UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended April 3, 1998.
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ________________ to ________________.
Commission File Number 000-24124
FRESH AMERICA CORP.
(Exact name of registrant as specified in its charter)
Texas 76-0281274
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
6600 LBJ FREEWAY, SUITE 180, DALLAS, TX 75240
(Address of principal executive offices and Zip Code)
Registrant's telephone number, including area code: (972) 774-0575
----------------
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 [ ]
At May 12, 1998 the Registrant had 4,853,397 shares of its Common Stock
outstanding.
Total number of pages in this report, including the cover page is 14. Exhibit
index on page 14.
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. - FINANCIAL STATEMENTS
FRESH AMERICA CORP.
UNAUDITED CONSOLIDATED BALANCE SHEETS
(In thousands, except share amounts)
April 3, January 2,
1998 1998
-------- --------
ASSETS (Restated)
Current Assets:
Cash and cash equivalents ........................ $ 2,305 $ 2,725
Accounts receivable, net ......................... 46,095 43,361
Advances to growers .............................. 2,086 --
Inventories ...................................... 6,624 7,360
Prepaid expenses and other ....................... 1,529 1,550
Deferred income taxes ............................ 306 362
-------- --------
Total current assets ......................... 58,945 55,358
Property, plant and equipment, net ................. 13,646 13,581
Notes receivable from shareholders ................. 166 166
Goodwill, net of amortization of $516 and $261,
respectively ....................................... 20,388 9,138
Other assets ....................................... 1,727 1,721
-------- --------
$ 94,872 $ 79,964
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Current portion of long-term debt ................ 11,895 10,750
Accounts payable ................................. 30,978 27,711
Accrued salaries and wages ....................... 957 3,434
Other accrued expenses ........................... 1,058 920
Income taxes payable ............................. 1,480 1,324
-------- --------
Total current liabilities .................... 46,368 44,139
Long-term debt, less current portion ............... 11,668 6,193
Deferred income taxes .............................. 157 198
Other liabilities .................................. 157 99
-------- --------
Total liabilities ............................ 58,350 50,629
-------- --------
Shareholders' Equity:
Common stock $.01 par value. Authorized
10,000,000 shares; Issued 4,779,172
and 4,483,983 respectively ................... 48 45
Additional paid-in capital ..................... 23,230 16,508
Foreign currency translation adjustment ........ (171) (179)
Retained earnings .............................. 13,415 12,961
-------- --------
Total shareholders' equity ................... 36,522 29,335
-------- --------
Commitments and contingencies
-------- --------
$ 94,872 $ 79,964
======== ========
The notes to unaudited consolidated financial
statements are an integral part of these statements.
2
<PAGE>
FRESH AMERICA CORP.
UNAUDITED CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share amounts)
QUARTER ENDED
------------------------
APRIL 3, MARCH 28,
1998 1997
--------- --------
(Restated)
Net sales ......................................... $ 133,007 $ 90,448
Cost of goods sold ................................ 118,487 82,119
--------- --------
Gross profit .......................... 14,520 8,329
--------- --------
Selling, general and administrative expenses:
Salaries and related costs .................... 7,261 4,073
Rent, maintenance and related
costs ....................................... 2,309 1,177
Insurance expense ............................. 348 310
Automobile, travel and related
costs ....................................... 346 225
Communication expense ......................... 326 179
Depreciation and amortization ................. 755 397
Nonrecurring transaction costs ................ 1,395 --
Other ......................................... 610 461
--------- --------
13,350 6,822
--------- --------
Operating income ....................... 1,170 1,507
--------- --------
Other income (expense):
Interest expense .............................. (428) (21)
Interest income ............................... 49 57
Other, net .................................... (126) 62
--------- --------
(505) 98
--------- --------
Income before income taxes ........................ 665 1,605
Provision for income taxes ........................ 211 573
--------- --------
Net income .............................. $ 454 $ 1,032
========= ========
Earnings per share:
Basic ......................................... $ 0.10 $ 0.24
========= ========
Diluted ....................................... $ 0.10 $ 0.23
========= ========
The notes to unaudited consolidated financial
statements are an integral part of these statements.
3
<PAGE>
FRESH AMERICA CORP. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
QUARTER ENDED
----------------------
APRIL 3, MARCH 28,
1998 1997
-------- --------
Cash flows from operating activities: (Restated)
Net income ....................................... $ 454 $ 1,032
Adjustments to reconcile net income to net
cash provided by (used in) operating
activities, excluding the effects of
acquisitions:
Depreciation and amortization .............. 755 397
Non cash transaction costs, net of tax ..... 519 --
Deferred income taxes ...................... (23) --
Other ...................................... 97 6
Change in assets and liabilities:
Accounts receivable .................... 3,450 (3,664)
Advances to growers .................... (1,061) --
Inventories ............................ 1,183 276
Prepaid expenses ....................... 76 119
Other assets ........................... 291 (38)
Accounts payable ....................... (647) 10,057
Accrued expenses and other current
liabilities .......................... (2,239) (3,260)
-------- --------
Total adjustments ................. 2,401 3,893
-------- --------
Net cash provided by operating
activities ...................... 2,855 4,925
-------- --------
Cash flows from investing activities:
Additions to property, plant and
equipment, net .................................. (362) (3,047)
Cost of acquisitions, exclusive of cash
acquired ....................................... (5,965) (682)
-------- --------
Net cash used in investing
activities ...................... (6,327) (3,729)
-------- --------
Cash flows from financing activities:
Proceeds from revolving line of credit ........... 31,219 2,500
Repayments of revolving line of credit ........... (32,757) (2,668)
Additions to short-term indebtedness ............. 5,000 --
Payments of short-term indebtedness .............. (469) --
Payments of long-term indebtedness ............... (89) (229)
Net proceeds from exercise of employee
stock options .................................. 130 118
-------- --------
Net cash provided by (used in)
financing activities ............ 3,034 (279)
-------- --------
Effect of exchange rate changes on cash .............. 18 --
-------- --------
Net increase (decrease) in
cash and cash equivalents ....... (420) 917
Cash and cash equivalents at beginning
of period .......................................... 2,725 4,247
-------- --------
Cash and cash equivalents at end of period ........... $ 2,305 $ 5,164
======== ========
Supplemental disclosures of cash flow information:
Cash paid for interest ........................... $ 357 $ 21
Cash paid for income taxes ....................... $ 113 $ --
The notes to unaudited consolidated financial
statements are an integral part of these statements.
4
<PAGE>
FRESH AMERICA CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES.
Fresh America Corp. and subsidiaries (the "Company") is an integrated food
distribution management company engaged in the procurement, processing,
warehousing and delivery of fresh produce and other refrigerated perishable
products. The Company was founded in 1989 and distributes throughout the United
States and Canada through twenty-two distribution and processing facilities.
UNAUDITED INTERIM FINANCIAL INFORMATION - The consolidated balance sheets
as of April 3, 1998 and January 2, 1998 and the related consolidated statements
of income and cash flows for the quarters ended April 3, 1998 and March 28, 1997
and related notes have been prepared by the Company and are unaudited. In the
opinion of the Company, the interim financial information includes all
adjustments (consisting of only normal recurring adjustments) necessary for a
fair statement of the results of the interim periods.
Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted from the interim financial
information. The interim financial information should be read in conjunction
with the Company's audited consolidated financial statements included in the
Annual Report on Form 10-K for the fiscal year ended January 2, 1998. The
results for the quarters ended April 3, 1998 and March 28, 1997 may not be
indicative of operating results for the full year.
The consolidated financial statements give retroactive effect to an
acquisition of an operating business consummated in the first quarter of 1998
which was accounted for as a pooling of interests (Note 3).
The following are the significant accounting policies followed by the
Company in the preparation of the consolidated financial statements.
PRINCIPLES OF CONSOLIDATION - The consolidated financial statements
include the accounts of Fresh America Corp. and its wholly-owned subsidiaries.
All significant intercompany balances and transactions have been eliminated in
consolidation.
EARNINGS PER SHARE - The Company adopted the provisions of Statements of
Financial Accounting Standards "SFAS" No. 128, "Earnings per Share", during 1997
and retroactively restated all per share amounts. SFAS No. 128 reporting
requirements replace primary and fully diluted earnings per share (EPS) with
basic and diluted EPS. Basic EPS is calculated by dividing net income (available
to common shareholders) by the weighted average number of common shares
outstanding for the period. Diluted EPS reflects the potential dilution that
could occur if securities or other contracts to issue common stock were
exercised or converted into common stock.
COMPREHENSIVE INCOME - In June 1997, the Financial Accounting Standards
Board issued SFAS No. 130, "Reporting Comprehensive Income." This statement
establishes standards for reporting and display of comprehensive income and its
components. Components of comprehensive income are net income and all other
nonowner changes in equity such as the change in the cumulative translation
adjustment. This statement requires that an enterprise: (a) classify items of
other comprehensive income by their nature in a financial statement and (b)
display the accumulated balance of other comprehensive income separately from
retained earnings and additional paid-in capital in the equity section of a
balance sheet. SFAS No.130 is effective for financial statements issued for
periods beginning after December 15, 1997, which for the Company is the first
quarter of 1998. Presentation of
5
<PAGE>
comprehensive income for earlier periods provided for comparative purposes is
required and has been presented in these financial statements.
RECENT ACCOUNTING PRONOUNCEMENTS - The Company intends to adopt SFAS No.
131, "Disclosures About Segments of an Enterprise and Related Information" in
fiscal 1999. The Standard will require additional disclosure, but will not have
a material effect on the Company's financial position or results of operations.
SFAS No. 131 changes the way companies report segment information and requires
segments to be determined based on how management measures performance and makes
decisions about allocating resources.
Effective January 3, 1998, the Company adopted Statement of Position
("SOP") 98-1, "Accounting for the Cost of Computer Software Developed or
Obtained for Internal Use," which was issued in March 1998. The SOP requires
that certain costs related to the development or purchase of internal-use
software be capitalized and amortized over the estimated useful life of the
software. The SOP also requires that costs related to the preliminary project
stage and post-implementation/operations stage of an internal-use computer
software development be expensed as incurred.
FOREIGN CURRENCY TRANSLATION - The financial statements of all foreign
subsidiaries were prepared in their respective local currencies and translated
into U.S. dollars based on the current exchange rate at the end of the period
for the balance sheet and a weighted-average rate for the period on the
statement of income. Translation adjustments are reflected in the foreign
currency translation adjustments in Shareholders' Equity and accordingly have no
effect on net income. Exchange gains and losses for all foreign subsidiaries are
included in income for transactions denominated in currencies other than the
functional currency.
USE OF ESTIMATES - The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from those estimates.
FISCAL YEAR - The Company's fiscal year is a 52-week or 53 week period
ending on the first Friday in January. The quarters ended April 3, 1998 and
March 28, 1997 consist of 13 weeks and 12 weeks, respectively.
NOTE 2. AGREEMENT WITH SAM'S CLUB.
In August 1995, the Company entered into a five-year distribution
agreement (the "Agreement") with Sam's Club. The Agreement, which began on
December 1, 1995, replaced the Company's previously existing license agreement
with Sam's Club which expired on November 30, 1995. Under terms of the
Agreement, the Company expanded its distribution arrangement with Sam's into
specified exclusive new territories approximately doubling the number of Sam's
clubs serviced by the Company. As a result of this expansion, the Company
commenced operations from two new distribution centers in Chicago, Illinois and
Cincinnati, Ohio on January 2, 1996. For further information, see Note 2 to the
financial statements included in the Company's Annual Report on Form 10-K for
the fiscal year ended January 2, 1998.
The Agreement provides Sam's the option to reduce the number of clubs
within the Company's exclusive territory by forty per year under certain
circumstances and to discontinue service for clubs in which Sam's elects not to
offer produce, if any. The Company has conducted its operations assuming that
Sam's will withdraw forty clubs per year for each of the remaining years of the
Agreement. In February 1997, Sam's advised the Company that as a result of
opening certain new Wal-Mart Supercenter Distribution Centers, it elected to
exercise the existing option under the Agreement to distribute produce directly
with respect to forty clubs. Twenty-seven clubs were transitioned in May 1997
and the remaining thirteen clubs were transitioned in November 1997. In March
1998, Sam's
6
<PAGE>
began the transfer of an additional forty clubs, which was completed in April
1998. The event did not have a material adverse effect on the Company's
financial position in 1997, and the lost revenue attributable to such clubs is
estimated to be less than 3 percent of the Company's total fiscal 1998 revenues.
NOTE 3. ACQUISITIONS.
On February 2, 1998, the Company acquired substantially all of the net
operating assets and the business of Francisco Distributing Company, L.L.C.
("Francisco"), a produce marketing, distribution and repackaging company based
in Norwalk, California. The acquisition was accounted for using the purchase
method of accounting. As consideration for the net assets received, the Company
paid $5,575,000 in cash, 285,437 shares of Company common stock valued at $19.27
per share and contingent consideration subject to a minimum of $2.5 million with
a maximum of $16.6 million based on the pre-tax earnings of Francisco for the
1998 and 1999 fiscal years subject to certain adjustments. The minimum
contingent payments have been recorded as a liability and are payable in cash or
a combination of cash and common stock.
On March 4, 1998, the Company completed a merger with Ontario Tree Fruits
Limited and its affiliated companies (collectively, "OTF") by exchanging 609,713
shares of its common stock or exchangeable common stock for all of the common
stock of OTF and certain residual equity interests. OTF imports and distributes
fresh produce to large retail chains and hundreds of independent grocers and
wholesalers in Canada and the Northeastern United States.
The Merger constituted a tax-free reorganization and has been accounted
for as a pooling of interests under Accounting Principles Board Opinion No 16.
Accordingly, all prior periods consolidated financial statements presented have
been restated to include the combined results of operations, financial position
and cash flows of OTF as though it had always been a part of the Company.
Prior to the merger, OTF's fiscal year ended on August 31. In recording
the business combination, OTF's prior period financial statements have been
restated to a year ended December 31, to conform with the Company's fiscal
year-end.
There were no transactions between OTF and the Company prior to the
combination, and immaterial adjustments were recorded to conform OTF's
accounting policies. Certain reclassifications were made to the OTF financial
statements to conform to the Company's presentations.
In connection with the acquisition of OTF, the Company incurred
nonrecurring transaction costs of approximately $1.4 million, which were
expensed in the first quarter of 1998. The nonrecurring transaction costs
included approximately $942,000 of non-cash expenses ($519,000, net of tax)
related to the issuance of 52,342 shares of the Company's common stock issued to
the financial advisors of OTF.
In connection with the purchase of substantially all the net operating
assets of Lone Star Produce, Inc. in 1995, the Company issued a convertible
promissory note which allowed Lone Star (at Lone Star's option) to convert the
note into the Company's common stock at $6.49 per share. The note was valued at
approximately $1,459,000 and is included in current debt in the Company's
balance sheet at January 2, 1998 and April 3, 1998. The conversion option had an
original expiration date of March 31, 1998. By mutual agreement, the conversion
deadline was extended and the note was converted into 72,725 shares in April
1998.
7
<PAGE>
For those acquisitions accounted for using the purchase method of
accounting, only the results of operations of the acquired companies subsequent
to their respective acquisition dates are included in the consolidated financial
statements of the Company. At the acquisition dates, the purchase price was
allocated to assets acquired and liabilities assumed based on their relative
fair market values. The excess of total purchase price over fair values of the
net assets acquired was recorded as goodwill, which is being amortized over a 15
to 20 year period.
The following unaudited pro forma financial information presents the
combined results of operations of the Company and Francisco as if the
acquisition occurred as of the beginning of 1997, after giving effect to certain
adjustments, including amortization of goodwill, decreased interest income,
increased interest expense and related income tax effects. The pro forma
financial information does not necessarily reflect the results of operations
that would have occurred had the Company and Francisco constituted a single
entity during such periods.
QUARTER ENDED
-----------------------
(In thousands, except per share amounts) APRIL 3, MARCH 28,
1998 1997
--------- --------
Net sales ............................. $ 140,261 $114,781
========= ========
Net income ............................ $ 472 $ 1,324
========= ========
Earnings per share - diluted .......... $ 0.09 $ 0.27
========= ========
NOTE 4. DEBT.
On February 2, 1998, the Company restructured its existing loan agreement
with a major bank to provide a revolving line of credit ("Revolver") of up to
$12 million and a bridge loan of $5 million (the "Bridge Loan"). The Revolver
expires February 2, 2001 and is subject to certain covenants and borrowing base
requirements. Outstanding principal amounts under the Revolver ($9.7 million as
of April 3, 1998) accumulate interest at the bank prime rate (8.5% as of May 12,
1998), or at the Company's election, the eurodollar rate plus 1.75% (7.4% as of
May 12, 1998).
The Bridge Loan was funded on February 2, 1998 and the remaining balance
of $4.7 million (as of April 3, 1998) is to be repaid with an installment of
$312,500 due on June 30, 1998 and a final payment of the remaining principal
balance due on September 30, 1998. The bridge loan accumulates interest at prime
plus 1.375%, or at the Company's election, the Eurodollar rate plus 2.675% (8.3%
as of May 12, 1998).
Additionally, the Company's Canadian subsidiaries have a demand agreement
with a Canadian bank to provide revolving credit facilities of up to $10.6
million, denominated in Canadian dollars, subject to certain covenant and
borrowing base requirements. The revolving credit facility is collateralized by
substantially all assets of such Canadian subsidiaries. Interest on borrowings
accrue at U.S. prime plus 0.75% (9.25% at May 12, 1998) or Canadian prime plus
0.75% (7.5%), depending on the denomination of the borrowings. As of April 3,
1998, borrowings under the agreement amounted to $4.8 million, denominated in
Canadian dollars.
8
<PAGE>
NOTE 5. COMPREHENSIVE INCOME.
The following table reconciles the Company's net income to its
comprehensive income for the quarters ended April 3, 1998 and March 28,1997 (in
thousands):
1998 1997
---- -------
Net income ................................. $454 $ 1,032
Other comprehensive income-foreign
currency translation adjustments ........ 8 (9)
---- -------
Comprehensive income ....................... $462 $ 1,023
==== =======
NOTE 6. EARNINGS PER SHARE.
Shares used in calculating basic and diluted income per share for the
quarters ending April 3, 1998 and March 28, 1997 are as follows (in thousands):
1998 1997
----- -----
Weighted average common shares
outstanding - basic .................... 4,675 4,341
Dilutive securities:
Common stock options ................... 159 198
Contingent shares related to
acquisitions ......................... 114 23
----- -----
Weighted average shares common
outstanding - diluted basis ............. 4,948 4,562
===== =====
In calculating diluted earnings per share for the first quarter of 1998,
$21 of interest was added back to net income in connection with the assumed
conversion of certain contingent shares.
NOTE 7. SUBSEQUENT EVENT.
On May 15, 1998 the Company completed a $20 million, 12 percent
subordinated debt financing with a major national insurance company. The note
has a final maturity of May 1, 2003 with principle payments of $6,666,666 due on
May 1, 2001 and May 1, 2002. The Company also issued 155,483 warrants with an
exercise price of $22.70 per share to the insurance company in connection with
such subordinated note. A total of $15 million was funded on closing with the
remaining $5 million to be funded within 90 days. A portion of the proceeds was
used to prepay the Bridge Loan and to pay off existing balances on the Revolver.
The Company has also amended the terms of and increased the availability under
the Revolver to $15 million.
9
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
The following table presents the components of the consolidated statements
of income as a percentage of net sales for the periods indicated (including the
restatement to reflect the acquisition of OTF, which was accounted for as a
pooling of interests):
QUARTER ENDED
-----------------------
April 3, March 28,
1998 1997
------ ------
Net sales ................................... 100.0% 100.0%
Cost of goods sold .......................... 89.1 90.8
------ ------
Gross profit ................................ 10.9 9.2
Selling, general and
administrative expenses ................... 8.9 7.5
Nonrecurring transaction
costs ..................................... 1.1 --
------ ------
Operating income ............................ 0.9 1.7
Other income (expense) ...................... (0.4) .1
------ ------
Income before income taxes .................. 0.5 1.8
Provision for income taxes .................. 0.2 .7
------ ------
Net income .................................. 0.3% 1.1%
====== ======
COMPARISON OF QUARTER ENDED APRIL 3, 1998 TO QUARTER ENDED MARCH 28, 1997
The Company's quarters ended April 3, 1998 and March 28, 1997 include 13
weeks and 12 weeks, respectively. Therefore, when comparing the two quarters, it
should be noted that the 1998 quarter includes one additional week of operations
than the 1997 quarter.
NET SALES. Net sales increased $42.6 million, or 47.1%, to $133.0 million
in the first quarter of 1998 from $90.4 million in the first quarter of 1997. Of
the total increase, approximately $33 million was due to acquisitions made
subsequent to the first quarter of 1997 and $7.7 million was due to the effect
of an additional week in the first quarter of 1998. As a percentage of net
sales, Sam's represented 41.4% in the first quarter of 1998 compared to 58.9% in
the first quarter of 1997.
COST OF GOODS SOLD. Cost of goods sold increased by $36.4 million or 44.3%
to $118.5 million in the first quarter of 1998 from $82.1 million in the first
quarter 1997, primarily reflecting the increase in net sales above. As a
percentage of net sales, cost of goods sold decreased to 89.1% from 90.8%, which
in turn increased the Company's gross profit percentage to 10.9% from 9.2%. The
increase in gross profit percentage is due to the continuing increasing trend in
specialty foodservice and value-added businesses, which generally have higher
gross margins than those derived from the Company's programs and retail/
wholesale businesses. Net sales from these businesses were over 20% of total
revenues in the first quarter of 1998 compared to less than 10% in the same
period in 1997.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative ("SG&A") expenses increased by $6.5 million, or 95.7% to $13.3
million in the first quarter of 1998 from $6.8 million in the first quarter of
1997. Included in SG&A in the first quarter of 1998 are nonrecurring transaction
expenses of $1.4 million related to the acquisition of OTF. The remaining
increase is primarily due to SG&A expenses related to new business ($3.7
million) and, to a lesser extent, additional
10
<PAGE>
headcount and other costs required to support the Company's increased
acquisition, integration and operating activities.
OPERATING INCOME. As a result of the foregoing factors, which include $1.4
million of nonrecurring transaction costs in the first quarter of 1998,
operating income decreased by $0.3 million, or 22.4%, to $1.2 million in the
first quarter of 1998 from $1.5 million in the first quarter of 1997. The
following table summarizes the effect of the nonrecurring transaction costs on
operating income in the first quarter of 1998 (in thousands):
Quarter ended
-----------------------------------
% %
April 3, of net March 28, of net
1998 sales 1997 sales
------ --- ------ ---
Operating income as
reported ..................... $1,170 0.9% $1,507 1.7%
Nonrecurring transaction
costs ........................ 1,395 --
------ --- ------ ---
Operating income before
nonrecurring transaction
cost ......................... $2,565 1.9% $1,507 1.7%
====== ======
OTHER INCOME (EXPENSE). Interest expense increased $407,000 to $428,000 in
the first quarter of 1998 from $21,000 in the first quarter of 1997 primarily
due to increased borrowings to help finance acquisitions that were made
subsequent to the first quarter of 1997. Other expense increased to $126,000 in
the first quarter of 1998 primarily due to foreign currency losses of
approximately $120,000 incurred by OTF.
PROVISION FOR INCOME TAXES. The effective tax rate decreased from 36% in
the first quarter of 1997 to 32% in the first quarter of 1998. The decrease was
primarily due to the tax benefit effect of pre-tax losses incurred by the
Company's Canadian subsidiaries, which have a higher statutory tax rate than the
United States. The pre-tax losses resulted from nonrecurring transaction costs
of $1.1 million.
NET INCOME. As a result of the foregoing factors, net income decreased
$578,000 or 56% to $454,000 in the first quarter of 1998 compared to $1,032,000
in the first quarter of 1997. The following table summarizes the effect of the
nonrecurring transaction costs on the net income and earnings per share in the
first quarter of 1998 (in thousands):
Quarter Ended
---------------------
April 3, March 28,
1998 1997
--------- ---------
Net income as reported .................. $ 454 $ 1,032
Nonrecurring transaction
costs, net of tax ..................... 789 --
--------- ---------
Net income before effect of
nonrecurring transaction
costs ................................. $ 1,243 $ 1,032
========= =========
Earning per share as reported:
Basic ............................ $ 0.10 $ 0.24
Diluted .......................... $ 0.10 $ 0.23
Effect of nonrecurring transaction costs:
Basic ............................. $ 0.17 --
Diluted ........................... $ 0.16 --
Earnings per share before
effect of nonrecurring
transaction costs:
Basic ............................. $ 0.27 $ 0.24
Diluted ........................... $ 0.26 $ 0.23
11
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
Cash provided by operating activities was $2.9 million for the first
quarter 1998 compared to $4.9 million in the first quarter 1997. The difference
is primarily due to increased use of working capital to support the growth in
the business.
Cash used in investing activities increased $2.6 million from $3.7 million
in first quarter of 1997 1996 to $6.3 million in the first quarter of 1998. The
increase is primarily due to acquisition of Francisco (see Note 3 to the
accompanying unaudited consolidated financial statements).
Cash provided by financing activities was $3.0 million in the first
quarter of 1998 compared to cash used in financing activities of $279,000 in the
first quarter of 1997. The increase in financing compared to the prior year
quarter is primarily due to borrowings used to finance the cash portion of the
Francisco acquisition which were partially offset by reduction in the Company's
revolving credit facilities.
At April 3, 1998, the Company had working capital of $12.6 million
compared to $11.2 million at January 2, 1998. On February 2, 1998, the Company
entered into a new $17 million revolving line of credit and bridge loan bank
facility which can be used for general corporate purposes, including
acquisitions. As of May 12, 1998, there was an outstanding balance of $12.2
million under such facility, including the bridge loan balance of $4.7 million,
which is due on September 30, 1998. The Company also has revolving credit
facilities of up to $10.6 million, denominated in Canadian dollars, through its
Canadian subsidiaries. Such facilities have an outstanding balance of
approximately $4.7 million, denominated in Canadian dollars, as of May 12, 1998.
On May 15, 1998, the Company completed a $20 million, 12 percent subordinated
debt financing that matures in May 2003. See Note 4 and Note 7 to the
accompanying unaudited consolidated financial statements for further
information.
Management believes that the combination of cash generated from operating
activities, availability under its bank line of credit, the proceeds generated
from the subordinated debt financing and the use of operating leases where
appropriate is sufficient to meet its needs for operations, acquisitions and
near-term debt service requirements. The Company intends to continue its
expansion activities and may require additional debt or equity capital to meet
such requirements. The Company believes it has access to the capital markets and
can also obtain additional credit from financial institutions in order to raise
the capital necessary to fund such expansion activities. See "Outlook and
Uncertainties" below.
YEAR 2000
In 1997, the Company developed a plan to implement a new enterprise-wide
management information system, which better meets the Company's diverse and
long-term needs. Implementation of the new system commenced in March 1998 and is
currently expected to be completed by the end of 1999. The implementation is
also expected to ensure that the Company's computer systems and applications
will function properly beyond 1999 in all material respects. The Company
believes that it has allocated adequate resources for this purpose and expects
its Year 2000 date conversion program to be successfully completed on a timely
basis.
QUARTERLY RESULTS AND SEASONALITY
The Company's business is seasonal, with its greatest quarterly sales volume
historically occurring in the fourth quarter. A substantial portion of the
Company's produce sales consists of staple items such as apples, oranges,
grapefruit, potatoes, onions, lettuce and tomatoes which are generally strongest
during the fall, winter and spring. The supply of certain of these items
declines during the summer, although lost sales are replaced to some extent by
more seasonal products such as peaches, plums, nectarines, grapes, strawberries
and melons. Sales of imported fresh fruit such as Clementine oranges,
tangerines, grapes, and refrigerated, pre-packaged products, such as vegetable
trays, are strongest during the fourth
12
<PAGE>
quarter holiday season. Because the Company's results of operations depend
significantly on sales generated during the fourth quarter, any adverse
development affecting the Company's operations during this period, such as the
unavailability of high quality produce, harsh weather conditions, or product
costs, could have a disproportionate impact on the Company's results of
operations for the full year.
INFLATION
Although the Company cannot determine the precise effects of inflation,
management does not believe inflation has had a material effect on the Company's
sales or results of operations. However, independent of normal inflationary
pressures, the Company's produce products are subject to fluctuating prices as
discussed in "Quarterly Results and Seasonality" above.
OUTLOOK AND UNCERTAINTIES
Certain information in this Quarterly Report on Form 10-Q may contain
"forward-looking statements" within the meaning of Section 21E of the Securities
Exchange Act of 1934, as amended. All statements other than statements of
historical fact are "forward-looking statements" for purposes of these
provisions, including any projections of earnings, revenues or other financial
items, any statements of the plans and objectives of management for future
operations, any statements concerning proposed new products or services, any
statements regarding future economic conditions or performance, and any
statement of assumptions underlying any of the foregoing. Although the Company
believes that the expectations reflected in its forward-looking statements are
reasonable, it can give no assurance that such expectations or any of its
forward-looking statements will prove to be correct, and actual results could
differ materially from those projected or assumed in the Company's
forward-looking statements. The Company's future financial condition and
results, as well as any forward-looking statements, are subject to inherent
risks and uncertainties, including, without limitation, potential limitations on
the Company's ability to pursue its acquisition strategy and successfully
integrate acquired operations, dependence on it's primary customer, significant
competition, limitations arising from the Company's indebtedness, government
regulation, seasonality and dependence on key management. Additional information
concerning these and other risk factors is contained in the Company's Annual
Report on Form 10-K for the fiscal year ended January 2, 1998, a copy of which
may be obtained from the Company upon request.
13
<PAGE>
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
Exhibit 27.1 - Financial Data Schedule.
Exhibit 27.2 - Financial Data Schedule - Restated.
Exhibit 27.3 - Financial Data Schedule - Restated.
(b) Reports on Form 8-K
The Company filed a current report on Form 8-K, dated February 17, 1998,
reporting the acquisition of substantially all of the net operating
assets of Francisco on February 2, 1998. Financial statements of
Francisco and pro forma combined financial information relating to
Francisco and the Company were filed in an amendment on April 17, 1998.
Pursuant to the requirements of the Securities Exchange Act of 1934, the Company
has duly caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
FRESH AMERICA CORP.
(Registrant)
/s/ ROBERT C. KIEHNLE Date: MAY 15, 1998
Robert C. Kiehnle
Executive Vice President and
Chief Financial Officer
14
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