<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
July 30, 1997 0-21486
HARRY'S FARMERS MARKET, INC.
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(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
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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
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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
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Class Outstanding at September 10, 1997
Class B Common 2,050,701
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Class Outstanding at September 10, 1997
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
<PAGE>
HARRY'S FARMERS MARKET, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
Amounts in thousands (Unaudited)
July 30, January 29,
1997 1997
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<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash $ 622 $ 1,326
Accounts receivable, net of allowance 142 254
Inventories 8,725 9,110
Other receivable 599 256
Notes receivable 983 58
Prepaid expenses 884 585
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Total current assets 11,955 11,589
PROPERTY AND EQUIPMENT
Buildings 34,676 34,529
Equipment 24,743 23,721
Vehicles 143 102
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59,562 58,352
Accumulated depreciation (22,720) (20,565)
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36,842 37,787
Land 8,030 8,030
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44,872 45,817
OTHER ASSETS
Other property and equipment 1,840 1,902
Deposits on equipment 614 485
Loan costs 259 372
Other 195 263
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2,908 3,022
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Total assets $ 59,735 $ 60,428
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</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS
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<PAGE>
HARRY'S FARMERS MARKET, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
Amounts in thousands (Unaudited)
July 30, January 29,
1997 1997
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<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Current maturities of long-term obligations $ 528 $ 576
Accounts payable - trade 4,801 5,787
Accrued payroll and payroll taxes 543 546
Sales taxes payable 241 81
Other accrued liabilities 1,184 531
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Total current liabilities 7,297 7,521
LONG-TERM OBLIGATIONS, net of current maturities
Unearned consulting revenue 350 --
Notes Payable 13,641 26,225
CONVERTIBLE DEBT 11,484 --
REDEEMABLE PREFERRED STOCK 10,361 10,352
STOCKHOLDERS' EQUITY
Common Stock - Class A 34,673 34,623
Common Stock - Class B 3,936 3,936
Additional Paid-in Capital 1,601 513
Accumulated deficit (23,608) (22,742)
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Total stockholders' equity 16,602 16,330
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Total liabilities and stockholders' equity $ 59,735 $ 60,428
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</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS
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HARRY'S FARMERS MARKET, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Amounts in thousands, except per share data
For the Thirteen Weeks Ended,
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July 30, 1997 July 31, 1996
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<S> <C> <C> <C> <C>
Net sales $ 35,722 100.0% $ 38,224 100.0%
Cost of goods sold 27,313 76.5% 28,172 73.7%
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Gross profit 8,409 23.5% 10,052 26.3%
Operating expenses
Direct store expenses 5,877 16.5% 5,804 15.2%
Selling, general & administrative 3,219 9.0% 2,756 7.2%
Depreciation and other amortization 813 2.3% 868 2.3%
----------------------------- ------------------------------
Total operating expenses 9,909 27.7% 9,428 24.7%
Operating income (loss) (1,500) -4.2% 624 1.6%
Interest expense 519 1.5% 666 1.7%
Other income (301) -0.9% (439) -1.1%
----------------------------- ------------------------------
Pretax income (loss) (1,718) -4.8% 397 1.0%
Income taxes (22) 0.1% - 0.0%
----------------------------- ------------------------------
Net income (loss) (1,696) -4.7% 397 1.0%
Provision for accretion of warrants (37) -0.1% (57) -0.1%
----------------------------- ------------------------------
Net income (loss) applicable to common shareholders $ (1,733) -4.9% $ 340 0.9%
============================= ==============================
Earnings (loss) per common and common equivalent share:
Primary ($0.28) $0.05
================ ================
Shares used in computing earnings per
common and common equivalent share:
Primary 6,178 6,205
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS
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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 Twenty-six Weeks Ended,
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July 30, 1997 July 31, 1996
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<S> <C> <C> <C> <C>
Net sales $ 69,726 100.0% $ 71,738 100.0%
Cost of goods sold 52,383 75.1% 52,739 73.5%
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Gross profit 17,343 24.9% 18,999 26.5%
Operating expenses
Direct store expenses 11,368 16.3% 11,178 15.6%
Selling, general & administrative 6,048 8.7% 5,473 7.6%
Depreciation and other amortization 1,597 2.3% 1,693 2.4%
------------------------------ -----------------------------
Total operating expenses 19,013 27.3% 18,344 25.6%
Operating income (loss) (1,670) -2.4% 655 0.9%
Interest expense 1,182 1.7% 1,390 1.9%
Other income (1,986) -2.8% (870) -1.2%
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Pretax income (loss) (866) -1.3% 135 0.2%
Income taxes - 0.0% - 0.0%
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Net income (loss) (866) -1.2% 135 0.2%
Provision for accretion of warrants (74) -0.1% (114) -0.2%
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Net income (loss) applicable to common shareholders $ (940) -1.3% $ 21 0.0%
============================== =============================
Earnings (loss) per common and common equivalent share:
Primary ($0.15) $0.00
================ ================
Shares used in computing earnings per
common and common equivalent share:
Primary 6,173 6,187
</TABLE>
SEE ACCOMPANYING NOTES TO 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 Twenty-six Weeks Ended,
-------------------------------
July 30, 1997 July 31, 1996
-------------------------------
<S> <C> <C>
Changes in Cash
Cash flows from operating activities:
Net income (loss) $ (866) $ 135
Adjustments to reconcile net income (loss)
to cash provided by operations:
Depreciation and amortization 2,285 2,415
Gain on sale of equipment -- (439)
Gain on sale of intellectual property (1,422) --
Decrease (increase) in accounts receivable 112 (590)
Increase in other receivables (343) (51)
Decrease (increase) in inventories 385 (1,118)
Decrease (increase) in prepaid and deferred expenses (299) 91
Increase in other assets (78) (103)
Increase (decrease) in accounts payable (986) 1,090
Increase in accrued liabilities 954 227
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Net cash provided (used) by operating activities (258) 1,657
Cash flows from investing activities:
Capital expenditures, including capitalized interest (1,148) (1,036)
Proceeds from sale of property and equipment -- 5,195
Increase in notes receivable (925) (30)
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Net cash provided (used) by investing activities (2,073) 4,129
Cash flows from financing activities:
Proceeds from convertible debt issuance, net of costs 11,560 --
Line of credit (482) 210
Principal payments on long-term obligations (12,367) (5,932)
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 --
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Net cash provided (used) by financing activities 1,627 (5,717)
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Net increase (decrease) in cash (704) 69
Cash at beginning of period 1,326 1,042
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Cash at end of period $ 622 $ 1,111
======== ========
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS
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<PAGE>
HARRY'S FARMERS MARKET, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
JULY 30, 1997
NOTE A - BASIS OF PRESENTATION:
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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 July 30, 1997 and the results of operations and cash flows for the twenty-six
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:
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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, may 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.
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 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:
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Earnings per share for the periods represented are based on shares of common and
common stock equivalents outstanding during the fiscal quarter ended July 30,
1997 and shares of common and common stock equivalents outstanding during the
fiscal quarter ended July 31, 1996.
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<PAGE>
NOTE D - RECLASSIFICATION:
- --------------------------
Certain items have been reclassified in the presentation of the first twenty-six
weeks of fiscal 1997 to conform with the presentation in the current period.
NOTE E - NEW ACCOUNTING PRONOUNCEMENT
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Statement of Financial Accounting Standards ("SFAS") 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. The adoption of SFAS No. 121
had no impact on the results of operations.
-8-
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
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Thirteen Weeks Ended July 30, 1997 compared to Thirteen Weeks Ended July 31,
1996.
Net sales for the thirteen weeks ended July 30, 1997 (the "1998 Second
Quarter") were approximately $35.7 million, compared to approximately $38.2
million for the thirteen weeks ended July 31, 1996 (the "1997 Second Quarter").
Comparable store sales decreased 5.0% for the 1998 Second Quarter as compared to
the 1997 Second Quarter. These decreases are primarily a result of the inclusion
of approximately $0.7 million of sales in the 1997 Second Quarter directly
related to the 1996 Olympic Games in the Atlanta area as well as an undetermined
amount of additional business indirectly related to the Olympic Games during the
1997 Second Quarter. Increased competition in the Atlanta area also contributed
towards lower sales during the 1998 Second Quarter.
Gross profit for the 1998 Second Quarter decreased to approximately
$8.4 million or 23.5% of net sales compared to approximately $10.1 million or
26.3% of net sales for the 1997 Second Quarter. The 1998 Second Quarter gross
profit was negatively impacted primarily by the Company's efforts to reduce slow
moving non-perishable inventory with markdowns and close out pricing, which
accounted for approximately $0.8 million of the decrease. Further contributing
to the reduction in gross profit during the 1998 Second Quarter were costs
relating to the Company's efforts to improve efficiencies in the bakery and
prepared foods manufacturing facilities.
Direct store expenses increased slightly to approximately $5.9 million
during the 1998 Second Quarter compared to approximately $5.8 million during the
1997 Second Quarter. While the Company experienced an increase in repairs and
maintenance, higher rent expenses due to the new Harry's In A Hurry store
scheduled to open in December 1997 and retrospective adjustments to worker's
compensation expense, there was a partial offset in direct store expenses
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<PAGE>
as a result of a decrease in labor costs, supplies and equipment leases. In
addition to the aforementioned, as a result of the decrease in 1998 Second
Quarter sales as compared to 1997 Second Quarter sales, direct store expenses as
a percentage of net sales increased to 16.5% compared with 15.2% in the 1997
Second Quarter.
Selling, general and administrative expenses increased to approximately
$3.2 million or 9.0% of net sales in the 1998 Second Quarter compared to
approximately $2.8 million or 7.2% of net sales in the 1997 Second Quarter. This
increase in the 1998 Second 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, training new personnel for the new Harry's
In A Hurry store scheduled to open in December 1997 and an increase in reserves
as a result of the increase in the Company's receivables. These expenses were
partially offset with lower advertising expenses and lower general insurance
costs.
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 $0.81 million in the 1998 Second Quarter from
approximately $0.87 million in the 1997 Second Quarter. As a percentage of
sales, depreciation and amortization remained relatively unchanged at 2.3% of
net sales. This decline in depreciation and amortization expense is the result
of certain assets becoming fully depreciated prior to and during the 1998 Second
Quarter.
Due to the reasons set forth above, during the 1998 Second Quarter the
Company's operations resulted in an operating loss of approximately $1.5 million
or (4.2)% of net sales as compared to an operating profit in the 1997 Second
Quarter of approximately $0.6 million or 1.6% of net sales.
Interest expense decreased to approximately $0.5 million or 1.5% of net
sales in the 1998 Second Quarter compared to approximately $0.7 million or 1.7%
of net sales in the 1997 Second 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 approximating 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 decreased to approximately $0.3 million or 0.9% of net
sales during the 1998 Second Quarter, from approximately $0.4 million or 1.1% of
net sales in the 1997 Second Quarter. Included in the 1997 Second Quarter other
income was the gain from the proceeds of the sale of the Nashville, Tennessee
property of approximately $0.2 million. Included in the 1998 Second Quarter is
higher rental income from the Cobb County shopping center and a gain from the
sale of certain equipment, both totaling approximately $0.1 million.
During the fiscal quarter ended April 30, 1997, the Company established
an income tax provision of approximately $0.02 million which, as a result of the
net loss incurred during the 1998 Second Quarter, has been reversed for the 1998
Second Quarter. The Company has net operating loss carry forwards of
approximately $23.0 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 Second Quarter of approximately $1.7 million or $(.28) per common
and common equivalent share, compared with a net profit of approximately $0.3
million or $.05 per common and common equivalent share during the 1997 Second
Quarter.
Twenty-Six Weeks Ended July 30, 1997 compared to Twenty-Six Weeks Ended July 31,
1996.
Net sales for the twenty-six weeks ended July 30, 1997 (the "1998
Period") decreased to approximately $69.7 million from approximately $71.7
million for the twenty-six weeks ended July 31, 1996 (the "1997 Period"). On a
comparable store basis, sales decreased 2.1%. This decrease is primarily the
result of the inclusion in the 1997 Period of approximately $0.7 million of
revenues directly associated with the Olympic Games in the Atlanta area.
Additionally, during the
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<PAGE>
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 $17.3
million or 24.9% from approximately $19.0 million or 26.5% in the 1997 Period.
This decrease resulted primarily by 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 Second Quarter, 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
$11.4 million or 16.3% of net sales from approximately $11.2 million or 15.6% of
net sales for 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 because of wage increases and additional labor hours (time spent in
addition to regular duties) for training and consulting with PFCI employees and
consultants, 2) higher repairs and maintenance expenses due to increased
purchases of, and ordinary repairs of, store equipment, 3) increased safety and
sanitation expenses, 4) increased workers' compensation expense due to
retrospective workers' compensation adjustments and, 5) increased rent for the
new Harry's in A Hurry store scheduled to open in December 1997. These expenses
were partially offset with a decrease in supplies, utilities and equipment
leases.
Selling, general and administrative expense for the 1998 Period
increased to approximately $6.0 million or 8.7% of net sales from approximately
$5.5 million or 7.6% of net sales in the 1997 Period. The increase in the 1998
Period 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 relating to the development of new management
information systems, training new personnel for the new Harry's In A Hurry
store, an increase in reserves as
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<PAGE>
increase in reserves as a result of the increase in the Company's receivables
and higher repairs and maintenance. These expenses were partially offset with
lower advertising expenses and lower general insurance costs.
Depreciation and amortization declined to approximately $1.6 million or
2.3% of net sales in the 1998 Period from approximately $1.7 million or 2.4% of
net sales in the 1997 Period. This reduction resulted from certain assets
becoming fully depreciated prior to or during the 1998 Period.
Due to the reasons set forth above, the Company's operations during the
1998 Period resulted in an operating loss of $1.7 million or (2.4)% of net sales
as compared to an operating profit in the 1997 Period of $0.7 million or 0.9%.
Interest expense decreased to approximately $1.2 million or 1.7% of net
sales in the 1998 Period from approximately $1.4 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
approximating 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 $2.0 million
or 2.8% of net sales compared to approximately $0.9 million or 1.2% of net sales
in 1997 Period. This increase 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
$0.05 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.
As a result of the above, the Company's operations for the 1998 Period
incurred a net loss of approximately $0.9 million or ($.15) per common and
common equivalent share,
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<PAGE>
compared with a net profit of $0.02 million 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 $0.3 million in cash. The Company invested approximately $1.1
million in capital expenditures and incurred an increase of approximately $0.9
million in notes receivable. Additionally, the Company paid approximately $0.5
million on its line of credit and approximately $12.4 million on its long term
obligations. The Company received approximately $11.6 million net of expenses
from the convertible debt proceeds, approximately $0.5 million in proceeds from
the Consulting Agreement, as described herein, 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 the 1998 Period decreased by approximately $0.7 million resulting in a
cash balance at the end of the 1998 Period of approximately $0.6 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
$8.0 million under its Development Loan facility, as defined below.
Cash used by investing activities in the 1998 Period was approximately
$2.1 million. Investing activities consisted of capital expenditures for
property and equipment relating to stores, manufacturing facilities and the
corporate infrastructure, and an increase in notes receivable. During the 1998
Period, the Company used approximately $0.3 million on computer hardware to
improve current information systems, approximately $0.4 million on computer
software to improve the Company's codification of manufacturing processes as
well as financial management information systems, and approximately $0.4 million
for floor equipment, building improvements, and additional transportation
equipment for use at the stores and manufacturing facilities. Total capital
expenditures were approximately $1.1 million. In addition to capital
expenditures, notes receivable increased by approximately $0.9
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<PAGE>
million primarily for the financing of the Company's principal supplier of
premium quality tomatoes, as described below. Total cash used by investing
activities was approximately $2.1 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 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, may 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.
Cash provided by financing activities in the 1998 Period was
approximately $1.6 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
$0.4 million, net proceeds from the issuance of the convertible debt, of
approximately $11.6 million, net proceeds from the sale of warrants of
approximately $1.0 million, approximately $0.5 million payment on the line of
credit, 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, $8.0
million available under the Development Loan facility. Cash at the end of the
1998 Period was approximately $0.6 million.
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<PAGE>
To increase liquidity, the Company continues to seek
purchaser(s)/leasee(s) for the unused portion of the distribution facility, as
well as the remaining outparcel at the Gwinnett County megastore property.
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, 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. In addition, the Company
operates a United States Department of Agriculture ("USDA") approved facility
located at its Alpharetta Megastore. This plant produces approximately 300
different prepared foods with a USDA compliance inspection record of 99.5%.
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
during the late summer of 1997. However, as a result of longer than expected
training and education for the store employees, as well as proper design
implementation, that store is now anticipated to open in December 1997.
On January 31, 1997, the Company entered into a series of agreements
with Progressive Food Concepts, Inc. ("PFCI") pursuant to which PFCI loaned the
Company $12.0 milion 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 contain a commitment to loan up to an additional $8.0 million
(the "Development Loan"), which is 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
-16-
<PAGE>
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.
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 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.
PFCI was formed with a $17 million loan from Boston Chicken, Inc.
convertible into shares of PFCI common stock, as well as certain financing
commitments from certain members of the management of Boston Chicken, Inc. and
private investors.
In addition, 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 (the "Intellectual Property"), $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 a five-year mutual
consulting agreement (the "Consulting Agreement"). Pursuant to the transfer of
intellectual property rights, the Company also received a 2.5% interest in PFCI.
The Company used approximately $13.0 million of the proceeds from the
transactions discussed above 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
-17-
<PAGE>
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 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 aforementioned transactions, 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 $3.2 million. The weighted average interest rate during the 1998
Period was approximately 9.95%. The maximum borrowings outstanding at any month
end during the 1998 Period totaled approximately $10.5 million. The line of
credit and term loan is collaterallized by substantially all assets of the
Company. The total amount drawn at July 30, 1997 was approximately $10.4
million. The total amount available at July 30, 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
-18-
<PAGE>
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 financial results, business strategy,
plans for future business development activities, 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.
-19-
<PAGE>
PART II - OTHER INFORMATION
<PAGE>
Item 4. Submission of Matters to a Vote of Security Holders.
On June 18, 1997, the Company held its Annual Meeting of Shareholders
(the "Meeting"). At the Meeting, the shareholders of the Company voted on the
following matter:
Election of the following individuals, which constitute the entire
Board of Directors, as directors of the Company for a term of one year, with
votes cast as set forth below:
Nominee Votes For: Votes Against:
------- ---------- --------------
Harry A. Blazer 24,232,651 77,997
John D. Branch 24,238,757 71,891
Robert C. Glustrom 24,239,807 70,841
William J. Horvath 24,239,577 71,071
Terry L. Ransom 24,235,834 74,814
Item 6. Exhibits and Reports on Form 8-K
a. Exhibits. The following exhibit is filed with this report:
Exhibit
Number Description of Exhibit
------ ----------------------
10.1 Amendment to Loan Documents and Consent dated as
of June 6, 1997 between the Company, PFCI and
Creditanstalt-Bankverein.
b. No reports on Form 8-K were filed during the quarter ended July 30,
1997.
-21-
<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: September 10, 1997 By: /s/ Harry A. Blazer
----------------------- ---------------------
HARRY A. BLAZER
Chairman, President and Chief Executive Officer
(principal executive officer)
Dated: September 10 , 1997 By: /s/ Harold C. Weissman
----------------------- ----------------------
HAROLD C. WEISSMAN
Treasurer and Chief Financial Officer
(principal financial and accounting officer)
-22-
<PAGE>
AMENDMENT TO LOAN DOCUMENTS
AND CONSENT
THIS AMENDMENT TO LOAN DOCUMENTS AND CONSENT (the "Agreement") is made
and entered into as of the 6th day of June, 1997, between HARRY'S FARMER'S
MARKET, INC., a Georgia corporation ("Borrower"), PROGRESSIVE FOOD CONCEPTS,
INC., (f/k/a HFMI ACQUISITION CORPORATION), a Delaware corporation ("Subordinate
Lender"), and CREDITANSTALT BANKVEREIN, an Austrian banking corporation, in its
capacity as the lender (the "Lender") and agent (the "Agent") under the Credit
Agreement referred to below.
W I T N E S S E T H :
- - - - - - - - - -
WHEREAS, Borrower, Lender and Agent are parties to that certain
Amended and Restated Credit Agreement, dated as of December 30, 1994, as amended
(as amended, modified, restated or supplemented from time to time, the "Credit
Agreement"); and
WHEREAS, Borrower and Subordinate Lender are parties to that certain
Secured Loan Agreement dated as of January 31, 1997 (the "Original Subordinate
Loan Agreement"); and
WHEREAS, Agent and Subordinate Lender are parties to that certain
Intercreditor Agreement dated as of January 31, 1997 (as amended, modified,
restated or supplemented from time to time, the "Intercreditor Agreement"); and
WHEREAS, Borrower and Subordinate Lender desire to amend and restate
the Original Subordinate Loan Agreement to, among other things, establish a
special development credit facility; and
WHEREAS, in connection with their desire to amend and restate the
Original Subordinate Loan Agreement, Borrower and Subordinate Lender have
entered into that certain Amended and Restated Secured Loan Agreement, dated of
even date herewith (the "New Subordinate Loan Agreement"), the effectiveness of
which is conditioned upon the execution and delivery of this Agreement by all
parties hereto; and
WHEREAS, such amendment and restatement requires Lender's consent
under the Credit Agreement and certain amendments to the Credit Agreement and
Intercreditor Agreement; and
<PAGE>
WHEREAS, Lender is willing to grant such consent, and Agent and Lender
are willing to amend the Credit Agreement and Intercreditor Agreement, subject
to the terms and conditions set forth herein.
NOW, THEREFORE, in consideration of the foregoing premises, and other
good and valuable consideration, the receipt and legal sufficiency of which is
hereby acknowledged, the parties hereto agree as follows:
1. All capitalized terms used herein and not otherwise expressly
defined herein shall have the respective meanings given to such terms in the
Credit Agreement.
2. Borrower and Subordinate Lender each hereby represent and
warrant to Agent and Lender that attached hereto as Exhibit A is a true, correct
---------
and complete copy of the New Subordinate Credit Agreement.
3. Borrower, Lender and Agent hereby agree that the Credit
Agreement is amended by deleting the definition of "Newco Loan Agreement" in
Section 1.1 and replacing it with the following:
"Newco Loan Agreement" shall mean the Amended and
--------------------
Restated Secured Loan Agreement, dated as of June 6, 1997,
between Newco and the Company, as amended, modified or
supplemented from time to time.
4. In accordance with Section 8.7 of the Credit Agreement, Lender
hereby consents to the amendment and restatement of the Original Subordinate
Credit Agreement on the terms set forth in the New Subordinate Credit Agreement
attached hereto as Exhibit A.
---------
5. Agent and Subordinate Lender hereby agree that the
Intercreditor Agreement is amended by deleting the third "WHEREAS" clause on
page one thereof and replacing it with the following:
WHEREAS, Subordinate Lender has agreed to extend certain
financial accommodations to Borrower pursuant to an Amended
and Restated Secured Loan Agreement dated as of June 6, 1997
between Subordinate Lender and Borrower (the "Subordinate Loan
Agreement"), and has secured the payment of all indebtedness,
obligations and liabilities of the Borrower to the Subordinate
Lender arising out of the Subordinated Loan Documents (as
hereinafter defined), whether now existing or hereafter
arising, direct or indirect, absolute or contingent, joint
and/or several, arising by operation of law or otherwise
(herein collectively called the "Subordinated Debt") by
receiving from Borrower and its Subsidiaries (other than RPI)
a security interest in substantially all of their respective
personal property pursuant to the Subordinate Loan Agreement;
and
-2-
<PAGE>
6. Agent and Subordinate Lender hereby agree that the
Intercreditor Agreement is amended by deleting Section 4 thereof and replacing
it with the following:
4. Permitted Transactions. Notwithstanding anything to the
----------------------
contrary set forth herein:
(a) Borrower may make, and Subordinate Lender may accept,
the regularly scheduled payments of interest provided for in the
Subordinated Loan Agreement and payments of principal with respect to
the Special Development Loan (as defined in the Subordinated Loan
Agreement), without giving effect to any amendment or modification
thereof which would have the effect of increasing any such payment or
accelerating the maturity thereof; provided, however, that:
-------- -------
(i) No payment may be made by Borrower on account
of the interest on the Subordinated Debt or the principal on the
Special Development Loan (A) upon the maturity of any Senior
Indebtedness of Borrower by lapse of time, acceleration (unless
waived) or otherwise, unless and until all principal of, premium, if
any, and interest on such Senior Indebtedness are first paid in full
(or such payment is duly provided for), or (B) in the event of default
in the payment of any principal of, premium, if any, or interest on
any Senior Indebtedness of Borrower when it becomes due and payable,
whether at maturity or at a date fixed for prepayment or by
declaration or otherwise (a "Payment Default"), unless and until such
Payment Default has been cured or waived or otherwise has ceased to
exist.
(ii) Upon (A) the happening of an event of default
(other than a Payment Default) that permits, or would permit with (w)
the passage or time, (x) the giving of notice, (y) the making of any
payment of the Subordinated Debt then required to be made, or (z) any
combination thereof (collectively, a "Non-Payment Default"), the Agent
immediately to accelerate its maturity and (B) written notice of such
Non-Payment Default given to Borrower and the Subordinate Lender by
the Agent (a "Payment Notice"), then, unless and until such Non-
Payment Default has been cured or waived or otherwise has ceased to
exist, no payment by set-off or otherwise may be made by or on behalf
of Borrower on account of the interest on the Subordinated Debt or the
principal on the Special Development Loan. Notwithstanding the
foregoing, unless (1) the Senior Indebtedness has been declared due
and payable in its entirety within 179 days after the Payment Notice
is delivered as set forth above (the "Payment Blockage Period"), and
(2) such declaration has not been rescinded or waived, at the end of
the Payment Blockage Period, Borrower shall be required to pay all
sums not paid to the Subordinate Lender during the Payment Blockage
Period due to the foregoing prohibitions which were scheduled to be
payable
(b) The aggregate principal amount of Subordinated Debt
may be reduced as a result of Subordinate Lender contributing such
Subordinated Debt
-3-
<PAGE>
to the capital of Borrower in payment of the purchase price for shares
of Series B Preferred Stock (as such term is defined in the Senior
Credit Agreement) issued to Subordinate Lender as contemplated by
Section 3.9 of the Subordinate Loan Agreement.
7. Borrower hereby restates, ratifies, and reaffirms each and
every term, condition, representation and warranty heretofore made by it or in
connection with the execution and delivery of the Credit Agreement, as amended
hereby, and the other loan documents executed and/or delivered in connection
therewith (the "Loan Documents"), as fully as though such representations and
warranties had been made on the date hereof and with specific reference to this
Agreement (except to the extent any such representation or warranty relates
solely to a prior date).
8. Subordinate Lender hereby restates, ratifies, and reaffirms
each and every term, condition, representation and warranty heretofore made by
it under or in connection with the execution and delivery of the Intercreditor
Agreement, as amended hereby, as fully as though such representations and
warranties had been made on the date hereof and with specific reference to this
Agreement (except to the extent any such representation or warranty relates
solely to a prior date).
9. Except as expressly amended hereby, the Credit Agreement and
Intercreditor Agreement shall be and remain in full force and effect.
10. Borrower agrees to pay on demand all costs and expenses of
Agent and Lender in connection with the preparation, execution, delivery and
enforcement of this Agreement and any other transactions contemplated hereby,
including, without limitation, the reasonable fees and out-of-pocket expenses of
legal counsel to Agent and Lender.
11. To induce Agent and Lender to enter into this Agreement,
Borrower hereby (i) represents and warrants that, as of the date hereof and
after giving effect to the terms hereof, there exists no Event of Default (or
any event which, with the giving of notice or the passage of time, or both,
would constitute an Event of Default) under the Credit Agreement or any of the
Loan Documents, and (ii) acknowledges and agrees that no right of offset,
defense, counterclaim claim or objection exists in favor of Borrower against
Agent or Lender arising out of or with respect to any of the indebtedness
evidenced by the Credit Agreement.
12. Borrower and Subordinate Lender agree to take such further
action as Lender shall reasonably request in connection herewith to evidence the
amendments herein contained to the Credit Agreement and Intercreditor Agreement.
13. This Agreement may be executed in any number of counterparts
and by different parties hereto in separate counterparts each of which, when so
executed and delivered, shall be deemed to be an original and all of which
counterparts, taken together, shall constitute but one and the same instrument.
-4-
<PAGE>
14. This Agreement shall be binding upon and inure to the benefit
of the successors and permitted assigns of the parties hereto.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to
be duly executed under seal, all as of the date first above written.
BORROWER:
HARRY'S FARMER'S MARKET, INC.
By: _______________________________
Name: ________________________
Title: ________________________
Attest: ___________________________
Name: ________________________
Title: ________________________
[CORPORATE SEAL]
SUBORDINATE LENDER:
PROGRESSIVE FOOD CONCEPTS, INC.
By: _______________________________
Name: ________________________
Title: ________________________
Attest: ___________________________
Name: ________________________
Title: ________________________
[CORPORATE SEAL]
-5-
<PAGE>
LENDER:
CREDITANSTALT-BANKVEREIN
By: _______________________________
Name: ________________________
Title: ________________________
And: _______________________________
Name: ________________________
Title: ________________________
AGENT:
CREDITANSTALT-BANKVEREIN
By: _______________________________
Name: ________________________
Title: ________________________
And: _______________________________
Name: ________________________
Title: ________________________
Acknowledged and Agreed:
MARTHASVILLE TRADING COMPANY
By: _______________________________
Name: ________________________
Title: ________________________
KARALEA, INC.
By: _______________________________
Name: ________________________
Title: ________________________
-6-
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM 10-Q
FOR PERIOD ENDED JULY 30, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JAN-28-1998
<PERIOD-START> JAN-30-1997
<PERIOD-END> JUL-30-1997
<CASH> 622
<SECURITIES> 0
<RECEIVABLES> 142
<ALLOWANCES> 0
<INVENTORY> 8,725
<CURRENT-ASSETS> 11,955
<PP&E> 67,592
<DEPRECIATION> 22,720
<TOTAL-ASSETS> 59,735
<CURRENT-LIABILITIES> 7,297
<BONDS> 13,580<F1>
<COMMON> 38,609
10,361<F4>
0
<OTHER-SE> (22,007)
<TOTAL-LIABILITY-AND-EQUITY> 59,735
<SALES> 69,726
<TOTAL-REVENUES> 69,726
<CGS> 52,383
<TOTAL-COSTS> 19,013
<OTHER-EXPENSES> (804)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,182<F2>
<INCOME-PRETAX> (940)
<INCOME-TAX> 0
<INCOME-CONTINUING> (940)<F3>
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (940)
<EPS-PRIMARY> (0.15)
<EPS-DILUTED> 0
<FN>
<F1>SHORT TERM PORTION INCLUDED IN CURRENT LIABILITIES
<F2>INCLUDED IN OTHER EXPENSES
<F3>LOSS NET OF ACRRETION OF WARRANTS
<F4>MANDATORY REDEEMABLE FOR $11 MILLION
</FN>
</TABLE>
