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| FOOD > SEC Filings for FOOD > Form 10-Q on 12-Nov-2008 | All Recent SEC Filings |
12-Nov-2008
Quarterly Report
Forward-looking Statements
Certain written and oral statements set forth below or made by the Company with the approval of an authorized executive officer constitute "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. The words "believe," "expect," "intend," "anticipate," "project," "will" and similar expressions identify forward-looking statements, which convey the uncertainty of future events and generally are not historical in nature. All statements which address operating performance, events or developments that we expect or anticipate will occur in the future, including statements relating to the business, expansion and marketing strategies of the Company, industry projections or forecasts, the impact on our financial statements of inflation, legal action, future debt levels, sufficiency of cash flow from operations and borrowings and statements expressing general optimism about future operating results, are forward-looking statements. Such statements are based upon our management's current estimates, assumptions and expectations, which are based on information available at the time of the disclosure, and are subject to a number of factors and uncertainties, including, but not limited to:
º Our future operating results and the future value of our common stock;
º Our ability to obtain financing to fund our operations;
º whether our assumptions turn out to be materially correct;
º our ability to attain such estimates and expectations;
º our ability to execute our strategy;
º a downturn in market conditions in any industry, including the economic state of the food industry;
º the effects of, or changes in, economic and political conditions in the United States of America and the markets in which we serve;
º our ability to reasonably forecast prices of the commodities we purchase;
º our ability to timely forecast and meet customer demand for fresh-cut salads and refrigerated prepared salads;
º our ability to respond to changing consumer spending patterns; and
º our ability to attract and retain quality employees and control our labor costs.
Any of the foregoing factors and uncertainties, as well as others, could cause actual results to differ materially from those described herein. We undertake no obligation to affirm, publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.
The following discussion should be read in conjunction with the unaudited consolidated financial statements of the Company and the related notes thereto appearing elsewhere in this report.
General
We process and package value-added, refrigerated foods which we distribute to our customers three or more times per week in our fleet of refrigerated trucks and trailers. Our products consist of fresh-cut fruits and vegetables, refrigerated prepared salads and refrigerated soups and sauces. Refrigerated prepared salads generate higher gross profit margins than our fresh-cut produce.
We produce products in a variety of food service and retail package sizes, including custom vegetable mixes and custom sized packages for our large volume customers. Salads and salad mixes are sold primarily to restaurant chains, food service businesses, institutional users and, to a lesser extent, retail chains while the bulk of our refrigerated prepared salads are sold to grocery store deli departments, food service distributors and regional restaurant chains.
Critical Accounting Policies
The preparation of financial statements and related disclosures in conformity with accounting principles generally accepted in the United States of America requires management to make judgments, assumptions and estimates that affect the amounts reported in the Company's consolidated financial statements and accompanying notes. We base our estimates and judgments on historical experience and on various other assumptions that we believe are reasonable under the circumstances. However, future events are subject to change and our estimates, assumptions and judgments routinely require adjustment. The amounts of our assumptions regarding assets and liabilities reported in our consolidated balance
Inventory. Inventory purchases and purchase commitments are based upon forecasts of demand. Our inventory is stated at the lower of average cost (which approximates first-in, first-out) or market. Inventory turns rapidly due to the nature of our fresh products and, accordingly, we do not generally experience material inventory valuation issues. However, in the instance where we may believe that demand no longer allows us to sell certain inventory above cost or at all, then we revalue that particular inventory to market or charge-off excess inventory levels. If customer demand subsequently differs from our forecasts, requirements for inventory revaluations and charge-offs could differ from our estimates. We have not historically experienced any material inventory revaluations or charge-offs and manage inventory levels of both perishable and non-perishable supplies to minimize the effects of any revaluations.
Customer Rebates. Estimates and reserves for rebates are based on specific rebate programs, expected usage and historical experience. Actual results could differ from these estimates. With respect to some programs, we make a provision for rebates based on anticipated purchase volume. Greater than anticipated volume under a program would result in an additional charge to earnings. We have not historically experienced any material charges to earnings under our rebate programs; however, we could experience such charges in the future.
Allowance for Credit Losses. The allowance for credit losses is based on our assessment of the collectibility of specific customer accounts and an assessment of political and economic risk as well as the aging of the accounts receivable. If there is a change in a customer's creditworthiness or actual defaults differ from our historical experience, our estimates of recoverability of amounts due us will be affected. We continually monitor customer accounts for indications of a customer's inability to pay. Overdue accounts get special attention. Our recent losses on charged-off accounts have not been material.
Long-lived Assets Long-lived assets such as property and equipment are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of such assets may not ultimately be recoverable. Determination of recoverability is based on an estimate of undiscounted future cash flows resulting from the use of the asset and its ultimate disposition. Cash flow estimates used in evaluating for impairment represent management's best estimates using appropriate assumptions and projections at the time. We have not experienced any write downs due to impairment for equipment in use. The depreciation lives of these assets are short (generally 5 to 7 years), resulting in relatively low net book values. Equipment not in use is depreciated in full or held for sale at its estimated recovery value.
Intangible Assets We evaluate the recoverability of intangible assets annually or more frequently if impairment indicators arise. Under SFAS No. 144, Accounting for the Impairment and Disposal of Long-Lived Assets, intangible assets are evaluated whenever events or changes in circumstances indicate that the carrying value exceeds its fair value, which is determined based upon the estimated undiscounted future cash flows expected to result from the use of the asset, including disposition. Cash flow estimates used in evaluating for impairment represent management's best estimates using appropriate assumptions and projections at the time. We believe that accounting for intangible assets is a critical accounting policy due to the requirement to estimate the value in accordance with SFAS No. 144. Our intangible assets consist primarily of customer relationship intangibles of purchased entities.
Income taxes We account for income taxes under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. In assessing the realizability of the net deferred tax assets, management considers whether it is more likely than not that some or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon either the generation of future taxable income during the periods in which those temporary differences become deductible or the carryback of losses to recover income taxes previously paid during the carryback period. As of September 30, 2008, the Company has a net operating loss carryforward of $5.4 million which, if unused, will commence expiring in 2018 and state new jobs/investment credit carryforwards totaling $88,000 of which, if unused, will commence expiring in 2010.
Comparison of Three Months Ended September 30, 2008 and 2007
We recorded a net loss for the third quarter of 2008 of $1,159,000, or $0.25 per share, compared with net income of $96,000 or $0.02 per share during the third quarter of 2007.
Net sales Net sales increased by $3,401,000, or 16.6 percent in the third quarter of 2008, compared to the third quarter of 2007. We shipped 5.9 million or 22.4% greater pounds of product in the third quarter of 2008 compared to the third quarter of 2007. The increase in sales volume is a combination of new customer accounts and increasing sales volume
Cost of Sales. Our cost of sales increased $5,052,000 or 28.3 percent in the third quarter of 2008, compared to the third quarter of 2007. We paid $1,093,000 more for raw materials and $660,000 more for packaging materials. Raw material cost increases were caused by escalations in corn, wheat, soybean and dairy product prices all of which are significant components of our costs. Increases in the price of crude oil affected fuel and petroleum based resin costs, which increased our packaging costs. We paid $1,145,000 more for manufacturing labor and labor related costs, of which $659,000 was attributable to increased sales volume, and $486,000 was due to inefficiencies related to volume in the peak season of our operations. Our cost of delivery to our customers increased $1,414,000, resulting from increased in fuel purchases of $407,000, additional equipment lease costs of $183,000 and $824,000 of additional delivery costs in general, including contracted freight carrier costs. Our spoilage losses resulting from raw materials and finished goods shelf life expiration, increased by $137,000 to $156,000 in the third quarter of 2008. Other manufacturing overhead costs, including cost of maintenance and repair on our facilities and equipment, utilities, operating supplies, etc. increased by $603,000.
Gross profit. Our gross profit was weakened by higher raw materials and transportation costs, and our inability to impose timely price increases to our customers to mitigate the effects of cost increases. Material increases in selling prices may adversely affect our customer relationships and, accordingly, we were reluctant to impose increases too rapidly and as market conditions would have dictated for us to maintain our historical margins.
Our gross profit percentage was 4.0 percent for the third quarter of 2008, compared to 12.7 percent a year earlier, resulting from higher raw material and transportation costs. Our gross profit decreased by $1,651,000.
Selling, general and administrative expenses. Our selling, general and administrative expenses compared to the year-earlier quarter increased due to strengthening our management team and board of directors at all levels, changes in administration and accounting processes and internal controls.
Our selling, general and administrative expenses increased by $399,000 to $2,573,000 during the third quarter of 2008 compared to the third quarter of 2007. Sales and administrative salaries increased by $377,000 due primarily to certain personnel additions aimed at strengthening our management team over the last twelve months. Other less significant increases in selling, general and administrative expenses include a net amount of $22,000 resulting from increases in consulting, commissions and general office expenses, partially offset by decreases in investor relations and amortization expenses.
Other income and expense. Other income and expense amount to a net expense of $289,000 during the third quarter of 2008, compared to a net expense of $266,000 in the third quarter of 2007, an increase of $23,000, consisting primarily of a decrease in interest expense of $129,000, a decrease in interest income of $59,000 and a loss on the sale of assets of $93,000 compared to the year-earlier quarter.
Income tax expense (benefit). We recognized an income tax benefit of $758,000 during the third quarter of 2008, compared to a tax expense in the third quarter of 2007 of $62,000.
Comparison of Nine Months Ended September 30, 2008 and 2007
We recorded a net loss for the first nine months of 2008 of $2,123,000, or $0.46 per share, compared with a net loss of $462,000 or $0.15 per share during the first nine months of 2007.
Net sales. Net sales increased by $22,175,000, or 47.2 percent in the first nine months of 2008, compared to the nine months ended September 30, 2007. The acquisition of Allison's represents $12,299,000 of the increase. Our fresh-cut vegetable business shipped 11.0 million greater pounds of product in the first nine months of 2008 compared to the same period of 2007. Our average fresh-cut vegetable product selling price per pound of product increased 2.2 cents or $1.4 million. The increase in sales volume is a combination of new customer accounts and increasing volume with existing customers.
Cost of Sales. Our cost of sales increased $22,457,000 or 53.6 percent in the first nine months of 2008, compared to the nine months ended September 30, 2007. The acquisition of Allison's represents $10,705,000 of the increase. In our fresh-cut vegetable business, we paid $3,663,000 more for raw materials, $1,098,000 more for packaging materials and $2,014,000 more for manufacturing labor and labor related costs, primarily due to increased sales volume and peak season volume inefficiencies experienced primarily in the third quarter of 2008. Our cost of delivery to our customers increased $3,649,000, resulting from increased in fuel purchases of $1,402,000, additional equipment lease costs of $593,000 and $1,654,000 of additional delivery costs in general, including contracted freight carrier costs. Our fuel purchases for use in our delivery equipment represent approximately 5 percent of our total cost of sales. An increase of $0.50 per gallon of fuel purchased would cause an increase in our total cost of sales of approximately $400,000, annually. We have increased purchases of fuel as we are now delivering our products to our customers on the east coast. We experienced increased cost of maintenance and repair on facilities and equipment, spoilage losses due to shelf life, operating supplies and other manufacturing overhead expenses of $1,328,000.
Gross profit. Our gross profit was weakened by higher raw materials and transportation costs and our inability to impose timely price increases to our customers to mitigate the effects of cost increases. Material increases in selling prices may
Our gross profit percentage was 6.9 percent for the first nine months of 2008, compared to 10.8 percent a year earlier, resulting from higher raw material and transportation costs. Our gross profit decreased by $282,000.
Selling, general and administrative expenses. Our increased selling, general and administrative expenses compared to the same nine month period ended a year earlier were incurred primarily in connection with (a) operating as a public company, (b) strengthening our management team and board of directors at all levels, (c) changes in administration and accounting processes and internal controls, (d) the addition of Allison's, and (e) organic growth.
Our selling, general and administrative expenses increased by $3,498,000 to $7,475,000 during the first nine months of 2008 compared to the nine months ended September 30, 2007. The acquisition of Allison's increased selling, general and administrative expenses by $1,574,000. Sales and administrative salaries increased by $1,062,000 due primarily to certain personnel additions aimed at strengthening our management team over the last twelve months. Expenses associated with operating as a public company increased total selling, general and administrative expenses by $625,000. Consulting expenses increased by $158,000 as we have employed payroll related and capital projects consultants. Other less significant increases in selling, general and administrative expenses include $79,000 of computer and office supplies and travel expenses.
Other income and expense. Other income and expense amount to a net expense of $645,000 during the first nine months of 2008, compared to a net expense of $1,440,000 in the nine months ended September 30, 2007, a decrease of $795,000, consisting primarily of a decrease in interest expense of $1,123,000, a decrease in interest income of $54,000 and a loss on the sale of assets of $54,000 compared to the year-earlier quarter. The interest expense and income amounts are partially offset by a decrease in rent income, which was previously collected from Allison's.
Income tax expense (benefit). We recognized an income tax benefit of $1,208,000 during the first nine months of 2008, compared to a tax expense in the nine months ended September 30, 2007 of $116,000, which was higher than the expected rate primarily due to the amortization of equity transactions, which represent a permanent difference between tax and book income amounts.
Liquidity and Capital Resources
Historically, we have financed our liquidity requirements through internally generated funds, senior bank borrowings, and the issuance of other indebtedness. On July 3, 2007 we completed our initial public offering, which improved our working capital position and allowed us to retire certain indebtedness. On December 31, 2007 we completed a $5.0 million secured bank line of credit, due on March 31, 2010, containing loan covenants in which we were not in compliance with as of June 30, 2008.
The Company obtained a waiver of non-compliance with the agreement from its lender and subsequent to the execution of that waiver, availability under the facility was tied to certain benchmarks of performance, such that the Company's availability is limited to $1.0 million through December 31, 2008, and would be increased thereafter upon the Company's compliance with additional benchmarks. The interest rate on the line of credit is the prime rate plus 1.000% and is no longer adjustable. The Company is limited by covenants of the line of credit regarding the sale or assignment of encumbered assets or any asset when done so outside the ordinary course of business. The Company borrowed $900,000 under this facility during September 2008. There were short-term borrowings under this line of credit of $900,000 and zero at September 30, 2008 and December 31, 2007, respectively.
The Company is in violation of the benchmarks as of September 30, 2008 and has informed its lender that it will seek other financing sources to replace the existing revolving loan agreement.
The Company has engaged a merchant banking and advisory firm to assist it in exploring strategic alternatives, which could include replacing the revolving facility with an asset based facility, or undertaking a partial or entire re-financing of its balance sheet, which could include components of debt and additional equity capital. However, due to adverse conditions generally in the United States and world credit and capital markets, any refinancing of the entire balance sheet could be deferred until market conditions become more favorable. Although management believes that it will have several financing alternatives in the near term there can, of course be no guarantees that the Company will be able to obtain the necessary short-term debt financing on acceptable terms or on any terms. If the Company is unable to obtain the necessary short term debt financing, it will take other actions, which could include, among other things, selling additional equity capital, which could be dilutive to existing stockholders, selling or factoring accounts receivable, or certain other actions to maintain the proper amount of liquidity in the business.
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