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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended July 13, 2002
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Commission File Number 0-549
FRESH BRANDS, INC.
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(Exact Name of Registrant as Specified in its Charter)
WISCONSIN 39-2019963
- ------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation of organization) Identification No.)
2215 UNION AVENUE 53081
SHEBOYGAN, WISCONSIN ----------
--------------------- (Zip Code)
(Address of principal
executive offices)
Registrant's telephone number
including area code 920-457-4433
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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 12 months
(of for such shorter period that the registrant was required to file such
reports), and (2) has been subject to the filing requirements for the past 90
days.
As of August 22, 2002, 5,151,553 shares of Common Stock, $0.05 par value,
were issued and outstanding.
FRESH BRANDS, INC.
FORM 10-Q INDEX
PAGE
NUMBER
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PART I FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets 3
Consolidated Statements of Earnings 4
Consolidated Statements of Cash Flows 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of
Operations 10
Item 3. Quantitative and Qualitative Disclosures
about Market Risk 15
PART II OTHER INFORMATION
Item 4. Submission of Matters to Vote of Security Holders 16
Item 6. Exhibits and Reports on Form 8-K 16
SIGNATURES 18
2
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
FRESH BRANDS, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands)
- --------------------------------------------------------------------------------
July 13, December 29,
Assets 2002 2001
- --------------------------------------------------------------------------------
Current assets:
Cash and equivalents $ 14,327 $ 11,501
Receivables, net 11,868 10,799
Inventories 30,223 34,952
Land and building for resale 4,255 4,770
Other current assets 3,338 2,220
Deferred income taxes 4,459 4,459
- --------------------------------------------------------------------------------
Total current assets $ 68,470 $ 68,701
- --------------------------------------------------------------------------------
Noncurrent receivable under capital subleases 8,954 9,278
Property and equipment, net 29,185 26,513
Property under capital leases, net 10,163 10,604
Goodwill, net 20,280 20,280
Other noncurrent assets, net 4,678 3,273
- --------------------------------------------------------------------------------
Total assets $ 141,730 $ 138,649
================================================================================
Liabilities and Shareholders' Investment
- --------------------------------------------------------------------------------
Current liabilities:
Accounts payable $ 31,255 $ 33,981
Accrued salaries and benefits 5,949 7,845
Accrued insurance 3,215 3,150
Other accrued liabilities 6,979 3,615
Current obligations under capital leases 1,271 1,192
Current maturities of long-term debt 343 323
- --------------------------------------------------------------------------------
Total current liabilities 49,012 50,106
- --------------------------------------------------------------------------------
Long-term obligations under capital leases 20,102 20,808
Long-term debt 19,155 16,569
Deferred income taxes 1,103 1,103
Shareholders' investment:
Common stock 438 438
Additional paid-in capital 15,527 15,371
Retained earnings 78,216 75,323
Treasury stock (41,823) (41,069)
- --------------------------------------------------------------------------------
Total shareholders' investment 52,358 50,063
- --------------------------------------------------------------------------------
Total liabilities and shareholders' investment $ 141,730 $ 138,649
================================================================================
See notes to consolidated financial statements.
Prior year financial statements are subject to restatement audit.
3
FRESH BRANDS, INC.
CONSOLIDATED STATEMENTS OF EARNINGS
(In thousands, except per share data)
- --------------------------------------------------------------------------------
For the 12-weeks ended For the 28-weeks ended
- --------------------------------------------------------------------------------
July 13, July 14, July 13, July 14,
2002 2001 2002 2001
- --------------------------------------------------------------------------------
Net sales $ 146,921 $ 130,682 $ 331,060 $ 284,502
Cost of products sold 117,826 107,618 266,006 235,432
- --------------------------------------------------------------------------------
Gross profit 29,095 23,064 65,054 49,069
Selling and administrative
expenses 23,917 18,798 53,854 40,317
Depreciation and amortization 1,760 1,404 4,055 3,003
- --------------------------------------------------------------------------------
Operating income 3,418 2,862 7,145 5,749
Interest income 34 196 37 584
Interest expense (386) (250) (936) (534)
- --------------------------------------------------------------------------------
Earnings before income taxes 3,066 2,808 6,246 5,799
Provision for income taxes 1,182 1,067 2,422 2,202
- --------------------------------------------------------------------------------
Net earnings $ 1,884 $ 1,741 $ 3,824 $ 3,597
================================================================================
Earnings per share - basic $ 0.36 $ 0.33 $ 0.74 $ 0.67
Earnings per share - diluted $ 0.36 $ 0.33 $ 0.73 $ 0.67
Weighted average shares and
equivalents outstanding:
Basic 5,174 5,204 5,169 5,375
Diluted 5,270 5,251 5,266 5,398
Cash dividends paid per
share of common stock $ 0.09 $ 0.09 $ 0.18 $ 0.18
================================================================================
See notes to consolidated financial statements.
Prior year financial statements are subject to restatement audit.
4
FRESH BRANDS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
- --------------------------------------------------------------------------------
For the 28-weeks ended
July 13, July 14,
2002 2001
- --------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings $ 3,824 $ 3,597
Adjustments to reconcile net earnings to
net cash provided by operating activities:
Depreciation and amortization 4,055 3,003
Deferred income taxes - (160)
Changes in assets and liabilities:
Receivables (1,069) 2,067
Inventories 4,729 (1,287)
Other current assets (603) (3,927)
Accounts payable (2,726) 2,031
Accrued liabilities 1,688 (76)
- --------------------------------------------------------------------------------
Net cash flows from operating activities 9,898 6,169
- --------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (7,650) (880)
Receipt of principal amounts under capital
subleases 283 198
Acquisition, net of cash acquired - (27,298)
- --------------------------------------------------------------------------------
Net cash flows from investing activities (7,367) (27,980)
- --------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net change in revolver activity 3,100 15,500
Payment for acquisition of treasury stock (1,540) (6,828)
Payment of cash dividends (931) (961)
Exercise of stock options 772 546
Principal payments on capital lease obligations (627) (422)
Principal payments on long-term debt (494) (105)
Other financing activities 15 24
Long term debt borrowing - 378
- --------------------------------------------------------------------------------
Net cash flows from financing activities 295 8,132
- --------------------------------------------------------------------------------
CASH AND EQUIVALENTS:
Net change 2,826 (13,679)
Balance, beginning of period 11,501 31,309
- --------------------------------------------------------------------------------
Balance, end of period $ 14,327 $ 17,630
================================================================================
SUPPLEMENTAL CASH FLOW DISCLOSURES:
Interest paid $ 954 $ 494
Income taxes paid 315 1,956
See notes to consolidated financial statements.
Prior year financial statements are subject to restatement audit.
5
FRESH BRANDS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) Basis of Presentation
The financial statements included herein have been prepared by us without audit.
Although certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted, we believe that the disclosures are
adequate to make the information presented not misleading. The interim financial
statements furnished with this report reflect all adjustments of a normal
recurring nature, which are, in the opinion of management, necessary for a fair
statement of the results for the interim periods presented. It is suggested that
these financial statements be read in conjunction with the financial statements
and the notes thereto included in our 2001 annual report to shareholders, as
incorporated by reference in our Form 10-K for the fiscal year ended December
29, 2001. The 2001 financial statements included within this 10-Q reflect
restated numbers as described in footnote six.
(2) Acquisition
On June 16, 2001, we acquired all of the outstanding common stock of Dick's
Supermarkets, Inc. for approximately $30.2 million in cash (including assumption
of funded debt). This acquisition has been accounted for under the purchase
method of accounting. The results of Dick's Supermarkets, Inc. have been
included in our results from the date of acquisition. The purchase price was
allocated to the fair market value of the assets acquired and the liabilities
assumed. The purchase price allocation included the write-up to fair value of
inventory and fixed assets of $1.7 million and $4.7 million, respectively, and
resulted in goodwill of approximately $20.3 million.
The following pro forma consolidated results of continuing operations present
the companies as if they had been combined at the beginning of the periods
presented. These pro forma results are based on assumptions considered
appropriate by management and have been prepared for limited comparative
purposes only. These results do not purport to be indicative of results which
would have actually been reported had the acquisition taken place at the being
of fiscal 2001, or which may be reported in the future.
(In thousands, except per share data)
- -------------------------------------------------------------------- ----------------------
For the 12-weeks ended For the 28-weeks ended
July 13, 2002 July 14, 2001 July 13, 2002 July 14, 2001
- -------------------------------------------------------------------------------------------
Revenues $ 146,921 $ 144,377 $ 331,060 $ 328,891
Net income 1,884 1,615 3,824 3,046
Net income per share:
Basic $ 0.36 $ 0.31 $ 0.74 $ 0.57
Diluted $ 0.36 $ 0.31 $ 0.73 $ 0.56
- -------------------------------------------------------------------------------------------
6
(3) Other Current Assets
(In thousands)
- --------------------------------------------------------------------------------
July 13, 2002 December 29, 2001
- --------------------------------------------------------------------------------
Prepaid expenses $ 2,208 $ 1,268
Retail systems and supplies for resale 564 426
Receivable under capital subleases 566 526
- --------------------------------------------------------------------------------
Other current assets $ 3,338 $ 2,220
================================================================================
(4) Segment Reporting
Summarized financial information for the second quarter and year-to-date of 2002
and 2001 concerning our reportable segments is shown in the following tables (in
thousands):
- ---------------------------------------------------------------------------------------------
For the 12-weeks ended For the 28-weeks ended
Sales July 13, 2002 July 14, 2001 July 13, 2002 July 14, 2001
- ---------------------------------------------------------------------------------------------
Wholesale sales $ 110,849 $ 103,060 $ 250,765 $ 230,071
Intracompany sales (36,383) (30,301) (84,676) (66,092)
- ---------------------------------------------------------------------------------------------
Net wholesale sales 74,466 72,759 166,089 163,979
Retail sales 72,455 57,923 164,971 120,523
- ---------------------------------------------------------------------------------------------
Total sales $ 146,921 $ 130,682 $ 331,060 $ 284,502
=============================================================================================
- ---------------------------------------------------------------------------------------------
For the 12-weeks ended For the 28-weeks ended
Earnings Before Income Tax July 13, 2002 July 14, 2001 July 13, 2002 July 14, 2001
- ---------------------------------------------------------------------------------------------
Wholesale $ 2,267 $ 1,914 $ 5,491 $ 4,349
Retail 1,151 948 1,654 1,400
- ---------------------------------------------------------------------------------------------
Total operating income 3,418 2,862 7,145 5,749
Interest income 34 196 37 584
Interest expense (386) (250) (936) (534)
- ---------------------------------------------------------------------------------------------
Earnings before income taxes $ 3,066 $ 2,808 $ 6,246 $ 5,799
=============================================================================================
(5) New Accounting Pronouncements
In June 2001, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards ("SFAS") No. 141, "Business Combinations" and
SFAS No. 142, "Goodwill and Other Intangible Assets" effective for fiscal years
beginning after December 15, 2001. Under SFAS No. 142, goodwill and intangible
assets deemed to have indefinite lives will no longer be amortized, but will be
subject to annual impairment tests in accordance with this statement. Other
intangible assets will continue to be amortized over their useful lives. Under
these statements, business combinations initiated after June 30, 2001 are
required to be accounted for under the purchase method of accounting and new
criteria has been established for recording intangible assets separate from
goodwill.
During the first quarter of fiscal 2002, we implemented SFAS No. 142 and ceased
amortization on goodwill and intangible assets deemed to have indefinite lives.
The total goodwill amortization for the 12-week and 28-week periods ended July
14, 2001 was $96,000 and $114,000, respectively. For fiscal 2002, we anticipate
that the application of the nonamortization provisions is expected to have a
positive impact on operating income of approximately $1.0 million. Also, during
the first quarter of fiscal 2002,
7
we performed the required impairment test of goodwill as of December 29, 2001
and determined that no impairment existed.
In August 2001, the Emerging Issues Task Force ("EITF") issued EITF No. 01-09,
"Accounting for Consideration Given by a Vendor to a Customer or a Reseller of
Vendor's Products" which codified and reconciled the Task Force's consensuses in
EITF No. 00-14 "Accounting for Certain Sales Incentives", EITF No. 00-22
"Accounting for Points and Certain Other Time Based Sales Incentives or Volume
Based Sales Incentive Offers, and Offers of Free Products or Services to Be
Delivered in the Future", and EITF No. 00-25 "Vendor Income Statement
Characterization of Consideration Paid to a Reseller for the Vendor's Products".
These EITFs provide guidance regarding the timing of recognition and income
statement classification of costs incurred for certain sales incentive programs,
including sales incentives offered voluntarily by a vendor without charge to
customers that can be used in, or that are exercisable by a customer, as a
result of a single exchange transaction. The implementation of EITF 01-09 in the
first quarter of fiscal 2002 resulted in a reclassification that decreased 2001
second quarter and year-to-date net sales and cost of products sold each by $1.2
million and $3.1 million, respectively to conform with the 2002 presentation.
The implementation of EITF 01-09 did not impact operating income or net
earnings.
In August 2001, the FASB issued SFAS No. 143 "Accounting for Asset Retirement
Obligations." Statement No. 143 addresses financial accounting and reporting for
obligations associated with the retirement of tangible long-lived assets and the
associated asset retirement costs. Management is currently evaluating the impact
of adoption on the consolidated financial statements.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets" effective for years beginning after December 15,
2001. SFAS No. 144 establishes a single accounting model for long-lived assets
to be disposed of by sale and provides additional implementation guidance for
assets to be held and used and assets to be disposed of other than by sales.
SFAS No. 144 supersedes SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed of". The
implementation of this pronouncement did not have a material impact on our
results of operations or financial position.
In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities." The Statement requires companies to recognize
costs associated with exit or disposal activities when they are incurred rather
than at the date of a commitment to an exit or disposal plan. The Statement
replaces EITF Issue No. 94-3, "Liability Recognition for Certain Employee
Termination Benefits and Other Costs to Exit an Activity (Including Certain
Costs Incurred in a Restructuring)." The Company is required to apply this
Statement prospectively to exit or disposal activities initiated after December
31, 2002. Management is currently evaluating the impact of adoption on the
consolidated financial statements.
(6) Financial Statements Restatement
In July 2002, the Company announced that it had identified an error that
resulted in the understatement of cost of goods sold. We concluded that we need
to restate our earnings for fiscal years ended 2001, 2000, and 1999. The
understatement of cost of goods sold, which aggregated $400,000 on an after-tax
basis, is related to a unique supply relationship the Company has with one of
its direct store delivery meat vendors. Orders from nine supermarkets were
delivered by the vendor to the company's meat distribution center and shipped by
the Company to the stores. Sales were properly recorded, but the company
inadvertently failed to record accurately the corresponding cost of goods sold.
8
The re-audits of the financial statements for fiscal years ended 2001, 2000, and
1999 are expected to occur during the third and fourth quarters of 2002. The
financial statements and corresponding management discussion and analysis
included in this report have been restated to reflect the estimated
understatement of cost of goods sold. The operating income and earnings before
income taxes for the second quarter and year-to-date 2001 have been restated to
reflect reduced income of approximately $57,000 and $114,000, respectively. The
net after tax earnings for the second quarter and year-to-date 2001 have been
restated to reflect reduced net income of approximately $35,000 and $69,000,
respectively. The corresponding balance sheet, cash flow and earnings per share
line items have also been restated to reflect the estimated misstatement.
9
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations
General
As of July 13, 2002, we owned 27 supermarkets and franchised an additional 72
supermarkets. This compares to 27 owned supermarkets and 70 franchised
supermarkets as of July 13, 2001. Nineteen of our corporate supermarkets operate
under the Piggly Wiggly(R) banner, eight of them operate under the Dick's(R)
Supermarket's banner and all of our franchised supermarkets operate under the
Piggly Wiggly banner. We are the primary supplier to all 99 supermarkets and
also serve as a wholesaler to a number of smaller, independently operated
supermarkets and convenience stores. All of our supermarkets and other wholesale
customers are located in Wisconsin and northern Illinois.
Our operations are classified into two segments, wholesale and retail. Our
wholesale business derives its revenues primarily from the sale of groceries,
produce, dairy, meat and other products to our franchised supermarkets and
independent retail customers. We also supply these products to our corporate
supermarkets, but those revenues are eliminated for consolidated accounting
purposes. We supply grocery, frozen food, produce and general merchandise and
health and beauty care (HBC) to our supermarkets through two distribution
centers in Sheboygan, Wisconsin. We also provide our supermarkets with fresh,
frozen and processed meats, eggs, dairy and deli items through a third-party
distribution facility in Milwaukee, Wisconsin. Additionally, we distribute
bakery and deli items made in our Platteville, Wisconsin centralized production
facility.
Our retail business consists of the 27 corporate supermarkets which operate
under the Piggly Wiggly and Dick's Supermarkets banners. We earn our retail
revenue by selling to retail consumers products purchased from our wholesale
segment and other merchandise to retail consumers. Compared to our wholesale
segment, our retail segment generates higher gross profit margins, but has
higher operating and administrative expenses.
Annually, our fiscal year ends on the Saturday closest to December 31. Our
current fiscal year is a 52-week period. Our first quarter is comprised of
16-weeks and the remaining quarters are 12-weeks each.
Results of Operations
The following table sets forth certain items from our Consolidated Statements of
Earnings as a percent of net sales and the percentage change in the dollar
amounts of such line items from the restated second quarter of 2001 compared to
the second quarter of 2002 and restated year-to-date 2001 compared to
year-to-date 2002.
- -------------------------------------------------------------------------------------------------------------------
Percentage Percentage
Percent of net sales change Percent of net sales change
- -------------------------------------------------------------------------------------------------------------------
July 13, 2002 July 13, 2002
For the 12-weeks ended vs. For the 28-weeks ended vs.
July 13, 2002 July 14, 2001 July 12, 2001 July 13, 2002 July 14, 2001 July 12, 2001
- -------------------------------------------------------------------------------------------------------------------
Net sales 100.0% 100.0% 12.4% 100.0% 100.0% 16.4%
Retail sales 49.3% 44.3% 25.1% 49.8% 42.4% 36.9%
Net wholesale sales 50.7% 55.7% 2.3% 50.2% 57.6% 1.3%
Gross margin 19.8% 17.6% 26.1% 19.7% 17.2% 32.6%
Operating & admin
expenses 17.5% 15.5% 27.1% 17.5% 15.2% 33.7%
Operating income 2.3% 2.2% 19.4% 2.2% 2.0% 24.3%
Earnings before
income taxes 2.1% 2.1% 9.2% 1.9% 2.0% 7.7%
Net earnings 1.3% 1.3% 8.2% 1.2% 1.3% 6.3%
- -------------------------------------------------------------------------------------------------------------------
10
Net Sales
Record net sales for our 12- and 28-week periods ended July 13, 2002 were $146.9
million and $331.1 million, respectively, compared to $130.7 million and $284.5
million, respectively for the same periods in 2001. The increases of $16.2
million and $46.6 million, or 12.4% and 16.4%, respectively, were due primarily
to increases in our retail sales resulting from the acquisition of Dick's in
June 2001. Based on our internal wholesale price index, inflation did not have a
significant effect on our sales for the second quarter and first half of 2002.
Retail Sales
Total retail sales volume for our 12- and 28-week periods ended July 13, 2002
increased 25.1% and 36.9%, respectively to $72.5 million and $165.0 million,
compared to $57.9 million and $120.5 million, respectively for the same periods
in 2001. Our retail sales improved because of the following:
o Our acquisition of the Dick's Supermarket chain added $23.4 million and
$52.6 million to our retail sales for the second quarter and the first half
of fiscal 2002, respectively compared to $8.5 million for the same periods
of 2001, and was the primary factor contributing to our growth.
o The sales at our new replacement corporate supermarkets in Sheboygan,
Wisconsin and Zion, Illinois that opened in August 2001 and January 2002,
respectively, were higher than sales at the supermarkets they replaced.
Due in large part to increased intense competitive activity in certain market
areas where we operate, the overall softness of the economy and rising
unemployment rates (which reduces discretionary spending), same store sales for
our corporate and franchised supermarkets were flat for the second quarter of
2002, compared to last year's second quarter. Last year, significant sales
improvement was attributable, in part, to competitive store closures in several
of our markets. In contrast, this year we have experienced an increase in
competitive store openings in several markets. In light of the competitive
environment and near-term economic outlook, we anticipate continuing flat
same-store sales trends for the remainder of the year.
As part of our continuing efforts to increase our retail sales volume, we are
currently building a new market 50,000 square-foot corporate supermarket in
Kenosha, Wisconsin. We expect this new market store to open in January 2003. In
addition, we recently announced a new corporate replacement store and Pig
Stop(R) gas station project to be built in the north side of Sheboygan by late
summer of next year. Both stores are designed after our flagship supermarket in
Sheboygan, Wisconsin.
Net Wholesale Sales
Net wholesale sales for our 12- and 28-week periods ended July 13, 2002
increased to $74.5 million and $166.1 million, respectively, compared to $72.8
million and $164.0 million for the same period in 2001. The net wholesale sales
increases of $1.7 million and $2.1 million represented percentage increases of
2.3% and 1.3% for the second quarter and the first half of fiscal 2002,
respectively. Net wholesale sales increased as a result of the conversion of
independent supermarkets in Howard and Nekoosa, Wisconsin in October 2001 and
the addition of a wholesale customer in Oostburg, Wisconsin in March 2002. The
independent customer in Oostburg is expected to be converted into a franchise
supermarket in November 2002.
Over the next 12 months, multiple additional store openings are planned which we
expect will help increase our wholesale volume. These projects include expanded
and renovated franchise stores in Waunakee, Mosinee and Mayville, Wisconsin, and
new franchise replacement stores in West Bend, Omro, Oostburg, Union Grove and
Howard, Wisconsin. Additionally, in August 2002, we reached the
11
100-store milestone with the opening of a our 73rd franchise Piggly Wiggly
supermarket in Cambridge, Wisconsin.
Gross Margin
Our gross margin increased to 19.8% and 19.7% for the 12- and 28-week periods
ended July 13, 2002, compared to 17.6% and 17.2%, respectively, for the same
periods in 2001. This significant improvement was attributable to the increase
in our mix of retail sales to total sales resulting from the Dick's acquisition.
Operating and Administrative Expenses
Our operating and administrative expenses, as a percent of net sales, increased
to 17.5% for both the 12- and 28-week periods ended July 13, 2002, compared to
15.5% and 15.2% for the same periods in 2001. These increases were principally
attributable to the increase in our mix of retail sales to total sales resulting
from the Dick's acquisition, which led to a corresponding and anticipated
increase in our operating and administrative expenses. Additionally, during the
second quarter, we recognized a loss of approximately $220,000 from the sale of
a vacant corporate owned retail property. We also recorded approximately
$130,000 of additional depreciation in the second quarter compared to the same
period in 2001 as a result of our write-up of property and equipment resulting
from the Dick's acquisition, compared to the same period of 2001.
Health and accident insurance costs, as a percent of sales, for the second
quarter of 2002, were consistent with the same period during 2001. Like many
employers, we continue to be faced with the prospect of significant increases in
health care costs. For 2002, we anticipate the impact of these increases to
continue to be mitigated, in part, by our fall 2001 introduction of employee
health plan cost sharing.
We were notified by the trustees of the Illinois United Food and Commercial
Workers Health Benefits Fund that a special assessment will be imposed on plan
members, including the Company. Based on our knowledge at this time, we
anticipate that this special assessment will be paid over a two-year period
beginning this fall. We do not anticipate this charge to have a material impact
to this year's financial statements.
Due to the competitive nature of the supermarket industry, some of our
franchised and corporate retail stores continue to experience operational
challenges in their marketplaces. As a result, some of these supermarkets have
experienced financial and operational difficulties. In order to further improve
our overall financial results, we continue to actively evaluate various business
alternatives to these operations. These alternatives include selling these
supermarkets, converting franchised supermarkets into corporate supermarkets
(and vice versa), closing supermarkets and implementing other operational
changes. It is possible that one or more of these actions may be taken prior to
the end of the year. While we did not incur any significant retail repositioning
expenses during the past few years, implementing any of these alternatives could
result in our incurring significant repositioning or restructuring charges in
2002.
Net Earnings
Operating income for the 12- and 28-week periods ended July 13, 2002 increased
19.4% and 24.3%, respectively to $3.4 million and $7.1 million, compared to $2.9
million and $5.7 million, respectively, for the same periods in 2002. As a
percent of net sales, our operating income in the second quarter and first half
of 2002 was 2.3% and 2.2%, compared to 2.2% and 2.0% for the same periods in
2001. Our earnings before income taxes for the second quarter and first half of
2002 increased 9.2% and 7.7%, respectively, to $3.1 million and $6.2 million,
compared to $2.8 million and $5.8 million for the same periods of 2001. Our
interest expense increased $136,000 in the second quarter of 2002 as a result of
the acquisition of Dick's in June 2001 and borrowing on our revolving credit
agreement for additional
12
working capital needs. As a percent of sales, earnings before income taxes
remained constant between quarters at 2.1% for the second quarter of 2002 and
2001. Net earnings for the 12- and 28-week periods ended July 13, 2002 increased
8.2% and 6.3%, respectively, to $1.88 million and $3.82 million compared to
$1.74 million and $3.60 million, respectively, for the same periods in 2001.
Diluted earnings per share for the second quarter and first half of 2002
increased 9.1% and 7.8%, respectively to a record $0.36 and $0.73 compared to
$0.33 and $0.67, respectively for the same periods in 2001. The weighted average
common shares and equivalents for the second quarter and first half of 2002 were
5,270,000 and 5,266,000, compared to 5,251,000 and 5,398,000 for the same
periods in 2001.
Based on our performance through the second quarter, we currently expect
earnings per share for 2002 to be between $1.53 and $1.58, barring any unusual
or unforeseen occurrences in the economy, our markets or our business. Our
reduced expectations from our previous earnings per share guidance of between
$1.60 and $1.75 per share is largely due to the anticipated accounting and legal
costs expected to be incurred to restate our earnings for 2001, 2000 and 1999 as
previously discussed. We have concluded that we need to restate our earnings for
2001, 2000 and 1999 resulting from an inadvertent accounting mistake. The
aggregate after-tax impact to earnings for these three fiscal years is expected
to approximate $400,000. Additionally, we expect to incur, during the third and
fourth quarters of 2002, additional accounting and legal costs approximating
$180,000 on an after-tax basis.
Many of our peer companies measure the profitability of their sales using their
net earnings to sales ratio. This ratio represents the net earnings margin
realized from each dollar of sales. Our 2002 and 2001 second quarter net
earnings to sales were comparable at 1.3%. For the first half of 2002, our net
earnings to sales ratio was 1.2%, compared to 1.3% for the same period last
year. This nominal reduction was primarily due to increased competition in some
of our retail markets. We anticipate that our net earnings to sales ratio will
likely remain within this current range for the remainder of fiscal 2002.
EBITDA (earnings before interest, taxes, depreciation and amortization) for the
second quarter of 2002 was $5.2 million, a 21.4% increase from EBITDA of $4.3
million in the same period of 2001. Dick's contributed approximately $900,000 to
EBITDA in the second quarter of 2002. As a percent of sales, EBITDA for the
quarter ended July 13, 2002 was 3.5% compared to 3.3% for the same period in
2001. Although EBITDA is used as a measurement tool used to evaluate company
performance, it is not intended to be an alternative to performance measures
under generally accepted accounting principles.
Liquidity and Capital Resources
Summary
At July 13, 2002, we had cash and equivalents totaling $14.3 million. At
year-end 2001, cash and equivalents aggregated $11.5 million. Our net cash
inflow of approximately $2.8 million was attributable to various operational,
investing and financing activities as described below. Our working capital
position at July 13, 2002 was $19.8 million, compared to $18.6 million at
December 29, 2001. Our current ratio at July 13, 2002 was 1.40 to 1.00, compared
to 1.37 to 1.00 at December 29, 2001, with cash and equivalents contributing
approximately $14.3 million to working capital. As of July 13, 2002, we had
unsecured revolving bank credit facilities aggregating $35.0 million, with $18.4
million remaining available for use. Our current working capital levels provide
us with a very favorable and strong liquidity position. We have recently amended
our revolving credit agreement with our banks. The amendment resulted in certain
changes to our negative covenants and we expect our interest expense to increase
as a result of the amendments. We continue to remain in compliance with all
credit facility debt covenants.
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Cash Flows From Operating Activities
For the 28-week period ended July 13, 2002, our net cash generated from
operations was $9.9 million, compared to $6.2 million for the same period in
2001. Our net change in cash inflows from operations was attributable to the
timing of cash receipts and disbursements.
Cash Flows From Investing Activities
For the 28-week period ended July 13, 2002, our net cash outflows from investing
activities totaled $7.4 million, compared to $28.0 million for the same period
in 2001. Our acquisition of Dick's Supermarkets accounted for $27.3 million of
the 2001 investing cash outflow. For the 2002 28-week period, investing cash
outflows for capital items was nearly $7.7 million, compared to $900,000 for the
same period in 2001. Approximately $2.3 million of the investing outflow related
to capital expenditures for our on-going systems project. Additionally,
expenditures for retail equipment and fixtures, including those associated with
Dick's, were approximately $2.0 million, expenditures related to the expansion
of our distribution centers were nearly $3.0 million, and corporate office
technology expenditures were nearly $400,000.
Cash Flows From Financing Activities
For the 28-week period ended July 13, 2002, our net cash inflows from financing
activities totaled approximately $300,000 compared to nearly $8.1 million in
inflows for the same period in 2001. The change was primarily due to borrowings
of $15.5 million against our revolving line of credit in 2001. In the second
quarter of 2001, we entered into a new $35.0 million bank revolving credit
facility. We borrowed $12.5 million under our new revolving credit facility to
fund a portion of the purchase price of Dick's Supermarkets, Inc. in June of
2001. Subsequently, we borrowed additional amounts to fund our working capital
requirements, including our increased working capital requirements due to the
Dick's acquisition. We owed approximately $16.6 million under the revolving
credit facility at the end of the second quarter of 2002. Our ratio of total
liabilities to shareholders' investment for the 2002 second quarter was down
from the second quarter of 2001 to 1.70 from 1.75. Our ratio remains very low
relative to our publicly-held peer group companies.
Additional financing cash outflow was due to the repurchase of nearly 82,000
shares of our own common stock in the first half of 2002 for an aggregate price
of $1.5 million, compared to approximately 570,000 shares aggregating $6.8
million for the same period of 2001. Subsequent to the close of the second
quarter, on July 26, 2002, our Board of Directors authorized an increase in our
stock repurchase program from $25.0 million to $30.0 million. Prior to this
increase, only $350,000 remained available for additional stock repurchases.
Also, on July 26, 2002, our Board of Directors declared a third quarter 2002
cash dividend of $0.09 per common share. The dividend is payable on September 6,
2002 to shareholders of record on August 23, 2002 and is expected to total
approximately $450,000.
Major 2002 Commitments
During the second quarter of 2001, we announced our plans to spend approximately
$15.0 million, over a three-year period to replace and expand our current
business information systems. The new systems are expected to support our growth
plans and provide improved operational efficiencies and cost savings. The
project includes four critical phases. The first two phases, the core
infrastructure and the systems related to our wholesale business operations, are
expected to be completed by the first quarter of 2003. Part of the wholesale
phase of the project, which involved our meat and dairy warehouse operations,
have been substantially completed. The final two phases, related to our retail
pricing and promotional card marketing, and human resources, payroll and
financial reporting systems, are projected to be completed between the end of
2003 and the end of 2004. Since the inception of the systems project in 2001, we
have expended nearly $5.3 million on this project.
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Special Note Regarding Forward-Looking Statements
Certain matters discussed in our Form 10-Q are "forward-looking statements"
intended to qualify for the safe harbors from liability established by the
Private Securities Litigation Reform Act of 1995. These forward-looking
statements can generally be identified as such because the context of the
statement will include words such as we believe, anticipate, expect or words of
similar import. Similarly, statements that describe our future plans,
objectives, strategies or goals are also forward-looking statements.
Specifically, forward-looking statements include our statements about (a) our
2002 earnings expectations; (b) our plans to remodel existing supermarkets, open
additional corporate supermarkets and convert existing supermarkets to
franchised supermarkets; (c) our expectations regarding our future same store
sales growth; (d) potential increases in our health care costs and our plans to
offset the impact of these cost increases; (e) our expectations regarding our
net earnings to sales ratio; (f) the cost, timing and results of our new
business information technology systems replacement project; and (g) the
expected increase in interest expense as a result of interest rate changes
associated with our amended debt covenant. Such forward-looking statements are
subject to certain risks and uncertainties that may materially adversely affect
the anticipated results. Such risks and uncertainties include, but are not
limited, to the following: (1) the cost and results of our new business
information technology systems replacement project; (2) the presence of intense
competitive market activity in our market areas, including competition from
warehouse club stores and deep discount supercenters; (3) our ability to
identify and develop new market locations and/or acquisition candidates for
expansion purposes; (4) our continuing ability to obtain reasonable vendor
marketing funds for promotional purposes; (5) our ability to continue to
recruit, train and retain quality franchise and corporate retail store
operators; (6) the potential recognition of repositioning charges resulting from
potential closures, conversions and consolidations of retail stores due
principally to the competitive nature of the industry and to the quality of our
retail store operators; (7) the final cost and results of, and the diversion of
management's time and attention in connection with, its financial statement
restatements; and (8) our ability to integrate and assimilate the acquisition of
Dick's Supermarkets, Inc. and to achieve, on a timely basis, our anticipated
benefits and synergies thereof. Shareholders, potential investors and other
readers are urged to consider these factors carefully in evaluating the
forward-looking statements and are cautioned not to place undue reliance on such
forward-looking statements. The forward-looking statements made herein are only
made as of the date of this release and we disclaim any obligation to publicly
update such forward-looking statements to reflect subsequent events or
circumstances.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Our only variable rate financial instrument subject to interest rate risk is a
$35.0 million revolving credit facility which permits borrowings at interest
rates based on either the bank's prime rate or adjusted LIBOR. We have borrowed
approximately $16.6 million under this facility as of July 13, 2002 and, as a
result, increases in market interest rates would cause our interest expense to
increase and our earnings before income taxes to decrease. Based on our
outstanding revolving credit facility borrowings as of July 13, 2002, a 100
basis point increase in market interest rates would increase our annual interest
expense by approximately $166,000. Similarly, a 100 basis point decrease in the
market interest rates would reduce our annual interest expense by approximately
$166,000.
We believe that our exposure to market risks related to changes in foreign
currency exchange rates, interest rate fluctuations and trade accounts
receivable is immaterial.
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PART II Other Information
Item 4. Submission of Matters to a Vote of Security Holders
Our 2002 annual meeting of shareholders was held on Wednesday, May 22, 2002. At
the meeting, the shareholders re-elected Martin Crneckiy, Jr., R. Bruce Grover
and Elwood F. Winn to our Board of Directors for the three-year terms expiring
at our 2005 annual meeting of shareholders and until their successors are duly
qualified and elected. As of the March 15, 2002 record date for the annual
meeting, 5,163,737 shares of Common Stock were outstanding and eligible to vote.
Of these, 4,352,492 shares of Common Stock voted at the meeting in person or by
proxy. The following votes were recorded for each nominee:
For Withheld
----------------------- ---------------------
Votes Percentage Votes Percentage
Martin Crneckiy, Jr. 3,762,958 86.5% 589,534 13.5%
R. Bruce Grover 3,756,144 86.3% 596,348 13.7%
Elwood F. Winn 3,563,136 81.9% 789,356 18.1%
The tabulation of votes for the election of directors resulted in no broker
non-votes or abstentions.
Our continuing directors are Michael R. Houser, Bruce J. Olson and Walter G.
Winding, whose terms expire in 2003, and William K. Jacobson, Steven R. Barth
and G. William Dietrich, whose terms expire in 2004.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
4.5 Agreement of Substitution and Amendment of Rights Agreement,
dated as of August 19, 2002, among Fresh Brands, Inc. and
American Stock Transfer.
4.6 Second Amendment to Loan Agreement, dated as of August 23, 2002,
among Fresh Brands, Inc., certain subsidiaries of Fresh Brands,
Inc., M&I Marshall & Ilsley Bank and U.S. Bank National
Association.
99.1 Written Statements Pursuant to 189 U.S.C.ss.1350.
(b) Reports on Form 8-K
We filed one current report on Form 8-K, dated June 28, 2002, pursuant
to Item 4 thereof with respect to the dismissal of Arthur Andersen LLP
as our independent auditors and the engagement of KPMG LLP as our
independent auditors for the fiscal year ending December 28, 2002.
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We filed one current report on Form 8-K dated July 24, 2002, pursuant
to Item 4 thereof with respect to the acceptance by KPMG LLP to be the
independent auditors for our fiscal year ending December 28, 2002.
We filed one current report on Form 8-K dated July 25, 2002, pursuant
to Item 9 thereof with respect to our press release regarding an
accounting error and that we will restate of our financial statements
for the 2001, 2000, and 1999 fiscal years.
We filed one current report on Form 8-K dated August 2, 2002, pursuant
to Item 9 thereof with respect to our press release for the second
quarter ended July 13, 2002 and related disclosure requirements of
Regulation FD.
We filed one current report on Form 8-K dated August 15, 2002,
pursuant to Item 9 thereof with respect to our press release
announcing the resignation of our chief financial officer, Mr. Armand
C. Go, effective after August 23, 2002.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Company
has duly caused this report to be signed on its behalf by the undersigned
thereunto duly authorized.
FRESH BRANDS, INC.
Dated: August 23, 2002 By: /s/ Armand C. Go
--------------------------------------
Armand C. Go
Vice President, Chief Financial Officer
Secretary and Treasurer
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