<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For Quarterly Period Ended Commission File Number
October 29, 1997 0-21486
HARRY'S FARMERS MARKET, INC.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Georgia 58-2037452
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1180 Upper Hembree Road, Roswell, Georgia 30076
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (770) 667-8878
---------------------------
N/A
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(Former name, former address and former fiscal year, 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 (2) 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 registrant's classes of
common stock, as of the latest practicable date:
Class A Common 4,131,849
- --------------------------------- ------------------------------------
Class Outstanding at December 11, 1997
Class B Common 2,050,701
- --------------------------------- ------------------------------------
Class Outstanding at December 11, 1997
<PAGE>
HARRY'S FARMERS MARKET, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
Amounts in thousands (Unaudited)
October 29, January 29,
1997 1997
-------- --------
ASSETS
CURRENT ASSETS
Cash $ 397 $ 1,326
Accounts receivable, net of allowance 205 254
Inventories 8,917 9,110
Other receivable 450 256
Notes receivable 250 58
Prepaid expenses 740 585
-------- --------
Total current assets 10,959 11,589
PROPERTY AND EQUIPMENT
Buildings 31,864 34,529
Equipment 25,602 23,721
Vehicles 142 102
Construction in progress 113 -
-------- --------
57,721 58,352
Accumulated depreciation (23,834) (20,565)
-------- --------
33,887 37,787
Land 8,030 8,030
-------- --------
41,917 45,817
OTHER ASSETS
Other property and equipment 1,565 1,902
Deposits on equipment 965 485
Loan costs 187 372
Other 186 263
-------- --------
2,903 3,022
-------- --------
Total assets $ 55,779 $ 60,428
======== ========
See accompanying financial statements
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<PAGE>
HARRY'S FARMERS MARKET, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
Amounts in thousands (Unaudited)
October 29, January 29,
1997 1997
-------- --------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Current maturities of long-term obligations $ 521 $ 576
Accounts payable - trade 4,690 5,787
Accrued payroll and payroll taxes 646 546
Sales taxes payable 111 81
Other accrued liabilities 608 531
-------- --------
Total current liabilities 6,576 7,521
LONG-TERM OBLIGATIONS, NET OF CURRENT MATURITIES
Unearned consulting revenue 380 -
Notes Payable 14,006 26,225
CONVERTIBLE DEBT 13,013 -
REDEEMABLE PREFERRED STOCK 10,398 10,352
STOCKHOLDERS' EQUITY
Common Stock - Class A 34,673 34,623
Common Stock - Class B 3,936 3,936
Additional Paid-in Capital 1,564 513
Accumulated deficit (28,767) (22,742)
-------- --------
Total stockholders' equity 11,406 16,330
-------- --------
Total liabilities and stockholders' equity $ 55,779 $ 60,428
======== ========
See accompanying financial statements
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<PAGE>
Harry's Farmers Market, Inc. and Subsidiaries
Consolidated Statement of Operations
(Unaudited)
Amounts in thousands, except per share data
<TABLE>
<CAPTION>
For the Thirteen Weeks Ended,
---------------------------------------------
October 29, 1997 October 30, 1996
---------------------------------------------
<S> <C> <C> <C> <C>
Net sales $32,634 100.0% $33,844 100.0 %
Cost of goods sold 23,944 73.4% 24,932 73.7 %
------------------ ------------------
Gross profit 8,690 26.6% 8,912 26.3 %
Operating expenses
Direct store expenses 5,603 17.2 % 5,082 15.0 %
Selling, general & administrative 3,530 10.8 % 2,548 7.5 %
Depreciation and other amortization 850 2.6 % 874 2.6 %
Loss on impairment of asset 2,868 8.8 % - 0.0 %
------------------ ------------------
Total operating expenses 12,851 39.4 % 8,504 25.1 %
Operating income (loss) (4,161) (12.8)% 408 1.2 %
Interest expense 532 1.6 % 610 1.8 %
Other income (283) (1.0)% (241) (0.7)%
Loss on writedown of note receivable 750 2.2 % - 0.0 %
------------------ ------------------
Pretax income (loss) (5,160) (15.8)% 39 0.1 %
Income taxes - 0.0 % - 0.0 %
------------------ ------------------
Net income (loss) (5,160) (15.8)% 39 0.1 %
Provision for accretion of warrants (37) (0.1)% (57) (0.2)%
------------------ ------------------
Net loss applicable to common shareholders $(5,197) (15.9)% $ (18) (0.1)%
================== ==================
Earnings per common and
common equivalent share:
Primary (0.84) $ -
========== ==========
Shares used in computing earnings per
common and common equivalent share:
Primary 6,183 6,228
See accompanying financial statements
</TABLE>
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<PAGE>
HARRY'S FARMERS MARKET, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Amounts in thousands, except per share data
For the Thirty-nine Weeks Ended,
--------------------------------------------
October 29, 1997 October 30, 1996
--------------------------------------------
<S> <C> <C> <C> <C>
Net sales $102,360 100.0% $105,583 100.0%
Cost of goods sold 76,325 74.6% 77,671 73.6%
---------------- -----------------
Gross profit 26,035 25.4% 27,912 26.4%
Operating expenses
Direct store expenses 16,972 16.6% 16,261 15.4%
Selling, general & administrative 9,414 9.2% 8,023 7.6%
Depreciation and other amortization 2,447 2.4% 2,566 2.4%
Loss on impairment of asset 2,868 2.8% - 0.0%
---------------- -----------------
Total operating expenses 31,701 31.0% 26,850 25.4%
Operating income (loss) (5,666) -5.5% 1,062 1.0%
Interest expense 1,713 1.7% 2,000 1.9%
Other income (2,268) -2.2% (1,112) -1.1%
Loss on writedown of note receivable 914 0.9% - 0.0%
---------------- -----------------
Pretax income (loss) (6,025) -5.9% 174 0.2%
Income taxes - 0.0% - 0.0%
---------------- -----------------
Net income (loss) (6,025) -5.9% 174 0.2%
Provision for accretion of warrants (111) -0.1% (171) -0.2%
---------------- -----------------
Net income (loss) applicable to common shareholders $ (6,136) -6.0% $ 3 0.0%
================ =================
Earnings per common and
common equivalent share:
Primary (0.99) $ -
======== ========
Shares used in computing earnings per
common and common equivalent share:
Primary 6,176 6,211
</TABLE>
See accompanying financial statements
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<PAGE>
HARRY'S FARMERS MARKET, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Amounts in thousands For the Thirty-nine Weeks Ended,
----------------------------------------
October 29, 1997 October 30, 1996
---------------- ----------------
<S> <C> <C>
Changes in Cash
Cash flows from operating activities:
Net income (loss) (6,136) 174
Adjustments to reconcile net income (loss)
to cash provided by operations:
Depreciation and amortization 3,480 3,642
Loss on impairment of assets 2,868 -
Gain on sale of equipment - (456)
Gain on sale of intellectual property (1,422) -
Loss on writedown of notes receivable 914 -
Decrease (increase) in accounts receivable 49 (121)
Increase in other receivables (194) (808)
Decrease (increase) in inventories 304 (953)
Decrease (increase) in prepaid and deferred expenses (155) 19
Increase in other assets (459) -
Increase (decrease) in accounts payable (1,097) 737
Increase (decrease) in accrued liabilities 382 (654)
-------- -------
Net cash provided (used) by operating activities (1,466) 1,580
Cash flows from investing activities:
Capital expenditures, including capitalized interest (1,889) (1,292)
Proceeds from sale of property and equipment - 5,195
Increase in notes receivable (1,087) (44)
-------- -------
Net cash provided (used) by investing activities (2,976) 3,859
Cash flows from financing activities:
Proceeds from convertible debt issuance, net of costs 13,060 47
Line of credit 18 510
Principal payments on long-term obligations (12,481) (6,157)
Proceeds from employee stock purchase - 5
Proceeds from warrants, net of costs 994 -
Proceeds from sale of intellectual property, net of costs 1,422 -
Proceeds from consulting agreement 500 -
-------- -------
Net cash provided (used) by financing activities 3,513 (5,595)
-------- -------
Net decrease in cash (929) (156)
Cash at beginning of period 1,326 1,042
-------- -------
Cash at end of period 397 886
======== =======
</TABLE>
See accompanying notes to financial statements
-6-
<PAGE>
HARRY'S FARMERS MARKET, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
OCTOBER 29, 1997
NOTE A - BASIS OF PRESENTATION:
- -------------------------------
The interim financial statements included herein have been prepared by the
Company without audit. These statements reflect all adjustments which are, in
the opinion of management, necessary to present fairly the financial position as
of October 29, 1997 and the results of operations and cash flows for the
thirteen and thirty-nine weeks then ended. All such adjustments are of a normal
recurring nature. Certain information and footnote disclosures normally
included in financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted. It is suggested that
these financial statements be read in conjunction with the Financial Statements
and notes for the fiscal year ended January 29, 1997 included in the Annual
Report on Form 10-K filed by the Company.
NOTE B - NOTES RECEIVABLE:
- --------------------------
On March 28, 1997, the Company entered into a Loan and Security Agreement (the
"Security Agreement") with Ritter Farms and Grainger County Tomato Company
(collectively, the "Borrower") pursuant to which the Company agreed to provide
up to $1.0 million in financing to the Borrower. The Borrower is the Company's
principal supplier of premium quality tomatoes, and the Security Agreement was
entered into in connection with the Borrower's reorganization under Chapter 11
of the United States Bankruptcy Code. To date the full $1.0 million has been
advanced to the Borrower pursuant to the Security Agreement. The Company has
been advised that the intended source of repayment of the loan by the borrower,
the revenue generated by the sale of the Borrower's 1997 crop production, will
be insufficient to satisfy fully the borrower's indebtedness to the Company. In
addition to a first priority security interest in the Borrower's crops, the
Company holds a subordinated mortgage and security interest in other assets of
the Borrower including real estate and certain intangible property. In the
event that the revenues generated by the sale of the crops are insufficient to
repay the debt, the Company will use its best efforts to satisfy the debt from
the proceeds of sale of other collateral for the debt. There is, however, no
assurance that the Borrower's indebtedness to the Company will be repaid in
full. During the quarter ended October 29, 1997, the Company increased its
allowance for doubtful accounts by approximately $0.8 million in connection with
the notes receivable.
In connection with the Security Agreement, and in order to provide an additional
source of liquidity to fund advances made to the Borrower thereunder, on June 6,
1997 the Company amended its loan agreement with Progressive Food Concepts,
Inc. ("PFCI") to provide for the advance to the Company of up to $1.0 million of
the amount PFCI has committed to loan under
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<PAGE>
such loan agreement for the purpose of assisting the Company in funding
obligations under the Security Agreement. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources."
NOTE C - EARNINGS PER SHARE:
- ---------------------------
Earnings per share for the periods represented are based on shares of common and
common stock equivalents outstanding during the fiscal quarter ended October 29,
1997 and shares of common and common stock equivalents outstanding during the
fiscal quarter ended October 30, 1996.
NOTE D - RECLASSIFICATION:
- --------------------------
Certain items have been reclassified in the presentation of the first thirty-
nine weeks of fiscal 1997 to conform with the presentation in the current
period.
NOTE E - NEW ACCOUNTING PRONOUNCEMENT
- -------------------------------------
Statement of Financial Accounting Standards No. 121 "Accounting for the
impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of" was
issued in March 1995 and was adopted January 1996. During the quarter ended
October 29, 1997, the Company recorded approximately $2.8 million as an
impairment loss on its bakery and distribution facility.
NOTE F - SUBSEQUENT EVENT
- -------------------------
On November 3, 1997, the Company entered into a series of agreements with PFCI,
a majority owned subsidiary of Boston Chicken, Inc. pursuant to which the two
entities amended and restructured certain aspects of a transaction which was
originally entered into on January 31, 1997 (the "January Transaction"). In
accordance with such amendments, as more particularly described below, PFCI has
redeemed the 2.5% interest the Company held in PFCI, as consideration for (i)
PFCI's payment of $2.5 million, (ii) the funding of $2.5 million under that
certain Development Loan between the two entities, (iii) the commitment by PFCI
to make available to the Company $4.0 million under the Development Loan, as
described below, within the next twelve months, and (v) beginning in 1999, the
Company's right to use certain intellectual property, including the trademarks
and developmental rights to the Harry's Farmers Market and Harry's In A Hurry
concepts, which had been sold to PFCI in the January Transaction (collectively,
the "Restructuring").
The Company and PFCI amended that certain Secured Loan Agreement between the
parties whereby the Company, using a portion of the consideration described
above, paid $2.5 million to reduce outstanding indebtedness under the
Development Loan. The amount available under the Development Loan was reduced
to $5.5 million of which $1.5 million is outstanding. PFCI has
-8-
<PAGE>
committed to loan the remaining funds under the Development Loan to the Company
by funding $2.0 million on May 3, 1998 and $2.0 million on November 3, 1998.
The Development Loan is to be used by the Company to fund expenditures in
connection with a Mutual Consulting Agreement between the Company, PFCI and
Harry A. Blazer, President and Chief Executive Officer of the Company, for
refurbishment of existing Company stores, for development of new Harry's In A
Hurry stores and for general corporate purposes.
In connection with the January Transaction, the Company transferred certain
federal and state registered and unregistered trademarks, trademark
applications, registered and unregistered service marks, service mark
applications, trade names, trade name rights, copyrights, trade secrets and
know-how and other proprietary information of the Company (the "Intellectual
Property") to a newly organized business trust (the "Trust"). The Trust then
issued to the Company two ownership certificates, one of which entitled the
holder to beneficial ownership of, and a license to use, the Intellectual
Property in the States of Georgia and Alabama and one of which (the "Worldwide
Certificate") entitled the holder to beneficial ownership of, and a license to
use, the Intellectual Property throughout the rest of the world. The Company
then transferred the Worldwide Certificate to PFCI.
As a result of the Restructuring, and the redemption of the 712.3746 shares of
PFCI previously held by the Company, the Company's rights to use the
Intellectual Property were expanded. Beginning on November 3, 1999, the Company
will be entitled to use the Intellectual Property, on a non-exclusive basis, in
the states of Tennessee, North Carolina and South Carolina. However, in such
states, the Company will have the exclusive right to use the "Harry's" name and
trademarks, service marks and trade names incorporating the "Harry's" name (the
"Harry's Marks") effective immediately. Also on November 3, 1999, the Company's
exclusive rights to use the Intellectual Property in the states of Georgia and
Alabama ceases, notwithstanding the continued exclusivity on behalf of the
Company to the Harry's Marks in such states. In addition, on January 31, 2004,
the Company will be entitled to use the Intellectual Property, on a non-
exclusive basis, throughout the world; provided however, that the Company's
exclusive right to use the Harry's Marks on a worldwide basis are subject to
PFCI having not made the decision to use the Harry's Marks by such time.
-9-
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
- ---------------------
Thirteen Weeks Ended October 29, 1997 compared to Thirteen Weeks Ended October
30, 1996.
Net sales for the thirteen weeks ended October 29, 1997 (the "1998 Third
Quarter") were approximately $32.6 million, compared to approximately $33.8
million for the thirteen weeks ended October 30, 1996 (the "1997 Third
Quarter"). Comparable store sales decreased 2.2% for the 1998 Third Quarter as
compared to the 1997 Third Quarter. These decreases are primarily a result of
the inclusion of approximately $0.6 million of sales in the 1997 Third Quarter
directly related to the 1996 Olympic and Paralympic Games in the Atlanta area,
as well as an undetermined amount of additional business indirectly related to
the Olympic and Paralympic Games during the 1997 Third Quarter. Increased
competition in the Atlanta area also contributed towards lower sales during the
1998 Third Quarter.
Gross profit for the 1998 Third Quarter increased to 26.6% of net sales
compared to 26.3% of net sales for the 1997 Third Quarter. The increase was
primarily due to the Company's continuing efforts to lower its cost of goods
sold through better buying practices, improved product mix and better
distribution efficiencies. However, as a result of the decrease in the 1998
Third Quarter sales, gross profit in the 1998 Third Quarter was $8.7 million as
compared to $8.9 million in the 1997 Third Quarter.
Direct store expenses increased to approximately $5.6 million or 17.2% of net
sales during the 1998 Third Quarter compared to approximately $5.1 million or
15.0% of net sales during the 1997 Third Quarter. The increase is primarily due
to an increase in labor and labor related expenses, repairs and maintenance, and
new rent expenses due to the new Harry's In A Hurry store scheduled to open in
January 1998. Additionally, the 1997 Third Quarter included an approximately
$0.2 million credit in retrospective adjustments to worker's compensation
expense.
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<PAGE>
Selling, general and administrative expenses increased to approximately $3.5
million or 10.8% of net sales in the 1998 Third Quarter compared to
approximately $2.5 million or 7.5% of net sales in the 1997 Third Quarter. This
increase in the 1998 Third Quarter is primarily attributable to higher labor and
labor related expenses incurred as a result of adding new personnel to support
growth, higher consulting costs directly related to the development of new
management information systems and training new personnel for the new Harry's In
A Hurry store scheduled to open in January 1998.
Depreciation and amortization, which includes depreciation and amortization
for the stores and the corporate facilities, but excludes the manufacturing
facilities (which are included in cost of goods sold), declined slightly to
approximately $0.85 million in the 1998 Third Quarter from approximately $0.87
million in the 1997 Third Quarter. This decline in depreciation and amortization
expense is the result of certain assets becoming fully depreciated prior to and
during the 1998 Third Quarter. As a percentage of sales, depreciation and
amortization remained relatively unchanged at 2.6% of net sales.
During the 1998 Third Quarter, the Company recorded a loss on the impairment
of its bakery and distribution center of approximately $2.9 million or 8.8% of
net sales. The book value of the asset has been adjusted to reflect the amount
the Company could expect upon its sale.
Due to the reasons set forth above, during the 1998 Third Quarter the
Company's operations resulted in an operating loss of approximately $4.2 million
or (12.8)% of net sales as compared to an operating profit in the 1997 Third
Quarter of approximately $0.4 million or 1.2% of net sales.
Interest expense decreased to approximately $0.5 million or 1.6% of net sales
in the 1998 Third Quarter compared to approximately $0.6 million or 1.8% of net
sales in the 1997 Third Quarter. This decrease is primarily the result of
approximately $13.0 million of the Company's
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<PAGE>
long term debt, with a floating interest rate of approximately 9.0% at fiscal
year end, having been paid off on January 31, 1997 and adding approximately
$12.0 million of convertible debt with a fixed rate of 5.0%.
Other income increased to approximately $0.3 million or 1.0% of net sales
during the 1998 Third Quarter, from approximately $0.2 million or 0.7% of net
sales in the 1997 Third Quarter. The increase is primarily attributable to
interest income from the Company's principal supplier of premium quality
tomatoes of approximately $0.05 million. Included in other income is rental
income from the Cobb County shopping center.
The Company has increased its allowance for doubtful accounts during the 1998
Third Quarter by approximately $0.8 million or 2.2% of net sales to cover
potential losses in connection with notes receivable from its principal supplier
of premium quality tomatoes.
The Company has net operating loss carry forwards of approximately $28.0
million which may be applied against future earnings. Should the Company
experience a change in ownership in accordance with Section 382 of the Internal
Revenue Code of 1986, as amended, the extent that the Company may apply such
loss carry forwards may be limited.
As a result of the above, the Company's operations incurred a net loss for the
1998 Third Quarter of approximately $5.2 million or $(.84) per common and common
equivalent share, compared with a net loss of approximately $0.18 million or
$.00 per common and common equivalent share during the 1997 Third Quarter.
Thirty-Nine Weeks Ended October 29, 1997 compared to Thirty-Nine Weeks Ended
October 30, 1996.
Net sales for the thirty-nine weeks ended October 29, 1997 (the "1998 Period")
decreased to approximately $102.4 million from approximately $105.6 million for
the thirty-nine weeks ended October 30, 1996 (the "1997 Period"). On a
comparable store basis, sales
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<PAGE>
decreased 2.1%. This decrease is primarily the result of the inclusion in the
1997 Period of approximately $1.2 million of revenues directly associated with
the Olympic and Paralympic Games in the Atlanta area. Additionally, during the
1997 Period the Company indirectly benefited by increased sales during the
Olympic and Paralympic Games. Increased competition in the Atlanta area also
contributed towards lower sales in the 1998 Period.
Gross profit for the 1998 Period decreased to approximately $26.0 million or
25.4% from approximately $27.9 million or 26.4% in the 1997 Period. This
decrease resulted primarily from the Company's efforts during the 1998 Period to
markdown and close out slow moving non-perishable merchandise, which accounted
for approximately $0.8 million of the decrease. Further contributing to the
reduction in gross profit during the 1998 Period, were costs relating to the
Company's efforts to improve efficiencies in the bakery and prepared foods
manufacturing facilities.
Direct store expenses for the 1998 Period increased to approximately $16.9
million or 16.6% of net sales from approximately $16.3 million or 15.4% of net
sales for the 1997 Period. During the 1998 Period direct store expenses were
higher as a result of: 1) higher labor and labor related expenses in the 1998
Period due to (a) wage increases, (b) additional labor hours (time spent in
addition to regular duties) for training and consulting with PFCI employees and
consultants and (c) personnel expenses relating to the new Harry's In A Hurry
store scheduled to open in January 1998, 2) increased workers' compensation
expense due to retrospective workers' compensation adjustments, 3) higher
repairs and maintenance expenses due to increased purchases of, and ordinary
repairs of, store equipment and 4) rent for the new Harry's in A Hurry store
scheduled to open in January 1998. These expenses were partially offset with a
decrease in the cost of supplies and equipment lease expense.
Selling, general and administrative expense for the 1998 Period increased to
approximately $9.4 million or 9.2% of net sales from approximately $8.0 million
or 7.6% of net sales in the 1997 Period. The increase in the 1998 Period is
primarily attributable to: 1) higher
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<PAGE>
labor and labor related expenses incurred as a result of adding new personnel to
support growth, 2) higher consulting costs directly relating to the development
of new management information systems, 3) training new personnel for the new
Harry's In A Hurry store, 4) an increase in reserves as a result of the increase
in the Company's receivables, 5) higher repairs and maintenance expenses and 6)
an increase in general insurance costs and legal and accounting expenses,
relating to the new Harry's In A Hurry store scheduled to open in January 1998.
Depreciation and amortization declined to approximately $2.4 million in the
1998 Period from approximately $2.6 million in the 1997 Period. This reduction
resulted from certain assets becoming fully depreciated prior to or during the
1998 Period. As a percentage of sales, depreciation and amortization remained
relatively unchanged at 2.4% of net sales.
During the 1998 Third Quarter, the Company recorded a loss on the impairment
of its bakery and distribution center of approximately $2.9 million or 8.8% of
net sales. The book value of the asset has been adjusted to reflect the amount
the Company could expect upon its sale.
Due to the reasons set forth above, the Company's operations during the 1998
Period resulted in an operating loss of approximately $5.7 million or (5.5)% of
net sales as compared to an operating profit in the 1997 Period of approximately
$1.1 million or 1.0%.
Interest expense decreased to approximately $1.7 million or 1.7% of net sales
in the 1998 Period from approximately $2.0 million or 1.9% of net sales in the
1997 Period. This decrease is primarily attributable to approximately $13.0
million of the Company's long term debt, with a floating interest rate of
approximately 9.0%, at fiscal year end having been paid off on January 31, 1997
and adding approximately $12.0 million of convertible debt with a fixed rate of
5.0%
Other income in the 1998 Period increased to approximately $2.3 million or
2.2% of net sales compared to approximately $1.1 million or 1.1% of net sales in
1997 Period. This increase
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<PAGE>
is primarily due to the recognition of the sale of certain of the Company's
intellectual property, net of expenses, in the amount of approximately $1.4
million to PFCI, and the recognition of approximately $0.07 million of
consulting income from PFCI. Other income during the 1997 Period included a
gain of approximately $0.2 million from the sale of an outparcel at the Gwinnett
megastore and a gain of approximately $0.2 million from the sale of the
Nashville, Tennessee property. Included in other income is rental income from
the Cobb County shopping center.
The Company has increased its allowance for doubtful accounts during the 1998
Period by approximately $0.9 million or 0.9% of net sales to cover potential
losses in connection with notes receivable from its principal supplier of
premium quality tomatoes.
As a result of the above, the Company's operations for the 1998 Period
incurred a net loss of approximately $6.1 million or ($.99) per common and
common equivalent share, compared with a net profit of $3,000 or $.00 per common
and common equivalent share, for the 1997 Period.
LIQUIDITY AND CAPITAL RESOURCES
During the 1998 Period, the Company's operating activities used approximately
$1.5 million in cash. The Company invested approximately $1.9 million in capital
expenditures, incurred an increase of approximately $1.1 million in notes
receivable, and has increased its allowance for doubtful accounts by
approximately $0.9 million during the period. Additionally, the Company
paid approximately $12.5 million on its long term obligations. The Company
received approximately $13.0 million, net of expenses, from the convertible debt
proceeds, approximately $0.5 million in proceeds from that certain Mutual
Consulting Agreement (the "Consulting Agreement") by and between the Company,
Harry A. Blazer and Progressive Food Concepts, Inc. ("PFCI"), approximately $1.4
million in net proceeds from the sale of Intellectual Property, as described
below, and approximately $1.0 million net of expenses for warrants. As a result,
net cash during
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<PAGE>
the 1998 Period decreased by approximately $0.9 million resulting in a cash
balance at the end of the 1998 Period of approximately $0.4 million. The
Company had available approximately $1.6 million at the end of the 1998 Period
in additional borrowing capacity under its bank line of credit facility, and
$6.5 million under its Development Loan facility, as described below.
Cash used by investing activities in the 1998 Period was approximately $3.0
million. Investing activities consisted of capital expenditures for property
and equipment relating to stores, manufacturing facilities and the corporate
infrastructure, and a net increase in notes receivable. During the 1998 Period,
the Company used approximately $0.4 million on computer hardware to improve
current information systems, approximately $0.6 million on computer software to
improve the Company's codification of manufacturing processes as well as
financial management information systems, and approximately $0.9 million for
floor equipment, building improvements, and additional transportation equipment
for use at the stores and manufacturing facilities of which approximately $0.2
million is for the new Harry's In A Hurry store. Total capital expenditures were
approximately $1.9 million. In addition to capital expenditures, notes
receivable increased by approximately $1.1 million primarily for the financing
of the Company's principal supplier of premium quality tomatoes, as described
below. In connection with this notes receivable, the allowance for doubtful
accounts has been increased by approximately $0.9 million to reserve against a
potential loss. Total cash used by investing activities was approximately $3.0
million.
On March 28, 1997, the Company entered into a Loan and Security Agreement (the
"Security Agreement") with Ritter Farms and Grainger County Tomato Company
(collectively, the "Borrower") pursuant to which the Company agreed to provide
up to $1.0 million in financing to the Borrower. The Borrower is the Company's
principal supplier of premium quality tomatoes, and the Security Agreement was
entered into in connection with the Borrower's reorganization under Chapter 11
of the United States Bankruptcy Code. All funds advanced under the Security
Agreement bear interest at the rate of ten percent (10%) per annum, and will be
due and payable not later than December 31, 1997. To date the full $1.0 million
has been advanced to the Borrower pursuant to the Security Agreement. The
Company has been
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<PAGE>
advised that the intended source of repayment of the loan by the Borrower, the
revenue generated by the sale of the Borrower's 1997 crop production, will be
insufficient to satisfy fully the Borrower's indebtedness to the Company. In
addition to a first priority security interest in the Borrower's crops, the
Company holds a subordinated mortgage and security interest in other assets of
the Borrower including real estate of certain intangible property. In the event
that the revenues generated by the sale of the crops are insufficient to repay
the debt, the Company will use its best efforts to satisfy the debt from the
proceeds of sale of other collateral for the debt. There is, however, no
assurance that the Borrower's indebtedness to the Company will be repaid in
full. As a result of the above, the Company has increased its allowance for
doubtful accounts by approximately $0.9 million of the notes receivable in the
1998 Period to reserve against a potential loss.
Cash provided by financing activities in the 1998 Period was approximately
$3.5 million. Financing activities consisted mainly of an early payoff of the
Company's long-term debt, exclusive of the line of credit, of approximately
$12.0 million, other payments of long term debt of approximately $0.5 million,
net proceeds from the issuance of the convertible debt, of approximately $13.0
million, net proceeds from the sale of warrants of approximately $1.0 million,
approximately $0.5 million in proceeds from the Consulting Agreement and
approximately $1.4 million in net proceeds from the sale of Intellectual
Property, as described below. At the end of the 1998 Period, the Company had
approximately $1.6 million left on the bank line of credit facility, $6.5
million available under the Development Loan facility. Cash at the end of the
1998 Period was approximately $0.4 million.
To increase liquidity, the Company continues to seek purchaser(s) or leasee(s)
for the unused portion of the bakery and distribution facility, as well as the
remaining outparcel at the Gwinnett County megastore property. During the 1998
Third Quarter, the Company recorded approximately $2.8 million as an impairment
loss on its bakery and distribution facility.
The Company presently owns and operates a 151,000 square foot
production/warehouse facility, of which approximately 55,000 square feet is
currently utilized for bakery production,
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<PAGE>
approximately 40,000 square feet is used for non-perishable inventory and the
balance of approximately 56,000 square feet, which was once used for the
Company's perishable distribution center, is currently available for lease. If
the opportunity should arise to sell the facility and lease back the bakery
area, the Company would pursue such possibility. The bakery facility currently
produces approximately 200 different products with state-of-the-art industrial
baking equipment and is currently utilizing approximately 33% of its potential
capacity. The Company plans to relocate the bakery to the Alpharetta megastore
in January 1998. In addition, the Company operates a United States Department of
Agriculture ("USDA") approved facility located at its Alpharetta Megastore. This
facility produces approximately 300 different prepared foods with a USDA
compliance inspection record of 99.7%. Currently the USDA approved facility is
operating at approximately 40% of its potential utilization. Management believes
that the excess capacities available from both plants, as well as the
distribution center, will be more fully utilized as the PFCI concept and the
Company's own growth plans develop.
The Company had planned to open the third Harry's In A Hurry store toward the
end of 1997. However, as a result of longer than expected training and education
for the new store employees, as well as proper design implementation, such store
is now anticipated to open in January 1998.
On January 31, 1997, the Company entered into a series of agreements PFCI, a
majority owned subsidiary of Boston Chicken, Inc., (the "January Transaction")
pursuant to which PFCI loaned the Company $12.0 million which is exchangeable
for shares of Series B convertible preferred stock of the Company. Such Series
B convertible preferred stock is convertible into 3,000,000 shares of the
Company's Class A common stock. The agreements also contained a commitment to
loan up to an additional $8.0 million, (the "Development Loan"), which was
convertible into an aggregate of 2,000,000 shares of Class A common stock. If
not earlier paid or accelerated for payment, the outstanding principal of both
these loans become an amortized term loan on January 31, 2002. Both loans may
be prepaid at any time without penalty or premium, and accrue interest at a rate
of 5% per annum for a period of five years from January 31, 1997.
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<PAGE>
In connection with that certain Security Agreement by and among the Company,
Ritter Farms and Grainger Tomato Company, and in order to provide an additional
source of liquidity to fund advances made to the Borrower thereunder, on June 6,
1997, the Company amended its loan agreement with PFCI to provide for the
advance to the Company of up to $1.0 million of the amount PFCI has committed to
loan under such loan agreement for the purpose of assisting the Company in
funding obligations under the Security Agreement. The full amount of such
advance was made on August 11, 1997.
On November 3, 1997, the Company entered into a series of agreements PFCI,
pursuant to which the two entities amended and restructured certain aspects of
January Transaction. In accordance with such amendments, as more particularly
described below, PFCI has redeemed the 2.5% interest the Company held in PFCI,
as consideration for (i) PFCI's payment of $2.5 million, (ii) the funding of
$2.5 million under the Development Loan, (iii) the commitment by PFCI to make
available to the Company $4.0 million under the Development Loan, as described
below, within the next twelve months, and (v) beginning in 1999, the Company's
right to use certain intellectual property, including the trademarks and
developmental rights to the Harry's Farmers Market and Harry's In A Hurry
concepts, which had been sold to PFCI in the January Transaction, as described
below, (collectively, the "Restructuring").
The Company and PFCI amended that certain Secured Loan Agreement between the
parties whereby the Company, using a portion of the consideration described
above, paid $2.5 million to reduce outstanding indebtedness under the
Development Loan. The amount available under the Development Loan was reduced
to $5.5 million of which $1.5 million is outstanding. PFCI has committed to
loan the remaining funds under the Development Loan to the Company by funding
$2.0 million on May 3, 1998 and $2.0 million on November 3, 1998. The
Development Loan is to be used by the Company to fund expenditures in connection
with the Consulting Agreement, for refurbishment of existing Company stores, for
development of new Harry's In A Hurry stores and for general corporate purposes.
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<PAGE>
In addition, as part of the January Transaction, PFCI paid the Company $1.5
million for the transfer of certain intellectual property rights of the Company
outside the States of Georgia and Alabama, as described below, $1.0 million for
warrants to purchase 2,000,000 shares of Class A common stock of the Company at
exercise prices ranging from $4.00 to $5.50, and $0.5 million for the five-year
Consulting Agreement.
In the January Transaction, the Company transferred certain federal and state
registered and unregistered trademarks, trademark applications, registered and
unregistered service marks, service mark applications, trade names, trade name
rights, copyrights, trade secrets and know-how and other proprietary information
of the Company (the "Intellectual Property") to a newly organized business trust
(the "Trust"). The Trust then issued to the Company two ownership certificates,
one of which entitled the holder to beneficial ownership of, and a license to
use, the Intellectual Property in the States of Georgia and Alabama and one of
which (the "Worldwide Certificate") entitled the holder to beneficial ownership
of, and a license to use, the Intellectual Property throughout the rest of the
world. The Company then transferred the Worldwide Certificate to PFCI.
As a result of the Restructuring, the Company's rights to use the Intellectual
Property were expanded. Beginning on November 3, 1999, the Company will be
entitled to use the Intellectual Property, on a non-exclusive basis, in the
states of Tennessee, North Carolina and South Carolina. However, in such
states, the Company will have the exclusive right to use the "Harry's" name and
trademarks, service marks and trade names incorporating the "Harry's" name (the
"Harry's Marks") effective immediately. Also on November 3, 1999, the Company's
exclusive rights to use the Intellectual Property in the states of Georgia and
Alabama ceases, notwithstanding the continued exclusively on behalf of the
Company to the Harry's Marks in such states. In addition, on January 31, 2004,
the Company will be entitled to use the Intellectual Property, on a non-
exclusive basis, throughout the world; provided however, that the Company's
exclusive right to use the Harry's Marks on a worldwide basis are subject to
PFCI having not made the decision to use the Harry's Marks by such time.
-20-
<PAGE>
In addition, the Restructuring provides the Company, at its option, with the
ability to create or develop a new name or identity for the Harry's In A Hurry
stores and the Harry's Farmers Market megastores, and such new name will not be
included in the Intellectual Property, as ownership thereof will belong
exclusively to the Company.
The Company used approximately $13.0 million of the proceeds from the January
Transaction to pay off a portion of its term loan outstanding at January 29,
1997. As a result of paying off part of the term loan, 144,000 warrants to
purchase 144,000 shares of Class A common stock at $6.00 per share were
canceled. The terms of the remaining portion of the term loan and line of credit
were also renegotiated, on terms discussed below, and a new maturity date of
January 29, 2000 was established. In consideration for this transaction, the
Company reduced the exercise price for 48,000 of the bank's outstanding warrants
from $6 to $3. These transactions resulted in one bank being replaced as the
Company's senior credit agent by another bank. The successor bank received
72,000 of the warrants previously owned by the predecessor bank. These warrants
have an exercise price of $3 per share. As a result of this transaction, the
successor bank owns 216,000 warrants to purchase 216,000 shares Class A common
stock at $3 per share.
In connection with the above described transactions with PFCI and the
Company's banks, in an effort to make the Company's then outstanding Series A
Preferred Stock maintain similar rights and preferences and properly rank with
the preferences of the newly issued Series B Preferred Stock, all of the
outstanding Series A preferred shares were exchanged by the shareholders for an
equal number of the Company's newly issued Series AA preferred stock, with a
stated value of $9 per share. The Series AA preferred stock is mandatorily
redeemable on December 1, 2001 at the stated value (total redemption value of
$11.0 million). At any time prior to redemption, each share of the series AA
preferred stock is convertible into the number of shares of Class A common stock
obtained by dividing the aggregate liquidation preference of the Series AA
preferred stock by the applicable conversion price. The initial conversion
price is $6.50 per share and is subject to adjustment in certain circumstances.
In connection with the
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<PAGE>
exchange of Series A preferred shares for Series AA preferred shares, the
Company reduced the exercise price of the warrants outstanding from $10 to $4.
As a result of the January Transaction, the Company has a line of credit and
term loan agreement with Creditanstalt-Bankverein ("Creditanstalt") that allows
borrowing up to $12.0 million bearing interest at Libor plus 3.5% or prime plus
1.5% which matures on January 29, 2000. The average outstanding short-term
borrowings during the 1998 Period was approximately $3.3 million. The weighted
average interest rate during the 1998 Period was approximately 9.97%. The
maximum borrowings outstanding at any month end during the 1998 Period totaled
approximately $10.9 million. The line of credit and term loan is collaterallized
by substantially all assets of the Company. The total amount drawn at October
29, 1997 was approximately $10.4 million. The total amount available at October
29, 1997 was approximately $1.6 million.
The Company's ability to fund its working capital and capital expenditure
requirements, make interest payments and meet its other cash requirements
depends, among other things, on the availability of internally generated funds
and the continued availability of and compliance with its credit facilities.
Management believes that internally generated funds and its available credit
facilities, as restructured, will provide the Company with sufficient sources of
funds to satisfy its anticipated cash requirements in fiscal 1998. However, if
there is a significant reduction of internally generated funds, the Company may
require funds from outside financing sources. In such event, there can be no
assurance that the Company would be able to obtain such funding as and when
required or on acceptable terms.
CAUTIONARY STATEMENT FOR PURPOSES OF "SAFE HARBOR PROVISIONS" OF THE PRIVATE
SECURITIES LITIGATION REFORM ACT OF 1995.
Certain statements contained in this filing are "forward-looking statements"
within the meaning of the Private Securities Litigation Reform Act of 1995, such
as statements relating to
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<PAGE>
financial results, business strategy, plans for future business development
activities, including the opening of new stores, capital spending or financing
sources, capital structure and the effects of regulation and competition, and
are thus prospective. Such forward-looking statements are subject to risks,
uncertainties and other factors which could cause actual results to differ
materially from future results expressed or implied by such forward-looking
statements. Potential risks and uncertainties include, but are not limited to:
economic conditions, changes in consumer spending, weather, competition, changes
in the rate of inflation, changes in state or federal legislation or regulation,
inability to develop new stores as planned, stability of product costs, and
other uncertainties detailed from time to time in the Company's Securities and
Exchange Commission filings.
-23-
<PAGE>
Item 6. Exhibits and Reports on Form 8-K
A. No exhibits are filed with this report.
B. No reports on Form 8-K were filed during the quarter ended
October 29, 1997.
-24-
<PAGE>
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.
HARRY'S FARMERS MARKET, INC.
Dated: December 11, 1997 By: /s/ Harry A. Blazer
------------------- -----------------------------------------------
HARRY A. BLAZER
Chairman, President and Chief Executive Officer
(principal executive officer)
Dated: December 11 , 1997 By: /s/ Harold C. Weissman
------------------- -----------------------------------------------
HAROLD C. WEISSMAN
Treasurer and Chief Financial Officer
(principal financial and accounting officer)
-25-
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM 10-Q
FOR PERIOD ENDED OCTOBER 29, 19997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JAN-28-1998
<PERIOD-START> JAN-30-1997
<PERIOD-END> OCT-29-1997
<CASH> 397
<SECURITIES> 0
<RECEIVABLES> 235
<ALLOWANCES> 30
<INVENTORY> 8,917
<CURRENT-ASSETS> 10,959
<PP&E> 65,751
<DEPRECIATION> 23,834
<TOTAL-ASSETS> 55,779
<CURRENT-LIABILITIES> 6,576
<BONDS> 14,006 <F1>
10,398 <F4>
0
<COMMON> 38,609
<OTHER-SE> (27,203)
<TOTAL-LIABILITY-AND-EQUITY> 55,779
<SALES> 102,360
<TOTAL-REVENUES> 102,360
<CGS> 76,325
<TOTAL-COSTS> 31,701 <F5>
<OTHER-EXPENSES> (555)
<LOSS-PROVISION> (914)<F6>
<INTEREST-EXPENSE> 1,713 <F2>
<INCOME-PRETAX> (6,136)<F3>
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (6,136)
<EPS-PRIMARY> (0.99)
<EPS-DILUTED> (0.99)
<FN>
<F1>SHORT TERM PORTION INCLUDED IN CURRENT LIABILITIES
<F4>MANDATORY REDEEMABLE FOR $11 MILLION
<F5>INCLUDE IMPAIRMENT LOSS OF $2.9 MILLION
<F6>LOSS RELATED TO WRITEDOWN OF NOTES RECEIVABLE
<F2>INCLUDED IN OTHER EXPENSES
<F3>LOSS NET OF ACCRETION OF WARRANTS
</FN>
</TABLE>
