SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
--- THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended July 14, 2001
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OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d)
--- OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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Commission File Number 0-549
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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 (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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SCHULTZ SAV-O STORES, INC.
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Former name, former address and former fiscal year,
if changed since last report
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 the
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 August 28, 2001, 5,044,390 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 8
Item 3. Quantitative and Qualitative Disclosures
about Market Risk 12
PART II OTHER INFORMATION
Item 4. Submission of Matters to Vote of Security Holders 13
Item 6. Exhibits and Reports on Form 8-K 14
SIGNATURES 15
2
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
FRESH BRANDS, INC.
CONSOLIDATED BALANCE SHEETS
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(Unaudited) (Audited)
July 14, December 30,
Assets 2001 2000
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Current assets:
Cash and equivalents $ 17,630,000 $ 31,309,000
Receivables 9,736,000 11,691,000
Inventories 30,846,000 24,259,000
Other current assets 6,894,000 2,916,000
Deferred Income taxes 4,262,000 4,102,000
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Total current assets 69,368,000 $ 74,277,000
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Noncurrent receivable under capital subleases 3,940,000 4,163,000
Property under capital leases, net 2,829,000 3,051,000
Goodwill 21,495,000 717,000
Other noncurrent assets 957,000 1,278,000
Property and equipment, net 28,996,000 21,413,000
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Total assets $127,585,000 $104,899,000
===================================================================================================================
Liabilities and Shareholders' Investment
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Current liabilities:
Accounts payable $ 35,269,000 $ 27,700,000
Accrued salaries and benefits 7,497,000 5,673,000
Accrued insurance 3,337,000 3,032,000
Other accrued liabilities 7,003,000 6,197,000
Current obligations under capital leases 865,000 785,000
Current maturities of long-term debt 329,000 169,000
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Total current liabilities 54,300,000 43,556,000
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Long-term obligations under capital leases 7,816,000 8,284,000
Long-term debt 18,560,000 2,685,000
Deferred income taxes 861,000 861,000
Shareholders' investment:
Common stock 438,000 438,000
Additional paid-in capital 15,262,000 15,174,000
Retained earnings 72,472,000 69,767,000
Treasury stock (42,124,000) (35,866,000)
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Total shareholders' investment 46,048,000 49,513,000
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Total liabilities and shareholders' investment $127,585,000 $104,899,000
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3
FRESH BRANDS, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF EARNINGS
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For the 12-weeks ended For the 28-weeks ended
July 14, 2001 July 15, 2000 July 14, 2001 July 15, 2000
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Net sales $131,899,000 $116,459,000 $287,623,000 $264,147,000
Costs and expenses:
Cost of products sold 108,778,000 96,988,000 238,440,000 220,218,000
Operating and
administrative expenses 20,202,000 16,507,000 43,320,000 37,966,000
Operating income 2,919,000 2,964,000 5,863,000 5,963,000
Interest income 196,000 302,000 584,000 578,000
Interest expense (250,000) (197,000) (534,000) (459,000)
Earnings before income taxes 2,865,000 3,069,000 5,913,000 6,082,000
Provision for income taxes 1,089,000 1,166,000 2,247,000 2,311,000
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Net earnings $ 1,776,000 $ 1,903,000 $ 3,666,000 $ 3,771,000
=============================================================================================================================
Earnings per share - basic $ 0.34 $ 0.32 $ 0.68 $ 0.63
Earnings per share - diluted $ 0.34 $ 0.32 $ 0.68 $ 0.63
Cash dividends paid per share
of common stock $ 0.09 $ 0.09 $ 0.18 $ 0.18
Weighted average common shares
and equivalents 5,251,000 5,989,000 5,398,000 5,995,000
4
FRESH BRANDS, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
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For the 28-weeks ended
July 14, 2001 July 15, 2000
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CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings $ 3,666,000 $ 3,771,000
Adjustments to reconcile net earnings to net cash flows
from operating activities
Depreciation and amortization 2,969,000 2,820,000
Deferred income taxes (160,000) -
Changes in assets and liabilities, excluding impact of acquisition
Receivables 2,874,000 (3,348,000)
Inventories (1,287,000) 3,680,000
Other current assets (3,893,000) (156,000)
Accounts payable 2,031,000 5,224,000
Accrued liabilities (31,000) (211,000)
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Net cash flows from operating activities 6,169,000 11,780,000
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CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition, net of cash acquired (27,298,000) -
Expenditures for property and equipment (880,000) (2,368,000)
Receipt of principal amounts under capital
sublease agreements 198,000 175,000
Other - 2,000
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Net cash flows from investing activities (27,980,000) (2,191,000)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Long-term debt borrowing 15,878,000 -
Payment for acquisition of treasury stock (6,828,000) (55,000)
Payment of cash dividends (961,000) (1,069,000)
Exercise of stock options 546,000 -
Principal payments under capital lease obligations (422,000) (375,000)
Principal payments on long-term debt (105,000) (94,000)
Other 24,000 24,000
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Net cash flows from financing activities 8,132,000 (1,569,000)
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CASH AND EQUIVALENTS:
Net change (13,679,000) 8,020,000
Balance, beginning of period 31,309,000 22,433,000
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Balance, end of period $ 17,630,000 $ 30,453,000
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SUPPLEMENTAL CASH FLOW DISCLOSURES:
Interest paid $ 494,000 $ 456,000
Income taxes paid 1,956,000 1,950,000
5
FRESH BRANDS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(1) Basis of Presentation
The financial statements included herein have been prepared by the Company
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, the Company believes 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 the Company's 2000 annual report to shareholders, as incorporated by
reference in the Company's Form 10-K for the fiscal year ended December 30,
2000.
(2) Business Combinations
On June 16, 2001, the Company acquired all of the outstanding common stock of
Dick's Supermarkets, Inc. for approximately $30.0 million in cash (including
assumption of funded debt), subject to adjustment based on the net working
capital of Dick's as of the closing date. This acquisition has been accounted
for under the purchase method of accounting and the results of Dick's
Supermarkets, Inc. have been included in the Company's results from the date of
acquisition. The Company allocated the purchase price, on a pro forma basis, to
the fair market value of the assets acquired and the liabilities assumed
resulting in goodwill of approximately $20.8 million. The final adjustments to
the purchase price allocations are not expected to be material to the
consolidated financial statements.
The unaudited pro forma results of operations for the 12-week and 28-week
periods ended July 14, 2001 and July 15, 2000 included in the table below have
been prepared for comparative purposes only. These results have been prepared as
if the acquisition of Dick's Supermarkets, Inc. had occurred at the beginning of
fiscal 2000, but do not necessarily reflect the results that would have occurred
had the acquisition actually occurred at the beginning of fiscal 2000. The
results presented below include certain pro forma adjustments to reflect the
amortization of goodwill, depreciation of fixed assets, adjustments to interest
expense and the inclusion of an income tax provision on all earnings :
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For the 12-weeks ended For the 28-weeks ended
July 14, 2001 July 15, 2000 July 14, 2001 July 15, 2000
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Revenues $148,100,000 $142,100,000 $334,500,000 $320,500,000
Net income 1,606,000 2,023,000 3,071,000 3,544,000
Net income per share:
Basic $ 0.32 $ 0.34 $ 0.58 $ 0.60
Diluted $ 0.31 $ 0.34 $ 0.58 $ 0.59
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(3) Other Current Assets
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July 14, 2001 December 30, 2000
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Prepaid expenses $ 1,407,000 $ 647,000
Property held for resale 4,626,000 1,417,000
Retail systems and supplies for resale 468,000 484,000
Receivable under capital subleases 393,000 368,000
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Other current assets $ 6,894,000 $ 2,916,000
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6
(4) Segment Reporting
Summarized financial information for the second quarter and year-to-date of 2001
and 2000 concerning the Company's reportable segments is shown in the following
tables (in thousands):
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For the 12-weeks ended For the 28-weeks ended
Sales July 14, 2001 July 15, 2000 July 14, 2001 July 15, 2000
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Wholesale sales $ 103,060 $ 94,071 $ 230,071 $ 214,465
Intracompany sales (30,301) (26,011) (66,092) (60,961)
------------ ------------ ------------ ------------
Net wholesale sales 72,759 68,060 163,979 153,504
Retail sales 59,140 48,399 123,644 110,643
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Total sales $ 131,899 $ 116,459 $ 287,623 $ 264,147
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For the 12-weeks ended For the 28-weeks ended
Earnings Before Income Tax July 14, 2001 July 15, 2000 July 14, 2001 July 15, 2000
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Wholesale $ 1,971 $ 2,150 $ 4,463 $ 4,625
Retail 948 814 1,400 1,338
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Total operating income 2,919 2,964 5,863 5,963
Interest income 196 302 584 578
Interest expense (250) (197) (534) (459)
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Earnings before income taxes $ 2,865 $ 3,069 $ 5,913 $ 6,082
======================================================================================================
(5) New Accounting Pronouncements
In June 2001, the Statement of Financial Accounting Standards ("SFAS") issued
SFAS No. 141, "Business Combinations" and No. 142, "Goodwill and Other
Intangible Assets" effective for fiscal years beginning after December 15, 2001.
Under the new rules, goodwill and intangible assets deemed to have indefinite
lives will no longer be amortized but will be subject to periodic impairment
tests in accordance with these statements. The nonamortization provisions of
SFAS No. 142 will not initially impact amortization expense related to
acquisitions initiated prior to June 30, 2001, but any goodwill or indefinite
lived intangibles on acquisitions subsequent to June 30, 2001 will not be
amortized. Effective December 30, 2001, all amortization expense on goodwill
with indefinite lives will stop. The Company estimates that the nonamortization
provisions of SFAS No. 142 will eliminate approximately $1.0 million of
amortization that would have been expensed in fiscal 2002 under the previous
guidance. During fiscal 2002, the Company will perform the first of the required
impairment tests of goodwill as of December 30, 2001. The Company has not yet
determined what effect this test will have on its net income and financial
position.
7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations
Results of Operations
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On June 16, 2001, Fresh Brands, Inc. completed the acquisition of Dick's
Supermarkets, Inc. The Company purchased Dick's Supermarkets, Inc. for
approximately $30.0 million in cash, less the assumption of approximately $3.8
million of funded debt, subject to further adjustment based on the net working
capital of Dick's as of the closing date.
Selected costs and results as a percent of net sales:
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For the 12-weeks ended For the 28-weeks ended
July 14, 2001 July 15, 2000 July 14, 2001 July 15, 2000
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Gross margin 17.5% 16.7% 17.1% 16.6%
Operating and administrative expenses 15.3 14.2 15.1 14.4
Earnings before income taxes 2.2 2.6 2.1 2.3
Net earnings 1.3 1.6 1.3 1.4
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Net Sales
Net sales for the 12- and 28-week periods ended July 14, 2001 were $131.9
million and $287.6 million, respectively, compared to $116.5 million and $264.1
million, respectively, for the same periods in 2000. The increases of $15.4
million and $23.5 million, or 13.3% and 8.9%, respectively, were due to
increases in both wholesale and retail sales volume.
Retail sales for the 12- and 28-week periods ended July 14, 2001 were $59.1
million and $123.6 million, respectively, compared to $48.4 million and $110.6
million for the same periods in 2000. The retail sales increases of $10.7
million and $13.0 million represented percentage increases of 22.1 % and 11.8%
for the second quarter and the first half of fiscal 2001, respectively. The June
16, 2001 acquisition of Dick's Supermarkets, Inc. added $8.5 million, or 14.4%,
to second quarter retail sales and was the primary factor contributing to the
volume growth. An additional key factor behind the retail sales improvement was
the continuing success of the Piggly Wiggly(R) Preferred Power Pricing marketing
and promotional program which was initiated in January 2001. Retail sales also
continued to be positively impacted, in comparison to the prior year, by the
replacement of one corporate store in Racine, Wisconsin in May 2000 and store
closures by competitors over the past year. For the Piggly Wiggly franchise and
corporate retail chain, same store sales increased 4.5% for the second quarter
and 3.7% for the first half of fiscal year 2001 compared to the same periods in
2000.
Net wholesale sales for the 12- and 28-week periods ended July 14, 2001 were
$72.8 million and $164.0 million, respectively, compared to $68.1 million and
$153.5 million for the same periods in 2000. The net wholesale sales increases
of $4.7 million and $10.5 million represented percentage increases of 6.9% and
6.8% for the second quarter and the first half of fiscal 2001, respectively. The
opening of three replacement franchise stores, the first in New Holstein,
Wisconsin in September 2000, the second in Slinger, Wisconsin in January 2001
and the third in Campbellsport, Wisconsin in April 2001, combined with the
opening of one new market franchise supermarket in Kewaskum, Wisconsin in June
2000, were significant reasons for the wholesale volume increase. The combined
year to date sales improvement through July 14, 2001 attributable to these
stores was approximately $3.5 million, or a 60% increase measured against last
year's same store sales. The conversion to a Piggly Wiggly of an independent
store in Kohler, Wisconsin in April 2001 and the Company's successful marketing
and promotional programs provided additional wholesale sales improvements.
Similar to certain corporate retail stores, certain franchise supermarkets
experienced intense competitive pressures. These competitive pressures resulted
in the closing of one underperforming and non-competitive franchise store in
Milwaukee, Wisconsin and one in Gurnee, Illinois in April 2001. As of July 14,
2001, the Company had 70 independent franchise-
8
owned supermarkets and 27 corporate stores, 89 of which operated under the
Piggly Wiggly banner and eight that operated as Dick's Supermarkets, Inc.
Gross Margin
Gross margin increased to 17.5% and 17.1% for the 12- and 28-week periods ended
July 14, 2001, compared to 16.7% and 16.6%, respectively, for the same periods
in 2000. This significant improvement was solely attributable to the increased
mix of higher margin retail sales resulting from the Dick's acquisition. For the
remainder of the year, the Company anticipates further gross margin improvements
as the mix of retail sales to total sales approaches 50%. For the 28-week period
ended July 14, 2001, the mix was 43.0%, compared to 41.9% for the 28-week period
ended July 15, 2000.
Operating and Administrative Expenses
Operating and administrative expenses, as a percent of sales, increased to 15.3%
and 15.1% for the 12- and 28-week periods ended July 14, 2001, compared to 14.2%
and 14.4%, respectively, for the same periods in 2000.
The increase in retail mix resulting from the Dick's acquisition resulted in a
corresponding and anticipated increase in operating and administrative expenses.
Further, goodwill amortization for the Dick's acquisition totaled approximately
$80,000 during the second quarter. For the year, the Company anticipates
goodwill amortization to total $550,000. However, as a result of two new
accounting pronouncements, goodwill amortization over its estimated useful life
will be eliminated effective as of January 1, 2002. Instead, goodwill will be
subject to at least an annual impairment assessment with the application of a
fair value-based test. Assuming that the Company's initial goodwill valuation of
$20.8 million from the acquisition of Dick's continues to represent its fair
value, these accounting changes are expected to increase the Company's operating
earnings next year by approximately $1.0 million from the earnings accretion
otherwise anticipated from the Dick's acquisition.
In addition to increased operating and administrative expenses resulting from
the Dick's acquisition, the Company continues to experience significant
increases in its employee health care costs. These cost increases relate to
costs from the Company's retail union employees who are involved with a
multi-employer health plan, as well as internal costs associated with its
non-union employees. In particular, costs with its multi-employer plan are
expected to increase by approximately $500,000 in the second half of fiscal
2001. The Company anticipates that these increased levels of health care costs
will continue in the future.
Due to the ongoing highly competitive nature of the industry in the Company's
markets, certain Company franchise operators and corporate retail supermarkets
continue to experience a variety of operational issues. The Company continues to
evaluate various business alternatives relating to these underperforming
operations. The Company's business alternatives include, but are not limited to,
the sale and subsequent conversion of corporate stores to franchise units,
closing stores, or implementing other operational changes. Implementation of
these alternatives could result in the Company incurring certain repositioning
or restructuring charges for these replaced, closed or sold stores and
negatively impact net earnings in the short term. However, the Company believes
that such actions will help improve the Company's long-term profitability. The
Company did not incur any significant repositioning costs relating to the
closure of two franchise stores in April 2001.
The Company borrowed $12.5 million in the second quarter of 2001 to help fund
its acquisition of Dick's Supermarkets, Inc. For the second quarter of 2001, the
corresponding interest charge was nominal. For the year, the Company expects
total interest expense from borrowings related to the Dick's
9
acquisition to be approximately $350,000. The Company expects other interest
expense for the year to be nominal as was total interest expense in 2000.
Net Earnings
Net earnings for the 12- and 28-week periods ended July 14, 2001 decreased 6.7%
and 2.8% to $1.8 million and $3.7 million, respectively, compared to $1.9
million and $3.8 million for the same periods in 2000. Diluted earnings per
share for the 12-week period ended July 14, 2001 increased 6.3% to $0.34,
compared to $0.32 in 2000, and increased 7.9% for the 28-week period ended July
14, 2001 to $0.68 compared to $0.63 in 2000. The weighted average common shares
and equivalents for the second quarter and first half of 2001 were 5,251,000 and
5,398,000, compared to 5,989,000 and 5,995,000, respectively, for the same
periods in 2000. The decreases of 738,000 shares and 597,000 shares, or 12.3%
and 10.0%, respectively, were due to significant share repurchases since 2000.
Liquidity and Capital Resources
-------------------------------
As of July 14, 2001, the Company had cash and equivalents totaling $17.6
million. At year-end 2000, cash and equivalents aggregated $31.3 million. The
net cash outflow of $13.7 million was primarily attributable to the acquisition
of Dick's Supermarkets, Inc. on June 16, 2001. Additional operating, investing
and financing activities contributing to changes in cash flows are described
below.
The Company had net cash inflows from operating activities of $6.2 million
during the first half of 2001, compared to net cash inflows of $11.8 million for
the same period in 2000. The decrease in cash inflows from operations was due
primarily to a $3.2 million increase in property held for resale since December
30, 2000. This increase in property held for resale was solely attributable to
capital expenditures relating to the new prototype, state-of-the-art supermarket
in Sheboygan, Wisconsin that opened early in August 2001. The timing of cash
receipts, cash payments and changes in short-term financing to the Company's
wholesale customers also contributed to the variance. The combined effect of
changes in accounts receivable, inventory and accounts payable was to increase
operating cash inflow by $3.6 million to $9.2 million compared to operating cash
inflows of $5.6 million during the same time period in the prior year.
Net cash outflows from investing activities for the 28-week period ended July
14, 2001 totaled $28.0 million, compared to $2.2 million for the same period in
2000. The acquisition of Dick's Supermarkets, Inc. accounted for nearly $27.3
million of the second quarter investing cash outflow.
During the second quarter of 2001, the Company announced a $15 million,
three-year capital expenditure project to replace and expand its current
business information technology systems. The new systems are expected to support
the Company's aggressive 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 business process phases. The
first two phases of the program, the core infrastructure and the systems
relating to the Company's wholesale business operations, are expected to be
completed over the next 12 to 18 months. The final two phases, relating to the
Company's retail pricing and promotional card marketing, human resources and
financial reporting systems, are projected to be completed over the next 24 to
36 months. This project is expected to be funded substantially with internally
generated cash from operations.
The Company expects that its growth in earnings and earnings per share could be
affected as a result of the implementation of this business information
technology project for the next several years. For 2001, the impact on earnings
and earnings per share is expected to be nominal because the project is
scheduled to commence during the third quarter of 2001. The Company expects to
spend between $3 million and $5 million during the remainder of this year on
this project. The impact of this project on the Company's earnings and earnings
per share in the future is uncertain and will be dependent upon the Company's
ability to successfully achieve it strategic growth initiatives and realize the
expected efficiencies and cost savings from its new business information
systems.
10
Principally as a result of the Company's systems project, the Company's capital
budget for 2001 has been increased to $14.3 million from $7.0 million. Of this
capital budget, approximately $4.2 million was committed for corporate retail
replacement stores and $1.0 million for warehouse distribution additions.
Additionally, up to $5.0 million of the budget has been allocated for the
Company's business systems project.
Net cash inflows from financing activities for the 28-week period ended July 14,
2001, totaled nearly $8.1 million compared to cash outflows of $1.6 million for
the same period in 2000. In the second quarter of 2001, the Company entered into
a new $35 million revolving credit facility. The lenders under the new facility
remained the same as under the Company's former $16.0 million credit agreement.
The Company borrowed $12.5 million on its new revolving credit facility to help
fund its acquisition of Dick's Supermarkets, Inc. in the second quarter of 2001.
An additional $3.0 million was borrowed during the second quarter to provide
additional working capital to Fresh Brands Distributing, Inc. Further, the 2001
second quarter outflows increased principally due to the Company repurchasing
nearly 570,000 shares of common stock aggregating $6.8 million during the first
half of 2001. This compares to the Company's repurchase of only 5,000 shares for
$55,000 during the first half of 2000. Approximately $3.3 million of the Board
authorized $25 million stock repurchase program remains available for future
share repurchases.
The Company's working capital position at July 14, 2001 was $15.1 million,
compared to $30.7 million at December 30, 2000. The Company's current ratio at
July 14, 2001 was 1.28 to 1.00 with cash and equivalents constituting
substantially all of the working capital. The current ratio for the same period
last year was 1.86 to 1.00. As of July 14, 2001, the Company had unsecured
revolving bank credit facilities aggregating $35.0 million, with $19.5 million
remaining available for use. Although the Company's working capital position
decreased significantly, its liquidity position continues to be very favorable
and strong.
Special Note Regarding Forward-Looking Statements
-------------------------------------------------
Certain matters discussed in this Form 10-Q are "forward-looking statements"
intended to qualify for the safe harbors from liability established by the
Private Securities Litigation Reform Act of 1995. These forward-looking
statements can generally be identified as such because the context of the
statement will include words such as the Company believes, anticipates, expects
or words of similar import. Similarly, statements that describe the Company's
future plans, objectives, strategies or goals are also forward-looking
statements. Such forward-looking statements are subject to certain risks and
uncertainties including, but not limited, to the following: (1) presence of
intense competitive market activity in the Company's market areas; (2) ability
to identify and develop new market locations for expansion purposes; (3)
continuing ability to obtain reasonable vendor marketing funds for promotional
purposes; (4) the cost and results of the Company's new business information
technology systems replacement project; (5) ongoing absence of food price
inflation; (6) the Company's ability to continue to recruit, train and retain
quality franchise and corporate retail store operators; (7) the potential
recognition of repositioning charges resulting from potential closure,
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 (8) 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 report and the Company undertakes no
obligation to publicly update such forward-looking statements to reflect
subsequent events or circumstances.
11
Item 3. Quantitative and Qualitative Disclosures about Market Risk
The Company's 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. Because
the Company has borrowed approximately $15.5 million under this facility as of
July 14, 2001, increases in market interest rates would cause the Company's
interest expense to increase and its earnings before income taxes to decrease.
Based on the Company's outstanding revolving credit facility borrowings as of
July 14, 2001, a 100 basis point increase in market interest rates would
increase annual interest expense by approximately $155,000.
The Company believes that its exposure to market risks related to changes in
foreign currency exchange rates and trade accounts receivable is immaterial.
12
PART II Other Information
Item 4. Submission of Matters to a Vote of Security Holders
The Company's 2001 annual meeting of shareholders was held on Wednesday, May 30,
2001. At the meeting, the shareholders re-elected William K. Jacobson and Steven
R. Barth and elected G. William Dietrich to the Company's Board of Directors for
the three-year terms expiring at the Company's 2004 annual meeting of
shareholders and until their successors are duly qualified and elected. As of
the April 27, 2001 record date for the annual meeting, 5,478,454 shares of
Common Stock were outstanding and eligible to vote. Of these, 4,797,593 shares
of Common Stock voted at the meeting in person or by proxy. The following votes
were recorded for each nominee:
For Withheld
------------------------- ------------------------
Votes Percentage Votes Percentage
----- ---------- ----- ----------
William K. Jacobson 4,402,365 91.8% 395,228 8.2%
Steven R. Barth 4,402,365 91.8% 395,228 8.2%
G. William Dietrich 4,400,487 91.7% 397,106 8.3%
The tabulation of votes for the election of directors resulted in no broker
non-votes or abstentions.
The Company's continuing directors are Martin Crneckiy, Jr., R. Bruce Grover and
Elwood F. Winn with terms expiring in 2002 and Michael R. Houser, Bruce J. Olson
and Walter G. Winding with terms expiring in 2003.
Of the 4,797,593 shares of Common Stock voted at the meeting in person or by
proxy, the following votes were recorded for approval of the share exchange with
Fresh Brands, Inc.:
For Against Abstained
---------------------- -------------------- ---------------------
Votes Percentage Votes Percentage Votes Percentage
----- ---------- ----- ---------- ----- ----------
4,208,405 98.2% 59,176 1.4% 17,317 0.4%
The tabulation of votes for the increase in the number of shares issuable under
the share exchange with Fresh Brands, Inc. resulted in broker non-votes of
512,695 shares.
Of the 4,797,593 shares of Common Stock voted at the meeting in person or by
proxy, the following votes were recorded for approval of the of the increase in
the number of shares issuable under the 1995 Equity Incentive Plan from
1,250,000 shares to 1,750,000 shares:
For Against Abstained
---------------------- -------------------- ---------------------
Votes Percentage Votes Percentage Votes Percentage
----- ---------- ----- ---------- ----- ----------
2,293,125 53.5% 1,899,137 44.3% 92,636 2.2%
The tabulation of votes for the increase in the number of shares issuable under
the 1995 Equity Incentive Plan resulted in broker non-votes of 512,695 shares.
13
Of the 4,797,593 shares of Common Stock voted at the meeting in person or by
proxy, the following votes were recorded for approval of the of the adoption of
the 2001 Nonemployee Director Stock Option Plan:
For Against Abstained
---------------------- -------------------- ---------------------
Votes Percentage Votes Percentage Votes Percentage
----- ---------- ----- ---------- ----- ----------
2,441,335 57.0% 1,739,053 40.6% 104,510 2.4%
The tabulation of votes for the adoption of the 2001 Nonemployee Director Stock
Option Plan resulted in broker non-votes of 512,695 shares.
Of the 4,797,593 shares of Common Stock voted at the meeting in person or by
proxy, the following votes were recorded for approval of the ratification of
Arthur Andersen LLP as the Company's 2001 independent public accountants:
For Against Abstained
---------------------- -------------------- ---------------------
Votes Percentage Votes Percentage Votes Percentage
----- ---------- ----- ---------- ----- ----------
4,764,421 99.3% 21,436 0.4% 11,736 0.3%
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
10.1 Loan Agreement, dated as of June 16, 2001, by and among Fresh Brands,
Inc., Fresh Brands Distributing, Inc., Dick's Supermarkets, Inc., M&I
Marshall & Ilsley Bank and Firstar Bank, N.A. The Company agrees to
furnish supplementally a copy of any omitted schedule to the
Securities and Exchange Commission upon request.
(b) Reports of Form 8-K
The Company filed one current report on Form 8-K, dated June 26, 2001,
pursuant to item 2 thereof with respect to the acquisition of all the
issued and outstanding shares of Dick's Supermarkets, Inc. by Schultz
Acquisition Corp., a wholly owned subsidiary of Fresh Brands, Inc.
14
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
FRESH BRANDS, INC.
Dated: August 28, 2001 By:/s/ Armand C. Go
------------------------------------
Armand C. Go, Vice President,
Chief Financial Officer
Secretary and Treasurer
15
EXHIBIT INDEX
-------------
No. Description
--- -----------
10.1 Loan Agreement, dated as of June 16, 2001, by and among Fresh Brands,
Inc., Fresh Brands Distributing, Inc., Dick's Supermarkets, Inc., M&I
Marshall & Ilsley Bank and Firstar Bank, N.A. The Company agrees to
furnish supplementally a copy of any omitted schedule to the
Securities and Exchange Commission upon request.
16