<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:
April 29, 1998 0-21486
HARRY'S FARMERS MARKET, INC.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Georgia 58-2037452
- --------------------------------------------------------------------------------
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
1180 Upper Hembree Road, Roswell, Georgia 30076
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (770) 667-8878
-----------------------------
N/A
- --------------------------------------------------------------------------------
(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 4,132,257
---------------- ----------------------------
Class Outstanding at June 10, 1998
Class B Common 2,050,701
---------------- ----------------------------
Class Outstanding at June 10, 1998
<PAGE>
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)
April 29, January 28,
1998 1998
------------ -----------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash $ 537 $ 1,479
Accounts receivable, net of allowance 156 109
Inventories 8,694 8,568
Prepaid expenses 846 698
Other current assets 458 643
-------- --------
Total current assets 10,691 11,497
PROPERTY AND EQUIPMENT
Buildings 28,698 28,562
Equipment 28,510 25,510
Vehicles 196 190
-------- --------
57,404 54,262
Accumulated depreciation (24,435) (23,440)
-------- --------
32,969 30,822
Land 7,224 7,224
-------- --------
40,193 38,046
OTHER ASSETS
Other Property and Equipment 7,035 7,080
Deposits on equipment 280 303
Loan costs 61 121
Other 155 200
-------- --------
7,531 7,704
-------- --------
Total assets $ 58,415 $ 57,247
======== ========
</TABLE>
See accompanying notes to financial statements
-1-
<PAGE>
HARRY'S FARMERS MARKET, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
Amounts in thousands (Unaudited)
April 29, 1998 January 28, 1998
-------------- ----------------
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Current maturities of long-term obligations $ 1,778 $ 459
Accounts payable - trade 5,147 5,849
Workers' compensation and general liability
insurance 402 636
Accrued payroll and payroll taxes payable 599 640
Sales taxes payable 141 77
Other accrued liabilities 782 733
-------- --------
Total current liabilities 8,849 8,394
LONG-TERM OBLIGATIONS, NET OF CURRENT MATURITIES 13,977 13,359
CONVERTIBLE DEBT 13,072 13,043
OTHER NON-CURRENT LIABILITIES 494 489
REDEEMABLE PREFERRED STOCK 10,471 10,434
STOCKHOLDERS' EQUITY
Common Stock - Class A 34,674 34,674
Common Stock - Class B 3,936 3,936
Additional Paid-in Capital 1,491 1,527
Accumulated deficit (28,549) (28,609)
-------- --------
Total stockholders' equity 11,552 11,528
-------- --------
Total liabilities and stockholders' equity $ 58,415 $ 57,247
======== ========
</TABLE>
See accompanying notes to financial statements
-2-
<PAGE>
HARRY'S FARMERS MARKET, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Amounts in thousands, except per share date For the Thirteen Weeks Ended,
------------------------------------------------
April 29, 1998 April 30, 1997
--------------------- ---------------------
<S> <C> <C> <C> <C>
Net sales $33,059 100.0% $34,004 100.0%
Cost of goods sold 23,319 70.5% 25,070 73.7%
-------- ------- -------- -------
Gross profit 9,740 29.5% 8,934 26.3%
Operating expenses
Direct store expenses 5,310 16.1% 5,491 16.2%
Selling, general & administrative expenses 3,070 9.3% 2,829 8.3%
Depreciation and other amortization 1,038 3.1% 784 2.3%
-------- ------- -------- -------
Total operating expenses 9,418 28.5% 9,104 26.8%
Operating income (loss) 322 1.0% (170) -0.5%
Interest expense 597 1.8% 663 1.9%
Other income (335) -1.0% (1,685) -5.0%
-------- ------- -------- -------
Pretax income 60 0.2% 852 2.5%
Income taxes - 22 0.1%
-------- ------- -------- -------
Net income 60 0.2% 830 2.4%
Provision for accretion of warrants (37) -0.1% (37) -0.1%
-------- ------- -------- -------
Net income applicable to common shareholders
$ 23 0.1% $ 793 2.3%
======== ======= ======== =======
Net income (loss) per common share
Basic $ 0.00 $ 0.13
======== ========
Diluted $ (0.02) $ 0.04
======== ========
</TABLE>
See accompanying notes to financial statements
-3-
<PAGE>
HARRY'S FARMERS MARKET, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Amounts in thousands, except per share data For the Thirteen Weeks Ended,
----------------------------------------------
April 29, 1998 April 30, 1997
----------------------------------------------
<S> <C> <C>
Changes in Cash
Cash flows from operating activities:
Net income $ 60 $ 830
Adjustments to reconcile net earnings
to cash provided by operations:
Depreciation and amortization 1,110 1,130
Gain on sale of intellectual property - (1,422)
(Increase) decrease in accounts receivables (47) 148
Increase in inventories (126) (814)
Increase in pre-opening expenses - (61)
Increase in prepaid and deferred expenses (148) (121)
(Increase) decrease in other current assets 214 (28)
Decrease in accounts payable (702) (1,958)
Increase (decrease) in accrued liabilities (101) 404
Increase (decrease) in deferred revenue (25) 475
Increase in income tax payable - 22
-------- --------
Net cash provided by (used in) operating 235 (1,395)
activities
Cash flows from investing activities:
Capital expenditures, including capitalized interest (862) (449)
Proceeds from sale of property and equipment 42 -
Proceeds from sale of intellectual property, net of costs - 1,422
(Increase) decrease in notes receivable 25 (539)
-------- --------
Net cash provided by (used in) investing activities (795) 434
Cash flows from financing activities:
Proceeds from long-term debt, net of costs - 11,560
Line of credit 157 (371)
Principal payments on long-term obligations (539) (12,205)
Proceeds from warrants - 994
-------- --------
Net cash used in financing activities (382) (22)
-------- --------
Net decrease in cash (942) (983)
Cash at beginning of period 1,479 1,326
-------- --------
Cash at end of period $ 537 $ 343
======== ========
Supplemental Schedule of Noncash Investing and
Financing Activities:
Capital leases $2,385
</TABLE>
See accompanying notes to financial statements
-4-
<PAGE>
NOTES TO FINANCIAL STATEMENTS
APRIL 29, 1998
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 April 29, 1998 and the results of operations and cash flows for the thirteen
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 28, 1998 included in the Annual Report on Form 10-K filed by the
Company.
Due to the seasonal nature of the Company's business, the results for the
quarter ended April 29, 1998 are not necessarily indicative of the results for
the entire 1999 fiscal year.
NOTE B - INVENTORIES
Inventories consist primarily of grocery items, which are stated at the lower of
cost or market. Cost is determined under the first-in, first-out (FIFO)
valuation method.
NOTE C - EARNINGS PER SHARE
The Company has adopted Statement of Financial Accounting Standards No. 128
(SFAS 128), Earnings Per Share. Basic net earnings per common share is based
upon the weighted average number of common shares outstanding during the period.
Diluted net earnings per common share is based upon the weighted average number
of common shares outstanding plus dilutive potential common shares, including
options and warrants outstanding during the period. All comparative earnings
per share data for prior periods presented has been restated. The following
table sets forth the computation of basic and diluted income (loss) per share.
<TABLE>
<CAPTION>
April 29, 1998 April 30, 1997
--------------------- ---------------------
<S> <C> <C>
Numerator for basic net income (loss) per common share -
income attributable to common stockholders $ 23 $ 830
Interest savings from assumed conversion of Debt 198 179
Write off of discount on convertible debt (428) (546)
--------------------- ---------------------
Numerator for diluted net income (loss) per common share $ (207) $ 463
===================== =====================
Denominator for basic net income (loss) per common share -
weighted average shares outstanding 6,183 6,169
Effect of dilutive options and warrants - 267
Effect of assumed conversion of debt and preferred stock 5,067 4,692
--------------------- ---------------------
Denominator for diluted net income (loss) per common share -
adjusted weighted average shares outstanding 11,250 11,128
===================== =====================
Basic net income per share $ 0.00 $ 0.13
===================== =====================
Diluted net income (loss) per share $ (0.02) $ 0.04
===================== =====================
</TABLE>
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<PAGE>
NOTE D - STOCK OPTIONS
During the quarter ended April 29, 1998, the following changes occurred in
outstanding stock options:
<TABLE>
<CAPTION>
Shares Exercise Price
----------------- ----------------------
<S> <C> <C>
Options outstanding, January 28, 1998 583,475 $3.00 - 6.00
Options granted 256,440 $ 2.50
Options cancelled (327,280) $3.00 - 6.00
Options exercised - -
----------------- ----------------------
Options outstanding, April 29, 1998 512,635 $2.50 - 6.00
================= ======================
</TABLE>
NOTE E - NEW ACCOUNTING PRONOUNCEMENTS
The Financial Accounting Standards Board (FASB) has issued the following
Statement of Financial Accounting Standards (SFAS):
SFAS 131, Disclosures about Segments of an Enterprise and Related Information,
which is effective for financial statements for periods beginning after December
15, 1997. SFAS 131 requires companies to report information about an entity's
different types of business activities and the different economic environments
in which it operates, referred to as operating segments.
Additionally, the AICPA Accounting Standards Executive Committee has issued
Statement of Position (SOP) 98-1, Costs of Software for Internal Use and Related
Reengineering Costs, which is effective for fiscal years beginning after
December 15, 1998. SOP 98-1 segments an internal use software project into
stages and the accounting is based on the stage in which the cost is incurred.
Management does not expect the adoption of the Statement of Financial Accounting
Standard and SOP 98-1, referred to above, to have a material impact on the
Company's results of operations or financial condition.
-6-
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
- ---------------------
Thirteen Weeks Ended April 29, 1998 compared to Thirteen Weeks Ended April 30,
1997.
Net sales for the thirteen weeks ended April 29, 1998 (the "1999
Quarter") were approximately $33.0 million, compared to approximately $34.0
million for the thirteen weeks ended April 30, 1997 (the "1998 Quarter").
Comparable store sales decreased 6.5% for the period. This decrease is
primarily the result of the unusual weather conditions from the ocean warming
phenomenon known as "El Nino," which has adversely effected the availability,
quality and cost of many produce items that makes up a significant portion of
the Company's sales volume. In addition, the Company's sales have been
adversely affected by the growing competition in the Atlanta area.
Gross profit in the 1999 Quarter increased to approximately $9.7
million or 29.5% of net sales compared with approximately $8.9 million or 26.3%
of net sales in the 1998 Quarter. This increase is primarily the result of the
Company's continuing efforts to implement the necessary technology in its stores
in order to provide timely and accurate information to management. These efforts
have allowed the Company to more accurately predict demand and efficiently
control inventory. Gross margin has increased despite the negative impact El
Nino has had on produce margins in general, and despite the fact that labor
costs in manufacturing and distribution were up slightly. In addition, gross
margin was positively impacted by approximately 0.8% of net sales as a result of
no longer depreciating the bakery facility, which is being held for sale. The
Company currently intends to move the bakery to the Alpharetta megastore during
the 1999 Third Quarter.
Direct store expenses decreased to approximately $5.3 million or
16.1% of net sales in the 1999 Quarter compared to approximately $5.5 million or
16.2% of net sales in the 1998 Quarter. This decrease is primarily due to a
decrease in lease expenses as a result of the Company's purchase and refinancing
pursuant to a capital lease structure of certain equipment during the 1999
Quarter, which had previously been subject to operating leases. These expenses
were partially offset by an increase in equipment and building rents related to
the newest Harry's in a Hurry store, which opened in January 1998 in the Cobb
County area of Atlanta.
Selling, general and administrative expenses increased to
approximately $3.1 million or 9.3% of net sales in the 1999 Quarter from
approximately $2.8 million or 8.3% of net sales in the 1998 Quarter. The
increase in the 1999 Quarter is primarily attributable to higher labor costs to
support current and future growth and higher advertising expenses designed to
increase store sales. These expenses were partially offset by lower consulting
expenses.
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), increased
to approximately $1.0 million or 3.1% of net sales in the 1999 Quarter from
approximately $0.8 million or 2.3% of net sales in the 1998 Quarter. This
increase resulted primarily from depreciation on new assets purchased during
fiscal 1998 and fiscal 1999, including those items acquired for use at the third
Harry's In A Hurry store, which opened in January 1998. The majority of such new
assets, which had previously been classified as lease expenses, are a result of
the Company's recent purchase and refinance, in accordance with a capital lease
structure, of the residual values of such assets previously recorded as
operating leases.
Due to the reasons set forth above, the Company, during the 1999
Quarter, had an operating profit of approximately $0.3 million or 1.0.% of net
sales as compared to an operating loss in the 1998 Quarter of approximately $0.2
million or 0.5% of net sales.
Interest expense decreased slightly to approximately $0.60 million or
1.8% of net sales in the 1999 Quarter compared to approximately $0.66 million or
1.9% of net sales in the 1998 Quarter. This decrease is primarily attributable
to a non-recurring adjustment taken during the 1998 Quarter to interest expense,
as a result of the Company's early payoff of its previous credit facility. This
was partiality offset by additional interest on slightly higher long-term
obligations in the 1999 Quarter as compared to the 1998 Quarter.
-7-
<PAGE>
Other income decreased to approximately $0.3 million or 1.0% of net
sales during the 1999 Quarter, from approximately $1.7 million or 5.0% of net
sales in the 1998 Quarter. This decrease is primarily due to the one-time
recognition in the 1998 Quarter of the sale of certain of the Company's
intellectual property, net of expenses, in the amount of approximately $1.4
million to Progressive Food Concepts, Inc. ("PFCI"), a wholly owned subsidiary
of Boston Chicken, Inc.
For the 1999 Quarter no income tax provision was necessary. For the
1998 Quarter, the Company set up an income tax provision of approximately $0.02
million as a result of the income from the sale of the intellectual property.
The Company has net operating loss carry forwards of approximately $23.5 million
which may be applied against future earnings. However, 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 produced net income
for the 1999 Quarter of approximately $23,000 or $0.00 per common share,
compared with a net profit of approximately $0.8 million or $0.13 per common
share during the 1998 Quarter.
LIQUIDITY AND CAPITAL RESOURCES
During the 1999 Quarter, the Company's operating activities provided
approximately $0.2 million in cash. The Company invested approximately $0.9
million in capital expenditures. Additionally, the Company borrowed
approximately $0.2 million on its line of credit and paid approximately $0.5
million on its long-term obligations. As a result, net cash during the 1999
Quarter decreased by approximately $0.9 million resulting in a quarter-end cash
balance of approximately $0.5 million. In addition, as of the end of the 1999
Quarter, the Company had approximately $1.5 million in additional borrowing
capacity available under its bank line of credit and approximately $4.0 million
available under its Development Loan with PFCI. Subsequent to the end of the
1999 Quarter, the Company received $2.0 million from PFCI under such loan.
Cash used by investing activities in the 1999 Quarter was
approximately $0.8 million. Investing activities consisted primarily of capital
expenditures for property and equipment relating to stores, manufacturing
facilities, and the corporate infrastructure. During the 1999 Quarter, the
Company used approximately $0.3 million on computer hardware and software to
improve information systems and approximately $0.6 million for equipment and
building improvements, primarily for use at the new Harry's In A Hurry store, as
well as the Company's manufacturing facilities. Total capital expenditures were
approximately $0.9 million. Total cash used by investing activities was
approximately $0.8 million.
Cash provided by financing activities in the 1999 Quarter was
approximately $0.4 million. Financing activities consisted mainly of payments
of the Company's long-term debt of approximately $0.5 million, and borrowing on
the line of credit of approximately $0.2 million. At the end of 1999 Quarter,
the Company had approximately $1.5 million remaining on its bank line of credit
facility and approximately $4.0 million available under the Development Loan
facility. Cash at the end of the 1999 Quarter was approximately $0.5 million.
To increase liquidity, the Company continues to seek
purchaser(s)/leasee(s) for the unused portion of the distribution facility as
well as a remaining outparcel at the Gwinnett County megastore property.
The Company's working capital position in the 1999 Quarter was
approximately $1.8 million as compared to the fiscal year end of approximately
$3.1 million. The decrease in working capital is primarily a result of the
Company's recent purchase and refinance, to a capital lease structure, of the
residual values under certain operating leases, which has caused an increase in
current maturities on long term debt of approximately $1.3 million.
Additionally, inventory increased by approximately $0.1 million while accounts
payable decreased by approximately $0.7 million. At the end of the 1999 Quarter,
the Company had approximately $1.5 million available on its bank line of credit
and approximately
-8-
<PAGE>
$4.0 million available under its Development Loan with PFCI, as compared to
approximately $1.7 million and approximately $4.0 million, respectively, at the
end of fiscal 1998.
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 available
credit facilities will provide the Company with sufficient sources of funds to
satisfy its anticipated cash requirements in fiscal 1999. 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,
unavailability of anticipated financings, and other uncertainties detailed from
time to time in the Company's Securities and Exchange Commission filings.
-9-
<PAGE>
PART II - OTHER INFORMATION
<PAGE>
Item 1. Legal Proceedings
From time to time the Company is involved in lawsuits in the ordinary
course of business. Such lawsuits have not resulted in any material losses to
date, and the Company does not believe that the outcome of any existing lawsuits
will have a material adverse effect on its business or financial condition.
Item 2. Changes in Securities
There been no material modification in the instruments defining the
rights of shareholders. None of the rights evidenced by the shares of the
Company's common stock have been materially limited or qualified by the issuance
or modification of any other class of securities.
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
Item 6. Exhibits and Reports on form 8-K
A. No reports on Form 8-K were filed during the quarter for which this
report is filed.
-1-
<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: June 10, 1998 By: /S/ HARRY A. BLAZER
---------------- -----------------------
HARRY A. BLAZER
Chairman, President and Chief Executive
Officer
(principal executive officer)
Dated: June 10, 1998 By: /S/ HAROLD C. WEISSMAN
----------------- ---------------------------
HAROLD C. WEISSMAN
Treasurer and Chief Financial Officer
(principal financial and accounting
officer)
-2-
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM 10Q FOR
PERIOD ENDED APRIL 29, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JAN-27-1999
<PERIOD-START> JAN-29-1998
<PERIOD-END> APR-29-1998
<CASH> 537
<SECURITIES> 0
<RECEIVABLES> 246
<ALLOWANCES> 90
<INVENTORY> 8,694
<CURRENT-ASSETS> 10,691
<PP&E> 64,628
<DEPRECIATION> 24,435
<TOTAL-ASSETS> 58,415
<CURRENT-LIABILITIES> 8,849
<BONDS> 13,977<F1>
10,471<F4>
0
<COMMON> 38,610
<OTHER-SE> (27,058)
<TOTAL-LIABILITY-AND-EQUITY> 58,415
<SALES> 33,059
<TOTAL-REVENUES> 33,059
<CGS> 23,319
<TOTAL-COSTS> 9,418
<OTHER-EXPENSES> (262)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 597<F2>
<INCOME-PRETAX> 23<F3>
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 23
<EPS-PRIMARY> 0.00
<EPS-DILUTED> (0.02)
<FN>
<F1>SHORT TERM PORTION INCLUDED IN CURRENT LIABILITIES
<F4>MANDATORY REDEEMABLE FOR $11 MILLION
<F2>INCLUDED IN OTHER EXPENSES
<F3>LOSS NET OF ACCRETION OF WARRANTS
</FN>
</TABLE>
