<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 28, 1998 0-21486
HARRY'S FARMERS MARKET, INC.
------------------------------------------------------
(Exact Name of Registrant as Specified in Its Charter)
Georgia 58-2037452
- ------------------------------- ----------------------------
(State or Other Jurisdiction of (I.R.S. Employer
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 December 10, 1998
Class B Common 2,050,701
- --------------------------------- --------------------------------
Class Outstanding at December 10, 1998
<PAGE>
Harry's Farmers Market, Inc. and Subsidiaries
Consolidated Balance Sheets
<TABLE>
<CAPTION>
Amounts in thousands (Unaudited)
October 28, January 28,
1998 1998
--------------------------------------------------
ASSETS
<S> <C> <C>
CURRENT ASSETS
Cash $ 999 $ 1,479
Accounts receivable, net of allowance 73 89
Inventories 8,113 8,568
Prepaid expenses 606 698
Other current assets 671 663
---------------- -----------------
Total current assets 10,462 11,497
PROPERTY AND EQUIPMENT
Buildings 29,841 28,562
Equipment 29,618 25,510
Vehicles 185 190
---------------- -----------------
59,644 54,262
Accumulated depreciation (26,831) (23,440)
---------------- -----------------
32,813 30,822
Land 7,224 7,224
---------------- -----------------
40,037 38,046
OTHER ASSETS
Other Property and Equipment 6,986 7,080
Deposits on equipment 310 303
Loan costs 113 121
Other 225 200
---------------- -----------------
7,634 7,704
---------------- -----------------
Total assets $58,133 $57,247
================ =================
</TABLE>
See accompanying notes to financial statements.
2
<PAGE>
Harry's Farmers Market, Inc. and Subsidiaries
Consolidated Balance Sheets
<TABLE>
<CAPTION>
Amounts in thousands (Unaudited)
October 28, January 28,
1998 1998
------------------------------------------
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Current maturities of long-term obligations $ 1,647 $ 447
Accounts payable -- trade 6,149 5,849
Workers' compensation and general liability insurance 436 636
Accrued payroll and payroll taxes payable 601 640
Sales taxes payable 48 77
Other accrued liabilities 729 745
----------------- ----------------
Total current liabilities 9,610 8,394
LONG-TERM OBLIGATIONS, NET OF CURRENT MATURITIES 13,207 13,359
CONVERTIBLE DEBT 15,131 13,043
OTHER NON-CURRENT LIABILITIES 523 489
REDEEMABLE PREFERRED STOCK 10,545 10,434
STOCKHOLDERS' EQUITY
Common Stock - Class A 34,674 34,674
Common Stock - Class B 3,936 3,936
Additional Paid-in Capital 1,417 1,527
Accumulated deficit (30,910) (28,609)
----------------- ----------------
Total stockholders' equity 9,117 11,528
----------------- ----------------
Total liabilities and stockholders' equity $ 58,133 $ 57,247
================= ================
</TABLE>
See accompanying notes to financial statements.
3
<PAGE>
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,
------------------------------------------------------------------
October 28, 1998 October 29, 1997
------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net sales $ 31,925 100.0 % 32,634 100.0 %
Cost of goods sold 23,189 72.6 % 23,944 73.4 %
---------- ---------- ---------- ----------
Gross profit 8,736 27.4 % 8,690 26.6 %
Operating expenses
Direct store expenses 5,584 17.5 % 5,603 17.2 %
Selling, general & administrative expenses 3,360 10.5 % 3,360 10.3 %
Depreciation and other amortization 1,056 3.3 % 850 2.6 %
Loss on impairment of asset - 0.0 % 2,868 8.8 %
---------- ---------- ---------- ----------
Total operating expenses 10,000 31.3 % 12,681 38.9 %
Operating loss (1,264) (4.0)% (3,991) (12.2)%
Interest expense 591 1.9 % 532 1.6 %
Other income (305) (1.0)% (283) (0.9)%
Loss on writedown of note receivable - 0.0 % 750 2.3 %
---------- ---------- ---------- --------
Pretax loss (1,550) (4.9)% (4,990) (15.3)%
Income taxes - 0.0 % - 0.0 %
---------- ---------- ---------- --------
Net loss (1,550) (4.9)% (4,990) (15.3)%
Provision for accretion of warrants (37) (0.1)% (37) (0.1)%
---------- ---------- ---------- ---------
Loss applicable to common shareholders $ (1,587) (5.0)% $ (5,027) (15.4)%
============ ========== ========== ========
Net loss per common share
Basic $ (0.26) $ (0.81)
============ ==========
Diluted $ (0.26) $ (0.81)
============ ==========
</TABLE>
See accompanying notes to financial statements.
4
<PAGE>
Harry's Farmers Market, Inc. and Subsidiaries
Consolidated Statement of Operations
<TABLE>
<CAPTION>
(Unaudited)
Amounts in thousands, except per share data
For the Thirty-nine Weeks Ended,
----------------------------------------------------------------------
October 28, 1998 October 29, 1997
---------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net sales $99,388 100.0 % $102,360 100.0 %
Cost of goods sold 71,538 72.0 % 76,325 74.6 %
----------------------------- --------------------------
Gross profit 27,850 28.0 % 26,035 25.4 %
Operating expenses
Direct store expenses 16,384 16.5 % 16,972 16.2 %
Selling, general & administrative expenses 9,978 10.0 % 9,244 9.0 %
Depreciation and other amortization 2,983 3.0 % 2,447 2.4 %
Loss on impairment of asset -- 0.0 % 2,868 2.8 %
----------------------------- --------------------------
Total operating expenses 29,345 29.5 % 31,531 30.8 %
Operating loss (1,495) (1.5)% (5,496) (5.4)%
Interest expense 1,788 1.8 % 1,713 1.7 %
Other income (982) (1.0)% (2,268) (2.2)%
Loss on writedown of note receivable -- 0.0 % 914 0.9 %
----------------------------- --------------------------
Pretax loss (2,301) (2.3)% (5,855) (5.7)%
Income taxes -- -- 0.0 %
----------------------------- --------------------------
Net loss (2,301) (2.3)% (5,855) (5.7)%
Provision for accretion of warrants (111) (0.1)% (111) (0.1)%
----------------------------- --------------------------
Loss applicable to common shareholders $ (2,412) (2.4)% $ (5,966) (5.8)%
============================= ==========================
Net loss per common share
Basic $ (0.39) $ (0.97)
================== =================
Diluted $ (0.39) $ (0.97)
================== =================
</TABLE>
See accompanying notes to financial statements.
5
<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 28, 1998 October 29, 1997
-------------------------------------------------------------
<S> <C> <C>
Changes in Cash
Cash flows from operating activities:
Net loss $(2,301) $(5,855)
Adjustments to reconcile net loss
to cash provided by (used in) operations:
Depreciation and amortization 3,539 3,480
Loss on impairment of assets 0 2,868
Gain on sale of intellectual property 0 (1,422)
Loss on writedown of notes receivable 63 914
Decrease in accounts receivable 36 49
Decrease in inventories 5 193
(Increase) decrease in prepaid and deferred expenses 92 (155)
(Increase) decrease in other assets 157 (688)
Increase (decrease) in accounts payable 300 (1,097)
Increase (decrease) in accrued liabilities (52) 322
Increase (decrease) in deferred revenue (109) 425
--------------- ----------------
Net cash provided by (used in) operating activities 1,730 (966)
Cash flows from investing activities:
Capital expenditures, including capitalized interest (3,053) (1,889)
Proceeds from sale of property and equipment 37 -
Proceeds from sale of intellectual property, net of costs - 1,422
(Increase) decrease in notes receivable 76 (1,087)
--------------- ---------------
Net cash used in investing activities (2,940) (1,554)
Cash flows from financing activities:
Line of credit (46) 18
Principal payments on long-term obligations (1,224) (12,481)
Proceeds from issuance of convertible debt 2,000 13,060
Proceeds from warrants - 994
--------------- ---------------
Net cash provided by financing activities 730 1,591
--------------- ---------------
Net decrease in cash (480) (929)
Cash at beginning of period 1,479 1,326
--------------- ---------------
Cash at end of period $ 999 $ 397
=============== ===============
Supplemental Schedule of Noncash Investing and Financing Activities:
Capital leases $ 2,385 -
</TABLE>
See accompanying notes to financial statements.
6
<PAGE>
HARRY'S FARMERS MARKET, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
OCTOBER 28, 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 October 28, 1998 and the results of operations and cash flows for the 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 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 October 28, 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.
7
<PAGE>
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 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 loss per share.
<TABLE>
<CAPTION>
FOR THE THIRTEEN WEEKS ENDED: October 28 1998 October 29, 1997
--------------- ----------------
<S> <C> <C>
Numerator for basic net loss per common share
- income attributable to common stockholders $ (1,587) $(5,027)
======== =======
Denominator for basic net loss per common share
- weighted average shares outstanding 6,183 6,183
Effect of dilutive options and warrants - -
------- -------
Denominator for diluted net loss per common share
- adjusted weighted shares outstanding 6,183 6,183
------- -------
Basic net loss per share $ (0.26) $ (0.81)
======= =======
Diluted net loss per share $ (0.26) $ (0.81)
======= =======
FOR THE THIRTY-NINE WEEKS ENDED: October 28, 1998 October 29, 1997
---------------- ----------------
Numerator for basic net loss per common share
- income attributable to common stockholders $(2,412) $(5,966)
======= =======
Denominator for basic net loss per common share
- weighted average shares outstanding 6,183 6,183
Effect of dilutive options and warrants - -
------- -------
Denominator for diluted net loss per common share
- adjusted weighted shares outstanding 6,183 6,183
------- -------
Basic net loss per share $ (0.39) $ (0.97)
======= ========
Diluted net loss per share $ (0.39) $ (0.97)
======= ========
</TABLE>
NOTE D - RECLASSIFICATION
- -------------------------
Certain items have been reclassified in the presentation of the first thirty-
nine weeks of fiscal 1998 to conform with the presentation in the current
period.
8
<PAGE>
NOTE E - STOCK OPTIONS:
- ----------------------
During the quarter ended October 28, 1998, the following changes occurred in
outstanding stock options:
<TABLE>
<CAPTION>
Shares Exercised Price
------- ---------------
<S> <C> <C>
Options outstanding, July 29, 1998 523,956 $2.50-6.00
Options granted -- --
Options cancelled -- --
Options exercised -- --
------- ----------
Options outstanding, October 28, 1998 523,956 $2.50-6.00
------- ----------
</TABLE>
NOTE E - NEW ACCOUNTING PRONOUNCEMENT
- -------------------------------------
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,
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 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.
9
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
- ---------------------
Thirteen Weeks Ended October 28, 1998 compared to Thirteen Weeks Ended October
29, 1997.
Net sales for the thirteen weeks ended October 28, 1998 (the "1999 Third
Quarter") were approximately $31.9 million, compared to approximately $32.6
million for the thirteen weeks ended October 29, 1997 (the "1998 Third
Quarter"). Included in the 1999 Third Quarter sales are sales from the two
Harry's In A Hurry stores which were opened subsequent to the 1998 Third
Quarter. Comparable store sales decreased 7.7% for the 1999 Third Quarter as
compared to the 1998 Third Quarter. Notwithstanding the aforementioned, October
1998 was the first month since December 1997 that the Company has seen an
increase in the Company's overall sales as compared with the same month in the
prior year. While management can only speculate as to the cause of the decline
in overall sales in the 1999 Third Quarter as compared to the 1998 Third
Quarter, it is the Company's belief that the primary reason for such decline is
attributed to a decline in sales at the megastores, which offset any gains
received from the Akers Mill and Dunwoody Harry's In A Hurry stores, which
opened in January 1998 and September 1998, respectively. However, while such
results are not necessarily indicative of future earnings, during the month of
October 1998, with the opening of the Dunwoody Harry's In A Hurry store on
September 19, 1998, the Company has finally seen positive Company-wide revenue
growth. Management believes the decline in sales at the megastores can be
attributed to increased drive times due to increased traffic congestion in
metropolitan Atlanta, a consumer trend which values convenience and
accessibility more highly everyday and an increased number of supermarkets and
restaurants that provide a more accessible alternative for the consumer.
Gross profit for the 1999 Third Quarter increased to approximately $8.74
million or 27.4% of net sales compared to approximately $8.69 million or 26.6%
of net sales for the 1998 Third Quarter. This increase is primarily the result
of the Company's continuing efforts to improve operating efficiency through the
implementation of necessary technology in each of its stores in order to provide
timely and accurate information to management. Furthermore, gross margin during
the 1999 Third Quarter was positively impacted by approximately 0.4% of net
sales as a result of the Company 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 quarter ending January 27, 1999, which
will likely result in higher operating expenses during such period.
Direct store expenses slightly decreased to approximately $5.58 million during
the 1999 Third Quarter compared to approximately $5.60 million during the 1998
Third Quarter. This decrease is primarily due to a decrease in labor and labor
related expenses in an effort by the Company to improve operating efficiencies.
In addition, the reduction in direct store expenses is directly related to a
decrease in lease expenses resulting from the Company's purchase and refinancing
of certain operating leases. These expense reductions were partially offset by
an increase in building rents, utilities and supplies related to the new Harry's
In A Hurry stores. As a result of the decrease in the 1999 Third Quarter sales
as compared to the 1998 Third Quarter sales, direct store expenses as a
percentage of net sales slightly increased to 17.5% as compared to 17.2% of net
sales during the 1998 Third Quarter.
10
<PAGE>
Selling, general and administrative expenses remained unchanged at
approximately $3.4 million for the 1999 Third Quarter as compared to the 1998
Third Quarter. While certain expenses, including wages and benefits and general
sales taxes were higher during the 1999 Third Quarter, such increases were
offset by decreases in advertising expenses, consulting fees and other
professional expenses and overall building rents. As a result of the decrease
in the 1999 Third Quarter sales as compared to the 1998 Third Quarter sales,
selling, general and administrative expenses as a percentage of net sales
increased to 10.5% as compared to 10.3% of net sales for the 1998 Third Quarter.
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 $1.1 million, or 3.3% of net sales, in the 1999 Third Quarter up
from approximately $0.9 million, or 2.6% of net sales, in the 1998 Third
Quarter. This increase resulted primarily from depreciation on new assets
purchased during fiscal 1999. In addition, as a result of the Company's
purchase and refinance, in accordance with a capital lease structure, of the
residual values of certain existing assets, the Company has reclassified such
assets, and is now depreciating them. Such assets had previously been
classified as operating leases.
During the 1998 Third Quarter, in connection with the diminished use by the
Company of its bakery and distribution center, which resulted in the current
relocation efforts of the bakery to the Alpharetta megastore, the Company
recorded a loss on the impairment of such facility of approximately $2.9 million
or 8.8% of net sales. The book value of such property has been adjusted to
reflect the approximate amount the Company anticipates receiving upon its sale.
Due to the reasons set forth above, during the 1999 Third Quarter the
Company's operations resulted in an operating loss of approximately $1.3 million
or (4.0)% of net sales as compared to an operating loss in the 1998 Third
Quarter of approximately $4.0 million or (12.2)% of net sales.
Interest expense increased to approximately $0.6 million or 1.9% of net sales
in the 1999 Third Quarter compared to approximately $0.5 million or 1.6% of net
sales in the 1998 Third Quarter. This increase is primarily the result of
interest on an additional $2.0 million in convertible debt received May 5, 1998
from Progressive Food Concepts, Inc. ("PFCI"), a wholly owned subsidiary of
Boston Chicken, Inc.("BCI"), in accordance with a prior agreement between the
parties. In addition, interest on long term obligations resulting from the
purchase and refinance, in accordance with a capital lease structure, of the
residual value of certain assets previously recorded as operating leases,
contributed to the increase in interest expense.
11
<PAGE>
Other income slightly increased to approximately $0.31 million or 1.0% of
net sales, from approximately $0.28 million or 0.9% of net sales in the 1998
Third Quarter. The increase is primarily due to approximately $0.05 million in
income received from leasing a portion of the Company's distribution facility.
During the 1998 Third Quarter, the Company wrote down its notes receivable
by approximately $0.8 million or 2.3% of net sales to cover losses in connection
with a note from its principal supplier of premium quality tomatoes. No such
material adjustment was made during the 1999 Third Quarter.
For the 1999 and 1998 Third Quarter, no income tax provision was necessary.
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.
Primarily as a result of the expenses associated with the Harry's In A
Hurry expansion program and, to a lesser extent, the expenses related to the
efforts to improve operating efficiencies, the Company's operations incurred a
net loss for the 1999 Third Quarter of approximately $1.6 million or $(.26) per
common share, compared with a net loss of approximately $5.0 million or $(.81)
per common share during the 1998 Third Quarter.
Thirty-nine Weeks Ended October 28, 1998 compared to Thirty-nine Weeks Ended
October 29, 1997.
Net sales for the thirty-nine weeks ended October 28, 1998 (the "1999
Period") decreased to approximately $99.4 million from approximately $102.4
million for the thirty-nine weeks ended october 29, 1997 (the "1998 Period").
Included in the 1999 Period sales are sales from the two Harry's In A Hurry
stores which were opened subsequent to the 1998 Period. On a comparable store
basis, sales decreased 7.0%. Notwithstanding the aforementioned, October 1998
was the first month since December 1997 that the Company has seen an increase in
the Company's overall sales as compared with the same month in the prior year.
While management can only speculate as to the cause of the decline in overall
sales in the 1999 Period as compared to the 1998 Period, it is the Company's
belief that the primary reason for such decline is attributed to a decline in
sales at the megastores, which offset any gains received from the Akers Mill and
Dunwoody Harry's In A Hurry stores, which opened in January 1998 and September
1998, respectively. However, while such results are not necessarily indicative
of future earnings, during the month of October 1998, with the opening of the
Dunwoody Harry's In A Hurry store on September 19, 1998, the Company has finally
seen positive Company-wide revenue growth. Management believes the decline in
sales at the megastores can be attributed to increased drive times due to
increased traffic congestion in metropolitan Atlanta, a consumer trend which
values convenience and accessibility more highly everyday and an increased
number of supermarkets and restaurants that provide a more accessible
alternative for the consumer.
12
<PAGE>
Gross profit for the 1999 Period increased to approximately $27.9 million
or 28.0% from approximately $26.0 million or 25.4% in the 1998 Period. 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. Gross margin increased despite the previous
negative impact El Nino has had on produce margins in general. Furthermore,
gross margin was positively impacted by approximately 0.4% of net sales as a
result of the Company 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 quarter ending January 27, 1999. In addition,
the 1998 Period gross profit was negatively impacted by the Company's efforts to
reduce slow moving non-perishable inventory with markdowns and close-out
pricing.
Direct store expenses for the 1999 Period decreased to approximately $16.4
million from approximately $17.0 million for the 1998 Period. During the 1999
Period direct store expenses were lower as a result of overall lower labor and
labor related expenses due to better labor controls, and lower lease expenses as
a result of the Company's purchase and refinancing of certain equipment pursuant
to a capital lease structure, which had previously been subject to operating
leases. The expenses were partially offset by an increase in building rents,
utility costs and supplies related primarily to the new, and projected, Harry's
in a Hurry stores. As a result of the decrease in the 1999 Period sales as
compared to the 1998 Period sales, direct store expenses as a percentage of net
sales increased slightly to 16.5% as compared to 16.2% of net sales from the
1998 Period.
Selling, general and administrative expenses for the 1999 Period increased
to approximately $10.0 million or 10.0% of net sales, from approximately $9.2
million or 9.0% of net sales, in the 1998 Period. The increase in the 1999
Period is primarily attributable to higher (1) labor and labor related expenses,
(2) advertising costs (3) sales taxes and (4) general insurance expenses.. Each
of the aforementioned increased expenses were incurred directly as a result of
opening the additional Harry's in a Hurry stores throughout fiscal 1999. In
addition, bank charges were higher due to an increase in customer usage of
credit cards. These expenses were offset with lower (1) repairs and maintenance
expenses, (2) utility costs, (3) consultant's fees, (4) hiring costs and (5)
legal and accounting fees, all as a result of the Company's cost reduction
efforts. In addition, reserves against receivables decreased during the 1999
Period.
Depreciation and amortization increased to approximately $3.0 million or
3.0% of net sales in the 1999 Period from approximately $2.4 million or 2.4% of
net sales in the 1998 Period. This increase resulted primarily from depreciation
on new assets purchased predominately for the Harry's In A Hurry stores. In
addition, the Company has reclassified certain existing assets, and is
depreciating such assets, which had previously been classified as operating
leases, as a result of the Company's purchase and refinance, in accordance with
a capital lease structure, of the residual values of such assets.
13
<PAGE>
During the 1998 Third Quarter, in connection with the Company's diminished
use of the facility at its bakery and distribution center, the Company recorded
a loss on the impairment of such facility of approximately $2.9 million or 2.8%
of net sales. The book value of the asset has been adjusted to reflect the
approximate amount the Company anticipates receiving upon its sale.
Due to the reasons set forth above, the Company's operations during the
1999 Period resulted in an operating loss of approximately $1.5 million or
(1.5)% of net sales as compared to an operating loss in the 1998 Period of
approximately $5.5 million or (5.4)%.
Interest expense increased slightly to approximately $1.79 million or 1.8%
of net sales, in the 1999 Period from approximately $1.71 million, or 1.7% of
net sales in the 1998 Period. This increase is primarily attributable to
interest on an additional $2.0 million of convertible debt received May 5, 1998
from PFCI, as well as additional interest on long term obligations resulting
from the purchase and refinance, in accordance with a capital lease structure,
of the residual value of certain assets previously recorded as operating leases.
Other income in the 1999 Period decreased to approximately $1.0 million or
1.0% of net sales compared to approximately $2.3 million or 2.2% of net sales in
1998 Period. The 1998 Period included 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. The 1999 Period includes approximately $0.2
million from leasing a portion of the Company's distribution facility.
During the 1998 Period, the Company wrote down its notes receivable by
approximately $0.9 million or 0.9% of net sales to cover losses in connection
with a note from its principal supplier of premium quality tomatoes.
As a result of the above, the Company's operations for the 1999 Period
incurred a net loss of approximately $2.4 million or ($.39) per common share,
compared with a net loss of approximately $6.0 million or ($.97) per common
share, for the 1998 Period. For the 1999 Period, this loss is primarily a
result of costs associated with the Harry's In A Hurry expansion program.
LIQUIDITY AND CAPITAL RESOURCES
During the 1999 Period, the Company's operating activities provided
approximately $1.7 million in cash. The Company invested approximately $3.1
million in capital expenditures during the 1999 Period. Additionally, the
Company paid approximately $0.05 million on its line of credit and approximately
$1.2 million on its long term obligations. The Company also received
approximately $2.0 million in additional
14
<PAGE>
convertible debt proceeds. As a result, net cash during the 1999 Period
decreased by approximately $0.5 million resulting in a cash balance at the end
of the 1999 Period of approximately $1.0 million. At the end of the 1999 Period,
the Company had available approximately $1.5 million in additional borrowing
capacity under its bank line of credit facility.
Cash used by investing activities in the 1999 Period was approximately $2.9
million. Investing activities consisted primarily of capital expenditures for
property and equipment relating to stores, manufacturing facilities and general
corporate infrastructure. During the 1999 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 its manufacturing processes, as well as financial
management information systems, and approximately $2.4 million for floor
equipment, building improvements and leasehold improvements at the stores and
manufacturing facilities. Of the $2.4 million, leasehold improvements and
equipment totaling $1.6 million have been utilized towards the two Harry's in a
Hurry stores that opened in January and September 1998. In addition, during the
1999 Period, approximately $0.1 million was expended for the fifth Harry's In A
Hurry store, which opened in the Virginia Highland area of Atlanta in December
1998. Total capital expenditures were approximately $3.1 million. Total cash
used by investing activities was approximately $2.9 million.
Cash provided by financing activities in the 1999 Period was approximately
$0.7 million. Financing activities consisted of approximately $2.0 million in
proceeds from convertible debt, approximately $1.2 million in principal payments
on long term obligations and approximately $0.05 million in payments on the
Company's line of credit. At the end of the 1999 Period, the Company had
approximately $1.5 million available on its bank line of credit facility.
To increase liquidity, the Company continues to seek purchaser(s)/leasee(s)
for the unused portion of the distribution and bakery facility, as well as the
remaining outparcel at the Gwinnett County megastore property.
The Company's working capital position in the 1999 Period was approximately
$0.9 million as compared to approximately $3.1 million at the end of the fiscal
year ended January 29, 1998. The decrease in working capital is primarily a
result of the Company's 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 decreased by approximately $0.5 million while accounts
payable increased by approximately $0.3 million. The Company has a line of
credit and term loan agreement with Bank Austria, Creditanstalt Corporate
Finance, Inc., formally known as Creditanstalt-Bankverein, 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
15
<PAGE>
outstanding borrowings during the 1999 Period was approximately $9.6 million.
The weighted average interest rate during the 1999 Period was approximately
9.58%. The maximum borrowings outstanding at any month end during the 1999
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 28, 1998 was approximately $10.5 million. The total amount
available at October 28, 1998 was approximately $1.5 million.
During the 1999 Third Quarter, the Company was informed that PFCI did not
intend to fund the remaining $2.0 million due to the Company in November 1998
under the development loan facility with PFCI. In October 1998, PFCI filed for
protection from creditors under Chapter 11 of the United States Bankruptcy Code.
The Company is currently evaluating all options at its disposal to address this
matter.
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 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.
YEAR 2000
The Company has performed an analysis and is modifying its computer
hardware and software to address year 2000 issues. The Company is also
contacting its banks and major suppliers to determine the extent to which the
Company may be vulnerable to third party year 2000 issues. Based on current
information, management believes that all hardware and software modifications
necessary to operate and effectively manage the Company will be performed by the
year 2000 and that related costs will not have a material impact on the results
of operations, cash flow or financial condition of future periods, with the
exception of approximately $1.1 million for certain front-end register systems.
16
<PAGE>
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:
general 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.
17
<PAGE>
PART II - OTHER INFORMATION
18
<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
28, 1998.
19
<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, 1998 By: /s/ Harry A. Blazer
----------------- -------------------
HARRY A. BLAZER
Chairman, President and Chief
Executive Officer
(principal executive officer)
Dated: December 11, 1998 By: /s/ Harold C. Weissman
------------------ -----------------------
HAROLD C. WEISSMAN
Treasurer and Chief Financial Officer
(principal financial and
accounting officer)
20
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S FORM 10Q FOR PERIOD ENDING OCTOBER 28, 1998 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 9-MOS
<FISCAL-YEAR-END> JAN-27-1999 JAN-27-1999
<PERIOD-START> JUL-30-1998 JAN-29-1998
<PERIOD-END> OCT-28-1998 OCT-28-1998
<CASH> 999 999
<SECURITIES> 0 0
<RECEIVABLES> 133 133
<ALLOWANCES> 60 60
<INVENTORY> 8,113 8,113
<CURRENT-ASSETS> 10,462 10,462
<PP&E> 66,868 66,868
<DEPRECIATION> 26,831 26,831
<TOTAL-ASSETS> 58,133 58,133
<CURRENT-LIABILITIES> 9,610 9,610
<BONDS> 13,207<F1> 13,207<F1>
10,545<F4> 10,545<F4>
0 0
<COMMON> 38,610 38,610
<OTHER-SE> (29,493) (29,493)
<TOTAL-LIABILITY-AND-EQUITY> 58,133 58,133
<SALES> 31,925 99,388
<TOTAL-REVENUES> 31,925 99,388
<CGS> 23,189 71,539
<TOTAL-COSTS> 10,000 29,345
<OTHER-EXPENSES> 286 806
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 591<F2> 1,788<F2>
<INCOME-PRETAX> (1,587)<F3> (2,412)<F3>
<INCOME-TAX> 0 0
<INCOME-CONTINUING> 0 0
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (1,587) (2,412)
<EPS-PRIMARY> (0.26) (0.39)
<EPS-DILUTED> (0.26) (0.39)
<FN>
<F1>SHORT TERM PORTION INCLUDED IN CURRENT LIABILITIES
<F2>INCLUDED IN OTHER EXPENSES
<F3>LOSS NET OF ACCRETION OF WARRANTS
<F4>MANDATORY REDEEMABLE FOR $11 MILLION
</FN>
</TABLE>
