<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:
May 5, 1999 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 issuer's classes of
common stock, as of the latest practicable date:
Class A Common 4,139,375
------------------------ ----------------------------
Class Outstanding at June 17, 1999
Class B Common 2,050,701
----------------------------- ----------------------------
Class Outstanding at June 17, 1999
-1-
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. Financial Statements
-2-
<PAGE>
Harry's Farmers Market, Inc. and Subsidiaries
Consolidated Balance Sheets
<TABLE>
<CAPTION>
Amounts in thousands (Unaudited)
May 5, February 3,
1999 1999
------------------- ------------------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash $ 341 $ 1,697
Accounts receivable, net of allowance 51 526
Inventories 6,817 7,138
Other receivables 135 -
Prepaid expenses 454 431
Assets held for sale - 281
Other current assets 18 76
------------------- ------------------
Total current assets 7,816 10,149
------------------- ------------------
PROPERTY AND EQUIPMENT
Buildings 31,455 31,328
Equipment 30,744 30,438
Vehicles 196 191
------------------- ------------------
62,395 61,957
Accumulated depreciation (28,998) (27,861)
------------------- ------------------
33,397 34,096
Land 7,224 7,224
------------------- ------------------
Total property and equipment 40,621 41,320
------------------- ------------------
OTHER ASSETS
Assets held for sale 4,900 4,900
Deposits on equipment 344 240
Loan costs 107 110
Other 10 268
------------------- ------------------
5,361 5,518
------------------- ------------------
Total assets $ 53,798 $ 56,987
=================== ==================
</TABLE>
See accompanying notes to financial statements
-3-
<PAGE>
Harry's Farmers Market, Inc. and Subsidiaries
Consolidated Balance Sheets
<TABLE>
<CAPTION>
Amounts in thousands (Unaudited)
May 5, February 3,
1999 1999
---------------- --------------
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Current maturities of long-term obligations $ 664 $ 991
Accounts payable - trade 6,803 8,729
Workers' compensation and general liability
insurance 246 253
Accrued payroll and payroll taxes payable 592 625
Sales taxes payable 80 128
Other accrued liabilities 1,073 870
--------------- --------------
Total current liabilities 9,458 11,596
--------------- --------------
LONG-TERM OBLIGATIONS, NET OF CURRENT MATURITIES 13,278 14,203
--------------- --------------
CONVERTIBLE DEBT 15,189 15,159
--------------- --------------
OTHER NON-CURRENT LIABILITIES 505 478
--------------- --------------
REDEEMABLE PREFERRED STOCK 10,619 10,582
--------------- --------------
STOCKHOLDERS' EQUITY
Common Stock - Class A 34,681 34,681
Common Stock - Class B 3,936 3,936
Additional Paid-in Capital 1,343 1,380
Accumulated deficit (35,211) (35,028)
--------------- --------------
Total stockholders' equity 4,749 4,969
--------------- --------------
Total liabilities and stockholders' equity $ 53,798 $ 56,987
=============== ==============
</TABLE>
See accompanying notes to financial statements
-4-
<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,
--------------------------------------------------------
May 5, 1999 April 29, 1998
----------------------- ------------------------
<S> <C> <C> <C> <C>
Net sales $ 33,674 100.0 % $33,059 100.0 %
Cost of goods sold 24,339 72.3 % 23,319 70.5 %
--------- ----- ------- -------
Gross profit 9,335 27.7 % 9,740 29.5 %
--------- ----- ------- -------
Operating expenses
Direct store expenses 5,847 17.4 % 5,310 16.1 %
Selling, general & administrative expenses 3,146 9.3 % 3,070 9.3 %
Depreciation and other amortization 1,033 3.1 % 1,038 3.1 %
--------- ----- ------- -------
Total operating expenses 10,026 29.8 % 9,418 28.5 %
--------- ----- ------- -------
Operating income (loss) (691) (2.1)% 322 1.0 %
Interest expense 503 1.5 % 597 1.8 %
Other income (1,011) (3.0)% (335) (1.0)%
--------- ----- ------- -------
Pretax income (183) (0.6)% 60 0.2 %
Income taxes - 0.0 % -
--------- ----- ------- -------
Net income (183) (0.6)% 60 0.2 %
Provision for accretion of warrants (37) (0.1)% (37) (0.1)%
--------- ----- ------- -------
Net income applicable to common shareholders $ (220) (0.7)% $ 23 0.1 %
========= ===== ======= =======
Net income (loss) per common share - Basic $ (0.04) $ 0.00
========= =======
Net income (loss) per common share - Diluted $ (0.04) $ (0.02)
========= =======
</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, except per share data For the Thirteen Weeks Ended,
---------------------------------------------
May 5, 1999 April 29, 1998
---------------------------------------------
<S> <C> <C>
Changes in Cash
Cash flows from operating activities:
Net income $ (183) $ 60
Adjustments to reconcile net earnings
to cash provided by operations:
Depreciation and amortization 1,153 1,110
(Gain) or loss on sale of assets (100) -
(Increase) decrease in accounts receivables 409 (47)
Increase (decrease) in inventories 321 (126)
Increase in prepaid and deferred expenses (23) (148)
(Increase) decrease in other current assets 7 214
Decrease in accounts payable (1,925) (702)
Increase (decrease) in accrued liabilities 124 (101)
Increase (decrease) in deferred revenue - (25)
--------- --------
Net cash provided by (used in) operating activities (217) 235
--------- --------
Cash flows from investing activities:
Capital expenditures, including capitalized interest (296) (862)
Proceeds from sale of property and equipment 100 42
Proceeds from sale of other assets 262 25
(Increase) decrease in notes receivable --
--------- --------
Net cash provided by (used in) investing activities 66 (795)
--------- --------
Cash flows from financing activities:
Line of credit (846) 157
Principal payments on long-term obligations (359) (539)
Proceeds from warrants -- -
--------- --------
Net cash used in financing activities (1,205) (382)
--------- --------
Net decrease in cash (1,356) (942)
Cash at beginning of period 1,697 1,479
--------- --------
Cash at end of period $ 341 $ 537
========= ========
Supplemental Schedule of Noncash Investing and Financing
Activities:
Capital leases $ -- $ 2,385
========= ========
</TABLE>
See accompanying notes to financial statements
-6-
<PAGE>
NOTES TO FINANCIAL STATEMENTS
MAY 5, 1999
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 May 5, 1999, 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
February 3, 1999, included in the Company's 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 May 5, 1999, are not necessarily indicative of the results for the
entire 2000 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
Basic net earnings per common share are 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 have been restated. The following table sets forth the
computation of basic and diluted income (loss) per share.
<TABLE>
<CAPTION>
May 5, 1999 April 29, 1998
----------- --------------
<S> <C> <C>
Numerator for basic net income (loss) per common share $ (220) $ 23
Interest savings from assumed conversion of Debt - 198
Write off of discount on convertible debt - (428)
----------- --------------
Numerator for diluted net income (loss) per common share $ (220) $ (207)
=========== ==============
Denominator for basic net income (loss) per common share -
weighted average shares outstanding 6,183 6,183
Effect of assumed conversion of debt and preferred stock - 5,067
----------- --------------
Denominator for diluted net income (loss) per common share -
adjusted weighted average shares outstanding 6,183 11,250
=========== ==============
Basic net income (loss) per share $ (0.04) $ 0.00
=========== ==============
Diluted net income (loss) per share $ (0.04) $ (0.02)
=========== ==============
</TABLE>
NOTE D - CLAIMS AND LITIGATION
The Company is involved in various claims and litigation, which arise in the
ordinary course of business. In the opinion of management, the amount of
ultimate liability with respect to these actions will not materially affect the
financial position of the Company.
-7-
<PAGE>
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
RESULTS OF OPERATIONS
- ---------------------
Thirteen Weeks Ended May 5, 1999 (the "First Quarter of Fiscal 2000") compared
to Thirteen Weeks Ended April 29, 1998 (the "First Quarter of Fiscal 1999").
Net sales for the First Quarter of Fiscal 2000 were approximately
$33.7 million, compared to approximately $33.1 million for the First Quarter of
Fiscal 1999. The sales increase of $0.6 million or approximately 1.8%, consisted
of a comparable store sales decrease of 10.3% for the quarter, which was more
than offset by a $3.8 million sales increase from new stores. Management
believes that the decrease in comparative store sales is largely due to growing
competition in the Atlanta area.
Gross profits in the First Quarter of Fiscal 2000 decreased to
approximately $9.3 million or 27.7 % of net sales, compared to approximately
$9.7 million or 29.5% of net sales in the First Quarter of Fiscal 1999. The
decrease in gross profit dollars was largely due to lower same store sales and a
lower gross profit percent. This decrease was partially offset by sales from new
stores.
Direct store expenses increased to approximately $5.8 million or 17.4
% of net sales in the First Quarter of Fiscal 2000 compared to approximately
$5.3 million or 16.1% of net sales in the First Quarter of Fiscal 1999. Direct
store expenses increased due to (1) the addition of two new Harry's In a Hurry
stores, which generally incur higher direct store expenses as a percent of sales
than mega stores, and (2) the decrease in comparable store sales which resulted
in direct store expenses at comparable stores increasing as a percent of sales.
Selling, general and administrative expenses for the First Quarter of
Fiscal 2000 were relatively flat compared to the First Quarter of Fiscal 1999.
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) also did not
change significantly from the same quarter last year. The decrease in
depreciation that resulted from certain assets becoming fully depreciated since
the First Quarter of Fiscal 1999 was largely offset by the depreciation on new
assets added since the first quarter of last year. The assets added since the
First Quarter of Fiscal 1999 related mainly to the two new Harry's In a Hurry
stores opened late in fiscal 1999.
Due to the reasons set forth above, the Company had an operating loss
of approximately $(0.7) million or (2.1) % of net sales during the first quarter
of 2000 compared to an operating profit of approximately $0.3 million or 1.0 %
of net sales in the First Quarter of Fiscal 1999.
Interest expense decreased slightly to approximately $0.5 million or
1.5% of net sales in the First Quarter of Fiscal 2000, compared to approximately
$0.6 million or 1.8 % of net sales in the First Quarter of Fiscal 1999. This
decrease was primarily attributable to a lower average interest rate partially
offset by a slightly higher average debt balance.
Other income increased to approximately $1.0 million or 3.0 % of net
sales during the First Quarter of Fiscal 2000, from approximately $0.3 million
or 1.0 % of net sales in the First Quarter of Fiscal 1999. This increase was
primarily due to the Company receiving approximately $500,000 from the sale of
certain property rights related to the use of a billboard on one of the
Company's properties.
-8-
<PAGE>
For the First Quarters of Fiscal 2000 and 1999 no income tax provision
was necessary. The Company has unrecognized net operating loss carry forwards
for financial purposes of approximately $32.0 million that 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 had a net loss applicable to
common shareholders for the First Quarter of Fiscal 2000 of approximately $(0.2)
million or $(0.04) per common share - Basic, compared with net income applicable
to common shareholders of approximately $0.0 million or $0.00 per common share -
Basic, during the First Quarter of Fiscal 1999.
Liquidity And Capital Resources
During the First Quarter of Fiscal 2000, the Company's operating
activities used approximately $0.2 million of cash flow. The Company invested
approximately $0.3 million for capital expenditures, and received approximately
$0.4 million in proceeds from the sale of certain assets. Additionally, during
the First Quarter of Fiscal 2000, the Company paid approximately $0.8 million on
its line of credit and approximately $0.4 million on its long-term obligations.
As a result, net cash during the First Quarter of Fiscal 2000 decreased by
approximately $1.4 million, which resulted in a cash balance at the end of the
First Quarter of Fiscal 2000 of approximately $0.3 million. As of the end of the
First Quarter of Fiscal 2000, the Company had approximately $1.7 million in
additional borrowing capacity available under its bank line of credit.
Cash provided by investing activities in the First Quarter of Fiscal
2000 was approximately $0.1 million. Investing activities consisted of
approximately $0.3 million of capital expenditures for property and equipment
relating to stores, manufacturing facilities and the corporate infrastructure.
In addition, cash provided by investing activities consisted of approximately
$0.1 million in proceeds from the sale of equipment and approximately $0.3
million in proceeds from the sale of other assets.
To increase liquidity, the Company continues to seek purchaser(s)
/leasee(s) for the unused portion of its distribution facility, as well as a
remaining outparcel at its Gwinnett County megastore property.
In the First Quarter of Fiscal 2000 the Company had a working capital
deficit of approximately $1.6 million, compared to a working capital deficit of
approximately $1.4 million at the end of the prior fiscal year end. At the end
of the First Quarter of 2000, the Company had approximately $1.7 million
available on its bank line of credit, compared to approximately $0.8 million
available on the bank line at the end of fiscal 1999. The improvement in the
Company's total working capital position (the sum of its new working capital
deficit and the amount available under its line of credit) in the First Quarter
of Fiscal 2000 compared to the end of the prior year is due to (1) the Company
obtaining long-term operating leases to finance certain equipment for the two
new Harry's In A Hurry stores which opened in fiscal 1999 and (2) the sale of
the right to place a billboard on its property for approximately $500,000.
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 2000. 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.
-9-
<PAGE>
Year 2000
In 1997, the Company established an investigative group supervised by
Harry A. Blazer, the President and Chief Executive Officer of the Company, which
consisted of personnel from the Company's internal MIS department and outside
product specialists. This group has identified all computer-based systems and
applications that the Company uses in its operations and has categorized them by
their critical nature to the operations of the Company. The group is in the
process of determining and performing the necessary modifications and
replacements to insure that the Company's operations will be minimally effected
by the Year 2000 issue.
Although the investigative group is also verifying the Year 2000
compliance of the Company's significant outside vendors, at the present time, it
does not believe that the failure of any particular third party to be Year 2000
compliant will have a material adverse effect on the operations or financial
condition of the Company. The investigative group is also in the process of
establishing and implementing a contingency plan for the Company to provide
alternative methods to insure the continuation of the Company's operations in
the event of a Year 2000 based failure either internally or externally.
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 beginning of the year 2000 and that related
expenditures over the remainder of fiscal 2000 will not exceed $300,000.
Other Matters
The Nasdaq Stock Market has various requirements for continued listing
on the Nasdaq National Market, including a requirement that the total market
capitalization of the Company not fall below $5,000,000 for any 30-consecutive
business day period. The Company has received notice from the Nasdaq National
Market that it does not currently satisfy the minimum market capitalization
requirement. The Company has requested a hearing with the Nasdaq National Market
to extend the deadline by which the Company must be in compliance with this
requirement. There can be no assurance that the results of the Company will be
effective in meeting such requirement within any timeframe set out by the Nasdaq
Stock Market and, therefore, that the Company will be able to continue to list
its Class A Common Stock on the Nasdaq National Market.
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, acceptance of new stores, stability
and availability of product costs, unavailability of anticipated financings,
interest rates, the impact of certain litigation and other uncertainties
detailed from time to time in the Company's Securities and Exchange Commission
filings.
ITEM 3. Quantitative And Qualitative Disclosure About Market Risk.
Not Applicable.
-10-
<PAGE>
PART II - OTHER INFORMATION
-11-
<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.
In addition, on May 7, 1999, Fine Distributing, Inc. ("Fine") filed
suit against the Company in the Superior Court of Cobb County, Georgia, alleging
that the Company repudiated a distributing agreement with Fine (the
"Complaint"), in breach of the terms of the agreement. Fine is seeking an
unspecified amount of damages. The Company has timely answered the Complaint and
has filed certain counterclaims against Fine related to the distribution
agreement, including claims that Fine breached the distribution agreement and
conspired with another party to defraud the Company. The Company has not yet
determined the amount of damages it has suffered as a result of these breaches.
The Company believes the claims made by Fine are without merit and intends to
vigorously defend itself against all allegations as well as pursue all remedies
available to the Company raised in its counterclaims; however, due to the
uncertainties of litigation, the Company is unable to predict an outcome at this
time. Discovery in this action has just begun.
Item 2. Changes in Securities
There been no material modification in the instruments defining the
rights of shareholders during the First Quarter of Fiscal 2000. 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.
-12-
<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 18, 1999 By: /S/ HARRY A. BLAZER
--------------- ---------------------------
HARRY A. BLAZER
Chairman, President and
Chief Executive Officer
(principal executive officer)
By: /S/ JOHN D. BRANCH
Dated: June 18, 1999 --------------------------
--------------- John D. Branch
Chief Financial Officer
(principal financial and
accounting officer)
-13-
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM 10Q FOR
PERIOD ENDED MAY 5, 1999 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> FEB-02-2000
<PERIOD-START> FEB-01-1999
<PERIOD-END> MAY-05-1999
<CASH> 341
<SECURITIES> 0
<RECEIVABLES> 119
<ALLOWANCES> 68
<INVENTORY> 6,817
<CURRENT-ASSETS> 7,816
<PP&E> 69,619
<DEPRECIATION> 26,998
<TOTAL-ASSETS> 53,798
<CURRENT-LIABILITIES> 9,458
<BONDS> 13,278
10,619
15,189
<COMMON> 38,617
<OTHER-SE> (33,668)
<TOTAL-LIABILITY-AND-EQUITY> 53,798
<SALES> 33,674
<TOTAL-REVENUES> 33,674
<CGS> 24,338
<TOTAL-COSTS> 10,028
<OTHER-EXPENSES> (508)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 503
<INCOME-PRETAX> (220)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (220)
<EPS-BASIC> (0.04)
<EPS-DILUTED> (0.04)
</TABLE>
