U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-QSB
(Mark One)
[X] Quarterly report under Section 13 or 15(d) of he Securities Exchange Act of
1934
For the quarterly period ended March 31, 2002
--------------
[ ] Transition report under Section 13 or 15(d) of the Exchange Act
For the transition period from ___________ to _________
Commission file number 000-31148
------------------------------------------------
PENNEXX FOODS, INC.
--------------------------------------------------------------------------------
(Exact Name of Small Business Issuer as Specified in Its Charter)
Pennsylvania 23-3008972
----------------------------------- ----------------------
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
980 Glasgow Street, Pottstown, PA 19464
--------------------------------------------------------------------------------
(Address of Principal Executive Offices)
610-705-3620
--------------------------------------------------------------------------------
(Issuer's Telephone Number, Including Area Code)
--------------------------------------------------------------------------------
(Former Name, Former Address and Former Fiscal Year, if Changed
Since Last Report)
Check whether the issuer: (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Yes X No
----- ------
APPLICABLE ONLY TO ISSUERS INVOLVED IN
BANKRUPTCY PROCEEDINGS DURING THE
PRECEDING FIVE YEARS
Check whether the registrant filed all documents and reports required
to be filed by Section 12, 13 or 15(d) of the Exchange Act after the
distribution of securities under a plan confirmed by a court.
Yes No
----- ------
APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each of the issuer's classes
of common equity, as of the latest practicable date: 25,324,822
---------------------
Transitional Small Business Disclosure Format (check one):
Yes No X
----- ------
INDEX
PART I
FINANCIAL INFORMATION
Item 1. Financial Statements.............................................3
Item 2. Management's Discussion and Analysis or Plan of Operation........9
PART II
OTHER INFORMATION
Item 1. Legal Proceedings...............................................12
Item 6. Exhibits and Reports on Form 8-K................................12
2
PART I
FINANCIAL INFORMATION
Item 1. Financial Statements
PENNEXX FOODS, INC.
Balance Sheets
ASSETS
March 31, 2002 December 31, 2001
---------------------- -----------------------
(Unaudited)
Current Assets:
Cash $ 2,586,371 $2,415,785
Trade Receivables, less allowance of $25,595 2,530,305 2,595,495
Inventory 1,574,702 1,142,223
Prepaid Expenses 241,100 201,843
---------------------- -----------------------
Total Current Assets 6,932,478 6,355,346
---------------------- -----------------------
Fixed Assets:
Property and Equipment 4,974,548 4,186,944
Less Accumulated Depreciation 1,112,976 947,232
---------------------- -----------------------
Total Fixed Assets 3,861,572 3,239,712
---------------------- -----------------------
Other Assets: 60,245 61,772
---------------------- -----------------------
Total Assets: $ 10,854,295 $9,656,830
====================== =======================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Current Installments of Capital Lease Obligations $ 242,807 $ 233,000
Accounts Payable 3,111,198 2,100,254
Accrued Expenses 468,665 266,784
------------------------- ----------------------
Total Current Liabilities 3,822,670 2,600,038
------------------------- ----------------------
Long Term Liabilities:
Capital Lease Obligations Less Current Installments 619,007 677,790
Note Payable 2,500,000 2,500,000
------------------------- ----------------------
Total Long Term Liabilities 3,119,007 3,177,790
------------------------- ----------------------
Shareholders' Equity:
Common Stock 264,249 264,249
Additional Paid-In Capital 12,097,881 12,097,881
Deficit (8,161,690) (8,169,140)
Deferred Compensation (287,822) (313,988)
------------------------- ----------------------
Total Shareholders' Equity 3,912,618 3,879,002
------------------------- ----------------------
Total Liabilities and Shareholders' Equity $ 10,854,295 $ 9,656,830
========================= ======================
See accompanying notes to financial statements.
3
PENNEXX FOODS, INC.
Statements of Operations
(Unaudited)
For the Three Month Period Ended
March 31
--------------------------------------------------
2002 2001
------------------------ ---------------------
Sales $10,924,971 $ 8,017,624
Cost of Goods Sold
Meat 7,031,091 5,193,044
Labor 1,200,807 1,285,095
Supplies 1,218,199 786,125
------------------------ ---------------------
Total Cost of Goods Sold 9,450,097 7,264,264
------------------------ ---------------------
Gross Profit 1,474,874 753,360
Operating Expenses 1,417,171 1,089,962
------------------------ ---------------------
Income (Loss) from Operations 57,703 (336,602)
Interest (Net of Interest Income) 50,253 68,148
------------------------ ---------------------
Net Income (Loss) $ 7,450 $ (404,750)
======================== =====================
Income (Loss) Per Share
Basic $ 0.00 $ (0.03)
Diluted $ 0.00 $ (0.03)
Weighted Average Shares Outstanding
Basic 25,825,655 11,745,333
Diluted 27,208,342 11,745,333
See accompanying notes to financial statements.
4
PENNEXX FOODS, INC.
Statements of Cash Flows
(Unaudited)
For the Three Month Period Ended
March 31
---------------------------------------------------------
2002 2001
--------------------------- --------------------------
Cash Flows From Operating Activities
Net Income (Loss) $ 7,450 $ (404,750)
Adjustments
Depreciation and Amortization 165,744 143,482
Deferred Compensation 26,166 26,166
Common Stock Issued for:
Interest 23,818
Consulting 128,000
Changes in Assets and Liabilities
Trade Receivables 65,190 (157,771)
Other Receivables 95,410
Inventory (432,479) (293,885)
Prepaid Expenses (39,257) (17,908)
Accounts Payable 1,010,944 599,723
Accrued Expenses 201,881 14,213
--------------------------- --------------------------
Net Cash Provided By Operating Activities 1,005,639 156,498
--------------------------- --------------------------
Cash Flows From Investing Activities
Purchase of Property and Equipment (787,604) (79,840)
Other Assets 1,527 6,500
--------------------------- --------------------------
Net Cash Used for Investing Activities (786,077) (73,340)
--------------------------- --------------------------
Cash Flows From Financing Activities
Line of Credit Advances, Net 100,000
Repayments on Capital Lease Obligations (48,976) (76,333)
--------------------------- --------------------------
Net Cash (Used In ) Provided by Financing Activities (48,976) 23,667
--------------------------- --------------------------
Net Increase in Cash 170,586 106,825
Cash, Beginning of Period 2,415,785 -
--------------------------- --------------------------
Cash, End of Period $2,586,371 $ 106,825
=========================== ==========================
Supplemental Disclosures of Cash Flow Information
Interest Paid during the Period $25,622 $44,121
Non-cash Items
Debt Converted into Common Stock $100,000
See accompanying notes to financial statements.
5
PENNEXX FOODS, INC.
Statement of Shareholders' Equity
Three Month Period Ended March 31, 2002
(Unaudited)
Common stock
$.01 par value
50,000,000 shares authorized
-----------------------------
Shares Additional
issued or paid-in Deferred
issuable Amount capital Deficit Compensation Total
-------------------------------------------------------------------------------------------------------
Balance, January 1, 2002 26,424,822 $ 264,249 $ 12,097,881 $ (8,169,140) $ (313,988) $ 3,879,002
Net Income 7,450 7,450
Amortization of
compensatory
options 26,166 26,166
-------------------------------------------------------------------------------------------------------
Balance, March 31, 2002 26,424,822 $ 264,249 $ 12,097,881 $(8,161,690) $ (287,822) $3,912,618
=======================================================================================================
See accompanying notes to financial statements.
6
PENNEXX FOODS, INC.
Notes to Condensed Financial Statements
March 31, 2002
1. Basis of Presentation.
---------------------
The unaudited condensed financial statements have been prepared by
Pennexx Foods, Inc. (the "Company") pursuant to the rules and regulations of the
Securities and Exchange Commission (the "SEC"). Certain information and footnote
disclosure normally included in financial statements prepared in accordance with
generally accepted accounting principles have been omitted pursuant to such SEC
rules and regulations; nevertheless, the Company believes that the disclosures
are adequate to make the information presented not misleading. These financial
statements and the notes hereto should be read in conjunction with the financial
statements and notes thereto included in the Company's Annual Report on Form
10-KSB for the year ended December 31, 2001. In the opinion of the Company, all
adjustments, including normal recurring adjustments, necessary to present fairly
the financial position of the Company as of March 31, 2002 and the results of
its operations and cash flows for the three month period then ended have been
included. The results of operations for the interim period are not necessarily
indicative of the results for the year.
2. Accounting Policies.
-------------------
There have been no changes in accounting policies used by the Company
during the quarter ended March 31, 2002.
3. Summary of Business.
-------------------
The Company, incorporated on July 20, 1999 in the Commonwealth of
Pennsylvania, prepares case-ready meats for distribution to retailers in the
Northeastern United States. It grants credit to its customers without requiring
collateral.
4. Inventory.
---------
The Company's inventories are valued at the lower of first-in,
first-out or market. Inventories at March 31, 2002 consist of the following:
Unfinished Beef, pork, veal, lamb $ 516,284
Packaging supplies 718,422
Finished goods 339,996
---------------
$ 1,574,702
===============
7
5. Note Payable.
------------
The Company has established a $30,000,000 revolving line of credit with
its 50% shareholder, Smithfield Foods, Inc. ("Smithfield"). The Company's
outstanding balance under the line of credit bears interest at 1% above prime
and is secured by all of the Company's assets. The loan will mature in 2006. At
March 31, 2002, the Company's outstanding principal balance under the line of
credit was $2.5 million and the accrued and unpaid interest was $91,867.
6. Net Income (Loss) Per Share.
---------------------------
Basic income /(loss) per share ("EPS") is computed using the weighted
average number of common shares outstanding during the period. Diluted EPS is
computed using the weighted average number of common and dilutive common
equivalent shares outstanding during the period. Dilutive common equivalent
shares consist of common stock issuable upon exercise of stock options. The
potential dilutive common shares for the period ending March 31, 2002 are
1,382,687. For the period ending March 31, 2001, there were no dilutive
potential common shares because the assumed exercise of the options would be
anti-dilutive.
8
Item 2. Management's Discussion and Analysis or Plan of Operation
Certain information contained in this Quarterly Report on Form 10-QSB
represents "forward-looking" statements (as defined in Section 27A of the
Securities Act of 1933, as amended) that involve risks and uncertainties which
may cause actual results to differ materially from those predicted in the
forward-looking statements. If any of the Company's assumptions on which such
statements are based prove incorrect, or should unanticipated circumstances
arise, the Company's actual results could materially differ from those
anticipated by such forward-looking statements. The differences could be caused
by a number of factors or combination of factors, including, but not limited to,
those listed under Item 6, "Note Regarding Forward-Looking Statements" filed
with the Securities and Exchange Commission on Form 10-KSB for the year ended
December 31, 2001.
Results of Operations
Sales for the three-month period ended March 31, 2002 were $10.9
million, representing an increase of approximately $2.9 million or 36% over
sales of $8.0 million from the corresponding period of 2001. This increase was
primarily the result of the increase in the volume of products handled (due in
part to increasing sales to existing customers as well as sales to new
customers) but was also partially due to a change in the mix of products sold in
favor of higher priced items. As the diversity of services that the Company
offers continues to grow, customers are increasing both the range of products as
well as the quantity ordered.
Cost of goods sold for the three-month period ended March 31, 2002 was
$9.4 million which resulted in a gross profit of approximately $1.5 million or
14% of sales. By comparison, cost of goods sold for the three-month period ended
March 31, 2001 was $7.2 million, which resulted in a gross profit of $0.8
million or 9% of sales. The Company's cost of goods sold is comprised of three
main components: meat, direct payroll, and supplies. These items accounted for
approximately 64%, 11% and 11% of sales, respectively, in the three months ended
March 31, 2002 as compared to 65%, 16% and 10% of sales for the corresponding
period of the prior year. Direct payroll declined as a percentage of sales in
2002 compared to 2001 due to increasing labor efficiencies.
Operating expenses for the three months ended March 31, 2002 were $1.4
million (13% of sales) as compared to $1.1 million (14% of sales) for the
corresponding period of 2001. This increase of $0.3 million resulted from
increased non-productive payroll expenses, increased depreciation expenses,
increased maintenance expenses, increased insurance expenses, and increased
freight and commissions expenses due to sales volume and continued growth.
Interest expense (net of interest income) for the three-month period
ended March 31, 2002 was approximately $0.05 million compared to approximately
$0.07 million for the comparable period of 2001. This decrease in interest
expense (net of interest income) is principally due to the increase in interest
earned on investments. The net income for the three-month period of 2002 was
approximately $0.008 million as compared to a net loss of $0.4 million for the
first three months of 2001.
9
On April 2, 2002, the Company purchased and will be renovating a new
facility located on Tabor Avenue in Philadelphia, PA (the "Tabor Avenue
Facility"). The Company intends to consolidate all operations in the new plant
when it is refurnished and equipped. The purchase price for the property was
$2.0 million. The Company's estimate to renovate and equip the new facility is
as follows:
Renovation Cost $2.5 million to $4.0 million
Equipment Costs $9.0 million to $12.0 million
------------------- ------------------
Total $11.5 million to $16.0 million
=================== ==================
In addition to these expenses, the Company will also incur moving
expenses and other costs associated with the proposed move to the new plant.
Although employment will be offered to the existing work force, the Company
believes that it will have to replace at least a portion of the work force which
chooses not to relocate from Pottstown. As a result, the Company will probably
experience, at least temporarily, certain lost efficiencies among workers, and
will incur additional costs to train new employees.
The Company expects to capitalize the acquisition and renovation costs
of the Tabor Avenue Facility as well as the transactional expenses incurred in
connection with the purchase. These amounts will be amortized over the estimated
39 year life of the building. The costs of moving and installing equipment in
the new plant will be capitalized and depreciated over three years.
When the Company vacates the Pottstown plant, it will write-off all
remaining unamortized leasehold improvements located there. At March 31, 2002
the amount of such unamortized leasehold improvements was $185,000.
Liquidity and Capital Resources
At March 31, 2002, the Company had $2.6 million of cash (and cash
equivalents). The Company's current ratio at March 31, 2002 was 1.8 to 1.0.
Generally, the Company maintains an unfinished inventory of meat
supplies equal to approximately 60-75% of estimated weekly sales volume.
Purchases are made using the trade credit programs of suppliers, which allow the
Company to purchase meat supplies with payment due within seven days. Inventory
is purchased generally on a daily basis and in advance (i.e., in anticipation)
of customer orders.
The Company's working capital decreased from $3.8 million at December
31, 2001 to $3.1 million at March 31, 2002, principally as a result of the
purchase of property and equipment (including $0.2 million as a down payment on
the Tabor Avenue plant). Inventory at March 31, 2002 was unusually high due to
heavy purchases of supplies in anticipation of second quarter volume. Accounts
payable increased from $2.1 million at December 31, 2001 to $3.1 million at
March 31, 2002 as a result of the Company's efforts to take advantage of credit
10
terms provided by suppliers. Finally, accrued expenses were unusually high at
March 31, 2002 as a result of the timing of payroll dates in relation to the
quarter ending March 31, 2002.
Smithfield has agreed to allow the Company to use up to $18.3 million
of the $30 million credit line (see note 5 to financial statements) to allow the
Company to purchase, renovate and equip the Tabor Avenue Facility. If the actual
costs exceed this amount, the Company will have to get incremental funding
approval from Smithfield, use internally generated funds, or secure additional
commercial financing. The amount outstanding on the Smithfield line of credit
was as follows on the dates indicated:
Description March 31, 2002 December 31, 2001
Principal Advances $ 2,500,000 $2,500,000
Accrued Interest $ 91,867 $58,000
---------------- -----------------
Total $ 2,591,867 $2,558,000
---------------- -----------------
The Company has also applied for certain economic development related
financing for the new facility in an aggregate amount of $10 million. To the
extent received, these amounts would be used to repay advances made by
Smithfield on the line of credit. The economic development loans, if obtained,
would bear below market interest rates.
11
PART II
OTHER INFORMATION
Item 1. Legal Proceedings
The Company is involved in a lawsuit with the landlord at the Pottstown
facility. Proceedings began on November 11, 2000 in the Montgomery County Court
of Common Pleas. The landlord has alleged that the Company failed to make timely
rental payments and is seeking damages and ejectment. The Company's defense is
that the rent was withheld because of the landlord's prior failure to honor its
obligations to make certain improvements at the property. All rents due to date
have either been paid to the landlord or deposited into escrow. Since the
commencement of the litigation, the landlord has filed a voluntary petition for
protection from its creditors under Chapter 11 of the Bankruptcy Code. As a
result, the case has been transferred to the Federal bankruptcy court. If the
Company were to lose this suit, whether before the Montgomery County Court or
the Federal bankruptcy court, the landlord could eject the Company from the
property, and the Company could lose some or all of the benefit of certain
improvements made to the property in the aggregate approximate amount of
$185,000.
The current lease at the Pottstown plant terminated in accordance with
its terms on April 30, 2002. However, the Company is nonetheless continuing to
use the plant for production because the Tabor Avenue Facility is not yet
operational. On April 25, 2002 the landlord filed a motion for partial summary
judgment with the United States Bankruptcy Court for the Eastern District of
Pennsylvania to evict, eject and dispossess the Company from the Pottstown
plant. Because management does not believe the Tabor Avenue Facility will be
operational until the end of the third quarter of 2002, if the Court forced the
Company to vacate the Pottstown facility before the Tabor Avenue Facility is
available, the Company would not have a plant in which to operate, which would,
in turn, have a material, adverse effect on the Company's operations.
Item 6. Exhibits and Reports on Form 8-K
The Company filed no Current Reports on Form 8-K during the three month
period ended March 31, 2002. However, the Company filed a Current Report on Form
8-K dated April 2, 2002 in connection with its purchase of the Tabor Avenue
Facility.
12
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
PENNEXX FOODS, INC.
Date: May 15, 2002 By: /s/ Michael D. Queen
--------------------------------
Michael D. Queen
President
By: /s/ George B. Pearcy
--------------------------------
George B. Pearcy
Chief Financial Officer
13