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FILE NO. 0-7277
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
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FORM 10-K
ANNUAL REPORT
Pursuant to Section 13 of the Securities Exchange Act of 1934
For the Fiscal Year Ended February 27, 1998
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FRESH FOODS, INC.
Incorporated in North Carolina
CLAREMONT, NORTH CAROLINA 28610 56-0945643
(704) 459 - 7626 (I.R.S. Employer Identification No.)
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Securities filed pursuant to Section 12(g)
of the Securities Exchange Act of 1934:
COMMON STOCK, PAR VALUE $1 PER SHARE
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 twelve months (or for such shorter period that
the registrant was required to file such report(s), and (2) has been subject to
such filing requirements for the past 90 days. Yes [ X ] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulations S-K is not contained herein and will not be contained,
to the best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
The number of shares of Fresh Foods, Inc. Common Stock outstanding as
of May 1, 1998 was 5,902,619. The aggregate market value of Fresh Foods, Inc.
Common Stock held by nonaffiliates of Fresh Foods, Inc. as of May 1, 1998 was
$50,089,046.
DOCUMENTS OF WHICH PORTIONS PARTS OF FORM 10-K INTO WHICH PORTIONS
ARE INCORPORATED BY REFERENCE OF DOCUMENTS ARE INCORPORATED
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Proxy Statement for Fresh Foods, Inc. III
Annual Meeting of Shareholders to be
held on June 25, 1998
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PART I
ITEM 1. BUSINESS
OVERVIEW
Fresh Foods, Inc. (the "Company" or "Fresh Foods") is a producer and
marketer of fully-cooked branded and private label microwaveable sandwiches for
the domestic foodservice and home meal replacement ("HMR") markets. The Company
sells its high-quality, value-added products through various distribution
channels under the Mom 'n' Pop's brand name. In addition to its food processing
business, the Company owns and operates 61, and franchises an additional 42,
restaurants operating under the Sagebrush, Western Steer, Prime Sirloin and
Bennett's concepts.
The Company's predecessor was founded in 1966 to own and operate
restaurants, initially under the Mom 'n' Pop's Ham House concept and later
under the Western Steer Family Steakhouse and other concepts. The Company's
food processing business was originally developed to support these restaurants,
but has grown independently to become the Company's principal business and the
primary focus of its growth strategy. In order to enhance the value of the
Company's restaurant business, the Company merged with Sagebrush, Inc. in
January 1998 and is converting most of its existing restaurants to the
successful Sagebrush concept. This combination was accounted for as a pooling
of interests under Accounting Principles Board Opinion No. 16, and accordingly,
all prior period consolidated financial statements presented have been restated
to include the combined financial position, results of operations and cash
flows of Sagebrush.
In May 1998, the Company, formerly known as WSMP, Inc., changed its
name to Fresh Foods, Inc. The new name identifies the Company with the food
service industry, projects a positive image about the food products produced
and acknowledges that the Company is more than a restaurant company. The name
change should have no major impact on the Company's business, other than to
make it more recognizable, emphasize its corporate identity as a multi-faceted
food service company and de-emphasize its identity with particular restaurant
concepts.
The Company's fiscal year ended February 23, 1996 is referred to
herein as "fiscal 1996"; its fiscal year ended February 28, 1997 is referred to
herein as "fiscal 1997"; and its fiscal year ended February 27, 1998 is "fiscal
1998."
BUSINESS SEGMENTS
The Company operates in two principal business segments: food
processing operations and restaurant operations. Information as to revenue,
operating profit, identifiable assets, depreciation and amortization expense,
and capital expenditures, for each of the Company's business segments for fiscal
1998 is contained herein in Item 8: Financial Statements and Supplementary Data,
under the caption "Lines of Business."
FOOD PROCESSING
PREPARED FOODS DIVISION
The Company's prepared foods division produces a variety of fully
cooked items that are sold frozen or refrigerated to retail and institutional
customers. This division includes all items produced and packaged as part of the
existing bakery and sandwich packaging operations, as well as other items being
developed and packaged for the developing HMR market.
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Within its bakery and sandwich packaging operations, the Company
produces a variety of biscuits, yeast rolls and other flour-based products. The
Company purchases flour, yeast, sugar and shortening, which are blended, using
technologically-advanced equipment and the Company's proprietary recipes,
kneaded into dough, rolled, cut and baked into yeast rolls and biscuits. Its
biscuits are sold both plain and as sandwiches filled with items such as
sausage, cheese, eggs and country ham. These frozen products are directly
marketed under the "Mom 'n' Pop's" brand name to institutional buyers, vending
companies, delicatessens and supermarkets and are also packed for several of
Fresh Foods' customers under private labels. The Company's yeast rolls are used
primarily in frozen microwavable sandwiches. The Company packs microwavable
hamburger, cheeseburger, chicken, barbecue and other sandwiches using its own
fresh baked yeast rolls for two customers under custom manufacturing
agreements. In addition, similar sandwiches are produced under the "Mom 'n''
Pop's" brand name and marketed directly to supermarkets, vending companies and
institutional buyers.
The Company has recently entered into licensing agreements with
Hardee's Food Systems, Inc. ("Hardee's"), Checkers Drive-In Restaurants, Inc.
("Checkers"), Rally's Hamburgers, Inc. ("Rally's") and GB Foods Corp. ("Green
Burrito") to begin producing and marketing microwaveable Hardee's, Checkers and
Rally's sandwiches and to market Green Burrito products through the Company's
existing distribution channels beginning in the summer of 1998. The Company
believes that the introduction of these widely-recognized, branded products will
further enhance the Company's leading position in the microwaveable sandwich
market.
During fiscal 1997, the Company announced its entry into the HMR
category, including individually packaged, refrigerated meats, vegetables,
desserts and other items for sale through supermarkets. In addition, the Company
is developing a line of fully-prepared fresh sandwiches to be sold into the
convenience store, vending machine and grocery store markets beginning in the
summer of 1998. The Company has developed experience in the HMR field over the
last two years as a result of other research and development efforts in its
bakery operations. The Company recently constructed a fresh sandwich production
"clean room" with the capacity to prepare and package 500,000 fresh sandwiches
per week. This facility utilizes modified atmosphere packaging ("MAP")
technology by using specialized tray and barrier films in modified atmosphere
packaging of HMR items. This technology enables the Company to sell to
distributors fresh sandwiches with extended shelf lives. The Company expects to
produce a complete line of fresh sandwiches at this facility, including
traditional choices such as ham-and-cheese, turkey-and-cheese and
bologna-and-cheese sandwiches.
The ingredients used in the bakery and sandwich packaging operation
are purchased primarily from five vendors, but alternative sources are
available. The bakery and sandwich products are then either sold to foodservice
customers or combined with meat and other fillings to create sandwiches.
Three customers accounted for approximately 85.3% of bakery and
sandwich packaging sales during fiscal 1998. One of these customers, Hudson
Foods, Inc., through its Pierre Foods Division, accounted for approximately
68.5% of sales. On April 10, 1998, the Company entered into an Asset Purchase
Agreement with Hudson Foods, Inc. (a wholly-owned subsidiary of Tyson Foods,
Inc.), to purchase substantially all of the business in Cincinnati, Ohio, and a
portion of the business in Caryville, Tennessee, of the Pierre Foods Division
("Pierre"). Fresh Foods agreed to pay a cash purchase price of $122.0 million
and to assume certain of Hudson's liabilities, consisting principally of trade
payables and other similar liabilities (estimated at $8.1 million in the
aggregate as of February 27, 1998). The Company intends to finance this
acquisition through the issuance of senior subordinated notes, totaling $100
million, and senior bank debt, totaling $22 million.
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The acquisition of Pierre will position the Company as a leading
producer of value-added, fully-cooked food products. Pierre produces high-margin
specialty beef, poultry and pork products that are typically custom-developed to
meet specific customer requirements. Pierre purchases beef, poultry and pork,
which it processes into a broad range of fully-cooked food products such as:
flame-broiled chicken; beef, turkey and pork patties; country-fried steak;
chicken nuggets; and beef and pork fingers. These products are either (i) sold
to foodservice customers such as restaurant chains, schools and healthcare
providers, (ii) sold through various distribution channels, including warehouse
clubs and grocery stores, or (iii) combined with specialty breads to produce
microwaveable sandwiches that are sold through HMR channels such as convenience
stores, vending machines, warehouse clubs and grocery stores. Following the
acquisition, the Company will be vertically integrated as it relates to its
sandwich operations, controlling all aspects of the production and distribution
process, enabling it to realize numerous production, marketing, logistical and
product development efficiencies.
HAM CURING DIVISION
The Company produces whole cured hams, packaged cured ham slices,
pre-portioned ham for portion control customers and various "side meat"
products. In its modern curing facilities, the atmospheric conditions of
traditional air curing of pork hams are simulated, resulting in a curing
process that fully cures raw hams in a period of approximately 80 days. A
portion of ham production is sold directly or through distributors to retail
supermarkets under the "Mom 'n' Pop's" brand name, primarily in North Carolina,
South Carolina, Virginia, Tennessee, Alabama and Georgia. The remainder of
production is sold to institutional food distributors. The division cured over
8.0 million pounds of ham during fiscal 1998 in its 55,000 square foot
facility. In fiscal 1998, ham products accounted for 14.9% of the Company's
total food processing sales. One supermarket customer accounted for 26.5% of
cured ham sales during fiscal 1997. The Company is confident, based upon
historical demand, that numerous other outlets exist for these products.
Raw hams are available from numerous sources, although the Company
relies mainly upon two suppliers for most of its hams. Loss of one or both of
these suppliers would not have a material adverse effect on the Company.
FOOD PROCESSING REVENUES
Revenues for the two divisions that comprise the food processing line
of business were as follows for the past three fiscal years:
Fiscal Prepared Foods Division Ham Curing Division
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1998 $56,400,000 $ 9,900,000
1997 $48,200,000 $10,400,000
1996 $38,600,000 $12,300,000
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QUALITY CONTROL
The Company employs quality control personnel dedicated to the
maintenance of rigid quality standards and compliance with the Hazard Analysis
and Critical Control Points ("HACCP") system of the USDA and other government
regulations in its food processing plants. These employees perform both
periodic and random inspections of production lines and machinery. The Company
has well-defined procedures to ensure that all food is processed uniformly and
within federal guidelines and product specifications.
FUTURE TRENDS
The Company is well-positioned to take advantage of the following food
industry trends:
Increased Outsourcing by Foodservice Providers. Rising public concern
over the safety of foods prepared in public dining establishments has resulted
in dramatic growth of the market for fully-cooked foods produced under
stringent quality controls. Many foodservice companies are now outsourcing much
of their food preparation in order to: (i) avoid the cost and administrative
requirements associated with meeting federal quality standards; (ii) maximize
food safety; (iii) ensure product consistency; (iv) reduce labor costs; and (v)
reduce the amount of food waste. Due to the Company's ability to address these
issues, it is in an excellent position to respond to this rapid growth in food
production outsourcing.
Growth in Number of HMR Outlets. The growth of alternative food
outlets such as convenience stores, vending machines, warehouse clubs and food
kiosks has created additional demand for packaged and fully-cooked food
products. According to Convenience Store News, approximately 82% of all
convenience store operators are currently expanding in-house foodservice or
adding branded fast foods. Non-traditional outlets often lack extensive
preparation, cooking and storage facilities, resulting in a need for
fully-cooked foods such as the Company's products. The Company's branded and
private label sandwich programs provide a safe and high-quality solution for
these operators.
Growth in Sales of Fully-Cooked Food Products in Grocery Stores. The
increased use of HMR outlets has contributed to a gradual decline in
home-cooked meals, which has in turn eroded grocery stores' share of food
sales. According to Forbes, the percentage of sales attributed to meal
ingredients has declined from 70% to 47% between 1989 and 1996. To combat this
decline, grocery stores are now turning to independent suppliers to provide
branded and private label packaged and fully-cooked food products. The Company
believes that it can continue to capitalize on this trend by providing
high-quality, fully-cooked food products to grocery stores.
Increased Consumer Demand for Convenience Foods. The market for
branded and private label packaged foods, particularly for easy-to-prepare,
microwaveable convenience foods, has experienced substantial growth over the
past several years. One of the fastest growing segments in this category is the
estimated $2.5 billion refrigerated and frozen hand-held foods segment, which
includes sandwiches, meat-filled biscuits, burritos, appetizers and other
similar products. This segment grew at an estimated compound annual rate of 5%
from 1992 to 1996 and is expected to grow by 7% annually from 1998 to 2000,
according to Packaged Facts. The Company currently offers a full line of
microwaveable sandwiches sold under the Mom 'n' Pop's brand name and has plans
to expand this product line through its licensing agreements with Hardee's,
Checkers, Rally's and Green Burrito.
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Increased Government Regulation in the Food Processing Industry. The
food processing industry is subject to increasing federal, state and local
government regulation. The USDA's HACCP system, governing the preparation and
production of food, has made it more difficult for foodservice companies to
prepare their own food products. The Company's facilities are in full
compliance with HACCP standards.
RESTAURANT OPERATIONS
The Company's restaurant operations are located primarily in smaller
cities and suburban areas in the southeastern United States, a market niche
where the primary competitors are economy steakhouses. At May 1, 1998, the
Company owned and operated 38 Sagebrush steakhouse restaurants, which provide
family-oriented, full-service, casual dining in an atmosphere suggestive of a
Texas roadhouse. The Company also owned and operated 17 Western Steer and five
Prime Sirloin restaurants, which are more mature family steakhouses using the
"buffet and bakery" format, and one Bennett's barbecue-style restaurant.
Sagebrush restaurants are the only casual dining steakhouses in a majority of
the local markets in which they operate.
RESTAURANT LOCATIONS
The Company's restaurants have an average seating capacity of 260 and
occupy an average of 7,000 square feet. The following table sets forth the
location, opening date and concept of each of the Company's owned restaurants
at May 1, 1998:
Location Date Opened Concept
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North Carolina:
Arden August 1994 Sagebrush
Boone June 1992 Sagebrush
Brevard March 1994 Sagebrush
Clemmons December 1993 Sagebrush
Denver October 1997 Sagebrush
Graham March 1998 Sagebrush
Hickory October 1990 Sagebrush
Hickory July 1992 Sagebrush
Kernersville June 1995 Sagebrush
Lenoir August 1997 Sagebrush
Monroe December 1994 Sagebrush
Morganton March 1993 Sagebrush
Mt. Airy January 1997 Sagebrush
Salisbury April 1997 Sagebrush
Sanford January 1998 Sagebrush
Stanleyville April 1998 Sagebrush
Statesville October 1991 Sagebrush
Waynesville January 1994 Sagebrush
Wilkesboro September 1994 Sagebrush
Winston-Salem September 1993 Sagebrush
Asheboro* July 1992 Prime Sirloin
Charlotte January 1992 Prime Sirloin
Cornelius March 1992 Prime Sirloin
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Location Date Opened Concept
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Matthews June 1992 Prime Sirloin
Statesville May 1992 Prime Sirloin
Boone June 1976 Western Steer
Elizabeth City September 1979 Western Steer
Elkin* April 1981 Western Steer
Galax May 1980 Western Steer
Hickory January 1984 Western Steer
Hudson May 1984 Western Steer
Jefferson June 1985 Western Steer
Lenoir April 1987 Western Steer
Lexington March 1978 Western Steer
Lincolnton March 1977 Western Steer
Mocksville October 1985 Western Steer
Morganton November 1984 Western Steer
Mt. Airy January 1984 Western Steer
Newton January 1978 Western Steer
Winston-Salem January 1983 Western Steer
Yadkinville July 1985 Western Steer
Conover March 1990 Bennett's
South Carolina:
Aiken April 1998 Sagebrush
Gaffney December 1995 Sagebrush
Greenwood November 1996 Sagebrush
Lexington December 1997 Sagebrush
Rock Hill December 1992 Sagebrush
Tennessee:
Alcoa June 1996 Sagebrush
Gatlinburg April 1995 Sagebrush
Johnson City March 1996 Sagebrush
Kingsport February 1993 Sagebrush
Knoxville February 1992 Sagebrush
Morristown September 1996 Sagebrush
Newport February 1998 Sagebrush
Oak Ridge November 1991 Sagebrush
Pigeon Forge September 1991 Sagebrush
Sevierville May 1994 Sagebrush
Virginia:
Colonial Heights October 1996 Sagebrush
Lynchburg July 1996 Sagebrush
Roanoke June 1997 Sagebrush
Wytheville* October 1980 Western Steer
- ---------------
* Currently under conversion to the Sagebrush format.
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RESTAURANT CONCEPTS
THE SAGEBRUSH CONCEPT
The Sagebrush concept is to serve high-quality, moderately-priced
meals in a casual, family-oriented atmosphere suggestive of a Texas roadhouse.
Sagebrush restaurants are located in smaller cities and suburban areas, a
market niche where the primary competitors are economy steakhouses, many
of which are cafeteria-style. Sagebrush differentiates itself from economy
steakhouses by its full table service and attentive wait staff, full bar
service, entertaining atmosphere, distinctive decor and consistently
high-quality steaks. The Company believes these factors make the Sagebrush
concept attractive to a broad range of consumers in the markets it serves.
Menu. The Sagebrush menu features high-quality aged steaks, prime rib,
chops, ribs, chicken and fish, along with hamburgers and chicken sandwiches. The
dinner menu includes steak entrees cut daily from specially-selected USDA choice
aged western beef and prepared using a special seasoning. In addition to the
regular menu items, each restaurant has a daily, specially-priced "Blue Plate
Special" at lunch, which is selected by its general manager and typically
features fish, chicken or pork chops. All steaks come with a choice of Texas
fries, baked potato or baked sweet potato, a fresh garden salad and bread. The
menu also includes specialty appetizers, desserts and full bar service where
legally permitted. New menu items are tested periodically in an effort to update
and adapt to changing customer preferences. Dinner entrees, which are also
available at lunch, range in price from $8.49 to $19.99, lunch entrees range in
price from $4.29 to $5.99, and appetizers are priced from $2.29 to $9.99. The
average check per customer, including beverages, is approximately $13.10 for
dinner and $7.55 for lunch. Menu prices are generally the same at each
restaurant, except for those located in resort areas, where seasonal factors
require slightly higher prices. Sales of alcoholic beverages, which are
available in all but one Sagebrush restaurant, account for approximately 9% of
Sagebrush revenues. Each restaurant typically serves lunch to 150 to 250
customers each week day and to 100 to 300 customers on Saturdays and Sundays.
Each restaurant typically serves dinner to 250 to 300 customers from Sunday
through Thursday and to 700 to 900 customers on Friday and Saturday. Sagebrush
restaurants do not serve breakfast.
Atmosphere and Decor. Sagebrush restaurants are decorated with wooden
booths and walls and a mixture of western memorabilia and other collectibles,
including license plates and signs from around the United States, photographs
of sports figures and movie stars and replicas of antique jukeboxes featuring
country music. Complimentary peanuts are offered in all areas of the
restaurants, and customers are encouraged to drop their shells on the floor.
Special effort is made to make families with children feel welcome. A "Little
Pistols" children's menu featuring hamburgers and sandwiches is available,
birthdays are recognized in a special manner by the wait staff, and servers
offer balloons to children.
Facilities. All but one Sagebrush restaurant is located in a
freestanding building, generally near an interstate highway or other main
thoroughfare. Because the Company has established most of its restaurants in
existing buildings that it remodeled into the Sagebrush concept, restaurant
sizes vary from approximately 4,500 to 8,500 square feet, with the tables in
the dining area seating from approximately 150 to 280 people. The bar area of a
typical restaurant generally has seating capacity for approximately 20 people.
Most Sagebrush restaurants also have a private banquet room seating from 25 to
50 people. Although the banquet facilities are often used for private parties,
they can also be used for general customer seating during peak dining hours.
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Conversion Plan. The Company intends to convert all but seven of its
family steakhouse restaurants to the Sagebrush concept within two years based
on the historically-attractive unit economics of the Sagebrush concept, at an
average cost of $500,000 per conversion. A typical Sagebrush generates 44% more
revenue than a typical Western Steer restaurant. The Company has extensive
experience in converting restaurants to the Sagebrush format as 27 of the
Company's 38 Sagebrush restaurants were originally converted from other
restaurant concepts. Since acquiring Sagebrush, Inc. in January 1998, the
Company has converted three Western Steer restaurants to the Sagebrush concept
and has realized a significant increase in weekly sales volume at these
locations. Other than the three new Sagebrush restaurants currently in
development, the Company has no plans for additional new construction.
THE WESTERN STEER CONCEPT
The Western Steer concept originated in 1975 as a family-oriented,
economy steakhouse restaurant, featuring a rustic, western-style design, steaks
and other entrees cooked to order. Beginning in 1992, the Company began an
extensive program of renovation of this concept, which included adding an
"all-you-can-eat" buffet food bar and in-house bakery and changing the store
appearance to highlight a new format. Restaurants updated to the new format
have been renamed "Western Steer -- Steaks, Buffet & Bakery." For fiscal 1998,
the average ticket price at Company-owned Western Steer restaurants was $6.00.
THE PRIME SIRLOIN CONCEPT
In 1987, the Company acquired Prime Sirloin, Inc., a regional
franchised steakhouse chain then headquartered in Morristown, Tennessee and
currently composed of five units. As compared to the Western Steer concept,
this concept features greater seating capacity and a broader offering of buffet
items, resulting in a greater concentration of buffet sales. For fiscal 1998,
the average ticket price at Company-owned Prime Sirloin restaurants was $6.25.
THE BENNETT'S CONCEPT
In 1990, the Company became a sub-franchiser of Bennett's Bar-B-Que,
Inc., based in Denver, Colorado. As a sub-franchiser, the Company pays royalty
fees to the franchiser equal to 1.0% of revenues for each Bennett's restaurant
owned or sub-franchised by the Company. In 1994, the Company redesigned the
Bennett's concept into "Bennett's Smokehouse & Saloon," a Texas roadhouse
concept merging steaks and barbecue in a 186-seat casual dinner house.
OTHER RESTAURANT OPERATIONS
The Company operates three Western Steer restaurants in Kentucky for a
franchisee, two Prime Sirloin restaurants in South Carolina for a franchisee
and one Bennett's in West Virginia for a franchisee. The Company does not
consider these restaurants significant to its overall restaurant operations.
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RESTAURANT FRANCHISING PROGRAM
At May 1, 1998, the Company franchised 33 Western Steer, six Prime
Sirloin and three Bennett's restaurants, all in accordance with standard
franchise agreements. The Company does not presently expect to franchise the
Sagebrush concept. The franchise agreements executed prior to 1990 cover a term
of 20 years, renewable for an additional term of 20 years, while those executed
after 1990 cover ten-year terms. Royalty fees of 3.0% of the franchised
restaurant's gross sales throughout the term of the agreement are payable to the
Company. All of the Company's franchise agreements provide for an exclusive
territory and include in-term and post-term non-compete covenants. For fiscal
1998, revenues from the Company's restaurant franchise operations were $1.8
million. No single franchisee or group of franchisees under common control
provides revenues equal to as much as 2% of the Company's revenues.
INGREDIENTS AND PURCHASING
As part of its commitment to using fresh, high-quality ingredients,
the Company establishes rigid specifications for all of its meat and produce.
Steaks are hand-cut daily at each restaurant. In order to assure the uniform
quality and freshness of the food served in its restaurants, the Company
monitors the prices and specifications of the products that it purchases in
order to assure delivery of consistently high-quality food at competitive
prices. The Company currently purchases 90% of its food products from one
supplier, Institutional Food House, Inc. The Company believes that products of
comparable quality are available, or upon short notice can be made available,
from alternative suppliers.
RESTAURANT MARKETING AND ADVERTISING
The Company utilizes billboard advertising for its restaurants located
near interstate highways. It also uses aggressive direct local marketing
campaigns, including school programs, hotel marketing and charitable and
community events, to promote restaurant traffic. The Company does not advertise
its restaurants in newspapers or by distributing coupons. Local advertising has
been the responsibility of individual restaurant general managers.
Most Western Steer franchisees, through franchise agreements or
supplementary agreements, are obligated to pay the Company an advertising fee
of 2% of the gross sales of each franchised restaurant. This fee is intended to
provide funds for future national, regional and local advertising of Western
Steer restaurants.
EMPLOYEES
As of February 27, 1998, the Company employed 3,847 full-time and
part-time persons. These included 80 administrative and accounting personnel,
608 food processing employees, and 3,159 restaurant employees. The Company
offers its employees various benefits, including major medical health insurance
coverage, and participation in its cafeteria plan, its profit-sharing
retirement plan and its employee stock purchase plan.
None of the Company's employees is covered by a collective bargaining
agreement. The Company has experienced no work stoppage attributed to labor
disputes and considers its employee relations to be good.
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TRADEMARKS AND LICENSING
Food Processing. The Company's food products are marketed under a
variety of brand names, including Mom 'n' Pop's. The Company has recently
entered into licensing agreements to produce and market microwaveable Hardee's,
Checkers and Rally's sandwiches and to market Green Burrito hand-held products
through its existing distribution channels beginning in the summer of 1998. The
term of each such license is subject to renewal and satisfaction of sales volume
requirements. The Company may distribute Hardee's sandwiches and biscuits west
of the Mississippi River. The Company's distribution rights for Rally's,
Checkers and Green Burrito products are nationwide.
Restaurants. The Company has registered the service mark "Sagebrush
Steakhouse & Saloon" with the United States Patent and Trademark Office (the
"USPTO"). It regards this service mark as having significant value and as being
an important factor in the marketing of its Sagebrush restaurants. The Company
also has registered with the USPTO the "Western Steer" logotype and the names
"Western Steer," "Western Steer Family Restaurant," "Western Steer -- Steaks,
Buffet & Bakery," "Prime Sirloin -- Buffet, Bakery & Steaks," the "Prime
Sirloin" logotype and the "Mom 'n' Pop's" logotype, and variations thereof, as
well as several distinct Western Steer menu items, as trademarks and service
marks. Generally, trademarks remain valid as long as they are used properly for
identification purposes.
COMPETITION
Food Processing. The food production business is highly competitive
and is often affected by changes in tastes and eating habits of the public,
economic conditions affecting spending habits and other demographic factors. In
sales of biscuit and yeast roll products, the Company competes with a number of
large bakeries in various parts of the country. The sandwich segment of the HMR
industry is extremely fragmented, with few large direct competitors but low
barriers to entry and indirect competition in the form of numerous other HMR
products. The Company's competitors in the sandwich industry include McLane
Company, Inc., Bridgford Foods Corp. and Jimmy Dean Foods.
Restaurants. The restaurant industry generally, and the Company's
restaurant business specifically, are intensely competitive with respect to
concept, price, service, location and food quality. There are many well
established competitors, including a number of other steakhouse and
family-oriented restaurants with concepts similar to the Company's, with
substantially greater financial and other resources than the Company. Some
competitors have been in existence for much longer than the Company and may be
better established in, or may decide to enter, markets in which the Company's
restaurants are or may be located. The restaurant business is often affected by
changes in consumer tastes, national, regional or local economic conditions,
demographic trends, traffic patterns and the type, number and location of
competing restaurants. The Company endeavors to compete with other restaurants
primarily on the basis of service, value, location and providing high-quality
meals in a casual, family-oriented atmosphere. While the Company believes that
it competes for customers with a broad variety of other restaurants, there are
particular restaurant chains, including Longhorn Steakhouse, Lone Star
Steakhouse & Saloon, Outback Steakhouse and Logan's Road House, that have
restaurant concepts very similar to the Company's and that operate in, and may
expand further into, the Company's market areas.
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GOVERNMENT REGULATION
The food production and restaurant industries are subject to extensive
federal, state and local government regulation.
The Company's food processing facilities and food products are subject
to frequent inspection by the USDA and other government authorities. In July
1996, the USDA issued strict new policies against contamination by food-borne
pathogens such as E. coli and Salmonella and established the HACCP system. The
Company is in full compliance with all USDA regulations, including HACCP
standards. There can be no assurance, however, that the Company will be able to
remain in compliance. The Company's failure to comply with applicable laws and
regulations could subject it to civil remedies, including fines, injunctions,
recalls and seizures, or even criminal sanctions, any of which could have
material adverse effects on the Company.
The Company's operations also are governed by laws and regulations
relating to workplace safety and worker health that, among other things,
establish noise standards and regulate the use of hazardous chemicals in the
workplace. The Company also is subject to numerous federal, state and local
environmental laws. Under applicable environmental laws, the Company may be
responsible for remediation of environmental conditions and may be subject to
associated liabilities relating to its facilities and the land on which its
facilities are or had been situated, regardless of whether the Company leases
or owns the facilities or land in question and regardless of whether such
environmental conditions were created by the Company or by a prior owner or
tenant. There can be no assurance that any failure to comply, or compliance in
the future, with environmental laws, or that liabilities arising thereunder,
will have no material adverse effect on the Company's business, financial
condition or results of operations.
The Company's operations are subject to licensing and regulation by a
number of state and local governmental authorities, which include alcoholic
beverage control, health, safety, sanitation, building and fire agencies.
Operating costs are affected by increases in costs of providing health care
benefits, the minimum hourly wage, unemployment tax rates, sales taxes and
other similar matters over which the Company has no control. The Company is
subject to laws governing relationships with employees, including minimum wage
requirements, overtime, working conditions and citizenship requirements.
EXECUTIVE OFFICERS OF THE REGISTRANT.
Officers are elected annually by the Company's Board of Directors and
serve indefinitely at the pleasure of the Board. The following table sets forth
certain information with respect to the executive officers of the Company at
May 1, 1998:
Executive
Officer
Name Position Age Since
- ---- -------- --- -----
Richard F. Howard Chairman of the Board 48 1987
James C. Richardson, Jr. Vice Chairman of the Board and 49 1987
Chief Executive Officer
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13
Executive
Officer
Name Position Age Since
- ---- -------- --- ----------
David R. Clark President, Chief Operating Officer and 41 1996
Director
James E. Harris Executive Vice President, Chief Financial
Officer, Treasurer and Secretary 35 1998
Noland M. Mewborn Vice President - Finance, Assistant 38 1998
Treasurer & Assistant Secretary
Mr. Howard became a director in 1987 and has served as Chairman of the
Board of Directors since 1993. Mr. Howard served as Executive Vice President of
the Company from 1989 to 1993 and as Chief Financial Officer and Treasurer from
1989 to 1994.
Mr. Richardson became a director in 1987. He is the Company's Chief
Executive Officer and Vice Chairman of the Board of Directors, positions he
assumed in 1993 and 1996, respectively. He has served the Company as an
executive officer since 1987, including Executive Vice President from 1989 to
1993 and President from 1993 to 1996.
Mr. Clark is the Company's President and Chief Operating Officer,
positions he assumed in 1996. From 1994 to 1996, he served as Executive Vice
President and Chief Operating Officer of Bank of Granite, located in Granite
Falls, North Carolina. Prior to joining Bank of Granite, Mr. Clark worked for
13 years with BB&T, a commercial bank and trust company. Mr. Clark served BB&T
in various executive capacities, including President of BB&T of South Carolina
during 1993 and 1994. He has been a director of the Company since 1996.
Mr. Harris is the Company's Executive Vice President, Chief Financial
Officer, Treasurer and Secretary, positions he assumed in March 1998. From 1987
to 1998, Mr. Harris served in various executive capacities with The Shelton
Companies, Inc., a diversified investment group headquartered in Charlotte,
North Carolina. He served as Executive Vice President of Finance for The
Shelton Companies, Inc. from 1993 to 1998. Prior to joining The Shelton
Companies, Inc., Mr. Harris was a Senior Accountant with Ernst & Young.
Mr. Mewborn is the Company's Vice President - Finance, Assistant
Treasurer and Assistant Secretary, positions he assumed in January 1998. From
1995 to 1998, Mr. Mewborn served as Vice President, Chief Financial Officer and
Treasurer of Sagebrush, Inc., which was acquired by the Company in January
1998. Prior to this, Mr. Mewborn was employed by Lowe's Companies, Inc., a
building supply retailer, from 1981 until November 1995, serving as Senior
Manager - Financial Reporting from 1990 until November 1995 and as Manager -
Corporate Accounting from 1986 to 1990.
12
14
ITEM 2. PROPERTIES.
The Company believes that its facilities generally are in good
condition and that they are suitable for their current uses. The Company
nevertheless engages periodically in construction and other capital improvement
projects designed to expand and improve the efficiency of its facilities.
Principal Offices. The Company currently owns and uses a
23,000-square-foot building located on a 62-acre tract in Claremont as its
principal executive offices.
Food Processing Plants. The Company operates its food processing
division at plants it owns in Claremont. The Claremont facilities occupy
buildings totaling 192,460 square feet, including 18,941 square feet of freezer
and cooler space.
Restaurant Sites. The Company owns the property upon which 21 of its
61 restaurants are located, and it leases the remaining properties, generally
under long-term leases.
Other Property. The Company owns various other parcels of property,
consisting of raw land and closed restaurant sites that are either vacant or
are leased to others. It also holds leasehold interests in various properties
that are either vacant or are subleased to others. None of these properties are
of material importance to the Company's operations.
ITEM 3. LEGAL PROCEEDINGS.
The Company is not a party to any material legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
On January 27, 1998, a special meeting of shareholders was held in
Hickory, North Carolina, to consider: 1) the approval of a proposed merger with
Sagebrush, Inc., and 2) a proposal to increase the Company's authorized shares
from 10,000,000 to 100,000,000. The first proposal received 2,149,178 votes
for, 2,296 votes against, and 877,951 shares abstained. The second proposal
received 2,789,005 votes for, 186,129 votes against, and 54,291 abstained.
On May 7, 1998, a special meeting of shareholders was held in Hickory,
North Carolina to consider: 1) a proposal to increase the membership of the
Board of Directors from nine to eleven, and 2) a proposal to change the
corporate name from WSMP, Inc. to Fresh Foods, Inc. The first proposal received
3,521,173 votes for, 5,771 against, and 31 shares abstained from voting. The
second proposal received 3,509,574 votes in favor, 17,243 votes against, and
158 shares abstained.
13
15
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED
SECURITY HOLDER MATTERS.
The Company's common stock trades on the NASDAQ National Market tier of
the NASDAQ Stock Market under the symbol: "FOOD" ("WSMP" prior to May 8, 1998).
As of April 15, 1998, Fresh Foods, Inc. had approximately 925 shareholders based
on the number of holders of record. The quarterly high and low closing bid price
quotations are presented below as reported by the National Association of
Securities Dealers, Inc. These quotations represent interdealer prices, without
retail mark-up, mark-down or commissions, and do not necessarily reflect actual
transactions.
1998 1997
--------------------------- ---------------------------
High Low High Low
---- --- ---- ---
First Quarter $ 12.750 $ 9.000 $ 5.375 $ 4.250
Second Quarter $ 15.750 $ 11.875 $ 6.500 $ 4.875
Third Quarter $ 24.500 $ 12.500 $ 8.000 $ 6.125
Fourth Quarter $ 29.000 $ 16.000 $ 9.500 $ 6.500
The closing price on May 26, 1998, was 16.125,
No cash dividends have been declared during fiscal 1998 or 1997. The Company's
existing policy is to reinvest earnings rather than pay dividends.
ITEM 6. SELECTED FINANCIAL DATA.
The following selected historical financial information has been
derived from audited consolidated financial statements of Fresh Foods. Such
financial information should be read in conjunction with the consolidated
financial statements of Fresh Foods, the notes thereto and the other financial
information contained elsewhere herein. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and Fresh Foods'
consolidated financial statements.
14
16
Fiscal Year Ended
Feb. 27, Feb. 28, Feb. 23, Feb. 24, Feb. 25,
1998 1997 1996 1995 1994
---------------------------------------------------------------------------
(dollars in thousands, except per share data)
STATEMENT OF OPERATIONS DATA:
Revenues $ 158,412 $ 129,934 $ 113,536 $ 122,830 $ 92,392
Cost of goods sold 93,018 79,452 69,647 77,246 53,721
Restaurant operating expenses 39,796 29,821 26,560 26,144 23,362
Selling, general and expenses 15,593 11,651 10,588 10,410 9,832
Depreciation and amortization 5,004 3,600 3,476 3,405 3,346
------------- ------------ ------------- ------------- -------------
Operating income 5,001 5,410 3,265 5,625 2,131
Interest expense, net 1,762 1,868 2,163 2,068 1,893
Other income 736 600 154 1,064 808
Equity in earnings (loss) of affiliate 3 (107) (385) (12) (72)
Provision for income taxes (benefit) 1,728 2,010 (1,139) 575 (263)
------------- ------------ -------------- ------------- -------------
Earnings before extraordinary item
and accounting change 2,250 2,025 2,010 4,034 1,237
Extraordinary items (1) 415 (245)
------------- ------------ ------------- ------------- -------------
Net earnings $ 2,250 $ 2,440 $ 2,010 $ 4,034 $ 992
============= ============ ============= ============= =============
EARNINGS PER SHARE: (2)
Basic $ 0.40 $ 0.48 $ 0.42
Diluted $ 0.37 $ 0.45 $ 0.41
OTHER DATA:
Capital expenditures $ 12,592 $ 9,702 $ 3,970 $ 3,674 $ 6,755
BALANCE SHEET DATA:
Working capital $ (497) $ 2,114 $ 1,724 $ 1,273 (329)
Total assets 71,656 59,571 51,994 54,939 $ 55,502
Total debt 20,918 18,208 21,109 22,861 25,898
Shareholders' equity 39,227 31,348 22,328 22,654 19,339
- --------------------------------
(1) Reflects cumulative effect of change in accounting principle in the amount
of $(245,000) in the fiscal year ended February 25, 1994 and extraordinary
gain from early extinguishment of debt in the amount of $415,000 in the
fiscal year ended February 28, 1997.
(2) See Note 2 to The Company's consolidated financial statements for an
explanation of the calculation of net income per share. The Company
historically has paid no dividends.
15
17
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
RESULTS OF OPERATIONS
Fresh Foods' operations are classified into two business segments:
food processing operations, principally sandwich production; and restaurant
operations, comprised of the Sagebrush, Western Steer, Prime Sirloin and
Bennett's concepts. Results for fiscal 1996, fiscal 1997 and fiscal 1998 for
each segment are shown below:
Fiscal Year Ended
-------------------------------------------------
February 27, February 28, February 23,
1998 1997 1996
------------ ------------ ------------
(in millions)
Revenues:
Food processing operations $ 66.2 $ 58.6 $ 50.9
Restaurant operations 92.2 71.3 62.6
------------ ----------- -----------
Total 158.4 129.9 113.5
------------ ----------- -----------
Cost of goods sold:
Food processing operations 59.2 53.8 47.0
Restaurant operations 33.8 25.6 22.6
------------ ----------- -----------
Total 93.0 79.4 69.6
------------ ----------- -----------
Restaurant operating expenses 39.8 29.8 26.5
Selling, general and administrative 15.6 11.7 10.6
Depreciation and amortization 5.0 3.6 3.5
------------ ----------- -----------
Operating income 5.0 5.4 3.3
------------ ----------- -----------
Other income (expense) (1.0) (1.4) (2.4)
------------ ----------- -----------
Earnings before income taxes and
extraordinary items 4.0 4.0 0.9
------------ ----------- -----------
Provision for income taxes (benefit) 1.7 2.0 (1.1)
------------ ----------- -----------
Earnings before extraordinary item 2.3 2.0 2.0
------------ ----------- -----------
Extraordinary item 0.4
------------ ---------- -----------
Net earnings $ 2.3 $ 2.4 $ 2.0
============ =========== ===========
16
18
Fiscal 1998 Compared to Fiscal 1997
Revenues. Revenues increased by $28.5 million, or 21.9%, due to a
$20.8 million (29.2%) increase in the restaurant segment and a $7.6 million
(13.0%) increase in the food processing segment. The increase in restaurant
revenues was due to the March 1997 acquisition of fourteen restaurants from a
former franchisee and the opening of seven Sagebrush restaurants during fiscal
1998, offset by the closing of six non-Sagebrush restaurants. The increase in
food processing revenues was due to the introduction of a new line of HMR
products and to a general increase in the volume of other food products.
Cost of goods sold. Cost of goods sold increased by $13.6 million, or
17.1%, due to increases in such cost in both business segments. Cost of goods
sold in the food processing segment increased by $5.3 million, or 9.9%, but
decreased as a percentage of operating revenues of that segment from 91.8% to
89.3%. The decrease was due to three principal factors: (1) a shift within the
ham segment to the production of higher-margin products, (2) a slight increase
in the margins associated with the new line of HMR products and (3) an
improvement in the absorption of fixed costs. Cost of goods sold in the
restaurant segment increased by $8.2 million, or 32.1%, and increased as a
percentage of restaurant revenues from 35.9% to 36.7%, due primarily to higher
beef costs in fiscal 1998.
Restaurant operating expenses. Such expenses increased by $10.0
million, or 33.5%, primarily as a result of the operation of additional
restaurants in fiscal 1998. As a percentage of restaurant revenues, restaurant
operating expenses increased from 41.8% to 43.2% due primarily to the
incurrence in fiscal 1998 of rental expense associated with the fourteen
restaurants purchased from a former franchisee.
Selling, general and administrative expenses. Such expenses increased
by $3.9 million, or 33.8%, due to a $2.0 million nonrecurring cost associated
with the acquisition of Sagebrush, Inc., and costs related to the operation of
additional restaurants in fiscal 1998. But for the nonrecurring cost, selling,
general and administrative expenses as a percentage of revenues would have
declined slightly.
Depreciation and amortization. Depreciation and amortization increased
by $1.4 million, or 39.0%, and increased as a percentage of revenues from 2.8%
to 3.2% due to the construction of additional restaurants and the acquisition
of fourteen restaurants from a former franchisee in fiscal 1998.
Operating income. Operating income decreased by $409,000, or 7.6%, and
decreased as a percentage of revenues from 4.2% to 3.2%, for the reasons stated
above.
Other income (expense). Net other expense decreased by $352,000, or
25.6%, due primarily to gains on the sale of excess real property.
Earnings before income taxes and extraordinary items. Such earnings
remained unchanged at $4.0 million, but declined as a percentage of revenues
from 3.1% to 2.5%, for the reasons stated above.
Provision for income taxes. The effective tax rate for fiscal 1998 was
43.4%, as compared to 49.8% for fiscal 1997. Such rates were higher than the
combined federal and state rates primarily due to nondeductible permanent
differences. See Note 10 to the Company's consolidated financial statements.
Earnings before extraordinary item. Such earnings increased by
$225,000, or 11.1%, for the reasons stated above.
17
19
Extraordinary item. In fiscal 1997, the Company recorded an
extraordinary gain of $415,000, net of tax, due to extinguishment of debt.
Net earnings. Net earnings decreased by $190,000, or 7.8%, and
decreased as a percentage of revenues from 1.9% to 1.4%, for the reasons stated
above.
Fiscal 1997 Compared to Fiscal 1996
Revenues. Revenues increased by $16.4 million, or 14.4%, due to an
$8.7 million (13.8%) increase in the restaurant segment and a $7.7 million
(15.2%) increase in the food processing segment. The opening of six Sagebrush
restaurants and a slight increase in same-store sales accounted for the
increase in restaurant revenues. The increase in food processing revenues was
driven by a $9.6 million volume increase in the bakery, representing the
introduction of certain bread stick products and, of greater significance, new
sandwich volume marketed to replace old volume lost in fiscal 1996 upon the
attrition of a significant warehouse customer. The increase in bakery volume
was offset by a $1.8 million decline in ham product sales.
Cost of goods sold. Cost of goods sold increased by $9.8 million, or
14.1%. Cost of goods sold in the food processing segment increased by $6.8
million, or 14.5%, but decreased as a percentage of revenues of that segment
from 92.4% to 91.8%. The increase in bakery volume referred to above resulted
in a decrease in fixed cost per unit sold. Cost of goods sold in the restaurant
segment increased by $3.0 million, or 13.2%, but decreased as a percentage of
restaurant revenues from 36.1% to 35.9% due to slightly lower food costs in
fiscal 1997.
Restaurant operating expenses. Restaurant operating expense increased
by $3.3 million, or 12.3%, due to the increase in restaurant volume. As a
percentage of restaurant revenues, such expense decreased from 42.4% to 41.8%
due to the slight increase in same-store sales.
Selling, general and administrative expenses. Such expenses increased
by $1.1 million, or 10.0%, but decreased slightly as a percentage of revenues
due to utilization of available scale economies.
Depreciation and amortization. Depreciation and amortization was
essentially unchanged. As a percentage of revenues, depreciation and
amortization decreased from 3.1% to 2.8% due to utilization of available scale
economies.
Operating income. Operating income increased by $2.1 million, or
65.7%, and increased as a percentage of revenues from 2.9% to 4.2%, for the
reasons stated above.
Other income (expense). Net other expense decreased by $1.0 million, or
42.6%, due primarily to lower interest expense, management's decision to
terminate certain unprofitable restaurant joint ventures and an insurance
settlement.
Earnings before income taxes and extraordinary items. Such earnings
increased by $3.2 million, and increased as a percentage of revenues from 0.8%
to 3.1%, for the reasons stated above.
Provision for income taxes. Certain of the related corporations that
had conducted the business of Sagebrush, Inc. before its initial public offering
in January 1996 were subchapter "S" corporations. This materially affected the
fiscal 1996 provision. See Note 10 to the Company's consolidated financial
statements.
18
20
Earnings before extraordinary item. Such earnings were essentially
unchanged, both in absolute terms and as a percentage of revenues.
Extraordinary item. In fiscal 1997, the Company recorded an
extraordinary gain of $415,000, net of tax, due to extinguishment of debt.
Net earnings. Net earnings increased by $429,000, or 21.4%, primarily
due to the extraordinary item in fiscal 1997. As a percentage of revenues, net
earnings increased slightly for the reasons stated above.
LIQUIDITY AND CAPITAL RESOURCES
The Company had a working capital deficit of $497,000 at February
27, 1998, as compared to positive working capital of $2.1 million a year
earlier. Most of the decrease was due to the incurrence, in fiscal 1998, of the
costs of acquiring Sagebrush, Inc., which amounted to approximately $2.0
million. The remainder is attributable to restaurant conversions and, to a
lesser extent, new restaurant construction.
The Company has traditionally financed its working capital needs
through a combination of cash flow from operations and bank borrowings and,
from time to time, sales of underutilized assets. During fiscal 1997, the
Company entered into an agreement with a bank to provide a $6.0 million
revolving credit facility, secured by a lien on inventory and receivables. At
February 27, 1998, approximately $3.1 million was outstanding under this
facility subject to the applicable borrowing base formula. The Company also
obtained construction loans from a bank in amounts of up to $1 million per
restaurant to finance the construction of new restaurants. At February 27,
1998, an aggregate of approximately $270,000 was outstanding under such
facilities with respect to three restaurants.
Funding for capital expenditures has been obtained primarily through
current earnings and term loans. Such funding also has been obtained in recent
years through the initial public offering of Sagebrush, Inc. and sales of
underutilized assets. Capital expenditures were $12.6 million for fiscal 1998,
as compared to $9.7 million for fiscal 1997. The reason for this increase was
the acquisition and construction of additional restaurants and the conversion of
one restaurant to the Sagebrush concept.
The Company anticipates changes in its capital structure as part of the
proposed acquisition of Pierre. (See Note 21 to the Company's consolidated
financial statements.) The Company has agreed to pay a cash purchase price of
$122 million for Pierre. Approximately $100.0 million of the purchase price will
be financed through the issuance of senior subordinated notes. In addition, the
Company has received a commitment for a new five-year, $75.0 million, senior
secured revolving credit facility with availability subject to a borrowing base
formula. The Company expects to borrow approximately $48 million under this
facility to finance the remainder of the purchase price and to refinance
substantially all existing borrowings, with the exception of certain capital
lease obligations. Borrowings under this facility will bear interest at an
annual rate equal to the "base rate" or the "Eurodollar rate" plus a margin that
will vary based upon a leverage ratio. Such margin will range from zero to 1.0%,
in the case of a base rate loan, and from 1.0% to 2.5%, in the case of an
Eurodollar rate loan. Upon consummation of the acquisition of Pierre, the
Company expects to have approximately $16.0 million of additional availability
under this facility.
The Company has budgeted approximately $13.5 million for capital
expenditures in fiscal 1999, including expenditures for Pierre subsequent to its
acquisition from Hudson Foods, Inc. These expenditures are expected to be
devoted to (i) restaurant conversions and the construction of three new
Sagebrush restaurants (approximately $10.6 million) and (ii) routine equipment
upgrading and maintenance (approximately $2.9 million).
19
21
INFLATION
The Company believes that inflation has not had a material impact on
its results of operations for fiscal 1996, fiscal 1997 or fiscal 1998.
SEASONALITY
The Company considers its restaurant operations to be somewhat
seasonal in nature, with stronger sales during the Christmas season and spring,
weaker sales during the mid-summer and late winter. Sales for the Company's ham
curing division are seasonal in nature, with sales volume increases occurring
around Thanksgiving, Christmas, and Easter. However, there is no significant
seasonal variation in sales within the Company's prepared foods division. The
Company's food production is steady throughout the year.
"YEAR 2000" ISSUES
Many existing computer programs use only two digits to identify a year
in the date field. These programs were designed and developed without
considering the impact of the upcoming change in the century. If not corrected,
many computer applications could fail or create erroneous results by or at the
year 2000. "Year 2000" issues affect virtually all companies and organizations,
including the Company. The Company has engaged consultants who have studied its
information systems and have made recommendations with a view to upgrading and
improving such systems. A definitive plan of action has been approved based on
such recommendations and is expected to be implemented this year. The Company
estimates the cost of the necessary software modifications at less than $500,000
in the aggregate, an amount the Company considers immaterial to its consolidated
financial position.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board issued SFAS No.
131, Disclosures about Segments of an Enterprise and Related Information. This
standard redefines how operating segments are determined and requires
disclosure of certain financial and descriptive information about a company's
operating segments. The statement is effective for fiscal years beginning after
December 31, 1997. The Company has not yet completed its analysis of the effect
of this new standard on its financial statement disclosures.
CAUTIONARY STATEMENT AS TO FORWARD LOOKING INFORMATION
Statements contained in this report as to the Company's outlook for
sales, operations, capital expenditures and other amounts, budgeted amounts and
other projections of future financial or economic performance of the Company,
and statements of the Company's plans and objectives for future operations,
including the prospective acquisition of Pierre, are "forward looking"
statements and are being provided in reliance upon the "safe harbor" provisions
of the Private Securities Litigation Reform Act of 1995. Important factors that
could cause actual results or events to differ materially from those projected,
estimated, assumed or anticipated in any such forward looking statements include
the substantial leverage of the Company, restrictions to be imposed on the
Company by the terms of its new revolving credit facility and senior
subordinated notes, risks relating to the prospective acquisition of Pierre and
the Company's ability to execute its business strategy, competitive
considerations, government regulation and general risks of the food industry,
the possibility of adverse changes in food costs, the availability of supplies,
the Company's dependence on key personnel and "Year 2000" issues.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The information required by this Item is set forth on pages F-1
through F-28.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE.
Not applicable.
20
22
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The name, age and other information required to be disclosed for each
of the Company's directors is contained under the caption "Election of
Directors" in the Company's Proxy Statement for its 1998 Annual Meeting of
Shareholders and is incorporated herein by reference.
The name, age and other information required to be disclosed for each
of the Company's executive officers is contained under the caption "Executive
Officers of the Registrant" in Item 1 of this Form 10-K.
ITEM 11. EXECUTIVE COMPENSATION.
Information on remuneration of the Company's officers and directors is
contained in the Company's Proxy Statement for its 1998 Annual Meeting of
Shareholders under the caption "Election of Directors" and is incorporated
herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
Information on security ownership of certain beneficial owners and
management is contained in the Company's Proxy Statement for its 1998 Annual
Meeting of Shareholders under the caption "Principal Shareholders and
Management Ownership" and is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Information on remuneration of the Company's officers and directors is
contained in the Company's Proxy Statement for its 1998 Annual Meeting of
Shareholders under the caption "Election of Directors" and is incorporated
herein by reference.
21
23
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a) 1. FINANCIAL STATEMENTS
The Financial Statements listed in the accompanying Index on page
F-1 are filed as a part of this Report.
2. FINANCIAL STATEMENT SCHEDULES
Financial statement schedules are omitted because they are either:
(i) not applicable or not required; or (ii) the information
required is contained in the consolidated financial statements or
the notes thereto.
3. EXHIBITS
See Index to Exhibits.
(b) REPORTS ON FORM 8-K.
A Current Report on Form 8-K was filed on November 25, 1997
announcing the signing of the Agreement and Plan of Merger with
Sagebrush, Inc. as of November 14, 1997.
A Current Report on Form 8-K was filed on April 28, 1998,
announcing the Company's operating results for the first
twenty-eight days subsequent to the pooling of interests
acquisition of Sagebrush, Inc.
A Current Report on Form 8-K was filed on May 13, 1998, announcing
that the Company had entered into an Asset Purchase Agreement
dated April 10, 1998 with Hudson Foods, Inc., whereby the Company
will acquire substantially all of the business in Cincinnati,
Ohio, and a portion of the business in Caryville, Tennessee,
conducted by the Pierre Foods Division of Hudson.
SIGNATURES
Pursuant to the requirements of Section 13 of the Securities Exchange
Act of 1934, Fresh Foods, Inc. has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
Dated May 26, 1998
Fresh Foods, Inc.
By: /s/ David R. Clark
-------------------------------
David R. Clark
President
22
24
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed by the following persons on behalf of Fresh Foods,
Inc., and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
- --------- ----- ----
/s/ Richard F. Howard
- ------------------------------------- Chairman of the Board May 26, 1998
(Richard F. Howard) Secretary
/s/ James C. Richardson, Jr.
- ------------------------------------- Vice Chairman of the Board May 26, 1998
(James C. Richardson, Jr.) (Principal Executive Officer)
/s/ David R. Clark
- ------------------------------------- President and Director May 26, 1998
(David R. Clark) (Principal Operating Officer)
/s/ James E. Harris
- ------------------------------------- Executive Vice President, May 26, 1998
(James E. Harris) Treasurer and Secretary (Principal
Financial Officer)
/s/ Noland M. Mewborn
- ------------------------------------- Vice President-Finance May 26, 1998
(Noland M. Mewborn) (Principal Accounting Officer)
/s/ Bobby C. Holman Director May 26, 1998
- -------------------------------------
(Bobby C. Holman)
/s/ Lewis C. Lanier Director May 26, 1998
- -------------------------------------
(Lewis C. Lanier)
/s/ William R. McDonald III Director May 26, 1998
- -------------------------------------
(William R. McDonald III)
/s/ L. Dent Miller Director May 26, 1998
- -------------------------------------
(L. Dent Miller)
/s/ E. Edwin Bradford Director May 26, 1998
- -------------------------------------
(E. Edwin Bradford)
/s/ James M. Templeton
- ------------------------------------- Director May 26, 1998
(James M. Templeton)
23
25
FRESH FOODS, INC.
AND SUBSIDIARIES
------------------------------------
EXHIBITS
FOR INCLUSION IN ANNUAL REPORT
ON FORM 10-K
FISCAL YEAR ENDED FEBRUARY 27, 1998
24
26
EXHIBITS
FOR INCLUSION IN ANNUAL REPORT ON FORM 10-K
YEAR ENDED FEBRUARY 27, 1998 INDEX TO EXHIBITS
ITEM 14 (A) (3)
Sequential
Exhibit Page Number
------- -----------
2 Agreement and Plan of Merger dated as of November 14, 1997,
among the Registrant, Sagebrush, Sub and the Sagebrush
Shareholders (14) *
3.1 Restated Charter of Registrant (1) *
3.2 Articles of Amendment dated September 2, 1997 Included
3.3 Articles of Amendment dated May 8, 1998 Included
3.4 By-laws of Registrant dated May 8, 1998 Included
4.1 Rights Agreement dated as of September 2, 1997, between the
Registrant and the Rights Agent named therein (2) *
4.2 Loan Agreement dated as of January 10, 1997, between the
Registrant and SouthTrust Bank of North Carolina, pertaining
to a term loan not to exceed $5,000,000 in aggregate principal
amount (3) *
4.3 Amendment to Loan Agreement dated as of January 17, 1997,
between the Registrant and SouthTrust Bank of North Carolina (3) *
4.4 Financing and Security Agreement dated as of November 22,
1996, between Registrant and National Bank of Canada,
pertaining to a revolving credit not to exceed $6,000,000 in
aggregate principal amount (3) *
10.1 Management Services Agreement dated March 31, 1996, between
the Registrant and HERTH Management, Inc. (4) *
10.2 Extension Agreement dated as of August 29, 1997, between the
Registrant and HERTH Management, Inc. (5) *
10.3 1987 Incentive Stock Option Plan (6) *
10.4 First Amendment to 1987 Incentive Stock Option Plan (7) *
10.5 1987 Special Stock Option Plan (restated as of May 15, 1997) (8) *
10.6 1997 Incentive Stock Option Plan (9) *
25
27
10.7 1997 Special Stock Option Plan (10) *
10.8 1994 Employee Stock Purchase Plan (11) *
10.9 Amendment to 1994 Employee Stock Purchase Plan (12) *
10.10 Second Amendment to 1994 Employee Stock Purchase Plan (12) *
10.11 Third Amendment to 1994 Employee Stock Purchase Plan (13) *
10.12 Agreement of Purchase and Sale dated as of March 1, 1997,
among the Registrant, F & H Companies, Inc., Western Steer of
North Carolina, Inc., Northwest Food Systems, Inc., Davidson
Food Systems, Inc., Mocksville Food Systems, Inc. and CFR
Foods, Inc. (3) *
10.13 Asset Purchase Agreement dated as of April 10, 1998, among the
Registrant and Hudson Foods, Inc. (15) *
10.14 Non-Competition Agreement dated March 1, 1997, between Cecil
R. Hash and the Registrant (3) *
11 Computation of Per Share Earnings (Loss) Included
21 Subsidiaries of the Registrant Included
23 Independent Auditors' Consent Included
27 Financial Data Schedule (for SEC use only) Included
99.1 Change of Control Agreement dated as of August 29, 1997,
with each of Messrs. Richardson, Howard, Clark, Templeton
and Hefner (5) *
99.2 Note dated December 31, 1996, made by the Registrant in
favor of First Century Bank, pertaining to a loan in the principal
amount of $1,900,000 (3) *
99.3 Security Agreement dated December 31, 1996, between the
Registrant and First Century Bank (3) *
99.4 Guaranty Agreement dated as of March 1, 1997, between Cecil
R. Hash and the Registrant (3) *
26
28
Sequential
Exhibit Page Number
------- -----------
99.5 Promissory Note dated March 1, 1997, made by the Registrant
in favor of Western Steer of North Carolina, Inc. in the principal
amount of $700,000 (3) *
99.6 Promissory Note dated March 1, 1997, made by the Registrant
in favor of Davidson Food Systems, Inc. in the principal amount
of $100,000 (3) *
-----------------
* Incorporated by reference.
(1) Incorporated by reference to the Exhibits to the Registrant's Annual Report
on Form 10-K for the fiscal year ended February 24, 1989.
(2) Incorporated by reference to the Exhibits to the Registrant's Current
Report on Form 8-K dated September 5, 1997.
(3) Incorporated by reference to the Exhibits to the Registrant's Registration Statement
on Form S-3 (No. 333-22891).
(4) Incorporated by reference to the Exhibits to the Registrant's Annual Report
on Form 10-K for the fiscal year ended February 23, 1996.
(5) Incorporated by reference to the Exhibits to the Registrant's Quarterly Report on Form
10-Q for the quarterly period ended November 7, 1997.
(6) Incorporated by reference to the Exhibits to the Registrant's Registration
Statement on Form S-8 (No. 33-15017)
(7) Incorporated by reference to the Exhibits to Post-Effective Amendment No. 10 to the
Registrant's Registration Statement on Form S-8 (No. 33-15017).
(8) Incorporated by reference to the Exhibits to the Registrant's Registration
Statement on Form S-8 (No. 333-29111).
(9) Incorporated by reference to the Exhibits to the Registrant's Registration Statement
on Form S-8 (No. 333-32455).
(10) Incorporated by reference to the Exhibits to the Registrant's Registration
Statement on Form S-8 (No. 333-33439).
(11) Incorporated by reference to the Exhibits to the Registrant's Registration Statement
on Form S-8 (No. 33-79014).
(12) Incorporated by reference to the Exhibits to Post-Effective Amendment No. 3 to the
Registrant's Registration Statement on Form S-8 (No. 33-79014).
(13) Incorporated by reference to the Exhibits to Post-Effective Amendment No. 4 to
the Registrant's Registration Statement on Form S-8 (No. 33-79014)
(14) Incorporated by reference to the Registrant's Registration Statement on Form S-4
(No. 333-43921)
(15) Incorporated by reference to the Registrant's Registration Statement on Form 8-K
(No. 000-07277)
The Registrant hereby agrees to provide to the Commission upon request
copies of long-term debt instruments omitted pursuant to Item 601 (b) (4)
(iii) (A) of Regulation S-K.
27
29
INDEX TO FINANCIAL STATEMENTS
PAGE
----
FRESH FOODS
INDEPENDENT AUDITORS' REPORT................................ F-2
CONSOLIDATED FINANCIAL STATEMENTS:
Consolidated Balance Sheets as of February 27, 1998 and
February 28, 1997...................................... F-3
Consolidated Statements of Earnings for the Years Ended
February 27, 1998, February 28, 1997 and February 23,
1996................................................... F-4
Consolidated Statements of Shareholders' Equity for the
Years Ended February 27, 1998, February 28, 1997 and
February 23, 1996...................................... F-5
Consolidated Statements of Cash Flow for the Years Ended
February 27, 1998, February 28, 1997 and February 28,
1996................................................... F-6
Notes to Financial Statements............................. F-7
F-1
30
INDEPENDENT AUDITORS' REPORT
Shareholders and Board of Directors
Fresh Foods, Inc.
Claremont, North Carolina
We have audited the accompanying consolidated balance sheets of Fresh
Foods, Inc. and its subsidiaries (formerly "WSMP, Inc. and subsidiaries") (the
"Company") as of February 27, 1998 and February 28, 1997, and the related
consolidated statements of earnings, shareholders' equity, and cash flows for
each of the three fiscal years in the period ended February 27, 1998. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of the Company at February 27,
1998 and February 28, 1997, and the results of its operations and its cash flows
for each of the three fiscal years in the period ended February 27, 1998 in
conformity with generally accepted accounting principles.
As discussed in Note 21 to the consolidated financial statements, on April
10, 1998 the Company entered into an agreement to acquire certain of the net
assets of the Pierre Foods Division of Hudson Foods, Inc.
DELOITTE & TOUCHE LLP
Charlotte, North Carolina
May 7, 1998
F-2
31
FRESH FOODS, INC.
CONSOLIDATED BALANCE SHEETS
FEBRUARY 27, 1998 AND FEBRUARY 28, 1997
FEBRUARY 27, FEBRUARY 28,
1998 1997
------------ ------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................. $ 2,818,071 $ 3,995,497
Marketable equity securities (at fair value; cost of:
1998 -- $175,790 and 1997 -- $155,768).................. 206,706 171,910
Accounts receivable, net (Notes 3, 8 and 19 -- includes
related party receivables of $181,367 and $278,919 at
February 27, 1998 and February 28, 1997)................ 5,204,700 3,735,936
Notes receivable -- current, net (includes related party
notes receivable of $526,592 and $563,644 at February
27, 1998 and February 28, 1997)......................... 1,150,906 973,640
Inventories (Notes 4 and 8)............................... 7,361,347 6,706,838
Income taxes refundable (Note 10)......................... 872,157 343,557
Deferred income taxes (Note 10)........................... 424,786 454,259
Prepaid expenses and other current assets................. 269,222 108,323
----------- -----------
Total current assets............................... 18,307,895 16,489,960
----------- -----------
PROPERTY, PLANT AND EQUIPMENT, NET (Notes 5 and 8).......... 45,023,793 36,964,110
----------- -----------
OTHER ASSETS:
Properties held for sale (Notes 6 and 8).................. 1,680,993 3,277,670
Intangible assets, net (Note 7)........................... 3,735,866 628,186
Notes receivable (Notes 3 and 19 -- includes related party
notes receivable of $1,550,638 and $963,117 at February
27, 1998 and February 28, 1997)......................... 1,886,249 1,433,462
Investments in affiliates (Note 16)....................... -- 374,533
Deferred income taxes (Note 10)........................... 685,458 --
Other..................................................... 335,545 403,209
----------- -----------
Total other assets................................. 8,324,111 6,117,060
----------- -----------
Total Assets....................................... $71,655,799 $59,571,130
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Notes payable -- banks (Note 8)........................... $ 5,105,144 $ 4,487,776
Current installments of long-term debt (Note 8)........... 2,189,401 1,297,792
Trade accounts payable (Note 19 -- includes related party
payables of $218,180 and $115,094 at February 27, 1998
and February 28, 1997).................................. 6,605,893 4,568,176
Other accrued liabilities (Note 9)........................ 4,904,841 4,021,755
----------- -----------
Total current liabilities................................. 18,805,279 14,375,499
DEFERRED INCOME TAXES (Note 10)............................. -- 1,425,100
LONG-TERM DEBT (Note 8)..................................... 13,623,532 12,422,150
COMMITMENTS AND CONTINGENCIES (Notes 11 and 17)
SHAREHOLDERS' EQUITY (Notes 8, 13 and 20):
Preferred stock -- par value, $.10, authorized 2,500,000,
no shares issued
Common stock -- par value $1, authorized 100,000,000
shares; issued 1998 -- 5,898,449 and
1997 -- 5,326,948....................................... 5,898,449 5,326,948
Capital in excess of par value............................ 23,647,020 18,868,284
Retained earnings......................................... 9,662,258 7,143,090
Unrealized gain on securities available for sale.......... 19,261 10,059
----------- -----------
Total shareholders' equity......................... 39,226,988 31,348,381
----------- -----------
Total Liabilities and Shareholders' Equity......... $71,655,799 $59,571,130
=========== ===========
See notes to consolidated financial statements.
F-3
32
FRESH FOODS, INC.
CONSOLIDATED STATEMENTS OF EARNINGS
YEARS ENDED FEBRUARY 27, 1998, FEBRUARY 28, 1997 AND FEBRUARY 23, 1996
FEBRUARY 27, FEBRUARY 28, FEBRUARY 23,
1998 1997 1996
------------ ------------ ------------
REVENUES (Notes 1, 3 and 15):
Food processing........................................... $ 66,245,345 $ 58,615,493 $ 50,868,707
Restaurant operations and franchising (Note 19 -- includes
related party transactions totaling $315,000 in 1998,
$1,004,000 in 1997 and $1,162,000 in 1996).............. 92,166,216 71,318,432 62,667,763
------------ ------------ ------------
Total revenues..................................... 158,411,561 129,933,925 113,536,470
------------ ------------ ------------
COSTS AND EXPENSES:
Cost of goods sold (Note 19 -- includes related party
transactions totaling $429,000 in 1998, $513,000 in 1997
and $474,000 in 1996)................................... 93,017,228 79,451,764 69,647,206
Restaurant operating expenses (Note 19 -- includes related
party transactions totaling $3,682,000 in 1998,
$2,744,000 in 1997 and $2,665,000 in 1996).............. 39,796,313 29,821,561 26,560,293
Selling, general and administrative expenses (Note
19 -- includes related party transactions totaling
$2,206,000 in 1998, $2,070,000 in 1997 and $2,551,000 in
1996)................................................... 15,592,569 11,650,618 10,587,620
Depreciation and amortization (Note 2).................... 5,004,310 3,600,317 3,476,152
------------ ------------ ------------
Total costs and expenses........................... 153,410,420 124,524,260 110,271,271
------------ ------------ ------------
OPERATING INCOME............................................ 5,001,141 5,409,665 3,265,199
------------ ------------ ------------
OTHER INCOME (EXPENSE):
Other income (including interest) (Note 19 -- includes
related party transactions totaling $146,000 in 1998,
$114,000 in 1997 and $102,000 in 1996).................. 744,121 1,125,745 736,855
Net gain on dispositions of assets (net of writedowns)
(Notes 7 and 19 includes gains (losses) on sales of
assets to related parties totaling $710,000 in 1998,
$103,000 in 1997 and ($360,000) in 1996)................ 639,966 345,930 105,367
Equity in earnings (loss) of affiliates................... 3,000 (107,000) (385,366)
Interest expense (Note 19 -- includes related party
transactions totaling $110,000 in 1998 and $32,000 in
1997)................................................... (1,762,363) (1,867,948) (2,162,547)
Other expense (Note 19 -- includes related party
transactions totaling $147,000 in 1998, $99,000 in 1997
and $80,000 in 1996).................................... (647,857) (871,388) (688,580)
------------ ------------ ------------
Net other expense.................................. (1,023,133) (1,374,661) (2,394,271)
------------ ------------ ------------
EARNINGS BEFORE INCOME TAXES AND EXTRAORDINARY ITEM......... 3,978,008 4,035,004 870,928
PROVISION FOR INCOME TAXES (BENEFIT) (Note 10).............. 1,728,008 2,009,999 (1,139,430)
------------ ------------ ------------
EARNINGS BEFORE EXTRAORDINARY ITEM.......................... 2,250,000 2,025,005 2,010,358
EXTRAORDINARY GAIN FROM EARLY EXTINGUISHMENT OF DEBT (Net of
income taxes of $251,000)(Note 8)......................... -- 414,784 --
------------ ------------ ------------
NET EARNINGS................................................ $ 2,250,000 $ 2,439,789 $ 2,010,358
============ ============ ============
EARNINGS PER COMMON SHARE -- BASIC (Notes 1 and 2):
Earnings before extraordinary item........................ $ 0.40 $ 0.40 $ 0.42
Extraordinary gain from early extinguishment of debt...... --.......... 0.08 --
------------ ------------ ------------
Net earnings....................................... $ 0.40 $ 0.48 $ 0.42
============ ============ ============
EARNINGS PER COMMON SHARE -- DILUTED (Notes 1 and 2):
Earnings before extraordinary item........................ $ 0.37 $ 0.37 $ 0.41
Extraordinary gain from early extinguishment of debt...... -- 0.08 --
------------ ------------ ------------
Net earnings....................................... $ 0.37 $ 0.45 $ 0.41
============ ============ ============
See notes to consolidated financial statements.
F-4
33
FRESH FOODS, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
YEARS ENDED FEBRUARY 27, 1998, FEBRUARY 28, 1997 AND FEBRUARY 23, 1996
UNREALIZED
GAIN (LOSS)
CAPITAL IN ON SECURITIES
COMMON EXCESS OF AVAILABLE RETAINED
STOCK PAR VALUE FOR SALE EARNINGS
---------- ----------- ------------- ----------
BALANCE AT FEBRUARY 24, 1995................... $2,828,009 $12,368,730 $(5,214) $7,462,521
Net earnings................................. -- -- -- 2,010,358
Issuance of common stock -- Sagebrush, Inc.
(30,529 shares)........................... 30,529 949,473 -- --
Common stock options exercised (100,000
shares) (Note 13)......................... 100,000 190,000 -- --
Capital contributions........................ -- 264,310 -- --
S Corporation dividends and distributions --
Sagebrush, Inc............................ -- -- -- (3,881,390)
Unrealized gain on securities available for
sale...................................... -- -- 10,492 --
---------- ----------- ------- ----------
BALANCE AT FEBRUARY 23, 1996................... 2,958,538 13,772,513 5,278 5,591,489
Net earnings................................. -- -- -- 2,439,789
Common stock options exercised (158,750
shares) (Note 13)......................... 158,750 561,750 -- --
Payments to and exchanges with shareholders
related to Sagebrush, Inc.
reorganization............................ 1,478,900 (6,475,119) -- --
Net proceeds of Sagebrush, Inc. public
offering (Note 1)......................... 687,960 10,337,242 -- --
Issuance of common stock -- Sagebrush, Inc.
(42,800 shares)........................... 42,800 671,898 -- --
S Corporation dividends and distributions --
Sagebrush, Inc............................ -- -- -- (888,188)
Unrealized gain on securities available for
sale...................................... -- -- 4,781 --
---------- ----------- ------- ----------
BALANCE AT FEBRUARY 28, 1997................... 5,326,948 18,868,284 10,059 7,143,090
Net earnings................................. -- -- -- 2,250,000
Net earnings of Sagebrush, Inc. for period
from January 4, 1997 to February 28, 1997
(Note 2).................................. -- -- -- 269,168
Common stock options exercised (391,000
shares) (Note 13)......................... 391,000 919,700 -- --
Purchase of common stock (143,325 shares).... (143,325) (1,840,425) -- --
Issuance of common stock (323,826 shares).... 323,826 2,599,040 -- --
Tax benefit of stock options exercised (Notes
10 and 13)................................ -- 3,100,421 -- --
Unrealized gain on securities available for
sale...................................... -- -- 9,202 --
---------- ----------- ------- ----------
BALANCE AT FEBRUARY 27, 1998................... $5,898,449 $23,647,020 $19,261 $9,662,258
========== =========== ======= ==========
See notes to consolidated financial statements.
F-5
34
FRESH FOODS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOW
YEARS ENDED FEBRUARY 27, 1998, FEBRUARY 28, 1997 AND FEBRUARY 23, 1996
FEBRUARY 27, FEBRUARY 28, FEBRUARY 23,
1998 1997 1996
------------ ------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings.............................................. $ 2,250,000 $ 2,439,789 $ 2,010,358
------------ ----------- -----------
Adjustments to reconcile net earnings to net cash provided
by operating activities:
Extraordinary gain on extinguishment of debt (before
effect of income taxes) (Note 8)...................... -- (665,646) --
Depreciation and amortization........................... 5,004,311 3,600,317 3,476,152
Depreciation on properties leased to others............. 225,733 293,894 282,104
Deferred income taxes, net.............................. (2,081,085) 582,224 (1,133,463)
Net gain on dispositions of assets (net of
writedowns)........................................... (639,966) (345,930) (105,367)
Provision for losses on receivables..................... 300,979 223,358 216,039
Tax benefit of stock options............................ 3,100,421 -- --
Equity in (earnings) loss of affiliates................. (3,000) 107,000 385,366
Other noncash adjustments to earnings................... (78,140) (183,475) 152,598
Changes in operating assets and liabilities (net of
effects from purchase of restaurant companies)
providing (using) cash:
Receivables............................................. (1,780,815) 246,740 102,755
Inventories............................................. (544,001) (741,522) (463,691)
Income taxes refundable, prepaid expense and other
assets................................................ (673,905) 35,703 (619,536)
Trade accounts payable and other accrued liabilities.... 2,654,178 902,488 6,119
------------ ----------- -----------
Total adjustments.................................. 5,484,710 4,055,151 2,299,076
------------ ----------- -----------
Net cash provided by operating activities.......... 7,734,710 6,494,940 4,309,434
------------ ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures to related parties................... (1,752,565) (563,294) (612,578)
Capital expenditures -- other............................. (10,839,058) (9,138,245) (3,357,550)
Proceeds from sales of assets to related parties.......... 1,350,000 150,000 1,079,955
Proceeds from sales of assets to others................... 2,185,787 1,208,447 2,028,335
Deposits, net of refunds.................................. 34,931 47,942 (121,554)
Decrease (increase) in marketable equity securities....... (20,022) (15,213) 13,575
Decrease in related party notes receivables............... 179,452 289,913 203,874
Decrease in other notes receivable........................ 355,852 220,164 287,897
Other investing activities, net........................... -- (92,322) (202,989)
------------ ----------- -----------
Net cash used in investing activities.............. (8,505,623) (7,892,608) (681,035)
------------ ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds (repayments) under short-term borrowing
agreements.............................................. (935,382) 27,776 1,000,000
Proceeds from issuance of long-term debt.................. 5,894,000 8,585,000 1,414,629
Principal payments on long-term debt...................... (4,971,615) (11,948,322) (4,445,189)
Cash restricted for secured letter of credit (Note 17).... -- -- 500,000
Proceeds from issuance of common stock.................... -- 11,472,779 --
S Corporation distribution dividend....................... -- (888,188) (3,962,390)
Proceeds from exercise of stock options................... 1,310,700 720,500 290,000
Acquisition of treasury stock............................. (1,983,750) -- --
Purchase of assets related to reorganization.............. -- (1,652,500) --
Cash paid to shareholders related to reorganization....... -- (3,412,902) --
Capital contributions..................................... -- -- 1,481,312
------------ ----------- -----------
Net cash provided by (used in) financing
activities....................................... (686,047) 2,904,143 (3,721,638)
------------ ----------- -----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS........ (1,456,960) 1,506,475 (93,239)
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR................ 4,275,031 2,489,022 2,582,261
------------ ----------- -----------
CASH AND CASH EQUIVALENTS, END OF YEAR...................... $ 2,818,071 $ 3,995,497 $ 2,489,022
============ =========== ===========
See notes to consolidated financial statements.
F-6
35
FRESH FOODS, INC.
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED FEBRUARY 27, 1998, FEBRUARY 28, 1997 AND FEBRUARY 23, 1996
1. BASIS OF PRESENTATION
Business Combination. Effective January 30, 1998, WSMP, Inc. ("WSMP"),
which subsequently changed its name to Fresh Foods, Inc. ("Fresh Foods"),
completed a merger with Sagebrush, Inc. ("Sagebrush") through issuance of
2,264,535 shares of Fresh Foods common stock for all of the outstanding common
stock of Sagebrush. Each share of Sagebrush common stock was converted into
.3822 shares of Fresh Foods common stock. The outstanding Sagebrush employee
stock options were converted at the .3822 exchange ratio into options to
purchase 120,317 shares of WSMP common stock. Fresh Foods and its subsidiaries,
together with Sagebrush and its subsidiaries after giving effect to such merger,
are referred to herein collectively as the ("Company").
The merger qualifies as a tax-free reorganization and has been accounted
for as a pooling of interests under Accounting Principles Board Opinion No. 16.
Accordingly, all prior period consolidated financial statements presented have
been restated to include the combined financial position, results of operations
and cash flows of Sagebrush.
Transactions between Fresh Foods and Sagebrush prior to the combination
have been eliminated. Adjustments recorded to conform Sagebrush's accounting
policies were immaterial, except for restaurant pre-opening costs. Prior to the
consummation of the merger, Sagebrush deferred restaurant pre-opening costs and
amortized these costs over 12 months. The accompanying financial statements have
been restated to conform to Fresh Foods' policy which is to expense these costs
as incurred. In addition, certain reclassifications were made to the Sagebrush
financial statements to conform to Fresh Foods' presentation.
The results of operations for the separate companies and the combined
amounts presented in the consolidated financial statements follow:
YEAR YEAR YEAR