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 July 2, 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 August 12, 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 16.
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. - FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
FRESH AMERICA CORP.
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share amounts)
JULY 2, JANUARY 1,
1999 1999
--------- ---------
ASSETS (unaudited)
<S> <C> <C>
Current Assets:
Cash and cash equivalents .................................... $ 1,093 $ 1,171
Accounts receivable, net ..................................... 72,607 80,674
Advances to growers .......................................... 5,131 2,238
Inventories .................................................. 9,581 11,450
Prepaid expenses ............................................. 2,044 2,504
Deferred income taxes ........................................ 251 338
Income taxes receivable ...................................... 157 363
--------- ---------
Total current assets ..................................... 90,864 98,738
Property, plant and equipment, net ............................. 27,289 23,900
Notes receivable from shareholders ............................. 178 178
Goodwill, net of amortization of $2,565 and $1,557, respectively 32,494 33,005
Other assets ................................................... 2,579 2,278
--------- ---------
$ 153,404 $ 158,099
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Notes payable and current portion of long-term debt .......... $ 25,583 $ 14,807
Accounts payable ............................................. 44,395 51,979
Accrued salaries and wages ................................... 3,042 1,460
Other accrued expenses ....................................... 2,261 2,018
--------- ---------
Total current liabilities ................................ 75,281 70,264
Long-term debt, less current portion ........................... 22,696 35,985
Deferred income taxes .......................................... 1,476 1,070
Other liabilities .............................................. 258 218
--------- ---------
Total liabilities ........................................ 99,711 107,537
========= =========
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 ................................. 32,219 31,672
Foreign currency translation adjustment .................... (195) (345)
Retained earnings .......................................... 21,617 19,183
--------- ---------
Total shareholders' equity ............................... 53,693 50,562
Commitments and contingencies
--------- ---------
$ 153,404 $ 158,099
========= =========
</TABLE>
The notes to 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)
<TABLE>
<CAPTION>
QUARTER ENDED SIX MONTHS ENDED
----------------------- -----------------------
JULY 2, JULY 3, JULY 2, JULY 3,
1999 1998 1999 1998
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Net sales ................................... $ 194,102 $ 159,598 $ 367,529 $ 292,605
Cost of sales ............................... 170,411 142,156 321,832 260,643
--------- --------- --------- ---------
Gross profit .................... 23,691 17,442 45,697 31,962
--------- --------- --------- ---------
Selling, general and administrative expenses:
Salaries and related costs .............. 11,360 7,782 22,169 15,043
Rent, maintenance and related costs ..... 3,441 2,682 6,830 4,991
Insurance expense ....................... 487 323 902 671
Automobile, travel and related costs .... 498 417 988 763
Communication expense ................... 479 370 986 696
Depreciation and amortization ........... 1573 863 3,088 1,618
Transaction costs ....................... 465 -- 808 1,395
Other ................................... 1,245 1,179 2,533 1,789
--------- --------- --------- ---------
19,548 13,616 38,304 26,966
--------- --------- --------- ---------
Operating income ................ 4,143 3,826 7,393 4,996
--------- --------- --------- ---------
Other income (expense):
Interest expense ........................ (1,292) (606) (2,580) (1,034)
Interest income ......................... 45 35 111 84
Other, net .............................. (71) (39) (84) (165)
--------- --------- --------- ---------
(1,318) (610) (2,385) (1,115)
--------- --------- --------- ---------
Income before income taxes .................. 2,825 3,216 5,008 3,881
Provision for income taxes .................. 1,572 1,256 2,574 1,467
--------- --------- --------- ---------
Net income ....................... $ 1,253 $ 1,960 $ 2,434 $ 2,414
========= ========= ========= =========
Earnings per share:
Basic ................................... $ 0.24 $ 0.41 $ 0.46 $ 0.51
========= ========= ========= =========
Diluted ................................. $ 0.23 $ 0.40 $ 0.44 $ 0.49
========= ========= ========= =========
</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>
SIX MONTHS ENDED
---------------------
JULY 2, JULY 3,
1999 1998
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net income ........................................................ $ 2,434 $ 2,414
Adjustments to reconcile net income to net cash provided by
operating activities
Depreciation and amortization ............................... 3,088 1,618
Bad debt expense ............................................ 473 456
Noncash transaction costs ................................... -- 519
Deferred income taxes ....................................... 485 (153)
Other ....................................................... 249 (92)
Change in assets and liabilities, excluding the effects of
acquisitions:
Accounts receivable ..................................... 7,989 (7,330)
Advances to growers ..................................... (2,908) (638)
Inventories ............................................. 1,991 2,030
Prepaid expenses ........................................ 462 (295)
Other assets ............................................ 30 262
Accounts payable ........................................ (7,913) 7,861
Accrued expenses and other liabilities .................. 1,339 (2,451)
-------- --------
Total adjustments .................................. 5,285 1,787
-------- --------
Net cash provided by operating activities .......... 7,719 4,201
-------- --------
Cash flows from investing activities:
Additions to property, plant and equipment, net ................... (5,350) (2,689)
Cost of acquisitions, exclusive of cash acquired .................. -- (6,103)
-------- --------
Net cash used in investing activities .............. (5,350) (8,792)
-------- --------
Cash flows from financing activities:
Proceeds from revolving line of credit ............................ 56,747 51,420
Repayments of revolving line of credit ............................ (54,655) (64,092)
Proceeds from short-term indebtedness ............................. 81 5,019
Payments of short-term indebtedness ............................... (3,651) (5,169)
Additions to long-term indebtedness ............................... 668 15,015
Payments of long-term indebtedness ................................ (1,654) (161)
Net proceeds from exercise of employee stock options .............. 42 106
-------- --------
Net cash provided by (used in) financing activities (2,422) 2,138
-------- --------
Effect of exchange rate changes on cash ............................... (25) (54)
-------- --------
Net increase (decrease) in cash and cash equivalents (78) (2,507)
Cash and cash equivalents at beginning of period ...................... 1,171 2,725
-------- --------
Cash and cash equivalents at end of period ............................ $ 1,093 $ 218
======== ========
Supplemental disclosures of cash flow information:
Cash paid for interest ............................................ $ 2,359 $ 572
Cash paid for income taxes ........................................ $ 673 $ 1,793
</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-seven
distribution and processing facilities.
UNAUDITED INTERIM FINANCIAL INFORMATION - The consolidated balance sheet
as of July 2, 1999, the consolidated statements of income for the quarters and
six month periods ended July 2, 1999 and July 3, 1998, the consolidated
statements of cashflow for the six month periods ended July 2, 1999 and July 3,
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 July 2, 1999 and July 3, 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 July 2, 1999 and July
3, 1998 each consist of 13 weeks. The six-month periods ended July 2, 1999 and
July 3, 1998 each consist of 26 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 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. 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 $2.6 million was paid in cash in April 1999. During the second
quarter, the Company prepaid the minimum contingent payment related to fiscal
1999 in the amount of $1.4 million cash and paid an additional $1.3 million as
an advance against the 1999 contingent payment.
In connection with the acquisition of Ontario Tree Fruits Limited and its
affiliated companies (collectively, "OTF"), 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.
SIX MONTHS ENDED
----------------------
(In thousands, except per share amounts)
JULY 2, JULY 3,
1999 1998
HISTORICAL PRO FORMA
---------- ----------
Net sales .................. $367,529 $408,290
======== ========
Net income ................. $ 2,434 $ 3,356
======== ========
Earnings per share - diluted $ 0.44 $ 0.66
======== ========
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") of up to
$12 million and a bridge loan of $5 million (the "Bridge Loan"). On May 15,
1998, the Company amended the terms of this loan agreement and increased the
borrowing availability under the Revolver to $15 million. On March 4, 1999, the
Company further amended the terms of this loan agreement and increased the
borrowing availability under the Revolver to $20 million. 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 subsidiaries. Outstanding principal amounts
under the Revolver ($19.6 million outstanding as of July 2, 1999) accumulate
interest at the bank prime rate (7.75% as of July 2, 1999), or at the Company's
election, the eurodollar rate plus 1.75% (6.85% as of July 2, 1999). The
effective interest rate at July 2, 1999 was 7.20% .
At July 2, 1999, the Company was not in compliance with a financial
covenant in the Revolver. While the Company obtained a waiver from the lender
for this instance of noncompliance for the second quarter of fiscal 1999, the
waiver was not sufficient for the related debt to be classified as a noncurrent
liability in the accompanying consolidated balance sheet. The Company decided
not to request the extended waiver because of the anticipated merger with
FreshPoint Holdings, Inc., which is expected to close in late August 1999, and
the related commitment received from this lender for long-term financing to be
provided to the merged entity contingent on the closing of the merger. Absent
the anticipated merger, the Company would have requested a waiver sufficient to
allow for classification of the debt as a noncurrent liability, and believes
such waiver would have been granted. Following is a pro forma condensed
consolidated balance sheet as of July 2, 1999 with the debt reported as a
noncurrent liability in accordance with the terms of the Revolver (in
thousands):
Current assets ..................................... $ 90,864
Property, plan and equipment, net .................. 27,289
Other assets ....................................... 35,251
--------
Total assets ............................. $153,404
========
Current liabilities ................................ $ 55,681
Long-term debt ..................................... 42,296
Other noncurrent liabilities ....................... 1,734
Shareholders' equity ............................... 53,693
--------
Total liabilities and shareholders' equity $153,404
========
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
($13.4 million), subject to certain covenant and borrowing base requirements.
The Canadian Revolver is collateralized by substantially all
8
<PAGE>
assets of OTF. Interest on borrowings accrue at U.S. base rate plus 0.75% (9.25%
at July 2, 1999) or Canadian prime plus 0.75% (7.0%), 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 SIX MONTHS ENDED
------------------ ------------------
JULY 2, JULY 3, JULY 2, JULY 3,
1999 1998 1999 1998
------- ------- ------- -------
<S> <C> <C> <C> <C>
Net Income .............................. $ 1,253 $ 1,960 $ 2,434 $ 2,414
Other comprehensive income (loss)-foreign
currency translation adjustments .... 27 (103) 150 (95)
------- ------- ------- -------
Comprehensive income .................... $ 1,280 $ 1,857 $ 2,584 $ 2,319
======= ======= ======= =======
</TABLE>
NOTE 6. EARNINGS PER SHARE.
Shares used in calculating basic and diluted EPS (in thousands):
<TABLE>
<CAPTION>
QUARTER ENDED SIX MONTHS ENDED
---------------- ----------------
JULY 2, JULY 3, JULY 2, JULY 3,
1999 1998 1999 1998
----- ----- ----- -----
<S> <C> <C> <C> <C>
Weighted average common shares
Outstanding - basic ........................... 5,241 4,779 5,239 4,759
Dilutive securities:
Common stock options .......................... 110 172 124 189
Contingent shares related to acquisitions ..... 214 -- 185 --
----- ----- ----- -----
Weighted average shares common outstanding -
diluted basis ................................. 5,565 4,951 5,548 4,948
===== ===== ===== =====
</TABLE>
Options and warrants to purchase approximately 260 thousand and 156
thousand shares of common stock at prices per share ranging from $17.25 to
$25.50 and $22.70 to $25.50, respectively were outstanding during the three and
six month periods ended July 2, 1999 and July 3, 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 quarters ended July 2,
1999 and July 3, 1998 interest expense amounts of $6 thousand and $15 thousand,
respectively were added back to net income in connection with assumed conversion
of indebtedness related to certain contingent shares. For the six-month periods
ended July 2, 1999 and July 3, 1999, $35 thousand and $15 thousand,
respectively, were added back to net income.
9
<PAGE>
NOTE 7. PENDING MERGER.
On May 3, 1999, the Company, and Dallas based, privately held FreshPoint
Holdings, Inc., ("FreshPoint") signed a definitive agreement to merge the two
companies. The merger is pending approval of the shareholders of the Company,
refinancing of certain outstanding debt, approval by regulatory authorities and
other customary conditions. The merger will be structured as a tax-free stock
for stock exchange, whereby Fresh America will exchange approximately 5,685,826
shares of newly issued common stock for 100% of the capital stock of FreshPoint
and will be accounted for as an reverse acquisition with FreshPoint as the
accounting acquirer. Upon completion of the merger, the Company's name will be
FreshPoint America, Inc.
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 SIX MONTHS ENDED
----------------- -----------------
JULY 2, JULY 3, JULY 2, JULY 3,
1999 1998 1999 1998
----- ----- ----- -----
<S> <C> <C> <C> <C>
Net sales ........................... 100.0% 100.0% 100.0% 100.0%
Cost of goods sold .................. 87.8 89.1 87.6 89.1
----- ----- ----- -----
Gross profit ........................ 12.2 10.9 12.4 10.9
Selling, general and
administrative expenses .......... 9.9 8.5 10.2 8.7
Nonrecurring transaction costs ...... 0.2 -- 0.2 0.5
----- ----- ----- -----
Operating income .................... 2.1 2.4 2.0 1.7
Other income (expense) .............. (0.7) (0.4) (0.6) (0.4)
----- ----- ----- -----
Income before income taxes .......... 1.4 2.0 1.4 1.3
Provision for income taxes .......... 0.8 0.8 0.7 0.5
----- ----- ----- -----
Net income .......................... 0.6% 1.2% 0.7% 0.8%
===== ===== ===== =====
</TABLE>
COMPARISON OF QUARTER ENDED JULY 2, 1999 TO QUARTER ENDED JULY 3, 1998
The Company's quarters ended July 2, 1999 and July 3, 1998 each include
13 weeks.
NET SALES. Net sales increased $34.5 million, or 21.6%, to $194.1 million
in the second quarter of 1999 from $159.6 million in the second quarter of 1998.
Such increase was primarily due to acquisitions made subsequent to the second
quarter of 1998. Sam's, the Company's largest customer, represented 30.1% of net
sales in the second quarter of 1999 compared to 37.7% in the second quarter of
1998.
COST OF SALES. Cost of sales increased $28.3 million, or 19.9% to $170.4
million in the second quarter of 1999 from $142.2 million in the second quarter
of 1998, primarily reflecting the increase in net sales above. As a percentage
of net sales, cost of sales decreased to 87.8% from 89.1%, which in turn
increased the Company's gross profit percentage to 12.2% from 10.9%. The
increase in gross profit percentage is primarily due to acquisitions made
subsequent to the second quarter of 1998, which included retail/wholesale,
value-added and foodservice companies that have historically contributed higher
gross profit percentages than the Company's already existing operations.
10
<PAGE>
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative ("SG&A") expenses increased by $5.9 million, or 43.6% to $19.5
million in the second quarter of 1999 from $13.6 million in the second quarter
of 1998. The increase is primarily due to SG&A expenses related to acquired
businesses. Included in SG&A in the second quarter of 1999 are transaction
expenses of $0.5 million related to the pending merger with FreshPoint as
discussed further in Note 7 to the accompanying unaudited consolidated financial
statements.
OPERATING INCOME. As a result of the foregoing factors, which include
transaction costs of $0.5 million in the second quarter of 1999, operating
income increased by $0.3 million, or 8.3%, to $4.1 million in the second
quarter of 1999 from $3.8 million in the second quarter of 1998. The
following table summarizes the effect of the transaction costs on operating
income in the comparable periods (in thousands):
QUARTER ENDED
----------------------------------------
JULY 2, % OF JULY 3, % OF
1999 Net sales 1998 net sales
------- ------- ------- -------
Operating income as reported $4,143 2.1% $3,826 2.4%
Transaction costs .......... 465 0.2 -- --
------ ------ ------ ------
Operating income before
transaction costs ....... $4,608 2.3% $3,826 2.4%
====== ====== ====== ======
OTHER INCOME (EXPENSE). Interest expense increased $0.7 million to $1.3
million in the second quarter of 1999 from $0.6 million in the second quarter of
1998 due to increased borrowings to help finance acquisitions that were made
subsequent to the second quarter of 1998.
PROVISION FOR INCOME TAXES. The effective tax rate was 55.6% in the second
quarter of 1999 compared to 39.1 % in the second quarter of 1998 due to merger
costs incurred and the increase in goodwill related to certain acquisitions made
subsequent to the second quarter of 1998, both of which are non-deductible for
tax purposes.
NET INCOME. As a result of the foregoing factors, net income decreased
$0.7 million or 36.1%, to $1.3 million in the second quarter of 1999 compared
to $2.0 million in the second quarter of 1998. The following table summarizes
the effect of the transaction costs on the net income and earnings per share
in the comparable periods (in thousands):
QUARTER ENDED
-----------------------
JULY 2, JULY 3,
1999 1998
--------- ---------
Net income as reported ............ $ 1,253 $ 1,960
transaction costs, net of tax ... 594 --
--------- ---------
Net income before effect of
transaction costs ............... $ 1,847 $ 1,960
========= =========
Earning per share as reported:
Basic ........................ $ 0.24 $ 0.41
Diluted ...................... $ 0.23 $ 0.40
Effect of transaction costs:
Basic ......................... $ 0.11 $ --
Diluted ....................... $ 0.10 $ --
Earnings per share before effect of
transaction costs:
Basic ......................... $ 0.35 $ 0.41
Diluted ....................... $ 0.33 $ 0.40
11
<PAGE>
COMPARISON OF SIX MONTHS ENDED JULY 2, 1999 TO SIX MONTHS ENDED JULY 3, 1998
NET SALES. Net sales increased $74.9 million, or 25.6%, to $367.5 million
in the first six months of 1999 from $292.6 million in the first six months of
1998. Such increase was primarily due to acquisitions made during or subsequent
to the first six months of 1998. As a percentage of net sales, Sam's represented
28.7% in the first six months of 1999 compared to 39.4% in the first six months
of 1998.
COST OF SALES. Cost of sales increased $61.2 million, or 23.5% to $321.8
million in the first six months of 1999 from $260.6 million in the first six
months of 1998, primarily reflecting the increase in net sales above. As a
percentage of net sales, cost of sales decreased to 87.6% from 89.1%, which in
turn increased the Company's gross profit percentage to 12.4% from 10.9%. The
increase in gross profit percentage is primarily due to acquisitions made
subsequent to the first six months of 1998, which included retail/wholesale,
value-added and foodservice companies that have historically contributed higher
gross profit percentages than the Company's already existing operations.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative ("SG&A") expenses increased by $11.3 million, or 42.0% to $38.3
million in the first six months of 1999 from $30.0 million in the first six
months of 1998. The increase is primarily due to SG&A expenses related to
acquired businesses. Included in SG&A in the first six months of 1999 are
transaction expenses of $0.8 million related to the pending merger with
FreshPoint as discussed further in Note 7 to the accompanying unaudited
financial statements. Included in 1998 are transaction costs of $1.4 million
related to the acquisition of OTF.
OPERATING INCOME. As a result of the foregoing factors, which include
transaction costs of $0.8 million and $1.4 million in the first six months of
1999 and 1998, respectively, operating income increased by $2.4 million, or
48.0%, to $7.4 million in the first six months of 1999 from $5.0 million in the
first six months of 1998. The following table summarizes the effect of the
transaction costs on operating income in the comparable periods (in thousands):
SIX MONTHS ENDED
----------------------------------------
JULY 2, % OF JULY 3, % OF
1999 NET SALES 1998 NET SALES
------ ------ ------ ------
Operating income as reported ..... $7,393 2.0% $4,996 1.7%
Transaction costs ................ 808 0.2 1,395 0.5
------ ------ ------ ------
Operating income before
transaction costs ............. $8,201 2.2% $6,391 2.2%
====== ====== ====== ======
OTHER INCOME (EXPENSE). Interest expense increased $1.5 million to $2.6
million in the first six months of 1999 from $ 1.0 million in the first six
months of 1998 due to increased borrowings to help finance acquisitions that
were made subsequent to the first six months of 1998.
PROVISION FOR INCOME TAXES. The effective tax rate was 51.4% in the first
six months of 1999 compared to 37.8 % in the first six months of 1998. The
increase is due to three factors, one of which is a significant increase in
earnings in the Company's Canadian operations in the first six months of 1999
versus the same period in 1998. Secondly, there has been an increase in
non-deductible goodwill due to certain acquisitions made since the first six
months of 1998. Finally, the Company has incurred significant costs related to
the aforementioned merger which are not deductible for tax purposes.
12
<PAGE>
NET INCOME. As a result of the foregoing factors, net income remained
relatively consistent between the two periods. The following table summarizes
the effect of the transaction costs on the net income and earnings per share
in the comparable periods (in thousands):
SIX MONTHS ENDED
-----------------------
JULY 2, JULY 3,
1999 1998
--------- ---------
Net income as reported ............ $ 2,434 $ 2,414
Transaction costs,
net of tax benefit in 1998..... 808 789
--------- ---------
Net income before effect of
transaction costs ............. $ 3,242 $ 3,203
========= =========
Earning per share as reported:
Basic ....................... $ 0.46 $ 0.51
Diluted ..................... $ 0.44 $ 0.49
Effect of transaction costs:
Basic ....................... $ 0.16 $ 0.16
Diluted ..................... $ 0.15 $ 0.16
Earnings per share before effect of
transaction costs:
Basic ....................... $ 0.62 $ 0.67
Diluted ..................... $ 0.59 $ 0.65
LIQUIDITY AND CAPITAL RESOURCES
Cash provided by operating activities was $7.7 million for the first six
months of 1999 compared to $4.2 million in the first six months of 1998.
Cash used in investing activities decreased $3.4 million to $5.4 million
in the first six months of 1999 from $8.8 million in the first six months of
1998. The decrease from the prior year is due primarily to the acquisition of
Francisco during the first six months of 1998. Cash used in financing activities
was $2.4 million in the first six months of 1999 compared to cash provided of
$2.1 million in the first six 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 contingent payments during 1999 (see Note 3 of notes to
unaudited consolidated financial statements).
At July 2, 1999, the Company had working capital of $15.6 million compared
to $28.5 million at January 1, 1999. The decrease in working capital is due to
the classification of the borrowings under the Company's Revolver as a current
liability at July 2, 1999 as discussed in Note 4 to unaudited consolidated
financial statements. On February 2, 1998, the Company entered into a new $17
million revolving line of credit and bridge loan bank facility to be used for
general corporate purposes, including acquisitions. In May 1998, the $5.0
million bridge loan portion of the facility was prepaid and the revolving line
of credit was increased from $12 million to $15 million. On March 4, 1999, the
Company amended the terms of the Revolver to increase the borrowing availability
under the Revolver to $20 million. As of July 2, 1999, borrowings outstanding
under the facility totaled $19.6 million. On July 23, 1999, the Revolver was
further amended to: 1) increase the Company's borrowing availability to $25
million through September 30, 1999 and 2) relieve any borrowing base
restrictions or reductions through
13
<PAGE>
September 30, 1999. The Company also has revolving credit facilities of up to
CDN $20 million ($13.4 million), through its Canadian subsidiaries. Such
facilities have an outstanding balance of CDN $5.7 million ($3.9 million) as of
July 2, 1999. In May 1998, the Company completed a $20 million, 12% subordinated
debt financing that matures in May 2003 (see Note 4 of notes to unaudited
consolidated financial statements).
Management believes that the combination of cash generated from operating
activities, availability under its bank lines of credit, the proceeds generated
from its subordinated debt financing and the use of operating leases where
appropriate is sufficient to meet its current needs for operations and near-term
debt service requirements, subject to the matters set forth in the next
paragraph. The Company intends to continue its expansion activities and most
likely will 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.
In connection with the proposed merger with FreshPoint, the Company must
refinance most of the existing debt of the Company and FreshPoint. The Company
has received a commitment letter from Bank of America National Trust and Savings
Association for senior credit facilities for the combined company in an
aggregate amount of $175 million. The senior credit facilities will be
syndicated with Bank of America acting as agent. The Company has also received
an agreement from John Hancock Mutual Life Insurance Company to restructure its
existing $20 million senior subordinated notes and to purchase an additional $15
million, for a total of $35 million in senior subordinated notes. The
commitments discussed above are contingent upon consummation of the merger. For
additional information, see the Company's Proxy Statement dated July 22, 1999.
YEAR 2000
The Year 2000 will have a broad impact on the business environment in
which Fresh America 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, Fresh America
has been in the process of implementing a new enterprise-wide management
information technology ("IT") system, which better meets its diverse and
long-term needs. Fresh America has received assurances from the provider of the
system that it meets requirements for Year 2000 compliance. As a result of the
pending merger with FreshPoint, Fresh America has suspended further
implementation of its system beyond the initial sites in which it has already
been installed. Management believes that Fresh America can achieve its
technology strategy quicker and with less additional cost by utilizing
FreshPoint's current technology. The six sites affected by this suspension that
had Year 2000 compliance issues, as well as the three sites scheduled for
implementation in 2000, have reached agreement with their software vendors to
upgrade their current systems for Year 2000 compliance. All such upgrades will
be completed no later than October 1, 1999 at an immaterial cost. Fresh America
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 Fresh America'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 Fresh America's produce. In addition, such
business risks can be reduced by working with Fresh America's customers to
ensure that they are aware of the Year 2000 business risks and are appropriately
assessing and addressing them.
14
<PAGE>
Because third party failures could have a material impact on Fresh
America's ability to conduct business, Fresh America has sent out questionnaires
to all of Fresh America's significant suppliers, service providers and customers
to obtain reasonable assurance that they have plans to address the Year 2000
issues within their companies. Fresh America will work individually with its
most critical suppliers and service providers to insure their Year 2000
readiness. To the extent that suppliers and service providers do not provide
Fresh America with satisfactory evidence of their readiness to handle Year 2000
issues, contingency plans will be developed to obtain qualified replacement
suppliers and service providers by the end of the 1999 calendar year. Fresh
America'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, Fresh America has not identified any costs, whether internal
or external, related to Fresh America 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 Fresh America 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.
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 to our consolidated shareholders' equity
under accumulated 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-
15
<PAGE>
percentage point interest rate change on the outstanding balance of the
variable rate debt as of July 2, 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 acquisition strategy and successfully
integrate acquired operations, dependence on its 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 1, 1999, a copy of which
may be obtained from the Company upon request. In addition, the proposed merger
with FreshPoint is subject to numerous conditions, including the arranging of
new debt financing and the approval of the Company's shareholders. There can be
no assurances that the merger will be completed or if completed, that the
anticipated benefits of the merger will be realized.
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON 8-K
(a) Exhibits
Exhibit 27.1 - Financial Data Schedule.
(b) Reports on Form 8-K
Form 8-K, filed on May 7, 1999, describing an agreement to merge with
FreshPoint Holdings, Inc.
16
<PAGE>
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: AUGUST 13, 1999
John Gray
Executive Vice President and
Chief Financial Officer
17
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JAN-07-2000
<PERIOD-END> JUL-02-1999
<CASH> 1,093
<SECURITIES> 0
<RECEIVABLES> 72,607
<ALLOWANCES> 0
<INVENTORY> 9,581
<CURRENT-ASSETS> 90,864
<PP&E> 27,289
<DEPRECIATION> 0
<TOTAL-ASSETS> 153,404
<CURRENT-LIABILITIES> 75,281
<BONDS> 0
0
0
<COMMON> 52
<OTHER-SE> 53,641
<TOTAL-LIABILITY-AND-EQUITY> 153,404
<SALES> 367,529
<TOTAL-REVENUES> 367,529
<CGS> 321,832
<TOTAL-COSTS> 321,832
<OTHER-EXPENSES> 84
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,580
<INCOME-PRETAX> 5,008
<INCOME-TAX> 2,574
<INCOME-CONTINUING> 2,434
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,434
<EPS-BASIC> 0.46
<EPS-DILUTED> 0.44
</TABLE>
