture was $674,000, resulting in a gain on sale of
approximately $191,000. In accordance with the sales agreement, the Company does
not have any obligations with respect to the Joint Venture at May 31, 1997.
11. Other Comment
In 1997, the aggregate effect of year-end adjustments increased the fourth
quarter net loss by approximately $153,000 or $.10 per share.
F-21
Piemonte Foods, Inc. and Subsidiaries
Schedule II - Valuation and Qualifying Accounts
COL A COL B COL C COL D COL E
- -------------------------------------------- ----------------- ----------------- ------------------ ------------
Additions
----------------------------------
Balance at Charged to Charged to Balance at
Beginning of Cost and Other Accounts End of Period
Description Period Expenses Deductions
- -------------------------------------------- ----------------- ---------------- ----------------- ----------------- ---------------
Year Ended May 31, 1997
Allowance for doubtful accounts $170,000 $100,000 $ - $173,000 $ 97,000
Valuation account-deferred tax assets 143,000 - - 7,000 136,000
Year Ended June 1, 1996
Allowance for doubtful accounts 160,000 76,000 - 66,000 170,000
Valuation account-deferred tax assets 127,000 - 16,000 - 143,000
Year Ended June 3, 1995
Allowance for doubtful accounts 127,000 67,000 - 34,000 160,000
Valuation account-deferred tax assets 127,000 - - - 127,000
F-22
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.
PIEMONTE FOODS, INC.
(Registrant)
By /s/ Virgil L. Clark
-------------------------------------
Virgil L. Clark, Chairman,
President and Director
Date August 28, 1997
Pursuant to the requirement 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 date indicated.
s/ Virgil L. Clark August 28, 1997
Virgil L. Clark, Chairman, President Date
and Director
s/ T. Patrick Costello July 24, 1997
T. Patrick Costello, COO Date
and Director
s/ Steven R. DeGrave July 24, 1997
Steven R. DeGrave, Director Date
s/ Ronald T. Huth July 24, 1997
Ronald T. Huth, Director Date
s/ Myron R. Lyskanycz July 24, 1997
Myron R. Lyskanycz, Date
Director
s/ Richard J. Stoner July 24, 1997
Richard J. Stoner, Director Date