FORM 10-Q
QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended October 4, 2003
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) |
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 _____
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).
Yes X 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 November 14, 2003, 4,986,123 shares of Common Stock, $0.05 par value, were issued and outstanding. |
FORM 10-Q INDEX
| PAGE NUMBER | |
| PART I FINANCIAL INFORMATION | |
Item 1. Financial Statements | |
Condensed Consolidated Balance Sheets |
3 |
Condensed Consolidated Statements of Earnings |
4 |
Condensed Consolidated Statements of Cash Flows |
5 |
Notes to Condensed Consolidated Financial Statements |
6 |
Item 2. Management's Discussion and Analysis of Financial | |
| Condition and Results of Operations | 10 |
Item 3. Quantitative and Qualitative Disclosures | |
| about Market Risk | 18 |
Item 4. Procedures and Controls |
18 |
PART II OTHER INFORMATION | |
Item 3. Defaults upon Senior Securities |
19 |
Item 5. Other Items |
19 |
Item 9. Exhibits and Reports on Form 8-K |
19 |
Signature |
20 |
2
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
FRESH BRANDS, INC.
CONDENSED CONSOLIDATED
BALANCE SHEETS
(unaudited)
| (In thousands) | ||||||||
| Assets |
October 4, 2003 |
December 28, 2002 | ||||||
| Current assets: | ||||||||
| Cash and equivalents | $ | 11,570 | $ | 14,250 | ||||
| Receivables, net | 17,754 | 14,267 | ||||||
| Inventories | 37,764 | 36,268 | ||||||
| Land and building held for resale | 4,976 | 7,601 | ||||||
| Current receivable under capital subleases | 1,271 | 584 | ||||||
| Other current assets | 3,821 | 2,961 | ||||||
| Deferred income taxes | 4,291 | 4,291 | ||||||
| Total current assets | 81,447 | 80,222 | ||||||
| Noncurrent receivable under capital subleases | 27,461 | 22,332 | ||||||
| Property and equipment, net | 31,902 | 28,229 | ||||||
| Property under capital leases, net | 24,649 | 13,635 | ||||||
| Goodwill, net | 20,280 | 20,280 | ||||||
| Other noncurrent assets, net | 7,542 | 6,475 | ||||||
| Total assets | $ | 193,281 | $ | 171,173 | ||||
| Liabilities and Shareholders' Investment | ||||||||
| Current liabilities: | ||||||||
| Accounts payable | $ | 37,693 | $ | 34,475 | ||||
| Accrued salaries and benefits | 6,584 | 6,276 | ||||||
| Accrued insurance | 3,153 | 3,064 | ||||||
| Other accrued liabilities | 5,004 | 5,379 | ||||||
| Current obligations under capital leases | 2,208 | 1,898 | ||||||
| Current maturities under revolving line of credit | 26,650 | -- | ||||||
| Current maturities of long-term debt | 316 | 316 | ||||||
| Total current liabilities | 81,608 | 51,408 | ||||||
| Long-term obligations under capital leases | 53,279 | 36,965 | ||||||
| Long-term debt | 554 | 3,504 | ||||||
| Long-term debt under revolving line of credit | -- | 22,700 | ||||||
| Deferred income taxes | 1,114 | 1,114 | ||||||
| Shareholders' investment: | ||||||||
| Common stock | 438 | 438 | ||||||
| Additional paid-in capital | 15,574 | 15,527 | ||||||
| Retained earnings | 84,928 | 82,030 | ||||||
| Treasury stock | (44,214 | ) | (42,513 | ) | ||||
| Total shareholders' investment | 56,726 | 55,482 | ||||||
| Total liabilities and shareholders' investment | $ | 193,281 | $ | 171,173 | ||||
See notes to condensed consolidated financial statements.
3
FRESH BRANDS, INC.
CONDENSED CONSOLIDATED
STATEMENTS OF EARNINGS
(unaudited)
| (In thousands, except per share data) | ||||||||||||||
| |
For the 12-weeks ended |
For the 40-weeks ended | ||||||||||||
| October 4, 2003 |
October 5, 2002 |
October 4, 2003 |
October 5, 2002 | |||||||||||
| Net sales | $ | 152,614 | $ | 141,860 | $ | 492,456 | $ | 472,920 | ||||||
| Cost of products sold | 123,204 | 113,560 | 395,026 | 379,060 | ||||||||||
| Gross profit | 29,410 | 28,300 | 97,430 | 93,860 | ||||||||||
| Selling, general and administrative | ||||||||||||||
| expenses | 25,213 | 23,702 | 81,827 | 78,063 | ||||||||||
| Depreciation and amortization | 2,372 | 1,829 | 6,884 | 5,885 | ||||||||||
| Operating income | 1,825 | 2,769 | 8,719 | 9,912 | ||||||||||
| Interest expense (net) | 704 | 425 | 1,738 | 1,323 | ||||||||||
| Earnings before income taxes | 1,121 | 2,344 | 6,981 | 8,589 | ||||||||||
| Provision for income taxes | 437 | 901 | 2,722 | 3,323 | ||||||||||
| Net earnings | $ | 684 | $ | 1,443 | $ | 4,259 | $ | 5,266 | ||||||
| Earnings per share – basic | $ | 0.14 | $ | 0.28 | $ | 0.84 | $ | 1.02 | ||||||
Earnings per share – diluted | $ | 0.14 | $ | 0.28 | $ | 0.84 | $ | 1.00 | ||||||
Weighted average shares and | ||||||||||||||
| equivalents outstanding: | ||||||||||||||
Basic | 5,026 | 5,143 | 5,041 | 5,161 | ||||||||||
Diluted | 5,058 | 5,207 | 5,074 | 5,249 | ||||||||||
Cash dividends paid per share of common | $ | 0.09 | $ | 0.09 | $ | 0.27 | $ | 0.27 | ||||||
| stock | ||||||||||||||
See notes to condensed consolidated financial statements.
4
FRESH BRANDS, INC.
CONDENSED CONSOLIDATED
STATEMENTS OF CASH FLOWS
(unaudited)
| (In thousands) | ||||||||
| For the 40-weeks ended | ||||||||
| October 4, 2003 |
October 5, 2002 | |||||||
| CASH FLOWS FROM OPERATING ACTIVITIES: | ||||||||
| Net earnings | $ | 4,259 | $ | 5,266 | ||||
| Adjustments to reconcile net earnings to net cash provided | ||||||||
| by operating activities: | ||||||||
| Depreciation and amortization | 6,884 | 5,885 | ||||||
| Changes in assets and liabilities: | ||||||||
| Receivables, net | (3,487 | ) | (2,737 | ) | ||||
| Inventories | (1,496 | ) | 1,128 | |||||
| Other current assets | 1,250 | (3,964 | ) | |||||
| Accounts payable | 3,218 | (3,547 | ) | |||||
| Accrued liabilities | 68 | 3,452 | ||||||
| Net cash flows provided by operating activities | 10,696 | 5,483 | ||||||
CASH FLOWS FROM INVESTING ACTIVITIES: | ||||||||
| Capital expenditures | (10,577 | ) | (10,002 | ) | ||||
| Receipt of principal amounts under capital subleases | 887 | 405 | ||||||
| Other-proceeds from asset sales | 33 | 24 | ||||||
| Net cash flows used in investing activities | (9,657 | ) | (9,573 | ) | ||||
CASH FLOWS FROM FINANCING ACTIVITIES: | ||||||||
| Payment for acquisition of treasury stock | (2,375 | ) | (1,843 | ) | ||||
| Principal payments on capital lease obligations | (1,657 | ) | (895 | ) | ||||
| Payment of cash dividends | (1,361 | ) | (1,394 | ) | ||||
| Net change in revolver activity | 1,250 | 9,050 | ||||||
| Exercise of stock options | 644 | 772 | ||||||
| Principal payments on long-term debt | (250 | ) | (265 | ) | ||||
| Other financing activities | 30 | 89 | ||||||
| Net cash flows provided by (used in) financing activities | (3,719 | ) | 5,514 | |||||
CASH AND EQUIVALENTS: | ||||||||
| Net change | (2,680 | ) | 1,424 | |||||
| Balance, beginning of period | 14,250 | 11,501 | ||||||
| Balance, end of period | $ | 11,570 | $ | 12,925 | ||||
SUPPLEMENTAL CASH FLOW DISCLOSURES: | ||||||||
| Interest paid | $ | 1,835 | $ | 2,071 | ||||
| Income taxes paid | 2,059 | 2,447 | ||||||
See notes to condensed consolidated financial statements.
5
FRESH BRANDS, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(1) Basis of Presentation
The condensed consolidated 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 accounting principles generally accepted in the United States of America 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 (consisting of a normal recurring nature), which are, in the opinion of management, necessary for a fair presentation of the results for the interim periods presented. These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and the notes thereto included in our annual report on Form 10-K for the fiscal year ended December 28, 2002. Additionally, it should be noted that certain prior year amounts have been reclassified to conform to the current year presentation.
Annually, our fiscal year ends on the Saturday closest to December 31. Our current fiscal year is a 53-week period while our prior year was a 52-week period. Consistent with 2002, our first quarter of 2003 was comprised of 16-weeks and the second and third quarters consist of 12-weeks each. Our fourth quarter of 2003 will consist of 13-weeks but typically consists of 12-weeks, as it did in 2002.
(2) Stock-Based Compensation
We have stock option plans which are fully described in our annual report on Form 10-K for the fiscal year ended December 28, 2002. We account for our stock-based compensation plans using the intrinsic value method, under the principles prescribed by the Accounting Principles Board’s Opinion No. 25, Accounting for Stock Issued to Employees, and related interpretations. For stock options granted, no employee compensation cost is reflected in the our results of operations for the third quarter and year-to-date of 2003 or 2002, as all options granted under our plans had an exercise price equal to the market value of the underlying common stock on the grant date.
We have adopted the disclosure-only provisions of FASB Statement No. 123, (“Statement No. 123”) Accounting for Stock Based Compensation, as amended by FASB Statement No. 148, Accounting for Stock-Based Compensation-Transition and Disclosure. Accordingly, no compensation cost has been recognized in our results of operations for the third quarter and year-to-date of 2003 and 2002 for stock options granted under our stock option plans. Had compensation cost for stock options granted been determined based on the fair value on the grant date for awards consistent with an alternative method prescribed by Statement No. 123, our net income and earnings per share for the third quarter and year-to-date 2003 and 2002 would have reflected the pro forma amounts indicated below:
6
| (In thousands, except per share data) | ||||||||||||||
| For the 12-weeks ended | For the 40-weeks ended | |||||||||||||
| October 4, 2003 |
October 5, 2002 |
October 4, 2003 |
October 5, 2002 | |||||||||||
| Net earnings | ||||||||||||||
| As reported | $ | 684 | $ | 1,443 | $ | 4,259 | $ | 5,266 | ||||||
| Deduct: Total stock-based | ||||||||||||||
| compensation expense determined | ||||||||||||||
| under fair value based method, net | ||||||||||||||
| of tax | 102 | 132 | 331 | 439 | ||||||||||
| Pro forma | $ | 582 | $ | 1,311 | $ | 3,928 | $ | 4,827 | ||||||
| Earnings per share-basic | ||||||||||||||
| As reported | $ | 0.14 | $ | 0.28 | $ | 0.84 | $ | 1.02 | ||||||
| Pro forma | $ | 0.12 | $ | 0.25 | $ | 0.78 | $ | 0.94 | ||||||
| Earnings per share-diluted | ||||||||||||||
| As reported | $ | 0.14 | $ | 0.28 | $ | 0.84 | $ | 1.00 | ||||||
| Pro forma | $ | 0.12 | $ | 0.25 | $ | 0.77 | $ | 0.92 | ||||||
(3) Other Current Assets
| (In thousands) | ||||||||
| October 4, 2003 |
December 28, 2002 | |||||||
| Prepaid expenses | $ | 2,816 | $ | 1,364 | ||||
| Receivables under capital subleases | 1,271 | 1,082 | ||||||
| Retail systems and supplies for resale | 1,005 | 1,099 | ||||||
| Other current assets | $ | 5,092 | $ | 3,545 | ||||
(4) Segment Reporting
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 supermarket customers. We also supply these products to our corporate supermarkets, but those revenues and corresponding cost of sales are eliminated in consolidation for accounting purposes. We supply grocery, frozen food, produce and general merchandise and health and beauty care 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 revenue is generated by our 29 corporate supermarkets selling products, including products purchased from our wholesale segment, to retail consumers.
7
Summarized financial information for the third quarter and year-to-date periods of 2003 and 2002 concerning each of our reportable segments is shown in the following tables:
| (In thousands) | ||||||||||||||
| For the 12-weeks ended | For the 40-weeks ended | |||||||||||||
| Net Sales |
October 4, 2003 |
October 5, 2002 |
October 4, 2003 |
October 5, 2002 | ||||||||||
| Wholesale | $ | 115,919 | $ | 107,516 | $ | 376,251 | $ | 358,281 | ||||||
| Intercompany | (40,342 | ) | (35,387 | ) | (127,911 | ) | (120,063 | ) | ||||||
| Wholesale net sales | 75,577 | 72,129 | 248,340 | 238,218 | ||||||||||
| Retail | 77,037 | 69,731 | 244,116 | 234,702 | ||||||||||
| Total net sales | $ | 152,614 | $ | 141,860 | $ | 492,456 | $ | 472,920 | ||||||
| For the 12-weeks ended | For the 40-weeks ended | |||||||||||||
| Operating Income |
October 4, 2003 |
October 5, 2002 |
October 4, 2003 |
October 5, 2002 | ||||||||||
| Wholesale | 2,554 | 2,308 | 9,827 | |||||||||||