<PAGE> 1
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 June 30, 2000.
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 10, 2000, the Registrant had 5,243,404 shares of its Common Stock
outstanding.
Total number of pages in this report, including the cover page is 16. Exhibit
index on page 16.
<PAGE> 2
PART I - FINANCIAL INFORMATION
ITEM 1. - FINANCIAL STATEMENTS
FRESH AMERICA CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
2000 1999
------------- -------------
ASSETS (unaudited)
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 4,313 $ 3,197
Accounts receivable, net 52,106 58,885
Advances to growers 1,756 3,296
Inventories 6,848 10,624
Prepaid expenses 1,401 1,618
Income tax receivable 5,738 5,900
------------- -------------
Total current assets 72,162 83,520
Property, plant and equipment, net 22,640 24,440
Notes receivable from shareholders 359 359
Goodwill, net of accumulated amortization of $3,193 and $2,491, 22,795 23,497
respectively
Other assets 2,794 2,665
------------- -------------
Total assets $ 120,750 $ 134,481
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Notes payable and current portion of long-term debt $ 22,303 $ 24,446
Accounts payable 38,899 39,277
Accrued salaries and wages 1,429 2,191
Other accrued expenses 3,724 5,360
------------- -------------
Total current liabilities 66,355 71,274
Long-term debt, less current portion 19,936 32,843
Deferred income taxes 287 295
Other liabilities 353 298
------------- -------------
Total liabilities 86,931 104,710
------------- -------------
12% Redeemable cumulative preferred stock $1.00 par value (50,000 shares
authorized and issued); liquidation value of $5,000
plus accrued and unpaid dividends 4,232 --
------------- -------------
Shareholders' Equity:
Common stock $.01 par value (authorized 10,000,000 shares;
issued 5,243,404 shares)
52 52
Additional paid-in capital 33,659 32,555
Foreign currency translation adjustment (149) (28)
Accumulated deficit (3,975) (2,808)
------------- -------------
Total shareholders' equity 29,587 29,771
Commitments and contingencies
------------- -------------
Total liabilities and shareholders' equity $ 120,750 $ 134,481
============= =============
</TABLE>
The notes to consolidated financial statements are an integral
part of these statements.
2
<PAGE> 3
FRESH AMERICA CORP.
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
QUARTER ENDED SIX MONTHS ENDED
--------------------------------- ---------------------------------
JUNE 30, JULY 2, JUNE 30, JULY 2,
2000 1999 2000 1999
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Net sales $ 163,585 $ 194,102 $ 306,237 $ 367,529
Cost of sales 145,078 170,411 272,500 321,832
------------- ------------- ------------- -------------
Gross profit 18,507 23,691 33,737 45,697
------------- ------------- ------------- -------------
Selling, general and administrative expenses 13,856 17,661 27,854 34,743
Bad debt expense 1,011 314 1,240 473
Depreciation and amortization 1,472 1,573 2,983 3,088
------------- ------------- ------------- -------------
Total operating costs and expenses 16,339 19,548 32,077 38,304
------------- ------------- ------------- -------------
Operating income 2,168 4,143 1,660 7,393
------------- ------------- ------------- -------------
Other income (expense):
Interest expense (1,384) (1,292) (2,790) (2,580)
Interest income 105 45 180 111
Other, net (63) (71) 165 84
------------- ------------- ------------- -------------
(1,342) (1,318) (2,445) (2,385)
------------- ------------- ------------- -------------
Income (loss) before income taxes 826 2,825 (785) 5,008
Income tax expense 15 1,572 204 2,574
------------- ------------- ------------- -------------
Net income (loss) 811 1,253 (989) 2,434
Preferred dividends and accretion 178 -- 178 --
------------- ------------- ------------- -------------
Net income (loss) available to common
shareholders $ 633 $ 1,253 $ (1,167) $ 2,434
============= ============= ============= =============
Earnings (loss) per share:
Basic $ .12 $ .24 $ (.22) $ .46
============= ============= ============= =============
Diluted $ .08 $ .23 $ (.22) $ .44
============= ============= ============= =============
</TABLE>
The notes to consolidated financial statements are an integral
part of these statements.
3
<PAGE> 4
FRESH AMERICA CORP. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOW
(IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
-------------------------------
JUNE 30, JULY 2,
2000 1999
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ (989) $ 2,434
Adjustments to reconcile net income (loss) to net cash provided by operating
activities:
Bad debt expense 1,240 473
Depreciation and amortization 2,983 3,088
Deferred income taxes (8) 485
Other 403 249
Change in assets and liabilities
Accounts receivable 5,539 7,989
Advances to growers 920 (2,908)
Inventories 3,776 1,991
Prepaid expenses 217 462
Other assets 241 30
Accounts payable (378) (7,913)
Accrued expenses and other current liabilities (2,343) 1,339
------------ ------------
Total adjustments 12,590 5,285
------------ ------------
Net cash provided by operating activities 11,601 7,719
------------ ------------
Cash flows from investing activities:
Additions to property, plant and equipment, net (919) (5,350)
Proceeds from sale of equipment 146 --
------------ ------------
Net cash used in investing activities (773) (5,350)
------------ ------------
Cash flows from financing activities:
Proceeds from revolving line of credit 18,113 56,747
Repayments of revolving line of credit (30,241) (54,655)
Proceeds from short-term indebtedness -- 81
Repayments of short-term indebtedness (2,031) (3,651)
Additions to long-term indebtedness -- 668
Payments of long-term indebtedness (432) (1,654)
Proceeds from preferred stock and warrants 5,000 --
Net proceeds from exercise of employee stock options -- 42
------------ ------------
Net cash used in financing activities (9,591) (2,422)
------------ ------------
Effect of exchange rate changes on cash (121) (25)
Net increase (decrease) in cash and cash equivalents 1,116 (78)
Cash and cash equivalents at beginning of period 3,197 1,171
------------ ------------
Cash and cash equivalents at end of period $ 4,313 $ 1,093
============ ============
Supplemental disclosures of cash flow information:
Cash paid for interest $ 2,415 $ 2,359
Cash paid for income taxes $ 1,600 $ 673
</TABLE>
The notes to consolidated financial statements are an integral
part of these statements.
4
<PAGE> 5
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") provides procurement, processing, repacking, warehousing and distribution
services of fresh produce and other refrigerated products for a wide variety of
customers in the retail, food service and food distribution businesses. The
Company was founded in 1989 and distributes throughout the United States and
Canada through 16 distribution and processing facilities.
Unaudited Interim Financial Information - The consolidated balance
sheet as of June 30, 2000, the consolidated statements of operations for the
quarters and six month periods ended June 30, 2000 and July 2, 1999, the
consolidated statements of cash flow for the six month periods ended June 30,
2000 and July 2, 1999, 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, definitions 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 December 31, 1999. The
results for the periods ended June 30, 2000 and July 2, 1999 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 (Loss) Per Share - Basic earnings (loss) per share ("EPS") is
calculated by dividing net income (loss) available to common shareholders by the
weighted average number of common shares outstanding for the period. Diluted EPS
reflects the potential dilution that could occur if securities or other
contracts to issue common stock were exercised or converted into common stock.
See Note 5.
New Accounting Standards - 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, establishes
accounting and reporting standards for derivative instruments and hedging
activities and will require the Company to recognize all derivatives on its
balance sheet at fair value. If the derivative is a hedge, depending on the
nature of the hedge, changes in the fair value of the derivatives will either be
offset against the change in fair value of the hedged item through earnings, or
recognized in other comprehensive income until the hedged item is recognized in
earnings. The Company expects to adopt SFAS No. 133 in the first quarter of
fiscal 2001 and does not anticipate that the adoption will have a material
effect on the Company's results of operations or financial position.
In March 2000, the Financial Accounting Standards Board issued
Interpretation No. 44, "Accounting for Certain Transactions involving Stock
Compensation: an interpretation of Accounting Principles Board ("APB") Opinion
No. 25". Among other issues, Interpretation No. 44 clarifies the application of
APB Opinion No. 25 regarding (a) the definition of employee for purposes of
applying APB No. 25, (b) the criteria for determining whether a plan qualifies
as a non-compensatory plan, (c) the
5
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accounting consequences of various modifications to the terms of a previously
fixed stock option or award, and (d) the accounting for an exchange of stock
compensation awards in a business combination. The provisions of Interpretation
No. 44 affecting the Company are to be applied on a prospective basis effective
July 1, 2000. The Company does not anticipate that the adoption will have a
material effect on the Company's results of operations or financial position.
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 operations. Translation adjustments are reflected in the foreign
currency translation adjustment in shareholders' equity and, accordingly, have
no effect on net income (loss). 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 last Friday in December. The quarters ended June 30, 2000 and July
2, 1999 each consisted of 13 weeks.
NOTE 2. AGREEMENT WITH SAM'S CLUB.
The Company's relationship with Sam's is governed by the terms and
conditions of a five-year agreement (the "Agreement"), which became effective
December 1, 1995 and expires on November 30, 2000. Sam's has elected to begin
internal distribution of produce for all its clubs beginning in December of
2000. Therefore, the Agreement will not be renewed.
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 would
withdraw 40 clubs per year.
The Agreement transfers ownership of the product to Sam's as it enters
the clubs and complete operational authority within the produce departments of
each club. Accordingly, Sam's assumes all costs and liabilities related to the
operation of the departments, including all in-club personnel costs,
merchandising and sales costs, customer returns and credits, and product shrink.
Under the Agreement, the Company invoices Sam's for product delivered to the
clubs in accordance with purchase orders issued by Sam's.
Sam's is the Company's largest customer, and accounted for 36.3% and
30.1% of net sales in the second quarter of 2000 and 1999, respectively, and
34.9% and 28.7% of net sales in the first six months of 2000 and 1999,
respectively.
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NOTE 3. DEBT AND LIQUIDITY.
The Company is party to a senior secured revolving credit facility
agreement (the "Revolver") with a bank (the "Senior Lender") and a subordinated
note agreement with an insurance company (the "Subordinated Lender"). The
Company was not in compliance with certain covenants under the agreement with
the Senior Lender during fiscal 1999 and was not in compliance with certain
covenants under both agreements at December 31, 1999. On April 14, 2000, the
Company entered into an amendment (the tenth amendment to the Revolver) of the
agreement with the Senior Lender that waived the instances of noncompliance and
established new terms, including terms for repayment of the outstanding
borrowings, obtained waivers from the Subordinated Lender for instances of
noncompliance at December 31, 1999 and anticipated future instances of
noncompliance through January 1, 2001, and entered into an agreement with the
Subordinated Lender to provide additional financing through the purchase of $5.0
million (50,000 shares) of the Company's 12% redeemable cumulative preferred
stock ("Preferred Stock"), and to restructure the existing subordinated notes.
The Preferred Stock funded on April 28, 2000 and is mandatorily redeemable in
April 2007. Dividends on the Preferred Stock are payable semi-annually.
Cumulative preferred dividends accrued as of June 30, 2000 totaled $156,000 or
$3.11 per share. The redemption price of the Preferred Stock is computed so that
the combined return from the Preferred Stock and the warrants referred to below
is not less than 18% per annum.
The Company's Revolver provided for borrowings of up to $22.0 million
as of December 31, 1999 with outstanding borrowings as of that date of $21.2
million. The available and outstanding Revolver balances were permanently
reduced to $17.0 million and $16.8 million, respectively, as of June 30, 2000.
The reduction of $4.2 million included regularly scheduled reductions of $2.2
million as well as prepayments of $2.0 million. Subsequent to June 30, 2000, the
Company further permanently reduced the available and outstanding Revolver
balances to $15.0 million and $14.8 million, respectively, by making an
additional payment of $2.0 million. Such amount included the regularly scheduled
July 2000 payment of $1.0 million as well as a prepayment of $1.0 million.
Available borrowings under the Revolver will be further reduced by scheduled
principal reductions so that the available and outstanding balance on December
31, 2000 and thereafter is no greater than $14.5 million. The monthly Revolver
balance is further limited to predetermined amounts in excess of a computed
borrowing base. In addition to the scheduled principal reductions described
above, all proceeds from any income tax refunds or disposition of assets or
subsidiaries and a minimum of one-half of any proceeds from the issuance of debt
or equity securities (other than the Preferred Stock) must be used to further
permanently reduce available and outstanding bank borrowings. The Company must
also comply with certain capital expenditure restrictions. Under the amended
agreement, interest accrues at prime plus 3% (currently 12.5%) through the
expiration of the agreement in February 2001 or, if mutually agreed, the
Eurodollar rate plus 2.75% (currently 9.45%). The effective interest rate at
June 30, 2000 was 9.96%.
Repayment of the Revolver balance is due in February 2001. Accordingly,
the entire balance has been classified as a current liability in the
accompanying June 30, 2000 consolidated balance sheet. The Company intends to
arrange a new senior debt facility to replace the Revolver and has engaged
Rabobank International ("Rabobank") as its exclusive financial advisor to raise
additional capital through the private sale of equity or debt securities. There
can be no assurance that Rabobank will be able to raise additional capital or
that the Company will be able to arrange a new senior credit facility.
The Subordinated Lender holds notes totaling $20.0 million, bearing
interest at 12%, payable semi-annually in May and November. In conjunction with
the purchase and funding of the Preferred Stock, the repayment terms of the
subordinated notes were modified such that the entire balance is due in a single
lump-sum payment in April 2007. The remaining discount associated with the notes
is being amortized over the amended term of the notes. The terms of the amended
agreement also decreased the exercise price of 155,483 warrants previously
issued to the Subordinated Lender from $22.70 to $3.25 per share and extended
the expiration date of the warrants to approximate the modified maturity date of
the subordinated notes. In connection with the purchase of the Preferred Stock,
the Subordinated Lender also received warrants to purchase additional common
shares, which were equal to approximately 7% of the Company's
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outstanding common stock after exercise at $3.25 per share. The warrants are
exercisable until August 31, 2007 and their term may be further extended under
certain circumstances.
Failure of the Company to comply with the terms of the amended
agreement with the Senior Lender or the agreement with the Subordinated Lender
could result in a default under the terms of the agreements. Upon the occurrence
of an event of default, the lenders would be entitled to declare the amounts
outstanding, including accrued interest to be immediately due and payable. If
repayment of the Company's debt were to be accelerated, the Company cannot be
certain that its assets or liquidity would be sufficient to repay such debt.
Acceleration of such debt would also cause the Preferred Stock to become
immediately redeemable.
Additionally, OTF has a demand agreement with a Canadian bank to
provide revolving credit facilities (the "Canadian Revolver") of up to CDN $20.0
million ($13.8 million), subject to certain covenant and borrowing base
requirements. The Canadian Revolver is collateralized by substantially all
assets of OTF. Interest on borrowings accrues at U.S. prime plus 0.75% (10.25%
at June 30, 2000) or Canadian prime plus 0.75% (8.25%), depending on the
denomination of the borrowings. The Canadian Revolver had an outstanding balance
of CDN $2.1 million ($1.4 million) as of June 30, 2000.
In July 2000, the Company entered into an agreement amending a certain
stock purchase agreement related to the Company's 1998 acquisition of Perricone.
As part of the amended agreement, promissory notes owed by the Company totaling
$3.5 million were cancelled. In exchange, the Company agreed to the following:
payments totaling $100,000 upon execution of the amended agreement; lump-sum
payments of $350,000 and $150,000 on January 1, 2002 and August 1, 2002,
respectively; and 24-month installment notes totaling $900,000. The installment
notes and the lump-sum payments accrue interest at 10% per annum. However, all
accrued interest will be forgiven if scheduled principal payments are made in
accordance with the terms of the agreement. Additionally, the Company agreed to
provide the noteholders 300,000 warrants to purchase common shares of the
Company at an exercise price of $2.50 per share. The warrants are exercisable
for a duration of seven years. The restructuring of the promissory notes and
related accrued interest resulted in an extraordinary gain to the Company in the
third quarter 2000 of $1.9 million. Based on the quarterly weighted average
common shares outstanding at June 30, 2000 less 824,000 contingent shares
associated with the original agreement, the impact of the extraordinary gain is
$.29 per diluted share. The entire promissory note balance of $3.5 million was
classified as a current liability as of June 30, 2000.
The original Perricone agreement allowed for the promissory notes to be
paid 50 percent cash and 50 percent common stock. Accordingly, the diluted EPS
calculation for the quarter ended June 30, 2000 included approximately 824,000
contingent shares related to this liability. Pro forma diluted EPS for the
quarter ended June 30, 2000 would have been $.09 per share without the dilutive
effect of these contingent shares.
Management believes that the combination of cash generated from ongoing
operations, the funding of the Preferred Stock, the realization of recent
reductions in overhead expenses, and the effects of the amendments to the
Revolver and the subordinated notes will enable the Company to meet its
obligations as they come due in 2000.
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NOTE 4. COMPREHENSIVE INCOME (LOSS).
The following table reconciles the Company's net income (loss) to its
comprehensive income (loss) (in thousands):
<TABLE>
<CAPTION>
QUARTER ENDED SIX MONTHS ENDED
------------------------------- -------------------------------
June 30, July 2, June 30, July 2,
2000 1999 2000 1999
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net income (loss) $ 811 $ 1,253 $ (989) $ 2,434
Other comprehensive income (loss)-foreign
currency translation adjustments (132) 27 (121) 150
------------ ------------ ------------ ------------
Comprehensive income (loss) $ 679 $ 1,280 $ (1,110) $ 2,584
============ ============ ============ ============
</TABLE>
NOTE 5. EARNINGS (LOSS) PER SHARE.
The following table reconciles the calculations of the Company's basic
and diluted EPS (in thousands, except per share amounts):
<TABLE>
<CAPTION>
QUARTER ENDED SIX MONTHS ENDED
------------------------------- -------------------------------
June 30, July 2, June 30, July 2,
2000 1999 2000 1999
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Basic EPS:
Net income (loss) $ 811 $ 1,253 $ (989) $ 2,434
Less: Preferred stock dividends 156 -- 156 --
Accretion of preferred stock 22 -- 22 --
------------ ------------ ------------ ------------
Net income (loss) available to common
shareholders $ 633 $ 1,253 $ (1,167) $ 2,434
============ ============ ============ ============
Weighted average common shares outstanding 5,243 5,241 5,243 5,239
============ ============ ============ ============
Net income (loss) per share $ .12 $ .24 $ (.22) $ .46
============ ============ ============ ============
Diluted EPS:
Net income (loss) $ 811 $ 1,253 $ (989) $ 2,434
Less: Preferred stock dividends 156 -- 156 --
Accretion of preferred stock 22 -- 22 --
Amortization of additional goodwill
from issuance of contingent shares 76 -- -- --
------------ ------------ ------------ ------------
Net income (loss) available to common
shareholders - diluted basis $ 557 $ 1,253 $ (1,167) $ 2,434
============ ============ ============ ============
Weighted average common shares outstanding 5,243 5,241 5,243 5,239
Effect of dilutive securities:
Common stock options and warrants 17 110 -- 124
Contingent shares related to acquisitions 2,077 214 -- 185
------------ ------------ ------------ ------------
Weighted average common shares outstanding -
diluted basis 7,337 5,565 5,243 5,548
============ ============ ============ ============
Net income (loss) per share - diluted basis $ .08 $ .23 $ (.22) $ .44
============ ============ ============ ============
</TABLE>
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Options and warrants to purchase 900,000 shares of common stock for the
quarter ended June 30, 2000 and 449,000 shares of common stock for the six month
period ended June 30, 2000 were not included in the computation of diluted EPS
because the option's or warrant's exercise price was greater than the average
market price of the common shares.
Options and warrants to purchase 260,000 shares of common stock for the
quarter ended July 2, 1999 and the six month period ended July 2, 1999 were not
included in the computation of diluted EPS because the option's or warrant's
exercise price was greater than the average market price of the common shares.
NOTE 6. INCOME TAXES
Income tax expense for the quarter and the six months ended June 30,
2000 relates to the earnings of OTF, the Company's Canadian subsidiary, and has
been provided at an effective rate of 46%, reflecting combined provincial and
federal Canadian income taxes. Based on the Company's assessment of its ability
to carryback net operating losses, scheduled reversals of taxable and deductible
temporary differences and future taxable income, a valuation allowance of $.8
million has been recorded to reduce the deferred tax asset related to the
Company's U.S. operations to zero. Income tax expense for the quarter ended July
2, 1999 exceeds the U.S. statutory rate of 35% due to the higher combined
provincial and federal rates in Canada applied to OTF's earnings and
nondeductible goodwill amortization.
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 operations as a percentage of net sales for the periods indicated:
<TABLE>
<CAPTION>
QUARTER ENDED SIX MONTHS ENDED
---------------------- -----------------------
JUNE 30, JULY, 2 JUNE 30, JULY, 2
2000 1999 2000 1999
------- ------- ------- -------
<S> <C> <C> <C> <C>
Net sales 100.0% 100.0% 100.0% 100.0%
Cost of sales 88.7 87.8 89.0 87.6
------- ------- ------- -------
Gross profit 11.3 12.2 11.0 12.4
Selling, general and administrative expenses 8.5 9.1 9.1 9.5
Bad debt expense 0.6 0.2 0.4 0.1
Depreciation and amortization 0.9 0.8 1.0 0.8
------- ------- ------- -------
Operating income 1.3 2.1 0.5 2.0
Other income (expense) (0.8) (0.7) (0.8) (0.6)
------- ------- ------- -------
Income (loss) before income taxes 0.5 1.4 (0.3) 1.4
Income tax expense -- 0.8 0.1 0.7
------- ------- ------- -------
Net income (loss) 0.5 0.6 (0.4) 0.7
------- ------- ------- -------
Preferred dividends and accretion 0.1 -- -- --
------- ------- ------- -------
Net income (loss) available to common 0.4% 0.6% (0.4)% 0.7%
======= ======= ======= =======
shareholders
</TABLE>
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COMPARISON OF QUARTER ENDED JUNE 30, 2000 TO QUARTER ENDED JULY 2, 1999
Net sales. Net sales decreased $30.5 million, or 15.7%, to $163.6
million in the second quarter of 2000 from $194.1 million in the second quarter
of 1999. The decrease in revenues is primarily attributable to the fourth
quarter 1999 divestiture of some of the Company's direct food service
distribution operations and the closure of the Company's market operation in Los
Angeles, California in February 2000. As a percentage of net sales, Sam's
represented 36.3% in the second quarter of 2000 as compared to 30.1% in the
second quarter of 1999.
Cost of Sales. Cost of sales decreased $25.3 million, or 14.9% to
$145.1 million in the second quarter of 2000 from $170.4 million in the second
quarter of 1999. As a percentage of net sales, cost of sales increased to 88.7%
from 87.8%, which in turn decreased the Company's gross profit percentage to
11.3% from 12.2%. The Company's gross profit was negatively affected by weak
commodity markets in the industry, a larger portion of revenue attributable to
Sam's which historically generates a lower gross profit in relation to other
revenues and less direct delivery food service business.
Selling, general and administrative expenses. Selling, general and
administrative expenses ("SG&A") expenses decreased by $3.8 million, or 21.5% to
$13.9 million in the second quarter of 2000 from $17.7 million in the second
quarter of 1999. The decrease in SG&A is primarily attributable to a reduction
in operating expenses of $2.3 million caused by the closing of poorly performing
operations in the latter part of 1999 and first quarter of 2000. Additionally,
salaries and benefits decreased at the Company's corporate office and certain
other locations as a result of improved efficiencies and restructurings. This
decrease was partially offset by higher legal and professional fees incurred
during the restructuring of the Company's debt facilities in 2000. No such
charges were incurred in 1999.
Bad debt expense. Bad debt expense increased by $.7 million to $1.0
million in the second quarter of 2000 from $.3 million in the second quarter of
1999. The increase is primarily attributable to additional reserves taken
against receivables associated with closed operations.
Operating income. As a result of the foregoing factors, operating
income decreased $1.9 million to $2.2 million in the second quarter of 2000 from
$4.1 million in the second quarter of 1999.
Income Tax Expense. Income tax expense for the second quarter of 2000
relates to the earnings of OTF, the Company's Canadian subsidiary, and has been
provided at an effective rate of 46%, reflecting combined provincial and federal
Canadian income taxes. Based on the Company's assessment of its ability to
carryback net operating losses, scheduled reversals of taxable and deductible
temporary differences and future taxable income, a valuation allowance of $.8
million has been recorded to reduce the deferred tax asset related to the
Company's U.S. operations to zero. Income tax expense for the first quarter of
1999 exceeded the U.S. statutory rate of 35% due to the higher combined
provincial and federal tax rates in Canada applied to OTF's earnings and
nondeductible goodwill amortization.
Net income (loss). As a result of the foregoing factors, the Company
reported net income of $.8 million in the second quarter of 2000 compared to net
income of $1.3 million in the second quarter of 1999, a decrease of $.5 million.
COMPARISON OF SIX MONTHS ENDED JUNE 30, 2000 TO SIX MONTHS ENDED JULY 2, 1999
Net sales. Net sales decreased $61.3 million, or 16.7%, to $306.2
million in the first six months of 2000 from $367.5 million in the first six
months of 1999. The decrease in revenues is primarily attributable to the fourth
quarter 1999 divestiture of some of the Company's direct food service
distribution operations and the closure of the Company's market operation in Los
Angeles, California in February 2000. As a percentage of net sales, Sam's
represented 34.9% in the first six months of 2000 as compared to 28.7% in the
first six months of 1999.
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Cost of Sales. Cost of sales decreased $49.3 million, or 15.3% to
$272.5 million in the first six months of 2000 from $321.8 million in the first
six months of 1999. As a percentage of net sales, cost of sales increased to
89.0% from 87.6%, which in turn decreased the Company's gross profit percentage
to 11.0% from 12.4%. The Company's gross profit was negatively affected by weak
commodity markets in the industry, a larger portion of revenue attributable to
Sam's which historically generates a lower gross profit in relation to other
revenues and less direct delivery food service business.
Selling, general and administrative expenses. SG&A expenses decreased
by $6.9 million, or 19.8% to $27.8 million in the first six months of 2000 from
$34.7 million in the first six months of 1999. The decrease in SG&A is primarily
attributable to a decrease in operating expenses of $4.6 million resulting from
the closing of poorly performing operations in the latter part of 1999 and first
quarter of 2000. Additionally, salaries and benefits decreased at the Company's
corporate office and certain other locations as a result of improved
efficiencies and restructurings.
Bad debt expense. Bad debt expense increased by $.8 million to $1.2
million in the first six months of 2000 from $.4 million in the first six months
of 1999. The increase is primarily attributable to additional reserves taken
against receivables associated with closed operations.
Operating income. As a result of the foregoing factors, operating
income decreased $5.7 million to $1.7 million in the first six months of 2000
from $7.4 million in the first six months of 1999.
Income Tax Expense. Income tax expense for the first six months of 2000
relates to the earnings of OTF, the Company's Canadian subsidiary, and has been
provided at an effective rate of 46%, reflecting combined provincial and federal
Canadian income taxes. Based on the Company's assessment of its ability to
carryback net operating losses, scheduled reversals of taxable and deductible
temporary differences and future taxable income, a valuation allowance of $.8
million has been recorded to reduce the deferred tax asset related to the
Company's U.S. operations to zero. Income tax expense for the first quarter of
1999 exceeded the U.S. statutory rate of 35% due to the higher combined
provincial and federal tax rates in Canada applied to OTF's earnings and
nondeductible goodwill amortization.
Net income (loss). As a result of the foregoing factors, the Company
incurred a net loss of $1.0 million in the first six months of 2000 compared to
net income of $2.4 million in the first six months of 1999, a decrease of $3.4
million.
LIQUIDITY AND CAPITAL RESOURCES
Cash provided by operating activities was $11.6 million for the first
six months of 2000 compared to $7.7 million for the first six months of 1999.
Cash used in investing activities decreased $4.6 million to $.8 million in the
first six months of 2000 from $5.4 million in the first six months of 1999. The
decrease is primarily attributable to expenditures in 1999 related to the
Company's implementation of its SAP information system. Cash used in financing
activities was $9.6 million in the first six months of 2000 compared to cash
used of $2.4 million in the first six months of 1999. The decrease in cash flows
from financing activities compared to the prior year is primarily due to
reductions in the available and outstanding balance of its senior secured
revolving credit facility (the "Revolver") and the retirement of certain
short-term debt partially offset by proceeds from preferred stock and warrants.
At June 30, 2000, the Company had working capital of $5.8 million
compared to working capital of $12.2 million at December 31, 1999. The decrease
in working capital is primarily due to the classification of all borrowing under
the Company's Revolver as a current liability at June 30, 2000 as discussed in
Note 3 to unaudited consolidated financial statements.
The Company is party to a senior secured revolving credit facility
agreement (the "Revolver") with a bank (the "Senior Lender") and a subordinated
note agreement with an insurance company (the
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"Subordinated Lender"). The Company was not in compliance with certain covenants
under the agreement with the Senior Lender during fiscal 1999 and was not in
compliance with certain covenants under both agreements at December 31, 1999. On
April 14, 2000, the Company entered into an amendment (the tenth amendment to
the Revolver) of the agreement with the Senior Lender that waived the instances
of noncompliance and established new terms, including terms for repayment of the
outstanding borrowings, obtained waivers from the Subordinated Lender for
instances of noncompliance at December 31, 1999 and anticipated future instances
of noncompliance through January 1, 2001, and entered into an agreement with the
Subordinated Lender to provide additional financing through the purchase of $5.0
million (50,000 shares) of the Company's 12% redeemable cumulative preferred
stock ("Preferred Stock"), and to restructure the existing subordinated notes.
The Preferred Stock funded on April 28, 2000 and is mandatorily redeemable in
April 2007. Dividends on the Preferred Stock are payable semi-annually. The
redemption price of the Preferred Stock is computed so that the combined return
from the Preferred Stock and the warrants referred to below is not less than 18%
per annum.
The Company's Revolver provided for borrowings of up to $22.0 million
as of December 31, 1999 with outstanding borrowings as of that date of $21.2
million. The available and outstanding Revolver balances were permanently
reduced to $17.0 million and $16.8 million, respectively, as of June 30, 2000.
The reduction of $4.2 million included regularly scheduled reductions of $2.2
million as well as prepayments of $2.0 million. Subsequent to June 30, 2000, the
Company further permanently reduced the available and outstanding Revolver
balances to $15.0 million and $14.8 million, respectively, by making an
additional payment of $2.0 million. Such amount included the regularly scheduled
July 2000 payment of $1.0 million as well as a prepayment of $1.0 million.
Available borrowings under the Revolver will be further reduced by scheduled
principal reductions so that the available and outstanding balance on December
31, 2000 and thereafter is not greater than $14.5 million. The monthly Revolver
balance is further limited to predetermined amounts in excess of a computed
borrowing base. In addition to the scheduled principal reductions described
above, all proceeds from any income tax refunds or disposition of assets or
subsidiaries and a minimum of one-half of any proceeds from the issuance of debt
or equity securities (other than the Preferred Stock) must be used to further
permanently reduce available and outstanding bank borrowings. The Company must
also comply with certain capital expenditure restrictions. Under the amended
agreement, interest accrues at prime plus 3% (currently 12.5%) through the
expiration of the agreement in February 2001 or, if mutually agreed, the
Eurodollar rate plus 2.75% (currently 9.45%). The effective interest rate at
June 30, 2000 was 9.96%.
Repayment of the Revolver balance is due in February 2001. Accordingly,
the entire balance has been classified as a current liability in the
accompanying June 30, 2000 consolidated balance sheet. The Company intends to
arrange a new senior debt facility to replace the Revolver and has engaged
Rabobank International ("Rabobank") as its exclusive financial advisor to raise
additional capital through the private sale of equity or debt securities.
The Subordinated Lender holds notes totaling $20.0 million, bearing
interest at 12%, payable semi-annually in May and November. In conjunction with
the purchase and funding of the Preferred Stock, the repayment terms of the
subordinated notes were modified such that the entire balance is due in a single
lump-sum payment in April 2007. The remaining discount associated with the notes
is being amortized over the amended term of the notes. The terms of the amended
agreement also decreased the exercise price of 155,483 warrants previously
issued to the Subordinated Lender from $22.70 to $3.25 per share and extended
the expiration date of the warrants to approximate the modified maturity date of
the subordinated notes. In connection with the purchase of the Preferred Stock,
the Subordinated Lender also received warrants to purchase additional common
shares, which were equal to approximately 7% of the Company's outstanding common
stock after exercise at $3.25 per share. The warrants are exercisable until
August 31, 2007 and their term may be further extended under certain
circumstances.
Failure of the Company to comply with the terms of the amended
agreement with the Senior Lender or the agreement with the Subordinated Lender
could result in a default under the terms of the agreements.
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<PAGE> 14
Upon the occurrence of an event of default, the lenders would be entitled to
declare the amounts outstanding, including accrued interest to be immediately
due and payable. If repayment of the Company's debt were to be accelerated, the
Company cannot be certain that its assets or liquidity would be sufficient to
repay such debt. Acceleration of such debt would also cause the Preferred Stock
to become immediately redeemable.
Additionally, OTF has a demand agreement with a Canadian bank to
provide revolving credit facilities (the "Canadian Revolver") of up to CDN $20.0
million ($13.8 million), subject to certain covenant and borrowing base
requirements. The Canadian Revolver is collateralized by substantially all
assets of OTF. Interest on borrowings accrues at U.S. prime plus 0.75% (10.25%
at June 30, 2000) or Canadian prime plus 0.75% (8.25%), depending on the
denomination of the borrowings. The Canadian Revolver had an outstanding balance
of CDN $2.1 million ($1.4 million) as of June 30, 2000.
In August 2000, the Company entered into an agreement amending a
certain stock purchase agreement related to the Company's 1998 acquisition of
Perricone. As part of the amended agreement, promissory notes owed by the
Company totaling $3.5 million were cancelled. In exchange, the Company agreed to
the following: payments totaling $100,000 upon execution of the amended
agreement; lump-sum payments of $350,000 and $150,000 on January 1, 2002 and
July 1, 2002, respectively; and 24-month installment notes totaling $900,000.
The installment notes and the lump-sum payments accrue interest at 10% per
annum. However, all accrued interest will be forgiven if scheduled principal
payments are made in accordance with the terms of the agreement. Additionally,
the Company agreed to provide the noteholders 300,000 warrants to purchase
common shares of the Company at an exercise price of $2.50 per share. The
warrants are exercisable for a duration of seven years. The restructuring of the
promissory notes and related accrued interest resulted in an extraordinary gain
to the Company in the third quarter 2000 of $1.9 million. Based on the quarterly
weighted average common shares outstanding at June 30, 2000 less 824,000
contingent shares associated with the original agreement, the impact of the
extraordinary gain is $.29 per diluted share. The entire promissory note balance
of $3.5 million was classified as a current liability as of June 30, 2000.
Management believes that the combination of cash generated from ongoing
operating activities, the funding of the Preferred Stock, the realization of
recent reductions in overhead expenses, and the effects of the amendments to the
Revolver and the subordinated notes will enable the Company to meet its
obligations as they come due in 2000.
As discussed previously, the Company retained Rabobank as its exclusive
financial advisor to raise additional capital through the private sale of equity
or debt securities. The Company expects that any such capital raised would be
used primarily to refinance existing debt and possibly the Preferred Stock. The
Company also intends to arrange a new senior debt facility to replace the
current facility which expires in February 2001. There can be no assurance that
Rabobank will be able to raise additional capital or that the Company will be
able to arrange a new senior credit facility.
QUARTERLY RESULTS AND SEASONALITY
The Company's business is somewhat seasonal, with its greatest
quarterly sales volume historically occurring in the fourth quarter. With the
change in the current mix of business resulting from the Company's divestitures
of certain specialty food service operations, the termination of the Sam's
agreement in November 2000 and the increasing effect of global sourcing,
seasonal fluctuations may diminish in future years. A substantial portion of the
Company's produce sales consists of staple items such as apples, oranges,
grapefruit, potatoes and onions, which are strongest during the fall, winter and
spring. The supply and quality of these items declines during the summer,
although lower sales of these items are partially replaced by more seasonal
products such as peaches, plums, nectarines, strawberries and melons. Sales of
refrigerated, prepackaged products, such as vegetable trays, are strongest
during the fourth quarter holiday season. In any given quarter, an adverse
development such as the unavailability of high quality produce or
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harsh weather conditions 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 in our consolidated shareholders' equity as
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-percentage point interest rate change on the outstanding
balance of the variable rate debt as of June 30, 2000 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 or financing, any statements concerning proposed new products
or services, any statements regarding future economic conditions or performance,
and any statement of assumptions underlying any of the foregoing. Although the
Company believes that the expectations reflected in its forward-looking
statements are reasonable, it can give no assurance that such expectations or
any of its forward-looking statements will prove to be correct, and actual
results could differ materially from those projected or assumed in the Company's
forward-looking statements. The Company's future financial condition and
results, as well as any forward-looking statements, are subject to inherent
risks and uncertainties, including, without limitation, potential limitations on
the Company's ability to pursue its business strategy and successfully integrate
acquired operations, the expiration of the agreement with its primary customer,
significant competition, general economic and market conditions, the
availability and cost of borrowed funds and limitations arising from the
Company's indebtedness, the ability to refinance its existing bank facility and
raise additional capital, 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 December 31, 1999, a copy of which may be obtained from the Company upon
request.
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PART II - OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
The 2000 Annual Meeting of Shareholders was held on June 29, 2000. At
the meeting, the following proposals were voted upon by the shareholders:
1. Election of Sheldon I. Stein and Thomas M. Hubbard to serve as Class
III directors for three year terms expiring at the 2003 annual
meeting.
2. Ratification of KPMG LLP as the Company's independent auditors for
fiscal year 2000.
Both of the above proposals were approved by the shareholders.
The results of the vote were as follows: Proposal 1, 4,113,780 for and
25,391 against; Proposal 2, 4,124,910 for, 10,717 against and 3,544 abstain.
ITEM 6. EXHIBITS AND REPORTS ON 8-K.
(a) Exhibits
Exhibit 10.1 Amendment to Stock Purchase Documents dated July
28, 2000 with respect to the Stock Purchase
Agreement dated as of October 30, 1998 between
Fresh America Corp. and Sam Perricone, Sr., Henry
Beyer, and the Sam Perricone Children's Trust.
Exhibit 10.2 Amended and Restated Promissory Notes dated July
28, 2000 with respect to Promissory Notes dated as
of November 1, 1998 between Fresh America Corp.
and individually, Sam Perricone, Sr., Henry Beyer,
and the Sam Perricone Children's Trust.
Exhibit 10.3 Common Stock Purchase Warrant Agreements dated
July 28, 2000 between Fresh America Corp and
individually, Sam Perricone, Sr., Henry Beyer, and
the Sam Perricone Children's Trust.
Exhibit 27.1 Financial Data Schedule.
(b) Reports on Form 8-K
None.
Items 1, 2, 3 and 5 of Part II are not applicable and have been omitted.
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 H. Gray Date: August 11, 2000
----------------------------- ---------------
John H. Gray
Executive Vice President and Chief Financial Officer
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INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<S> <C>
10.1 Amendment to Stock Purchase Documents dated July
28, 2000 with respect to the Stock Purchase
Agreement dated as of October 30, 1998 between
Fresh America Corp. and Sam Perricone, Sr., Henry
Beyer, and the Sam Perricone Children's Trust.
10.2 Amended and Restated Promissory Notes dated July
28, 2000 with respect to Promissory Notes dated as
of November 1, 1998 between Fresh America Corp.
and individually, Sam Perricone, Sr., Henry Beyer,
and the Sam Perricone Children's Trust.
10.3 Common Stock Purchase Warrant Agreements dated
July 28, 2000 between Fresh America Corp and
individually, Sam Perricone, Sr., Henry Beyer, and
the Sam Perricone Children's Trust.
27.1 Financial Data Schedule.
</TABLE>
