UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q/A
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended April 20, 2002
OR
__ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________ to __________
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)
Registrant's 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
----- -----
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all reports required to
be filed by Section 12, 13 or 15(d) of the Securities Exchange Act of 1934
subsequent to the distribution of securities under a plan confirmed by a court.
Yes 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, 2002, 5,181,737 shares of Common Stock, $0.05 par value, were
issued and outstanding.
FRESH BRANDS, INC.
FORM 10-Q/A INDEX
PAGE
NUMBER
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PART I FINANCIAL INFORMATION
Item 1. Financial Statements (Restated)
Overview 3
Consolidated Balance Sheets 4
Consolidated Statements of Earnings 5
Consolidated Statements of Cash Flows 6
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of
Operations 12
Item 3. Quantitative and Qualitative Disclosures
about Market Risk 18
Item 4. Procedures and Controls 18
PART II OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds 19
Item 6. Exhibits and Reports on Form 8-K 19
Signature 20
Certifications 21 - 24
2
PART I FINANCIAL INFORMATION
Overview
Our previously issued consolidated balance sheets as of April 20, 2002 and
December 29, 2001 and the related consolidated statements of earnings and cash
flows for the quarters ended April 20, 2002 and April 21, 2001 have been
restated.
This amendment to our Quarterly Report on Form 10-Q for the quarter ended
April 20, 2002 amends and restates those items of the Form 10-Q originally filed
on June 3, 2002 (the Original Filing) which have been affected by the
restatement. In order to preserve the nature and character of the disclosures
set forth in such items as originally filed, no attempt has been made in this
amendment to update such disclosures. Except as required to reflect the effects
of the restatement and certain other stylistic changes, all information
contained in this amendment is stated as of the date of the Original Filing. For
additional information regarding the restatement, see "Notes to Consolidated
Financial Statements - Note 6 - Restatement" and to our Annual Report on Form
10-K/A for the year ended December 29, 2001.
3
Item 1. Financial Statements
FRESH BRANDS, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands)
--------------------------------------------------------------------------------------------------------
Restated Restated
April 20, December 29,
Assets 2002 2001
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Current assets:
Cash and equivalents $ 11,370 $ 11,501
Receivables, net 13,843 10,884
Inventories 29,963 34,538
Land and building held for resale 2,904 4,770
Other current assets 2,460 2,220
Deferred income taxes 4,459 4,459
--------------------------------------------------------------------------------------------------------
Total current assets 64,999 $ 68,372
--------------------------------------------------------------------------------------------------------
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 $ 136,759 $ 138,320
========================================================================================================
Liabilities and Shareholders' Investment
--------------------------------------------------------------------------------------------------------
Current liabilities:
Accounts payable $ 30,513 $ 33,293
Accrued salaries and benefits 5,838 7,845
Accrued insurance 2,800 2,665
Other accrued liabilities 4,049 3,942
Current obligations under capital leases 1,237 1,192
Current maturities of long-term debt 340 323
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Total current liabilities 44,777 49,260
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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 77,289 75,840
Treasury stock (41,495) (41,069)
--------------------------------------------------------------------------------------------------------
Total shareholders' investment 51,742 50,580
--------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' investment $ 136,759 $ 138,320
========================================================================================================
See notes to consolidated financial statements.
4
FRESH BRANDS, INC.
CONSOLIDATED STATEMENTS OF EARNINGS
(In thousands, except per share data)
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Restated
For the 16-weeks ended
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April 20, 2002 April 21, 2001
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Net sales $ 184,139 $ 153,820
Cost of products sold 148,223 127,814
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Gross profit 35,916 26,006
Selling and administrative expenses 29,936 21,538
Depreciation and amortization 2,296 1,580
---------------------------------------------------------------------------------------------------------
Operating income 3,684 2,888
Interest income 3 388
Interest expense (549) (284)
---------------------------------------------------------------------------------------------------------
Earnings before income taxes 3,138 2,992
Provision for income taxes 1,224 1,136
---------------------------------------------------------------------------------------------------------
Net earnings $ 1,914 $ 1,856
=========================================================================================================
Earnings per share - basic $ 0.37 $ 0.34
Earnings per share - diluted $ 0.36 $ 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 consolidated financial statements.
5
FRESH BRANDS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
----------------------------------------------------------------------------------------------------------------
Restated
For the 16-weeks ended
April 20, 2002 April 21, 2001
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CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings $ 1,914 $ 1,856
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 (2,959) (524)
Inventories 4,575 (480)
Other current assets 1,626 (2,377)
Accounts payable (2,780) (3,254)
Accrued liabilities (1,625) (888)
----------------------------------------------------------------------------------------------------------------
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 consolidated financial statements.
6
FRESH BRANDS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) Basis of Presentation
The financial statements included herein have been prepared by us without
audit. Although certain information and footnote disclosures normally included
in financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted, we believe that the
disclosures are adequate to make the information presented not misleading. The
interim financial statements furnished with this report reflect all adjustments
of a normal recurring nature, which are, in the opinion of management, necessary
for a fair statement of the results for the interim periods presented. It is
suggested that these financial statements be read in conjunction with the
audited financial statements and the notes thereto included in our 2001 annual
report to shareholders, as incorporated by reference in our Form 10-K/A for the
fiscal year ended December 29, 2001. The 2001 financial statements included
within this 10-Q/A reflect restated numbers as described in note 6.
(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)
---------------------------------------------------------------------------------------------
Restated
For the 16-weeks ended
April 20, 2002 April 21, 2001
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Net Sales $ 184,139 $ 186,419
Net Earnings 1,914 1,643
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Basic and diluted earnings per share
---------------------------------------------------------------------------------------------
Basic $ 0.37 $ 0.30
Diluted $ 0.36 $ 0.30
=============================================================================================
7
(3) Other Current Assets
(In thousands)
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April 20, 2002 December 29, 2001
--------------------------------------------------------------------------------------------------
Prepaid expenses $ 1,453 $ 1,268
Retail systems and supplies for resale 549 426
Receivable under capital subleases 458 526
--------------------------------------------------------------------------------------------------
Other current assets $ 2,460 $ 2,220
==================================================================================================
(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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Restated
For the 16-weeks ended
April 20, 2002 April 21, 2001
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Earnings Before Income Tax
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Wholesale $ 3,178 $ 2,436
Retail 506 452
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Total operating income 3,684 2,888
Interest income 3 388
Interest expense (549) (284)
----------------------------------------------------------------------------------------
Earnings before income taxes $ 3,138 $ 2,992
========================================================================================
(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.
8
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 2001 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 on 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.
(6) Restatement
Our previously issued quarterly consolidated balance sheets as of April 20,
2002 and December 29, 2001 and the related consolidated statements of earnings,
shareholders' investment, and cash flows for the 16-weeks then ended have been
restated for the items described below. Additionally, our previously issued
consolidated balance sheet as of December 29, 2001 and the related consolidated
statements of earnings, shareholders' investment, and cash flows for the year
then ended have been restated in our 2001 10-K/A.
Receivables, net
As more fully described within the caption addressing cost of products
sold, we understated our cost of products sold due to an error related to a
unique supply relationship we have with one of our direct store delivery meat
vendors. Accurately stating cost of products sold resulted in a reduction to
receivables, net, at April 20, 2002 and December 29, 2001.
Additionally, we corrected an error to recognize patronage dividends on an
accrual basis rather than the cash basis. This correction resulted in an
increase in receivables, net, at April 20, 2002 and December 29, 2001.
9
Inventories
Inventory balances were adjusted to recognize the reduction in inventory
values reflecting cash discounts received by us from our vendors. The correction
reducedinventory balances at April 20, 2002 and December 29, 2001.
We did not fully eliminate intercompany profit recorded within our
inventory balance. Correction of this error resulted in a reduction in the
reported inventory balance at April 20, 2002 and December 29, 2001.
Accounts payable
Accounts payable were reduced to reflect our estimate of the underlying
vendor liability based on the best information available at the balance sheet
date. Correction of this error impacted our periods ended April 20, 2002 and
December 29, 2001.
Accrued insurance
Accrued insurance was reduced to reflect our estimate of the underlying
employee health insurance liability based on the best information available at
the balance sheet date. Correction of this error impacted our periods ended
April 20, 2002 and December 29, 2001.
Other accrued liabilities
The originally reported tax liabilities were increasedto reflect the impact
of the adjustments described in this note, impacting our periods ended April 20,
2002 and December 29, 2001.
Cost of products sold
We understated our cost of products sold due to an error related to a
unique supply relationship we have with one of our direct store delivery meat
vendors. Orders from nine supermarkets were delivered by the vendor to our meat
distribution center and shipped by us to these stores. Sales were properly
recorded, but we inadvertently failed to record accurately the corresponding
cost of products sold. Correction of this error resulted in an increase in our
periods ended April 20, 2002 and April 21, 2001.
Provision for income taxes
The tax provision for all periods disclosed was reducedfor the impact of
adjustments described above.
The following tables present the changes that have been made to the
consolidated balance sheet as of April 20, 2002 and the related consolidated
statements of earnings for the 16-weeks ending April 20, 2002 as a result of the
restatement. The changes made to the consolidated balance sheet as of December
29, 2001, and the related consolidated statements of earnings for the 16-week
period ending April 21, 2001 are presented within the quarterly financial
information note included within the 2001 Form 10-K/A, as such, these changes
are not included herein. There were no net changes in operating, financing or
investing cash flows for the 16-weeks ending April 20, 2002 and April 21, 2001.
10
(In thousands)
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Condensed Balance Sheet
April 20, 2002
------------------------------------------------------------------------------------------------------------
As Previously
Reported As Restated
------------------------------------------------------------------------------------------------------------
Receivables, net $ 14,386 $ 13,843
Inventories 30,377 29,963
Total current assets 65,956 64,999
Total assets 137,716 136,759
Accounts payable 31,201 30,513
Accrued insurance 3,285 2,800
Other accrued liabilities 3,967 4,049
Total current liabilities 45,868 44,777
Retained earnings 77,155 77,289
Total shareholders' investment 51,608 51,742
Total liabilities and shareholders' investment 137,716 136,759
------------------------------------------------------------------------------------------------------------
(In thousands except per share data)
--------------------------------------------------------------------------------
Condensed Earnings Statements For the 16-weeks ended
April 20, 2002
--------------------------------------------------------------------------------
As Previously
Reported As Restated
--------------------------------------------------------------------------------
Cost of products sold $148,181 $148,223
Gross profit 35,958 35,916
Operating income 3,726 3,684
Earnings before income taxes 3,180 3,138
Provision for income taxes 1,240 1,224
Net earnings 1,940 1,914
Earnings per share - basic .38 .37
Earnings per share - diluted .37 .36
--------------------------------------------------------------------------------
11
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations
General
Our previously issued consolidated balance sheets as of April 20, 2002 and
December 29, 2001 and the related consolidated statements of earnings and cash
flows for the 16-week periods ending April 20, 2002 and April 21, 2001 have been
restated.
The following managements' discussion and analysis has been restated to
reflect the changes more fully described within note 6 of the notes to the
consolidated financial statements.
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.
12
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.
-------------------------------------------------------------------------------------------------------------
Restated Restated
Percent of net sales Percentage change
-------------------------------------------------------------------------------------------------------------
For the 16-weeks ended April 20, 2002
April 20, 2002 April 21, 2001 vs. April 21, 2001
-------------------------------------------------------------------------------------------------------------
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% 38.1%
Operating and administrative expenses 17.5% 15.0% 39.4%
Operating income 2.0% 1.9% 27.6%
Earnings before income taxes 1.7% 1.9% 4.9%
Net earnings 1.0% 1.2% 3.1%
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13
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):
------------------------------------------------------------------------------
For the 16-weeks ended
April 20, 2002 April 21, 2001
------------------------------------------------------------------------------
Net wholesales sales $ 91,623 $ 91,220
Retail sales 92,516 62,600
------------------------------------------------------------------------------
Total sales $ 184,139 $ 153,820
------------------------------------------------------------------------------
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.
14
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 their 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 27.6%, 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 4.9%, to $3.1 million, compared to $3.0 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 1.9% in the first quarter of
2001. Net earnings for the first quarter of 2002 increased 3.1% to $1.91 million
compared to $1.86 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 5.9% to a record $0.36 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
15
performance for the first quarter, we expect that our earnings per share for
2002 will be on the lower end of the range of $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 1.04%, compared to 1.21% 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.
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 $20.2 million, compared to $19.1 million at
December 29, 2001. Our current ratio at April 20, 2002 was 1.45 to 1.00,
compared to 1.39 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.
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
16
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 1.64 from
1.00 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.
17
Special Note Regarding Forward-Looking Statements
-------------------------------------------------
Certain matters discussed in our 10 Q/A are "forward-looking statements"
intended to qualify for the safe harbors from liability established by the
Private Securities Litigation Reform Act of 1995. These forward-looking
statements can generally be identified as such because the context of the
statement will include words such as we believe, anticipate, expect or words of
similar import. Similarly, statements that describe our future plans,
objectives, strategies or goals are also forward-looking statements.
Specifically, forward-looking statements include our statements about (a) our
2002 earnings expectations; (b) our plans to remodel existing supermarkets, open
additional corporate supermarkets and convert existing supermarkets to
franchised supermarkets; (c) our expectations regarding our future same store
sales growth; (d) potential increases in our health care costs and our plans to
offset the impact of these cost increases; (e) 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.
Item 4. Procedures and Controls
a. Evaluation of disclosure controls and procedures:
------------------------------------------------
Based on his evaluation as of a date within 90 days of the filing date of
this Quarterly Report on Form 10-Q/A, our principal executive officer and
principal financial officer has 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.
18
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
(a) Exhibits
99.1 Written Statements Pursuant to 18 U.S.C. ss. 1350.
(b) 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.
19
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: March 27, 2003 By: /s/ S. Patric Plumley
----------------------------------------
S. Patric Plumley,
Senior Vice President, Chief
Financial Officer, Secretary and
Treasurer
20
CERTIFICATION
-------------
I, Elwood F. Winn, certify that:
1. I have reviewed this quarterly report on Form 10-Q/A 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 officers 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 officers 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 officers 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: March 27, 2003 By: /s/ Elwood f. Winn
--------------------------------------
Elwood F. Winn,
President and Chief Executive Officer
21
CERTIFICATION
-------------
I, S. Patric Plumley, certify that:
1. I have reviewed this quarterly report on Form 10-Q/A 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 officers 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 officers 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 officers 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: March 27, 2003 By: /s/ S. Patric Plumley
---------------------------------------
S. Patric Plumley,
Senior Vice President, Chief Financial
Officer Secretary and Treasurer
22