Fresh Foods, Inc. History

Address:

3437 East Main Street
Claremont, North Carolina 28610
U.S.A.

Telephone: (828) 459-7626
Fax: (828) 459-3131

Public Company
Incorporated: 1970 as Mom 'n' Pops Ham House
Employees: 3,800
Sales: $158.41 million (1998)
Stock Exchanges: NASDAQ
Ticker Symbol: FOOD
NAIC: 72211 Full Service Restaurants; 311812 Commercial Bakeries; 311613 Rendering & Meat Byproduct Processing

Company History:

North Carolina-based Fresh Foods, Inc., formerly known as WSMP, Inc., is a holding company for a variety of food preparation and restaurant businesses primarily in the Southeast, including: Pierre Foods, which prepares precooked red meats; Claremont Restaurant Group, which is responsible for all restaurant activities; and Mom 'n' Pop's Country Ham, which is one of the nation's largest ham producers. The company sells its value-added products through various distribution channels, such as supermarkets, convenience stores, vending machines, warehouse clubs, schools and healthcare providers. In its prepared foods operations, Fresh Foods produces more than 4.5 million microwaveable sandwiches per week, sold under several nationally recognized labels as well as under its own Pierre, Fast Choice, and Mom 'n' Pop's brand names. Fresh Foods' restaurant division owns and operates Sagebrush Steakhouse restaurants, Western Steer restaurants, Prime Sirloin restaurants, and Bennett's Smokehouse and Saloon restaurants.

A 1960s Start in Country Cooking

The company's history may be traced to the 1966 founding of Mom 'n' Pop's Ham House by Charles Conner and Marshall Digh. The restaurant was a success, popular for its sugar-cured ham, and the two men eventually incorporated and expanded the company. By 1970, Mom 'n' Pops Ham House had gone public, consisting of a handful of restaurants that specialized in "country" cooking in several North Carolina cities. The concept of homestyle cooking available at affordable prices would serve the company well into the 1990s.

Digh and Conner next made the decision to build upon the success of certain of their food items. In 1972, they opened a bakery division in a corner of their main office building, where they produced homemade-style biscuits for consumption in Mom 'n' Pops restaurants. At the same time, a ham curing facility was established at the company's Claremont, North Carolina, headquarters.

By the mid-1970s, demand for Mom 'n' Pop's biscuits was such that the company had added an automated line to roll, cut, bake, cool, and package biscuits. Future plant expansions in 1981 brought production capacity to 3,500 cases of biscuits per three-shift day by the early 1980s. Also during this time, the company shifted gears slightly to test the idea of creating and franchising family steakhouse restaurants, and the first Western Steer Family Steakhouse made its debut in 1975.

Mom 'n' Pop's and Western Steer expanded hand in hand, and Conner and Digh renamed their company Western Steer-Mom 'n' Pop's in 1981. The company found an outlet for its biscuits and cured hams in institutional and retail markets in addition to the restaurants where they were regularly served.

In addition to adding gift shops with a country store theme to its Mom 'n' Pops restaurants, the company also enhanced its restaurants with the late 1980s addition of an "All American Food Bar" that included 65 hot items and salad. Customers could buy unlimited trips to the food bar for $3.99 a person or $1.89 with the purchase of an entree. The concept proved popular, and by 1987 the food bar was accounting for some 40 percent of the menu mix and 20 to 25 percent of average store sales. This was not an unmediated boon, however, as the food bar involved an increase in the cost of both food and labor for the chain. By fiscal 1987, the company was reporting annual revenues of $62.9 million with earnings of $1.7 million, a figure considered disappointing by some analysts when compared to that of similar concept restaurants.

Changes in Leadership in the Late 1980s

Fiscal softness was compounded by uncertainty involving the company's ownership and identity when, early in 1987, Chairman, President, and CEO Marshall Digh announced that he wanted to retire and sell off his share of the company. Speculations abounded about a hostile takeover, and in fact, corporate raider E.W. Kelley of Kelley & Partners attempted to buy out the company, but wound up instead with a seat on the board and ownership of the promising, seven-unit Mom 'n' Pop's country store and coffee shop chain for $6.1 million. Western Steer representatives said in a news release at the time that ceding the unit to Kelley would enable the company to devote more of its time and resources to the continued development of its steakhouse restaurants.

Meanwhile, co-founder Conner, the company's new president and treasurer, called upon Richard Howard, an early Western Steer executive, to provide much of the $4.9 million needed to buy Digh's share of Western Steer-Mom 'n' Pop's in December 1987. Management rallied together under Conner and Howard to purchase Digh's approximately 15 percent stake in the company, increasing their holdings to a combined 40 percent and renaming the company WSMP, Inc. in 1988. Howard assumed the roles of chairman and chief executive after the purchase, and the two men promised to stay with the company for the long haul.

Surprisingly, then, in April 1988, Howard and Conner suddenly sold a $25,000 option to buy their 20 percent stake to a group of senior executives of the Wes-Mar Group, a food distributor based in Columbia, South Carolina, led by James C. Richardson, Jr., and Cecil Hash and including Howard's son. The transaction, which Howard and Conner agreed to help finance, cost $12.9 million and raised the buying group's stake in WSMP to 47.3 percent. Howard, Miller and Conner resigned immediately after completing the sale of their 917,000 shares, although Conner assumed the Tennessee and Virginia franchise rights of Prime Sirloin Steak and Seafood, an 11-unit steak house chain purchased by Western Steer shortly after he and Howard took control. He also maintained ownership of 18 properties, including seven Western Steer units.

Hash, who had himself been an operator of 31 franchised Western Steer units in North Carolina, became the new president and chief executive of WSMP, and immediately led the new management group in an attempt to take WSMP private in a $14.6 million leveraged buyout option presented to the board. However, the group withdrew its offer after a special committee of the board of directors indicated it would not recommend the proposed merger. Hash stayed with the company until 1993, when he was replaced by James Richardson as chair and chief executive officer.

The Search for a New Niche in the Early 1990s

The new group settled down to redefining the Western Steer concept as that of a value-added steakhouse. After limiting the sale of new franchises, it rewrote the franchise package to include training programs, marketing support, equipment deals, and product, site, and building specifications. With Western Steer the second smallest of the nation's eight major steakhouse chains, averaging $933,000 a unit in fiscal 1989, the group decided to undertake aggressive marketing to combat overcompetition on the one hand and high food costs on the other. From 1988 to 1990, at a time when the entire budget steak house segment was being hit by a slowing economy, Western Steer revamped its food bar, which now accounted for 45 percent of its sales, and slashed menu items. Addressing concerns about nutrition, it added a USDA choice beef product called MorLean. Plans called for 25 new units in 1990, part of a move to strengthen regional franchise dominance and expand into a national chain capable of competing with leader Bonanza/Sizzler. WSMP also began to experiment with converting its Western Steers to a table service, rather than buffet, concept.

In 1992, with 29 Western Steers and nine Prime Sirloin Steak and Seafood restaurants to its name, WSMP grossed $150 million from its underperforming dining establishments. Still casting about for a way in which to occupy the niche between the casual and budget steakhouse, the company made the decision to try adding onto its Prime Sirloin concept to create Prime Sirloin Buffet, Bakery, Steaks. The revamped restaurant, which offered a $4.99 lunch and dinner, was a success. By mid-year, there were eight Prime Sirloins in operation, while at the same time Western Steer had introduced an upgrade package, including an expanded buffet and in-store bakery.

Meanwhile Mom 'n' Pop's Bakery was generating the best revenue within the company, the division having grown to $30 million by 1993 from $10 million five years prior. No longer producing bakery goods for Western Steer restaurants, which preferred to cook on site, WSMP sold its food products to foodservice accounts and large food-processing companies. Among its most notable products was an assembled sandwich delivered frozen for distribution. The company was also making sandwiches sold under the Mom 'n' Pop's brand name.

However, the mid-1990s were a difficult time for steakhouses across the nation as Americans sought to eat less red meat, and WSMP's earnings zigzagged more than most. The company lost 21 cents a share in fiscal 1994, earned 38 cents a share the next year, then lost 55 cents a share in 1996. In 1994, in another attempt to branch out beyond the family steakhouse theme, WSMP teamed up with the Denver-based Bennett's Bar-B-Que to launch Bennett's Smokehouse & Saloon. The new chain represented a Texas roadhouse-themed merger of steaks and barbecue in a casual dining atmosphere. Under the partnership, WSMP began to operate four Bennett's units, in addition to its 33 company-owned restaurants, with exclusive development rights for Bennett's in Tennessee, North Carolina, and Virginia. Along with the Sagebrush Steak & Saloon restaurants, which WSMP agreed to acquire in late 1997 in a deal worth $40 million, Bennett's represented another step in WSMP's move away from its buffet-style restaurants to table service.

By 1997, the processed foods business totaled $58.6 million nationwide, and WSMP was on solid ground again. With 1997 revenues of $87.75 million and profits of $1.12 million, the company purchased back 14 of its restaurants from former president Hash and privately placed new shares of common stock for sale. In order to pay for its acquisitions, WSMP entered into a $13.5 million debt refinancing agreement arranged through a consortium of banks which allowed it to repay $11.5 million in existing debt and provided an additional $2 million in working capital. By the third quarter of the year, it found itself listed as one of the top stock performers for 1997 in Nation's Restaurant News, posting profits of $616,853, which more than tripled its earnings of a year earlier, and increased its price per share 178 percent.

The Late 1990s and Beyond

The trend toward growth continued into 1998. Revenues reached $158.4 million, up from $87.5 million in 1996, while net income growth was up 109 percent. However, the price of WSMP's stock, which had risen 236 percent in 1997 after stagnating at $5 for most of the past 20 years, took a freakish turn in the middle of 1998. A stockbroker at the only brokerage firm to have an analyst assigned to WSMP, St. Louis-based Pauli & Company, died suddenly, and his clients began selling their shares, causing the stock price to sink 34 percent from $28 to $18.50 before it began to bounce back and hover around $21 a few months later.

At this point, WSMP undertook an initiative to expand into the branded sandwich field, making a concerted effort to establish its line of private label, ready-to-eat meal components. In addition, a new division, Mom 'n' Pop's Home Meal Replacement, marketed single-serve, modified atmosphere, packaged entrees and side dishes which were produced under custom manufacturing agreements with retailers and sold fresh-frozen. Since late 1996, WSMP had been supplying retailer Food Lion of Salisbury, North Carolina, with meal components, and in late 1997, it began to test market sausage, steak, chicken, and ham biscuits under the Hardee's label for CKE Restaurants, Inc. It also began to prepare chilled entrees, side dishes, and shelf-stable desserts for Ingles Markets, a North Carolina-based chain of supermarkets, in a move which reflected another trend in American dining, the growing desire of consumers to purchase prepared meals.

Since shoppers apparently preferred branded items to generics, WSMP focused its efforts in 1998 on creating a national network of restaurant brand sandwich lines for distribution to grocery stores, convenience stores, discount club stores, and coin-operated vending machines. The company signed a series of licensing agreements with CKE Restaurants, the parent of Hardee's chain, and with other entities affiliated with CKE--GB Foods Corporation, Checkers Drive-In Restaurants, Inc., and Rally's Hamburgers, Inc.&mdashø offer refrigerated and frozen biscuits, biscuit sandwiches, hamburgers, and burritos through several channels in various markets throughout the country.

WSMP also entered into a pair of important acquisitions. In early 1998, it completed the purchase of Sagebrush, Inc. in a stock for stock merger and began plans to convert its remaining Western Steer properties to the Sagebrush theme. In June 1998, it acquired Pierre Foods for $122 million cash after issuing $155 million of senior unsecured notes and securing a $75 million syndicated bank loan. This Arkansas-based subsidiary of Tyson Foods. Inc., sold processed meats under the Pierre and Fast Foods labels, and supplied on-site foodservice items to schools and healthcare facilities. Its annual revenue totaled $150 million. WSMP already had a co-packaging agreement with Pierre to cook and process sandwich meats, which it shipped to Mom 'n' Pop's Bakery for assembly into sandwiches; in fact, it had been Pierre's largest customer for the past ten years. Although the Pierre brand had limited distribution in grocery stores, the acquisition of Pierre meant that WSMP now controlled its own protein processing unit; it was a fully integrated producer and marketer of cooked, branded, and private label meat products and packaged microwaveable sandwiches.

In order to integrate its new purchases, WSMP adopted a new corporate structure and changed its name to Fresh Foods, Inc., a name chosen to be broad in scope and allow easy integration of future acquisitions and new brands by the company. As the parent of several wholly-owned subsidiaries, Fresh Foods expanded its board of directors and named three foodservice industry leaders to the new posts. As the company entered 1999, it was optimistic about its future despite the fact the growth had slowed toward the end of 1998, and by January 1999, stock prices had once again dropped to $4.88. Pierre's Jumbo Cheeseburger captured the 1998 Readers Choice Award for Food Product of the Year from Automatic Merchandiser, the top ten vote getter among all competition categories, and Pierre Foods was named as one of the nation's top suppliers to SYSCO, the largest foodservice marketing and distribution organization in North America. The company's board of directors authorized the repurchase of up to $1.5 million of its common stock, believing its stock to be an "excellent investment" under current market conditions.

Principal Subsidiaries: Pierre Foods, LLC; Claremont Restaurant Group, LLC; Mom 'n' Pop's Country Ham, LLC

Principal Divisions: Ham Curing Division; Mom 'n' Pop's Bakery Division.

Fresh Foods, Inc. History

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