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Bridgford FoodsDESCRIPTION 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 and Canada. The Company sells its products through wholesale outlets, restaurants and institutions. The products are sold by the Company's own sales force, brokers, cooperatives, wholesalers and independent distributors. Products are currently sold through approximately 29,000 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 19,000 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 1999 1998 1997 1996 1995 69 31 78 22 82 18 83 17 85 15 100 100 100 100 100 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 fiscal quarters. ----- Prices ----- Fiscal Quarter Ended $High $Low Cash Dividends Paid January 30, 1998 13 & 7/8 10 & 3/8 May 1, 1998 12 & 3/4 9 & 1/2 July 31, 1998 12 & 3/8 11 & 1/8 October 30, 1998 11 & 7/8 10 & 1/4 Jaunary 29, 1999 12 & 1/2 12 & 1/2 April 30, 1999 10 & 1/4 10 July 30, 1999 10 & 7/8 10 & 3/4 October 29, 1999 9 & 15/16 9 & 7/8 $.055 $.055 $0.55 $.055 $.06 $.06 $.06 $.06 ANNUAL SHAREHOLDERS MEETING The 2000 annual shareholders meeting will be held at the Four Points Sheraton, 1500 South Raymond Avenue, Anaheim, California at 10:00 a.m. on Wednesday March 15, 2000. RECENT HISTORICAL TRENDS TO OUR SHAREHOLDERS: It is a great pleasure to report that 1999 was a banner year for Bridgford Foods Corporation. New all-time record highs were attained in sales, earnings, dividends and capital. Net profits exceeded ten million dollars for the first time in our sixty-seven year history. SALES, EARNINGS AND DIVIDENDS Sales in fiscal 1999 reached $138,786,260, a record high by 3%. It was our fourteenth consecutive annual sales gain. Our meat snack division, Bridgford Foods of Illinois, again recorded outstanding sales volume increases as we added a variety of new flavors, sizes and improved packaging graphics to our meat snack line. Especially successful are our new 8-ounce packages of natural beef jerky. Bridgford's 4-ounce natural beef jerky continued to maintain the number one sales ranking for a meat snack product in American supermarkets and mass merchandising stores in 1999. During the year, hundreds of new customers have been added to our direct distribution deli and meat snack systems. Two new frozen retail-pack par-baked roll items were successfully tested during the fall of 1999. We expect to bring these new items to market in the year 2000. Also, our new french dip sandwiches, as well as our sausage, cheese and egg breakfast sandwiches, have shown excellent sales gains during 1999. Net income in 1999 reached a record high of $10,024,505. This represents a 15% gain over 1998 income. Bridgford has now set earnings records for three consecutive years and in 12 of the last 13 years. We experienced favorable flour costs in 1999. Meat costs increased substantially in the second half of 1999 when compared with costs in the first half of the year. Cash dividends of twenty-four cents per share were paid in 1999 on the 11,369,812 shares outstanding. At the November 1999 Board of Directors meeting, the quarterly cash dividend rate was raised to 7¢ per share, a 17% increase. FINANCIAL MATTERS Shareholders equity increased more than 14% to $58,134,865 during 1999, a gain of $7,292,617. Working capital was $43,760,200 at year-end, more than 17% higher than at the end of fiscal 1998. Our working capital ratio was a very strong 4.2 to 1 at year-end. We continued to be debt-free for the 13th consecutive year while investing $4,901,936 in property, plant and equipment. A $2,000,000 bank line of credit remains available to us for new business opportunities. Employee stock options were authorized and issued to members of the Corporate Operating Committee during 1999. Options for shares were issued at a price of $10.00 per share. Members of the current Executive Committee are excluded from receiving options. During November of 1999 the Board authorized the Company to repurchase up to 1,000,000 shares of its common stock on the open market. The Company believed that the stock was undervalued at the time and that the repurchase program is a good investment of available funds. The investment firm of Salomon Smith Barney was engaged to manage the repurchase program. OPERATIONS During 1999 we completed a new 27,000 square foot addition to our Chicago meat snack foods plant and warehouse. We also finished a 6,000 square foot freezer addition at our Dallas, Texas sandwich manufacturing plant. Plans for our 2000 fiscal year include expansion of the freezer at the Bridgford-Superior bakery and frozen dough plant in Dallas. We have offered to purchase property adjacent to both our Frozen-Rite and Superior plants in Dallas to facilitate future growth. The Company is adding substantial amounts of new modern equipment to its Chicago and Dallas facilities for expanded production of current and new products. We are experiencing higher meat raw material costs in the first quarter of 2000. It appears that grain supplies are plentiful and we do not expect higher costs for our basic bakery raw materials. SUMMARY Thank you to our customers, shareholders, directors, officers, associates and suppliers for enabling us to experience an extraordinarily successful year in 1999. We are poised to continue our progress in the year 2000. Respectfully submitted, Allan L. Bridgford Chairman Robert E. Schulze President BRIDGFORD FOODS CORPORATION FINANCIAL SUMMARY Fiscal Year Ended October 29 1999 October 30 1998 % 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 $138,786,260 16,169,505 10,024,505 .88 .24 43,760,200 85,469,476 58,134,865 18.40% $134,815,787 14,065,430 8,720,430 .77 .22 37,251,202 75,792,941 50,842,248 18.27% 2.95 14.95 14.94 14.29 9.09 17.47 12.77 14.34 - SELECTED FINANCIAL DATA October 30 1998 October 29 1999 November 1 1997 November 1 1996 November 3 1995* Net Sales Net Income Basic Earnings Per Share Current Assets ** Current Liabilities ** Working Capital ** Property, Plant and Equip., Net Deferred Taxes on Income Total Assets Shareholders' Equity Cash Dividends Per Share $138,786,260 $134,815,787 $127,859,491 $118,316,470 $112,497,590 6,590,855 10,024,505 .88 57,236,926 13,476,726 43,760,200 17,764,652 4,605,530 85,469,476 58,134,865 .24 8,720,430 .77 50,558,938 13,307,736 37,251,202 16,197,108 3,738,976 75,792,941 50,842,248 .22 6,605,354 .58 41,136,786 11,454,700 29,682,086 16,853,248 3,102,479 65,663,892 44,605,782 .20 5,651,383 .50 33,871,431 9,625,313 24,246,118 17,854,524 3,008,911 58,277,948 40,255,691 .20 .58 32,946,552 8,484,009 24,462,543 14,364,995 2,353,377 52,623,417 36,859,572 .19 * 53 weeks ** Certain financial statement reclassifications have been recorded in years prior to 1997 to conform to the current year presentation. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 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 deployment of capital; availability of qualified personnel; 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. 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 needs and capital expenditures. RESULTS OF OPERATIONS 1999 compared to 1998 Sales in fiscal year 1999 increased $3,970,000 (2.9%) when compared to sales of the prior year, primarily as a result of increased sales volume. Cost of products sold decreased by $332,000 when compared to the prior year. The gross margin was approximately 42% in 1999, 40% in 1998 and 36.9% 1997. Costs for pork commodity products remained at historically low levels and flour costs continued to be favorable in 1999 and 1998. Selling, general and administrative expenses increased $1,844,000 (5.0%) when compared to the prior year. This increase was generally consistent with the overall increase in sales. Selling expenses slightly outpaced sales growth due to an increased sales force and higher performance bonuses due to record profitability. The Company's capital expansion projects increased compared to recent years. 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%. 1998 compared to 1997 Sales in fiscal year 1998 increased $6,956,000 (5.4%) when compared to sales of the prior year, primarily as a result of increased sales volume. Cost of products sold increased by only $255,000 when compared to the prior year. The gross margin was approximately 40% in 1998, 36.9% in 1997 and 35.9% 1996. Costs for pork commodity products reached historically low levels and flour costs continued to be favorable in 1998 and 1997 compared to the prior years. Selling, general and administrative expenses increased $3,303,000 (9.8%) when compared to the prior year. This increase was generally consistent with the overall increase in sales. Selling expenses outpaced sales growth due to an increased sales force and higher performance bonuses due to record profitability. The effective tax rate remained consistent with the prior year at 38%. 1997 compared to 1996 Sales in fiscal year 1997 increased $9,543,000 (8.1%) when compared to sales of the prior year, primarily as a result of increased sales volume. Cost of products sold increased by $4,747,000 (6.3%) when compared to the prior year. The gross margin was approximately 36.9% in 1997 and 35.9% 1996. Costs for pork commodity products remained at historically high levels while flour costs became more favorable in 1997 compared to the prior year. Improved sales of higher margin products and lower flour costs result in a slight improvement in the gross margin. LIQUIDITY AND CAPITAL RESOURCES Favorable operating results over the past several years have continued to provide significant liquidity to the Company. Net cash provided by operating activities was $9,635,000 in the 1999 fiscal year compared to $14,579,000 in 1998 and $10,189,000 in 1997. Accounts receivable balances increased $1,617,000 (13%) in 1999, $699,000 (6%) in 1998 and $1,367,000 (13%) in 1997 due to higher sales and slower collections. Inventories increased in 1999 $2,083,000 due to higher unit quantities and decreased $1,490,000 in fiscal 1998 due primarily to significantly lower commodity costs and lower quantities compared to the prior fiscal year. Non-current assets increased $1,431,000 (16%), $1,363,000 (18%), and $1,122,000 (17%) in 1999, 1998, and 1997, respectively, due primarily to the increased cash surrender value of life-insurance policies and increases in deferred income tax benefits due primarily to increases in non-funded employee benefits. Accounts payable and accrued expenses increased $1,759,000 (19%) in 1997, due to higher purchasing activity to support record fourth quarter sales volume, and increased product promotion and bonus accruals. The Company's capital improvement expenditures increased in 1999 compared to recent years. Cash used for additions to property, plant and equipment increased $2,617,000 (114%) compared to fiscal year 1998. Significant projects were completed in 1999, primarily the Dallas Sandwich Freezer expansion at a total cost of $966,000 and the shipping dock expansion of the Chicago plant at a total cost of $1,541,000. Cash and cash equivalents increased $2,749,000 in 1999 (12.3%). The increase was lower than in recent years due to higher tax payments, increased capital expenditures and higher accounts receivable and inventory balances. Cash and cash equivalents increased $9,894,000 in 1998 and $6,035,000 (95%) in 1997 primarily as a result of lower capital expenditures, improved profitability and significant increases in non-funded employee benefits. The Company has remained free of interest-bearing debt for twelve consecutive years. Working capital increased $6,509,000 (17.5%) and $7,569,000 (25.5%) in 1999 and 1998. The increases in working capital reflect lower capital spending in 1998, improved profitability and significant increases in non-funded employee benefits. The Company maintains a line of credit with Bank of America that expires April 30, 2001. There were no borrowings under this line of credit during 1999. The Company has and will continue to make certain investments in its software systems and applications to ensure year 2000 compliance. The financial impact to the Company has not been and is not anticipated to be material to its financial position or results of operations in any given year. Detail disclosure regarding the Company's year 2000 plan and discussion of risk factors is continued under Item 1., "Business" in Form 10-K for the fiscal year ended October 29, 1999. Consolidated Balance Sheets October 29 1999 October 30 1998 ASSETS Current assets: Cash and cash equivalents Accounts receivable, less allowance for doubtful accounts of $25,020,839 $22,272,141 $647,219 and $582,787 Inventories Prepaid expenses Deferred income tax benefits Total current assets 13,689,463 12,072,818 16,149,918 14,066,898 233,848 1,913,233 268,892 2,107,814 57,236,926 50,558,938 Property, plant and equipment, net of accumulated depreciation of $30,533,865 and $27,894,827 Other non-current assets Deferred income tax benefits 17,764,652 16,197,108 5,297,919 3,738,976 5,862,368 4,605,530 $85,469,476 $75,792,941 October 29 1999 October 30 1998 $5,849,237 $5,343,725 6,759,979 6,373,886 867,510 1,590,125 13,476,726 13,307,736 LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable Accrued payroll and other expenses Income taxes payable Total current liabilities Contingencies and commitments (Note 6) Shareholders' equity: Preferred stock, without par value Authorized - 1,000,000 shares Issued and outstanding - none Common stock, $1.00 par value Authorized - 20,000,000 shares Issued and outstand - 11,369,812 Capital in excess of par value Retained earnings 11,426,695 11,426,695 26,347,123 26,347,123 20,361,047 13,068,430 58,134,865 50,842,248 $85,469,476 $75,792,941 Consolidated Statements of Income Fiscal year ended October 29 1999 October 30 1998 October 31 1997 Net sales $138,786,260 $134,815,787 $127,859,491 Cost of products sold, excluding depreciation Selling, general and administrative expenses Depreciation 80,544,109 38,780,300 3,292,346 80,876,022 36,935,860 2,938,475 80,621,498 33,633,263 2,950,376 122,616,755 120,750,357 117,205,137 Income before taxes Provision for taxes on income 16,169,505 6,145,000 14,065,430 5,345,000 10,654,354 4,049,000 Net income Net income per share $10,024,505 $8,720,430 $6,605,354 $0.88 $0.77 $0.58 CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY Common stock Shares Amount 9,396,933 $9,453,816 Capital in excess of par Retained earnings Total shareholder's equity $3,024,881 $27,776,994 $40,255,691 6,605,354 6,605,354 (2,263,265) (2,255,265) 10,921,478 (11,860,960) 939,482 939,482 10,336,415 $10,393,298 $13,946,359 $20,266,125 8,720,430 (2,483,964) 12,400,764 (13,434,161) 1,033,397 1,033,397 $8,720,430 8,720,430 (2,483,964) $11,369,812 $11,426,695 26,347,123 $13,068,430 $50,842,248 10,024,505 10,024,505 Balance, November 1, 1996 - Net income - Cash dividends paid ($.20 per share) - 10% stock dividends, November 10, 1997 Balance, October 31, 1997 - Net income - Cash dividends paid* ($.22 per share) - 10% stock dividends, November 16, 1998 Balance, October 30, 1998 - Net income - Cash dividends paid* ($.24 per share) (2,731,888) (2,731,888) Balance, October 29, 1999 $11,369,812 $11,426,695 26,347,123 $20,361,047 $58,134,865 Consolidated Statements of Cash Flows Fiscal year ended October 29 1999 October 30 1998 October 31 1997 Cash flows from operating activities: Net income Income charges not affecting cash: Depreciation Provision for losses on accounts receivable Gain on sale of assets $10,024,505 $8,720,430 $6,605,354 3,292,346 221,650 (705,288) 2,938,475 254,150 (81,941) 2,950,376 149,150 (50,129) Changes in assets and liabilities: Accounts receivable Inventories Prepaid expenses Deferred income tax benefits Other non-current assets Accounts payable and accrued expenses Income taxes payable Non-current liabilities (1,838,295) (2,083,020) (35,044) (1,061,135) (564,449) 891,605 (722,615) 2,214,928 (952,705) (1,516,171) 1,489,852 47,162 (96,101) 206,099 (859,636) (210,152) (726,540) (1,028,297) 1,758,848 70,539 1,206,466 446,768 1,406,268 2,039,547 Net cash provided by operating activities 9,635,188 14,578,567 10,189,145 Cash used in investing activities: Proceeds from sale of assets Additions to property, plant and equipment 747,334 50,129 (4,901,936) (2,285,335) (1,949,100) 84,941 Net cash used in investing activities (4,154,602) (2,200,394) (1,898,971) Cash used in financing activities: Cash dividends paid (2,731,888) (2,483,964) (2,255,264) Net increase (decrease) in cash and cash equivalents 2,748,698 9,894,209 6,034,910 Cash and cash equivalents at beginning of year 22,272,141 12,377,932 6,343,022 Cash and cash equivalents at end of year Cash paid for income taxes $25,020,839 $22,272,141 $12,377,932 $7,837,000 $4,891,000 $4,022,000 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 1999, 1998 and 1997 include 52 weeks each. 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 $24,980,000 at October 29, 1999 and $20,985,000 at October 30, 1998. 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. Stock-based compensation Statement of Financial Accounting Standards (SFAS No. 123), "Accounting for Stock-Based Compensation," encourages, but does not require, companies to record compensation cost for stock-based employee compensation plans based on the fair market value of options granted. The Company has chosen to account for stock based compensation using the intrinsic value method prescribed in Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," and related interpretations. Accordingly, compensation for stock options is measured as the excess, if any, of the fair market value of the Company's stock price at the date of grant as determined by the Board of Directors over the amount an employee must pay to acquire the stock. Basic and diluted earnings per share Basic earnings and cash dividends per share are calculated based on the weighted average number of shares outstanding, 11,369,812 for all periods presented. Diluted earnings per share is calculated based on the weighted average number of shares outstanding plus shares issuable on conversion or exercise of all potentially dilutive securities. NOTE 2 - COMPOSITION OF CERTAIN FINANCIAL STATEMENT CAPTIONS: 1999 (in thousands) 1998 (in thousands) Property, plant and equipment: Land Buildings and improvements Machinery and equipment Transportation equipment 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 $1,087 12,511 27,761 6,940 48,299 (30,534) $17,765 $3,288 1,837 11,025 $16,150 $6,051 263 446 $6,760 $1,083 11,310 25,616 6,083 44,092 (27,895) $16,197 $3,695 1,353 9,019 $14,067 $5,533 263 578 $6,374 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 (loss) on plan assets Amortization of unrecognized gain Amortization of transition asset Amortization of unrecognized prior service costs Net pension cost 1999 1998 1997 $646 958 (990) 138 (68) (76) 34 $568 907 (748) (34) (83) (76) 34 $485 810 (1,602) 931 (38) (76) 34 $644 $568 $544 The transition asset is being amortized using the straight-line method over 15.02 years, the average remaining service period of active plan participants. The discount rate and expected long-term rate of return used in determining the projected benefit obligation for fiscal years 1999, 1998 and 1997 was 7.75%. The assumed rate of future compensation increases for fiscal years 1999 and 1998 was 4% and for fiscal year 1997 was 6%. Plan assets are primarily invested in marketable equity securities, corporate and government debt securities and real estate and are administered by an investment management 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 benefits based on current salary levels, including vested benefits of $9,974, $8,927 and $7,324 &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 gain on plan assets Unrecognized net transition asset 1999 1998 1997 $11,455 $10,622 $10,081 12,970 10,502 817 946 9,415 1,152 13,916 11,319 10,567 (2,461) (3,463) (3,065) 281 (2,404) (3,463) (3,065) (520) (445) 233 247 (369) Accrued pension cost $(5,001) $(4,358) $(3,790) 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 contribute 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 1999, 1998 and 1997 was $320,000, $303,000 and $348,000, respectively. Benefits payable related to these plans and included in other non-current liabilities in the accompanying financial statements were $4,384,000 and $3,594,000 at October 29, 1999 and October 30, 1998, 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 non-current assets, was $5,862,000 and $5,298,000 at October 29, 1999 and October 30, 1998, respectively. The Company provides a deferred compensation plan for certain key executives, which is based upon the Company's pretax income and return on shareholders' equity. The payment of these bonuses is generally deferred over a five-year period. The total amount payable related to this arrangement was $5,823,000 and $4,598,000 at October 29, 1999 and October 30, 1998, respectively. Future payments are approximately $1,700,000, $1,434,000, $1,226,000, $942,000 and $521,000 for fiscal years 2000 through 2004, respectively. Postretirement health care benefits in the approximate amount of $350,000 and $345,000 are included in non- current liabilities at October 29, 1999 and October 30, 1998, respectively. The Company's 1999 Stock Incentive Plan ("the Plan") was approved by the Board of Directors on January 11, 1999 and 275,000 shares were granted on April 29, 1999. Under the Plan, the maximum aggregate number of shares which may be optioned and sold is 900,000 shares of common stock, subject to adjustment upon changes in capitalization or merger. Generally, options granted under the plan vest in annual installments over four years following the date of grant (as determined by the Board of Directors) subject to the optionee's continuous service. Options expire ten years from the date of grant with the exception of an incentive stock option granted to an optionee who owns stock representing more than 10% of the voting power of all classes of stock of the Company, in which case the term of the option is five years. Options generally terminate three months after termination of employment or one year after termination due to permanent disability or death. Options are generally granted at a fair market value determined by the Board of Directors subject to the following: a.) With respect to options granted to an employee or service provider who, at the time of grant owns stock representing more than 10% of the voting power of all classes of stock of the Company, the per share exercise price shall be no less than 110% of the fair market value on the date of grant. b.) With respect to options granted to an employee or service provider other than described in the preceding paragraph, the exercise price shall be no less than 100% for incentive stock options and 85% for non-statutory stock options of the fair market value on the date of grant. Stock option activity under the plan was as follows: Granted Canceled Exercised Balance at October 29, 1999 Options Outstanding Exercise Price Per Share 900,000 - - 900,000 $10.00 - - $10.00 Options Outstanding Options Exercisable Weighted average Weighted Weighted average Exercise price Shares remaining life (years) average exercise price Shares $10 900,000 9.2 $10 0 exercise price (years) $10 The Company adopted the disclosure requirements of Statement of Financial Accounting Standards No. 123 ("FAS 123"). As permitted by FAS 123, the Company measures compensation cost in accordance with APB 25. Therefore, the adoption of FAS 123 had no impact on the Company's financial condition or results of operations. Had compensation cost for the Company's Stock Option Plan been determined based on the fair value of the options consistent with FAS 123, the Company's net income and earnings per share would have been reduced to the pro forma amounts indicated below: Net Income Basic Earning Per Share October 29, 1999 As reported Pro forma As reported Pro forma $10,024,505 $9,845,208 $.88 $.87 The fair value of compensatory stock options was estimated using the Black-Scholes option pricing model using the following weighted average assumptions: Risk-free interest rate Expected years until exercise Expected stock volatility Expected dividends October 29, 1999 5.34% 6.0 years 40.0% 2.20% 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 1999 1998 1997 $6,034 1,172 $5,241 964 7,206 6,205 (867) (194) (1,061) (735) (125) (860) $3,602 658 4,260 (99) (112) (211) $6,145 $5,345 $4,049 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 1999 1998 1997 $5,498 $4,782 $3,622 596 51 416 11 $6,145 $5,345 $4,049 518 45 Deferred income taxes result from differences in the bases of assets and liabilities for tax and accounting purposes. Deferred income taxes result from differences in the bases of assets and liabilities for tax and accounting purposes. Receivables allowance $263 $235 $233 1999 1998 1997 Inventory capitalization Deferred compensation Franchise tax Employee benefits Other Current tax assets Deferred compensation Pension and health care benefits Depreciation Non-current taz assets, net 367 478 183 853 (36) 329 382 154 842 (29) 233 385 107 631 44 $2,108 $1,673 3,951 (1,018) 4,606 $1,913 $1,690 $1,348 $1,001 3,343 2,870 (952) (769) 3,739 3,102 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, 2001. At any time prior to May, 2001, the Company may convert borrowings, if any, into a three-year term loan with principal and interest payable monthly commencing May 31, 2001. 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 operating leases expiring in 2005. 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 $320,000, $316,000, and $255,000 in fiscal years 1999, 1998, and 1997, respectively. Contingent payments were $102,000, $105,000 and $98,000 in 1999, 1998 and 1997, respectively. Future minimum lease payments are approximately $320,000 in the years 2000 through 2004 and $240,000 in 2005. NOTE 7 - SUBSEQUENT EVENTS: In November 1999 the City of San Diego redevelopment agency acquired, under eminent domain proceedings, land owned by the Company and a pretax gain of $675,000 was recognized. In November 1999 the Board of Directors approved the repurchase of up to 1,000,000 shares of common stock. These repurchases will be made on the open market at prevailing market prices or in negotiated transactions off the market. Report of Independent Accountants PricewaterhouseCoopers 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 flows present fairly, in all material respects, the financial position of Bridgford Foods Corporation and its subsidiaries at October 29, 1999 and October 30, 1998, and the results of their operations and their cash flows for each of the three years in the period ended October 29, 1999, in conformity with accounting principles generally accepted in the United States. 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 auditing standards generally accepted in the United States, 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 10, 1999
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