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 April 20, 2002
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Commission File Number 0-549
FRESH BRANDS, INC.
(Exact Name of Registrant as Specified in its Charter)
WISCONSIN 39-2019963
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(State or other jurisdiction (I.R.S. Employer
of incorporation of organization) Identification No.)
2215 UNION AVENUE
SHEBOYGAN, WISCONSIN 53081
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(Address of principal (Zip Code)
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 June 3, 2002, 5,181,737 shares of Common Stock, $0.05 par value, were
issued and outstanding.
FRESH BRANDS, INC.
FORM 10-Q INDEX
PAGE
NUMBER
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets 3
Unaudited Consolidated Statements of Earnings 4
Unaudited Consolidated Statements of Cash Flows 5
Notes to Unaudited 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
PART II OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds 15
Item 6. Exhibits and Reports on Form 8-K 15
SIGNATURES 16
2
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
FRESH BRANDS, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands)
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(Unaudited) (Audited)
April 20, December 29,
Assets 2002 2001
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Current assets:
Cash and equivalents $ 11,370 $ 11,501
Receivables, net 14,386 11,385
Inventories 30,377 34,952
Land and building for resale 2,904 4,770
Other current assets 2,460 2,220
Deferred income taxes 4,459 4,459
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Total current assets 65,956 $ 69,287
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Noncurrent receivable under capital subleases 9,093 9,278
Property and equipment, net 28,157 26,513
Property under capital leases, net 10,352 10,604
Goodwill, net 20,280 20,280
Other noncurrent assets, net 3,878 3,273
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Total assets $ 137,716 $ 139,235
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Liabilities and Shareholders' Investment
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Current liabilities:
Accounts payable $ 31,201 $ 33,981
Accrued salaries and benefits 5,838 7,845
Accrued insurance 3,285 3,150
Other accrued liabilities 3,967 3,844
Current obligations under capital leases 1,237 1,192
Current maturities of long-term debt 340 323
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Total current liabilities 45,868 50,335
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Long-term obligations under capital leases 20,404 20,808
Long-term debt 18,733 16,569
Deferred income taxes 1,103 1,103
Shareholders' investment:
Common stock 438 438
Additional paid-in capital 15,510 15,371
Retained earnings 77,155 75,680
Treasury stock (41,495) (41,069)
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Total shareholders' investment 51,608 50,420
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Total liabilities and shareholders' investment $ 137,716 $ 139,235
===============================================================================
See notes to unaudited consolidated financial statements.
3
FRESH BRANDS, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF EARNINGS
(In thousands, except per share data)
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For the 16-weeks ended
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April 20, April 21,
2002 2001
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Net sales $ 184,139 $ 153,820
Cost of products sold 148,181 127,758
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Gross profit 35,958 26,062
Selling and administrative expenses 29,936 21,538
Depreciation and amortization 2,296 1,580
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Operating income 3,726 2,944
Interest income 3 388
Interest expense (549) (284)
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Earnings before income taxes 3,180 3,048
Provision for income taxes 1,240 1,158
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Net earnings $ 1,940 $ 1,890
=============================================================================
Earnings per share - basic $ 0.38 $ 0.34
Earnings per share - diluted $ 0.37 $ 0.34
Weighted average shares and equivalents outstanding:
Basic 5,165 5,503
Diluted 5,265 5,518
Cash dividends paid per share of common stock $ 0.09 $ 0.09
=============================================================================
See notes to unaudited consolidated financial statements.
4
FRESH BRANDS, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
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For the 16-weeks ended
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April 20, April 21,
2002 2001
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CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings $ 1,940 $ 1,890
Adjustments to reconcile net earnings to
net cash provided by operating activities:
Depreciation and amortization 2,296 1,580
Changes in assets and liabilities:
Receivables (3,001) (580)
Inventories 4,575 (480)
Other current assets 1,626 (2,377)
Accounts payable (2,780) (3,254)
Accrued liabilities (1,609) (866)
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Net cash flows from operating activities 3,047 (4,087)
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CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (4,272) (327)
Receipt of principal amounts under
capital subleases 162 112
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Net cash flows from investing activities (4,110) (215)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Net change in revolver activity 2,300 -
Payment for acquisition of treasury stock (924) (1,598)
Exercise of stock options 492 363
Payment of cash dividends (465) (493)
Principal payments on capital lease obligations (386) (241)
Principal payments on long-term debt (91) (66)
Other financing activities 6 24
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Net cash flows from financing activities 932 (2,011)
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CASH AND EQUIVALENTS:
Net change (131) (6,313)
Balance, beginning of period 11,501 31,309
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Balance, end of period $ 11,370 $ 24,996
=============================================================================
SUPPLEMENTAL CASH FLOW DISCLOSURES:
Interest paid $ 549 $ 277
Income taxes paid 12 1,095
See notes to unaudited consolidated financial statements.
5
FRESH BRANDS, INC.
NOTES TO UNAUDITED 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 audited 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.
(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 $20.2 million.
The following unaudited 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)
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For the 16-weeks ended
April 20, 2002 April 21, 2001
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Net Sales $ 184,139 $ 186,419
Net Earnings 1,940 1,643
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Basic and diluted earnings per share
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Basic $ 0.38 $ 0.30
Diluted $ 0.37 $ 0.30
=============================================================================
6
(3) Other Current Assets
(In thousands)
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April 20, 2002 December 29, 2001
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Prepaid expenses $ 1,453 $ 1,268
Retail systems and supplies for resale 549 426
Receivable under capital subleases 458 526
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Other current assets $ 2,460 $ 2,220
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(4) Segment Reporting
Summarized financial information for the first quarters of 2002 and 2001
concerning our reportable segments is shown in the following tables (in
thousands):
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For the 16-weeks ended
April 20, 2002 April 21, 2001
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Sales
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Wholesale sales $ 139,916 $ 127,011
Intracompany sales (48,293) (35,791)
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Net wholesale sales 91,623 91,220
Retail sales 92,516 62,600
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Total sales $ 184,139 $ 153,820
=============================================================================
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For the 16-weeks ended
April 20, 2002 April 21, 2001
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Earnings Before Income Tax
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Wholesale $ 3,220 $ 2,492
Retail 506 452
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Total operating income 3,726 2,944
Interest income 3 388
Interest expense (549) (284)
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Earnings before income taxes $ 3,180 3,048
=============================================================================
(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.
7
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 first quarter of fiscal 2001 was less
than $20,000. 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, 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 to decrease first
quarter net sales and cost of products sold by $1.9 million each 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. 144, "Accounting for Impairment of
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.
8
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations
General
As of April 20, 2002, we owned 27 supermarkets and franchised an additional 72
supermarkets. This compares to 19 owned supermarkets and 70 franchised
supermarkets as of April 21, 2001. Nineteen of our corporate supermarkets
operated under the Piggly Wiggly(R) banner, 8 of them operated under the
Dick's(R) Supermarket's banner and all of our franchised supermarkets operated
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 accounting purposes in
consolidation. We supply grocery, frozen food, dairy, 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 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 27 corporate 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.
Annually, our fiscal year ends on the Saturday closest to December 31. As such,
the current fiscal year is a 52-week period. Our first quarter is comprised of
16-weeks and the remaining quarters consisting of 12-weeks each.
Results of Operations
The following table sets forth certain items from our unaudited Consolidated
Statements of Earnings as a percent of net sales and the percentage change in
the dollar amounts of such line items from the first quarter of 2001 compared to
the first quarter of 2002.
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Percent of net sales Percentage change
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For the 16-weeks ended April 20, 2002
April 20, 2002 April 21, 2001 vs. April 21, 2001
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Net sales 100.0% 100.0% 19.7%
Retail sales 50.2% 40.7% 47.8%
Net wholesale sales 49.8% 59.3% 0.4%
Gross margin 19.5% 16.9% 38.0%
Operating and
administrative
expenses 17.5% 15.0% 39.4%
Operating income 2.0% 1.9% 26.6%
Earnings before
income taxes 1.7% 2.0% 4.3%
Net earnings 1.1% 1.2% 2.6%
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9
Net Sales
Information regarding our sales for the 16-weeks ended April 20, 2002 and April
21, 2001 is set forth in the following table (in thousands):
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For the 16-weeks ended
April 20, 2002 April 21, 2001
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Net wholesales sales $ 91,623 $ 91,220
Retail sales 92,516 62,600
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Total sales $ 184,139 $ 153,820
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Net sales for our first quarter were a record $184.1 million, compared to $153.8
million for the same period in 2001. The increase of $30.3 million, or 19.7%,
was 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 first quarter
of 2002.
Retail Sales
Total retail sales volume for our first quarter increased 47.8% to $92.5 million
compared to $62.6 million for the same period in 2001. Our retail sales improved
because of the following:
o The acquisition of the Dick's Supermarket chain added $29.2 million to our
first quarter retail sales 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 significantly higher than sales at the supermarkets they
replaced.
Due in large part to increased intense competitive activity in certain market
areas we operate, the overall softness of the economy and rising unemployment
rates (which therefore reduces discretionary spending), same store sales for our
corporate and franchised supermarkets only increased 1.1% for the first quarter
of 2002. Although same store sales were below our expectations, we are
encouraged by the fact that our customer counts continue to increase as a result
of our successful marketing programs. We are confident in our programs and
direction and believe that we will be able to achieve same store sales increases
that are closer to our targeted rate of 2.0% as the economy improves and our
markets stabilize.
To further enhance our existing supermarkets and supermarket brands, we are
currently in the process of building a new market 50,000 square-foot corporate
supermarket in Kenosha, Wisconsin. This store, patterned after the flagship
supermarket in Sheboygan, Wisconsin, is scheduled to open by January 2003.
Net Wholesale Sales
Net wholesale sales for first quarter increased nominally to $91.6 million
compared to $91.2 million for the same period in 2001. Since the first quarter
of 2001, net wholesale sales increased from the opening of a replacement
franchise supermarket in Campbellsport, Wisconsin in April 2001, the conversion
of independent supermarkets in Kohler, Wisconsin in April 2001, in Howard and
Nekoosa, Wisconsin in October 2001, and in Oostburg, Wisconsin in March 2002.
However, our net wholesale sales were negatively impacted from the closing of
two under-performing franchise stores in April 2001 and the closing of one
independent wholesale customer in July 2001.
Over the next 12 months, multiple additional store openings are planned which we
expect to positively impact net wholesale sales. These facility 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.
10
Gross Margin
Our gross margin for the first quarter increased to 19.5% from 16.9% for the
same period 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 our first quarter compared to 15.0% for the same period in 2001.
The increase was attributable to several factors. Principally, the increase in
our mix of retail sales to total sales resulting from the Dick's acquisition led
to a corresponding and anticipated increase in our operating and administrative
expenses. Additionally, in the first quarter, we recorded approximately $250,000
of depreciation related to the write-up of property and equipment resulting from
the Dick's acquisition.
Health and accident insurance costs, as a percent of sales, for the first
quarter of 2002, were consistent with prior year's. 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 be mitigated, in
part, by the introduction of employee cost sharing for our health plan effective
fall 2001.
We continue to focus on controlling costs throughout our operations. As part of
this initiative, we recently announced the establishment of a marketing alliance
with Fresh Ideas, a new advertising, printing services, media buying and public
relations agency that will provide services exclusively for us. We expect that
this new relationship will not only be more efficient, but will also be more
cost effective in providing the broad range of marketing services we use to
support our brands.
Due to the competitive nature of the supermarket industry, some of our
franchised and corporate retail stores continue to experience operational
challenges in there respective 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 in the next twelve months. 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
Our operating income for our first quarter increased $800,000, or 26.6%, to $3.7
million, compared to $2.9 million for our 2001 first quarter. The addition of
Dick's results in the first quarter of 2002 was the major reason for the
operating income increase over the prior year. As a percent of net sales, our
operating income in the first quarter of 2002 was 2.0%, compared to 1.9% in the
first quarter of 2001. Our earnings before income taxes for the first quarter of
2002 increased $100,000, or 4.3%, to $3.2 million, compared to $3.1 million for
the first quarter of 2001. Our interest expense increased nearly $500,000 in the
first quarter of 2002 as a result of the acquisitions of Dick's Supermarkets in
June, 2001 and borrowing on our revolving credit agreement for additional
working capital needs. As a percent of sales, earnings before income taxes for
the first quarter decreased to 1.7%, compared to 2.0% in the first quarter of
2001. Net earnings for the first quarter of 2002 increased 2.6% to $1.94 million
compared to $1.89 million for the same period in 2001. In large part due to
continued stock repurchases, diluted earnings per share for the first quarter of
2002 increased 8.8% to a record $0.37 compared to $0.34 for the same period in
2001. The weighted average common shares and equivalents for the first quarter
of 2002 were 5,265,000 compared to 5,518,000 for the same period in 2001. Based
on our performance for the first quarter, we expect that our earnings per share
for 2002 will be on the lower end of the range of
11
$1.60 to $1.75 per share, barring any unusual or unforeseen occurrences in the
economy, our markets or our businesses.
Many of our peer companies measure the profitability of their sales using the
net earnings to sales ratio. This ratio represents the net earnings margin
realized from each dollar of sales. Our 2002 first quarter net earnings to sales
ratio was 1.05%, compared to 1.23% for the first quarter of 2001. This was
primarily due to increased competition in some of our retail markets. We expect
that our net earnings to sales ratio will improve throughout the remainder of
fiscal 2002.
EBITDA (earnings before interest, taxes, depreciation and amortization) for the
first quarter of 2002 was $6.0 million, a 33.3% increase from EBITDA of $4.5
million in the same period of 2001. Dick's Supermarkets contributed
approximately $1.0 million to EBITDA in the first quarter of 2002. As a percent
of sales, EBITDA for the quarter ended April 20, 2002 was 3.3% compared to 2.9%
for the same period in 2001.
Liquidity and Capital Resources
Summary
At April 20, 2002, we had cash and equivalents totaling $11.4 million. At
year-end 2001, cash and equivalents aggregated $11.5 million. The net cash
outflow of approximately $100,000 was attributable to various operational,
investing and financing activities as described below. Our working capital
position at April 20, 2002 was $20.1 million, compared to $19.0 million at
December 29, 2001. Our current ratio at April 20, 2002 was 1.44 to 1.00,
compared to 1.38 to 1.00 at December 29, 2001, with cash and equivalents
contributing approximately $11.4 million to working capital. As of April 20,
2002, we had unsecured revolving bank credit facilities aggregating $35.0
million, with $19.0 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 2002, our net cash generated from operations was
$3.0 million, compared to net cash outflows of $4.1 million for the same period
in 2001. A primary reason contributing to the increase in net operating cash
flows was the reduction in the amount of property held for resale. In the first
quarter of 2001, expenditures made for property held for resale of $2.4 million,
compared to $1.9 million of cash inflows from property held for resale projects
completed during the first quarter of 2002. Additional increases in operating
cash inflows in the first quarter of 2002 were due to the combined effect of
changes in accounts receivable, inventory and accounts payable. Changes in these
accounts resulted in net cash outflows of $1.2 million compared to net cash
outflows of $4.3 million during the same time period in the prior year.
Cash Flows From Investing Activities
Net cash outflows from investing activities for our first quarter of 2002
totaled $4.1 million, compared to $200,000 for the same period in 2001. Nearly
$4.3 million of capital items were purchased during the first quarter of 2002
compared to $300,000 for the same period in 2001. Expenditures for retail
equipment and fixtures, including those associated with Dick's, were nearly $1.6
million, expenditures related to the expansion of the distribution centers were
nearly $1.3 million, and corporate office technology expenditures were nearly
$400,000 which accounted for approximately $3.3 million of the cash outflow.
Additionally, approximately $1.0 million of the investing outflow related to
capital expenditures for our on-going systems project.
12
Cash Flows From Financing Activities
Net cash inflows from financing activities for our first quarter ended April 20,
2002 totaled $900,000 compared to nearly $2.0 million in outflows for the same
period in 2001. The change was primarily due to the usage of our revolving line
of credit during 2002 of $2.3 million. 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 the second quarter 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 $16.0 million under the revolving
credit facility at the end of the first quarter of 2002. This increase in our
debt is the main reason that our ratio of total liabilities to shareholders'
investment increased to 1.67 from 1.03 at the end of the first quarters of 2002
and 2001, respectively. Despite the increase in our debt to equity ratio, our
ratio still remains very low relative to our competition. We believe that at
this time, based on our strong balance sheet, that we have the capacity to
acquire two more acquisitions the size of Dick's.
Additional financing cash outflow was due to the repurchase of nearly 51,000
shares of our own common stock in the first quarter of 2002 for an aggregate
price of $924,000, compared to approximately 145,000 shares aggregating $1.6
million for the first quarter of 2001. Approximately $1.0 million of the Board
of Director's authorized $25.0 million stock repurchase program remains
available for future share repurchases. On March 12, 2002, the Fresh Brands'
board of directors declared a second quarter 2002 cash dividend of $0.09 per
share of common stock. The dividend is payable on June 7, 2002 to shareholders
of record on May 24, 2002 and is expected to approximate $450,000.
Major 2002 Commitments
During the second quarter of 2001, we announced a $15.0 million, three-year
capital expenditure project 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,
which is expected to be rolled-out over a three-year period, 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
during the first quarter of 2003. The first phase of the project, which involves
our meat and dairy warehouse operation, is expected to go live during the second
quarter of 2002. 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 third
quarter of 2004. Since the inception of the systems project in 2001, we have
expended nearly $4.0 million. This project is expected to be funded fully with
cash generated by our operations. As additional funding requirements are
identified, other financing sources are available to us, including borrowings
under our existing revolving credit agreement. Expenditures and commitments for
the systems project during the first quarter of 2002 were approximately $1.0
million.
Our 2002 capital budget is approximately $23.0 million compared to $15.0 million
for 2001. At the beginning of the year we had committed $15.0 million of the
total capital budget. This commitment included approximately $2.9 million for
corporate retail replacement supermarkets, $3.6 million for distribution center
additions, $8.0 million for the business systems project and $500,000 for other
technology-related projects. At the end of the first quarter of 2002, we have
approximately $18.6 million remaining of the $23.0 million capital budget. Our
2002 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 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 sames store sales growth; (d) potential
increases in our health care costs and our plans to offset the impact of these
cost increases; (e) cost savings we expect to realize as a result of our
marketing alliance with Fresh Ideas; (f) our expectations regarding our net
earnings to sales ratio; (g) our ability to finance future multiple-store
supermarket chains; and (h) the cost, timing and results of our new business
information technology systems replacement project. 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 the Company's
new business information technology systems replacement project; (2) the
presence of intense competitive market activity in the Company's market areas,
including competition from warehouse club stores and deep discount supercenters;
(3) the Company's ability to identify and develop new market locations and/or
acquisition candidates for expansion purposes; (4) the Company's continuing
ability to obtain reasonable vendor marketing funds for promotional purposes;
(5) the Company's 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 the Company's retail store operators; and (7) the
Company's ability to integrate and assimilate the acquisition of Dick's
Supermarkets, Inc. and to achieve, on a timely basis, the Company's 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 the Company disclaims 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 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 $16.0 million under this facility as of April 20, 2002 and, as a
result, increases in market interest rates would cause our interest expense to
increase and its earnings before income taxes to decrease. Based on the our
outstanding revolving credit facility borrowings as of April 20, 2002, a 100
basis point increase in market interest rates would increase our annual interest
expense by approximately $160,000. Similarly, a 100 basis point decrease in the
market interest rate would reduce our annual interest expense by approximately
$160,000.
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 2. Changes in Securities and Use of Proceeds
As part of our annual compensation to our independent directors, on January 31,
2002, we issued 356 shares of our Common Stock to each of our five non-employee
directors that are not otherwise compensated by us for professional services. On
March 6, 2002 we issued 208 shares of its Common Stock to one of our
non-employee directors as a prior payment of director compensation for 2001. We
issued such shares without registration under the Securities Act of 1933 in
reliance on Section 4(2) of such Act.
Item 6. Exhibits and Reports on Form 8-K
We filed one current report on Form 8-K dated February 22, 2002 with
respect to our press release for the fiscal year ended December 29,
2001 and related disclosure requirements of Regulation FD.
We filed one current report on Form 8-K dated May 13, 2002 with
respect to our press release for the first quarter ended April 20,
2002 and related disclosure requirements of Regulation FD.
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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: June 3, 2002 By: /s/ Armand C. Go
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Armand C. Go
Vice President, Chief Financial Officer
Secretary and Treasurer
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