United States
Securities and Exchange Commission
Washington, D.C. 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
Date of Report (Date of earliest event reported): April 2, 2002
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PENNEXX FOODS, INC.
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(Exact Name of Registrant as Specified in Charter)
Pennsylvania 000-31148 23-3008972
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(State or Other (Commission File (IRS Employer
Jurisdiction of Incorporation) Number) Identification No.)
980 Glasgow Street
Pottstown, Pennsylvania 19464
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(Address of Principal (Zip Code)
Executive Offices)
(610) 705-3620
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(Registrant's Telephone Number, Including Area Code)
Not Applicable
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(Former Name or Former Address, if Changed Since Last Report)
ITEM 2. ACQUISITION OR DISPOSITION OF ASSETS.
On April 2, 2002 Pennexx Foods, Inc. (the "Company") purchased a 145,000
square foot facility on ten acres of land located at 5501 Tabor Avenue in
Philadelphia, Pennsylvania (the "Tabor Avenue Facility") from QF Acquisition
Corp., the equitable owner, and PIDC Financing Corp., the legal owner. The
purchase price of the Tabor Avenue Facility was $2,000,000 which was negotiated
at arms length by the parties. (Although the Company has not obtained an
appraisal of the property, it is aware of the existence of a recent appraisal at
an amount in excess of the purchase price.)
The Company intends to consolidate all operations in the new plant after
it has been renovated and equipped. The Company's estimate to renovate and equip
the Tabor Avenue Facility is as follows:
Renovation Costs $2.0 million to $3.0 million
Equipment Costs $6.5 million to $13.0 million
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Total $8.5 million to $16.0 million
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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 amortize the acquisition, renovation and related
construction interest and transaction costs of the Tabor Avenue Facility over 39
years. 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. As described
below, the Company is in litigation with the landlord of the Pottstown plant.
Smithfield advanced $2 million on the existing Credit Line to finance the
building acquisition and has agreed to allow the Company to renovate and equip
the Tabor Avenue Facility with additional borrowings under the Credit Line in
amounts of up to $2 million and $6.5 million, respectively. If the actual costs
exceed these amounts, the Company will have to fund the difference from its cash
flow or will need to obtain additional financing. Absent an Event of Default,
the Company will pay Smithfield interest on its outstanding balances under the
Line of Credit at an annual rate of one percent (1%) over the prime rate
announced from time to time by J.P. Morgan Chase & Co. The Company has given
Smithfield a mortgage on the Tabor Avenue Facility and a security interest in
the fixtures and equipment installed there. The amounts outstanding on the
Smithfield Credit Line were as follows on the dates indicated:
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Description December 31, 2001 April 2, 2002
(after purchase price
drawdown)
Principal $ 2,500,000 $4,500,000
Accrued Interest $ 58,000 $ 93,000
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Total $ 2,558,000 $4,593,000
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The Company has also applied for certain economic development related
financing for the Tabor Avenue Facility in an aggregate amount of up to $2.75
million. To the extent received, these amounts would be used to repay the
advances made by Smithfield on the Credit Line. The economic development loans,
if obtained, would bear below market interest rates and Smithfield has agreed to
subordinate its mortgage and security interests to the liens of the lender(s)
making any such loans to the Company.
The new facility is intended to address space and automation issues.
Management believes that the new facility will allow the Company to accommodate
a substantial increase in production orders and, after accounting for the
increased costs associated with the move (such as higher debt service expense),
management expects that such increased volume, if achieved, will lead to higher
gross profits. In addition, the new plant offers the physical layout to improve
the Company's automation which, after accounting for the costs of equipment
acquisition, installation, and training, should also increase gross profits.
These projected increases in gross profit, in turn, are expected to help cover
Company overheads.
Currently, no operations are being conducted at the Tabor Avenue Facility;
however, historically the facility has been used for various food processing
activities. The Company intends to move its executive offices and all operations
to this facility by the end of the third quarter of 2002, and to vacate its
other two facilities when the lease for each of those properties terminates.
The Company is involved in a dispute with the landlord at the Pottstown
facility. Proceedings began approximately 18 months ago 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. If the Company were to lose this suit, the landlord could eject the
Company from the property, and the Company could lose some or all of the benefit
of certain improvements and repairs made to the property. The cost of such
improvements and repairs was approximately $377,000, the unamortized amount of
which at March 31, 2002 was $185,000.
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The current lease at the Pottstown plant terminates in accordance with its
terms on April 30, 2002. However, the Company nonetheless expects to continue to
use the plant for production after that date because the Tabor Avenue Facility
will not yet be operational. Quite aside from the merits of the litigation
described in the preceding paragraph, the Company will become a holdover tenant
and might not be able to remain in possession of the Pottstown plant if
challenged by the landlord. Because management does not believe the Tabor Avenue
Facility will be operational until the end of the third quarter of 2002, the
Company's inability to continue use of the Pottstown facility until then would
have a material, adverse effect on the Company's operations.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
PENNEXX FOODS, INC.
(Registrant)
By: /s/ Michael D. Queen, President
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Date: April 12, 2002 Michael D. Queen, President
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