UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended April 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 May 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 15. Exhibit
index on page 15.
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. - FINANCIAL STATEMENTS
FRESH AMERICA CORP. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED BALANCE SHEETS
(In thousands, except share amounts)
<TABLE>
<CAPTION>
April 2, January 1,
1999 1999
--------- ---------
ASSETS
Current Assets:
<S> <C> <C>
Cash and cash equivalents .................................... $ 7,563 $ 1,171
Accounts receivable, net ..................................... 68,556 80,674
Advances to growers .......................................... 4,663 2,238
Inventories .................................................. 9,937 11,450
Prepaid expenses ............................................. 2,627 2,504
Deferred income taxes ........................................ 404 338
Income taxes receivable ...................................... 47 363
--------- ---------
Total current assets ..................................... 93,797 98,738
Property, plant and equipment, net ............................. 25,967 23,900
Notes receivable from shareholders ............................. 178 178
Goodwill, net of amortization of $2,060
and $1,557, respectively ..................................... 32,576 33,005
Other assets ................................................... 2,321 2,278
--------- ---------
$ 154,839 $ 158,099
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Notes payable and current portion of long-term debt .......... $ 12,528 $ 14,807
Accounts payable ............................................. 44,499 51,979
Accrued salaries and wages ................................... 1,987 1,460
Other accrued expenses ....................................... 2,528 2,018
--------- ---------
Total current liabilities ................................ 61,542 70,264
Long-term debt, less current portion ........................... 39,508 35,985
Deferred income taxes .......................................... 1,166 1,070
Other liabilities .............................................. 238 218
--------- ---------
Total liabilities ........................................ 102,454 107,537
--------- ---------
Shareholders' Equity:
Common stock $.01 par value. Authorized 10,000,000 shares;
issued 5,239,051 and 5,202,511 respectively .......... 52 52
Additional paid-in capital ................................. 32,191 31,672
Foreign currency translation adjustment .................... (222) (345)
Retained earnings .......................................... 20,364 19,183
--------- ---------
Total shareholders' equity ............................... 52,385 50,562
--------- ---------
Commitments and contingencies
--------- ---------
$ 154,839 $ 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 share amounts)
QUARTER ENDED
------------------------
April 2, April 3,
1999 1998
--------- ---------
Net sales ........................................ $ 173,427 $ 133,007
Cost of sales .................................... 151,421 118,487
--------- ---------
Gross profit ......................... 22,006 14,520
--------- ---------
Selling, general and administrative expenses:
Salaries and related costs ................... 10,809 7,261
Rent, maintenance and related costs .......... 3,390 2,309
Insurance expense ............................ 416 348
Automobile, travel and related costs ......... 490 346
Communication expense ........................ 507 326
Depreciation and amortization ................ 1,515 755
Transaction costs ............................ 343 1,395
Other ........................................ 1,287 610
--------- ---------
18,757 13,350
--------- ---------
Operating income ...................... 3,249 1,170
--------- ---------
Other income (expense):
Interest expense ............................. (1,279) (428)
Interest income .............................. 65 49
Other, net ................................... 147 (126)
--------- ---------
(1,067) (505)
--------- ---------
Income before income taxes ....................... 2,182 665
Provision for income taxes ....................... 1,001 211
--------- ---------
Net income ............................. $ 1,181 $ 454
========= =========
Earnings per share:
Basic ........................................ $ 0.23 $ 0.10
========= =========
Diluted ...................................... $ 0.22 $ 0.10
========= =========
The notes to consolidated financial statements are an
integral part of these statements.
3
<PAGE>
FRESH AMERICA CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOW
(IN THOUSANDS)
QUARTER ENDED
---------------------
APRIL 2, APRIL 3,
1999 1998
-------- --------
Cash flows from operating activities:
Net income ....................................... $ 1,181 $ 454
Adjustments to reconcile net income
to net cash provided by
(used in) operating activities
Depreciation and
amortization ............................. 1,515 755
Bad debt expense ........................... 159 74
Noncash transaction costs .................. -- 519
Deferred income taxes ...................... 30 (23)
Other ...................................... 102 23
Change in assets and
liabilities, excluding
the effects of
acquisitions:
Accounts receivable .................... 12,384 3,450
Advances to growers .................... (2,439) (1,061)
Inventories ............................ 1,597 1,183
Prepaid expenses ....................... (121) 76
Other assets ........................... (465) 291
Accounts payable ....................... (7,740) (647)
Accrued expenses and
other liabilities .................... 1,813 (2,239)
-------- --------
Total adjustments ................. 6,835 2,401
-------- --------
Net cash provided by
operating activities ............ 8,016 2,855
-------- --------
Cash flows from investing activities:
Additions to property, plant and
equipment, net ................................. (3,095) (362)
Cost of acquisitions, exclusive of
cash acquired .................................. -- (5,965)
Proceeds from sale of equipment
-------- --------
Net cash used in
investing activities ............ (3,095) (6,327)
-------- --------
Cash flows from financing activities:
Proceeds from revolving lines of
credit ......................................... 43,563 31,219
Repayments of revolving lines of
credit ......................................... (41,753) (32,757)
Proceeds from short term
indebtedness ................................... 29 5,000
Payments of short term indebtedness .............. (661) (469)
Additions to long-term indebtedness .............. 415 --
Payments of long-term indebtedness ............... (153) (89)
Net proceeds from exercise of
employee stock options ......................... 14 130
-------- --------
Net cash provided by
financing activities ............ 1,454 3,034
-------- --------
Effect of exchange rate changes on cash .............. 17 18
Net increase
(decrease) in cash
and cash equivalents ............ 6,392 (420)
Cash and cash equivalents at beginning
of period .......................................... 1,171 2,725
-------- --------
Cash and cash equivalents at end of
period ............................................. $ 7,563 $ 2,305
======== ========
Supplemental disclosures of cash flow information:
Cash paid for interest ........................... $ 514 $ 357
Cash paid for income taxes ....................... $ 604 $ 113
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 April 2, 1999, and the related consolidated statements of income and cash
flows for the quarters ended April 2, 1999 and April 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 quarters ended April 2, 1999 and April 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.
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 establishes accounting and
reporting standards for fiscal years beginning after June 15, 1999. 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 2000.
5
<PAGE>
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 - During the fiscal 1998, the Company
adopted 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 April 2, 1999 and
April 3, 1998 each consist of 13 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 per year for each of the remaining years of the
Agreement.
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 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
6
<PAGE>
contingent payments have been recorded as a liability and are 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. Also in April 1999, the Company prepaid the minimum
contingent payment related to fiscal 1999 in the amount of $1.4 million cash.
On March 4, 1998, the Company acquired Ontario Tree Fruits Limited and its
affiliated companies (collectively, "OTF") by exchanging 609,713 shares of its
common stock or exchangeable common stock for all of the capital stock of OTF
and certain residual equity interests. OTF imports and distributes fresh produce
to large retail chains and hundreds of independent grocers and wholesalers in
Canada and the Northeastern United States.
The acquisition of OTF constituted a tax-free reorganization and has been
accounted for as a pooling of interests. Accordingly, all prior periods
consolidated financial statements presented have been restated to include the
combined results of operations, financial position and cash flows of OTF as
though it had always been a part of the Company.
In connection with the acquisition of 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
7
<PAGE>
operations that would have occurred had the Company and such acquired entities
constituted a single entity during such periods.
Quarter Ended
(In thousands, except per share amounts) --------------------------
April 2, April 3,
1999 1998
Historical Pro Forma
--------- --------
Net sales ................................. $ 173,427 $186,963
========= ========
Net income ................................ $ 1,181 $ 691
========= ========
Earnings per share - diluted .............. $ 0.22 $ 0.13
========= ========
NOTE 4. DEBT.
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. A portion of the initial proceeds was used to prepay the Bridge
Loan in full and the remainder to pay off existing balances on the Revolver. 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 become exercisable on May 1, 1999 at an
exercise price of $22.70 per share and expire on May 1, 2003.
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 ($15.5 million outstanding as of April 2, 1999) accumulate
interest at the bank prime rate (7.75% as of April 2, 1999), or at the Company's
election, the eurodollar rate plus 1.75% (6.56% as of April 2, 1999). The
effective interest rate at April 2, 1999 was 6.83% .
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 assets of OTF.
Interest on borrowings accrue at U.S. prime plus 0.75% (9.25% at April 2, 1999)
or Canadian prime plus 0.75% (7.5%), depending on the denomination of the
borrowings.
8
<PAGE>
NOTE 5. COMPREHENSIVE INCOME.
The following table reconciles the Company's net income to its
comprehensive income (in thousands):
QUARTER ENDED
------------------
April 2, April 3,
1999 1998
------ ----
Net Income ....................................... $1,181 $454
Other comprehensive income - foreign
currency translation adjustments ............. 123 8
------ ----
Comprehensive income ............................. $1,304 $462
====== ====
NOTE 6. EARNINGS PER SHARE.
Shares used in calculating basic and diluted EPS (in thousands):
QUARTER ENDED
------------------
April 2 April 3,
1999 1998
----- -------
Weighted average common shares
Outstanding - basic .................................... 5,237 4,675
Dilutive securities:
Common stock options .............................. 143 159
Contingent shares related to acquisitions ......... 191 114
----- -----
Weighted average shares common outstanding -
Diluted basis ..................................... 5,571 4,948
===== =====
Options and warrants to purchase approximately 182 thousand and six
thousand shares of common stock at prices per share ranging from $19.00 to
$25.50 and $19.75 to $25.50, respectively were outstanding during the three
month periods ended April 2, 1999 and April 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 April 2,
1999 and April 3, 1998 interest expense of $29 thousand and $21 thousand,
respectively was added back to net income in connection with assumed conversion
of indebtedness related to certain contingent shares.
NOTE 7. SUBSEQUENT EVENT.
On May 3, 1999, the Company, and Dallas based, privately held FreshPoint
Holdings, Inc. signed a definitive agreement to merge the two companies. The
merger is subject to 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 Holdings,
Inc. Upon completion of the merger, the Company's name will be FreshPoint
America, Inc.
9
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
The following table presents the components of the consolidated statements
of income as a percentage of net sales for the periods indicated:
QUARTER ENDED
------------------------
APRIL 2, APRIL 3,
1999 1998
------ ------
Net sales .................................. 100.0% 100.0%
Cost of sales .............................. 87.3 89.1
------ ------
Gross profit ............................... 12.7 10.9
Selling, general and
administrative expenses ................. 10.6 8.9
Nonrecurring transaction costs ............. 0.2 1.1
------ ------
Operating income ........................... 1.9 0.9
Other income (expense) ..................... (0.6) (0.4)
------ ------
Income before income taxes ................. 1.3 0.5
Provision for income taxes ................. 0.6 0.2
------ ------
Net income ................................. 0.7% 0.3%
------ ------
COMPARISON OF QUARTER ENDED APRIL 2, 1999 TO QUARTER ENDED APRIL 3, 1998
The Company's quarters ended April 2, 1999 and April 3, 1998 each include
13 weeks.
NET SALES. Net sales increased $40.4 million, or 30.4%, to $173.4 million
in the first quarter of 1999 from $133.0 million in the first quarter of 1998.
Of the total increase, approximately $47.7 million was due to acquisitions made
during or subsequent to the first quarter of 1998. Such increase was offset by a
decrease in Sam's Club revenue of $8.0 million due to the decrease of 46 clubs
serviced between the two periods. As a percentage of net sales, Sam's
represented 27.2% in the first quarter of 1999 compared to 41.4% in the first
quarter of 1998.
COST OF SALES. Cost of sales increased $32.9 million, or 27.8% to $151.4
million in the first quarter of 1999 from $118.5 million in the first quarter of
1998, primarily reflecting the increase in net sales above. As a percentage of
net sales, cost of sales decreased to 87.3% from 89.1%, which in turn increased
the Company's gross profit percentage to 12.7% from 10.9%. The increase in gross
profit percentage is primarily due to acquisitions made subsequent to the first
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.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative ("SG&A") expenses increased by $5.4 million, or 40.5% to $18.7
million in the first quarter of 1999 from $13.4 million in the first quarter of
1998. The increase is primarily due to SG&A expenses related to acquired
businesses. Included in SG&A in the first quarter of 1999 are transaction
expenses of $0.3 million related to the pending merger with FreshPoint as
discussed further in Note 7 Subsequent Event. Included in 1998 are transaction
costs of $1.4 million related to the acquisition of OTF.
OPERATING INCOME (EXPENSE). As a result of the foregoing factors, which
include transaction costs of $0.3 million and $1.4 million in the first quarter
of 1999 and 1998, respectively, operating income increased by $2.1
10
<PAGE>
million, or 177.6%, to $3.2 million in the first quarter of 1999 from $1.2
million in the first quarter of 1998. The following table summarizes the effect
of the transaction costs on operating income in the comparable periods (in
thousands):
Quarter ended
---------------------------------------
% of % of
April 3, net April 2, net
1999 sales 1998 sales
------ --- ------ ---
Operating income as
reported ......................... $3,249 1.9% $1,170 0.9%
Transaction costs .................. 343 .2 1,395 1.0
------ --- ------ ---
Operating income
before transaction costs ......... $3,592 2.1% $2,565 1.9%
====== === ====== ===
OTHER INCOME (EXPENSE). Interest expense increased $0.9 million to $1.3
million in the first quarter of 1999 from $0.4 million in the first quarter of
1998 due to increased borrowings to help finance acquisitions that were made
subsequent to the first quarter of 1998.
PROVISION FOR INCOME TAXES. The effective tax rate was 45.9% in the first
quarter of 1999 compared to 31.7 % in the first quarter of 1998. The increase is
due to two factors, one of which is a significant increase in earnings in the
Company's Canadian operations in the first quarter of 1999 versus a loss in the
1998 comparable period. Secondly, there has been an increase in non-deductible
goodwill due to several acquisitions made since the first quarter of 1998.
NET INCOME. As a result of the foregoing factors, net income increased
$0.7 million or 160.0%, to $1.2 million in the first quarter of 1999 compared to
$0.5 million in the first 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
---------------------------
April 2, April 3,
1999 1998
--------- ---------
Net income as reported ..................... $ 1,181 $ 454
Transaction costs, net of tax .............. 214 789
--------- ---------
Net income before effect of
transaction costs ...................... $ 1,395 $ 1,243
========= =========
Earning per share as
reported:
Basic ............................... $ 0.23 $ 0.10
Diluted ............................. $ 0.22 $ 0.10
Effect of transaction
costs:
Basic................................. $ 0.04 $ 0.17
Diluted .............................. $ 0.04 $ 0.16
Earnings per share before
effect of transaction costs:
Basic ................................ $ 0.27 $ 0.27
Diluted .............................. $ 0.26 $ 0.26
11
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
Cash provided by operating activities was $8.0 million for the first
quarter of 1999 compared to $2.9 million in the first quarter of 1998. Cash used
in investing activities decreased $3.2 million to $3.1 million in the first
quarter of 1999 from $6.3 million in the first quarter of 1998. The decrease
from the prior year is due primarily to the acquisition of Francisco during the
first quarter of 1998. Cash provided by financing activities was $1.5 million in
the first quarter of 1999 compared to $3.0 million in the first quarter 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.
At April 2, 1999, the Company had working capital of $32.3 million
compared to $28.5 million at January 1, 1999. 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 further amended the terms of the Revolver to increase
the borrowing availability under the Revolver to $20 million. As of April 2,
1999, there was $15.5 million in borrowings outstanding under the facility. 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 $10.0 million ($6.7 million) as of April 2, 1999. In May 1998,
the Company completed a $20 million, 12% subordinated debt financing that
matures in May 2003 (see Note 4 to the accompanying 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, computer
system implementations and near-term debt service requirements, subject to the
matters set forth in the next succeeding 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 has to
refinance most of the existing debt of the Company and FreshPoint. The Company
is in the process of considering financing proposals received from its existing
senior and subordinated lenders as well as other debt financing alternatives.
While there can be no assurance that the required refinancing can be completed,
based on current market conditions the Company believes that it can arrange such
financing on a timely basis. The Company expects that any refinancing will
subject the Company to numerous operating and financial convenants, including
limitations on future borrowings and acquisitions.
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 is in
the process of implementing a new enterprise-wide management information
technology ("IT") system which better meets its diverse and long-term needs. The
Company has received assurances from the provider of the system that it meets
requirements for Year 2000 compliance. The Company continues to be on schedule
with its corporate wide rollout of the system, which is scheduled to be
completed by September 30, 1999. Three sites are scheduled to migrate to this
new system after September 1999, therefore agreements have been reached with
their current software vendors to upgrade their current systems for Year 2000
compliance. These upgrades will be completed no later than September 1, 1999 at
a nominal cost. 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.
12
<PAGE>
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 and customers to obtain reasonable assurance
that they have plans to address the Year 2000 issues within their companies. The
Company will work individually with its most critical suppliers to insure their
Year 2000 readiness. To the extent that suppliers do not provide the Company
with satisfactory evidence of their readiness to handle Year 2000 issues,
contingency plans will be developed to obtain qualified replacement suppliers by
the end of the 1999 calendar year. 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.
The Company's decision to implement a new management information system
relates directly to the Company's efforts to integrate its recent acquisitions
and growth activities. The timing of the implementation has not been accelerated
and management does not anticipate the need to accelerate the implementation due
to the Year 2000. Accordingly, the Company does not consider the cost of
implementation to be a Year 2000 cost. 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.
13
<PAGE>
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 for which it 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 April 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.
14
<PAGE>
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
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: MAY 17, 1999
John Gray
Executive Vice President and
Chief Financial Officer
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