SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the Securities Exchange Act of 1934
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Check the appropriate box:
[ ] Preliminary Proxy Statement
[ ] Confidential, for Use of the Commission Only (as permitted by
Rule 14a-6(e)(2))
[X] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant toss.240.14a-11(c) orss.240.14
Fresh Brands, Inc.
------------------
(Name of Registrant as Specified in its Charter)
(Name of Person(s) Filing Proxy Statement if other than the Registrant)
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[X] No fee required.
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pursuant to Exchange Act Rule 0-11 (Set forth the amount on which the
filing fee is calculated and state how it was determined):
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[ ] Check box if any part of the fee is offset as provided by Exchange
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[GRAPHIC OMITTED][FRESH BRANDS, INC.'S LOGO]
FRESH BRANDS, INC.
2215 Union Avenue
Sheboygan, Wisconsin 53081
NOTICE OF 2003 ANNUAL
MEETING OF SHAREHOLDERS
TO BE HELD ON MAY 13, 2003
Dear Shareholder:
We invite you to attend our 2003 annual meeting of shareholders on May
13, 2003 at 3:00 P.M. at the John Michael Kohler Arts Center, located at 608 New
York Avenue, Sheboygan, Wisconsin. As we describe in our accompanying proxy
statement, if you held shares of our common stock on March 10, 2003, you will be
entitled to vote at the annual meeting on the election of three directors and
any other business that may properly come before our annual meeting.
We have enclosed a proxy card and our 2002 annual report along with
this proxy statement. Your vote is important, no matter how many shares you own.
Even if you plan to attend our annual meeting, please complete, date and sign
the proxy card and mail it as soon as you can in the envelope provided. If you
attend the annual meeting, you can revoke your proxy and vote your shares in
person if you like.
Thank you for your continued support. We look forward to seeing you at
our annual meeting.
Sincerely,
FRESH BRANDS, INC.
/s/ S. Patric Plumley
S. Patric Plumley
Senior Vice President, Chief Financial
Officer, Treasurer and Secretary
Sheboygan, Wisconsin
March 28, 2003
FREQUENTLY ASKED QUESTIONS
Q: Why did I receive this proxy statement? Q: Who will count the votes?
Our board of directors has sent you this proxy American Stock Transfer & Trust Company, our
statement starting on or about March 28, 2003 to transfer agent and registrar, will count the votes
ask for your vote, as a Fresh Brands shareholder, and act as inspector of elections at the annual
on one matter to be voted on at our upcoming meeting. The address for our transfer agent and
annual shareholders' meeting. registrar is 59 Maiden Lane, Plaza Level, New
York, NY 10038.
Q: What am I voting on?
Q: How many shares of Fresh Brands' stock are entitled
You will vote on the election of three directors. to vote?
Our board of directors is not aware of any other
matter that will be presented for your vote at the A total of 5,053,946 shares of common stock will
annual meeting. be entitled to vote at the annual meeting. Each
share of common stock is entitled to one vote on
Q: Do I need to attend the annual meeting in order to each matter submitted for shareholder
vote? consideration at the annual meeting.
No. You can vote either in person at the annual Q: What constitutes a quorum?
meeting or by completing and mailing the enclosed
proxy card. A "quorum" refers to the number of shares that
must be in attendance at a meeting to lawfully
Q: What happens if I sign and return my proxy card but conduct business. A majority of the shares of our
do not mark my vote? common stock entitled to be cast will represent a
quorum. As a result, at least 2,526,974 shares
If you return a signed proxy card without must be present at the annual meeting before we
indicating how you wish to vote, Walter G. Winding can take action at the meeting.
and Elwood F. Winn, as proxies, will vote your
shares to elect our nominees for directors. Q: What is the address and telephone number of
Fresh Brands?
Q: What percentage of Fresh Brands' votes do directors
and officers control? The address of our principal executive office is
2215 Union Avenue, Sheboygan, Wisconsin 53081 and
Approximately 9.6% of our shares in total, as of its telephone number is (920) 457-4433.
the record date, are controlled by our directors
and officers.
Q: Who is entitled to vote?
You are entitled to vote at the annual
meeting if you owned shares as of the
close of business on the March 10, 2003
record date. You will be entitled to one
vote for each share of our common stock
you owned on the record date.
1
FREQUENTLY ASKED QUESTIONS
Q: Who are Fresh Brands' largest shareholders? Q: What do I need to do now?
Investors holding 5% or more of our outstanding Just mail your signed proxy card in the
common stock are: enclosed postage-paid return envelope as
soon as possible so that your shares may
1) Franklin Resources, Inc. - 15.0% be represented at the annual meeting.
2) Fresh Brands Distributing, Inc. Retirement Q: Can I revoke my proxy after it is returned?
Savings Plan - 12.3%
Yes, you may revoke your proxy at any
3) FMR Corp. - 10.1% time before it is exercised by giving
notice thereof to us in writing or in
4) Delphi Management, Inc. - 7.4% open meeting. If you have executed a
proxy and attend the annual meeting,
5) Dimensional Fund Advisors, Inc. - 5.4% your presence at the annual meeting does
not, in itself, revoke your proxy.
ELECTION OF DIRECTORS
At the annual meeting, our shareholders will elect three directors to
hold office until our annual meeting held in 2006. The Nominating Committee of
our board of directors has recommended, and our board has nominated, Michael R.
Houser, Bruce J. Olson and Walter G. Winding, each of whom currently serves as a
shareholder-elected director, as the three directors to hold office until our
annual meeting in 2006. Walter G. Winding and Elwood F. Winn, as proxies, intend
to vote for the election of all of our nominees. They will also vote for another
person that our Nominating Committee may recommend and our board may nominate in
the event that a nominee becomes unable to serve as a director before the annual
meeting.
Under Wisconsin law, shareholders elect directors by a plurality of
the votes cast. This means that the nominees receiving the largest number of
votes, even if less than a majority, will be elected as directors. Any shares
that are not voted, whether by abstention, broker non-vote or otherwise, will
not affect the election of directors.
Our board of directors recommends a vote for Michael R. Houser, Bruce
J. Olson and Walter G. Winding.
2
The tables set forth below list certain information about our
board of directors and the board committees on which our directors serve, as
well as how many times the board and each committee met in 2002. Each of our
directors attended at least 75% of the meetings of our board and each committee
on which he served in 2002.
Class II - Nominees for Election at the Annual Meeting
------------------------------------------------------------------------------------------------------------------------------
Stock Strategic Corporate
Nominating Audit Compensation Option Planning Governance
Board Committee Committee Committee Committee Committee Committee
------------------------------------------------ ------ ----------- ---------- ------------ ---------- ----------- -----------
Michael R. Houser (51), a director since 1992; |X|
Vice Chairman of the Board, Executive Vice |X|
President and Chief Marketing Officer(1)
------------------------------------------------ ------ ----------- ---------- ------------ ---------- ----------- -----------
Bruce J. Olson (53), a director since 1999;
Group Vice President and a director of The
Marcus Corporation - owner and operator of |X| |X| |X| |X| |X| |X|
limited service lodging inns, hotels, resorts
and movie theatres
------------------------------------------------ ------ ----------- ---------- ------------ ---------- ----------- -----------
Walter G. Winding (61), a director since 1999; |X|* |X|* |X| |X|* |X|
Chairman of the Board; owner and Chief
Executive Officer of Winding and Company - a
business consulting firm
------------------------------------------------------------------------------------------------------------------------------
Class III - Directors Whose Terms Expire in 2004
------------------------------------------------------------------------------------------------------------------------------
Stock Strategic Corporate
Nominating Audit Compensation Option Planning Governance
Board Committee Committee Committee Committee Committee Committee
------------------------------------------------ ------ ----------- ---------- ------------ ----------- ---------- -----------
Steven R. Barth (44), a director since 1998; |X| |X| |X| |X| |X|*
Partner in the law firm of Foley & Lardner
------------------------------------------------ ------ ----------- ---------- ------------ ----------- ---------- -----------
G. William ("Bill") Dietrich (57), a director |X| |X| |X| |X| |X| |X| |X|
since 2001; President, Chief Executive Officer
and director of Onyx North America Corp. - a
provider of a variety of environmental
services, including waste collection,
transfer, recycling and disposal services
------------------------------------------------------------------------------------------------------------------------------
Class I - Directors Whose Terms Expire in 2005
------------------------------------------------------------------------------------------------------------------------------
Stock Strategic Corporate
Nominating Audit Compensation Option Planning Governance
Board Committee Committee Committee Committee Committee Committee
------------------------------------------------ ------ ----------- ---------- ------------ ---------- ---------- ------------
Martin Crneckiy, Jr. (57), a director since |X| |X| |X|* |X| |X| |X| |X|
1989; Executive Vice President of The Vollrath
Company, L.L.C. - a manufacturer of stainless
steel and plastic wares and light equipment
for the international food service industry
------------------------------------------------ ------ ----------- ---------- ------------ ---------- ---------- ------------
R. Bruce Grover (67), a director since 1989; |X| |X| |X| |X|* |X|* |X| |X|
President and Chief Executive Officer of VPI,
LLC - a manufacturer of solid vinyl floor
products, custom extruded sheets and sound
barrier materials for automotive applications
------------------------------------------------ ------ ----------- ---------- ------------ ---------- ---------- ------------
Elwood F. Winn (52), a director since 2000; |X|
President and Chief Executive Officer(1) |X|
------------------------------------------------ ------ ----------- ---------- ------------ ---------- ---------- ------------
Meetings held in 2002 7 2 3 2 2 2 0(2)
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* Denotes Chairman.
1) Because we operate as a holding company, Messrs. Winn and Houser are also
directors and officers of certain of our subsidiaries.
2) The Corporate Governance Committee was formed on January 28, 2003.
3
All of our directors have held the positions indicated on the
preceding charts for at least the last five years, except that:
o Michael R. Houser became our Chief Marketing Officer in May 2000 and
became our Vice Chairman of the Board in December 2000;
o Elwood F. Winn was President and Chief Executive Officer of Certified
Grocers Midwest Inc. ("CGM") from February 1992 to October 1998, a
consultant to CGM from October 1998 until September 1999, our Senior
Vice President - Strategic Planning from September 1999 until May
2000, our Executive Vice President, Chief Financial Officer and
Secretary from May 2000 until December 2000, became our President and
Chief Executive Officer in December 2000, and was our Acting Chief
Financial Officer from August 2002 to January 2003;
o Walter G. Winding, who serves as our independent Chairman of the
Board, has served as an independent director since 1999 and was
elected Chairman of the Board in December 2000. Mr. Winding is, and
has been for the past five years, the owner and Chief Executive
Officer of Winding and Company, a business consulting firm based in
Hartland, Wisconsin. Mr. Winding serves as a member of the boards of
directors and advisory boards of several private companies.
The Nominating Committee
All of the members of our Nominating Committee are "independent
directors," as defined by the rules applicable to the members of the Nominating
Committee. The Nominating Committee's principal functions include:
o identifying and recommending to our board prospective candidates for
board membership; and
o selecting candidates for each of the board's committees.
The Nominating Committee recommends, and our board nominates, director
nominees to stand for election at our annual meetings of shareholders and to
fill vacancies occurring on our board. The Nominating Committee will consider
nominees recommended by shareholders, but has no established procedures which
shareholders must follow to make a recommendation. Our bylaws also provide for
shareholder nominations of candidates for election as directors. These
provisions require such nominations to be made pursuant to timely notice (as
specified in the bylaws) in writing to our secretary. The shareholder's notice
must contain information relating to the nominee which is required to be
disclosed by our bylaws and the Securities Exchange Act of 1934.
The Audit Committee
All of the members of our Audit Committee are "independent directors,"
as defined by the rules applicable to members of the Audit Committee. Martin
Crneckiy, Jr. and G. William Dietrich are "audit committee financial experts,"
as defined by the Securities and Exchange Commission. The Audit Committee's
principal functions include:
o appointing, establishing the compensation for and overseeing our
independent auditors;
o reviewing annual audit plans with management and our independent
auditors;
o preapproving all audit and non-audit services provided by our
independent auditors;
o overseeing management's evaluation of the adequacy of our internal and
business controls, disclosure controls and procedures and risk
assessment and management;
o reviewing areas of financial risk that could have a material adverse
effect on our results of operations and financial condition with
management and our independent auditors;
4
o reviewing our policies as to officers' conflicts of interest with
management and our independent auditors;
o evaluating the independence of our independent auditors;
o reviewing, in consultation with management and our independent
auditors, financial reporting and accounting practices of comparable
companies that differ from our own; and
o receiving, retaining and addressing complaints (including employees'
confidential, anonymous submission of concerns) regarding financial
disclosure and accounting and auditing matters.
The Compensation Committee
All of the members of our Compensation Committee are "independent
directors," as defined by the rules applicable to members of the Compensation
Committee. The Compensation Committee's principal functions include:
o evaluating and setting cash compensation levels for our officers;
o reviewing and establishing the employee benefits we offer to our
officers;
o determining our officers' annual bonuses; and
o reviewing our compensation policies for board members who are not
employees.
The Stock Option Committee
All of the members of our Stock Option Committee are "independent
directors," as defined by the rules applicable to members of the Stock Option
Committee. The Stock Option Committee's principal functions include:
o evaluating and granting stock options and other equity incentives to
our directors, officers and other employees; and
o administering our equity incentive plans.
The Strategic Planning Committee
The Strategic Planning Committee's principal functions include:
o working closely with our key management personnel to review the
development and execution of our long- and short-term strategic goals
and plans; and
o reviewing the progress we have made toward attaining these goals and
plans.
The Corporate Governance Committee
All of the members of our Corporate Governance Committee are
"independent directors," as defined by the rules applicable to members of the
Corporate Governance Committee. The Corporate Governance Committee's principal
functions include:
o developing and maintaining our corporate governance policy guidelines;
o developing and maintaining our Code of Conduct;
o overseeing the interpretation and enforcement of our Code of Conduct;
and
o evaluating the performance of our board, its committees and committee
chairmen and our directors.
5
Stock Ownership of Management and Others
The following table describes certain information, as of the record
date, regarding the beneficial ownership of our common stock held by:
o each person or entity that we know beneficially owns more than 5% of
our common stock;
o each of our directors and our executive officers who are named in the
Summary Compensation Table under "Summary Compensation Information"
below; and
o all of our directors and named executive officers as a group.
We believe that, as of the record date, all of the people listed below
have sole voting and investment power over the listed shares, except as
indicated otherwise in the accompanying footnotes.
Name of Individual or Entity Shares Percentage(1)
---------------------------- ------ -------------
Franklin Resources, Inc.(2) 758,100 15.0%
Fresh Brands Distributing, Inc.
Retirement Savings Plan(3) 623,783 12.3%
FMR Corp.(4) 510,700 10.1%
Delphi Management, Inc.(5) 373,650 7.4%
Dimensional Fund Advisors Inc. (6) 275,250 5.4%
Michael R. Houser(7) 164,931 3.2%
Elwood F. Winn(8) 91,749 1.8%
William K. Jacobson(9) 76,000 1.5%
Thomas J. Timler(10) 57,864 1.1%
Walter G. Winding(11) 37,238 *
Martin Crneckiy, Jr.(12) 24,534 *
R. Bruce Grover(13) 20,534 *
G. William Dietrich(14) 18,013 *
Bruce J. Olson(15) 17,142 *
Robert J. Brodbeck (16) 12,640 *
Steven R. Barth 5,875 *
All current directors and executive
officers as a group (13 persons)(17) 526,520 9.6%
____________________________________________________________________
* Indicates less than 1%
1) For individuals who hold rights to acquire shares of stock upon exercise of
stock options, the percentages reflect inclusion of certain of these shares
as described in the footnotes below as well as the increase in the total
number of shares of common stock outstanding that would result from their
exercise of those options.
2) We obtained the share amount listed from the Schedule 13G/A, dated February
14, 2002, filed with the SEC. The address of Franklin Resources, Inc. is
One Franklin Parkway, San Mateo, California 94403.
3) We obtained the share amount listed from the Schedule 13G/A, dated February
12, 2003, filed by the Fresh Brands Distributing, Inc. Retirement Savings
Plan with the Securities and Exchange Commission. The listed shares were
held by Marshall & Ilsley Trust Company ("M&I"), as trustee for the Fresh
Brands Distributing, Inc. Retirement Savings Plan. Retirement Savings Plan
participants have investment power over the listed shares held by the
Retirement Savings Plan that are allocated to their accounts. A Plan
Administrative Committee, consisting of Michael G. Isken, Nadine A. Becker
and Lynn M. Berg, administers the Retirement Savings Plan and shares voting
power for the shares listed with the participants in the Retirement Savings
Plan in that the Plan Administrative Committee is entitled to vote shares
when participants have provided no voting instructions. The address of M&I
is 770 North Water Street, Milwaukee, Wisconsin 53202. The
6
address for the individual members of the Plan Administrative Committee is
c/o Fresh Brands, Inc., 2215 Union Avenue, Sheboygan, Wisconsin 53081.
4) We obtained the share amount listed from the amended Schedule 13G/A, dated
February 14, 2003, filed with the SEC. The address of FMR Corp. is 82
Devonshire Street, Boston, Massachusetts 02109.
5) We obtained the share amount listed from the Form 13F, dated February 7,
2003, filed with the SEC. The address of Delphi Management, Inc. is 50
Rowes Wharf #540, Boston, Massachusetts 02110.
6) We obtained the share amount listed from the amended Schedule 13G/A, dated
February 3, 2003, filed with the SEC. The address of Dimensional Fund
Advisors Inc. is 1299 Ocean Avenue, 11th Floor, Santa Monica, California
90401.
7) The share amount listed includes (a) 34,886 shares allocated to Mr.
Houser's account in the Fresh Brands Distributing, Inc. Retirement Savings
Plan as of December 28, 2002; (b) 117,550 shares covered by stock options
that will be exercisable within 60 days following the record date; and (c)
1,080 shares held as joint tenant with his wife.
8) The share amount listed includes (a) 3,709 shares allocated to Mr. Winn's
account in the Fresh Brands Distributing, Inc. Retirement Savings Plan as
of December 28, 2002; and (b) 87,040 shares covered by stock options that
will be exercisable within 60 days following the record date.
9) The share amount listed reflects shares which Mr. Jacobson can acquire by
exercising stock options that will be exercisable within 60 days following
the record date. Subsequent to the record date, Mr. Jacobson exercised
stock options for 34,000 shares and sold the stock received upon such
exercise.
10) The share amount listed includes (a) 13,108 shares allocated to Mr.
Timler's account in the Fresh Brands Distributing, Inc. Retirement Savings
Plan as of December 28, 2002; and (b) 43,640 shares covered by stock
options that will be exercisable within 60 days following the record date.
11) The share amount listed includes (a) 31,750 shares which Mr. Winding can
acquire by exercising stock options that will be exercisable within 60 days
following the record date; and (b) 3,346 shares held as joint tenant with
his wife.
12) The share amount listed includes (a) 15,000 shares which Mr. Crneckiy can
acquire by exercising stock options that will be exercisable within 60 days
following the record date; and (b) 3,600 shares held as joint tenant with
his wife.
13) The share amount listed includes 15,000 shares which Mr. Grover can acquire
by exercising stock options that will be exercisable within 60 days
following the record date.
14) The share amount listed includes 15,000 shares which Mr. Dietrich can
acquire by exercising stock options that will be exercisable within 60 days
following the record date.
15) The share amount listed includes 15,000 shares which Mr. Olson can acquire
by exercising stock options that will be exercisable within 60 days
following the record date.
16) The share amount listed reflects shares which Mr. Brodbeck can acquire by
exercising stock options that will be exercisable within 60 days following
the record date.
17) Two current executive officers, S. Patric Plumley and John C. Rocker, both
of whom joined us in 2003, are not separately listed in this table because
they do not own any shares of our stock or have any stock options
exercisable within 60 days of the record date. The share amount listed
includes 412,020 shares issuable under stock options exercisable within 60
days of the record date and 51,703 shares beneficially held by the named
executive officers in the Fresh Brands Distributing, Inc. Retirement
Savings Plan as of December 28, 2002.
7
AUDIT COMMITTEE REPORT
Our management is responsible for the company's financial reporting
process, including its system of internal controls and disclosure controls and
procedures, and for the preparation of the company's consolidated financial
statements in accordance with accounting principles generally accepted in the
United States. The company's independent auditors are responsible for auditing
those financial statements. Our responsibility is to oversee, monitor and review
these processes. It is not our duty or our responsibility to conduct auditing or
accounting reviews or procedures. We are neither employees of the company nor
auditors by profession. Therefore, we have relied, without independent
verification, on management's representations, including those in the
certifications of the financial statements that have been filed with the
Securities and Exchange Commission, that the company's financial statements have
been prepared with integrity and objectivity and in conformity with accounting
principles generally accepted in the United States. We have also relied on the
representations of the company's independent auditors included in its reports.
Our discussions with management and the company's independent auditors do not
ensure that the company's financial statements are presented in accordance with
generally accepted accounting principles, that the audit of the company's
financial statements has been carried out in accordance with generally accepted
auditing standards or that the company's independent auditors are in fact
"independent."
As noted in our report included in the company's April 2002 proxy
statement, although early in 2002 our Board of Directors initially decided to
retain Arthur Andersen as the company's independent auditors for 2002, it also
authorized management to explore the retention of another auditing firm if and
when our Board decided that such action was in the best interests of the company
and its shareholders. In June 2002, our Board, upon a recommendation made by us,
dismissed Arthur Andersen as our independent auditors and selected KPMG LLP as
our independent auditors for 2002.
In July 2002, management identified an inadvertent bookkeeping error
related to a unique supply relationship the company has with one of its vendors
that resulted in the understatement of the company's cost of goods sold between
1997 and the date that the error was discovered. After discovering this error,
the company immediately began a thorough investigation of the cause and extent
of the understatements. Upon determination of the cause and extent, the company
corrected the mistake. The company also carefully examined all of its other
vendor relationships to ensure that no other similar understatements have
occurred. As a result of this comprehensive review, management has represented
to us that it does not believe that there are any other similar understatements
reflected in the company's financial statements. After discussions among the
Audit Committee, management and KPMG, management and the Audit Committee
determined that the company needed to restate its earnings for 2001, 2000, and
1999 to correct this accounting error. The aggregate after-tax impact to
earnings for the three years that were restated, taken together, was $357,000,
or $145,000 in 2001 ($.03 per share), $90,000 in 2000 ($.02 per share) and
$122,000 in 1999 ($.02 per share). In addition, the company restated its 2001
cost of products sold to include labor costs related to its deli and bakery
manufacturing operation which were previously included in selling and
administrative expenses. Further, the company identified several errors which
originated in periods prior to fiscal year 1997. The errors resulted in
understatements of accounts receivable and accrued income taxes by $85,000 and
$326,000, respectively. Additionally, other errors resulted in overstatements of
inventory, accounts payable and accrued insurance by $414,000, $688,000 and
$485,000, respectively. An adjustment to increase retained earnings in 1996 by
$518,000 was recorded to reflect the correction of these errors.
Our Audit Committee reviewed and discussed the company's 2002 audited
financial statements and KPMG's reports on the company's financial statements
with KPMG and the company's management. In connection with this review and
discussion, our Audit Committee separately discussed with the company's
management and independent auditors the quality and adequacy of the company's
internal controls and disclosure controls and procedures.
8
We also discussed with KPMG all communications required by Statement
on Auditing Standards No. 61 (SAS 61), as amended by Statement on Auditing
Standards No. 90. These statements require independent auditors to communicate
to audit committees matters related to the conduct of the audit, including: (a)
independent auditors' responsibility under auditing standards generally accepted
in the United States; (b) changes in or new significant accounting policies and
transactions; (c) management judgments and accounting estimates; (d) quality of
accounting principles; (e) uncorrected financial statement misstatements; (f)
other information in documents containing audited financial statements; (g)
disagreements with management; (h) consultation with other accountants; (i)
major issues discussed with management prior to retention; (j) difficulties
encountered in performing the audit; (k) confirmation of audit independence; and
(l) fees from non-audit services. KPMG reported to us that, based on its audit
procedures, it believed that the company's internal controls are adequate and
sufficient.
We also received a written report and a letter from KPMG disclosing
all relationships between the company and KPMG. KPMG's letter advised us that,
in 2002, it provided $130,000 of audit services related to the audit of the
company's 2002 financial statements and an additional $195,000 of audit services
related to the re-audits summarized above. KPMG also notified us that it
provided $14,000 of other audit related services to the company in 2002
comprised of $11,000 related to benefit plan audits with the remainder relating
to tax services provided in connection with the financial statement audit. KPMG
further advised us that it provided no financial information systems design and
implementation support to the company in 2002. KPMG discussed its letter with us
and advised us that it did not believe its audit was impaired by its provision
of non-audit related services, particularly in view of the relationship of the
related fees to its annual revenues. As a result, KPMG confirmed that, as of
February 24, 2003, it was an independent accountant with respect to the company
within the meaning of the Securities Act administered by the Securities and
Exchange Commission and the requirements of the Independence Standards Board. We
considered whether KPMG's provision of non-audit services was compatible with
maintaining its independence with respect to the company. Based on our
discussions with management and KPMG, as well as our review of the
representations of management and KPMG's reports, we recommended to the Board of
Directors that the company's audited consolidated financial statements at and
for the year ending December 28, 2002 be included in the company's Annual Report
on Form 10-K for its fiscal year ended December 28, 2002 filed with the
Securities and Exchange Commission. We also reappointed KPMG as the company's
independent auditors for 2003.
Mr. Barth, a former member and Chairman of the Audit Committee, is a
member of a law firm that provides ongoing services to the company. Mr. Barth
meets the Nasdaq definition of "independence" that is generally applicable to
directors. He does not, however, meet the new, heightened Nasdaq and
Sarbanes-Oxley Act "independence" rules applicable to audit committee members.
As a result, Mr. Barth resigned from official membership on the Audit Committee,
although he still serves as an ex officio member of the Audit Committee.
This report (i) does not constitute soliciting material; (ii) shall
not be deemed to be incorporated by reference into any filing under the
Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as
amended, except to the extent this report or the performance graphs are
specifically incorporated; and (iii) shall not otherwise be deemed filed under
such Acts.
By the Audit Committee:
Martin Crneckiy, Jr., Chairman
G. William Dietrich
R. Bruce Grover
9
EXECUTIVE COMPENSATION
Our Compensation Committee of the Board of Directors evaluates and
establishes the compensation of our executive officers. Our executive
compensation program is designed to:
o attract, retain and motivate key officers;
o encourage a focus on strategic objectives which will result in
superior current and long-term financial performance;
o compensate officers above median market levels when financial
performance is superior and below median market levels when financial
performance is below the targeted levels;
o link long-term incentives to increasing shareholder value; and
o allow consideration of the positive or negative effects of
extraordinary events on financial performance.
Our executive compensation package consists of four principal
components: base salary, annual incentive bonus eligibility, annual stock option
grants, and other complementary compensation and employee benefits. We structure
each individual component of the company's executive compensation - as well as
the company's entire executive compensation package - in a manner that closely
aligns the economic interests of our management with the economic interests of
our shareholders. We do this by making a substantial part of the company's
executive compensation package dependent upon the company's achievement of
specific annual corporate financial performance objectives, and by tying our
executives' long-term compensation potential to future increases in the
company's stock price. We are firm believers in performance-based compensation
and we believe that this philosophy is best implemented by establishing combined
annual salary and bonus levels at amounts designed to be above relative median
market compensation levels when the company's financial performance meets or
exceeds our targeted objectives, and below median market compensation levels
when the company's financial performance does not meet our targets.
Additionally, by making stock option grants the principal long-term component of
our executive compensation package, we believe we've directly linked our
executives' realization of benefits from these option grants to future increases
in the intrinsic value of our company. At least conceptually, we believe that
shareholder value should be driven principally by the company achieving its
targeted financial performance goals.
Although the company had record sales and earnings per share in 2002,
it did not meet its financial performance goals. As a result, (i) only one of
our executive officers received an increase in his 2003 salary; (ii) except for
a longevity bonus required by an employment agreement with the president of our
Dick's Supermarkets subsidiary, none of our executive officers received bonuses
for 2002; and (iii) unlike previous years, we did not make any discretionary
contributions to our Fresh Brands Distributing retirement savings plans or our
executive benefit restoration plan for 2002. In addition, in December 2002, we
amended our Fresh Brands Distributing retirement savings plan and our executive
benefit restoration plan to eliminate all mandatory contributions (other than
contributions related to the company's 401(k) plan "matching" contributions). We
believe these changes will allow us to further align the economic interests of
our management with the economic interests of our shareholders by allowing us to
more closely link contributions to these plans to the company achieving its
annual financial performance objectives.
Salary
Base salary is the largest portion of the cash compensation package
received by each of our executives. After extensive analysis and consideration,
and consistent with our executive compensation philosophy, we have set each
executive's salary at or below the midpoint of the salary range paid to
similarly situated executives at comparable companies. We decided that, by
establishing annual base salaries at these relatively low levels, if the company
does not achieve its targeted annual financial goals, then our executives will
receive below market level cash compensation because they will not receive the
vast majority of their eligible bonus. The salary of one of our executive
officers, Robert Brodbeck, is
10
governed by an employment agreement we entered into in connection with our June
2001 Dick's Supermarkets acquisition (see "Executive Compensation-Employment and
Consulting Agreements" below). This agreement significantly reduced Mr.
Brodbeck's base salary from the level he received prior to our acquisition, but
included additional payments in 2002 provided he remained employed by us through
certain target dates.
We based the salary of Elwood F. Winn, our President and Chief
Executive Officer, on the foregoing factors along with Mr. Winn's experience in
our industry and his performance as our President and Chief Executive Officer.
In 2002, Mr. Winn's second year as our President and Chief Executive Officer, he
received a salary increase. However, as noted above, because our company did not
achieve its financial performance targets last year, neither Mr. Winn nor, with
one exception, any other executive officers received an increase in their
salaries in 2003.
Annual Bonus
Each of our executive officers is eligible to receive an annual cash
bonus equal to a preestablished percentage of his base salary. These eligibility
percentages range from 20% to 50% of the executive's base salary. Because we
believe that the amount of annual bonuses should be directly linked to the
company's achievement of its annual financial performance targets (which, in
turn, we believe should fundamentally translate into increased shareholder
value), 80% of each executive's potential bonus eligibility is dependent upon
whether the company meets or exceeds our preestablished annual earnings per
share before tax goal for that year. Generally, this portion of each executive's
potential bonus will not be paid unless the company's earnings per share before
tax target is met or exceeded. However, we may decide to pay some or all of this
eligible bonus amount if we determine that the company's earnings per share
before tax target was not met as a result of extraordinary or unusual
circumstances beyond the company's control. Additionally, if the company
substantially exceeds its earnings per share before tax target, we may decide to
increase the amount of bonuses paid to some or all of our executives. The
remaining potential 20% of each executive's bonus eligibility is dependent upon
whether other specific predetermined individual and company goals and objectives
are met by the executive, as well as other subjective factors that we believe
are appropriate.
In 2002, the company had record sales and earnings per share in 2002,
but did not meet its preestablished annual earnings per share before tax goal.
As a result, no executive officer earned the 80% of their potential bonus based
on achieving that target. Similarly, because the company did not meet its 2002
earnings per share before tax goals, Mr. Winn recommended, and we agreed, that
none of our executive officers should receive any portion of their bonus based
on the achievement of other individual and company goals and objectives. As a
result, the only bonus received by our executive officers for 2002 was the
contractual longevity bonuses paid to Mr. Brodbeck pursuant to his employment
agreement. Similarly, for these same reasons, Mr. Winn did not receive a 2002
bonus.
Long-Term Incentives - Stock Options
Our Stock Option Committee, which includes all of the members of our
Compensation Committee except Steven R. Barth and Walter G. Winding, annually
grants stock options to our executives under our 1995 equity incentive plan. We
use stock option grants to supplement the annual cash portion of our executive
compensation package and to provide the long-term incentive compensation element
of our executive compensation package. Since the value of stock options is
inherently dependent upon the future market price appreciation of the company's
common stock, stock options will only provide our executive officers with
economic value to the extent that the market price of the company's common stock
increases. Thus, we believe that these stock option grants help further align
the economic interests of our executive officers with those of our shareholders.
We have historically granted options at 100% of the fair market value of the
company's common stock on the date of grant, with a term not to exceed ten years
and with vesting in increments of one-third on each of the first, second and
third anniversaries of the grant date. Beginning with our stock options granted
in 2003, shares acquired by the exercise of a stock option grant cannot be sold
for one year unless the executive has reached the age of 60 prior to exercising
the option.
11
Although not determinative, each executive officer's relative salary
serves as a base guideline for the number of shares subject to his annual option
grant. We also concentrate the relative size of option grants on the officers
who we believe will have the greatest impact upon the company's future financial
performance. In addition, we carefully analyze the total number of shares made
subject to stock options granted each year to ensure that the goals of the 1995
equity incentive plan are realized without unnecessarily diluting our current
shareholders. Finally, when determining the relative size of each officer's
stock option grant, our Stock Option Committee had broad discretion to consider
a variety of other factors, including the factors listed below that influence
the options that are granted, as well as other subjective factors.
Our Stock Option Committee based its 2002 stock option grants
principally on (i) relative position at the company; (ii) increases (if any) in
duties and responsibilities; (iii) existing and anticipated ability to directly
impact corporate performance; (iv) relative level of cash compensation; (v)
seniority; (vi) prior levels of stock option grants; (vii) options then
currently held; (viii) direct stock ownership; and (ix) the company's 2002
financial performance. Each executive officer's individual initiatives and
achievements over the prior year also affected the level of each officer's
option grant.
We believe that our 1995 equity incentive plan has been adopted, and
is being administered, in accordance with the requirements of Internal Revenue
Code Section 162(m). Given the levels of compensation and benefits provided
currently to our executive officers, we do not otherwise believe it is necessary
to further conform or adjust our compensation policies, plans or practices to
comply with the $1 million executive compensation deductibility cap imposed by
Internal Revenue Code Section 162(m).
Other Compensation
The Fresh Brands Distributing retirement savings plan is a qualified
profit sharing plan that provides for supplemental income at retirement for all
eligible salaried employees of Fresh Brands Distributing, Inc., one of our
wholly-owned subsidiaries. The retirement benefits provided by the retirement
savings plan for each participant are based upon the value of the participant's
account balance at retirement. In 2002 and previous years, the retirement
savings plan required us to make an annual basic contribution which, when added
to forfeitures for the year, was equal to 5% of the participant's salary for the
year and allowed us to make an additional discretionary contribution as
determined by our Board. Basic contributions to each participant's account are
allocated on the basis of the participant's eligible compensation compared to
the compensation of all participants for such year. Discretionary contributions
are allocated in the same way, except that contributions to Social Security
benefits are taken into account in the allocation of discretionary
contributions. Although the company had record sales and earnings per share in
2002, it did not meet its financial performance goals. As a result, no
additional discretionary contributions were made to the plan for 2002. In
addition, in December 2002, we amended the Fresh Brands Distributing retirement
savings plan to eliminate the mandatory 5% contribution, a change that will take
effect in 2003. The retirement savings plan permits pretax employee
contributions pursuant to Internal Revenue Code Section 401(k). We provide a 25%
matching contribution on pretax employee contributions up to 4% of pay. At the
end of 2002, our executive officers named below, as a group, beneficially held
51,703 shares, or approximately 1% of our total outstanding common stock on the
record date, in their accounts under the retirement savings plan. See "Stock
Ownership of Management and Others."
The Dick's Supermarket retirement savings plan is a plan that provides
benefits to all eligible employees of Dick's Supermarkets, Inc., one of our
wholly-owned subsidiaries. The retirement savings plan permits pretax employee
contributions pursuant to Internal Revenue Code Section 401(k). We provide a 50%
matching contribution on pretax employee contributions up to 3% of pay. In
addition, the retirement savings plan allows us to make additional discretionary
contributions. In 2002, we made a discretionary contribution equal to 1% of each
participant's salary for the year.
12
We also maintain an executive benefit restoration plan, which is a
supplemental benefit pension plan intended to provide benefits otherwise denied
to participants under the Fresh Brands
Distributing retirement savings plan by reason of limitations imposed by the
Internal Revenue Code. The executive benefit restoration plan provides mandatory
benefit accruals on pay in excess of the amount able to be recognized by a
participant under the retirement savings plan for the year. In December 2002, in
connection with the amendments to the Fresh Bands Distributing retirement
savings plan summarized above, we made conforming changes to the executive
benefit restoration plan, eliminating all mandatory contributions.
This report and the performance graphs included elsewhere in this
proxy statement (i) do not constitute soliciting material; (ii) shall not be
deemed to be incorporated by reference into any filing under the Securities Act
of 1933, as amended, or the Securities Exchange Act of 1934, as amended, except
to the extent this report or the performance graphs are specifically
incorporated; and (iii) shall not otherwise be deemed filed under such Acts.
By the Compensation Committee: By the Stock Option Committee:
R. Bruce Grover, Chairman R. Bruce Grover, Chairman
Martin Crneckiy, Jr. Martin Crneckiy, Jr.
G. William Dietrich G. William Dietrich
Bruce J. Olson Bruce J. Olson
Walter G. Winding
Steven R. Barth
13
Summary Compensation Information
The table below describes the compensation paid to our Chief Executive
Officer and four other most highly compensated officers.
Summary Compensation Table
Annual Shares
Compensation Underlying
Fiscal ------------------ Options All Other
Name and Positions(1) Year Salary Bonus Granted(2) Compensation(3)
--------------------- ---- ------------------ ---------- ---------------
Elwood F. Winn 2002 $320,000 $ 0 38,000 $42,511
President and Chief Executive Officer 2001 $275,000 $118,000 100,000 $58,822
2000 $162,923 $ 76,000 7,500 $19,500
Michael R. Houser 2002 $275,000 $ 0 35,000 $21,100
Vice Chairman of the Board, Executive Vice 2001 $250,000 $107,000 75,000 $48,523
President and Chief Marketing Officer 2000 $172,000 $ 75,000 20,000 $41,013
William K. Jacobson(4) 2002 $150,000 $ 0 15,000 $11,517
Senior Vice President - Retail Operations and 2001 $135,000 $ 42,000 20,000 $21,136
Development of Fresh Brands Distributing, Inc. 2000 $120,000 $ 40,000 14,000 $21,700
of Fresh Brands Distributing, Inc.
Robert J. Brodbeck (5) 2002 $150,000 $ 25,000 8,000 $ 7,803
President of Dick's Supermarkets, Inc. 2001 $ 81,370 $ 15,000 30,000 $ 8,175
Thomas J. Timler 2002 $115,000 $ 0 8,000 $ 8,535
Vice President and Chief Information Officer 2001 $110,000 $ 28,000 12,000 $16,199
of Fresh Brands Distributing, Inc. 2000 $ 92,000 $ 31,000 12,000 $17,408
_____________________
1) On January 27, 2003, S. Patric Plumley became our Senior Vice President, Chief Financial Officer, Treasurer and
Secretary. Mr. Plumley's salary for 2003 is $200,000 and, on January 28, 2003, the date that our other officers and
key employees received their annual option grants, he was granted an option to purchase 25,000 shares of our stock
at a per share exercise price equal to the fair market value of our common stock. On February 17, 2003, John C.
Rocker became our Vice President of Retail Operations. Mr. Rocker's salary for 2003 is $140,000 and on February 17,
2003, his first day as our employee, he was granted an option to purchase 10,000 shares of our stock at a per share
exercise price equal to the fair market value of our common stock.
2) Granted at the fair market value of our common stock on the date of grant. See footnote 1) to the table set forth
under "Stock Options--Option Grants In 2002" below for additional information.
3) For Messrs. Winn and Houser amounts set forth for 2002 under this column represent: (a) benefit accruals of $30,940
and $9,100, respectively, under our Executive Benefit Restoration Plan; and (b) our contributions of $11,571 and
$12,000, respectively, under the Fresh Brands Distributing, Inc. retirement savings plan. For Messrs. Jacobson and
Timler, the amounts represent our contributions to the Fresh Brands Distributing, Inc. retirement savings plan. See
"Severance and Change in Control Arrangements" below with respect to certain severance arrangements between us and
the named executive officers in the event that we experience a "change of control."
4) In November 2002, Mr. Jacobson announced his retirement, which was effective in February 2003. See "Employment and
Consulting Agreements" below with respect to a consulting agreement we have with Mr. Jacobson.
5) Mr. Brodbeck joined us in connection with our acquisition of Dick's Supermarkets, Inc. in June 2001. See
"Employment and Consulting Agreements" below with respect to an employment agreement we have with Mr. Brodbeck.
14
Stock Options
We have two stock option plans currently in place: our 1995 equity
incentive plan and our 2001 nonemployee director stock option plan. Our 1995
plan allows us to make grants to our executive officers and other employees and
our 2001 plan provides for annual automatic grants of options to our directors
who are not our employees. The following table lists the option grants under the
1995 plan that we made during 2002, as well as certain other information
relating to those grants.
Option Grants In 2002
Percentage
Shares of Total
Underlying Options Granted Exercise Grant Date
Options to All Employees Price (Per Present
Name Granted(1) in 2002(2) Share)(3) Expiration Date Value(4)
---- ---------- ---------------- ---------- --------------- --------
Elwood F. Winn 38,000 25.50% $18.75 January 30, 2012 $ 274,440
Michael R. Houser 35,000 23.49% $18.75 January 30, 2012 $ 252,774
William K. Jacobson 15,000 10.07% $18.75 January 30, 2012 $ 108,332
Robert J. Brodbeck 8,000 5.37% $18.75 January 30, 2012 $ 57,777
Thomas J. Timler 8,000 5.37% $18.75 January 30, 2012 $ 57,777
All Officers(2) 112,000 69.80%
Non-Officer Employees 37,000 30.20%
_____________________
1. The options reflected in the table are nonqualified stock options under the Internal Revenue Code. With the
exception of the options granted to certain of our directors under our 2001 nonemployee director stock option plan,
which were granted on December 28, 2002, all options granted during 2002 were granted on January 30, 2002. The
exercise price of each option granted during 2002 was equal to 100% of the fair market value of our common stock on
the date of grant, as determined by our Stock Option Committee. These options become exercisable in increments of
one-third on each of the first, second and third anniversaries of the grant date; provided, however, that no
options may be exercised more than ten years after the date of grant. These options are subject to early vesting in
the event of the optionee's death, disability or retirement. Under the stock option agreements evidencing these
options, upon a "change of control" (as defined in such stock option agreements), all options then outstanding will
become immediately exercisable in full for the remainder of their term and each optionee will have the right, for a
period of 30 days, to require us to purchase his outstanding options for cash at an aggregate "acceleration price"
for all shares of common stock then subject to such options, provided that at least six months has elapsed since
the grant date.
2. All calculations exclude the options granted under our 2001 nonemployee director stock option plan and include
options granted to officers of our subsidiaries.
3. The exercise price of options may be paid in cash, by delivering previously issued shares of common stock or any
combination thereof.
4. The option values presented are based on the Black-Scholes pricing model, adapted for use in valuing stock options.
The actual value, if any, that an optionee may realize upon exercise will depend on the excess of the market price
of our common stock over the option exercise price on the date the option is exercised. There is no assurance that
the actual value realized by an optionee upon the exercise of an option will be at or near the value estimated
under the Black-Scholes model. The estimated values under the Black-Scholes model are based on arbitrary
assumptions as to variables such as interest rates, stock price volatility and future dividend yield, including the
following: (a) an assumed United States Treasury bond rate of 5.02%; (b) stock price volatility of 33.88% (based on
36-month stock price history ending January 31, 2002); and (c) a current dividend yield of 2.35%.
15
Set forth below is certain information about the cash values realized
by the listed officers who exercised stock options during 2002 and the number
and value of unexercised stock options held by named executive officers as of
the end of fiscal 2002.
2002 Year-End Value Table
Number of Shares Value of Unexercised
Underlying Options at In-the-Money Options at
Shares End of Fiscal 2002 End of Fiscal 2002(2)
Acquired Value ---------------------------- ----------------------------
Name On Exercise Realized(1) Exercisable Unexercisable Exercisable Unexercisable
---- ----------- ----------- ----------- ------------- ----------- -------------
Elwood F. Winn 0 0 38,000 77,500 $ 127,015 $ 235,460
Michael R. Houser 0 0 74,400 91,600 $ 124,927 $ 189,588
William K. Jacobson(3) 25,500 $197,355 42,980 33,020 $ 50,361 $ 59,164
Robert J. Brodbeck 0 0 10,000 28,000 $ 12,800 $ 25,600
Thomas J. Timler 19,200 $148,626 33,000 20,000 $ 37,375 $ 38,960
__________________________
1. Reflects the difference between the fair market value of the underlying shares of common stock at the time of
exercise and the exercise price of the options exercised.
2. Reflects the difference between the fair market value of the underlying shares of common stock at the end of fiscal
2002 and the various applicable exercise prices of the officers' outstanding options. The dollar values do not
reflect any options that had an exercise price in excess of the fair market value of the underlying shares at the
end of fiscal 2002. The fair market value at the end of fiscal 2002 was $15.03, the closing sale price per share on
December 27, 2002, the last trading day of our fiscal year.
3. On February 14, 2003, Mr. Jacobson retired. As a result, pursuant to the terms of his option grants, all of his
options became exercisable on February 14, 2003. In March 2003, Mr. Jacobson exercised options to purchase 34,000
shares of common stock and realized $65,980.
Director Compensation
Our directors who are also employees or who work for entities that
perform professional services for us receive no additional compensation for
serving on our board or its committees. In 2002, our qualifying outside
directors, other than our Chairman of the Board, received:
o an annual cash retainer of $12,000;
o $1,000 for each board meeting attended and $500 for each committee
meeting attended that was not held in conjunction with a board
meeting;
o an annual 5,000 share stock option grant on the last day of our fiscal
year; and
o an annual grant of the number of our shares valued at $6,000 (taking
into account a 10% discount for the applicable restrictions on
transfer of such shares under the securities laws).
In addition, in 2002 the chairmen of our audit and compensation committees
received additional annual cash retainers of $4,000 and the chairmen of our
other board committees receive annual cash retainers of $2,000. Beginning in
January 2003, the additional annual cash retainer of our audit committee
chairman was increased to $12,000.
In 2002, Walter Winding, our Chairman of the Board, who is a
non-employee director, received:
o an annual cash retainer of $37,000;
o $1,000 for each board meeting attended and $500 for each committee
meeting attended that was not held in conjunction with a board
meeting;
o an annual 5,000 share stock option grant on the last day of our fiscal
year;
16
o an annual grant of the number of our shares valued at $6,000 (taking
into account a 10% discount for restrictions on transfer of such
shares under the securities laws); and
o approximately $72,400, which reflects per hour compensation for
services performed as our Chairman of the Board on behalf of our board
and us through April 2002 and a flat $6,000 monthly fee for such
services for the remainder of 2002 (see "Certain Transactions" below
for more information).
In addition, our Chairman of the Board may participate in our various
health and medical plans if he pays all premiums for such plans. Beginning in
May 2002, our Chairman of the Board and President and Chief Executive Officer
agreed to change our Chairman of the Board's compensation for services performed
on behalf of our board and us from compensation paid on a per hour basis to a
flat $6,000 monthly fee. Our Compensation Committee formally eliminated our
Chairman of the Board's per hour compensation effective as of January 2003 and
increased his annual cash retainer to $60,000.
Employment and Consulting Agreements
On June 16, 2001, in connection with our acquisition of Dick's
Supermarkets, we entered into a one-year employment agreement with Robert J.
Brodbeck, one of the former owners of Dick's Supermarkets. Pursuant to this
agreement, Mr. Brodbeck agreed to serve as the President of Dick's Supermarkets
for a salary of $150,000 and we agreed to pay longevity bonuses of $15,000 and
$25,000 on December 15, 2001 and June 15, 2002, respectively. We also agreed to
provide health insurance to Mr. Brodbeck until the third anniversary of his
termination, with the first 18 months of such insurance to be paid for by us,
and the remaining 18 months to be paid for by Mr. Brodbeck. The agreement
prohibits Mr. Brodbeck from competing with us or soliciting any of our employees
for a period of two years after the termination of his employment with us. On
June 5, 2002, we extended the term of this employment agreement until June 21,
2003 and added additional longevity bonuses of $20,000 and $25,000 payable on
December 31, 2002 and June 21, 2003, respectively.
On October 7, 2002, in connection with William K. Jacobson's February
14, 2003 retirement, we entered into a consulting agreement with Mr. Jacobson
pursuant to which he agreed to provide us with consulting services through
December 31, 2004. Specifically, Mr. Jacobson agreed to provide up to 500 hours
of consulting services during 2003 and up to an additional 500 hours of
consulting services during 2004. In exchange, we agreed to pay Mr. Jacobson
$7,500 per month beginning in March 2003 through December 2003 and $6,250 per
month in 2004. If Mr. Jacobson provides more consulting services than required
by this agreement, we will pay him $125 for each additional hour of services
provided. We also agreed to provide, until December 31, 2005, health insurance
to Mr. Jacobson and his family on terms similar to those offered to our
employees (i.e., Mr. Jacobson will pay all "employee contribution" portions of
such insurance and we will pay all other amounts). Subject to certain narrow
exceptions, the agreement prohibits Mr. Jacobson from competing with us or
soliciting any of our employees through December 31, 2005.
Change of Control Arrangements
We have change of control agreements with each of Walter G. Winding,
Elwood F. Winn, Michael R. Houser, S. Patric Plumley and Thomas J. Timler. Each
of these agreements provides that, following a "change of control" of us (as
defined in the agreements), such officer will be employed in the same position
performing equivalent duties at the same location as immediately prior to the
change of control for a length of time set forth in the agreement (three years
in the case of Messrs. Winding, Winn and Houser and two years in the case of
Messrs. Plumley and Timler). During the employment period, each such officer
would be entitled to receive a salary (or, in the case of Mr. Winding, all
Chairman of the Board fees) equal to his annual compensation rate in effect at
the date of the change of control (subject to increase by the Compensation
Committee) and inclusion in benefit plans available to employees of comparable
status.
17
If, at any time during the employment period, the officer's employment
is terminated other than for "cause" (as defined in the agreements) or for the
officer's disability, or if the officer's duties are
changed substantially without his written consent, and the officer terminates
his employment as a result, the officer would be entitled to receive:
o a lump sum payment equal to (a) the sum of (i) the officer's annual
base salary at the time of the change of control and (ii) the greater
of his most recent annual bonus or the average of his three most
recent bonuses at the time of the change of control multiplied by (b)
the number of years set forth in the employment agreement (three in
the case of Messrs. Winding, Winn and Houser and two in the case of
Messrs. Plumley and Timler);
o the actuarially determined present value of the benefit accruals that
would have been made through the end of the employment period under
our retirement plans applicable to the officer; and
o along with his eligible dependents, coverage under medical benefit
plans through the end of the employment period or, in the case of
Messrs. Winding, Winn and Houser, until the later of the end of the
employment period or the officer's sixty-fifth birthday.
The severance agreements with Messrs. Winding, Winn and Houser also provide that
if, at any time during the employment period, such executive is terminated due
to disability, he will be entitled to receive these payments and benefits.
Further, the severance agreements with Messrs. Winding, Winn and Houser provide
that if, during the sixty day period beginning one year after a change of
control occurs, such executive officer elects to terminate his employment with
us for any reason, he will be entitled to receive these payments and benefits.
The payments under these severance agreements may be subject to
certain adverse tax consequences that (i) impose on executives an excise tax on
total severance payments (which includes the value of certain non-cash benefits)
received by them and (ii) limits our ability to deduct such payments for tax
purposes. The severance agreements with Messrs. Winding, Winn and Houser provide
for cash payments to compensate them for the excise tax payments they would
incur as a result of receiving payments under their agreements. The agreements
with Messrs. Plumley and Timler limit the cash payment to an amount that ensures
that these tax consequences do not apply.
Additionally, upon a "change of control:"
o stock options granted to our executive officers will become fully
exercisable; and
o the optionee will have the right to require us to purchase his
outstanding options for cash at an aggregate "acceleration price" for
all shares of common stock subject to such options.
Compensation Committee and Stock Option Committee Interlocks and Insider
Participation
Steven R. Barth, a member of our Compensation Committee, is a partner
in the law firm of Foley & Lardner. Foley & Lardner has provided legal services
to us for over 40 years. As described in "Certain Transactions" below in 2002,
Walter G. Winding, our nonemployee Chairman of the Board and a member of our
Compensation Committee, provided services on behalf of our board and us in his
capacity as Chairman of the Board, for which he was paid an hourly fee of $200
through April 2002 and, beginning in May 2002, a flat $6,000 monthly fee for the
remainder of 2002. Under our bylaws, the Chairman of the Board is an officer.
18
STOCK PERFORMANCE INFORMATION
The line graph appearing below compares the total return on our common
stock during the last five years with the total return of:
o companies in the Wilshire 5000 Index; and
o companies in a peer group of food retailers and wholesalers which
consists of: Arden Group, Inc., Marsh Supermarkets, Inc., Nash Finch
Co., Supervalu Inc., Fleming Companies, Inc. and Spartan Stores, Inc.
Comparison of Five-Year Total Shareholder Returns
(on a dividend reinvested basis)
[GRAPH OMITTED]
1/3/98 1/2/99 1/1/00 12/30/00 12/29/01 12/28/02
------- ------ ------ -------- -------- --------
Fresh Brands, Inc. $100.00 106.77 84.29 73.38 131.34 107.52
Wilshire 5000 $100.00 123.09 152.09 135.52 121.90 95.04
Peer Group $100.00 122.54 91.91 74.67 126.70 76.77
OUR INDEPENDENT AUDITORS
As described in our Audit Committee Report, our Audit Committee
reappointed KPMG LLP to serve as our independent auditors for 2003. We expect
that representatives of KPMG will be at the annual meeting and will have a
chance to make a statement if they would like to do so. They will also be
available to respond to your questions.
CERTAIN TRANSACTIONS
In connection with the performance of his duties as our Chairman of
the Board, Walter G. Winding has provided consulting and other related services
on behalf of our board and us. As part of his compensation for serving as our
Chairman of the Board during 2002, Mr. Winding was entitled to receive an hourly
fee of $200 per hour for these services through April 2002 and, beginning in May
2002, received a flat $6,000 monthly fee in lieu of his per hour compensation
for the remainder of 2002. In fiscal 2002, we paid Mr. Winding a total of
approximately $72,400 for these services.
19
MISCELLANEOUS
We expect that the election of directors will be the only matter that
will be presented for shareholder consideration at the annual meeting. Other
matters may properly come before the annual meeting and the proxies named in the
accompanying proxy will vote on them in accordance with their best judgment.
We will bear the cost of soliciting proxies, including reimbursing
brokers and other nominees for their reasonable expenses in communicating with
the persons for whom they hold common stock. We expect to solicit proxies mainly
by mail. Some of our employees may also solicit proxies personally and by
telephone. We do not anticipate that we will retain anyone to solicit proxies or
that we will pay compensation to anyone for that purpose. We will, however,
reimburse brokers and other nominees for their reasonable expenses in
communicating with the persons for whom they hold common stock.
If you would like to receive a copy of our 2002 annual report on Form
10-K - without exhibits - please write to S. Patric Plumley, our Secretary, at
2215 Union Avenue, Sheboygan, Wisconsin 53081, and we will provide you with a
copy free of charge.
If you wish to include a proposal in our proxy statement for the 2004
annual meeting pursuant to Rule 14a-8 under the Securities Exchange Act of 1934,
you should forward your proposal to our Secretary by December 14, 2003. If you
submit a proposal after this date, your proposal will be considered untimely
under our bylaws and we will not be required to present your proposal at the
2004 annual meeting. If the board chooses to present your proposal despite its
untimeliness, the people named in the proxies solicited by the board of
directors for the 2004 annual meeting will have the right to exercise
discretionary voting power with respect to your proposal.
Sincerely,
FRESH BRANDS, INC.
/s/ S. Patric Plumley
S. Patric Plumley
Senior Vice President, Chief Financial
Officer, Treasurer and Secretary
Sheboygan, Wisconsin
March 28, 2003
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