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 9, 2004
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 15, 2004, 4,927,414 shares of Common Stock, $0.05 par value, were issued and outstanding. |
1
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 | 11 | |
Item 3. |
Quantitative and Qualitative Disclosures | |
| about Market Risk | 19 | |
Item 4. |
Procedures and Controls | 20 |
PART II |
OTHER INFORMATION | |
Item 2. |
Changes in Securities and Use of Proceeds | 21 |
Item 6. |
Exhibits and Reports on Form 8-K | 21 |
Signatures |
22 |
2
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
FRESH BRANDS,
INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(unaudited)
| (In thousands, except share and per share data) |
||||||||
| Assets |
October 9, 2004 |
January 3, 2004 | ||||||
| Current assets: | ||||||||
| Cash and equivalents | $ | 11,107 | $ | 6,260 | ||||
| Receivables, net | 9,310 | 12,520 | ||||||
| Inventories | 36,785 | 33,675 | ||||||
| Land and building under development | 90 | 4,926 | ||||||
| Other current assets | 11,206 | 10,781 | ||||||
| Total current assets | 68,498 | 68,162 | ||||||
Noncurrent receivable under capital subleases | 22,926 | 33,296 | ||||||
| Property and equipment, net | 35,270 | 31,233 | ||||||
| Property under capital leases, net | 39,903 | 22,453 | ||||||
| Goodwill | 21,455 | 20,280 | ||||||
| Other noncurrent assets, net | 6,207 | 6,264 | ||||||
| Total assets | $ | 194,259 | $ | 181,688 | ||||
Liabilities and Shareholders' Investment | ||||||||
| Current liabilities: | ||||||||
| Accounts payable | $ | 31,444 | $ | 36,251 | ||||
| Accrued liabilities | 16,577 | 12,785 | ||||||
| Current obligations under capital leases | 2,736 | 2,367 | ||||||
| Current maturities of consolidated franchise debt | 2,023 | -- | ||||||
| Current maturities of long-term debt | 251 | 316 | ||||||
| Total current liabilities | 53,031 | 51,719 | ||||||
Long-term obligations under capital leases | 66,536 | 58,857 | ||||||
| Long-term debt under revolving line of credit | 19,100 | 17,150 | ||||||
| Long-term debt of consolidated franchises | 7,110 | -- | ||||||
| Other long-term debt | 492 | 677 | ||||||
| Other noncurrent liabilities | 351 | 2,777 | ||||||
| Minority interests | 524 | -- | ||||||
| Shareholders' investment: | ||||||||
| Common stock, $0.05 par value, authorized 20,000,000 shares, | ||||||||
| issued 8,750,342 shares | 438 | 438 | ||||||
| Additional paid-in capital | 15,575 | 15,575 | ||||||
| Retained earnings | 76,211 | 79,750 | ||||||
| Treasury stock at cost, 3,822,928 shares as of October 9, 2004 | ||||||||
| and 3,841,191 shares as of January 3, 2004 | (45,109 | ) | (45,255 | ) | ||||
| Total shareholders' investment | 47,115 | 50,508 | ||||||
| Total liabilities and shareholders' investment | $ | 194,259 | $ | 181,688 | ||||
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 9, 2004 |
October 4, 2003 |
October 9, 2004 |
October 4, 2003 | |||||||||||
Net sales |
$ | 154,263 | $ | 139,582 | $ | 513,806 | $ | 450,482 | ||||||
| Cost of products sold | 121,087 | 113,340 | 404,928 | 363,088 | ||||||||||
| Gross profit | 33,176 | 26,242 | 108,878 | 87,394 | ||||||||||
| Selling and administrative expenses | 28,471 | 21,702 | 96,739 | 70,161 | ||||||||||
| Depreciation and amortization | 2,858 | 2,234 | 9,252 | 6,420 | ||||||||||
| Operating income | 1,847 | 2,306 | 2,887 | 10,813 | ||||||||||
| Interest expense | (764 | ) | (704 | ) | (2,357 | ) | (1,738 | ) | ||||||
| Interest expense of consolidated franchises | (254 | ) | -- | (886 | ) | -- | ||||||||
| Minority interest in earnings of consolidated | ||||||||||||||
| franchises | (135 | ) | -- | (199 | ) | -- | ||||||||
| Income (loss) from continuing operations | 694 | 1,602 | (555 | ) | 9,075 | |||||||||
| before income tax | ||||||||||||||
| Income tax provision (benefit) | 95 | 626 | (356 | ) | 3,530 | |||||||||
| Income (loss) from continuing operations | 599 | 976 | (199 | ) | 5,545 | |||||||||
| Loss from discontinued operations, net | (276 | ) | (292 | ) | (3,204 | ) | (1,286 | ) | ||||||
| of | tax | |||||||||||||
| Cumulative effect of change in accounting | ||||||||||||||
| principle | -- | -- | (136 | ) | -- | |||||||||
| Net income (loss) | $ | 323 | $ | 684 | $ | (3,539 | ) | $ | 4,259 | |||||
Earnings (loss) per basic share: | ||||||||||||||
| Income (loss) from continuing operations | $ | 0.12 | $ | 0.19 | $ | (0.04 | ) | $ | 1.10 | |||||
| Loss from discontinued operations | (0.05 | ) | (0.05 | ) | (0.65 | ) | (0.26 | ) | ||||||
| Cumulative effect of change in accounting | ||||||||||||||
| principle | -- | -- | (0.03 | ) | -- | |||||||||
| Earnings (loss) per basic share | $ | 0.07 | $ | 0.14 | $ | (0.72 | ) | $ | 0.84 | |||||
Earnings (loss) per diluted share: | ||||||||||||||
| Income (loss) from continuing operations | $ | 0.12 | $ | 0.19 | $ | (0.04 | ) | $ | 1.09 | |||||
| Loss from discontinued operations | (0.05 | ) | (0.05 | ) | (0.65 | ) | (0.25 | ) | ||||||
| Cumulative effect of change in accounting | ||||||||||||||
| principle | -- | -- | (0.03 | ) | -- | |||||||||
| Earnings (loss) per diluted share | $ | 0.07 | $ | 0.14 | $ | (0.72 | ) | $ | 0.84 | |||||
Weighted average shares and equivalents | ||||||||||||||
| outstanding: | ||||||||||||||
| Basic | 4,927 | 5,026 | 4,917 | 5,041 | ||||||||||
| Diluted | 4,927 | 5,058 | 4,917 | 5,074 | ||||||||||
Cash dividends paid per share of common stock | $ | -- | $ | 0.09 | $ | -- | $ | 0.27 | ||||||
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 9, 2004 |
October 4, 2003 | |||||||
Cash flows from operating activities: |
||||||||
| Net income (loss) | $ | (3,539 | ) | $ | 4,259 | |||
| Adjustments to reconcile net income to net cash provided | ||||||||
| by operating activities: | ||||||||
| Depreciation and amortization | 9,376 | 6,884 | ||||||
| Provisions for store closures | 4,359 | -- | ||||||
| Property and equipment impairment charges | 1,511 | -- | ||||||
| Deferred income taxes | (12 | ) | -- | |||||
| Minority interest | 199 | -- | ||||||
| Cumulative effect of change in accounting principles | 136 | -- | ||||||
| Changes in assets and liabilities: | ||||||||
| Receivables, net | 1,380 | (3,487 | ) | |||||
| Inventories | 3,297 | (1,496 | ) | |||||
| Other current assets | (2,031 | ) | 2,943 | |||||
| Accounts payable | (7,407 | ) | 3,218 | |||||
| Accrued liabilities | (2,469 | ) | 68 | |||||
| Net cash flows provided by operating activities | 4,800 | 12,389 | ||||||
Cash flows from investing activities: | ||||||||
| Capital expenditures | (4,150 | ) | (10,544 | ) | ||||
| Proceeds from sale of store | 1,111 | -- | ||||||
| Expenditures for land and buildings under development | (1,941 | ) | (8,305 | ) | ||||
| Proceeds from sale of land and buildings under development | 6,776 | 6,612 | ||||||
| Receipt of principal amounts under capital subleases | 915 | 887 | ||||||
| Net cash flows provided by (used in) investing activities | 2,711 | (11,350 | ) | |||||
Cash flows from financing activities: | ||||||||
| Net change in revolver activity | 1,950 | 1,250 | ||||||
| Principal payments on capital lease obligations | (1,956 | ) | (1,657 | ) | ||||
| Principal payments of consolidated franchise debt | (1,926 | ) | -- | |||||
| Principal payments on long-term debt | (250 | ) | (250 | ) | ||||
| Deferred financing costs | (512 | ) | -- | |||||
| Distributions to minority interests | (186 | ) | -- | |||||
| Payment of cash dividends | -- | (1,361 | ) | |||||
| Payment for acquisition of treasury stock | -- | (2,375 | ) | |||||
| Exercise of stock options | -- | 644 | ||||||
| Other financing activities | 101 | 30 | ||||||
| Net cash flows used in financing activities | (2,779 | ) | (3,719 | ) | ||||
Cash and equivalents: | ||||||||
| Net change | 4,732 | (2,680 | ) | |||||
| Cash of consolidated franchises at beginning of period | 115 | -- | ||||||
| Balance, beginning of period | 6,260 | 14,250 | ||||||
| Balance, end of period | $ | 11,107 | $ | 11,570 | ||||
Supplemental cash flow disclosures: | ||||||||
| Interest paid | $ | 3,219 | $ | 1,835 | ||||
| Income taxes (refunded) paid | (1,500 | ) | 2,059 | |||||
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 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 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 Form 10-K for the fiscal year ended January 3, 2004.
Annually, our fiscal year ends on the Saturday closest to December 31. As such, the current fiscal year is a 52-week period while the prior year was a 53-week period. Consistent with 2003, our first quarter of 2004 is comprised of 16-weeks and the second and third quarters consisting of 12-weeks each. The fourth quarter for 2004 is made up of 12-weeks but the fourth quarter of 2003 consisted of 13-weeks.
Certain 2003 amounts have been reclassified to conform to the presentation for 2004.
(2) Consolidation of Certain Franchisees
In December 2003, the FASB issued revised Interpretation No. 46 (FIN 46R), “Consolidation of Variable Interest Entities – an interpretation of ‘Accounting Research Bulletin No. 51'". FIN 46R is intended to clarify the application of the majority voting interest requirement of ARB No. 51, “Consolidated Financial Statements”, to certain entities in which the equity investors do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. These entities are deemed to be variable interest entities (VIEs) under FIN 46R. The controlling financial interest in a VIE may be achieved through arrangements that do not involve voting interests.
In the past, we have provided credit enhancements to certain of our franchisees in the form of lease and sublease arrangements and loan guarantees. As a result, we have completed an evaluation of the financial arrangements with our franchisees and have concluded that we are required to consolidate certain of these franchisees, primarily as a result of our loan guarantees to these entities. We have adopted the requirement to consolidate these entities as of January 4, 2004. Prior to 2004, we recorded our exposure to losses through these credit enhancement arrangements through our provisions for bad debts. The cumulative-effect adjustment of $136,000 represents the difference between consolidating these entities as January 4, 2004 and the allowance for doubtful accounts that was provided for these franchisees at that date.
6
The following table reflects the impact of consolidating the accounts of the entities as of January 4, 2004:
| (In thousands) | ||||||||||||||
| Fresh Brands, Inc. |
Consolidated Franchisees |
Eliminations |
Adjusted Balances | |||||||||||
| Current assets | $ | 68,162 | $ | 8,216 | $ | (3,640 | ) | $ | 72,738 | |||||
| Noncurrent receivable under capital | ||||||||||||||
| subleases | 33,296 | -- | (9,349 | ) | 23,9 | |||||||||