UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended April 19, 2003
--------------
Commission File Number 000-32825
FRESH BRANDS, INC.
-------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
WISCONSIN 39-2019963
- ---------------------------------------- ----------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.
2215 Union Avenue
Sheboygan, Wisconsin 53081
- ---------------------------------------- ----------------------------
(Address of principal executive offices) (Zip Code)
Telephone number, including area code: (920) 457-4433
--------------
Indicate by check mark whether 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 (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to filing
requirements for the past 90 days.
Yes X No
--- ---
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes X No
--- ---
APPLICABLE ONLY TO CORPORATE ISSUERS: Indicate the number of shares outstanding
of each of the issuer's classes of common stock, as of the latest practicable
date.
As of June 3, 2003, 5,037,613 shares of Common Stock, $0.05 par value, were
issued and outstanding.
1
FRESH BRANDS, INC.
FORM 10-Q INDEX
PAGE
NUMBER
------
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets 3
Consolidated Statements of Earnings 4
Consolidated Statements of Cash Flows 5
Condensed Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 9
Item 3. Quantitative and Qualitative Disclosures
about Market Risk 14
Item 4. Procedures and Controls 14
PART II OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds 15
Item 9. Exhibits and Reports on Form 8-K 15
Signatures 16
Certifications 17 - 20
2
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
FRESH BRANDS, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands)
- ---------------------------------------------------------------------------------------------------
April 19, December 28, 2002
Assets 2003
- ---------------------------------------------------------------------------------------------------
Current assets:
Cash and equivalents $ 13,946 $ 14,250
Receivables, net 19,083 14,267
Inventories 35,512 36,268
Land and building held for resale 4,610 7,601
Other current assets 2,978 3,545
Deferred income taxes 4,291 4,291
- ---------------------------------------------------------------------------------------------------
Total current assets 80,420 80,222
- ---------------------------------------------------------------------------------------------------
Noncurrent receivable under capital subleases 21,967 22,332
Property and equipment, net 27,968 28,229
Property under capital leases, net 13,321 13,635
Goodwill, net 20,280 20,280
Other noncurrent assets, net 6,542 6,475
- ---------------------------------------------------------------------------------------------------
Total assets $ 170,498 $ 171,173
===================================================================================================
Liabilities and Shareholders' Investment
- ---------------------------------------------------------------------------------------------------
Current liabilities:
Accounts payable $ 33,706 $ 34,475
Accrued salaries and benefits 6,118 6,276
Accrued insurance 2,997 3,064
Other accrued liabilities 3,774 5,379
Current obligations under capital leases 1,891 1,898
Current maturities of long-term debt 316 316
- ---------------------------------------------------------------------------------------------------
Total current liabilities 48,802 51,408
- ---------------------------------------------------------------------------------------------------
Long-term obligations under capital leases 36,389 36,965
Long-term debt 28,222 26,204
Deferred income taxes 1,114 1,114
Shareholders' investment:
Common stock 438 438
Additional paid-in capital 15,570 15,527
Retained earnings 83,503 82,030
Treasury stock (43,540) (42,513)
- ---------------------------------------------------------------------------------------------------
Total shareholders' investment 55,971 55,482
- ---------------------------------------------------------------------------------------------------
Total liabilities and shareholders' investment $ 170,498 $ 171,173
===================================================================================================
See notes to consolidated financial statements.
3
FRESH BRANDS, INC.
CONSOLIDATED STATEMENTS OF EARNINGS
(In thousands, except per share data)
--------------------------------------------------------------------------------------------------------------
For the 16-weeks ended
--------------------------------------------------------------------------------------------------------------
April 19, 2003 April 20, 2002
--------------------------------------------------------------------------------------------------------------
Net sales $ 187,670 $ 184,139
Cost of products sold 149,494 147,533
--------------------------------------------------------------------------------------------------------------
Gross profit 38,176 36,606
Selling, general and administrative expenses 31,830 30,626
Depreciation and amortization 2,600 2,296
--------------------------------------------------------------------------------------------------------------
Operating income 3,746 3,684
Interest expense (net) 586 546
--------------------------------------------------------------------------------------------------------------
Earnings before income taxes 3,160 3,138
Provision for income taxes 1,233 1,224
--------------------------------------------------------------------------------------------------------------
Net earnings $ 1,927 $ 1,914
==============================================================================================================
Earnings per share - basic $ 0.38 $ 0.37
Earnings per share - diluted $ 0.38 $ 0.36
Weighted average shares and equivalents outstanding:
Basic 5,057 5,165
Diluted 5,095 5,265
Cash dividends paid per share of common stock $ 0.09 $ 0.09
==============================================================================================================
See notes to consolidated financial statements.
4
FRESH BRANDS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
- -----------------------------------------------------------------------------------------------------------------
For the 16-weeks ended
April 19, 2003 April 20, 2002
- -----------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings $ 1,927 $ 1,914
Adjustments to reconcile net earnings to net cash provided
by operating activities:
Depreciation and amortization 2,600 2,296
Changes in assets and liabilities:
Receivables, net (4,816) (2,959)
Inventories 756 4,575
Other current assets 3,580 1,626
Accounts payable (769) (2,780)
Accrued liabilities (1,786) (1,625)
- -----------------------------------------------------------------------------------------------------------------
Net cash flows provided by operating activities 1,492 3,047
- -----------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (2,083) (4,272)
Receipt of principal amounts under capital subleases 333 162
- -----------------------------------------------------------------------------------------------------------------
Net cash flows used in investing activities (1,750) (4,110)
- -----------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net change in revolver activity 2,150 2,300
Payment for acquisition of treasury stock (1,658) (924)
Exercise of stock options 601 492
Payment of cash dividends (454) (465)
Principal payments on capital lease obligations (583) (386)
Principal payments on long-term debt (132) (91)
Other financing activities 30 6
- -----------------------------------------------------------------------------------------------------------------
Net cash flows provided by (used in) financing activities (46) 932
- -----------------------------------------------------------------------------------------------------------------
CASH AND EQUIVALENTS:
Net change (304) (131)
Balance, beginning of period 14,250 11,501
- -----------------------------------------------------------------------------------------------------------------
Balance, end of period $ 13,946 $ 11,370
=================================================================================================================
SUPPLEMENTAL CASH FLOW DISCLOSURES:
Interest paid $ 605 $ 549
Income taxes paid 752 12
See notes to consolidated financial statements.
5
FRESH BRANDS, INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) Basis of Presentation
The consolidated 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 accounting
principles generally accepted in the United States 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 (consisting 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 2002 annual report to shareholders, as incorporated by
reference in our Form 10-K for the fiscal year ended December 28, 2002.
Additionally, it should be noted that certain prior year amounts have been
reclassed to conform with the current year presentation.
Annually, our fiscal year ends on the Saturday closest to December 31. As
such, the current fiscal year is a 53-week period while the prior year was a
52-week period. Consistent with 2002, our first quarter of 2003 is comprised of
16-weeks and the second and third quarters will consist of 12-weeks each. Our
fourth quarter for 2003 will consist of 13-weeks but is typically made up of
12-weeks, as in 2002.
(2) Stock-Based Compensation
We account for stock-based employee compensation plans under the guidance
of APB Opinion No. 25, "Accounting for Stock Issued to Employees." No
compensation expense is reflected in net earnings during the first quarter of
2003 or 2002. The following pro-forma amounts illustrate the effect on net
earnings and earnings per share for the first quarter of 2003 and 2002 if we had
determined compensation cost based on the fair value at the grant date for stock
options using the fair value recognition provisions of Statement of Financial
Accounting Standards "SFAS" No. 123, "Accounting for Stock-Based Compensation,"
to stock based employee compensation:
(In thousands, except per share data)
------------------------------------------------------------------------
For the 16-weeks ended
April 19, 2003 April 20, 2002
------------------------------------------------------------------------
Net earnings
As reported $ 1,927 $ 1,914
Pro forma 1,819 1,738
------------------------------------------------------------------------
Earnings per share-basic
As reported $ .38 $ .37
Pro forma $ .36 $ .34
Earnings per share-diluted
As reported $ .38 $ .36
Pro forma $ .36 $ .32
========================================================================
6
(3) Other Current Assets
(In thousands)
- -------------------------------------------------------------------------------------------------
April 19, 2003 December 28, 2002
- -------------------------------------------------------------------------------------------------
Prepaid expenses $ 1,492 $ 1,364
Receivable under capital subleases 1,114 1,082
Retail systems and supplies for resale 372 1,099
- -------------------------------------------------------------------------------------------------
Other current assets $ 2,978 $ 3,545
=================================================================================================
(4) Segment Reporting
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 supermarket 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 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 our 28 owned supermarkets.
Our retail revenue is generated by our corporate supermarkets selling products,
including products purchased from our wholesale segment, to retail consumers.
Summarized financial information for the first quarters of 2003 and 2002
concerning our reportable segments is shown in the following tables (in
thousands):
------------------------------------------------------------------------
For the 16-weeks ended
April 19, 2003 April 20, 2002
------------------------------------------------------------------------
Net Sales
------------------------------------------------------------------------
Wholesale $ 143,854 $ 139,916
Intracompany (50,127) (48,293)
------------------------------------------------------------------------
Wholesale net sales 93,727 91,623
Retail 93,943 92,516
------------------------------------------------------------------------
Total net sales $ 187,670 $ 184,139
========================================================================
------------------------------------------------------------------------
For the 16-weeks ended
April 19, 2003 April 20, 2002
------------------------------------------------------------------------
Operating Income
------------------------------------------------------------------------
Wholesale $ 4,273 $ 3,178
Retail (527) 506
------------------------------------------------------------------------
Total operating income $ 3,746 $ 3,684
========================================================================
7
(5) New Accounting Pronouncements
In the first quarter of 2003, we adopted Emerging Issues Task Force Issue
("EITF") No. 02-16, "Accounting by a Customer (including a Reseller) for Certain
Consideration Received from a Vendor." This EITF Issue establishes that cash
consideration received from a vendor is presumed to be a reduction in the prices
of the vendor's products or services and should, therefore, be characterized as
a reduction in cost of products sold when recognized in the reseller's income
statement unless it is a payment for assets or services delivered to the vendor,
in which case the cash consideration should be characterized as revenue or other
income as appropriate when recognized in the reseller's income statement, or it
is a reimbursement of costs, in which case the cash consideration should be
characterized as a reduction of that cost when recognized in the reseller's
income statement. Applying the provisions of EITF No. 02-16 resulted in the
reclassification of certain of our vendor rebates and advertising revenue
received in excess of advertising costs. The reclassification of these items
reduced cost of products sold and, correspondingly, increased selling, general
and administrative expense by $1.3 million and $1.5 million for the first
quarter of 2003 and 2002, respectively.
8
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
General
As of April 19, 2003, we owned 28 supermarkets and franchised an additional
74 supermarkets. This compares to 27 owned supermarkets and 72 franchised
supermarkets as of April 20, 2002. Twenty of our corporate supermarkets operated
under the Piggly Wiggly(R) banner, 8 of them operated under the Dick's(R)
Supermarkets banner and all of our franchised supermarkets operated under the
Piggly Wiggly banner. We are the primary supplier to all 102 supermarkets and
also serve as a wholesaler to a number of smaller, independently operated
supermarkets and convenience stores. In addition, we currently serve as a
temporary secondary wholesale supplier to a group of local supermarkets
otherwise generally supplied by one of our competitors which has filed for
bankruptcy protection. 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 accounting purposes in
consolidation. We supply grocery, frozen food, produce, general merchandise and
health and beauty care to our supermarkets through two distribution centers in
Sheboygan, Wisconsin. We also provide our supermarkets with dairy, fresh, frozen
and processed meats, eggs and deli items through a third-party distribution
facility in Milwaukee, Wisconsin. Additionally, we distribute items made in our
Platteville, Wisconsin centralized bakery/deli production facility.
Our retail business consists of the 28 corporate-owned supermarkets which
operate under the Piggly Wiggly and Dick's Supermarkets banners. We earn our
retail revenue by selling 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.
During the first quarter of 2003 we continued to be affected by competitive
store openings. Our competitors opened new stores in four of our markets in the
first quarter. Fierce competition, along with the softness of the economy,
continues to contribute to the minimal increase in our franchise and corporate
retail comparative store sales.
Annually, our fiscal year ends on the Saturday closest to December 31. As
such, the current fiscal year is a 53-week period while the prior year was a
52-week period. Consistent with 2002, our first quarter of 2003 is comprised of
16-weeks and the second and third quarters will consist of 12-weeks each. Our
fourth quarter for 2003 will consist of 13-weeks but is typically made up of
12-weeks, as in 2002.
9
RESULTS OF OPERATIONS
The following table sets forth certain items from our Consolidated
Statements of Earnings as a percentage of net sales and the variance in the
percentages for the first quarter of 2003 compared to the first quarter of 2002.
- ---------------------------------------------------------------------------------------------------------------
Percent of net sales Variance
- ---------------------------------------------------------------------------------------------------------------
For the 16-weeks ended
April 19, 2003 April 20, 2002
- ---------------------------------------------------------------------------------------------------------------
Net sales 100.0% 100.0% 0.0 %
Retail net sales 50.0% 50.2% (0.2)%
Wholesale net sales 50.0% 49.8% 0.2 %
Gross margin 20.3% 19.9% 0.4 %
Selling, general and administrative expenses 17.0% 16.6% 0.4 %
Depreciation and amortization 1.4% 1.2% 0.2 %
Operating income 2.0% 2.0% 0.0 %
Earnings before income taxes 1.7% 1.7% 0.0 %
Net earnings 1.0% 1.0% 0.0 %
- ---------------------------------------------------------------------------------------------------------------
NET SALES
Information regarding our net sales for the 16-weeks ended April 19, 2003
and April 20, 2002 is set forth in the following table (in thousands):
- -------------------------------------------------------------------------------
For the 16-weeks ended
April 19, 2003 April 20, 2002
- -------------------------------------------------------------------------------
Retail net sales $ 93,943 $ 92,516
Wholesale net sales 93,727 91,623
- -------------------------------------------------------------------------------
Total sales $ 187,670 $ 184,139
- -------------------------------------------------------------------------------
Net sales for our first quarter of 2003 were a record $187.7 million,
compared to $184.1 million for the same period in 2002. The increase of $3.5
million, or 1.9%, was due primarily to increases in wholesale net sales and the
January 2003 opening of our new corporate store in Kenosha, Wisconsin.
RETAIL NET SALES
Retail net sales for our first quarter of 2003 increased 1.5% to $93.9
million compared to $92.5 million for the same period in 2002. Our retail net
sales improvement was primarily due to the January 2003 opening of our new
corporate Piggly Wiggly Fresh MarketCircle store in Kenosha, Wisconsin.
Comparable store sales for our corporate Piggly Wiggly and Dick's
Supermarkets and franchised supermarkets on an aggregate basis increased 0.15%
for the first quarter of 2003. Comparable store sales represent sales of all
corporate and franchised stores that were open throughout the first quarter of
2003 and 2002. The minimal increase is due in large part to fierce competition
in certain market areas in which we operate and the continued softness of the
economy. Additionally, shoppers continue to be more selective in their purchases
which has reduced the average customer purchase.
As part of our continuing efforts to expand our existing supermarkets and
supermarket brands, we are planning additional retail store openings. We are
planning our first entry into the Iowa market with the expected 2003 fourth
quarter opening of our new, 30,000 square foot Dick's Supermarkets corporate
store and fuel station/convenience store in Maquoketa, IA. We also plan to open
our corporate replacement store on the north side of Sheboygan, Wisconsin in
August 2003. This will be our third Piggly Wiggly Fresh MarketCircle store and
will also feature our new "Pig Stop" gas station and
10
convenience store. Finally, we have entered into an agreement to purchase a
Rainbow Foods store located in Racine, Wisconsin from Fleming Companies, Inc.
and one of its affiliates. We expect to close this acquisition in July 2003 and
intend to operate the store as a corporate Piggly Wiggly store.
WHOLESALE NET SALES
Wholesale net sales for the first quarter of 2003 increased 2.3% to $93.7
million compared to $91.6 million for the same period in 2002. Since the first
quarter of 2002, our wholesale net sales have increased as a result of the
February 2003 opening of a replacement franchise supermarket in Omro, Wisconsin
and the conversion of an independent supermarket in Cambridge, Wisconsin in
August 2002. Wholesale net sales were also positively impacted by approximately
$500,000 as a result of our serving as a temporary secondary wholesale supplier
to a group of local supermarkets otherwise generally supplied by one of our
competitors which has filed for bankruptcy protection. We expect that these
additional wholesale sales will continue at least into the second quarter of
2003.
We expect our wholesale net sales to be further positively impacted over
the next 12 months by our expanded and renovated franchise replacement store
projects ongoing in Mayville, Mosinee and Cross Plains, Wisconsin and our
planned new franchise replacement stores in Juneau and Union Grove, Wisconsin.
GROSS MARGIN
Our gross margin for the first quarter of 2003 increased to 20.3% from
19.9% for the same period in 2002. The primary factor contributing to the gross
margin improvement was a one-time positive book-to-physical inventory adjustment
of approximately $500,000 related to the completion of the final phase of our
wholesale systems project, partially offset by lower perishable gross margins
subsequent to the implementation of the wholesale system.
Gross margin was also impacted by the application of Emerging Issues Task
Force Issue ("EITF") No. 02-16, "Accounting by a Customer (including a Reseller)
for Certain Consideration Received from a Vendor." during the first quarter.
Applying the provisions prescribed by EITF No. 02-16 resulted in the
reclassification of certain cash consideration received from our vendors. In the
past, we recognized certain vendor rebates and advertising consideration
received in excess of direct advertising costs as a reduction of our selling,
general and administrative expenses. EITF No. 02-16 specifies that if the amount
of cash consideration paid by the vendor exceeds the cost being reimbursed, that
the excess amount should be characterized as a reduction of cost of products
sold when recognized in the reseller's income statement. The reclassification we
recorded reduced our cost of products sold and, correspondingly, increased our
selling, general and administrative expenses for the first quarter of 2003 and
2002 by $1.3 million and $1.5 million, respectively.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Our selling, general and administrative expenses, as a percent of net
sales, increased to 17.0% for our first quarter of 2003 compared to 16.6% for
the same period in 2002. The increase was principally attributable to higher
operating costs compared to net sales as discussed below.
Despite adding an employee health insurance cost-sharing program in the
first quarter of 2003, we continue, like other companies, to experience
significant increases in health and accident insurance costs. For the first
quarter of 2003, our health and accident and other benefit costs increased
nearly $500,000 or 14.5% over the prior year. For the first quarter of 2003, we
experienced higher than normal claims, which increased our self-insured costs.
We anticipate that our claims experience will even out to a more normal level
during the remainder of the year; however, there can be no assurance this will
occur.
Due to the ongoing and increasingly competitive nature of the supermarket
industry, some of our franchised and corporate retail stores continue to
experience operational challenges in their respective
11
marketplaces. 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 in the next 12 months. While we have not incurred 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 the future.
NET EARNINGS
Our operating income for our first quarter increased by 1.7% to $3.75
million, compared to $3.68 million for our 2002 first quarter. As a percent of
net sales, our operating income was 2.0% in the first quarters of both years.
Our earnings before income taxes for the first quarter of 2003 increased 0.7%,
to $3.2 million, compared to $3.1 million for the first quarter of 2002. As a
percent of net sales, earnings before income taxes for the first quarter
remained unchanged from the prior year at 1.7%. Net earnings for the first
quarter of 2003 increased 0.7% to $1.93 million compared to $1.91 million for
the same period in 2002. Almost entirely due to stock repurchases, diluted
earnings per share for the first quarter of 2003 increased 5.6% to a record
$0.38 compared to $0.36 for the same period in 2002. Diluted weighted average
common shares and equivalents outstanding for the first quarter of 2003 were
5,095,000 compared to 5,265,000 for the same period in 2002.
Many of our peer companies measure the profitability of their sales using
the net earnings to net sales ratio. This ratio represents the net earnings
margin realized from each dollar of net sales. Our 2003 first quarter net
earnings to net sales ratio was 1.03% compared to 1.04% for the first quarter of
2002.
LIQUIDITY AND CAPITAL RESOURCES
SUMMARY
At April 19, 2003, we had cash and equivalents totaling $13.9 million. At
year-end 2002, cash and equivalents aggregated $14.3 million. The net cash
outflow of approximately $304,000 was attributable to various operational,
investing and financing activities. Our working capital position at April 19,
2003 increased 9.7% to $31.6 million, compared to $28.8 million at December 28,
2002. Our current ratio at April 19, 2003 was 1.65 to 1.00, compared to 1.56 to
1.00 at December 28, 2002. As of April 19, 2003, we had unsecured revolving bank
credit facilities aggregating $35.0 million, with $7.4 million remaining
available for use. Our current working capital levels provide us with a very
favorable and strong liquidity position. Additionally, we continue to remain in
compliance with all credit facility debt covenants.
CASH FLOWS FROM OPERATING ACTIVITIES
During our first quarter of 2003, our net cash provided by operations was
$1.5 million, compared to of $3.0 million for the same period in 2002. The
primary reason contributing to the decrease in net operating cash inflows as
compared to 2002 was the first quarter increase in our receivables from
franchise and trade customers of $4.8 million compared to $3.0 million for the
first quarter of 2002. The increase in receivables was partly offset by the
reduction in the amount of land and building held for resale. In the first
quarter of 2003, cash inflows from completed land and building held for resale
projects was $3.0 million compared to $1.9 million of cash inflows from projects
completed during the first quarter of 2002. Additional changes in operating cash
flows in the first quarter of 2003 were due to the combined effect of changes in
inventory and accounts payable.
CASH FLOWS FROM INVESTING ACTIVITIES
Net cash outflows from investing activities for our first quarter of 2003
totaled $1.8 million, compared to $4.1 million for the same period in 2002.
Nearly $2.1 million of capital items were purchased during the first quarter of
2003 compared to $4.3 million for the same period in 2002. Expenditures for
retail equipment and fixtures were nearly $800,000, expenditures related to the
12
expansion of the distribution centers were nearly $600,000, and corporate office
technology expenditures were nearly $200,000 which accounted for approximately
$1.6 million of the cash outflow. Additionally, approximately $500,000 of the
investing outflow related to capital expenditures for our on going systems
project.
CASH FLOWS FROM FINANCING ACTIVITIES
Net cash outflows from financing activities for our first quarter totaled
$46,000 compared to $932,000 in cash inflows for the same period in 2002. The
change was primarily due to increased acquisition of treasury stock during the
first quarter of 2003 compared to the same period in 2002. We repurchased nearly
106,000 shares of our own common stock for an aggregate price of $1.7 million,
compared to 51,000 shares aggregating $924,000 for the first quarter of 2002.
During the first quarter of 2003, we increased the borrowing on our $35.0
million revolving credit facility by $2.2 million to $27.6 million from $25.4
million at December 28, 2002. Our ratio of total liabilities to shareholders'
investment for the 2003 first quarter was 2.05 compared to 2.09 at fiscal year
end 2002 and 1.64 at the end of the first quarter of 2002. The increase in the
ratio of liabilities to shareholders' investment since the first quarter of 2002
is primarily due to an increase of $11.6 million on our $35.0 million revolving
credit facility to fund working capital and capital expenditures.
At the end of the quarter, approximately $2.9 million remained available
from our current Board-authorized $30 million share repurchase plan approved in
July 2002. Also, in March 2003, our board of directors declared a second quarter
2003 cash dividend of $0.09 per share of common stock. The dividend is payable
on June 6, 2003 to shareholders of record on May 23, 2003 and is expected to
approximate $450,000 in the aggregate.
MAJOR 2003 COMMITMENTS
During the first quarter of 2003, we successfully completed the
installation of the infrastructure and wholesale business segments of our
systems project. The next two phases are the retail business segment and the
services segment. For the retail business segment, we are nearly complete in the
final selection of the software. Additionally, a point of sale phase was added
to our project. This addition will include the replacement of the point of sale
equipment and software at our retail stores and is estimated to add about $5.0
million to the total cost of the project. We plan to begin implementation of the
services segment, which includes human resources, payroll and financial
reporting, during the second quarter of 2003. From the start of 2003 until the
targeted completion in late 2005, we expect to spend $13.5 million on our
systems project, with approximately $4.4 million planned for 2003.
Our 2003 capital budget is approximately $14.8 million, compared to our
actual 2002 capital spending of $13.7 million. This budget is comprised of
approximately $7.9 million for corporate retail replacement supermarkets, $1.3
million for distribution center additions, $4.4 million for the business systems
project and $1.2 million for other technology-related and office upgrade
projects. At the end of the first quarter of 2003, we have approximately $12.7
million remaining to be expended this year out of our total $14.8 million
capital budget. Our 2003 capital budget does not include any amounts that may be
required to acquire any multiple-store supermarket chains or fund any similar
opportunities.
13
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
expectation that we will continue serving as a temporary secondary wholesale
supplier to a group of local supermarkets during our second quarter; (b) plans
to remodel existing supermarkets, open additional corporate supermarkets and
convert existing supermarkets to franchised supermarkets; (c) our anticipated
claims experience related to our self-insured health benefits; and (d) the
possibility that we may incur retail repositioning expenses in the future. 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; and (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. 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 our $35 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 $27.5 million under this facility as of April 19, 2003
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 April 19, 2003, a 100
basis point increase in market interest rates would increase our annual interest
expense by approximately $275,000. Similarly, a 100 basis point decrease in the
market interest rate would reduce our annual interest expense by approximately
$275,000.
We believe that our exposure to market risks related to changes in foreign
currency exchange rates and trade accounts receivable is immaterial.
Item 4. Procedures and Controls
a. Evaluation of disclosure controls and procedures:
------------------------------------------------
Based on their respective evaluation as of a date within 90 days of the
filing date of this Quarterly Report on Form 10-Q, our principal executive
officer and principal financial officer have concluded that our disclosure
controls and procedures (as defined in Rules 13a-14(c) and 15d-14(c) under the
Securities Exchange Act of 1934 (the "Exchange Act")) are effective to ensure
that information required to be disclosed by us in reports that we file or
submit under the Exchange Act is recorded, processed, summarized and reported
within the time periods specified in Securities and Exchange Commission rules
and forms.
b. Changes in internal controls:
----------------------------
There were no significant changes in our internal controls or in other
factors that could significantly affect these controls subsequent to the date of
their evaluation, including any corrective actions with regard to significant
deficiencies and material weaknesses.
14
PART II OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds
As part of our annual compensation to our independent directors, on January
30, 2003, we issued 449 shares of our Common Stock to each of our five
non-employee directors that are not otherwise compensated by us for professional
services. We issued such shares with out registration under the Securities Act
of 1933 in reliance on Section 4(2) of such Act.
Item 9. Exhibits and Reports on Form 8-K
(a) Exhibits
99.1 Written Statements Pursuant to 18 U.S.C. ss. 1350.
(b) Reports on Form 8-K
We filed a current report on Form 8-K dated February 25, 2003 pursuant
to item 9 with respect to our press release for the fiscal year ended
December 28, 2002 and related disclosure requirements of Regulation
FD.
15
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: June 3, 2003 By: /s/ Elwood F. Winn
------------------------------------------
Elwood F. Winn,
President and Chief Executive Officer
Dated: June 3, 2003 By: /s/ S. Patric Plumley
------------------------------------------
S. Patric Plumley,
Senior Vice President, Chief Financial
Officer, Secretary and Treasurer
16
CERTIFICATION
-------------
I, Elwood F. Winn, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Fresh Brands,
Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and we have:
(a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
(b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date"); and
(c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent functions):
(a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
(b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
DATE: June 3, 2003 By: /s/ Elwood F. Winn
----------------------------------------
Elwood F. Winn,
President and Chief Executive Officer
17
CERTIFICATION
-------------
I, S. Patric Plumley, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Fresh Brands,
Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and we have:
(a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
(b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date"); and
(c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent functions):
(a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
(b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
DATE: June 3, 2003 By: /s/ S. Patric Plumley
-----------------------------------------
S. Patric Plumley,
Senior Vice President, Chief Financial
Officer Secretary and Treasurer
18