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 October 1, 1999.
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 November 10, 1999 the Registrant had 5,241,051 shares of its Common Stock
outstanding.
Total number of pages in this report, including the cover page is 17. Exhibit
index on page 17.
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. - FINANCIAL STATEMENTS
FRESH AMERICA CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
OCTOBER 1, JANUARY 1,
1999 1999
--------- ---------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents .................................................... $ 2,684 $ 1,171
Accounts receivable, net ..................................................... 50,800 80,674
Advance to growers ........................................................... 2,464 2,238
Inventories .................................................................. 7,744 11,450
Prepaid expenses and other ................................................... 1,747 2,504
Deferred income taxes ........................................................ 2,938 338
Income taxes receivable ...................................................... 5,169 363
--------- ---------
Total current assets ..................................................... 73,546 98,738
Property, plant and equipment, net ............................................. 25,735 23,900
Notes receivable from shareholders ............................................. 166 178
Goodwill, net of accumulated amortization of $3,125 and $1,557, ................ 31,090 33,005
respectively
Other assets ................................................................... 2,530 2,278
--------- ---------
$ 133,067 $ 158,099
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Notes payable and current portion of long-term debt .......................... $ 27,953 $ 14,807
Accounts payable ............................................................. 31,154 51,979
Accrued salaries and wages ................................................... 2,383 1,460
Other accrued expenses ....................................................... 5,291 2,018
--------- ---------
Total current liabilities ................................................ 66,781 70,264
Long-term debt, less current portion ........................................... 22,529 35,985
Deferred income taxes .......................................................... 934 1,070
Other liabilities .............................................................. 278 218
--------- ---------
Total liabilities ........................................................ 90,522 107,537
--------- ---------
Shareholders' Equity:
Common stock $.01 par value. Authorized 10,000,000 shares;
issued 5,241,051 and 5,202,511 respectively .......................... 52 52
Additional paid-in capital ................................................. 32,547 31,672
Foreign currency translation adjustment .................................... (226) (345)
Retained earnings .......................................................... 10,172 19,183
--------- ---------
Total shareholders' equity ............................................... 42,545 50,562
--------- ---------
Commitments and contingencies
$ 133,067 $ 158,099
========= =========
</TABLE>
The notes to consolidated financial statements are an integral part of these
statements.
2
<PAGE>
FRESH AMERICA CORP. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
QUARTER ENDED NINE MONTHS ENDED
---------------------- ----------------------
OCTOBER 1, OCTOBER 2, OCTOBER 1, OCTOBER 2,
1999 1998 1999 1998
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Net sales .................................. $ 151,220 $ 140,259 $ 518,749 $ 432,864
Cost of sales .............................. 136,748 124,822 458,580 385,465
--------- --------- --------- ---------
Gross profit ................... 14,472 15,437 60,169 47,399
--------- --------- --------- ---------
Selling, general and administrative expenses 16,513 12,745 50,518 36,242
Provision for bad debt ..................... 3,982 143 4,385 599
Depreciation and amortization .............. 1,668 876 4,756 2,494
Disposition costs and write-offs on
closed operations ...................... 5,819 -- 5,819 --
Transaction costs .......................... 3,042 -- 3,850 1,395
Settlement of lawsuit ...................... 600 -- 600 0
--------- --------- --------- ---------
31,624 13,764 69,928 40,730
--------- --------- --------- ---------
Operating income (loss) ......... (17,152) 1,673 (9,759) 6,669
--------- --------- --------- ---------
Other income (expense):
Interest expense ....................... (1,579) (814) (4,159) (1,848)
Interest income ........................ 76 94 187 178
Other, net ............................. (108) 13 (24) (152)
--------- --------- --------- ---------
(1,611) (707) (3,996) (1,822)
--------- --------- --------- ---------
Income (loss) before income taxes .......... (18,763) 966 (13,755) 4,847
Provision (benefit) for income taxes ...... (7,318) 377 (4,744) 1,844
--------- --------- --------- ---------
Net income (loss) ................ $ (11,445) $ 589 $ (9,011) $ 3,003
========= ========= ========= =========
Earnings (loss) per share:
Basic .................................. $ (2.18) $ 0.12 $ (1.72) $ 0.62
========= ========= ========= =========
Diluted ................................ $ (2.18) $ 0.11 $ (1.72) $ 0.59
========= ========= ========= =========
</TABLE>
The notes to consolidated financial statements are an integral part of these
statements.
3
<PAGE>
FRESH AMERICA CORP. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOW
(IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
--------------------
OCTOBER 1, OCTOBER 2,
1999 1998
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) ................................................. $ (9,011) $ 3,003
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization ............................... 4,756 2,494
Disposition costs and write-offs on closed operations ....... 5,187 --
Provision for bad debt ...................................... 4,385 599
Noncash transaction costs ................................... 340 519
Deferred income taxes ....................................... (2,736) (627)
Other ....................................................... 871 134
Change in assets and liabilities, excluding the effects of
acquisitions:
Accounts receivable ..................................... 25,990 1,673
Advances to growers ..................................... (242) (1,718)
Inventories ............................................. 3,819 1,577
Prepaid expenses ........................................ 759 19
Other assets ............................................ (4,636) (588)
Accounts payable ........................................ (21,382) (1,982)
Accrued expenses and other liabilities .................. 3,721 (1,009)
-------- --------
Total adjustments .................................. 20,832 1,091
-------- --------
Net cash provided by operating activities .......... 11,821 4,094
-------- --------
Cash flows from investing activities:
Additions to property, plant and equipment, net ................... (5,967) (4,155)
Cost of acquisitions, exclusive of cash acquired .................. (2,628) (11,200)
-------- --------
Net cash used in investing activities .............. (8,595) (15,355)
-------- --------
Cash flows from financing activities:
Proceeds from revolving line of credit ............................ 73,258 78,377
Repayments of revolving line of credit ............................ (70,223) (89,489)
Proceeds from short-term indebtedness ............................. 81 5,048
Payments of short-term indebtedness ............................... (3,690) (5,184)
Additions to long-term indebtedness ............................... 672 20,363
Payments of long-term indebtedness ................................ (1,873) (233)
Net proceeds from exercise of employee stock options .............. 42 143
-------- --------
Net cash provided by (used in) financing activities (1,733) 9,025
-------- --------
Effect of exchange rate changes on cash ............................... 20 (108)
Net increase (decrease) in cash and cash equivalents 1,513 (2,344)
Cash and cash equivalents at beginning of period ...................... 1,171 2,725
-------- --------
Cash and cash equivalents at end of period ............................ $ 2,684 $ 381
-------- --------
Supplemental disclosures of cash flow information:
Cash paid for interest ............................................ $ 2,572 $ 689
Cash paid for income taxes ........................................ $ 1,312 $ 2,485
</TABLE>
The notes to 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. ("Fresh America", the "Company", "we", "us" or "our")
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-one
distribution and processing facilities.
UNAUDITED INTERIM FINANCIAL INFORMATION - The consolidated balance sheet
as of October 1, 1999, the consolidated statements of income for the quarters
and nine month periods ended October 1, 1999 and October 2, 1998, the
consolidated statements of cashflow for the nine month periods ended October 1,
1999 and October 2, 1998, 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 1, 1999. The
results for the periods ended October 1, 1999 and October 2, 1998 may not be
indicative of operating results for the full year.
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 - Basic earnings per share ("EPS") is calculated by
dividing net income 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. See Note 6.
COMPREHENSIVE INCOME - The Company provides disclosure required by
Statement of Financial Accounting Standards ("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 foreign currency 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. See Note 5.
RECENT ACCOUNTING PRONOUNCEMENTS - The Company is assessing the reporting
and disclosure requirements of SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities. This statement, as amended by SFAS No. 137,
which delays the effective date, establishes accounting and
5
<PAGE>
reporting standards for fiscal years beginning after June 15, 2000. The Company
believes SFAS No. 133 will not have a material impact on its financial
statements or accounting policies. The Company will adopt the provisions of SFAS
No. 133 in the first quarter of fiscal 2001.
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 for 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.
SEGMENT AND RELATED INFORMATION - The Company provides disclosure required
by SFAS No. 131, "Disclosures About Segments of an Enterprise and Related
Information," which establishes standards for the way public business
enterprises report information about products and services. Since each business
unit is similarly engaged in procurement, processing and distribution services,
the business units have been aggregated into one reportable segment for
reporting purposes. See Note 2 - "Agreement with Sam's Club" for discussion of
the Company's major customer.
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 October 1, 1999 and
October 2, 1998 each consist of 13 weeks. The nine-month periods ended October
1, 1999 and October 2, 1998 each consist of 39 weeks.
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 the 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. The Agreement expires on November 20, 2000. 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 1, 1999.
Each year since 1997, Sam's has elected to exercise its existing option
under the Agreement to distribute produce directly with respect to 40 clubs,
thereby reducing the number of clubs to which the Company distributes.
Accordingly, the Company has conducted its operations assuming that Sam's will
continue to withdraw 40 clubs in the year 2000.
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 based on the market value of the stock at the time of the transaction,
and contingent consideration subject to a
6
<PAGE>
minimum of $2.5 million with a maximum of $16.6 million based on the pre-tax
earnings of the business of Francisco for the 1998 and 1999 fiscal years subject
to certain adjustments. The minimum contingent payments were recorded as a
liability and were payable in cash, common stock or a combination of cash and
common stock. In January 1999, the Company paid $1.0 million in satisfaction of
the minimum amount due for the contingent payment related to fiscal 1998. The
payment was made in the form of $.5 million cash and issuance of 35,540 shares
of common stock valued at $14.07 per share. The remaining 1998 contingent
payment of $5.3 million was paid in cash in the second quarter of 1999.
On March 4, 1998, the Company acquired Ontario Tree Fruits Limited and its
affiliated companies (collectively, "OTF") in a stock-for-stock transaction
accounted for using the pooling method of accounting. In connection with the
acquisition, the Company incurred transaction costs of approximately $1.4
million, which were expensed in the first quarter of 1998. The transaction costs
included approximately $942,000 of non-cash expenses ($519,000, net of tax)
related to the issuance of 52,342 shares (which were included in the total
609,713 shares issued) of the Company's common stock to the financial advisors
of OTF.
In addition to the acquisitions discussed above, the Company acquired all
of the capital stock of two businesses and substantially all of the net assets
of two other businesses during fiscal 1998. These acquisitions were accounted
for using the purchase method of accounting and were acquired through the
payment of $11.5 million in cash, issuance of notes payable totaling $4.1
million, the issuance of 332,726 shares of the Company's common stock valued at
$5.4 million and the assumption of $1.4 million in liabilities.
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 as if all the 1998 acquisitions
occurred as of the beginning of 1998, after giving effect to certain
adjustments, including amortization of goodwill, 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 such acquired entities constituted a single entity during such
periods (in thousands, except per share amounts).
NINE MONTHS ENDED
OCTOBER OCTOBER
1999 1998
HISTORICAL PRO FORMA
Net sales $ 518,749 $ 590,604
Net income (loss) $ (9,011) $ 4,274
Earnings (loss) per share - $ (1,72) $ 0.82
7
<PAGE>
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") and a
bridge loan totaling $17 million. The agreement has been amended several times,
most recently as of October 31, 1999, which resulted in the Company having
available borrowings under the Revolver of $22 million through November 15, 1999
with no borrowing base requirements. Subsequent to that date, the availability
under the Revolver, if not further amended, will be $20 million and subject to
borrowing base restrictions. The Revolver, which expires February 2, 2001, is
subject to certain covenants and borrowing base requirements and is
collateralized by accounts receivable and inventory of the Company and the
capital stock of its U.S. subsidiaries. Outstanding principal amounts under the
Revolver ($20.1 million outstanding as of October 1, 1999) accumulate interest
at the bank prime rate plus 1% ( 9.25% as of October 1, 1999), or at the
Company's election, the eurodollar rate plus 2.75% (8.06% as of October 1,
1999). The effective interest rate at October 1, 1999 was 9.25%.
At October 1, 1999, the Company was not in compliance with the financial
covenants in the loan agreement. While the Company obtained a waiver from the
lender for these instances of noncompliance for the third quarter of fiscal 1999
(which is effective through November 15, 1999), the waiver was not sufficient
for the related debt to be classified as a noncurrent liability in the
accompanying consolidated balance sheet. No assurance can be given that the
Company will reach an agreement with the bank by November 15, 1999 (or that the
bank will extend such date) or what action the bank will take if no such
agreement is reached.
On May 15, 1998 the Company completed a $20 million, 12% subordinated debt
financing with a major national insurance company. The note has a final maturity
of May 1, 2003 with principal payments of $6,666,666 due on May 1, 2001 and May
1, 2002. Interest payments are due semi-annually in May and November. A total of
$15 million was funded on May 15, 1998 with the remaining $5 million funded on
August 3, 1998. In connection with the subordinated note, the Company issued
116,612 warrants on May 15, 1998 and 38,871 warrants on August 3, 1998 with a
fair value of $953,000 and $289,000, respectively. The warrants became
exercisable on May 1, 1999 at an exercise price of $22.70 per share and expire
on May 1, 2003.
Additionally, OTF has a demand agreement with a Canadian bank to provide
revolving credit facilities (the "Canadian Revolver") of up to CDN $20 million
($13.6 million), subject to certain covenant and borrowing base requirements.
The Canadian Revolver is collateralized by substantially all assets of OTF.
Interest on borrowings accrue at U.S. base rate plus 0.75% ( 9.0% at October 1,
1999) or Canadian prime plus 0.75% (7.25%), depending on the denomination of the
borrowings.
NOTE 5. COMPREHENSIVE INCOME.
The following table reconciles the Company's net income to its
comprehensive income (in thousands):
<TABLE>
<CAPTION>
QUARTER ENDED NINE MONTHS ENDED
-------------------- --------------------
OCTOBER OCTOBER OCTOBER OCTOBER
1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net income (loss) ....................... $(11,445) $ 589 $ (9,011) $ 3,003
Other comprehensive income (loss)-foreign
currency translation adjustments .... (31) (3) 119 (98)
Comprehensive income (loss) ............. $(11,476) $ 586 $ (8,892) $ 2,905
</TABLE>
8
<PAGE>
NOTE 6. EARNINGS PER SHARE.
Shares used in calculating basic and diluted EPS are as follows (in
thousands):
<TABLE>
<CAPTION>
QUARTER ENDED NINE MONTHS ENDED
--------------------------- ---------------------------
OCTOBER 1, OCTOBER 2, OCTOBER 1, OCTOBER 2,
1999 1998 1999 1998
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Weighted average common shares
outstanding - basic ................................... 5,241 5,020 5,240 4,846
Dilutive securities:
Common stock options .................................. -- 126 -- 168
Contingent shares related to acquisitions ............. -- 184 -- 79
Weighted average common shares outstanding -
diluted basis ......................................... 5,241 5,330 5,240 5,093
------------ ------------ ------------ ------------
</TABLE>
Options and warrants to purchase approximately 529 thousand and 227
thousand shares of common stock respectively, were outstanding during the three
and nine month periods ended October 1, 1999 and October 2, 1998, but were not
included in the computation of diluted earnings per share because their
inclusion would have been antidilutive.
In calculating diluted earnings per share for the quarter and nine-month
period ended October 2, 1998, $30 thousand and $45 thousand, respectively, were
added back to net income in connection with assumed conversion of indebtedness
related to certain contingent shares.
NOTE 7. PROVISION FOR BAD DEBT.
The Company has provided for bad debts 1,417,000 and 1,772,000 during the
third quarter of 1999 related to direct Food Service operations that have been
closed or sold and certain distribution agreements, respectively.
NOTE 8. DISPOSITION COSTS AND WRITE-OFFS ON CLOSED OPERATIONS.
In the third quarter of 1999, the Company decided to close or sell several
of its foodservice operations, located in Los Angeles and San Francisco,
California, Orlando, Florida, Atlanta, Georgia and Austin and San Antonio,
Texas. The operations in Orlando, Los Angeles and Atlanta were closed during the
third quarter, while San Antonio and San Francisco were closed in October 1999.
The Austin operation was sold in November 1999. As a result of the above
transactions, the Company wrote off $4,619,000 in goodwill, wrote down the
carrying value or incurred losses on the sale of property and equipment of
$568,000, incurred shut down costs of $632,000.
NOTE 9. TERMINATION OF MERGER.
On May 3, 1999, the Company, and Dallas-based, privately held FreshPoint
Holdings, Inc. ("FreshPoint") entered into a definitive agreement pursuant to
which FreshPoint would have merged with and into the Company. The transaction
was to be accounted for as a reverse acquisition with FreshPoint as the
accounting acquirer. Effective September 30, 1999, the agreement was terminated
by the Company and FreshPoint. The Company and FreshPoint have each agreed to
pay their respective expenses in connection with the contemplated transaction.
The Company incurred expenses of $3,042,000 and $3,850,000 in the quarter and
nine month periods ended October 1, 1999. The expenses consisted primarily of
legal and professional fees, severance and stay-to-close incentives associated
with planned reductions in work force. No other fees are due by either party.
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NOTE 10. SETTLEMENT OF LAWSUIT.
In the third quarter of 1999, the Company recorded a charge related to the
settlement of a lawsuit which, including legal costs, amounted to $600,000. The
lawsuit involved a dispute over the Company's alleged improper solicitation of
employees while starting up a new business in 1998. Management believes it was
in the Company's best interests to settle the issue and avoid further legal
costs.
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:
<TABLE>
<CAPTION>
QUARTER ENDED NINE MONTHS ENDED
----------------------------- -----------------------------
OCTOBER 1, OCTOBER 2, OCTOBER 1, OCTOBER 2,
1999 1998 1999 1998
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net sales .................................. 100% 100% 100% 100%
Cost of sales .............................. 90.4 89.0 88.4 89.0
------------ ------------ ------------ ------------
Gross profit ................... 9.6 11.0 11.6 11.0
Selling, general and administrative expenses 10.9 9.1 9.7 8.4
Provision for bad debt ..................... 2.6 0.1 0.8 0.1
Depreciation and amortization .............. 1.1 0.6 0.9 0.6
Disposition costs and write-offs on
closed operations ...................... 3.8 -- 1.2 --
Transaction costs .......................... 2.1 -- 0.7 0.4
Settlement of lawsuit ...................... 0.4 -- 0.1 --
------------ ------------ ------------ ------------
20.9 9.8 13.4 9.5
------------ ------------ ------------ ------------
Operating income (loss) .................... (11.3) 1.2 (1.8) 1.5
Other, net ................................. (1.1) (0.5) (0.8) (0.4)
------------ ------------ ------------ ------------
Income (loss) before income taxes .......... (12.4) 0.7 (2.6) 1.1
Provision (benefit) for income taxes ...... (4.8) 0.3 (0.9) 0.4
------------ ------------ ------------ ------------
Net income (loss)........................... (7.6%) 0.4% (1.7%) 0.7%
------------ ------------ ------------ ------------
</TABLE>
COMPARISON OF QUARTER ENDED OCTOBER 1, 1999 TO QUARTER ENDED OCTOBER 2, 1998
NET SALES. Net sales increased $10.9 million, or 7.8%, to $151.2 million
in the third quarter of 1999 from $140.3 million in the third quarter of 1998.
Revenue from companies acquired during or subsequent to third quarter of 1998
increased by $32.6 million. This increase was offset by a decrease of $9.5
million in operations that were closed or designated to be closed during the
third quarter of 1999 and the effect of weak commodity pricing during the summer
months as further described below. Sam's, the Company's largest customer,
represented 34.7% of net sales in the third quarter of 1999 compared to 39.0% in
the third quarter of 1998.
COST OF SALES. Cost of sales increased $11.9 million, or 9.6% to $136.7
million in the third quarter of 1999 from $124.8 million in the third quarter of
1998, primarily reflecting the increase in net
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<PAGE>
sales above. As a percentage of net sales, cost of sales increased to 90.4% from
89.0%, which in turn decreased the Company's gross profit percentage to 9.6%
from 11.0%. The Company's gross profit was negatively affected by weak commodity
markets in the industry on such summer staples as onions, melons and bananas as
well as the unavailability of citrus product associated with last winter's
freeze.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses ("SG&A") expenses increased by $3.8 million, or 29.6% to
$16.5 million in the third quarter of 1999 from $12.7 million in the third
quarter of 1998. The increase is primarily due to $5.0 million of SG&A expenses
related to acquired companies offset by reductions in SG&A of $0.9 million
related to closed operations.
PROVISION FOR BAD DEBT. The Company's provision for bad debt increased
$3.9 million to $4.0 million in the third quarter of 1999 from $0.1 million in
the third quarter of 1998. In the third quarter of 1999, the Company recorded an
additional provision for bad debt amounting to $1.4 million related to the
closure or sale of five of its foodservice operations. The Company also recorded
charges totaling $1.8 million related to certain distribution agreements.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization increased
$0.8 million, or 90.4% to $1.7 million in the third quarter of 1999 from $0.9
million in the third quarter of 1998. The increase was primarily due to goodwill
amortization related to acquisitions made subsequent to or during the third
quarter of 1998 and increased depreciation related to the Company's computer
system that was implemented in its core operations in October 1998.
DISPOSITION COSTS AND WRITE-OFFS ON CLOSED OPERATIONS. In the third
quarter of 1999, the Company decided to close or sell several of its foodservice
operations, located in Los Angeles and San Francisco, California, Orlando,
Florida, Atlanta, Georgia and Austin and San Antonio, Texas. The operations in
Orlando, Los Angeles and Atlanta were closed during the third quarter, while San
Antonio and San Francisco were closed in October 1999. The Austin operation was
sold in November 1999. As a result of the above transactions, the Company wrote
off $4,619,000 in goodwill, wrote down the carrying value or incurred losses on
the sale of property and equipment of $568,000 and incurred shut down costs of
$632,000.
TRANSACTION COSTS. On May 3, 1999, the Company, and Dallas-based,
privately held FreshPoint Holdings, Inc. ("FreshPoint") entered into a
definitive agreement pursuant to which FreshPoint would have merged with and
into the Company. The transaction was to be accounted for as a reverse
acquisition with FreshPoint as the accounting acquirer. On September 30, 1999,
the agreement was terminated by the Company and FreshPoint. The Company and
FreshPoint have each agreed to pay their respective expenses in connection with
the contemplated transaction. During the third quarter of 1999, the Company
recorded expenses of $3,042,000, which consisted primarily professional fees,
severance and stay-to-close incentives associated with planned reductions in
work force. The nine months ended 1998 include $1.4 million in transaction costs
related to the acquisition of OTF.
SETTLEMENT OF LAWSUIT. In the third quarter of 1999, the Company settled a
lawsuit, which, including legal costs, amounted to $600,000. The lawsuit
involved a dispute over the Company's alleged improper solicitation of employees
while starting up a new business in 1998. Management believes it was in the
Company's best interests to settle the issue and avoid further legal costs.
11
<PAGE>
OPERATING INCOME (LOSS). As a result of the foregoing factors, the Company
incurred an operating loss of $17.2 million in the third quarter of 1999
compared to operating income of $1.7 million in the third quarter of 1998.
OTHER INCOME (EXPENSE). Interest expense increased $0.8 million to $1.6
million in the third quarter of 1999 from $0.8 million in the third quarter of
1998 due to increased borrowings to help finance acquisitions that were made
subsequent to the third quarter of 1998.
NET INCOME (LOSS). As a result of the foregoing factors, the Company
incurred a net loss of $11.4 million in the third quarter of 1999 compared to
net income of $0.6 million in the third quarter of 1998.
COMPARISON OF NINE MONTHS ENDED OCTOBER 1, 1999 TO NINE MONTHS ENDED OCTOBER
2, 1998
NET SALES. Net sales increased $85.8 million, or 19.8%, to $518.7 million
in the first nine months of 1999 from $432.9 million in the first nine months of
1998. Such increase was primarily attributable to acquisitions made during or
subsequent to the third quarter of 1999. This increase was somewhat offset by
weak commodity prices during the summer months as further described below.
Sam's, the Company's largest customer, represented 30.5% of net sales in the
first nine months of 1999 compared to 39.2% in the first nine months of 1998.
COST OF SALES. Cost of sales increased $73.1 million, or 19.0% to $458.6
million in the first nine months of 1999 from $385.5 million in the first nine
months of 1998, primarily reflecting the increase in net sales above. As a
percentage of net sales, cost of sales decreased to 88.4% from 89.0%, which in
turn increased the Company's gross profit percentage to 11.6% from 11.0%. The
increase in gross profit percentage is primarily due to the acquisitions made
during or subsequent to the first nine months of 1998, which included
retail/wholesale and value-added companies that have historically contributed
higher gross profit percentages than the Company's already existing operations.
This increase was offset significantly in the third quarter by weak commodity
markets in the industry on such summer staples as onions, melons and bananas as
well as the unavailability of citrus product associated with last winter's
freeze. The impact of the third quarter of 1999 is evidenced by the Company's
gross profit of 9.6% for the quarter compared to 12.4% for the first six months
of 1999.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses expenses increased by $14.3 million, or 39.4% to $50.5
million in the first nine months of 1999 from $36.2 million in the first nine
months of 1998. The increase is primarily due to $14.7 million of SG&A expenses
related to related to acquired companies.
PROVISION FOR BAD DEBT. The Company's provision for bad debt increased
$3.8 million to $4.4 million in the first nine months of 1999 from $0.6 million
in the first nine months of 1998. In the first nine months of 1999, the Company
recorded an additional provision for bad debt amounting to $1.4 million related
to the closure or sale of five of its foodservice operations. The Company also
recorded charges totaling $1.8 million related to certain distribution
agreements.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization increased
$2.3 million, or 90.7% to $4.8 million in the first nine months of 1999 from
$2.5 million in the first nine months of 1998. The increase was primarily due to
goodwill amortization related to acquisitions made subsequent to or during the
first nine months of 1998 and increased depreciation related to the Company's
computer system that was implemented in its core operations in October 1998.
DISPOSITION COSTS AND WRITE-OFFS ON CLOSED OPERATIONS. In the third
quarter of 1999, the Company decided to close or sell several of its foodservice
operations, located in Los Angeles and San Francisco,
12
<PAGE>
California, Orlando, Florida, Atlanta, Georgia and Austin and San Antonio,
Texas. The operations in Orlando, Los Angeles and Atlanta were closed during the
third quarter, while San Antonio and San Francisco were closed in October 1999.
The Austin operation was sold in November 1999. As a result of the above
transactions, the Company wrote off $4,619,000 in goodwill, wrote down the
carrying value or incurred losses on the sale of property and equipment of
$568,000 and incurred shut down costs of $632,000.
TRANSACTION COSTS. On May 3, 1999, the Company, and Dallas-based,
privately held FreshPoint entered into a definitive agreement pursuant to which
FreshPoint would have merged with and into the Company. The transaction was to
be accounted for as a reverse acquisition with FreshPoint as the accounting
acquirer. Effective September 30, 1999, the agreement was terminated by the
Company and FreshPoint. The Company and FreshPoint have each agreed to pay their
respective expenses in connection with the contemplated transaction. During the
first nine months of 1999, the Company recorded expenses of $3,850,000, which
consisted primarily of legal and professional fees, severance and stay-to-close
incentives associated with planned reductions in work force. The nine months
ended 1998 include $1.4 million in transaction costs related to the acquisition
of OTF.
SETTLEMENT OF LAWSUIT. In the first nine months of 1999, the Company
settled a lawsuit, which, including legal costs, amounted to $600,000. The
lawsuit involved a dispute over the Company's alleged improper solicitation of
employees while starting up a new business in 1998. Management believes it was
in the Company's best interests to settle the issue and avoid further legal
costs.
OPERATING INCOME (LOSS). As a result of the foregoing factors, the Company
incurred an operating loss of $9.8 million in the first nine months of 1999
compared to operating income of $6.7 million in the first nine months of 1998.
OTHER INCOME (EXPENSE). Interest expense increased $2.3 million to $4.1
million in the first nine months of 1999 from $1.8 million in the first nine
months of 1998 due to increased borrowings to help finance acquisitions that
were made during or subsequent to the first nine months of 1998.
NET INCOME (LOSS). As a result of the foregoing factors, the Company
incurred a net loss of $9.0 million in the first nine months of 1999 compared to
net income of $3.0 million in the first nine months of 1998.
LIQUIDITY AND CAPITAL RESOURCES
Cash provided by operating activities was $11.8 million for the first nine
months of 1999 compared to $4.1 million in the first nine months of 1998.
Cash used in investing activities decreased $6.8 million to $8.6 million
in the first nine months of 1999 from $15.4 million in the first nine months of
1998. The decrease from the prior year is due primarily to the acquisition of
Francisco during the first nine months of 1998. Cash used in financing
activities was $1.7 million in the first nine months of 1999 compared to cash
provided of $9.0 million in the first nine months of 1998. The decrease in cash
flows from financing activities compared to the prior year is primarily due to
borrowings used to finance the cash portion of the Francisco acquisition in 1998
and the use of funds for earnout payments during 1999 (see Note 3 of notes to
unaudited consolidated financial statements).
At October 1, 1999, the Company had working capital of $6.8 million
compared to $28.5 million at January 1, 1999. The decrease in working capital is
primarily due to the classification of the borrowing under the Company's
Revolver as a current liability since the end of its second quarter as
13
<PAGE>
discussed in Note 4 to unaudited consolidated financial statements.
Additionally, substantial amounts of working capital were used to fund merger
activities and fund the Company's operating loss in the third quarter of 1999.
Late in 1998, the Company solicited and received a proposal to refinance
its senior secured debt with a major bank to increase borrowing availability
commensurate with the growth and size of the Company. At that time, the Company
deferred acting upon such proposal due to the promising status of its
negotiations to merge with FreshPoint. During 1999, the Company with the consent
of its current lender, amended the existing credit facility throughout the time
period of the pending merger. Such amendments were necessitated by the Company's
non-compliance with the borrowing base formula and financial covenants that had
been established in February 1998. Such noncompliance occurred at the end of the
second and third quarters of 1999.
The Company's amended secured senior revolving credit facility currently
provides for borrowings of up to $22 million and is not subject to borrowing
base restrictions nor financial covenants. As of October 1, 1999, borrowings
outstanding under the revolving credit facility were $20.1 million. As
consideration for the waivers granted under the current amendment, the Company's
interest rates are the bank prime rate plus 1% or at the Company's election, the
eurodollar rate plus 2.75%. The current amendment to the credit facility expires
on November 15, 1999. No assurance can be given that the Company will reach an
agreement with the bank by November 15, 1999 (or that the bank will agree to
extend such date) or what action the bank will take if no such agreement is
reached.
The Company is currently finalizing with the bank an amendment to the
credit agreement to provide for borrowings of up to $22 million without any
borrowing base requirements and to waive compliance with the financial covenants
through the first quarter of 2000, as well as granting the bank a security
interest in additional collateral.
In addition to the Company's revolving credit facility, the Company's
Canadian subsidiaries have revolving credit facilities of up to CDN $20 million
($13.6 million). The Canadian facilities had an outstanding balance of CDN $5.0
million ($3.4 million) as of October 1, 1999. The Company also has a $20
million, 12% subordinated debt financing with a national insurance company. The
notes have a final maturity in May 2003 with principal payments of approximately
$6.7 million due in May 2001 and May 2002 (see Note 4 of notes to unaudited
consolidated financial statements).
Management believes that the combination of cash generated from ongoing
operating activities, realization of recent reductions in overhead, proceeds
from the sale of unprofitable smaller facilities and non-core assets and
availability under its bank lines of credit is sufficient to meet its current
needs for operations and near-term debt service requirements.
The Company will also seek to arrange refinancing for at least a
substantial portion of its bank line over the next several months. While there
can be no assurances as to the availability of longer-term debt financing, the
management believes that a refinancing can be arranged either with its current
lenders or from other financial institutions. Such refinancing will most likely
be at a higher interest cost than its current average interest cost. See
"Outlook and Uncertainties" below.
YEAR 2000
The Year 2000 will have a broad impact on the business environment in
which the Company operates due to the possibility that many computerized systems
across all industries will be unable to process information containing dates
beginning in the Year 2000. Due to its growth and expansion, the Company has
been in the process of implementing at designated sites a new enterprise-wide
management information technology ("IT") system, which better meets its diverse
and long-term needs. The implementation for the designated sites has been
completed, and the Company has received assurances
14
<PAGE>
from the provider of the system that it meets requirements for Year 2000
compliance. An independent external certification organization has certified the
system after testing all of the significant Year 2000 issues. Regarding the
Company locations where this system has not been implemented, the systems
currently in use have been upgraded for Year 2000 compliance and have been
tested and certified by the individual software vendors. The Company has also
reviewed its critical non-IT systems and has determined that none contain
embedded technology that would lead to failure due to the Year 2000 issue.
The nature of the Company's business is such that the business risks
associated with the Year 2000 can be reduced by working closely with and
assessing the vendors supplying the Company's produce. In addition, such
business risks can be reduced by working with the Company's customers to ensure
that they are aware of the Year 2000 business risks and are appropriately
assessing and addressing them.
Because third party failures could have a material impact on the Company's
ability to conduct business, the Company has sent out questionnaires to all of
the Company's significant suppliers, service providers and customers and has
obtained reasonable assurance that they have addressed the Year 2000 issues
within their companies. Management does not believe that it will have difficulty
in obtaining alternative produce suppliers or service providers in the event
that one of its suppliers has unforeseen difficulties. The Company's most likely
worst-case scenario would be delayed billings to customers and the inability of
customers to order and pay on a timely basis.
In addition, the Company has not identified any costs, whether internal or
external, related to the Company addressing its Year 2000 issues which it
considers to be material to its financial position or results of operations.
However, unanticipated failures by critical suppliers or customers, as well as
the failure by the Company to execute its own Year 2000 plan, could have a
material adverse effect on the cost related to the Year 2000 issue.
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 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
which result from factors discussed in "Quarterly Results and Seasonality"
above.
15
<PAGE>
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
FOREIGN EXCHANGE RISK. Our Canadian operations are subject to foreign
currency risk; however, we have not experienced any material foreign currency
transaction gains or losses during the last three fiscal years. Foreign currency
translation adjustments are recorded in our consolidated shareholders' equity as
accumulated other comprehensive income. We manage foreign currency risk by
maintaining portfolios of currency denominated in the currency which is required
to make payments.
INTEREST RATE RISK. Our senior credit facilities accrue interest at a
market rate at the time of borrowing plus an applicable margin on certain
borrowings. The interest rate is based on the lending bank's prime rate or the
Eurodollar rate. We manage our borrowings under our credit facilities each day
in order to minimize interest expense. The impact on the Company's results of
operations of a one-percentage point interest rate change on the outstanding
balance of the variable rate debt as of October 1, 1999 would be immaterial.
COMMODITY PRICING RISK. For reasons discussed previously, prices of high
quality produce can be extremely volatile. In order to reduce the impact of
these factors, we generally set our prices based on current delivered cost.
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 business strategy and successfully integrate
acquired operations, dependence on its primary customer, significant
competition, general economic and market conditions, the availability and cost
of borrowed funds and 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 1, 1999,
a copy of which may be obtained from the Company upon request.
16
<PAGE>
PART II - OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The 1999 Annual Meeting of shareholders was held on August 27, 1999. At
the meeting, the following proposals were voted upon by the shareholders:
1. Election of Lawrence V. Jackson to serve as a Class II director for a
three-year term expiring at the 2002 annual meeting. The terms of Thomas
M. Hubbard and Sheldon I. Stein will expire at the 2000 meeting and the
terms of David I. Sheinfeld and Colon Washburn will expire at the 2001
meeting;
2. Approval of the agreement and plan of merger dated as of May 3, 1999
relating to the merger of the Company with FreshPoint Holdings, Inc.;
3. Approval of the charter amendment changing the Company's name to
"FreshPoint America, Inc.," increasing the number of authorized shares of
Fresh America common stock from 10,000,000 to 50,000,000, and expanding
the Fresh America Board of Directors from a six-member board to an
eleven-member board;
4. Approval of the amendment to the Fresh America Corp. 1996 Stock Option and
Award Plan as amended and restated effective May 22, 1998 changing the
name of the stock option plan to the "FreshPoint America, Inc. 1999 Stock
Option and Award Plan" and increasing the number of shares issuable
thereunder.
Each of the above proposals were approved by the shareholders. No action
was taken by the Company with respect to proposals 2 through 4 above due to the
termination of the merger agreement with FreshPoint (see Note 9 to the notes to
the accompanying unaudited financial statements).
The results of the vote were as follows: Proposal 1, 4,790,927 for, and
157,397 abstain; Proposal 2, 3,938,578 for, 65,575 against, and 8,070 abstain;
Proposal 3, 3,774,137 for, 250,881 against, and 11,895 abstain; and Proposal 4,
3,566,668 for, 414,103 against, and 31,452 abstain.
ITEM 6. EXHIBITS AND REPORTS ON 8-K
(a) Exhibits
Exhibit 27.1 - Financial Data Schedule.
(b) Reports on Form 8-K
None.
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/ JOHN GRAY Date: NOVEMBER 12, 1999
John Gray
Executive Vice President and
Chief Financial Officer
17
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