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 July 12, 2003
Commission File Number 000-32825
FRESH BRANDS, INC.
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(Exact name of registrant as specified in its charter)
WISCONSIN 39-2019963
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2215 Union Avenue
Sheboygan, Wisconsin 53081
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(Address of principal executive offices) (Zip Code)
Telephone number, including area code: (920) 457-4433
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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 August 25, 2003, 5,029,613 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 15
Item 4. Procedures and Controls 15
PART II OTHER INFORMATION
Item 4. Submission of Matters to Vote of Security Holders 16
Item 9. Exhibits and Reports on Form 8-K 16
Signatures 17
Certifications 18 - 20
2
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
FRESH BRANDS, INC.
CONSOLIDATED BALANCE SHEETS
(unaudited)
(In thousands)
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July 12, December 28,
Assets 2003 2002
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Current assets:
Cash and equivalents $ 13,545 $ 14,250
Receivables, net 15,211 14,267
Inventories 36,416 36,268
Land and building held for resale 9,294 7,601
Other current assets 3,518 3,545
Deferred income taxes 4,291 4,291
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Total current assets 82,275 80,222
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Noncurrent receivable under capital subleases 21,693 22,332
Property and equipment, net 27,170 28,229
Property under capital leases, net 13,085 13,635
Goodwill, net 20,280 20,280
Other noncurrent assets, net 6,736 6,475
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Total assets $ 171,239 $ 171,173
======================================================================================================================
Liabilities and Shareholders' Investment
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Current liabilities:
Accounts payable $ 31,912 $ 34,475
Accrued salaries and benefits 6,492 6,276
Accrued insurance 3,169 3,064
Other accrued liabilities 6,034 5,379
Current obligations under capital leases 1,885 1,898
Current maturities of long-term debt 316 316
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Total current liabilities 49,808 51,408
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Long-term obligations under capital leases 35,956 36,965
Long-term debt 27,463 26,204
Deferred income taxes 1,114 1,114
Shareholders' investment:
Common stock 438 438
Additional paid-in capital 15,573 15,527
Retained earnings 84,698 82,030
Treasury stock (43,811) (42,513)
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Total shareholders' investment 56,898 55,482
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Total liabilities and shareholders' investment $ 171,239 $ 171,173
======================================================================================================================
See condensed notes to consolidated financial statements.
3
FRESH BRANDS, INC.
CONSOLIDATED STATEMENTS OF EARNINGS
(unaudited)
(In thousands, except per share data)
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For the 12-weeks ended For the 28-weeks ended
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July 12, 2003 July 13, 2002 July 12, 2003 July 13, 2002
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Net sales $ 152,172 $ 146,921 $ 339,842 $ 331,060
Cost of products sold 122,328 117,968 271,822 265,500
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Gross profit 29,844 28,953 68,020 65,560
Selling, general and administrative
expenses 24,785 23,733 56,615 54,360
Depreciation and amortization 1,912 1,760 4,512 4,055
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Operating income 3,147 3,460 6,893 7,145
Interest expense (net) 447 352 1,033 899
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Earnings before income taxes 2,700 3,108 5,860 6,246
Provision for income taxes 1,052 1,198 2,285 2,422
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Net earnings $ 1,648 $ 1,910 $ 3,575 $ 3,824
===================================================================================================================
Earnings per share - basic $ 0.33 $ 0.37 $ 0.71 $ 0.74
Earnings per share - diluted $ 0.33 $ 0.36 $ 0.70 $ 0.73
Weighted average shares and equivalents outstanding:
Basic 5,035 5,174 5,048 5,169
Diluted 5,063 5,270 5,081 5,266
Cash dividends paid per share of common $ 0.09 $ 0.09 $ 0.18 $ 0.18
stock
===================================================================================================================
See condensed notes to consolidated financial statements.
4
FRESH BRANDS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(In thousands)
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For the 28-weeks ended
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July 12, 2003 July 13, 2002
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CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings $ 3,575 $ 3,824
Adjustments to reconcile net earnings to net cash provided
by operating activities:
Depreciation and amortization 4,512 4,055
Changes in assets and liabilities:
Receivables, net (944) (1,069)
Inventories (147) 4,729
Other current assets (1,629) (603)
Accounts payable (2,563) (2,726)
Accrued liabilities 1,024 1,688
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Net cash flows provided by operating activities 3,828 9,898
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CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (3,178) (7,650)
Receipt of principal amounts under capital subleases 583 283
Other-proceeds from asset sales 32 -
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Net cash flows used in investing activities (2,563) (7,367)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Payment for acquisition of treasury stock (2,002) (1,540)
Net change in revolver activity 1,450 3,100
Principal payments on capital lease obligations (1,022) (627)
Payment of cash dividends (908) (931)
Exercise of stock options 674 772
Principal payments on long-term debt (192) (494)
Other financing activities 30 15
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Net cash flows provided by (used in) financing activities (1,970) 295
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CASH AND EQUIVALENTS:
Net change (705) 2,826
Balance, beginning of period 14,250 11,501
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Balance, end of period $ 13,545 $ 14,327
======================================================================================================================
SUPPLEMENTAL CASH FLOW DISCLOSURES:
Interest paid $ 1,059 $ 954
Income taxes paid 926 315
See condensed 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 of America 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
presentation of the results for the interim periods presented. These financial
statements should be read in conjunction with the consolidated 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 reclassified to conform to 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 was comprised of
16-weeks and the second and third quarters 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
The Company has stock option and other stock-based compensation plans which
are fully described in the Company's Form 10-K for the fiscal year ended
December 28, 2002. The Company accounts for its stock-based compensation plans
using the intrinsic value method, under the principles prescribed by the
Accounting Principles Board's opinion No. 25, Accounting for Stock Issued to
Employees, and related interpretations. For stock options granted, no employee
compensation cost is reflected in the Company's results of operations for the
second quarter and year-to-date of 2003 or 2002, as all options granted under
the plans had an exercise price equal to the market value of the underlying
common stock at the grant date.
The Company has adopted the disclosure-only provisions of FASB Statement
No. 123, ("Statement No. 123") Accounting for Stock Based Compensation, as
amended by FASB Statement No. 148, Accounting for Stock-Based
Compensation-Transition and Disclosure. Accordingly, no compensation cost has
been recognized in the results of operations for the second quarter and
year-to-date of 2003 and 2002 for the stock option plans. Had compensation cost
for stock options granted been determined based on the fair value at the grant
date for awards consistent with an alternative method prescribed by Statement
No. 123, the Company's net income and earnings per share for the second quarter
and year-to-date 2003 and 2002 would have reflected the pro forma amounts
indicated below:
6
(In thousands, except per share data)
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For the 12-weeks ended For the 28-weeks ended
July 12, 2003 July 13, 2002 July 12, 2003 July 13, 2002
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Net earnings
As reported $ 1,648 $ 1,910 $ 3,575 $ 3,824
Deduct: Total stock-based
compensation expense determined
under fair value based method, net
of tax 120 132 228 308
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Pro forma $ 1,528 $ 1,778 $ 3,347 $ 3,516
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Earnings per share-basic
As reported $ 0.33 $ 0.37 $ 0.71 $ 0.74
Pro forma $ 0.31 $ 0.34 $ 0.67 $ 0.68
Earnings per share-diluted
As reported $ 0.33 $ 0.36 $ 0.70 $ 0.73
Pro forma $ 0.30 $ 0.34 $ 0.66 $ 0.67
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(3) Other Current Assets
(In thousands)
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July 12, 2003 December 28, 2002
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Prepaid expenses $ 2,058 $ 1,364
Receivable under capital subleases 1,138 1,082
Retail systems and supplies for resale 322 1,099
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Other current assets $ 3,518 $ 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 operating
supermarkets. We also acquired a store on July 7, 2003 in Racine, Wisconsin
which we expect to open as a Piggly Wiggly store in the third quarter of 2003.
Our retail revenue is generated by our corporate supermarkets selling products,
including products purchased from our wholesale segment, to retail consumers.
7
Summarized financial information for the second quarter and year-to-date of
2003 and 2002 concerning our reportable segments is shown in the following
tables:
(In thousands)
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For the 12-weeks ended For the 28-weeks ended
Net Sales July 12, 2003 July 13, 2002 July 12, 2003 July 13, 2002
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Wholesale $ 116,479 $ 110,849 $ 260,333 $ 250,765
Intracompany (37,442) (36,383) (87,569) (84,676)
Wholesale net sales 79,037 74,466 172,764 166,089
Retail 73,135 72,455 167,078 164,971
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Total net sales $ 152,172 $ 146,921 $ 339,842 $ 331,060
==================================================================================================================
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For the 12-weeks ended For the 28-weeks ended
Operating Income July 12, 2003 July 13, 2002 July 12, 2003 July 13, 2002
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Wholesale $ 2,999 $ 2,309 $ 7,284 $ 5,491
Retail 148 1,151 (391) 1,654
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Total operating income 3,147 3,460 6,893 7,145
==================================================================================================================
(5) New Accounting Pronouncements
During 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 $1.0
million and $0.6 million for the second quarter of 2003 and 2002, respectively
and by $2.3 million and $2.1 million year-to-date for 2003 and 2002,
respectively.
8
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
General
As of July 12, 2003, we operated 28 supermarkets and franchised an
additional 74 supermarkets, including one franchised store which closed July 24,
2003. This compares to 27 owned supermarkets and 72 franchised supermarkets as
of July 13, 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
also acquired a store on July 7, 2003 in Racine, Wisconsin which we expect to
open as a Piggly Wiggly store in the third quarter of 2003. We are the primary
supplier to all 102 operating 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. 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 corporate-owned supermarkets which operated
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 two quarters of 2003 we continued to be affected by
competitive store openings. New competitive stores opened in four of our markets
in the first quarter, two more are expected to open this summer and one
additional store is scheduled to open in the fall. With one exception, all of
these stores are Wal-Mart Supercenters. Comparable store sales for franchised
and corporate retail stores decreased 0.7% for the second quarter of 2003 and
decreased 0.2% for the first two quarters of 2003, reflecting the continued
challenging economic and competitive environment.
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 second quarter and year-to-date of 2003 compared to the
second quarter and year-to-date of 2002.
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Percent of net sales Variance Percent of net sales Variance
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For the 12-weeks ended July 12, 2003 For the 28-weeks ended July 12, 2003
vs. vs.
July 12, 2003 July 13, 2002 July 13, 2002 July 12, 2003 July 13, 2002 July 13, 2002
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Net sales 100.0% 100.0% 0.0% 100.0% 100.0% 0.0%
Retail net sales 48.1% 49.3% (1.2)% 49.2% 49.8% (0.6)%
Wholesale net sales 51.9% 50.7% 1.2% 50.8% 50.2% 0.6%
Gross profit 19.6% 19.7% (0.1)% 20.0% 19.8% 0.2%
Selling, general &
admin expenses 16.3% 16.2% 0.1% 16.7% 16.4% 0.3%
Depreciation &
amortization 1.3% 1.2% 0.1% 1.3% 1.2% 0.1%
Operating income 2.1% 2.4% (0.3)% 2.0% 2.2% (0.2)%
Earnings before income
taxes 1.8% 2.1% (0.3)% 1.7% 1.9% (0.2)%
Net earnings 1.1% 1.3% (0.2)% 1.1% 1.2% (0.1)%
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Net Sales
Information regarding our net sales for the second quarter and year-to-date
periods ended July 12, 2003 and July 13, 2002 is set forth in the following
table:
(In thousands)
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For the 12-weeks ended For the 28-weeks ended
July 12, 2003 July 13, 2002 July 12, 2003 July 13, 2002
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Retail net sales $ 73,135 $ 72,455 $ 167,078 $ 164,971
Wholesale net sales 79,037 74,466 172,764 166,089
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Total sales $ 152,172 $ 146,921 $ 339,842 $ 331,060
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Net sales for our 12- and 28- week periods ended July 12, 2003 were both a
record $152.2 million and $339.8 million, respectively, compared to $146.9
million and $331.1 million, respectively, for the same periods in 2002. The net
sales increases for our 12- and 28- week periods ended July 12, 2003 were 3.6%
and 2.7%, respectively, due primarily to an increase in wholesale sales relating
to our temporary supply agreement with a group of local supermarkets, the
opening of a franchise replacement store in Omro, Wisconsin in February 2003 and
the opening of our new corporate store in Kenosha, Wisconsin in January 2003.
Retail Net Sales
Our total retail sales for the 12- and 28-week periods ended July 12, 2003
increased 0.9% to $73.1 million and 1.3% to $167.1 million, respectively,
compared to the same periods in 2002. Our retail net sales improvement was due
to the January 2003 opening of our new corporate Piggly Wiggly Fresh
MarketCircle store in Kenosha, Wisconsin, which was partially offset by the
decrease in our same store sales for our corporate supermarkets.
Comparable store sales for our corporate Piggly Wiggly and Dick's
Supermarkets and franchised supermarkets on an aggregate basis decreased 0.7%
for the second quarter of 2003 and 0.2% for the first two quarters of 2003.
Comparable store sales represent sales of all corporate and franchised stores
that were open throughout the second quarter of 2003 and 2002. The decrease was
due primarily to the challenging economic environment and the continued effects
of competitive activity in many of our market areas.
10
We are continuing our efforts to expand and upgrade our existing
supermarkets and supermarket brands, including through the opening of additional
and replacement retail stores. On August 8, 2003 we opened our third corporate
Piggly Wiggly Fresh MarketCircle store. This new, 50,000 square foot store in
Sheboygan, Wisconsin, replaces a smaller, outdated corporate store and features
our first corporate "Pig Stop" fuel and convenience store. In addition our new
30,000 square foot Dick's Supermarkets corporate store and fuel
station/convenience store in Maquoketa, Iowa, which represents our first entry
into the Iowa market, is expected to open in the fourth quarter of 2003. Also,
we expect to complete the conversion of a former Rainbow Foods store in Racine,
Wisconsin, to the Piggly Wiggly format during the third quarter of 2003.
Finally, we have entered into an agreement to purchase a Cub Foods store located
in Menasha, Wisconsin from Supervalu, Inc. We expect to close this acquisition
during the third quarter of 2003 and intend to operate the store as a corporate
Piggly Wiggly store, replacing an existing corporate store.
Wholesale Net Sales
Wholesale net sales for the 12- and 28-week periods ended July 12, 2003
increased 6.1% to $79.0 million and 4.0% to $172.8 million, respectively,
compared to the same periods in 2002. The increase reflects the February 2003
opening of a replacement franchise supermarket in Omro, Wisconsin. Net wholesale
sales for the second quarter of 2003 and year-to-date also included
approximately $4.6 million and $5.1 million, respectively, in sales as a
temporary secondary wholesale supplier to a group of local supermarkets,
previously supplied by Fleming Companies. We expect that these additional
wholesale sales will continue at least into the third quarter of 2003.
We expect our net wholesale sales to be positively impacted during the
remainder of 2003 due to the completion in July 2003 of expansion and remodeling
projects at franchise stores in Mosinee and Cross Plains, Wisconsin.
Additionally, on July 30, 2003, we opened a new 24,000 square foot franchise
replacement store in Juneau, Wisconsin. Also, by the fall of 2003, we expect to
complete an expansion and renovation of a franchise replacement store project in
Mayville, Wisconsin and plan to open a franchise replacement store in Union
Grove, Wisconsin by the end of the year.
Gross Profit
Our gross profit percentage for the second quarter of 2003 decreased to
19.6% from 19.7% for the same period in 2002. Year-to-date, our gross profit
percentage increased to 20.0% from 19.8% for the same period in 2002. Our
year-to-date gross profit improvement is partially due to a positive
book-to-physical inventory adjustment made in the first quarter of 2003 of
approximately $500,000 related to the completion of the final phase of our
wholesale systems project.
Gross profit percentage and dollars were 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." 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 of
these items reduced cost of products sold and, correspondingly, increased
selling, general and administrative expense by $1.0 million and $0.6 million for
the second quarter of 2003 and 2002, respectively and by $2.3 million and $2.1
million year-to-date for 2003 and 2002, respectively.
11
Selling, General and Administrative Expenses
Our selling, general and administrative expenses, as a percent of net
sales, increased to 16.3% for our second quarter of 2003 compared to 16.2% for
the same period in 2002. Year-to-date, as a percent of net sales, selling,
general, and administrative expenses increased to 16.7% compared to 16.4% for
the same period in 2002. We continue to experience significant increases in
health and accident insurance costs. During the first two quarters of 2003, our
health and accident and other benefit costs increased $850,000 or 16.7% over the
prior year.
Due to the ongoing and increasingly competitive nature of the supermarket
industry and the challenging economic environment, some of our franchised and
corporate retail stores continue to experience operational challenges in their
respective 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. We are paying close
attention to the franchised and corporate retail stores experiencing difficulty
and are implementing strategies for operational improvements.
During the second quarter of 2003 we incurred charges of $850,000,
including a retail repositioning charge of $350,000 and a bad debt reserve of
$500,000, compared to a charge for bad debt reserves of $171,000 in the second
quarter of 2002. These charges primarily related to franchise receivables,
including franchise receivables for a store which closed in our third quarter.
This additional year over year charge of $679,000 was partially offset by a net
benefit of $305,000 relating to a reduction in expense for the discretionary
profit sharing portion of our defined contribution plan. While we believe our
current bad debt reserves are adequate, we nonetheless may likely have
additional reserves for future sales to account for the credit risk associated
with franchise store operations that are being adversely impacted by difficult
competitive conditions and a weak general economy.
Net Earnings
Our operating income for the 12- and 28-week periods ended July 12, 2003
decreased 9.0% to $3.1 million and 3.5% to $6.9 million, respectively, compared
to the same periods in 2002. Net earnings for the 12- and 28- week periods ended
July 12, 2003 decreased 13.7% to $1.6 million and 6.5% to $3.6 million,
respectively, compared to the same periods in 2002. Diluted earnings per share
for the second quarter and first two quarters of 2003 decreased 8.3% and 4.1%,
respectively, to $0.33 and $0.70 compared to $0.36 and $0.73 for the same
periods in 2002. Diluted weighted average common shares and equivalents
outstanding for the 28-weeks ended July 12, 2003 were 5,081,000 compared to
5,266,000 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 second quarter and
year-to-date net earnings to net sales ratio were both 1.1% compared to 1.3% for
the second quarter of 2002 and 1.2% for year-to-date 2002.
Liquidity and Capital Resources
Summary
At July 12, 2003, we had cash and equivalents totaling $13.5 million,
compared to $14.3 million of cash and equivalents at year-end 2002. The net cash
outflow of approximately $705,000 was attributable to various operational,
investing and financing activities. Our working capital position (current assets
minus current liabilities), at July 12, 2003 increased 12.7% to $32.5 million,
compared to $28.8 million at December 28, 2002. Our current ratio (current
assets divided by current liabilities), at July 12, 2003 was 1.65 to 1.00,
compared to 1.56 to 1.00 at December 28, 2002. As of July 12, 2003, we had
unsecured revolving bank credit facilities aggregating $35.0 million, with $8.1
million remaining available for use. Our current working capital levels are
expected to provide us with an adequate liquidity position for
12
the forthcoming year. Additionally, we continue to remain in compliance with all
credit facility debt covenants.
Cash Flows From Operating Activities
For the 28-weeks ended July 12, 2003, our net cash provided from operations
was $3.8 million, compared to $9.9 million for the same period in 2002. This
decrease in net operating cash inflows compared to 2002 was primarily due to a
nominal inventory increase of $147,000 in 2003 compared to an inventory decrease
of $4.7 million in 2002.
Cash Flows From Investing Activities
Net cash outflows from investing activities for the first two quarters of
2003 totaled $2.6 million, compared to $7.4 million for the same period in 2002.
This decrease was primarily due to capital expenditures of $3.2 million in 2003
compared to $7.7 million for the same period in 2002. Capital expenditures
during the first two quarters of 2003 included $1.3 million for retail equipment
and fixtures, $748,000 relating to distribution centers, $327,000 for corporate
office technology and $850,000 for our ongoing systems projects.
Cash Flows From Financing Activities
Net cash outflows from financing activities for first two quarters of 2003
totaled $2.0 million compared to $295,000 in cash inflows for the same period in
2002. The change was primarily due to the net change in the borrowing activity
year over year. During the first two quarters of 2003, the borrowings on our
$35.0 million revolving credit facility increased $1.5 million compared to an
increase of $3.1 million for the first two quarters of 2002. Net cash outflows
for 2003 were also impacted by the increased acquisition of treasury stock
during the first two quarters of 2003 compared to the same period in 2002.
During the first two quarters of 2003 we repurchased 127,000 shares of our
common stock for an aggregate price of $2.0 million, compared to 82,000 shares
aggregating $1.5 million for the first two quarters of 2002.
Our ratio of total liabilities to shareholders' investment at the end of
the second quarter of 2003 was 2.01 compared to 2.09 at fiscal year end 2002 and
1.71 at the end of the second quarter of 2002. The increase in the ratio of
liabilities to shareholders' investment since the end of the second quarter of
2002 is primarily due to an increase of $10.4 million in drawings on our $35.0
million revolving credit facility to fund systems projects and franchise and
corporate store remodel and replacement projects.
At the end of the second quarter of 2003, approximately $2.6 million
remained available from our current Board-authorized $30 million share
repurchase plan. Also, in July 2003, our Board of Directors declared a third
quarter 2003 cash dividend of $0.09 per share of common stock. The dividend is
payable on September 5, 2003 to shareholders of record on August 22, 2003 and is
expected to approximate $450,000.
Major 2003 Commitments
Our business information technology capital expenditure project continues
on schedule. The first two phases of the project, the infrastructure and the
wholesale business segments, have been completed. The remaining three phases
include the retail business, services and point of sale segments. The retail and
services segments are currently in process and the new point of sale systems are
being tested at two of our Sheboygan stores. We are currently about 40% through
the business information system replacement program. Since the fourth quarter of
2001, we have invested about $8.5 million in 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
13
systems project and $1.2 million for other technology-related and office upgrade
projects. At the end of the first two quarters of 2003, we have approximately
$11.6 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 fund future acquisition opportunities.
14
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 statements about our (a)
expectations regarding future competitive store openings; (b) expectations
regarding our reserves related to our franchise receivables; (c) expectations
regarding potential future reserves for our receivables; and; (d) plans to
remodel existing supermarkets, open additional corporate supermarkets and
convert existing supermarkets to franchised supermarkets. 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 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 potential recognition of additional write-offs relating to
accounts receivable from our franchise operators; and (8) our increasing debt
and capitalized lease amounts. 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 Form 10-Q 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 rate. We
have borrowed approximately $26.9 million under this facility as of July 12,
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 July 12,
2003, a 100 basis point increase in market interest rates would increase our
annual interest expense by approximately $269,000. Similarly, a 100 basis point
decrease in the market interest rate would reduce our annual interest expense by
approximately $269,000.
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 the end of the period covered by
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.
15
b. Changes in internal controls:
-----------------------------
There were no significant changes in our internal controls or in other
factors that could significantly affect these controls during the second quarter
of 2003, including any corrective actions with regard to significant
deficiencies and material weaknesses.
PART II OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
Our 2003 annual meeting of shareholders was held on Wednesday, May 13, 2003. At
the meeting, the shareholders re-elected Michael R. Houser, Bruce J. Olson and
Walter G. Winding to our Board of Directors for the three-year terms expiring at
our 2006 annual meeting of shareholders and until their successors are duly
qualified and elected. As of the March 10, 2003 record date for the annual
meeting, 5,053,946 shares of Common Stock were outstanding and eligible to vote.
Of these, 4,468,346 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
----- ---------- ----- ----------
Michael R. Houser 4,410,096 98.7% 58,250 1.3%
Bruce J. Olson 4,420,776 98.9% 47,570 1.1%
Walter G. Winding 4,228,903 94.6% 239,443 5.4%
The tabulation of votes for the election of directors resulted in no broker
non-votes or abstentions.
Our continuing directors were Steven R. Barth and G. William Dietrich, whose
terms expire in 2004, and R. Bruce Grover, and Elwood F. Winn, whose terms
expire in 2005. Martin Crneckiy, Jr., whose term was to expire in 2005,
requested a leave of absence resignation from the board effective July 25, 2003
in order to dedicate his full business time and attention to expanded job
responsibilities and related extensive business travel commitments related to
his primary employment.
Item 9. Exhibits and Reports on Form 8-K
(a) Exhibits
31.1 Certification by the Chief Executive Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
31.2 Certification by the Chief Financial Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
32 Certifications of Periodic Financial Report by the Chief Executive Officer
and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.
(b) Reports on Form 8-K
We furnished a current report on Form 8-K dated May 16, 2003 pursuant to
item 9 with respect to our press release for the first quarter ended April
19, 2003 and related disclosure requirements of Regulation FD.
16
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 25, 2003 By: /s/ Elwood F. Winn
--------------------------------
Elwood F. Winn,
President and Chief Executive Officer
Dated: August 25, 2003 By: /s/ S. Patric Plumley
--------------------------------
S. Patric Plumley,
Senior Vice President, Chief Financial
Officer, Secretary and Treasurer
17