<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 September 2, 2000
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
PIERRE 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.)
9990 PRINCETON ROAD
CINCINNATI, OHIO 45246
(Address of principal executive offices) (zip code)
Registrant's telephone number, including area code: (513) 874-8741
FRESH FOODS, INC.
(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 date.
Class Outstanding at October 1, 2000
----- ------------------------------
COMMON STOCK, NO PAR VALUE 5,781,480
<PAGE> 2
PIERRE FOODS, INC.
INDEX
Page No.
--------
PART I. FINANCIAL INFORMATION:
Item 1. Financial Statements
Consolidated Balance Sheets -
September 2, 2000 and March 4, 2000............................... 1 - 2
Consolidated Statements of
Operations and Retained Earnings -
Thirteen Weeks Ended September 2, 2000
and Thirteen Weeks Ended September 4, 1999........................ 3 - 4
Consolidated Statements of
Operations and Retained Earnings -
Twenty-Six Weeks Ended September 2, 2000
and Twenty-Six Weeks Ended September 4, 1999...................... 5 - 6
Consolidated Statements of Cash Flows -
Twenty-Six Weeks Ended September 2, 2000 and
Twenty-Six Weeks Ended September 4, 1999.......................... 7 - 8
Notes to Consolidated Financial
Statements........................................................ 9 - 11
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of Operations........... 12 - 16
PART II. OTHER INFORMATION:
Item 6. Exhibits and Reports on Form 8-K........................... 17
Signatures........................................................ 18
Index to Exhibits................................................. 19 - 23
<PAGE> 3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PIERRE FOODS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
(Unaudited)
ASSETS September 2, 2000 March 4, 2000
----------------- -------------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 233,065 $ 2,701,464
Accounts receivable, net (includes related party receivables
of $203,880 and $292,990 at September 2, 2000 and March 4,
2000, respectively) 17,887,119 17,422,811
Notes receivable - current, net (includes related party notes
receivable of $152,456 at March 4, 2000) 84,561 238,513
Inventories 32,180,158 25,025,421
Refundable income taxes 3,814,248 2,828,156
Deferred income taxes 1,527,278 2,290,361
Prepaid expenses and other current assets (includes related
party prepaid expenses of $345,006 at September 2, 2000) 1,416,225 799,582
------------ ------------
Total current assets 57,142,654 51,306,308
------------ ------------
PROPERTY, PLANT AND EQUIPMENT, NET 34,985,331 35,784,819
------------ ------------
OTHER ASSETS:
Trade name, net 41,025,636 41,764,636
Excess of cost over fair value of net assets of businesses
acquired, net 28,382,419 28,893,723
Other intangible assets, net 2,460,403 2,556,936
Notes receivable - related party 705,493 705,493
Deferred loan origination fees, net 2,881,445 3,714,748
------------ ------------
Total other assets 75,455,396 77,635,536
------------ ------------
Total Assets $167,583,381 $164,726,663
============ ============
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
<PAGE> 4
PIERRE FOODS, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
(Unaudited)
LIABILITIES AND SHAREHOLDERS' EQUITY September 2, 2000 March 4, 2000
----------------- -------------
<S> <C> <C>
CURRENT LIABILITIES:
Current installments of long-term debt $ 197,452 $ 314,433
Trade accounts payable 3,655,851 5,493,168
Accrued insurance 6,131 154,947
Accrued interest 3,188,025 3,213,929
Accrued payroll and payroll taxes 2,989,447 2,427,691
Accrued promotions (includes related party payables of $32,483
and $51,450 at September 2, 2000 and March 4, 2000,
respectively) 2,259,831 1,903,241
Accrued taxes (other than income and payroll) 427,178 563,879
Other accrued liabilities 624,193 831,681
------------- -------------
Total current liabilities 13,348,108 14,902,969
------------- -------------
LONG TERM DEBT, less current installments 124,128,139 115,164,922
------------- -------------
OTHER LONG-TERM LIABILITIES 1,495,785 1,638,466
------------- -------------
DEFERRED INCOME TAXES -- 1,487,134
------------- -------------
SHAREHOLDERS' EQUITY:
Preferred stock - par value $.10, authorized 2,500,000 shares;
no shares issued -- --
Common stock - no par value, authorized 100,000,000 shares;
issued and outstanding September 2, 2000 - 5,781,480 shares
and March 4, 2000 - 5,781,000 shares 5,781,480 5,781,000
Additional paid in capital 23,317,053 23,315,881
Retained earnings 4,512,816 7,436,291
Note receivable - related party (5,000,000) (5,000,000)
------------- -------------
Total shareholders' equity 28,611,349 31,533,172
------------- -------------
Total Liabilities and Shareholders' Equity $ 167,583,381 $ 164,726,663
============= =============
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
2
<PAGE> 5
PIERRE FOODS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND RETAINED EARNINGS
(Unaudited)
<TABLE>
<CAPTION>
Thirteen Weeks Ended
--------------------
September 2, 2000 September 4, 1999
----------------- -----------------
<S> <C> <C>
REVENUES:
Food processing $ 48,734,129 $ 40,964,363
Ham curing -- 655,680
------------ ------------
Total operating revenues 48,734,129 41,620,043
------------ ------------
COSTS AND EXPENSES:
Cost of goods sold 31,072,676 24,176,211
Selling, general and administrative expenses (includes related
party transactions totaling $464,166 and $949,760 in fiscal
2001 and fiscal 2000, respectively) 14,356,617 14,060,158
Net loss on sale of Mom `n' Pop's Country Ham, LLC -- 2,826,096
Net loss of disposition of property, plant and equipment 22,505 32,740
Depreciation and amortization 1,560,934 1,561,512
------------ ------------
Total costs and expenses 47,012,732 42,656,717
------------ ------------
OPERATING INCOME (LOSS) 1,721,397 (1,036,674)
------------ ------------
OTHER INCOME (EXPENSE):
Interest expense (3,398,530) (4,100,077)
Other income, net - (including interest) (includes related party
income totaling $17,981 and $26,828 in fiscal 2001 and fiscal
2000, respectively) 73,860 39,299
------------ ------------
Other expense, net (3,324,670) (4,060,778)
------------ ------------
LOSS FROM CONTINUING OPERATIONS BEFORE INCOME
TAX BENEFIT (1,603,273) (5,097,452)
INCOME TAX BENEFIT 580,387 2,063,659
------------ ------------
LOSS FROM CONTINUING OPERATIONS (1,022,886) (3,033,793)
INCOME FROM DISCONTINUED RESTAURANT SEGMENT
(NET OF INCOME TAXES OF $876,256) -- 1,287,338
------------ ------------
LOSS BEFORE EXTRAORDINARY ITEM (1,022,886) (1,746,455)
EXTRAORDINARY LOSS ON EARLY EXTINGUISHMENT OF
DEBT (NET OF INCOME TAX BENEFIT OF $35,633) -- (52,350)
------------ ------------
NET LOSS $ (1,022,886) $ (1,798,805)
============ ============
</TABLE>
3
<PAGE> 6
<TABLE>
<S> <C> <C>
RETAINED EARNINGS:
Balance at beginning of period $ 5,535,702 $ 12,926,430
Net loss (1,022,886) (1,798,805)
----------- --------------
Balance at end of period $ 4,512,816 $ 11,127,625
=========== ==============
NET LOSS PER COMMON SHARE - BASIC AND DILUTED
Loss from continuing operations $ (0.18) $ (0.52)
Income from discontinued restaurant segment -- 0.22
Extraordinary loss on early extinguishment of debt -- (0.01)
----------- --------------
Net loss per share $ (0.18) $ (0.31)
=========== ==============
WEIGHTED AVERAGE SHARES OUTSTANDING - BASIC AND
DILUTED 5,781,437 5,809,837
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
4
<PAGE> 7
PIERRE FOODS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND RETAINED EARNINGS
(Unaudited)
<TABLE>
<CAPTION>
Twenty-Six Weeks Ended
----------------------
September 2, 2000 September 4, 1999
----------------- -----------------
<S> <C> <C>
REVENUES:
Food processing $ 94,680,882 $ 83,978,713
Ham curing -- 2,096,052
------------ ------------
Total operating revenues 94,680,882 86,074,765
------------ ------------
COSTS AND EXPENSES:
Cost of goods sold (includes related party transactions totaling
$34,322 in fiscal 2000) 60,330,355 50,374,854
Selling, general and administrative expenses (includes related
party transactions totaling $829,446 and $1,602,923 in fiscal
2001 and fiscal 2000, respectively) 28,543,519 27,574,524
Net loss on sale of Mom `n' Pop's Country Ham, LLC -- 2,826,096
Net loss of disposition of property, plant and equipment 22,505 32,740
Depreciation and amortization 3,126,505 3,072,941
------------ ------------
Total costs and expenses 92,022,884 83,881,155
------------ ------------
OPERATING INCOME 2,657,998 2,193,610
------------ ------------
OTHER INCOME (EXPENSE):
Interest expense (6,719,122) (7,949,282)
Other income (expense), net - (including interest) (includes
related party income totaling $35,621 and $44,990 in fiscal
2001 and fiscal 2000, respectively) 192,405 (29,954)
------------ ------------
Other expense, net (6,526,717) (7,979,236)
------------ ------------
LOSS FROM CONTINUING OPERATIONS BEFORE INCOME TAX
BENEFIT (3,868,719) (5,785,626)
INCOME TAX BENEFIT 1,400,482 2,343,365
------------ ------------
LOSS FROM CONTINUING OPERATIONS (2,468,237) (3,442,261)
INCOME FROM DISCONTINUED RESTAURANT SEGMENT (NET
OF INCOME TAXES OF $1,721,502) -- 2,529,121
------------ ------------
LOSS BEFORE EXTRAORDINARY ITEM (2,468,237) (913,140)
EXTRAORDINARY LOSS ON EARLY EXTINGUISHMENT OF
DEBT (NET OF INCOME TAX BENEFIT OF $258,303 AND
$35,633 IN FISCAL 2001 AND 2000, RESPECTIVELY) (455,238) (52,350)
------------ ------------
NET LOSS $ (2,923,475) $ (965,490)
============ ============
</TABLE>
5
<PAGE> 8
<TABLE>
<S> <C> <C>
RETAINED EARNINGS:
Balance at beginning of period $ 7,436,291 $ 12,093,115
Net loss (2,923,475) (965,490)
-------------- --------------
Balance at end of period $ 4,512,816 $ 11,127,625
============== ==============
NET LOSS PER COMMON SHARE - BASIC AND DILUTED
Loss from continuing operations $ (0.43) $ (0.59)
Income from discontinued restaurant segment -- 0.43
Extraordinary loss on early extinguishment of debt (0.08) (0.01)
-------------- --------------
Net loss per share $ (0.51) $ (0.17)
============== ==============
WEIGHTED AVERAGE SHARES OUTSTANDING - BASIC AND
DILUTED 5,781,309 5,809,205
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
6
<PAGE> 9
PIERRE FOODS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Twenty-Six Weeks Ended
--------------------------------------
September 2, 2000 September 4, 1999
----------------- -----------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (2,923,475) $ (965,490)
------------ ------------
Adjustments to reconcile net loss to net cash used in operating
activities:
Extraordinary loss on early extinguishment of debt before income
tax benefit 713,541 87,983
Depreciation and amortization 3,126,505 4,946,238
Depreciation on properties leased to others -- 68,125
Deferred income taxes (724,051) 32,350
Net loss on sale of Mom `n' Pop's Country Ham, LLC -- 2,826,096
Net loss on disposition of property, plant and equipment 22,505 32,740
Decrease in other long-term liabilities (142,681) --
Other non-cash adjustments to earnings 206,406 212,059
Changes in operating assets and liabilities:
Receivables (464,308) (413,567)
Inventories (7,154,737) (10,952,317)
Refundable income taxes, prepaid expenses and other
current assets (1,602,735) (3,638,315)
Trade accounts payable and other accrued liabilities (1,437,880) (6,024,775)
------------ ------------
Total adjustments (7,457,435) (12,823,383)
------------ ------------
Net cash used in operating activities (10,380,910) (13,788,873)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sales of property, plant and equipment -- 2,085,657
Decrease in related party notes receivables 152,456 111,189
Decrease in other notes receivable 1,496 134,824
Capital expenditures to related parties -- (316,233)
Capital expenditures - other (1,002,685) (2,169,102)
Payments for non-compete and consulting agreements -- (490,178)
Other investing activities, net -- 9,158
------------ ------------
Net cash used in investing activities (848,733) (634,685)
------------ ------------
</TABLE>
7
<PAGE> 10
<TABLE>
<S> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES
Net borrowings under revolving credit agreement 9,007,674 16,907,910
Principal payments on long-term debt (161,438) (2,262,428)
Loan origination fees (84,992) (77,425)
Proceeds from issuance of common stock -- 6,500
----------- ------------
Net cash provided by financing activities 8,761,244 14,574,557
----------- ------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (2,468,399) 150,999
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 2,701,464 1,664,398
----------- ------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 233,065 $ 1,815,397
=========== ============
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
8
<PAGE> 11
PIERRE FOODS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. BASIS OF PRESENTATION
In the opinion of the Company, the accompanying unaudited consolidated
financial statements contain all adjustments necessary to present fairly the
financial position as of September 2, 2000 and March 4, 2000, the results of
operations for the thirteen weeks and twenty-six weeks ended September 2, 2000
and September 4, 1999, and the cash flows for the twenty-six weeks ended
September 2, 2000 and September 4, 1999. Financial statements for the period
ended September 4, 1999 ("fiscal 2000") have been reclassified, where
applicable, to conform to financial statement presentation used for the period
ended September 2, 2000 ("fiscal 2001").
The Company reports the results of its operations using a 52-53 week
basis. In line with this, each quarter of the fiscal year will contain 13 weeks
except for the infrequent fiscal years with 53 weeks.
The results of operations for the thirteen weeks and twenty-six weeks
ended September 2, 2000 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 4, 2000
audited consolidated financial statements and notes thereto.
2. INVENTORY
A summary of inventories, by major classifications, follows:
September 2, 2000 March 4, 2000
--------------------- -----------------------
Manufacturing supplies $ 2,813,470 $ 1,149,107
Raw materials 2,868,074 3,857,801
Work in process 2,808 -
Finished goods 26,495,806 20,018,513
--------------------- -----------------------
Total $ 32,180,158 $ 25,025,421
===================== =======================
3. SUPPLEMENTAL CASH FLOW DISCLOSURES - CASH PAID DURING THE PERIOD
Twenty-six Twenty-six
Weeks Ended Weeks Ended
September 2, 2000 September 4, 1999
------------------- -----------------------
Interest $ 5,911,723 $ 7,655,265
=================== =======================
Income taxes net of
refunds received $ 51,358 $ 2,614,677
=================== =======================
9
<PAGE> 12
4. COMPREHENSIVE INCOME
Total comprehensive loss was comprised solely of the net loss in fiscal
2001 and fiscal 2000. Comprehensive loss was $1,022,886 and $1,798,805 for the
quarters ended September 2, 2000 and September 4, 1999, respectively; and
$2,923,475 and $965,490 for the year to date periods ended September 2, 2000 and
September 4, 1999, respectively.
5. LONG-TERM DEBT
Effective May 30, 2000, the Company terminated its $75 million credit
facility, resulting in an extraordinary loss on early extinguishment of debt of
$455,238, net of income taxes of $258,303.
Effective May 24, 2000, the Company obtained a three-year variable rate
$25 million revolving credit facility. As of September 2, 2000, outstanding
borrowings under the revolving credit facility were approximately $9.0 million,
and additional borrowing availability was approximately $13.1 million. In
addition, at September 2, 2000, the Company was in compliance with the financial
covenants under this facility.
6. SHAREHOLDERS' EQUITY
The increases in common stock and additional paid in capital are due to
the issuance of 480 shares of the Company's common stock to employees for
longevity awards.
7. EMPLOYEE BENEFIT PLANS
Effective June 16, 2000, the Company terminated its Employee Stock
Purchase Plan. The Plan assets, comprised of the Company's common stock and
cash, totaling approximately $230,000, were distributed to Plan participants
based on their respective account balances.
Effective July 3, 2000, the Company increased the Company's matching
contribution in its 401(k) Retirement Plan from a 50% match up to the
participant's first 4% contribution to a 50% match up to the participant's first
5% contribution.
Effective August 1, 2000, the Company adopted the Pierre Foods, Inc.
Compensation Exchange Plan. The Plan is a non-qualified deferred compensation
plan in which eligible participants consist of certain highly compensated
employees and the Company's Board of Directors. As of September 2, 2000, there
were no plan assets.
8. RECENTLY ISSUED ACCOUNTING GUIDANCE
In June 1998, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities."
SFAS No. 133 establishes accounting and reporting standards for derivative
financial instruments, including certain derivative instruments embedded in
other contracts (collectively referred to as embedded derivatives) and for
hedging activities. The new standard requires an entity to recognize all
derivatives as either assets or liabilities in the statement of financial
position and measure those instruments at fair value. SFAS No. 133 was amended
by SFAS No. 137, "Accounting for Derivative Instruments and Hedging Activities -
Deferral of the Effective Date of FASB Statement No. 133," which delays the
Company's effective date until the first quarter of the fiscal year ending March
2, 2002. Management is currently evaluating the effects of SFAS No. 133 on the
Company's financial statements and current disclosures.
10
<PAGE> 13
In June 2000, the Securities and Exchange Commission ("SEC") issued
Staff Accounting Bulletin No. 101 ("SAB 101"), "Revenue Recognition in Financial
Statements." SAB 101 provides the SEC staff's views in applying generally
accepted accounting principles to selected revenue recognition issues. The
Company must implement any applicable provisions of SAB 101 no later than the
fourth quarter of the fiscal year ending March 3, 2001. Management is currently
evaluating the effects of SAB 101 on the Company's financial statements and
current disclosures.
11
<PAGE> 14
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
The Company's operations historically have been classified into three
business segments: food processing operations, restaurant operations and ham
curing operations. As discussed in the Company's Annual Report on Form 10-K for
the fiscal year ended March 4, 2000, the Company sold its ham curing business
effective July 3, 1999, and sold its restaurant operations effective October 8,
1999. Accordingly, the results of the restaurant operations are presented as a
discontinued operation in fiscal 2000, and are excluded from the information
below. The ham curing operations did not qualify for discontinued operations
presentation. Subsequent to the sales of the restaurant operations and ham
curing operations, the Company's operations consist solely of food processing.
Fiscal Quarter Ended September 2, 2000 Compared to Fiscal Quarter Ended
September 4, 1999
Revenues. Revenues from continuing operations increased by $7.1
million, or 17.1%, comprised of a $7.8 million (19.0%) increase in the food
processing segment offset by a $.7 million decrease in the ham curing segment.
The increase in food processing revenues was due to increases in demand in all
core customer channels. The decrease in ham curing revenues was due to the
Company's strategic decision to exit the ham curing business, which was
effective July 3, 1999.
Cost of goods sold. Cost of goods sold increased by $6.9 million, or
28.5%, comprised of a $7.5 million (31.7%) increase in the food processing
segment offset by a $.6 million decrease in the ham curing segment. As a
percentage of food processing revenues, food processing cost of goods sold
increased from 58.1% to 63.8%. This increase primarily is due to increased
demand for product categories with lower margins, and costs incurred due to
change in product mix. The decrease in ham curing cost of goods sold was due to
the Company's strategic decision to exit the ham curing business, effective July
3, 1999.
Selling, general and administrative. Selling, general and
administrative expenses increased by $.3 million (2.1%), comprised of a $.6
million (4.1%) increase in the food processing segment offset by a $.3 million
decrease in the ham curing segment. The increase is primarily due to increased
selling expenses due to increased sales and the introduction of new products,
offset by a decrease in overhead costs following the divestitures of the
restaurant operations and ham curing business and subsequent corporate
restructuring in fiscal 2000. As a percentage of operating revenues, selling,
general and administrative expenses decreased from 33.8% to 29.5%.
Depreciation and amortization. Depreciation and amortization expense
remained constant at $1.6 million, comprised of a $26,000 increase in the food
processing segment offset by a $26,000 decrease in the ham curing segment. The
increase in the food processing segment is due to routine capital expenditures.
The decrease in ham curing depreciation and amortization was due to the
Company's strategic decision to exit the ham curing business. As a percentage of
operating revenues, depreciation and amortization decreased from 3.8% to 3.2%.
Other expense, net. Other expense, net decreased by $.7 million, or
18.1%. This decrease primarily was due to a decrease in interest expense due to
decreased borrowings under the Company's revolving credit facility (see ---
"Liquidity and Capital Resources" below).
Income tax benefit. The effective tax rate for the fiscal quarter ended
September 2, 2000 was 36.2%, compared to 40.5% for the fiscal quarter ended
September 4, 1999. The lower rate in the fiscal quarter ended September 2, 2000
is due to 1) state tax liabilities incurred in fiscal 2000 related to income
from discontinued operations; and 2) the effects of permanent timing
differences.
12
<PAGE> 15
Fiscal Year to Date Ended September 2, 2000 Compared to Fiscal Year to Date
Ended September 4, 1999
Revenues. Revenues from continuing operations increased by $8.6
million, or 10.0%, comprised of a $10.7 million (12.7%) increase in the food
processing segment offset by a $2.1 million decrease in the ham curing segment.
The increase in food processing revenues was due to increases in demand in all
core customer channels. The decrease in ham curing revenues was due to the
Company's strategic decision to exit the ham curing business, which was
effective July 3, 1999.
Cost of goods sold. Cost of goods sold increased by $10.0 million, or
19.8%, comprised of a $11.9 million (24.5%) increase in the food processing
segment offset by a $1.9 million decrease in the ham curing segment. As a
percentage of food processing revenues, food processing cost of goods sold
increased from 57.7% to 63.7%. This increase primarily is due to 1) increased
demand for product categories with lower margins; 2) costs incurred due to
change in product mix; and 3) training costs incurred to create additional
required capacity for future expected growth. The decrease in ham curing cost of
goods sold was due to the Company's strategic decision to exit the ham curing
business, effective July 3, 1999.
Selling, general and administrative. Selling, general and
administrative expenses increased by $1.0 million, or 3.5%, comprised of a $1.3
million (4.8%) increase in the food processing segment offset by a $.3 million
decrease in the ham curing segment. The increase in the food processing segment
was primarily due to 1) increased selling expenses due to increased sales and
the introduction of new products; and 2) increased distribution costs due to
fuel surcharges; offset by 3) a decrease in overhead costs following the
divestitures of the restaurant operations and ham curing business and subsequent
corporate restructuring in fiscal 2000. The decrease in ham curing selling,
general and administrative expenses was due to the Company's strategic decision
to exit the ham curing business, effective July 3, 1999. As a percentage of
operating revenues, selling, general and administrative expenses decreased from
32.0% to 30.1%.
Depreciation and amortization. Depreciation and amortization expense
increased by $.1 million, or 1.7%, comprised of a $.2 million (5.0%) increase in
the food processing segment offset by a $.1 million decrease in the ham curing
segment. The increase in the food processing segment is due to routine capital
expenditures. The decrease in ham curing depreciation and amortization was due
to the Company's strategic decision to exit the ham curing business. As a
percentage of operating revenues, depreciation and amortization decreased from
3.6% to 3.3%.
Other expense, net. Other expense, net decreased by $1.5 million, or
18.2%. This decrease primarily was due to a decrease in interest expense due to
decreased borrowings under the Company's revolving credit facility (see ---
"Liquidity and Capital Resources" below).
Income tax benefit. The effective tax rate for the fiscal year to date
ended September 2, 2000 was 36.2%, compared to 40.5% for the fiscal year to date
ended September 4, 1999. The lower rate in the fiscal year to date ended
September 2, 2000 is due to 1) state tax liabilities incurred in fiscal 2000
related to income from discontinued operations; and 2) the effects of permanent
timing differences.
13
<PAGE> 16
LIQUIDITY AND CAPITAL RESOURCES
Net cash used by operating activities was $10.4 million for the fiscal
year to date ended September 2, 2000, as compared to $13.8 million for the
fiscal year to date ended September 4, 1999. The primary components of net cash
used in operating activities for the fiscal year to date ended September 2, 2000
were: 1) an increase in inventory of $7.2 million due to the seasonal building
of inventories which normally occurs during late spring and early summer to
service certain market channels that require heavy shipments in late summer and
early fall; 2) an increase in refundable income taxes of $1.0 million, combined
with a decrease in deferred income tax assets of $.8 million and a decrease in
deferred income tax liabilities of $1.5 million; and 3) an increase in prepaid
and other current assets of $.6 million combined with a decrease in trade
accounts payable and other accrued liabilities of $1.4 million due to timing of
certain payments. The decrease in net cash used by operating activities
primarily was due to a more significant inventory build in the fiscal year to
date ended September 4, 1999 compared to the fiscal year to date ended September
2, 2000.
Net cash used by investing activities was $.8 million for the fiscal
year to date ended September 2, 2000, compared to $.6 million for the fiscal
year to date ended September 4, 1999. The primary components of net cash used in
investing activities for the fiscal year to date ended September 2, 2000 were
capital expenditures of $1.0 million, offset by the payment in full of a related
party note receivable of $.2 million.
Net cash provided by financing activities was $8.8 million for the
fiscal year to date ended September 2, 2000, compared to $14.6 million for the
fiscal year to date ended September 4, 1999. The decrease in cash provided by
financing activities was due to borrowings under the revolving credit facility
in fiscal 2000 which did not recur in fiscal 2001 at the same level.
Effective May 24, 2000, the Company secured a three-year $25 million
revolving credit facility, under which the Company may borrow up to an amount
(including standby letters of credit up to $.5 million) equal to the lesser of
$25 million less required minimum availability or a borrowing base (comprised of
eligible accounts receivable and inventory). Funds available under the facility
are available for working capital requirements, permitted investments and
general corporate purposes. Borrowings under the facility bear interest at
floating rates based upon the interest rate option selected from time to time by
the Company, and are secured by a first priority security interest in
substantially all of the accounts receivable and inventory of the Company. In
addition, the Company is required to meet certain financial covenants regarding
net worth, cash flow and restricted payments, including limited dividend
payments.
At September 2, 2000, the Company had outstanding borrowings of $9.0
million under the revolving credit facility, and approximately $13.1 million of
additional borrowing availability. At September 2, 2000, the Company was in
compliance with the financial covenants under the facility, but continued
compliance will depend upon future cash flows and net income.
The Company has budgeted approximately $2.0 million for capital
expenditures for the remainder of the current fiscal year. These expenditures
are devoted to routine capital improvement projects and other miscellaneous
expenditures and should be sufficient to maintain current operating capacity.
The Company believes that funds from operations, borrowings under the $25
million revolving credit facility, as well as the Company's ability to enter
into capital or operating leases, will be adequate to finance these capital
expenditures. If the Company continues its historical revenue growth trend as
expected, then the Company will be required to raise and invest additional
capital for various plant expansion projects to provide operating capacity to
satisfy increased demand. The Company believes that future cash requirements for
these plant expansion projects would need to be met through other long-term
financing sources, such as an increase in borrowing availability under the $25
million credit facility, the issuance of industrial revenue bonds or equity
investment. The incurrence of additional long-term debt is governed and
restricted by the Company's existing debt instruments. Furthermore, there can be
no assurance that additional long-term financing will be available on
advantageous terms (or any terms) when needed by the Company.
The Company anticipates continued sales growth in key market areas. As
noted above, however, this growth will require capital expansion projects to
increase existing plant capacity to satisfy increased demand. Sales growth,
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<PAGE> 17
improved operating performance and expanded plant capacity - none of which is
assured - will be necessary for the Company to continue to service existing
debt.
MARKET RISK
As discussed in its annual report for the fiscal year ended March 4,
2000, the Company is exposed to market risks stemming from changes in interest
rates, foreign exchange rates and commodity prices. Changes in these factors
could cause fluctuations in the Company's financial condition, results of
operations and cash flows. The Company owned no derivative financial instruments
or nonderivative financial instruments held for trading purposes at September 2,
2000 or March 4, 2000. Certain of the Company's outstanding nonderivative
financial instruments at September 2, 2000 are subject to interest rate risk,
but not subject to foreign currency or commodity price risk.
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
September 2, 2000 have not changed materially since March 4, 2000. At September
2, 2000, the $115 million of Senior Notes and $.1 million in capital lease
obligations were accruing interest at fixed rates, and the $9.0 million
borrowings under the revolving credit facility were accruing interest at
variable rates. In the future, should the Company continue to borrow funds under
its existing credit facility or enter into other long-term financing
arrangements, a rise in prevailing interest rates could have adverse effects on
the Company's financial condition and results of operations.
SEASONALITY
Except for sales to school districts, which decline during the early
spring and summer and early January, there is no significant seasonal variation
in sales.
INFLATION
The Company believes that inflation has not had a material impact on
its results of operations for any of the periods reported herein.
STOCK TRANSFER TO NASDAQ SMALLCAP MARKET
Subsequent to notification from the Nasdaq Stock Market ("Nasdaq") that
Nasdaq was reviewing the Company's eligibility for continued listing on the
Nasdaq National Market, the Company applied for listing on the Nasdaq SmallCap
Market tier of Nasdaq. The Company's stock was successfully transferred to the
Nasdaq SmallCap Market on August 25, 2000, and continues to trade under the
symbol "FOOD."
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 and
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<PAGE> 18
insufficient cash flows from operations of the Company, restrictions imposed on
the Company by the terms of its debt instruments, competitive considerations,
government regulation and general risks of the food industry, the possibility of
adverse changes in materials costs, the availability of supplies, the Company's
dependence on key personnel and potential labor disruptions. See Exhibit 99.1 to
the Company's Annual Report on Form 10-K for the fiscal year ended March 4,
2000.
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PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
See the Exhibit Index provided elsewhere in this report.
(b) Reports on Form 8-K
None.
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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.
PIERRE FOODS, INC.
Date October 11, 2000 By: /s/ Norbert E. Woodhams
---------------- ----------------------------------------
Norbert E. Woodhams
President and Chief Executive Officer
(Principal Executive Officer)
Date October 11, 2000 By: /s/ Pamela M. Witters
---------------- ----------------------------------------
Pamela M. Witters
Chief Financial Officer
(Principal Financial Officer)
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<PAGE> 21
INDEX TO EXHIBITS
For inclusion in Quarterly Report on Form 10-Q Quarter Ended September 2, 2000
Exhibit No. Description
----------- -----------
2.1 Purchase Agreement dated as of August 6, 1999, among Mom `n' Pop's
Country Ham, LLC, Pierre Foods, LLC, the Company and Hoggs, LLC
(schedules and exhibits omitted) (incorporated by reference to Exhibit
2.3 to the Company's Quarterly Report on Form 10-Q for its fiscal
quarter ended December 4, 1999)
2.2 Purchase Agreement dated as of September 10, 1999 among Claremont
Restaurant Group, LLC, Fresh Foods Sales, LLC, the Company and CRG
Holdings Corp. (incorporated by reference to Exhibit 2.4 to the
Company's Quarterly Report on Form 10-Q for its fiscal quarter ended
December 4, 1999)
2.3 Plan of Merger dated as of December 27, 1999 among Pierre Foods, LLC,
Pierre Leasing, LLC and the Company (incorporated by reference to
Exhibit 2.5 to the Company's Quarterly Report on From 10-Q for its
fiscal quarter ended December 4, 1999)
3.1 Restated Articles of Incorporation of the Company (incorporated by
reference to Exhibit 3.1 to the Company's Registration Statement on
Form S-4 (No. 333-58711))
3.2 Bylaws of the Company (incorporated by reference to Exhibit 3.4 to the
Company's Annual Report on Form 10-K for its fiscal year ended February
27, 1998)
4.1 Note Purchase Agreement, dated June 4, 1998, among the Company, the
Guarantors and the Initial Purchasers (incorporated by reference to
Exhibit 4.1 to the Company's Current Report on Form 8-K filed with the
SEC on June 24, 1998)
4.2 Indenture, dated as of June 9, 1998, among the Company, certain
Guarantors and State Street Bank and Trust Company, Trustee
(incorporated by reference to Exhibit 4.2 to the Company's Current
Report on Form 8-K filed with the SEC on June 24, 1998)
4.3 Registration Rights Agreement, dated June 9, 1998, among the Company,
certain Guarantors and certain Initial Purchasers (incorporated by
reference to Exhibit 4.3 to the Company's Current Report on Form 8-K
filed with the SEC on June 24, 1998 and incorporated herein by
reference)
4.4 Form of Initial Global Note (included as Exhibit A to Exhibit 4.2 to
the Company's Current Report on Form 8-K filed with the SEC on June 24,
1998 and incorporated herein by reference)
4.5 Form of Initial Certificated Note (included as Exhibit B to Exhibit 4.2
to the Company's Current Report on Form 8-K filed with the SEC on June
24, 1998 and incorporated herein by reference)
4.6 Form of Exchange Global Note (included as Exhibit C to Exhibit 4.2 to
the Company's Current Report on Form 8-K filed with the SEC on June 24,
1998 and incorporated herein by reference)
4.7 Form of Exchange Certificated Note (included as Exhibit D to Exhibit
4.2 to the Company's Current Report on Form 8-K filed with the SEC on
June 24, 1998 and incorporated herein by reference)
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<PAGE> 22
4.8 First Supplemental Indenture, dated as of September 5, 1998, among the
Company, State Street Bank and Trust Company, Trustee, and Pierre
Leasing, LLC (incorporated by reference to Exhibit 4.8 to Pre-Effective
amendment No. 1 to the Company's Registration Statement on Form S-4
(No. 333-58711))
4.9 Second Supplemental Indenture dated as of February 26, 1999 among the
Company, State Street Bank and Trust Company, Trustee, and Fresh Foods
Restaurant Group, LLC (incorporated by reference to Exhibit 4.9 to the
Company's Quarterly Report on Form 10-Q for its fiscal quarter ended
December 4, 1999)
4.10 Third Supplemental Indenture dated as of October 8, 1999 between the
Company and State Street Bank and Trust Company, Trustee, (incorporated
by reference to Exhibit 4.10 to the Company's Quarterly Report on Form
10-Q for its fiscal quarter ended December 4, 1999)
10.1 1987 Incentive Stock Option Plan (incorporated by reference to Exhibit
4 to the Company's Registration Statement on Form S-8 (No. 33-15017))
10.2 First Amendment to 1987 Incentive Stock Option Plan (incorporated by
reference to Exhibit 4(b) to Post-Effective Amendment No. 1 to the
Company's Registration Statement on Form S-8 (No. 33-15017))
10.3 1987 Special Stock Option Plan (restated as of May 15, 1997)
(incorporated by reference to Exhibit 99 to the Company's Registration
Statement on Form S-8 (No. 333-29111))
10.4 1997 Incentive Stock Option Plan (as amended and restated February 23,
1998) (incorporated by reference to Post-Effective Amendment No. 1 to
Exhibit 99(a) to the Company's Registration Statement on Form S-8 (No.
333-32455))
10.5 First Amendment to 1997 Incentive Stock Option Plan, dated February 23,
1998 (incorporated by reference to Exhibit 99(b) to Post-Effective
Amendment No. 1 to the Company's Registration Statement on Form S-8
(No. 333-32455))
10.6 1997 Special Stock Option Plan (as amended and restated February 23,
1998) (incorporated by reference to Exhibit 99.1 to Post-Effective
Amendment No. 1 to the Company's Registration Statement on Form S-8
(No. 333-33439))
10.7 First Amendment to 1997 Special Stock Option Plan, dated February 23,
1998 (incorporated by reference to Exhibit 99.2 to Post-Effective
Amendment No. 1 to the Company's Registration Statement on Form S-8
(No. 333-33439))
10.8 1994 Employee Stock Purchase Plan (incorporated by reference to Exhibit
4(c) to the Company's Registration Statement on Form S-8 (No.
33-79014))
10.9 Amendment to 1994 Employee Stock Purchase Plan, dated as of May 10,
1995 (incorporated by reference to Exhibit 4(b) to Post-Effective
Amendment No. 3 to the Company's Registration Statement on Form S-8
(No. 33-79014)
10.10 Second Amendment to 1994 Employee Stock Purchase Plan, dated as of
August 30, 1995 (incorporated by reference to Exhibit 4(c) to
Post-Effective Amendment No. 3 to the Company's Registration Statement
on Form S-8 (No. 33-79014)
10.11 Third Amendment to 1994 Employee Stock Purchase Plan, dated as of
February 12, 1997 (incorporated by reference to Exhibit 4(d) to
Post-Effective Amendment No. 4 to the Company's Registration Statement
on Form S-8 (No. 33-79014))
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<PAGE> 23
10.12 Employment Contract, dated as of June 30, 1996, between the Company and
David R. Clark, together with Amendment to Employment Contract, dated
as of February 23, 1998 (incorporated by reference to Exhibit 10.18 to
the Company's Registration Statement on Form S-4 (No. 333-58711))
10.13 Consulting and Non-Competition Agreement, dated as of January 29, 1998,
between the Company and Charles F. Connor, Jr. (incorporated by
reference to Exhibit 10.20 to the Company's Registration Statement on
Form S-4 (No. 333-58711))
10.14 Rights Agreement, dated as of September 2, 1997, between the Company
and American Stock Transfer & Trust Company, Rights Agent (incorporated
by reference to Exhibit 99.1 to the Company's Current Report on Form
8-K filed with the SEC on September 5, 1997)
10.15 Credit Agreement, dated as of June 9, 1998, among the Company, certain
Guarantors, First Union Commercial Corporation ("First Union"), as
Agent and a Lender, and NationsBank N.A., American National Bank and
Trust Company of Chicago and National City Commercial Finance, Inc., as
Lenders (incorporated by reference to Exhibit 99.1 to the Company's
Current Report on Form 8-K filed with the SEC on June 24, 1998)
10.16 Security Agreement, dated as of June 9, 1998, among the Company,
certain Guarantors and First Union, as Agent (incorporated by reference
to Exhibit 99.2 to the Company's Current Report on Form 8-K filed with
the SEC on June 24, 1998)
10.17 Pledge Agreement, dated as of June 9, 1998, among the Company, certain
Guarantors and First Union, as Agent (incorporated by reference to
Exhibit 99.3 to the Company's Current Report on Form 8-K filed with the
SEC on June 24, 1998)
10.18 Amendment to Credit Agreement and Consent, dated as of September 5,
1998, among the Company, certain subsidiaries of the Company, First
Union, as Agent and a Lender, and certain other Lenders (incorporated
by reference to Exhibit 10.32 to Pre-Effective Amendment No. 1 to the
Company's Registration Statement on Form S-4 (No. 333-58711)
10.19 Borrower Joinder Agreement dated as of February 26, 1999 between Fresh
Foods Restaurant Group, LLC and First Union, as Agent (schedules
omitted) (incorporated by reference to Exhibit 10.33 to the Company's
Quarterly Report on Form 10-Q for its fiscal quarter ended December 4,
1999)
10.20 Amendment No. 2 to Credit Agreement and Waiver dated as of April 14,
1999 among the Company, certain subsidiaries of the Company, First
Union, as Agent and a Lender, and certain other Lenders (incorporated
by reference to Exhibit 10.34 to the Company's Quarterly Report on Form
10-Q for its fiscal quarter ended December 4, 1999)
10.21 Amendment No. 3 to Credit Agreement dated as of May 14, 1999 among the
Company, certain subsidiaries of the Company, First Union, as Agent and
a Lender, and certain other Lenders (incorporated by reference to
Exhibit 10.35 to the Company's Quarterly Report on Form 10-Q for its
fiscal quarter ended December 4, 1999)
10.22 Consent dated as of July 29, 1999 among the Company, certain
subsidiaries of the Company, First Union, as Agent and a Lender, and
certain other Lenders (incorporated by reference to Exhibit 10.36 to
the Company's Quarterly Report on Form 10-Q for its fiscal quarter
ended December 4, 1999)
10.23 Amended and Restated Change in Control Agreement dated as of July 6,
1999 between the Company and David R. Clark (incorporated by reference
to Exhibit 10.37 to the Company's Quarterly Report on Form 10-Q for the
fiscal quarter ended December 4, 1999)
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<PAGE> 24
10.24 Amended and Restated Change in Control Agreement dated as of July 6,
1999 between the Company and James C. Richardson, Jr. (incorporated by
reference to Exhibit 10.38 to the Company's Quarterly Report on Form
10-Q for the fiscal quarter ended December 4, 1999)
10.25 Severance, Consulting and Noncompete Agreement dated as of July 12,
1999 among Claremont Restaurant Group, LLC, the Company and L. Dent
Miller (incorporated by reference to Exhibit 10.39 to the Company's
Quarterly Report on Form 10-Q for the fiscal quarter ended December 4,
1999)
10.26 Severance, Consulting and Noncompete Agreement dated as of July 12,
1999 among Claremont Restaurant Group, LLC, the Company, HERTH
Management, Inc. and Richard F. Howard (incorporated by reference to
Exhibit 10.40 to the Company's Quarterly Report on Form 10-Q for the
fiscal quarter ended December 4, 1999)
10.27 Incentive Agreement dated as of August 18, 1999 among the Company,
Pierre Foods, LLC and Norbert E. Woodhams, together with First
Amendment to Incentive Agreement dated as of January 1, 2000
(incorporated by reference to Exhibit 10.41 to the Company's Quarterly
Report on Form 10-Q for the fiscal quarter ended December 4, 1999)
10.28 Severance, Consulting and Noncompete Agreement dated as of September
13, 1999 among Claremont Restaurant Group, LLC, the Company, HERTH
Management, Inc. and James M. Templeton (incorporated by reference to
Exhibit 10.42 to the Company's Quarterly Report on Form 10-Q for the
fiscal quarter ended December 4, 1999)
10.29 Amendment No. 4 to Credit Agreement dated as of September 23, 1999
among the Company, certain subsidiaries of the Company, First Union, as
Agent and Lender, and certain other Lenders (incorporated by reference
to Exhibit 10.43 to the Company's Quarterly Report on Form 10-Q for the
fiscal quarter ended December 4, 1999)
10.30 Asset Purchase Agreement dated as of September 30, 1999 among Fairgrove
Restaurants, LLC, the Company and Fresh Foods Sales, LLC (schedules and
exhibits omitted) (incorporated by reference to Exhibit 10.44 to the
Company's Quarterly Report on Form 10-Q for the fiscal quarter ended
December 4, 1999)
10.31 Amended and Restated Management Services Agreement dated as of December
17, 1999 between HERTH Management, Inc. and the Company (incorporated
by reference to Exhibit 10.45 to the Company's Quarterly Report on Form
10-Q for the fiscal quarter ended December 4, 1999)
10.32 Agreement dated December 21, 1999 between the Company and Gungor
Solmaz, together with form of Agreement dated January 2000 between the
Company and Gungor Solmaz (incorporated by reference to Exhibit 10.46
to the Company's Quarterly Report on Form 10-Q for the fiscal quarter
ended December 4, 1999)
10.33 Fifth Amendment to Credit Agreement and Consent dated as of December
30, 1999 by and among the Company, certain subsidiaries of the Company,
First Union, as Agent and Lender, and certain other Lenders (schedules
and exhibits omitted) (incorporated by reference to Exhibit 10.47 to
the Company's Quarterly Report on Form 10-Q for the fiscal quarter
ended December 4, 1999)
10.34 Consulting and Noncompete Agreement dated as of January 6, 2000 between
the Company and L. Dent Miller (incorporated by reference to Exhibit
10.48 to the Company's Quarterly Report on Form 10-Q for the fiscal
quarter ended December 4, 1999)
10.35 Consulting and Noncompete Agreement dated as of January 14, 2000
between the Company and Charles F. Connor, Jr. (incorporated by
reference to Exhibit 10.49 to the Company's Quarterly Report on Form
10-Q for the fiscal quarter ended December 4, 1999)
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<PAGE> 25
10.36 Bonus Agreement dated as of June 30, 1999 between the Company and James
E. Harris (incorporated by reference to Exhibit 10.50 to the Company's
Quarterly Report on Form 10-Q for its fiscal quarter ended December 4,
1999)
10.37 Loan and Security Agreement, dated as of May 24, 2000, between the
Company and Fleet Capital Corporation, as Lender (schedules omitted)
(incorporated by reference to Exhibit 10.51 to the Company's Annual
Report on Form 10-K for its fiscal year ended March 6, 2000)
10.38 Pierre Foods, Inc. Compensation Exchange Plan dated August 1, 2000
27 Financial Data Schedule
The Company hereby agrees to provide to the Commission, upon
request, copies of long-term debt instruments omitted from this report pursuant
to Item 601(b)(4)(iii)(A) of Regulation S-K under the Securities Act.
23
