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NLMK GroupDESCRIPTION OF BUSINESS Bridgford Foods Corporation and its subsidiaries manufacture and/or distribute refrigerated, frozen and snack food products. The Company markets its products throughout the United States. The Company sells its products through wholesale outlets, restaurants and institutions. The products are sold by the Company's own sales force, brokers, cooperatives, sholesalers and independent distributors. Products are currently sold through approximately 25,000 retail food stores in forty-eight states within the continental United States, Hawaii and Canada that are serviced by Company-owned service routes. Company products are also sold throughout the country to approximately another 17,500 retail outlets and 19,000 restaurants and institutions. The following summary represents the approximate percentage of net sales by class of product for each of the last five fiscal years: Products manufactured or processed by the Company Products manufactured or processed by others Total 1996 1995 1994 1993 1992 83 17 85 15 87 13 89 11 89 11 100 100 100 100 100 COMMON STOCK AND DIVIDEND DATA The common stock of the Company is traded in the national over-the-counter market and is authorized for quotation on The Nasdaq National Market under the symbol "BRID". The following table reflects the high and low closing prices and cash dividends paid as quoted by Nasdaq for each of the last eight fixcal quarters. ----- Prices ----- Fiscal Quarter Ended $High $Low Cash Dividends Paid January 27, 1995 10 & 3/4 9 $.08 ** April 28, 1995 13 & 1/2 9 & 1/4 July 28, 1995 14 10 & 5/8 November 3, 1995 12 9 & 3/4 February 2, 1996 10 & 3/4 8 & 1/2 May 3, 1996 11 & 1/4 8 & 1/4 August 2, 1996 9 & 3/4 6 & 1/2 November 1, 1996 9 7 ** Includes $.03 per share extra cash dividend. $.05 $.05 $.05 $.06 $.06 $.06 $.06 ANNUAL SHAREHOLDERS MEETING The 1997 annual shareholders meeting was held at the Holiday Inn, 222 W. Houston Avenue, Fullerton, California at 10:00 a.m. on Wednesday, March 12, 1997. HISTORICAL TRENDS 88 89 90 9192 93 94 95 96 Fi seal Years 88 89 90 9192 93 94 95 96 Fi seal Years EQUITY illil Ii ans 50 40 30 20 : ii 88 89 90 9192 93 94 95 96 Fi seal Years TO OUR SHAREHOLDERS: Sales set a new record for the eleventh consecutive year in 1996. Dividends were increased for the tenth year in a row. Three major capital improvement projects begun in our 1995 fiscal year, including the two largest in the Company’s 64 year history, were completed with a total capitalized cost of $12,000,000. Net income for 1996 was $5.7 million, which reflects a decrease from 1995 due to extremely high raw material costs in both our meat and bakery divisions. SALES, EARNINGS AND DIVIDENDS Sales in our 52 week 1996 fiscal year increased to $118,316,470, a 5.2% gain over sales in the 53 week 1995 fiscal year. Most of our sales gains are attributed to increases In our number of direct store distribution customers and strong sales of our meat snack products such as pepperoni and beef jerky. We also added exciting new Focaccia Club and Focaccia Chicken sandwiches to our Bridgford Micro-Ready product line and developed new biscuit products for our foodservice customers. Net income was $5,651,383 or sixty cents per share in 1996, 14.3% less than 1995 net income. During 1996 costs of pork raw materials required in our meat business and wheat flour used in our bakery operations unexpectedly reached extraordinary high levels. Where possible, price increases to pass on these higher costs have been implemented. Bakery costs have stabilized somewhat during the first quarter of fiscal 1997. Costs of pork raw materials will remain relatively high during 1997. Cash dividends in 1996 were paid at a record level of twenty four cents per share. Cash dividends totaling $2,255,000 were paid to shareholders in the 1996 fiscal year. Your board of directors maintained the rate of six cents in the first quarter of 1997 based on our strong financial condition and positive business outlook. FINANCIAL CONDITION Bridgford Foods Corporation concluded 1996 with shareholders equity of $40,255,691, a gain of $3,396,119 or 9% over the prior year end. Working capital remained strong at $22,401,167 and our current asset to current liability ratio was maintained at a 2.2 to 1 level. Our excellent financial condition was sustained while we invested $5,988,000 in capital improvements during 1996. All improvements were financed internally and the company remained debt-free for the tenth consecutive year. A $2,000,000 line of credit with a major bank is available in the event it is needed for business opportunities. OPERATIONS A major portion of our expenditures were made to complete construction and equipping of our new state-of- the-art North Carolina frozen food plant and for the additions and modernization of our Frozen-Rite plant in Dallas, Texas. These factories are now running efficiently. We also renovated and enlarged the manufacturing facilities at our Chicago meat processing plant and equipped it with new processing machinery which will increase our capability to produce dry sausage products. Substantial savings in production, storage and distribution costs will result from these investments. SUMMARY We expect 1997 to be a good year for Bridgford Foods Corporation. The modernization and expansion of our manufacturing facilities, increased sales volume, new product development and more stable raw material costs are expected to produce improved operating results. We thank our directors, customers, suppliers, coworkers and shareholders for their support and confidence during 1996. Respectfully submitted, Allan L. Bridgford Chairman Robert E. Schulze President BRIDGFORD FOODS CORPORATION FINANCIAL SUMMARY Fiscal Year Ended November 1 1996 November 3 1995 % Change Net sales Income before taxes Net income Net income per share Cash dividends per share Working capital Total assets Shareholders' equity Return on average equity $118,316,470 9,116,383 5,651,383 .60 .24 22,401,167 58,277,948 40,255,691 14.66% $112,497,590 10,630,855 6,590,855 .70 .23 22,494,577 52,623,417 36,859,572 19.02% 5 (14) (14) (14) 4 - 11 9 SELECTED FINANCIAL DATA November 3 1995 November 1 1996 October 28 1994 October 29 1993 October 30 1992 Net Sales Net Income Net Income Per Share Current Assets Current Liabilities Working Capital Property, Plant and Equip., Net Total Assets Long-term Debt Deferred Taxes on Income Shareholders' Equity Cash Dividends Per Share $118,316,470 $112,497,590 $108,883,562 $105,146,822 $100,113,269 5,298,407 .56 28,652,723 17,214,946 6,879,902 6,879,902 35,532,625 6,141,726 .65 39,427,179 24,870,630 7,559,382 7,559,382 46,986,561 6,590,855 .70 38,258,422 22,494,577 14,364,995 14,364,995 52,623,417 5,576,332 .59 32,721,065 21,413,629 6,754,042 6,754,042 39,475,107 5,651,383 .60 40,423,424 22,401,167 17,854,524 17,854,524 58,277,948 - - - - - - - - - - 40,255,691 .24 36,859,572 .23 32,430,012 .20 28,167,671 .16 24,094,848 .12 MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS LIQUIDITY AND CAPITAL RESOURCES Certain statements under “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and elsewhere in this report constitute “forward-looking statements” within the meaning of the Securities Act of 1933 and the Securities Exchange Act of 1934. Such forward looking statements involve known and unknown risks, uncertainties, and other factors which may cause the actual results, performance, or achievements of Bridgford Foods Corporation to be materially different from any future results, performance or achievements expressed or implied by such forward looking statements. Such factors include, among others, the following; general economic and business conditions; the impact of competitive products and pricing; success of operating initiatives; development and operating costs; advertising and promotional efforts, adverse publicity; acceptance of new product offerings; consumer trial and frequency; changes in business strategy or development plans; availability, terms and commodity, labor, and employee benefit costs; changes in, or failure to comply with, government regulations; weather conditions; construction schedules; and other factors referenced in this report. The Company’s operating results are heavily dependent upon the prices paid for raw materials. The marketing of the company’s value-added products does not lend itself to instantaneous changes in selling prices. Changes in selling prices are relatively infrequent and do not compare with the volatility of commodity markets. Higher flour and pork prices were experienced during the fiscal 1996 compared o prior fiscal years. Management anticipates that these costs will continue to stabilize into fiscal year 1997 although no assurances can be given. Costs of flour have declined in 10 to 20% range since the close of the third quarter of 1996 while pork prices have remained at historically high levels. The impact of inflation on the Company’s financial position and results of operations has not been significant during the last three years. Management is of the opinion that the Company’s strong financial position and its capital resources are sufficient to provide for its operating results and capital expenditures. Favorable operating results over the past several years have continued to provide significant liquidity to the Company. Net cash provided by operating activities was $7,162,000 in the 1996 fiscal year compared to $5,580,000 in 1995 and $9,902,000 in 1994. Accounts receivable balances decreased by $185,000 in 2996 (2%) due to strong collections, and increased $769,000 (8%) in 1995 and $794,000 (9%) in 1994 due to the continued expansion of the business and changing nature of the customer base. Inventories increased $1,754,000 (13%) in 1196 and $1,790,000 (15%) in 1995 due to continued business expansion, higher storage capacities, higher raw materials costs and increased distribution of the Company’s products. Prepaid expenses increased $494,000 (15%0, $894,000 (33%), and $256,000 (11%) in 1996, 1995, and 1994 due primarily to the increased cash surrender value of life-insurance policies. The Company also recorded income tax receivable in prepaid expenses of $287,000 in 1995. Accounts payable and accrued expenses increased $2,200,000 (14%) in 1996 and $1,462,000 (10%) in 1995 due primarily to increases in non-funded employee benefits and accrued advertising. The Company’s capital improvement programs continued into 1996. Cash used for additions to property, plant and equipment decreased $2,787,000 (32%). Significant projects were completed at all locations, primarily the Dallas Freezer expansion at a total cost of $6,005,000 ($1,820,000 for fiscal year 1996) and the North Carolina plant at a total cost of $5,070,000 ($2,177,000 for fiscal year 1996). The balance of projects in process at November 1, 1996 was $167,000. Capital expenditures in fiscal year 1995 for these projects totaled approximately $6.3 million. These investments are expected to yield higher production capacities, improved plant utilization and realize cost savings in future years, Although annual depreciation expense will increase as a result of these additions, such increase is not expected to have a material adverse impact on the operating results of the Company. Cash used for additions to property, plant and equipment increased $993,000 (57%) in 1994 compared to the prior year. Expenditures consisted primarily of additions of delivery vehicles, machinery and equipment and $1,554,000 in construction projects. Cash flows used to pay cash dividends increased $94,000 (4%) in 1996, $282,000 (15%) in 1995 and $376,000 (25%) in 1994, when compared to the prior year, in recognition of the continuing success of the Company. Cash and cash equivalents decreased $1,023,000 (14%) in 1996 and $5,282,000 (42%) in 1995 due primarily to significant investments made in property, plant and equipment and in an increase in cash dividends paid. Cash and cash equivalents increased in 1994 $5,375,000 (74%) due to the continued operating success of the Company and significant increases in non-funded employee benefits. The Company has remained free of interest-bearing debt for ten consecutive years. Working capital decreased by $93,000 (1%) in 1996 and $2,376,000 (10%) in 1995 after reaching a record high of $24,871,000 in 1994. The decrease in working capital is directly attributable to significant investments made by the Company in projects in-process during the 1996 and 1995 fiscal years. The Company maintains a $2,000,000 revolving line of credit with Bank of America that expires April 30, 1998. There were no borrowings under this line of credit during 1996. RESULTS OF OPERTAIONS 1996 (52 weeks) compared to 1995 (53 weeks) Sales in fiscal year 1996 increased $5,819,000 (5.2%) when compared to sales of the prior year. After considering the 53 week year, sales volume increased approximately 7.2% when compared to the prior year. Cost of products sold increased by $4,020,000 (5.6%) when compared to the prior year. The gross margin was approximately 36% in 1996 and 1995 compared to 35% for 1994. Costs for commodity products were less favorable in 1996 compared to prior years. However, a changing sales mix and increased selling prices helped mitigate the impact of these increased costs. Selling, general and administrative expenses increased $2,784,000 (9.9%) when compared to the prior year. This increase was generally consistent with the overall increase in sales. Advertising expenses outpaced the increase in sales as a result of aggressive promotional allowances to promote the Company’s products and to maintain current distribution channels. Depreciation expense increased $530,000 (27%) when compared to the prior year. The Company completed significant expansion projects to existing facilities located in Texas and a flood processing facility in North Carolina. First year (half-year convention) depreciation from these projects totaled approximately $490,000. The Company expects to continue the growth and modernization of facilities and equipment used in the business. The effective tax rate remained consistent with prior year at 38%. 1995 Compared to 1994 (53 versus 52 weeks) Sales in fiscal year 1995 increased $3,614,000 (3%) when compared to sales of the prior year. After considering the 53 week year, sales volume increased slightly more than 1% when compared to the prior year. Cost of products sold increased by $1,274,000 (2%) when compared to the prior year. The gross margin increased to 36% in 1995 compared to 35% for 1994 and 1993. Commodity costs for meat products were made more favorable in 1995 compared to prior years and this trend helped improve margins in 1995 despite channels. Selling, general and administrative expenses increased $1,125,000 (6%) when compared to the prior year. This increases was generally consistent with the overall increase in sales. Increased advertising expenses slightly outpaced the increase in sales as a result of efforts to more heavily promote the Company’s products and to continue to expand distribution channels. Depreciation expense increased $93,000 (5%) when compared to the prior year. The Company continued to expand its vehicle fleet in 1995 and this contributed to the increase. Several projects which were in process in the prior year were placed in service during 1995 which also contributed to the overall increase in depreciation. The Company expects to continue the growth and modernization of facilities and equipment used in the business. The effective tax rate remained consistent with the prior year at 38%. 1994 compared to 1993 Sales in fiscal year 1994 increased $3,737,000 (4%) when compared to sales of the prior year. Added unit sales volume was the principal reason for the increase while price increases had minor influence on the overall sales gain. The closing of Bridgford Meat Company, the Company’s San Diego based fresh meat business, offset the increase by $2,665,000 in 1994. Cost of products sold increased by $1,816,000 (3%) as compared to the prior fiscal year due higher unit sales volume. The gross profit margin remained consistent at 35% for 1994 and 1995. Selling, General and administrative expenses increased $987,000 (4%) during fiscal 1994. The bulk of the increase was concentrated in the Company’s advertising programs. Advertising expenditures increased by approximately $700,000 during 1994 as compared to the prior year. Increases salaries and wages also contributed to higher costs. Depreciation expense increased $36,000 (2%) in 1994 compared 1993. The continued expansion of the Company’s business requires the addition and replacement of facilities and equipment related to manufacturing and sales activities. The effective tax rate was 38% for 1994 and 1993. Effective for fiscal year 1994, the Company adopted Statement of Financial Accounting Standards No. 106, “Employers’ Accounting for Postretirement Benefits Other Than Pensions.” Adoption of this statement did not materially impact the Company’s consolidated financial statements. Consolidated Balance Sheets ASSETS Current assets: Cash and cash equivalents Accounts receivable, less allowance for doubtful accounts of $503,584 and $505,623 Inventories Prepaid expenses Deferred income tax benefits Total current assets November 1 1996 November 3 1995 $6,343,022 $7,366,362 10,007,141 10,191,679 15,603,912 13,849,947 3,886,928 3,32,620 4,582,421 3,457,814 40,423,424 38,258,422 Property, plant and equipment, net of accumulated depreciation of $22,637,673 and $21,065,322 17,854,524 14,364,995 LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable Accrued payroll and other expenses Income taxes payable Total current liabilities $58,277,948 $52,623,417 November 1 1996 November 3 1995 $4,464,855 $4,662,825 13,444,084 11,046,103 54,917 113,318 18,022,257 15,763,845 Contingencies and commitments (Note 6) Shareholders' equity: Preferred stock, without par value Authorized - 1,000,000 shares Issued and outstand - none Common stock, $1.00 par value Authorized - 20,000,000 shares Issued and outstand - 9,396,933 shares Capital in excess of par value 9,453,816 3,024,881 9,453,816 3,024,881 Retained earnings 27,776,994 24,380,875 40,255,691 36,859,572 $58,277,948 $52,623,417 Consolidated Statements of Income Fiscal year ended November 1 1996 (52 weeks) November 3 1995 (53 weeks) October 28 1994 (52 weeks) Net sales $118,316,470 $112,497,590 $108,883,562 Cost of products sold, excluding depreciation Selling, general and administrative expenses Depreciation 75,874,768 30,832,011 2,493,308 71,854,739 28,048,294 1,963,702 70,580,426 26,525,652 1,870,758 109,200,087 101,866,735 98,976,836 Income before taxes Provision for taxes on income 9,116,383 3,465,000 10,630,855 4,040,000 9,906,726 3,765,000 Net income Net income per share $5,561,383 $6,590,855 $6,141,726 $0.60 $0.70 $0.65 Consolidated Statements of Shareholders' Equity Common stock Shares Amount 9,396,933 $9,453,816 9,396,933 $9,453,816 9,396,933 $9,453,816 Balance, October 29, 1993 - Net income - Cash dividends paid ($.20 per share) Balance, October 28, 1994 - Net income - Cash dividends paid ($.23 per share) Balance, november 3, 1995 - Net income - Cash dividends paid ($.24 per share) Balance, November 1, 1996 $9,396,933 $9,453,816 Capital in excess of par Retained earnings Total shareholder's equity $3,024,881 $15,688,974 $28,167,671 6,141,726 6,141,726 (1,879,385) (1,879,385) $3,024,881 $19,951,315 $32,430,012 6,590,855 6,590,855 (2,161,295) (2,161,295) $3,024,881 $24,380,875 $36,859,572 5,651,383 5,651,383 (2,255,264) (2,255,264) 3,024,881 $27,776,994 $40,255,691 Consolidated Statements of Cash Flows Cash flows from operating activities: Net income Income charges not affecting cash: Depreciation Provision for losses on accounts receivable Gain on sale of assets Effect on cash of changes in assets and liabilities: Accounts receivable Inventories Prepaid expenses Deferred income tax benefits Accounts payable and accrued expenses Income taxes payable Fiscal year ended November 1 1996 November 3 1995 October 28 1994 $5,651,383 $6,590,855 $6,141,726 2,493,308 139,150 (52,729) 1,963,702 138,650 (68,153) 1,870,758 64,545 (29,387) 45,388 (908,128) (1,753,965) (1,789,927) (849,272) (704,572) 1,462,211 (254,915) (494,308) (1,124,607) 2,200,011 58,401 (858,465) 473,457 (255,920) (754,275) 2,939,281 309,832 Net cash provided by operating activities 7,162,032 5,580,451 9,901,552 Cash used in investing activities: Proceeds from sale of assets Additions to property, plant and equipment 57,601 73,847 (5,987,709) (8,774,616) (2,720,558) 73,454 Net cash used in investing activities (5,930,108) (8,701,162) (2,646,711) Cash used for financing activities: Cash dividends paid (2,255,264) (2,161,295) (1,879,385) Net (decrease) increase in cash and cash equivalents (1,023,340) (5,282,006) 5,375,456 Cash and cash equivalents at beginning of year Cash and cash equivalents at end of year 7,366,362 12,648,368 7,272,912 $6,343,022 $7,366,362 $12,648,368 Cash paid for income taxes $3,955,717 $5,003,099 $4,021,490 Notes to Consolidated Financial Statements NOTE 1 - THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: The consolidated financial statements include the accounts of the Company and its subsidiaries, all of which are wholly owned. All intercompany transactions have been eliminated. The carrying amount of cash and cash equivalents, accounts and other receivables, accounts payable and accrued liabilities approximate fair market value due to the short maturity of these instruments. Business segment The Company and its subsidiaries operate in one business segment - the manufacturing and/or distributing of refrigerated, frozen and snack food products. Fiscal year The Company maintains its accounting records on a 52-53 week fiscal basis. Fiscal years 1996 and 1994 include 52 weeks in each. Fiscal year 1995 includes 53 weeks. Revenues Revenues are recognized upon product shipment or delivery to customers. Cash equivalents The Company considers all investments with original maturities of three months or less to be cash equivalents. Cash equivalents include treasury bills of $5,194,000 at November 1, 1996 and $6,987,000 at November 3, 1995. Inventories Inventories are stated at the lower of cost (determined on a first-in, first-out basis) or market. Property, plant and equipment Property, plant and equipment is carried at cost less accumulated depreciation. Major renewals and betterments are charged to the asset accounts while the cost of maintenance and repairs is charged to income as incurred. When assets are sold or otherwise disposed of, the cost and accumulated depreciation are removed from the respective accounts and the resulting gain or loss is credited or charged to income. Depreciation is computed on the straight-line basis over 10 to 20 years for buildings and improvements, 5 to 10 years for machinery and equipment and 3 to 5 years for transportation equipment. Income taxes Deferred taxes are provided for items whose financial and tax bases differ. Earnings per share Net income and cash dividends per share are calculated based on the weighted average number of shares outstanding, 9,396,933, for all periods presented. NOTE 2 - COMPOSITION OF CERTAIN FINANCIAL STATEMENT CAPTIONS: 1996 (in thousands) 1995 (in thousands) Property, plant and equipment: Land Buildings and improvements Machinery and equipment Transportation equipment Construction in-progress Accumulated depreciation Inventories: Meat, ingredients and supplies Work in progress Finished goods Accrued payroll and other expenses: Payroll, vacation and payroll taxes Property taxes Other $1,083 10,683 23,672 5,055 40,493 22,638 $17,855 $4,320 1,501 9,783 $15,604 $12,057 228 1,159 $13,444 $598 7,083 15,186 5,140 7,423 35,430 21,065 $14,365 $3,552 1,862 8,436 $13,850 $10,365 208 473 $11,046 Notes to Consolidated Financial Statements NOTE 3 - RETIREMENT AND BENEFITS PLANS: The Company has noncontributory trusteed defined benefit retirement plans for sales, administrative, supervisory and certain other employees. The benefits under these plans are primarily based on years of service and compensation levels. The Company's funding policy is to contribute annually the maximum amount deductible for federal income tax purposes. Net pension cost consisted of the following (in thousands): Cost of benefits earned during the year Interest cost on projected benefit obligation Actual return on plan assets Deferral of unrecognized gain on plan assets Amortization of transition asset Amortization of unrecognized prior service costs Net pension cost 1996 1995 1994 $611 689 120 (679) (76) 34 $568 585 152 (638) (76) 24 $547 532 85 (585) (76) 23 $699 $615 $526 The transition asset is being amortized using the straight-line method over 17.63 years, the average remaining service periods of active plan participants. The discount rate and rate of increase in future compensation levels used in determining the actuarial present value of the projected benefit obligation were 7.5% and 6%, respectively. The expected long-term rate of return on assets for all fiscal years was 7.5%. Plan assets are primarily invested in marketable equity securities, corporate and government debt securities and real estate and are administered by a life insurance company. The funded status of the plan is as follows (in thousands): Plan assets at fair market value Actuarial present value of benefit obligations: &mbsp;Accumulated benefirs based on current salary levels, including vested benefits of $7,324, $6,823 and $5,841 &mbsp;Additional benefits based on estimated future salary levels &mbsp;Projected benefit obligation Projected benefit obligation in excess of plan assets Unrecognized prior service costs Unrecognized loss (gain) on plan assets Unrecognized net transition asset Accrued pension cost 1996 1995 1994 $8,657 $7,554 $6,538 6,214 1,902 7,208 1,978 9,186 7,917 2,044 9,961 (1,304) (1,632) (1,578) 236 156 (747) 315 (1,661) (596) (671) (671) 235 8,116 $(3,246) $(2,547) $(1,933) In fiscal year 1991, the Company adopted a non-qualified supplemental retirement plan for certain key employees. Benefits provided under the plan are equal to 60% of the employee's final average earnings, less amounts provided by the Company's defined benefit pension plan and amounts available through Social Security. Total annual benefits are limited to $120,000 for each participant In the plan. Effective January 1, 1991 the Company adopted a deferred compensation savings plan for certain key employees. Under this arrangement, selected employees contributed a portion of their annual compensation to the plan. The Company contributes an amount to each participant's account by computing an investment return equal to Moody's Average Seasoned Bond Rate plus 2%. Employees receive vested amounts upon death, termination or retirement. Total benefit expense recorded under these plans for fiscal years 1996, 1995 and 1994 was $405,000, $470,000 and $358,000, respectively. Benefits payable related to these plans and included in accrued payroll in the accompanying financial statements were $2,480,000 and $1,872,000 at November 1, 1996 and November 3, 1995, respectively. In connection with this arrangement the Company is the beneficiary of life insurance policies on the lives of certain key employees. The aggregate cash surrender value of these policies, included in prepaid expenses, was $3,341,000 and $2,763,000 at November 1, 1996 and November 3, 1995, respectively. The total (income) expense recorded related to these policies was approximately ($46,000), (20,000) and $6,000 for fiscal years 1996, 1995 and 1994, respectively. Effective for fiscal year 1994, the Company adopted Statement of Financial Accounting Standards No. 106, "Employers Accounting for Postretirement Benefits Other Than Pensions." This statement focuses principally on postreitrement health care benefits and requires accrual of the expected cost of providing those benefits over the service lives of the employees. Adoption of this statement did not materially impact the Company's consolidated financial statements. Notes to Consolidated Financial Statements NOTE 4 - INCOME TAXES: The provision for taxes on income includes the following (in thousands): Current: Federal State Deferred: Federal State 1996 1995 1994 $4,039 551 $4,102 643 4,590 4,745 (933) (192) (1,125) (609) (96) (705) $3,844 675 4,519 (657) (97) (754) $3,465 $4,040 $3,765 The total tax provision differs from the amount computed by applying the statutory federal income tax rate to income before income taxes as follows (in thousands): Provision for federal income taxes at the applicable statutory rate Increase in provision resulting from: State income taxes, net of federal income tax benefit Other, net 1996 1995 1994 $3,100 $3,614 $3,368 335 30 391 6 $3,465 $4,040 $3,765 397 29 Deferred income taxes result from differences in the bases of assets and liabilities for tax and accounting purposes. Deferred tax assets (liabilities) are comprised of the following (in thousands): Receivables allowance Inventory capitalization Deferred compensation Vacation benefits Pension and health care benefits 1996 1995 $199 297 1,335 407 2,638 $167 218 1,098 321 1,676 Depreciation Other (313) (74) (54) (62) $4,582 $3,458 No valuation allowance was provided against deferred tax assets in the accompanying statements. Notes to Consolidated Financial Statements NOTE 5 - LINE OF CREDIT: Under the terms of a revolving line of credit with Bank of America, the company may borrow up to $2,000,000 through April 30, 1998. At any time prior to May 1998, the Company may convert borrowings, if any, into a three-year term loan with principal and interest payable monthly commencing May 31, 1998. The interest rate is at the bank's reference rate unless the Company elects an optional interest rate. The borrowing agreement contains various covenants, the more significant of which require the Company to maintain certain levels of shareholders' equity and working capital. The Company was in compliance with all provisions of the agreement during the year. There were no borrowings under this line of credit during the year. NOTE 6 - CONTINGENCIES AND COMMITMENTS: The preparation of financial statements in conformity with generally accepted accounting principles, requires management to make certain estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported revenues and expenses during the respective reporting periods. Actual results could differ from those estimates. The Company leases certain transportation equipment under an operating lease expiring in 1999. The terms of the lease provide for annual renewal options and contingent rental payments based upon mileage and adjustments of rental payments based on the Consumer Price index. Minimum rental payments were $263,000, $272,000 and $290,000 in fiscal years 1996, 1995 and 1994, respectively. Contingent payments were $95,000 in 1996 and 1995, and $92,000 in 1994. Future minimum lease payments are approximately $257,000 per year from 1996 through 1998, and $130,000 in 1999. The Company also leases certain other properties which do not result in material commitments. Report of Independent Accountants Price Waterhouse LLP To the Board of Directors and Shareholders of Bridgford Foods Corporation In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of income, shareholders' equity and cash floes present fairly, in all material respects, the financial position of Bridgford Foods Corporation and its subsidiaries at November 1, 1996 and November 3, 1995, and the results of their operations and their cash flows for each of the three years in the period ended November 1, 1996, in conformity with generally accepted accounting principles. 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 of these statements in accordance with generally accepted auditing standards which 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, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. Costa Mesa, California December 24, 1996
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