<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 5, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transaction period from ____________ to ____________
Commission File Number: 0-7277
FRESH FOODS, INC.
(Exact name of registrant as specified in its charter)
North Carolina
(State or other jurisdiction of incorporation or organization)
56-0945643
(I.R.S. Employer Identification No.)
361 Second Street, NW
Hickory, North Carolina 28603
(Address of principal executive offices) (zip code)
Registrant's telephone number, including area code: (828) 304-0027
_____________________________________________________________
(Former name or former address, if changed since last report)
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 (3) has been subject to such filing
requirements for the past 90 days.
Yes X No
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable
Class Outstanding at July 1, 1999
----- ---------------------------
Common Stock, $1.00 par value 5,908,674
<PAGE> 2
FRESH FOODS, INC. AND SUBSIDIARIES
INDEX
Page No.
--------
Part I. Financial Information:
Item 1. Financial Statements
Consolidated Balance Sheets -
June 5, 1999 and March 6, 1999...................................... 1-2
Consolidated Statements of
Operations and Retained Earnings -
Thirteen Weeks Ended June 5, 1999
and Twelve Weeks Ended May 22, 1998................................. 3
Consolidated Statements of Cash
Flows - Thirteen Weeks ended June 5, 1999 and
Twelve Weeks Ended May 22, 1998..................................... 4
Notes to Consolidated Financial
Statements.......................................................... 5-7
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of Operations.................... 8-12
Part II. Other Information:
Item 6. Exhibits and Reports on Form 8-K............................ 13
Signatures.......................................................... 14
Index to Exhibits................................................... 15
<PAGE> 3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
FRESH FOODS, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
<TABLE>
<CAPTION>
(Unaudited)
June 5, March 6,
ASSETS 1999 1999
------------ ------------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 1,688,686 $ 1,664,398
Accounts receivable, net (includes related party receivables of
$263,368 and $326,147 at June 5, 1999 and March 6, 1999,
respectively) 16,631,426 18,565,152
Notes receivable - current, net (includes related party notes
receivable of $889,170 and $986,457 at June 5, 1999 and March 6,
1999, respectively) 921,895 1,122,268
Inventories 37,603,762 30,430,482
Deferred income taxes 2,952,866 2,722,095
Prepaid expenses and other current assets (includes related party
prepaid expense of $80,000 at June 5, 1999) 715,818 988,023
------------ ------------
Total current assets 60,514,453 55,492,418
------------ ------------
PROPERTY, PLANT AND EQUIPMENT, NET 74,493,920 74,999,394
------------ ------------
OTHER ASSETS:
Properties held for sale 1,813,868 2,086,847
Trade name, net 42,873,136 43,242,636
Excess of cost over fair value of net assets of businesses acquired, net 32,228,377 32,623,400
Other intangible assets, net 3,457,022 3,520,053
Notes receivable (includes related party notes receivable of $309,863
and $313,274 at June 5, 1999 and March 6, 1999, respectively) 353,233 367,494
Deferred loan origination fees, net 4,350,765 4,524,753
Other 62,646 132,028
------------ ------------
Total other assets 85,139,047 86,497,211
------------ ------------
Total assets $220,147,420 $216,989,023
============ ============
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
1
<PAGE> 4
FRESH FOODS, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
(Unaudited)
June 5, March 6,
LIABILITIES AND SHAREHOLDERS' EQUITY 1999 1999
------------ ------------
<S> <C> <C>
CURRENT LIABILITIES:
Current installments of long-term debt $ 685,093 $ 673,752
Trade accounts payable (includes related party payables of $19,699
and $92,370 at June 5, 1999 and March 6, 1999, respectively) 8,225,240 11,255,920
Income taxes payable 564,191 151,366
Accrued insurance 339,730 1,155,942
Accrued interest 313,476 3,533,771
Accrued payroll and payroll taxes 5,579,054 4,941,033
Accrued marketing and advertising 1,813,804 1,420,580
Accrued taxes (other than income and payroll) 1,467,356 1,176,888
Other accrued liabilities (includes related party accrued
liabilities of $185,000 at March 6, 1999) 2,020,679 3,351,366
------------ ------------
Total current liabilities 21,008,623 27,660,618
LONG TERM DEBT, less current installments 155,149,678 146,265,928
DEFERRED INCOME TAXES 1,926,972 1,910,468
SHAREHOLDERS' EQUITY
Preferred stock - par value $.10 authorized 2,500,000 shares; no -- --
shares issued
Common stock - par value $1, authorized 100,000,000 shares; issued and
outstanding June 5, 1999 - 5,809,674 shares and March 6, 1999
- 5,807,049 shares 5,809,674 5,807,049
Capital in excess of par value 23,326,043 23,251,845
Retained earnings 12,926,430 12,093,115
------------ ------------
Total shareholders' equity 42,062,147 41,152,009
------------ ------------
Total liabilities and shareholders' equity $220,147,420 $216,989,023
============ ============
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
2
<PAGE> 5
FRESH FOODS, INC. AND SUBSIDIARIES
Consolidated Statements of Operations and Retained Earnings
Thirteen Weeks Ended June 5, 1999 and Twelve Weeks Ended May 22, 1998
(Unaudited)
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
REVENUES:
Food processing $ 43,014,350 $ 12,102,531
Restaurant operations and franchising (includes related party
transactions totaling $12,580 and $25,296 in 1999 and 1998,
respectively) 25,921,887 21,504,281
Ham curing 1,440,372 1,292,315
------------ ------------
Total operating revenues 70,376,609 34,899,127
------------ ------------
COSTS AND EXPENSES:
Cost of goods sold (includes related party transactions totaling
$34,322 and $101,041 in 1999 and 1998, respectively) 35,578,463 19,932,613
Restaurant operating expenses (includes related party transactions
totaling $443,589 and $850,295 in 1999 and 1998, respectively) 12,303,222 9,653,674
Selling, general and administrative expenses (includes related party
transactions totaling $656,589 and $425,474 in 1999 and 1998,
respectively) 14,607,413 2,912,241
Depreciation and amortization 2,445,740 1,126,334
------------ ------------
Total costs and expenses 64,934,838 33,624,862
------------ ------------
OPERATING INCOME 5,441,771 1,274,265
------------ ------------
OTHER INCOME (EXPENSE):
Other income - (including interest) (includes related party transactions
totaling $23,013 and $41,337 in 1999 and 1998, respectively) 64,231 180,633
Net loss on disposition of property, plant and equipment (60,333) (261,564)
Interest expense (includes related party transactions totaling
$24,688 in 1998) (3,849,205) (419,668)
Other expense (includes related party transactions totaling $13,500 and
$34,484 in 1999 and 1998, respectively) (197,608) (229,512)
------------ ------------
Other expense, net (4,042,915) (730,111)
------------ ------------
EARNINGS BEFORE INCOME TAXES 1,398,856 544,154
INCOME TAX PROVISION 565,541 205,146
------------ ------------
NET EARNINGS $ 833,315 $ 339,008
============ ============
RETAINED EARNINGS:
Balance at beginning of period 12,093,115 9,662,258
Net earnings 833,315 339,008
------------ ------------
Balance at end of period $ 12,926,430 $ 10,001,266
============ ============
Basic earnings per share $ .14 $ .06
============ ============
Diluted earnings per share $ .14 $ .05
============ ============
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
3
<PAGE> 6
FRESH FOODS, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Thirteen Weeks Ended June 5, 1999 and Twelve Weeks Ended May 22, 1998
(Unaudited)
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net earnings $ 833,315 $ 339,008
Adjustments to reconcile net earnings to net cash provided by (used
in) operating activities:
Depreciation and amortization 2,445,740 1,126,334
Depreciation on properties leased to others 34,158 91,057
Deferred income taxes (214,267) 11,655
Net loss on disposition of property, plant and equipment 60,333 261,565
Other non-cash adjustments to earnings 373,740 (8,131)
Changes in operating assets and liabilities:
Receivables 1,933,726 1,120,794
Inventories (7,173,280) (250,626)
Prepaid expenses and other current assets 272,205 (14,748)
Trade accounts payable and accrued liabilities (6,662,695) 1,139,412
------------ ------------
Total adjustments (8,930,340) 3,477,312
------------ ------------
Net cash provided by (used in) operating activities (8,097,025) 3,816,320
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sales of assets to others 228,770 15,550
Decrease in related party notes receivables 100,698 257,284
Decrease in other notes receivable 113,936 98,115
Capital expenditures to related parties (33,996) (452,364)
Capital expenditures - other (1,225,035) (4,562,565)
Other investing activities, net 68,121 (58,585)
------------ ------------
Net cash used in investing activities (747,506) (4,702,565)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net borrowings under revolving credit agreement 9,060,337 --
Principal payments on long-term debt (165,246) (697,345)
Net proceeds under short-term borrowing agreements -- 1,246,731
Loan origination fees (32,772) (73,445)
Proceeds from issuance of common stock 6,500 --
Proceeds from exercise of stock options -- 22,750
------------ ------------
Net cash provided by financing activities 8,868,819 498,691
------------ ------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 24,288 (387,554)
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 1,664,398 2,818,071
------------ ------------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 1,688,686 $ 2,430,517
============ ============
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
4
<PAGE> 7
FRESH FOODS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
1. In the opinion of the Company, the accompanying unaudited consolidated
financial statements contain all adjustments necessary to present fairly
the financial position as of June 5, 1999 and March 6, 1999, the results of
operations for the thirteen weeks ended June 5, 1999 and the twelve weeks
ended May 22, 1998, and the cash flows for the thirteen weeks ended June 5,
1999 and the twelve weeks ended May 22, 1998. Financial statements for
fiscal 1999 have been reclassified, where applicable, to conform to
financial statement presentation used in fiscal 2000.
The Company reports the results of its operations using a 52-53 week basis.
During fiscal 1999 the Company changed its interim fiscal periods to
conform to standard food processing industry interim periods. In line with
this, each quarter of the 52 week fiscal year will contain 13 weeks except
for the infrequent fiscal years with 53 weeks. References to fiscal 2000
and fiscal 1999 mean the fiscal years ending or ended March 4, 2000 and
March 6, 1999, respectively. The results of operations for the thirteen
weeks ended June 5, 1999 are not necessarily indicative of the results to
be expected for the full year. These interim unaudited consolidated
financial statements should be read in conjunction with the Company's
March 6, 1999 audited consolidated financial statements.
2. A summary of inventories, by major classifications, follows:
June 5, March 6,
1999 1999
--------------- ---------------
Manufacturing supplies $ 2,911,237 $ 1,299,177
Raw materials 3,018,382 4,553,087
Work in process 323,025 1,008,315
Finished goods 30,518,007 22,776,027
Restaurant food and supplies 833,111 793,876
--------------- ---------------
Total $ 37,603,762 $ 30,430,482
=============== ===============
3. The following is a reconciliation between basic and diluted earnings per
share:
Per Share
Net Income Shares Amount
---------- ------ ---------
Quarter Ended June 5, 1999
Basic earnings per share $ 833,315 5,808,573 $ .14
Stock-based compensation awards -- 43,858 --
--------- --------- ---------
Diluted earnings per share $ 833,315 5,852,431 $ .14
========= ========= =========
Quarter Ended May 22, 1998
Basic earnings per share $ 339,008 5,901,581 $ .06
Stock-based compensation awards -- 544,276 (.01)
--------- --------- ---------
Diluted earnings per share $ 339,008 6,445,857 $ .05
========= ========= =========
5
<PAGE> 8
4. Supplemental cash flow disclosures - cash paid during the period:
Thirteen Weeks Twelve Weeks
Ended Ended
June 5, 1999 May 22, 1998
-------------- ------------
Interest $ 7,067,943 $ 368,995
============== ============
Income taxes $ 374,307 $ 236,918
============== ============
5. On June 9, 1998, the Company purchased certain of the net operating assets
of the Pierre Foods Division ("Pierre") of Hudson Foods, Inc. ("Hudson"), a
wholly owned subsidiary of Tyson Foods. The following unaudited pro forma
consolidated results of operations assume the Pierre acquisition occurred
as of the beginning of 1999:
(In Thousands, Except Per Share Data)
Twelve Weeks
Ended
May 22, 1998
-------------
Total operating revenues $ 62,017
Operating income 1,130
Loss before extraordinary item (1,878)
Extraordinary loss (net of tax) (76)
Net loss $ (1,954)
Basic and diluted loss per share
Loss before extraordinary item $ (0.32)
Extraordinary loss (0.01)
-------------
Net loss $ (0.33)
=============
6. Total comprehensive income, comprised solely of net earnings in fiscal
2000, and net earnings and unrealized holding gains on available-for-sale
securities in fiscal 1999, was $833,315 and $343,388 for the quarters ended
June 5, 1999 and May 22, 1998, respectively.
6
<PAGE> 9
7. The following tables set forth revenue and operating profit by segment.
<TABLE>
<CAPTION>
Thirteen Weeks Ended June 5, 1999
---------------------------------------------------------------------
Food Restaurant Ham
Processing Operations Curing Total
--------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
Revenues from external customers $ 43,014,350 $ 25,921,887 $ 1,440,372 $ 70,376,609
Segment profit (loss) 4,993,496 2,211,487 (12,533) 7,192,450
</TABLE>
<TABLE>
<CAPTION>
Twelve Weeks Ended May 22, 1998
---------------------------------------------------------------------
Food Restaurant Ham
Processing Operations Curing Total
--------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
Revenues from external customers $ 12,102,531 $ 21,504,281 $ 1,292,315 $ 34,899,127
Segment profit (loss) 493,618 2,195,537 (175,093) 2,514,062
</TABLE>
<TABLE>
<CAPTION>
Thirteen Weeks Twelve Weeks
Ended Ended
June 5, 1999 May 22, 1998
------------------- -------------------
<S> <C> <C>
Profit or Loss:
Total profit for reportable segments $ 7,192,450 $ 2,514,062
Corporate expenses (1,750,679) (1,239,797)
Interest expense (3,849,205) (419,668)
Other non-operating loss (193,710) (310,443)
------------------- -------------------
Earnings before income taxes $ 1,398,856 $ 544,154
=================== ===================
</TABLE>
There were no material changes in total assets by segment from the
amounts disclosed in the annual report for the fiscal year ended March
6, 1999.
8. In June 1998, Statement of Financial Accounting Standards ("SFAS")
No. 133, "Accounting for Derivative Instruments and Hedging
Activities," was issued. SFAS No. 133 requires that an entity
recognize all derivatives as either assets or liabilities in the
balance sheet and measure those instruments at fair value. The Company
will be required to adopt this new Statement for the fiscal year
ending March 2, 2002. Management is currently evaluating the impact of
this Statement.
9. On July 2, 1999, the Company and the management group of Mom `n' Pop's
Country Ham, LLC signed a binding letter of intent for the management
group to acquire the Company's ham curing subsidiary for $995,000,
payable through the issuance of a 3 year, 8% note. In addition, the
Company has agreed to provide a $500,000 unsecured working capital
line of credit through June 30, 2000. The closing of the transaction,
which is scheduled to occur on August 6, 1999, is subject to the
receipt of a fairness opinion from an independent investment banking
firm and approval from the Company's lenders. As a result of this
sale, the Company will record a pretax charge of approximately $2
million during the second quarter of fiscal 2000.
7
<PAGE> 10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Results of Operations
The Company's operations are classified into three business segments: food
processing operations, principally fully cooked protein and sandwich production;
restaurant operations, comprised of the Sagebrush, Western Steer, Prime Sirloin
and Bennett's concepts; and ham curing operations.
As a part of the Pierre acquisition, the Company changed its interim fiscal
periods to conform to the standard food processing industry interim periods. In
line with this, each quarter of the 52 week fiscal year will contain 13 weeks
except for the infrequent fiscal years with 53 weeks. Accordingly, the current
fiscal quarter contains 13 weeks of operations as compared to 12 weeks of
operations in the same fiscal quarter of the prior year. This additional week of
activity did not have a material impact on the consolidated statements of
earnings when compared with the prior year's results.
Results for the fiscal quarters ended June 5, 1999 and May 22, 1998, are
shown below:
Fiscal Quarter Ended
------------------------------
June 5, 1999 May 22, 1998
------------ ------------
(In millions)
Revenues:
Food processing operations $ 43.0 $ 12.1
Restaurant operations 25.9 21.5
Ham curing operations 1.5 1.3
------------ ------------
Total $ 70.4 $ 34.9
------------ ------------
Cost of goods sold:
Food processing operations $ 25.4 $ 11.0
Restaurant operations 8.9 7.6
Ham curing operations 1.3 1.3
------------ ------------
Total $ 35.6 $ 19.9
------------ ------------
Restaurant operating expenses $ 12.3 $ 9.7
Selling, general and administrative 14.6 2.9
Depreciation and amortization 2.5 1.1
------------ ------------
Operating income 5.4 1.3
------------ ------------
Other expense 4.0 0.8
------------ ------------
Earnings before income taxes 1.4 .5
Income tax provision .6 .2
============ ============
Net earnings $ .8 $ .3
============ ============
Revenues. Revenues increased by $35.5 million, or 101.7%, comprised of a
$30.9 million (255.4%) increase in the food processing segment, a $4.4 million
(20.5%) increase in the restaurant segment and a $.1 million (11.5%) increase in
the ham curing segment. The increase in food processing revenues was due to the
inclusion of Pierre revenues since its acquisition on June 9, 1998. The increase
in restaurant revenues was due to the opening of two new Sagebrush restaurants,
conversion of three of the Company's existing buffet restaurants to
8
<PAGE> 11
the Sagebrush concept, conversion of three of the Company's franchisees to
Company-owned Sagebrush restaurants and the conversion of one unaffiliated
restaurant to the Sagebrush concept, all of which were opened after the end of
the fiscal quarter ended May 22, 1998. In addition, the Company opened one new
Sagebrush restaurant and converted four of its existing buffet restaurants to
the Sagebrush concept during the fiscal quarter ended May 22, 1998, thus a full
quarter of revenues were not included in the results of the fiscal quarter ended
May 22, 1998.
Cost of goods sold. Cost of goods sold increased by $15.6 million, or
78.5%, due to an increase in such costs in the food processing and restaurant
segments. Cost of goods sold in the food processing segment increased by $14.4
million (130.5%) due to the inclusion of Pierre costs of goods sold since its
acquisition on June 9, 1998. As a percentage of food processing revenues, cost
of goods sold in the food processing segment decreased from 91.0% to 59.0%. The
decrease is attributed to the Company's acquisition of Pierre, which has
historically realized a higher gross margin percentage than the Company's prior
food processing operations. Cost of goods sold in the restaurant segment
increased by $1.2 million (16.3%) due to the opening of nine restaurants after,
and five restaurants during, the fiscal quarter ended May 22, 1998,
respectively. As a percentage of restaurant revenues, cost of goods sold
decreased from 35.5% to 34.2% due to the effects of a new menu, which was
introduced, in late fiscal 1999.
Restaurant operating expenses. Restaurant operating expenses increased by
$2.6 million, or 27.4% due to the opening of nine restaurants after, and five
restaurants during, the fiscal quarter ended May 22, 1998. As a percentage of
restaurant revenues, restaurant operating expenses increased from 44.9% to 47.5%
due to the costs associated with an increased emphasis on training and
supervision throughout all restaurant concepts.
Selling, general and administrative. Selling, general and administrative
expenses increased by $11.7 million (401.6%) and, as a percentage of operating
revenues, increased from 8.3% to 20.8%, due to the following factors: (1)
incremental costs associated with the June 1998 Pierre acquisition, specifically
selling, distribution, personnel and facilities costs in Cincinnati; and (2)
costs related to the administration of additional restaurants in the fiscal
quarter ended June 5, 1999.
Depreciation and amortization. Depreciation and amortization increased by
$1.3 million (117.1%) due to the acquisition of Pierre in June 1998 and the
opening of nine restaurants after, and five restaurants during, the fiscal
quarter ended May 22, 1998. As a percentage of operating revenues, depreciation
and amortization increased from 3.2% to 3.5% as a result of the additional
depreciation of fixed assets and amortization of intangible assets associated
with the Pierre acquisition as well as the additional depreciation resulting
from the opening of new restaurants during and after the fiscal quarter ended
May 22, 1998.
Operating income. Operating income increased by $4.2 million (327.1%), and
increased as a percentage of revenues from 3.7% to 7.7%, due to the reasons
stated above.
Other expense, net. Net other expense increased by $3.3 million (453.7%)
due to: (1) an increase in interest expense resulting from borrowings obtained
to finance the Pierre acquisition and the Company's recapitalization (see "--
Liquidity and Capital Resources" below); (2) disposition of certain fixtures and
equipment; and (3) a decline in rental income from rental properties.
Earnings before income taxes. Such earnings increased by approximately $.9
million (157.1%), and increased as a percentage of revenues from 1.6% to 2.0%,
for the reasons stated above.
Income tax provision. The effective tax rate for the fiscal quarter ended
June 5, 1999 was 40.4%, as compared to 37.7% for the fiscal quarter ended May
22, 1998. Such increase is due to (1) a decline in tax credits as a percentage
of income, due to a disproportionate increase in net income relative to such
credits; and (2) the effects of permanent tax differences.
Net earnings. Net earnings increased by approximately $.5 million (145.8%),
and increased as a percentage of revenues from 1.0% to 1.2%, for the reasons
stated above.
9
<PAGE> 12
Liquidity and Capital Resources
The Company's primary sources of liquidity are cash flows from operating
activities and the use of the Company's revolving credit facility. Net cash used
by operating activities was $8.1 million for the fiscal quarter ended June 5,
1999 as compared to net cash provided by operating activities of $3.8 million
for the fiscal quarter ended May 22, 1998. The decrease in net cash provided by
operating activities was primarily due to the following factors: (1) an increase
in inventories by $7.2 million due to the seasonal building of inventories,
which normally occurs during the late spring and early summer in order to
service certain of Pierre's market channels, which require heavy shipments in
the late summer and early fall; (2) a decrease in trade accounts payable and
other accrued liabilities due to the semi-annual interest payment related to the
10.75% Senior Notes Due 2006 ("Notes"); and (3) payment of income taxes accrued
as of fiscal year-end 1999 offset by increased earnings (after reflecting
noncash items) from the acquisition of Pierre and the opening of nine
restaurants after, and five restaurants during, the fiscal quarter ended May 22,
1998.
Cash flows used by investing activities were approximately $.7 million for
the fiscal quarter ended June 5, 1999, as compared to $4.7 million for the
fiscal quarter ended May 22, 1998. The primary components of net cash used in
investing activities for the fiscal quarter ended June 5, 1999, were capital
expenditures for the food processing segment. The decrease in net cash used in
investing activities was due to capital expenditures relating to the opening of
five new restaurants in the fiscal quarter ended May 22, 1998, which did not
reoccur in the fiscal quarter ended June 5, 1999.
Cash flows provided by financing activities were $8.9 million for the
fiscal quarter ended June 6, 1999, as compared to $.5 million for the fiscal
quarter ended May 22, 1998. The major component of financing activities in the
fiscal quarter ended June 5, 1999 was borrowings under the revolving credit
facility, which was used primarily to fund (1) the seasonal increase in
inventories in the food processing segment related to the acquisition of Pierre;
and (2) the semi-annual interest payment on the Notes.
As of June 5, 1999, the Company had a $75.0 million revolving credit
facility with a syndicate of four banks. This facility is a five-year revolving
line of credit (expiring June 9, 2003) under which the Company may borrow up to
an amount (including standby letters of credit up to $2.5 million) equal to the
lesser of $75.0 million or a borrowing base (comprised of eligible accounts
receivable, inventory, machinery and real property). Funds available under the
facility may be used for working capital requirements, permitted acquisitions,
permitted investments and general corporate purposes. Borrowings under the
facility will bear interest at floating rates based upon he interest rate option
selected from time to time by the Company.
As of June 5, 1999, the Company had approximately $33.9 million in
outstanding borrowings under the revolving credit facility and approximately
$19.3 million of additional availability. The outstanding borrowings under the
revolving credit facility were used to finance part of the Pierre acquisition,
restaurant conversions and construction and working capital needs of all
business segments. These borrowings are classified as long-term debt on the
balance sheet.
The Company anticipates that for its foreseeable future, its cash
requirements, including working capital, capital expenditures and required
principal and interest payments under financing arrangements, will be met
through a combination of funds provided by operations and borrowings under the
revolving credit facility. In addition, from time to time the Company expects to
continue its practice of acquiring equipment with the proceeds of capital or
operating leases as permitted under such facility.
The Company has budgeted approximately $4.5 million for capital
expenditures for the remainder of its current fiscal year. These expenditures
are being devoted to (1) routine restaurant equipment and building upgrading and
maintenance, (2) routine capital improvement projects in the food processing
segment and (3) other miscellaneous expenditures. The Company believes that
funds from operations and funds from existing credit
10
<PAGE> 13
agreements, as well as the Company's ability to enter into capital or operating
leases, will be adequate to finance these capital expenditures.
As discussed in the Annual Report for the fiscal year ended March 6, 1999,
the Company's major market risk exposure is potential loss arising from changing
interest rates and its impact on long-term debt. The Company's policy is to
manage interest rate risk by maintaining a combination of fixed and variable
rate financial instruments in amounts and with maturities that management
considers appropriate. The risks associated with long-term debt at June 5, 1999
have not changed materially since March 6, 1999. Of long-term debt outstanding
at June 5, 1999, $35.9 million principal amount was accruing interest at a
variable rate. A rise in prevailing interest rates could have adverse effects on
the Company's financial condition and results of operations.
Engagement of Investment Banking Firm
The Company has engaged Bowles Hollowell Conner & Co., a division of First
Union Capital Markets Corp., to pursue strategic alternatives to enhance the
market price of the Company's common stock.
Seasonality
The Company considers its restaurant operations to be somewhat seasonal in
nature, with stronger sales during the Christmas season and spring, weaker sales
during the mid-summer and late winter. Except for sales to school districts,
which decline during the early spring and summer and early January, there is no
significant seasonal variation in the Company's sales of food products.
Inflation
The Company believes that inflation has not had a material impact on its
results of operations for any of the periods reported herein.
"Year 2000" Issues
The "Year 2000" problem arose because many existing computer programs use
only the last two digits to refer to a year. If not addressed, computer programs
that are date-sensitive may not have the ability to properly recognize dates in
the year 2000 and beyond. The result could be a temporary disruption of
operations and the processing of transactions.
The Company developed a four-phase approach to addressing this problem.
Phase 1 was an analysis to identify the impact and costs relating to year 2000,
both in computer information systems and other equipment. Phase 2 was the
creation of a comprehensive plan to address and fix any problems identified.
Phase 3 is the implementation of the comprehensive plan. In Phase 4, the Company
is to address any unforeseen complications or issues not previously addressed.
The Company has completed Phase 1 and Phase 2.
Phase 3, relating to the Company's systems, both information technology and
non-information technology, was substantially complete at the end of calendar
year 1998, with most of the systems Year 2000 compliant. Testing of compliance
is continuing. Additionally, as part of Phase 3, the Company has sent Year 2000
questionnaires to vendors and other entities with which the Company conducts
business in order to assess whether they are Year 2000 compliant or have
adequately addressed their system conversion requirements. More than two-thirds
of all vendors and other entities and substantially all major vendors and other
entities receiving questionnaires from the Company have responded. The vast
majority of vendors and other entities responding have done so by offering
assurances that they are either currently Year 2000 compliant or have a plan in
place to be Year 2000 compliant in a timely manner. The Company plans to
validate readiness responses for its key relationships as it assesses its
contingency planning requirements. For those vendors that have responded with
11
<PAGE> 14
substandard assurance, the Company is seeking alternative sources of supply. The
Company has sent out a second inquiry to those vendors and other entities that
had not responded to the initial mailing.
The Company cannot predict how many, if any, of the responses it receives
may prove later to be inaccurate or overly optimistic. The Company is continuing
to develop contingency plans, which are based on its actual testing experience
and an assessment of outside risks, to address unanticipated interruptions or
down time in both the Company's and third parties' systems and services. The
costs to implement the Company's plan through June 5, 1999 were $254,635 and are
being expensed as incurred. The estimated cost to complete Phase 3 is $115,000.
These costs exclude the costs of purchasing Year 2000 compliant computer
programs that would have been purchased in the ordinary course of business
regardless of Year 2000 concerns. As of June 5, 1999, the Company is on schedule
to complete Phase 3 by September 30, 1999.
The Company is continuing to closely monitor adherence to the
implementation plan and is currently satisfied that it will be completed in the
scheduled time frame. If, however, the Company encounters unforeseen
complications or issues not previously addressed in the comprehensive plan
(Phase 4), then additional resources would be committed to complete the
necessary conversions in the required time frame. The most reasonably likely
worst case Year 2000 scenario facing the Company's food processing business is
that production would be interrupted and distribution of products to customers
would be delayed, resulting in revenue and profit losses until the problems
could be corrected. The most reasonably likely worst case scenario relative to
the restaurant business is the failure to capture individual restaurant revenues
and other information electronically. The Company does not expect these events
to occur and thus has no plans for handling them (other than being aware that
data can be captured and accounted for temporarily by non-electronic means).
Since the Company has no reason to believe that it will need to use additional
(Phase 4) resources, no estimate as to their cost has been made at this time.
New Accounting Pronouncement
In June 1998, Statement of Financial Accounting Standards ("SFAS") No.133,
"Accounting for Derivative Instruments and Hedging Activities," was issued. SFAS
No. 133 requires that an entity recognize all derivatives as either assets or
liabilities in the balance sheet and measure those instruments at fair value.
The Company will be required to adopt this new Statement for the fiscal year
ending March 2, 2002. Management is currently evaluating the impact of this
Statement.
Cautionary Statement As To Forward Looking Information
Statements contained in this report as to the Company's outlook for sales,
operations, capital expenditures and other amounts, including budgeted amounts
and projections of future financial or economic performance of the Company, and
statements of the Company's plans and objectives for future operations, are
"forward looking" statements provided in reliance upon the "safe harbor"
provisions of the Private Securities Litigation Reform Act of 1995. Important
factors that could cause actual results or events to differ materially from
those projected, estimated, assumed or anticipated in any such forward looking
statements include, among others, the substantial leverage of the Company,
restrictions to be imposed on the Company by the terms of its Bank Facility and
Senior Notes, risks relating to the Company's ability to execute its business
strategy following the Pierre acquisition, competitive considerations,
government regulation and general risks of the food industry, the possibility of
adverse changes in food costs, the availability of supplies, the Company's
dependence on key personnel, potential labor disruptions and "Year 2000" issues.
See also Exhibit 99.1 to the Company's 10-K for the fiscal year ended March 6,
1999.
12
<PAGE> 15
PART II. OTHER INFORMATION
Item 6 - Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit No. Description Page No.
----------- ----------- --------
27 Financial Data Schedule 16
(b) Reports on Form 8-K
None.
13
<PAGE> 16
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
FRESH FOODS, INC.
Date July 20, 1999 By: /s/ James C. Richardson, Jr.
------------- --------------------------------------
James C. Richardson, Jr.
(Chief Executive Officer)
Date July 20, 1999 By: /s/ James E. Harris
------------- --------------------------------------
James E. Harris
(Principal Financial Officer)
14
<PAGE> 17
Index to Exhibits
For inclusion in Quarterly Report on Form 10-Q Quarter Ended June 5, 1999
Exhibit No. Page No.
- ----------- --------
27 Financial Data Schedule 16
15
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE FISCAL
2000 1ST QUARTER 10-Q FOR FRESH FOODS, INC. AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH 10-Q.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAR-04-2000
<PERIOD-START> MAR-07-1999
<PERIOD-END> JUN-05-1999
<CASH> 1,688,686
<SECURITIES> 0
<RECEIVABLES> 16,516,050
<ALLOWANCES> 201,190
<INVENTORY> 37,603,762
<CURRENT-ASSETS> 60,514,453
<PP&E> 106,417,563
<DEPRECIATION> 31,923,643
<TOTAL-ASSETS> 220,147,420
<CURRENT-LIABILITIES> 21,008,623
<BONDS> 155,834,771
0
0
<COMMON> 5,809,674
<OTHER-SE> 36,252,473
<TOTAL-LIABILITY-AND-EQUITY> 220,147,420
<SALES> 70,376,609
<TOTAL-REVENUES> 70,376,609
<CGS> 35,578,463
<TOTAL-COSTS> 47,881,685
<OTHER-EXPENSES> 2,445,740
<LOSS-PROVISION> 51,068
<INTEREST-EXPENSE> 3,849,205
<INCOME-PRETAX> 1,398,855
<INCOME-TAX> 565,540
<INCOME-CONTINUING> 833,315
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 833,315
<EPS-BASIC> .14
<EPS-DILUTED> .14
</TABLE>
