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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 March 30, 2001.
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: (469) 791-5700
----------------
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 [ ] No [X]
At August 10, 2001, the Registrant had 8,410,098 shares of its Common Stock
outstanding.
Total number of pages in this report, including the cover page is 15. Exhibit
index is on page 15.
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PART I - FINANCIAL INFORMATION
ITEM 1. - FINANCIAL STATEMENTS
FRESH AMERICA CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
MARCH 30, DECEMBER 29,
2001 2000
----------- ------------
ASSETS (unaudited)
Current Assets:
Cash and cash equivalents $ 4,966 $ 4,880
Accounts receivable, net 29,447 36,306
Inventories 3,992 6,849
Prepaid expenses 1,097 1,138
Deferred tax asset -- 297
Income tax receivable 2,275 1,084
----------- ------------
Total current assets 41,777 50,554
Property and equipment, net 8,761 9,944
Goodwill, net of accumulated amortization of $4,067 and $3,655, respectively 24,431 24,843
Other assets 1,005 1,920
----------- ------------
Total assets $ 75,974 $ 87,261
=========== ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Notes payable and current portion of long-term debt $ 14,857 $ 13,788
Accounts payable 25,405 27,785
Accrued salaries and wages 2,127 2,489
Other accrued expenses 4,037 3,902
----------- ------------
Total current liabilities 46,426 47,964
Long-term debt, less current portion 19,953 24,950
Other liabilities 555 499
----------- ------------
Total liabilities 66,934 73,413
----------- ------------
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 4,702 4,446
----------- ------------
Shareholders' Equity:
Common stock $.01 par value (authorized 10,000,000 shares; issued 5,243,404
shares) 52
52
Additional paid-in capital 33,308 33,564
Foreign currency translation adjustment (550) (469)
Accumulated deficit (28,472) (23,745)
----------- ------------
Total shareholders' equity 4,338 9,402
Commitments and contingencies
----------- ------------
Total liabilities and shareholders' equity $ 75,974 $ 87,261
=========== ============
The notes to consolidated financial statements are an integral
part of these statements.
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FRESH AMERICA CORP.
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
QUARTER ENDED
------------------------
MARCH 30, MARCH 31,
2001 2000
---------- ----------
Net sales $ 86,901 $ 142,652
Cost of sales 78,203 127,503
---------- ----------
Gross profit 8,698 15,149
---------- ----------
Selling, general and administrative expenses 12,038 13,998
Bad debt expense 361 229
Depreciation and amortization 807 1,512
---------- ----------
Total operating costs and expenses 13,206 15,739
---------- ----------
Operating loss (4,508) (590)
---------- ----------
Other income (expense):
Interest expense (1,021) (1,405)
Interest income 39 87
Other, net (95) 216
---------- ----------
(1,077) (1,102)
---------- ----------
Loss before income taxes (5,585) (1,692)
Income tax expense (benefit) (858) 189
---------- ----------
Net loss (4,727) (1,881)
Preferred dividends and accretion 256 --
---------- ----------
Net loss applicable to common shareholders $ (4,983) $ (1,881)
========== ==========
Basic and diluted net loss per share $ (.95) $ (.36)
========== ==========
The notes to consolidated financial statements are an
integral part of these statements.
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FRESH AMERICA CORP. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
QUARTER ENDED
------------------------
MARCH 30, MARCH 31,
2001 2000
---------- ----------
Cash flows from operating activities:
Net loss $ (4,727) $ (1,881)
Adjustments to reconcile net loss to net cash provided by operating activities:
Bad debt expense 361 229
Depreciation and amortization 807 1,512
Other 328 206
Deferred income taxes 297 --
Change in assets and liabilities
Accounts receivable 6,804 9,837
Inventories 2,857 1,497
Prepaid expenses 41 (13)
Income tax receivable and other assets (1,052) 826
Accounts payable (2,380) (5,660)
Accrued expenses and other current liabilities (171) (532)
---------- ----------
Total adjustments 7,892 7,902
---------- ----------
Net cash provided by operating activities 3,165 6,021
---------- ----------
Cash flows from investing activities:
Additions to property and equipment, net (271) (652)
Proceeds from Canadian note receivable 338 --
Proceeds from sale of property and equipment 944 97
---------- ----------
Net cash provided by (used in) investing activities 1,011 (555)
---------- ----------
Cash flows from financing activities:
Proceeds from Canadian revolving line of credit -- 10,755
Repayments of Canadian revolving line of credit (3,756) (14,457)
Repayments of Canadian short-term indebtedness (237) (1,434)
Payments of long-term indebtedness (16) (338)
---------- ----------
Net cash used in financing activities (4,009) (5,474)
---------- ----------
Effect of exchange rate changes on cash (81) 3
---------- ----------
Net increase (decrease) in cash and cash equivalents 86 (5)
Cash and cash equivalents at beginning of period 4,880 3,197
---------- ----------
Cash and cash equivalents at end of period $ 4,966 $ 3,192
========== ==========
Supplemental disclosures of cash flow information:
Cash paid for interest $ 340 $ 761
Cash paid for income taxes $ 116 $ 368
The notes to consolidated financial statements are an
integral part of these statements.
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FRESH AMERICA CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION AND CONSOLIDATION
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 9 distribution and processing facilities.
The Company's fiscal year is a 52-week period ending on the last Friday in
December. The quarters ended March 30, 2001 and March 31, 2000 each consisted of
13 weeks. 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.
UNAUDITED INTERIM FINANCIAL INFORMATION
The consolidated balance sheet as of March 30, 2001, the consolidated statements
of operations and the consolidated statements of cash flows for the quarter
ended March 30, 2001 and March 31, 2000 and related notes have been prepared by
the Company and are unaudited. In the opinion of the Company, the interim
financial information includes all 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 29, 2000. The
results for the periods ended March 30, 2001 and March 31, 2000 may not be
indicative of operating results for the full year.
Prior year balances include certain reclassifications to conform to the current
year presentation.
EARNINGS PER SHARE
Basic loss per share ("EPS") is calculated by dividing net loss applicable 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 4 - "Loss Per Share" for a calculation of EPS.
NEW ACCOUNTING STANDARDS
The Company has assessed the reporting and disclosure requirements of Statement
of Financial Accounting Standard ("SFAS") No. 133, "Accounting For Derivative
Instruments and Hedging Activities". This statement, as amended, 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 provisions of SFAS No. 133 were adopted in the first quarter of
fiscal 2001, and since the Company is not party to any derivative contracts,
adoption of this statement did not have any effect on the Company's results of
operations or financial position.
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FRESH AMERICA CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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.
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.
NOTE 2. DEBT AND LIQUIDITY
Throughout its operational restructuring during the past two years, the Company
has pursued various financing opportunities in an effort to restructure its
debt. In September 2001, the Company completed a financial restructure whereby
The North Texas Opportunity Fund LP, ("NTOF") purchased 8% Series D redeemable
cumulative preferred stock and warrants exercisable for 84,100,980 shares of our
common stock, which is approximately 50% of the Company's fully-diluted common
stock, for cash proceeds of $5 million. In connection with the NTOF investment
in the Company, John Hancock Life Insurance Company, John Hancock Variable Life
Insurance Company, Investors Partner Life Insurance, Signature 1A (Cayman), Ltd.
and Signature 3 Limited (collectively, the "Subordinated Lender") exchanged $20
million of subordinated debt, warrants to purchase 576,134 shares of common
stock, $5 million of 10% redeemable cumulative preferred stock and all accrued
interest and dividends for $2.7 million of 8% Series D redeemable cumulative
preferred stock and warrants exercisable for 45,114,529 shares of our common
stock, which is approximately 27% of the Company's fully-diluted common stock.
Bank Debt. In conjunction with this restructure, Bank of America, N.A. (the
"Senior Lender") agreed to a payment schedule which will reduce the Company's
indebtedness to the Senior Lender from $5.3 million, which was owed at the time
of closing of the NTOF transaction, to $3.8 million by year-end 2001. The
indebtedness, previously a revolving credit facility, was converted to a term
note with a maturity of the remaining balance in January 2002. The Company is
working to refinance the term debt prior to its maturity. There can be no
assurance that the Company will be able to replace its Senior Lender as
anticipated or extend its term note beyond January 2002, if that becomes
necessary.
Prior to its sale in March 2001, OTF had a demand agreement with Royal Bank of
Canada to provide revolving credit facilities, which were collateralized by
substantially all assets of OTF. The Canadian Revolver had an outstanding
balance of CDN $5.6 million (U.S. $3.8 million) as of December 29, 2000. This
outstanding balance was fully retired in March 2001 in conjunction with the sale
of OTF's operating assets.
Subordinated Debt. Prior to the restructure in September 2001, the Company had
$20 million of subordinated debt owing to the Subordinated Lender. Additionally
in April 2000, the Company issued to the Subordinated Lender $5 million (50,000
shares) of the Company's 12% redeemable cumulative preferred stock. The Company
was not in compliance with certain covenants under the terms of its agreements
with the Subordinated Lender at March 30, 2001. The preferred stock, the
subordinated debt owing to the Subordinated Lender and the accrued but unpaid
interest and dividends thereon were
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FRESH AMERICA CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
exchanged for a new issue of the Company's preferred stock and warrants as part
of the restructure discussed above.
Acquisitions. In July 2000, the Company entered into an agreement amending the
stock purchase agreement related to the Company's November 1998 acquisition of
Perricone Citrus Company. As part of the amended agreement, unsecured promissory
notes owed by the Company totaling $3.5 million and the accrued and unpaid
interest therein were restructured whereby, 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 monthly installment payments of $37,500 totaling $900,000.
The installment and lump-sum payments accrue interest at 10% per annum. However,
all accrued interest will be forgiven if scheduled principal payments are made
timely. Additionally, the Company issued 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 issuances of
these securities was exempt from registration under the Securities Act under
Regulation D. The restructuring of the promissory notes and related accrued
interest resulted in an extraordinary gain to the Company of $1.9 million in the
third quarter of 2000.
Under the terms of the purchase agreement for Jos. Notarianni & Co.
("Notarianni"), a portion of the purchase price is contingent upon Notarianni's
earnings subsequent to its acquisitions. The contingent payment for Notarianni
will be equal to 1.4 times Notarianni's average annual pretax earnings over a
three-year period from October 3, 1998 to October 3, 2001. Any contingent
payment is payable in cash or common stock at the Company's sole discretion. As
of March 2001, no amounts were owing in relation to the Notarianni acquisition.
The Company's purchase agreement with Hereford Haven Inc. d/b/a Martin Bros.
("Martin Bros.") also contains a contingent payment component in the purchase
price. The Martin Bros. contingent payment is equal to 4 times the average
annual pretax earnings for the three-year period from January 3, 1998 to January
3, 2001. The total contingent payment was $5.0 million at December 29, 2000. The
payment was due March 31, 2001 and was payable in either cash, common stock or a
combination of cash and common stock to the extent of 75% at the Company's
option and 25% at the selling shareholder's option.
In satisfaction of 75% of the contingent payment, in April 2001, the Company
issued 3,166,694 shares of its common stock to Larry Martin, the former owner of
Martin Bros. The issuance of these securities to Mr. Martin was exempt from
registration under the Securities Act under Regulation D. At the time of
issuance, the shares represented a 38% ownership interest in the Company. These
shares were valued at $1.17 per share, the market value of the Company's common
stock at the time of the transaction. The remaining $1.2 million of contingent
consideration remained a financial obligation of the Company and was
restructured as part of the financial restructuring discussed above. It is
payable in cash subject to the approval of the Company's Senior Lender. This
payment has been extended and is now due and payable in January 2002.
Equipment Financing. The Company is party to a master lease agreement with
SunTrust Bank that has been used to provide equipment financing for several of
the Company's operating units. The Company was not in compliance with certain
financial covenants under the terms of the lease at December 29, 2000 and
received waivers for noncompliance through January 2, 2002. The Company is
currently renegotiating the financial covenants of this agreement and
anticipates this agreement will be revised prior to the expiration of the waiver
in January 2002. The lease agreement provides that future lease payments can be
accelerated in the event of default. There can be no assurance that the Company
will be
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FRESH AMERICA CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
in compliance with such covenants subsequent to the waiver period or will be
successful in renegotiating the covenants.
Management believes that the combination of the effects of the financial
restructure completed in September 2001, the anticipated refinancing of the
indebtedness to the Senior Lender on a long-term basis, cash generated from
ongoing operating activities, and the realization of recent reductions in
overhead expenses will enable the Company to meet its obligations as they come
due in the foreseeable future. However, there can be no assurance the Company
will be able to replace its Senior Lender as anticipated or extend the term note
beyond January 2002, if that becomes necessary.
NOTE 3. COMPREHENSIVE LOSS
The following table reconciles the Company's net loss to its comprehensive loss
(in thousands):
QUARTER ENDED
----------------------
March 30, March 31,
2001 2000
--------- ---------
Net loss $ (4,727) $ (1,881)
Other comprehensive loss - foreign currency
translation adjustments (81) 11
--------- ---------
Comprehensive loss $ (4,808) $ (1,870)
========= =========
NOTE 4. LOSS PER SHARE
The following table reconciles the calculations of the Company's basic and
diluted EPS (in thousands, except per share amounts):
QUARTER ENDED
------------------------
March 30, March 31,
2001 2000
---------- ----------
BASIC & DILUTED EPS
Net loss $ (4,727) $ (1,881)
Less: Preferred stock dividends 223 --
Accretion of preferred stock 33 --
---------- ----------
Net loss applicable to common shareholders $ (4,983) $ (1,881)
========== ==========
Weighted average common shares outstanding 5,243 5,243
========== ==========
Net loss per share $ (.95) $ (.36)
========== ==========
Options and warrants to purchase approximately 1,455,000 and 732,000 shares of
common stock were outstanding for the quarter ended March 30, 2001 and March 31,
2000, respectively. These common stock equivalents were not included in the
computation of diluted EPS because to do so would have been anti-dilutive.
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FRESH AMERICA CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 5. INCOME TAXES
The income tax benefit for the quarter ended March 31, 2001 relates principally
to the loss of Ontario Tree Fruits (OTF), the Company's Canadian subsidiary
which can be carried back to recover Canadian taxes paid in prior years. The
Canadian tax benefit of $906,000 has been provided at an effective tax rate of
44.5%, reflecting combined provincial and federal Canadian income taxes.
Additionally, a US state tax provision of approximately $48,000 was recorded.
Income tax expense in the first quarter of 2000 consisted solely of Canadian
income taxes.
Based on the Company's assessment of its ability to carry back net operating
losses, scheduled reversals of taxable and deductible temporary differences and
future taxable income, a valuation allowance has been provided at March 30, 2001
and March 31, 2000 to eliminate the Company's U.S. net deferred tax assets.
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:
QUARTER ENDED
-------------
March 30, March 31,
2001 2000
---------------- ------------------
Net sales 100.0% 100.0%
Cost of sales 90.0 89.4
---------------- ------------------
Gross profit 10.0 10.6
Selling, general and administrative expenses 13.9 9.8
Bad debt expense 0.4 0.2
Depreciation and amortization .9 1.0
---------------- ------------------
Total operating costs and expenses 15.2 11.0
---------------- ------------------
Operating loss (5.2) (0.4)
Other expense 1.2 0.8
---------------- ------------------
Loss before income taxes (6.4) (1.2)
Income tax expense (benefit) (1.0) 0.1
---------------- ------------------
Net loss (5.4) (1.3)
Preferred dividends and accretion 0.3 -
---------------- ------------------
Net loss applicable to common shareholders (5.7)% (1.3)%
================ ==================
COMPARISON OF QUARTER ENDED MARCH 30, 2001 TO QUARTER ENDED MARCH 31, 2000
Net sales. Net sales decreased $55.8 million, or 39.1% to $86.9 million the
first quarter of 2001 from $142.7 million in the first quarter of 2000.
Approximately $47.6 million of this decrease in revenues is attributed to the
loss of the Sam's contract in October 2000. As a percentage of net sales, Sam's
represented 33.4% in first quarter of 2000. In addition, the Company's sales at
OTF decreased by $11.6 million during the first quarter of 2001. This decrease
is due to the sale of the OTF facility and the loss of a significant customer of
OTF in 1999 which had accounted for approximately 65% of the Canadian
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operation revenue. The decreases in sales were partially offset by increased
sales throughout the Company, primarily related to incremental business from
national and regional sales programs.
Cost of Sales. Cost of sales decreased $49.3 million, or 38.7% to $78.2 million
in the first quarter of 2001 from $127.5 million in the first quarter of 2000.
As a percentage of net sales, cost of sales increased to 90.0% from 89.4%, which
in turn decreased the Company's gross profit percentage to 10.0% from 10.6%.
This increase in cost of sales as a percentage of sales was due to a settlement
of on-going product purchase commitments that were terminated prior to
expiration when the sale of OTF was completed. Excluding the effects of the OTF
charges, gross profit increased to 11.2% in the first quarter of 2001 from 10.6%
in the first quarter of 2000. This increase was primarily attributable to the
loss of Sam's business that typically represented lower margin sales.
Selling, general and administrative expenses. Selling, general and
administrative expenses ("SG&A") expenses decreased by $2.0 million, or 14.0% to
$12.0 million in the first quarter of 2001 from $14.0 million in the first
quarter of 2000. Approximately $900,000 of the decrease relates to the four
distribution centers where the Company significantly reduced overhead and
operating expenses when the Sam's agreement ended in October 2000. In addition,
during the first quarter of 2000, the Company initiated a transition of its
corporate office from Houston to Dallas, Texas and closed its market operation
in Los Angeles, California. These changes resulted in savings to SG&A in the
first quarter of 2001 of $565,000 related to the reduction of headcount and
improved efficiencies associated with the corporate office move and $493,000
related to the closing in Los Angeles. These decreases were partially offset by
certain fees related to the Company's refinancing efforts in 2001. These
expenses are expected to continue throughout the second quarter and into the
third quarter of 2001.
Bad debt expense. Bad debt expense increased by $0.2 million to $0.4 million in
the first quarter of 2001 from $0.2 million in the first quarter of 2000.
Operating loss. As a result of the foregoing factors, the operating loss
increased $3.9 million to $4.5 million in the first quarter of 2001 from $.6
million in the first quarter of 2000.
Income tax expense (benefit). The income tax benefit in the first quarter of
2001 consists of a Canadian income tax benefit of $906,000 related to the loss
incurred by the Company's Canadian subsidiaries which can be carried back to
recover prior year income taxes paid, and U.S state income tax expense of
$48,000. Income tax expense in the first quarter of 2000 consisted solely of
Canadian income taxes. No U.S. federal income tax benefit was provided in either
period because the Company cannot carryback U.S. losses to recover any prior
year federal income taxes.
Net loss. As a result of the foregoing factors, the Company reported a net loss
of $4.7 million in the first quarter of 2001 compared to a net loss of $1.9
million in the first quarter of 2000, an increased loss of $2.8 million.
LIQUIDITY AND CAPITAL RESOURCES
Cash provided by operating activities was $3.2 million for the first quarter of
2001 compared to $6.0 million for the first quarter of 2000. The decrease of
$2.8 million is mainly attributed to the increase in the net loss. Cash provided
by investing activities was $1.0 million in the first quarter of 2001, an
increase of $1.6 million from cash used in investing activities of $0.6 million
in the first quarter of 2000. The increase is attributable to proceeds from the
sale of OTF property and equipment, collection of a note receivable, and fewer
capital expenditures. Cash used in financing activities was $4.0 million in the
first quarter of 2001 compared to cash used of $5.5 million in the first quarter
of 2000. The decrease in cash flows used in financing activities compared to the
prior year is primarily due to more debt retirements in fiscal 2000.
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At March 30, 2001, the Company had negative working capital of $4.6 million
compared to working capital of $2.6 million at December 29, 2000. The decrease
in working capital is primarily due to the substantial decreases in accounts
receivable and inventory, partially offset by reductions in short-term debt and
in accounts payable, all resulting from the reduced scope of business operations
after the termination of the Sam's agreement in October 2000.
FINANCIAL RESTRUCTURING
Throughout its operational restructuring during the past two years, the Company
has pursued various financing opportunities in an effort to restructure its
debt. In September 2001, the Company completed a financial restructure whereby
The North Texas Opportunity Fund LP, ("NTOF") purchased 8% Series D cumulative
redeemable preferred stock and warrants exercisable for 84,100,980 shares of our
common stock, which is approximately 50% of the Company's fully-diluted common
stock, for cash proceeds of $5 million. In connection with the NTOF investment
in the Company, John Hancock Life Insurance Company, John Hancock Variable Life
Insurance Company, Investors Partner Life Insurance, Signature 1A (Cayman),
Ltd., and Signature 3 Limited (collectively, the "Subordinated Lender")
exchanged $20 million of subordinated debt, warrants to purchase 576,134 shares
of common stock, $5 million of 10% redeemable cumulative preferred stock and all
accrued interest and dividends for $2.7 million of 8% Series D redeemable
cumulative preferred stock and warrants exercisable for 45,114,529 shares of our
common stock, which is approximately 27% of the Company's fully-diluted common
stock.
Bank Debt. In conjunction with this restructure, Bank of America, N.A. (the
"Senior Lender") agreed to a payment schedule which will reduce the Company's
indebtedness to the Senior Lender from $5.3 million, which was owed at the time
of closing of the NTOF transaction, to $3.8 million by year-end 2001. The
indebtedness, previously a revolving credit facility, was converted to a term
note with a maturity of the remaining balance in January 2002. The Company is
working to refinance the term debt prior to its maturity. There can be no
assurance that the Company will be able to replace its Senior Lender as
anticipated or extend its term note beyond January 2002, if that becomes
necessary.
Prior to its sale in March 2001, OTF had a demand agreement with Royal Bank of
Canada to provide revolving credit facilities, which were collateralized by
substantially all assets of OTF. The Canadian Revolver had an outstanding
balance of CDN $5.6 million (U.S. $3.8 million) as of December 29, 2000. This
outstanding balance was fully retired in March 2001 in conjunction with the sale
of OTF's operating assets.
Subordinated Debt. Prior to the restructure in September 2001, the Company had
$20 million of subordinated debt owing to the Subordinated Lender. Additionally
in April 2000, the Company issued to the Subordinated Lender $5 million (50,000
shares) of the Company's 12% redeemable cumulative preferred stock. The Company
was not in compliance with certain covenants under the terms of its agreements
with the Subordinated Lender at March 30, 2001. The preferred stock, the
subordinated debt owing to the Subordinated Lender and the accrued but unpaid
interest and dividends thereon were converted to new issues of the Company's
preferred stock as part of the restructure discussed above.
Acquisitions. In July 2000, the Company entered into an agreement amending the
stock purchase agreement related to the Company's November 1998 acquisition of
Perricone Citrus Company. As part of the amended agreement, unsecured promissory
notes owed by the Company totaling $3.5 million and the accrued and unpaid
interest therein were restructured whereby, 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 monthly installment payments of $37,500 totaling $900,000.
The installment and lump-sum payments accrue interest at 10% per annum. However,
all accrued interest will be forgiven if scheduled principal payments are made
timely. Additionally, the Company issued 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 issuances of
these securities was exempt from registration under the Securities Act under
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Regulation D. The restructuring of the promissory notes and related accrued
interest resulted in an extraordinary gain to the Company of $1.9 million in the
third quarter of 2000.
Under the terms of the purchase agreement for Jos. Notarianni & Co.
("Notarianni"), a portion of the purchase price is contingent upon Notarianni's
earnings subsequent to its acquisitions. The contingent payment for Notarianni
will be equal to 1.4 times Notarianni's average annual pretax earnings over a
three-year period from October 3, 1998 to October 3, 2001. Any contingent
payment is payable in cash or common stock at the Company's sole discretion. As
of March 2001, no amounts were owed in relation to the Notarianni acquisition.
The Company's purchase agreement with Hereford Haven Inc. d/b/a Martin Bros.
("Martin Bros.") also contains a contingent payment component in the purchase
price. The Martin Bros. contingent payment is equal to 4 times the average
annual pretax earnings for the three-year period from January 3, 1998 to January
3, 2001. The total contingent payment was $5.0 million at December 29, 2000. The
payment was due March 31, 2001 and was payable in either cash, common stock or a
combination of cash and common stock to the extent of 75% at the Company's
option and 25% at the selling shareholder's option.
In satisfaction of 75% of the contingent payment, in April 2001, the Company
issued 3,166,694 shares of its common stock to Larry Martin, the former owner of
Martin Bros. The issuance of these securities to Mr. Martin was exempt from
registration under the Securities Act under Regulation D. At the time of
issuance, the shares represented a 38% ownership interest in the Company. These
shares were valued at $1.17 per share, the market value of the Company's common
stock at the time of the transaction. The remaining $1.2 million of contingent
consideration was remained a financial obligation of the Company and was
restructured as part of the financial restructuring discussed above. It is
payable in cash subject to the approval of the Company's Senior Lender. This
payment has been extended and is now due and payable in January 2002.
Equipment Financing. The Company is party to a master lease agreement with
SunTrust Bank that has been used to provide equipment financing for several of
the Company's operating units. The Company was not in compliance with certain
financial covenants under the terms of the lease at December 29, 2000 and
received waivers for noncompliance through January 2, 2002. The Company is
currently renegotiating the financial covenants of this agreement and
anticipates this agreement will be revised prior to the expiration of the waiver
in January 2002. The lease agreement provides that future lease payments can be
accelerated in the event of default. There can be no assurance that the Company
will be in compliance with such covenants subsequent to the waiver period or
will be successful in renegotiating the covenants.
Management believes that the combination of the effects of the financial
restructure completed in September 2001, the anticipated refinancing of the
indebtedness to the Senior Lender on a long-term basis, cash generated from
ongoing operating activities, and the realization of recent reductions in
overhead expenses will enable the Company to meet its obligations as they come
due in the foreseeable future. However, there can be no assurance the Company
will be able to replace its Senior Lender as anticipated or extend the term note
beyond January 2002, if that becomes necessary.
RECENT ACCOUNTING PRONOUNCEMENTS
In July 2001, the Financial Accounting Standards Board ("FASB") issued SFAS No.
141 "Business Combinations" and SFAS No. 142 "Goodwill and Other Intangible
Assets". SFAS No. 141 requires that all business combinations initiated after
June 30 2001, be accounted for under the purchase method and SFAS No. 142
requires that goodwill no longer be amortized to earnings, but instead be
reviewed for impairment. The provisions of SFAS No. 142 will be effective for
fiscal years beginning after December 15, 2001. Also, the FASB has voted to
issue SFAS No. 143 "Accounting for Asset Retirement Obligations" which
establishes requirements for the accounting of removal-type costs associated
with asset retirements. SFAS No. 143 is effective for fiscal years beginning
after June 15, 2002, with earlier
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application encouraged. The Company is currently assessing the impact of these
standards on its financial statements.
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
October 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 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 above in "Quarterly Results and
Seasonality".
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Foreign Exchange Risk. The Company's 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. As of March 2001, the Company no longer conducts business in Canada.
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 March 30, 2001 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, the Company generally sets 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 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
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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 inherit risks and uncertainties, including, without limitation,
potential limitations on the Company's ability to pursue its business strategy,
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, and seasonality. 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 29, 2000, a copy of which may be obtained
from the Company upon request.
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PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON 8-K.
(a) Exhibits
None.
(b) Reports on Form 8-K
None.
Items 1, 2, 3, 4, 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/ Cheryl A. Taylor Date: September 12, 2001
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Cheryl A. Taylor
Executive Vice President and Chief
Financial Officer
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