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 July 13, 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.
--------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
WISCONSIN 39-2019963
------------------------------------------ ---------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.
2215 Union Avenue
Sheboygan, Wisconsin 53081
------------------------------------------ ---------------------------
(Address of principal executive offices) (Zip Code)
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 August 22, 2002, 5,151,553 shares of Common Stock, $0.05 par value,
were issued and outstanding.
FRESH BRANDS, INC.
FORM 10-Q/A INDEX
PAGE
NUMBER
------
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 17
Item 4. Procedures and Controls 17
PART II OTHER INFORMATION
Item 4. Submission of Matters to Vote of Security Holders 19
Item 6. Exhibits and Reports on Form 8-K 19
Signature S-1
Certifications S-2
2
PART I FINANCIAL INFORMATION
Overview
Our previously issued consolidated balance sheets as of July 13, 2002 and
December 29, 2001 and the related consolidated statements of earnings and cash
flows for the quarters ended July 13, 2002 and July 14, 2001 have been restated.
This amendment to our Quarterly Report on Form 10-Q for the quarter ended
July 13, 2002 amends and restates those items of the Form 10-Q originally filed
on August 23, 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
July 13, December 29,
Assets 2002 2001
-------------------------------------------------------------------------------------------------------
Current assets:
Cash and equivalents $ 14,327 $ 11,501
Receivables, net 11,953 10,884
Inventories 29,809 34,538
Land and building held for resale 4,255 4,770
Other current assets 3,338 2,220
Deferred income taxes 4,459 4,459
-------------------------------------------------------------------------------------------------------
Total current assets 68,141 $ 68,372
-------------------------------------------------------------------------------------------------------
Noncurrent receivable under capital subleases 8,954 9,278
Property and equipment, net 29,185 26,513
Property under capital leases, net 10,163 10,604
Goodwill, net 20,280 20,280
Other noncurrent assets, net 4,678 3,273
-------------------------------------------------------------------------------------------------------
Total assets $ 141,401 $ 138,320
=======================================================================================================
Liabilities and Shareholders' Investment
-------------------------------------------------------------------------------------------------------
Current liabilities:
Accounts payable $ 30,567 $ 33,293
Accrued salaries and benefits 5,949 7,845
Accrued insurance 2,730 2,665
Other accrued liabilities 7,305 3,942
Current obligations under capital leases 1,271 1,192
Current maturities of long-term debt 343 323
-------------------------------------------------------------------------------------------------------
Total current liabilities 48,165 49,260
-------------------------------------------------------------------------------------------------------
Long-term obligations under capital leases 20,102 20,808
Long-term debt 19,155 16,569
Deferred income taxes 1,103 1,103
Shareholders' investment:
Common stock 438 438
Additional paid-in capital 15,527 15,371
Retained earnings 78,734 75,840
Treasury stock (41,823) (41,069)
-------------------------------------------------------------------------------------------------------
Total shareholders' investment 52,876 50,580
-------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' investment $ 141,401 $ 138,320
=======================================================================================================
See notes to consolidated financial statements.
4
FRESH BRANDS, INC.
CONSOLIDATED STATEMENTS OF EARNINGS
(In thousands, except per share data)
-------------------------------------------------------------------------------------------------------------------
Restated Restated
For the 12-weeks ended For the 28-weeks ended
-------------------------------------------------------------------------------------------------------------------
July 13, 2002 July 14, 2001 July 13, 2002 July 14, 2001
-------------------------------------------------------------------------------------------------------------------
Net sales $ 146,921 $ 130,682 $ 331,060 $ 284,502
Cost of products sold 117,784 107,618 266,006 235,433
-------------------------------------------------------------------------------------------------------------------
Gross profit 29,137 23,064 65,054 49,069
Selling and administrative expenses 23,917 18,798 53,854 40,317
Depreciation and amortization 1,760 1,404 4,055 3,003
-------------------------------------------------------------------------------------------------------------------
Operating income 3,460 2,862 7,145 5,749
Interest income 34 196 37 584
Interest expense (386) (250) (936) (534)
-------------------------------------------------------------------------------------------------------------------
Earnings before income taxes 3,108 2,808 6,246 5,799
Provision for income taxes 1,198 1,067 2,422 2,203
-------------------------------------------------------------------------------------------------------------------
Net earnings $ 1,910 $ 1,741 $ 3,824 $ 3,596
===================================================================================================================
Earnings per share - basic $ 0.37 $ 0.33 $ 0.74 $ 0.67
Earnings per share - diluted $ 0.36 $ 0.33 $ 0.73 $ 0.67
Weighted average shares and
equivalents outstanding:
Basic 5,174 5,204 5,169 5,375
Diluted 5,270 5,251 5,266 5,398
Cash dividends paid per share of $ 0.09 $ 0.09 $ 0.18 $ 0.18
common stock
===================================================================================================================
See notes to consolidated financial statements.
5
FRESH BRANDS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
----------------------------------------------------------------------------------------------------------------------
Restated
For the 28-weeks ended
July 13, 2002 July 14, 2001
----------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings $ 3,824 $ 3,596
Adjustments to reconcile net earnings to net cash provided
by operating activities:
Depreciation and amortization 4,055 2,969
Deferred income taxes - (160)
Changes in assets and liabilities:
Receivables (1,069) 2,988
Inventories 4,729 (1,287)
Other current assets (603) (3,893)
Accounts payable (2,726) 2,031
Accrued liabilities 1,688 (75)
----------------------------------------------------------------------------------------------------------------------
Net cash flows from operating activities 9,898 6,169
----------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (7,650) (880)
Receipt of principal amounts under capital subleases 283 198
Acquisition, net of cash acquired - (27,298)
----------------------------------------------------------------------------------------------------------------------
Net cash flows from investing activities (7,367) (27,980)
----------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net change in revolver activity 3,100 15,500
Payment for acquisition of treasury stock (1,540) (6,828)
Payment of cash dividends (931) (961)
Exercise of stock options 772 546
Principal payments on capital lease obligations (627) (422)
Principal payments on long-term debt (494) (105)
Other financing activities 15 24
Long term debt borrowing - 378
----------------------------------------------------------------------------------------------------------------------
Net cash flows from financing activities 295 8,132
----------------------------------------------------------------------------------------------------------------------
CASH AND EQUIVALENTS:
Net change 2,826 (13,679)
Balance, beginning of period 11,501 31,309
----------------------------------------------------------------------------------------------------------------------
Balance, end of period $ 14,327 $ 17,630
======================================================================================================================
SUPPLEMENTAL CASH FLOW DISCLOSURES:
Interest paid $ 954 $ 494
Income taxes paid 315 1,956
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
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 $20.3 million.
The following 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 Restated
For the 12-weeks ended For the 28-weeks ended
July 13, 2002 July 14, 2001 July 13, 2002 July 14, 2001
----------------------------------------------------------------------------------------------------------------------
Revenues $ 146,921 $ 144,377 $ 331,060 $ 328,891
Net income 1,910 1,615 3,824 3,046
Net income per share:
Basic $ 0.37 $ 0.31 $ 0.74 $ 0.57
Diluted $ 0.36 $ 0.31 $ 0.73 $ 0.56
----------------------------------------------------------------------------------------------------------------------
7
(3) Other Current Assets
(In thousands)
-------------------------------------------------------------------------------------------------
July 13, 2002 December 29, 2001
-------------------------------------------------------------------------------------------------
Prepaid expenses $ 2,208 $ 1,268
Retail systems and supplies for resale 564 426
Receivable under capital subleases 566 526
-------------------------------------------------------------------------------------------------
Other current assets $ 3,338 $ 2,220
=================================================================================================
(4) Segment Reporting
Summarized financial information for the second quarter and year-to-date of
2002 and 2001 concerning our reportable segments is shown in the following
tables (in thousands):
------------------------------------------------------------------------------------------------------------------
For the 12-weeks ended For the 28-weeks ended
Sales July 13, 2002 July 14, 2001 July 13, 2002 July 14, 2001
------------------------------------------------------------------------------------------------------------------
Wholesale sales $ 110,849 $ 103,060 $ 250,765 $ 230,071
Intracompany sales (36,383) (30,301) (84,676) (66,092)
Net wholesale sales 74,466 72,759 166,089 163,979
Retail sales 72,455 57,923 164,971 120,523
------------------------------------------------------------------------------------------------------------------
Total sales $ 146,921 $ 130,682 $ 331,060 $ 284,502
==================================================================================================================
------------------------------------------------------------------------------------------------------------------
Restated Restated
For the 12-weeks ended For the 28-weeks ended
Earnings Before Income Tax July 13, 2002 July 14, 2001 July 13, 2002 July 14, 2001
------------------------------------------------------------------------------------------------------------------
Wholesale $ 2,309 $ 1,914 $ 5,491 $ 4,349
Retail 1,151 948 1,654 1,400
Total operating income 3,460 2,862 7,145 5,749
Interest income 34 196 37 584
Interest expense (386) (250) (936) (534)
------------------------------------------------------------------------------------------------------------------
Earnings before income taxes $ 3,108 $ 2,808 $ 6,246 $ 5,799
==================================================================================================================
(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.
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 12-week and 28-week periods ended
July 14, 2001 was $96,000 and $114,000, respectively. 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
8
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 that decreased 2001
second quarter and year-to-date net sales and cost of products sold each by $1.2
million and $3.1 million, respectively 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. 143 "Accounting for Asset
Retirement Obligations." Statement No. 143 addresses financial accounting and
reporting for obligations associated with the retirement of tangible long-lived
assets and the associated asset retirement costs. Management is currently
evaluating the impact of adoption on the consolidated financial statements.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets" effective for years beginning after
December 15, 2001. SFAS No. 144 establishes a single accounting model for
long-lived assets to be disposed of by sale and provides additional
implementation guidance for assets to be held and used and assets to be disposed
of other than by sales. SFAS No. 144 supersedes SFAS No. 121, "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
of". The implementation of this pronouncement did not have a material impact on
our results of operations or financial position.
In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities." The Statement requires companies
to recognize costs associated with exit or disposal activities when they are
incurred rather than at the date of a commitment to an exit or disposal plan.
The Statement replaces EITF Issue No. 94-3, "Liability Recognition for Certain
Employee Termination Benefits and Other Costs to Exit an Activity (Including
Certain Costs Incurred in a Restructuring)." The Company is required to apply
this Statement prospectively to exit or disposal activities initiated after
December 31, 2002. Management is currently evaluating the impact of adoption on
the consolidated financial statements.
(6) Restatement
Our previously issued quarterly consolidated balance sheets as of July 13,
2002 and the related consolidated statements of earnings, shareholders'
investment and cash flows for the 12-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
9
direct store delivery meat vendors. Accurately stating cost of products sold
resulted in a reduction to receivables, net, at 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 inreceivables, net, at July 13, 2002 and December 29, 2001.
Inventories
Inventory balances were adjusted to recognize the reduction in inventory
values reflecting cash discounts received by us from our vendors. The correction
reduced inventory balances at July 13, 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 July 13, 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 July 13, 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 July
13, 2002 and December 29, 2001.
Other accrued liabilities
The originally reported tax liabilities were increased to reflect the
impact of the adjustments described in this note, impacting our periods ended
July 13, 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 adjustments in our
periods ended July 13, 2002 and July 14, 2001.
Provision for income taxes
The tax provision for all periods disclosed was restated for the impact of
adjustments described above.
The following tables present the changes that have been made to the
consolidated balance sheet as of July 13, 2002 and the related consolidated
statements of earnings for the 12-weeks ending July 13, 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 quarters
in 2001 are presented within the quarterly financial information note included
within the 2001 10-K/A, as such, these changes are not included herein. There
were no net changes in earnings for the 28-weeks ending July 13, 2002 or in
operating, financing or investing cash flows for the 12-weeks ending July 13,
2002 and July 14, 2001.
10
(In thousands)
------------------------------------------------------------------------------------------------------------
Condensed Balance Sheet
July 13, 2002
------------------------------------------------------------------------------------------------------------
As Previously
Reported As Restated
------------------------------------------------------------------------------------------------------------
Receivables, net $ 11,868 $ 11,953
Inventories 30,223 29,809
Total current assets 68,470 68,141
Total assets 141,730 141,401
Accounts payable 31,255 30,567
Accrued insurance 3,215 2,730
Other accrued liabilities 6,979 7,305
Total current liabilities 49,012 48,165
Retained earnings 78,216 78,734
Total shareholders' investment 52,358 52,876
Total liabilities and shareholders' investment 141,730 141,401
------------------------------------------------------------------------------------------------------------
(In thousands except per share data)
------------------------------------------------------------------------------------------------------------
Condensed Earnings Statement For the 12-weeks ended
July 13, 2002
------------------------------------------------------------------------------------------------------------
As Previously Reported
As Restated
------------------------------------------------------------------------------------------------------------
Cost of products sold $ 117,826 $ 117,784
Gross profit 29,095 29,137
Operating income 3,418 3,460
Earnings before income taxes 3,066 3,108
Provision for income taxes 1,182 1,198
Net earnings 1,884 1,910
Earnings per share - basic .36 .37
Earnings per share - diluted .36 .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 July 13, 2002 and
December 29, 2001 and the related consolidated statements of earnings and cash
flows for the 12-week and 28-week periods ending July 13, 2002 and July 14, 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 July 13, 2002, we owned 27 supermarkets and franchised an additional
72 supermarkets. This compares to 27 owned supermarkets and 70 franchised
supermarkets as of July 14, 2001. Nineteen of our corporate supermarkets operate
under the Piggly Wiggly(R) banner, eight of them operate under the Dick's(R)
Supermarket's banner and all of our franchised supermarkets operate 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 consolidated accounting
purposes. We supply grocery, frozen food, 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, dairy and deli items through a third-party
distribution facility in Milwaukee, Wisconsin. Additionally, we distribute
bakery and deli items made in our Platteville, Wisconsin centralized production
facility.
Our retail business consists of the 27 corporate supermarkets which operate
under the Piggly Wiggly and Dick's Supermarkets banners. We earn our retail
revenue by selling to retail consumers 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. Our
current fiscal year is a 52-week period. Our first quarter is comprised of
16-weeks and the remaining quarters are 12-weeks each.
Results of Operations
The following table sets forth certain items from our Consolidated
Statements of Earnings as a percent of net sales and the percentage change in
the dollar amounts of such line items from the restated second quarter of 2001
compared to the second quarter of 2002 and restated year-to-date 2001 compared
to year-to-date 2002.
----------------------------------------------------------------------------------------------------------------------
Restated Restated
Restated Percentage Restated Percentage
Percent of net sales change Percent of net sales change
----------------------------------------------------------------------------------------------------------------------
July 13, 2002 July 13, 2002
For the 12-weeks ended vs. For the 28-weeks ended vs.
July 13, 2002 July 14, 2001 July 14, 2001 July 13, 2002 July 14, 2001 July 14, 2001
----------------------------------------------------------------------------------------------------------------------
Net sales 100.0% 100.0% 12.4% 100.0% 100.0% 16.4%
Retail sales 49.3% 44.3% 25.1% 49.8% 42.4% 36.9%
Net wholesale sales 50.7% 55.7% 2.3% 50.2% 57.6% 1.3%
12
Gross margin 19.8% 17.6% 26.3% 19.7% 17.2% 32.6%
Operating & admin
expenses 17.5% 15.5% 27.1% 17.5% 15.2% 33.7%
Operating income 2.3% 2.2% 20.9% 2.2% 2.0% 24.3%
Earnings before income
taxes 2.1% 2.1% 10.7% 1.9% 2.0% 7.7%
Net earnings 1.3% 1.3% 9.7% 1.2% 1.3% 6.3%
----------------------------------------------------------------------------------------------------------------------
Net Sales
Record net sales for our 12- and 28-week periods ended July 13, 2002 were
$146.9 million and $331.1 million, respectively, compared to $130.7 million and
$284.5 million, respectively for the same periods in 2001. The increases of
$16.2 million and $46.6 million, or 12.4% and 16.4%, respectively, were 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 second quarter and first half
of 2002.
Retail Sales
Total retail sales volume for our 12- and 28-week periods ended July 13,
2002 increased 25.1% and 36.9%, respectively to $72.5 million and $165.0
million, compared to $57.9 million and $120.5 million, respectively for the same
periods in 2001. Our retail sales improved because of the following:
o Our acquisition of the Dick's Supermarket chain added $23.4 million and
$52.6 million to our retail sales for the second quarter and the first half
of fiscal 2002, respectively compared to $8.5 million for the same periods
of 2001, 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 higher than sales at the supermarkets they replaced.
Due in large part to increased intense competitive activity in certain
market areas where we operate, the overall softness of the economy and rising
unemployment rates (which reduces discretionary spending), same store sales for
our corporate and franchised supermarkets were flat for the second quarter of
2002, compared to last year's second quarter. Last year, significant sales
improvement was attributable, in part, to competitive store closures in several
of our markets. In contrast, this year we have experienced an increase in
competitive store openings in several markets. In light of the competitive
environment and near-term economic outlook, we anticipate continuing flat
same-store sales trends for the remainder of the year.
As part of our continuing efforts to increase our retail sales volume, we
are currently building a new market 50,000 square-foot corporate supermarket in
Kenosha, Wisconsin. We expect this new market store to open in January 2003. In
addition, we recently announced a new corporate replacement store and Pig
Stop(R) gas station project to be built in the north side of Sheboygan by late
summer of next year. Both stores are designed after our flagship supermarket in
Sheboygan, Wisconsin.
Net Wholesale Sales
Net wholesale sales for our 12- and 28-week periods ended July 13, 2002
increased to $74.5 million and $166.1 million, respectively, compared to $72.8
million and $164.0 million for the same period in 2001. The net wholesale sales
increases of $1.7 million and $2.1 million represented percentage increases of
2.3% and 1.3% for the second quarter and the first half of fiscal 2002,
respectively. Net wholesale sales increased as a result of the conversion of
independent supermarkets in Howard and Nekoosa, Wisconsin in October 2001 and
the addition of a wholesale customer in Oostburg, Wisconsin in March 2002. The
independent customer in Oostburg is expected to be converted into a franchise
supermarket in November 2002.
13
Over the next 12 months, multiple additional store openings are planned
which we expect will help increase our wholesale volume. These 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. Additionally, in August 2002, we reached the
100-store milestone with the opening of a our 73rd franchise Piggly Wiggly
supermarket in Cambridge, Wisconsin.
Gross Margin
Our gross margin increased to 19.8% and 19.7% for the 12- and 28-week
periods ended July 13, 2002, compared to 17.6% and 17.2%, respectively, for the
same periods 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 both the 12- and 28-week periods ended July 13, 2002,
compared to 15.5% and 15.2% for the same periods in 2001. These increases were
principally attributable to the increase in our mix of retail sales to total
sales resulting from the Dick's acquisition, which led to a corresponding and
anticipated increase in our operating and administrative expenses. Additionally,
during the second quarter, we recognized a loss of approximately $220,000 from
the sale of a vacant corporate owned retail property. We also recorded
approximately $130,000 of additional depreciation in the second quarter compared
to the same period in 2001 as a result of our write-up of property and equipment
resulting from the Dick's acquisition, compared to the same period of 2001.
Health and accident insurance costs, as a percent of sales, for the second
quarter of 2002, were consistent with the same period during 2001. 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
continue to be mitigated, in part, by our fall 2001 introduction of employee
health plan cost sharing.
We were notified by the trustees of the Illinois United Food and Commercial
Workers Health Benefits Fund that a special assessment will be imposed on plan
members, including the Company. Based on our knowledge at this time, we
anticipate that this special assessment will be paid over a two-year period
beginning this fall. We do not anticipate this charge to have a material impact
to this year's financial statements.
Due to the competitive nature of the supermarket industry, some of our
franchised and corporate retail stores continue to experience operational
challenges in their 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 prior to
the end of the year. 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
Operating income for the 12- and 28-week periods ended July 13, 2002
increased 20.9% and 24.3%, respectively to $3.4 million and $7.1 million,
compared to $2.9 million and $5.7 million, respectively, for the same periods in
2002. As a percent of net sales, our operating income in the second quarter and
first half of 2002 was 2.3% and 2.2%, compared to 2.2% and 2.0% for the same
periods in 2001. Our earnings before income taxes for the second quarter and
first half of 2002 increased 10.7%
14
and 7.7%, respectively, to $3.1 million and $6.2 million, compared to $2.8
million and $5.8 million for the same periods of 2001. Our interest expense
increased $136,000 in the second quarter of 2002 as a result of the acquisition
of Dick's in June 2001 and borrowing on our revolving credit agreement for
additional working capital needs. As a percent of sales, earnings before income
taxes remained constant between quarters at 2.1% for the second quarter of 2002
and 2001. Net earnings for the 12- and 28-week periods ended July 13, 2002
increased 9.7% and 6.3%, respectively, to $1.91 million and $3.82 million
compared to $1.74 million and $3.60 million, respectively, for the same periods
in 2001. Diluted earnings per share for the second quarter and first half of
2002 increased 9.1% and 7.8%, respectively to a record $0.36 and $0.73 compared
to $0.33 and $0.67, respectively for the same periods in 2001. The weighted
average common shares and equivalents for the second quarter and first half of
2002 were 5,270,000 and 5,266,000, compared to 5,251,000 and 5,398,000 for the
same periods in 2001.
Based on our performance through the second quarter, we currently expect
earnings per share for 2002 to be between $1.53 and $1.58, barring any unusual
or unforeseen occurrences in the economy, our markets or our business. Our
reduced expectations from our previous earnings per share guidance of between
$1.60 and $1.75 per share is largely due to the anticipated accounting and legal
costs expected to be incurred to restate our earnings for 2001, 2000 and 1999 as
previously discussed. We have concluded that we need to restate our earnings for
2001, 2000 and 1999 resulting from an inadvertent accounting mistake. The
aggregate after-tax impact to earnings for these three fiscal years is expected
to approximate $400,000. Additionally, we expect to incur, during the third and
fourth quarters of 2002, additional accounting and legal costs approximating
$180,000 on an after-tax basis.
Many of our peer companies measure the profitability of their sales using
their net earnings to sales ratio. This ratio represents the net earnings margin
realized from each dollar of sales. Our 2002 and 2001 second quarter net
earnings to sales were comparable at 1.3%. For the first half of 2002, our net
earnings to sales ratio was 1.2%, compared to 1.3% for the same period last
year. This nominal reduction was primarily due to increased competition in some
of our retail markets. We anticipate that our net earnings to sales ratio will
likely remain within this current range for the remainder of fiscal 2002.
Liquidity and Capital Resources
Summary
At July 13, 2002, we had cash and equivalents totaling $14.3 million. At
year-end 2001, cash and equivalents aggregated $11.5 million. Our net cash
inflow of approximately $2.8 million was attributable to various operational,
investing and financing activities as described below. Our working capital
position at July 13, 2002 was $19.6 million, compared to $19.1 million at
December 29, 2001. Our current ratio at July 13, 2002 was 1.41 to 1.00, compared
to 1.39 to 1.00 at December 29, 2001, with cash and equivalents contributing
approximately $14.3 million to working capital. As of July 13, 2002, we had
unsecured revolving bank credit facilities aggregating $35.0 million, with $18.4
million remaining available for use. Our current working capital levels provide
us with a very favorable and strong liquidity position. We have recently amended
our revolving credit agreement with our banks. The amendment resulted in certain
changes to our negative covenants and we expect our interest expense to increase
as a result of the amendments. We continue to remain in compliance with all
credit facility debt covenants.
Cash Flows From Operating Activities
For the 28-week period ended July 13, 2002, our net cash generated from
operations was $9.9 million, compared to $6.2 million for the same period in
2001. Our net change in cash inflows from operations was attributable to the
timing of cash receipts and disbursements.
Cash Flows From Investing Activities
For the 28-week period ended July 13, 2002, our net cash outflows from
investing activities totaled $7.4 million, compared to $28.0 million for the
same period in 2001. Our acquisition of Dick's
15
Supermarkets accounted for $27.3 million of the 2001 investing cash outflow. For
the 2002 28-week period, investing cash outflows for capital items was nearly
$7.7 million, compared to $900,000 for the same period in 2001. Approximately
$2.3 million of the investing outflow related to capital expenditures for our
on-going systems project. Additionally, expenditures for retail equipment and
fixtures, including those associated with Dick's, were approximately $2.0
million, expenditures related to the expansion of our distribution centers were
nearly $3.0 million, and corporate office technology expenditures were nearly
$400,000.
Cash Flows From Financing Activities
For the 28-week period ended July 13, 2002, our net cash inflows from
financing activities totaled approximately $300,000 compared to nearly $8.1
million in inflows for the same period in 2001. The change was primarily due to
borrowings of $15.5 million against our revolving line of credit in 2001. In the
second quarter of 2001, we entered into a new $35.0 million bank revolving
credit facility. We borrowed $12.5 million under our new revolving credit
facility to fund a portion of the purchase price of Dick's Supermarkets, Inc. in
June 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 $16.6 million under the
revolving credit facility at the end of the second quarter of 2002. Our ratio of
total liabilities to shareholders' investment for the 2002 second quarter was
down from the second quarter of 2001 to 1.67 from 1.73. Our ratio remains very
low relative to our publicly-held peer group companies.
Additional financing cash outflow was due to the repurchase of nearly
82,000 shares of our own common stock in the first half of 2002 for an aggregate
price of $1.5 million, compared to approximately 570,000 shares aggregating $6.8
million for the same period of 2001. Subsequent to the close of the second
quarter, on July 26, 2002, our Board of Directors authorized an increase in our
stock repurchase program from $25.0 million to $30.0 million. Prior to this
increase, only $350,000 remained available for additional stock repurchases.
Also, on July 26, 2002, our Board of Directors declared a third quarter 2002
cash dividend of $0.09 per common share. The dividend is payable on September 6,
2002 to shareholders of record on August 23, 2002 and is expected to total
approximately $450,000.
Major 2002 Commitments
During the second quarter of 2001, we announced our plans to spend
approximately $15.0 million, over a three-year period 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 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 by the first quarter of 2003. Part of the wholesale
phase of the project, which involved our meat and dairy warehouse operations,
have been substantially completed. 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 end of 2004. Since the inception of the systems project in 2001, we
have expended nearly $5.3 million on this project.
16
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) our expectations regarding our
net earnings to sales ratio; (f) the cost, timing and results of our new
business information technology systems replacement project; and (g) the
expected increase in interest expense as a result of interest rate changes
associated with our amended debt covenant. Such forward-looking statements are
subject to certain risks and uncertainties that may materially adversely affect
the anticipated results. Such risks and uncertainties include, but are not
limited, to the following: (1) the cost and results of our new business
information technology systems replacement project; (2) the presence of intense
competitive market activity in our market areas, including competition from
warehouse club stores and deep discount supercenters; (3) our ability to
identify and develop new market locations and/or acquisition candidates for
expansion purposes; (4) our continuing ability to obtain reasonable vendor
marketing funds for promotional purposes; (5) our ability to continue to
recruit, train and retain quality franchise and corporate retail store
operators; (6) the potential recognition of repositioning charges resulting from
potential closures, conversions and consolidations of retail stores due
principally to the competitive nature of the industry and to the quality of our
retail store operators; (7) the final cost and results of, and the diversion of
management's time and attention in connection with, its financial statement
restatements; and (8) our ability to integrate and assimilate the acquisition of
Dick's Supermarkets, Inc. and to achieve, on a timely basis, our 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 we disclaim any obligation to publicly
update such forward-looking statements to reflect subsequent events or
circumstances.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Our only variable rate financial instrument subject to interest rate risk
is a $35.0 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 $16.6 million under this facility as of July 13, 2002
and, as a result, increases in market interest rates would cause our interest
expense to increase and our earnings before income taxes to decrease. Based on
our outstanding revolving credit facility borrowings as of July 13, 2002, a 100
basis point increase in market interest rates would increase our annual interest
expense by approximately $166,000. Similarly, a 100 basis point decrease in the
market interest rates would reduce our annual interest expense by approximately
$166,000.
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.
17
PART II Other Information
Item 4. Submission of Matters to a Vote of Security Holders
Our 2002 annual meeting of shareholders was held on Wednesday, May 22,
2002. At the meeting, the shareholders re-elected Martin Crneckiy, Jr., R. Bruce
Grover and Elwood F. Winn to our Board of Directors for the three-year terms
expiring at our 2005 annual meeting of shareholders and until their successors
are duly qualified and elected. As of the March 15, 2002 record date for the
annual meeting, 5,163,737 shares of Common Stock were outstanding and eligible
to vote. Of these, 4,352,492 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
----- ---------- ----- ----------
Martin Crneckiy, Jr. 3,762,958 86.5% 589,534 13.5%
R. Bruce Grover 3,756,144 86.3% 596,348 13.7%
Elwood F. Winn 3,563,136 81.9% 789,356 18.1%
The tabulation of votes for the election of directors resulted in no broker
non-votes or abstentions.
Our continuing directors are Michael R. Houser, Bruce J. Olson and Walter
G. Winding, whose terms expire in 2003, and William K. Jacobson, Steven R. Barth
and G. William Dietrich, whose terms expire in 2004.
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 June 28, 2002, pursuant
to Item 4 thereof with respect to the dismissal of Arthur Andersen LLP
as our independent auditors and the engagement of KPMG LLP as our
independent auditors for the fiscal year ending December 28, 2002.
We filed one current report on Form 8-K dated July 24, 2002, pursuant
to Item 4 thereof with respect to the acceptance by KPMG LLP to be the
independent auditors for our fiscal year ending December 28, 2002.
We filed one current report on Form 8-K dated July 25, 2002, pursuant
to Item 9 thereof with respect to our press release regarding an
accounting error and that we will restate of our financial statements
for the 2001, 2000, and 1999 fiscal years.
18
We filed one current report on Form 8-K dated August 2, 2002, pursuant
to Item 9 thereof with respect to our press release for the second
quarter ended July 13, 2002 and related disclosure requirements of
Regulation FD.
We filed one current report on Form 8-K dated August 15, 2002,
pursuant to Item 9 thereof with respect to our press release
announcing the resignation of our chief financial officer, Mr. Armand
C. Go, effective after August 23, 2002.
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