Five-Year Financial Summary
===================================================================================================================
(Dollars and shares in thousands,
except per share data) Fiscal Year (a) (b) (c)
- --------------------------------------------- --------------------------------------------------------------------
- --------------------------------------------- ------------ ------------ ------------ ------------ ------------
2002 2001 2000 1999 1998
- --------------------------------------------- ------------ ------------ ------------ ------------ ------------
Consolidated statements of earnings data:
Net sales $ 619,075 $ 574,232 $ 496,344 $ 491,035 $ 480,885
Gross profit 118,369 103,375 82,606 80,149 78,070
Earnings before income taxes 13,107 12,312 12,615 13,455 13,916
Provision for income taxes 5,062 4,676 4,792 5,220 5,398
Net earnings 8,045 7,636 7,823 8,235 8,518
Earnings per share - basic 1.56 1.46 1.32 1.30 1.26
Earnings per share - diluted 1.54 1.45 1.31 1.28 1.23
Cash dividends per share 0.36 0.36 0.36 0.34 0.30
Weighted average shares and equivalents
outstanding - diluted 5,231 5,269 5,951 6,438 6,923
Net earnings-to-sales ratio 1.30% 1.33% 1.58% 1.68% 1.77%
Consolidated balance sheet data
(at fiscal year-end):
Working capital $ 28,814 $ 19,112 $ 31,026 $ 30,192 $ 33,402
Total assets 171,173 138,320 104,222 93,097 103,987
Current obligations under capital leases
and current maturities of long-term debt 2,214 1,515 954 842 792
Long-term debt 26,204 16,569 2,685 2,865 3,021
Long-term obligations under capital leases 36,965 20,808 8,284 9,069 9,764
Total shareholders' investment 55,482 50,580 49,818 48,364 53,603
Other data:
Capital expenditures $ 13,673 $ 5,983 $ 5,345 $ 3,551 $ 3,815
Depreciation and amortization 7,771 6,913 5,282 4,617 5,107
NOTES: (a) Our fiscal year ends on the Saturday closest to December 31. All fiscal years presented were 52-week
periods.
(b) All data should be read in conjunction with our audited consolidated financial statements and
"Management's discussion and analysis of financial condition and results of operations" as set forth
in this Annual Report.
(c) The information provided for 2002 within the schedule above is derived from our audited consolidated
financial statements as included herein. The financial information provided for years 2001 through
1999 is derived from our restated audited consolidated financial statements as included within our
previously filed 10-K/A. The financial information provided for 1998 is derived from our restated
consolidated financial statements audited by auditors who have ceased operations.
Management's Responsibilities For Financial Reporting
The management of Fresh Brands, Inc. is responsible for the preparation,
objectivity and integrity of the Company's consolidated financial statements
contained in the Company's 2002 Annual Report to Shareholders. The consolidated
financial statements have been prepared in accordance with generally accepted
accounting principles and include amounts that are based on management's best
estimates and informed judgments.
To help assure that financial information is reliable and assets are
safeguarded, management maintains a system of internal controls and disclosure
controls and procedures which it believes are effective in accomplishing these
objectives. These controls and procedures are designed to provide reasonable
assurance, at appropriate costs, that transactions are executed and recorded in
accordance with management's authorization.
The Company's consolidated financial statements have been audited by its
independent auditors, KPMG LLP, whose report was based on audits conducted in
accordance with generally accepted auditing standards. As part of their audits,
they performed a review of the Company's system of internal controls for the
purpose of determining the amount of reliance to place on those controls
relative to the audit tests they performed.
The Audit Committee of the Board of Directors, composed of "independent
directors," as defined by the rules applicable to members of the Audit
Committee, meets periodically with KPMG LLP and management to inquire as to
whether each is properly discharging its responsibilities. The independent
auditors report directly to the Audit Committee.
/s/ Elwood F. Winn /s/ S. Patric Plumley
Elwood F. Winn S. Patric Plumley
President and Senior Vice President, Chief Financial
Chief Executive Officer Officer, Treasurer and Corporate Secretary
Independent Auditors' Report
To the Board of Directors and Shareholders
Fresh Brands, Inc.:
We have audited the accompanying consolidated balance sheets of Fresh
Brands, Inc. and subsidiaries as of December 28, 2002 and December 29, 2001 and
the related consolidated statements of earnings, shareholders' investment and
cash flows for each of the years in the three-year period ended December 28,
2002. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Fresh
Brands, Inc. and subsidiaries as of December 28, 2002 and December 29, 2001, and
the results of their operations and their cash flows for each of the years in
the three-year period ended December 28, 2002, in conformity with accounting
principles generally accepted in the United States of America.
As discussed in Note 2 to the consolidated financial statements, effective
December 30, 2001, the Company adopted Statement of Financial Accounting
Standards No. 142, "Goodwill and Other Intangible Assets."
/s/ KPMG LLP
KPMG LLP
Milwaukee, Wisconsin
February 24, 2003
CONSOLIDATED BALANCE SHEETS
As of December 28, 2002 and December 29, 2001
(In thousands, except share and per share data)
- ------------------------------------------------------- ---------- -----------
Assets 2002 2001
- ------------------------------------------------------- ---------- -----------
Current assets:
Cash and equivalents $ 14,250 $ 11,501
Receivables, net 14,267 10,884
Inventories 36,268 34,538
Land and building held for resale 7,601 4,770
Other current assets 3,545 2,220
Deferred income taxes 4,291 4,459
- ------------------------------------------------------- ---------- -----------
Total current assets 80,222 68,372
- ------------------------------------------------------- ---------- -----------
Noncurrent receivable under capital subleases 22,332 9,278
Property and equipment, net 28,229 26,513
Property under capital leases, net 13,635 10,604
Goodwill, net 20,280 20,280
Other noncurrent assets, net 6,475 3,273
- ------------------------------------------------------- ---------- -----------
Total assets $ 171,173 $ 138,320
======================================================= ========== ===========
Liabilities and Shareholders' Investment
- ------------------------------------------------------- ---------- -----------
Current liabilities:
Accounts payable $ 34,475 $ 33,293
Accrued salaries and benefits 6,276 7,845
Accrued insurance 3,064 2,665
Other accrued liabilities 5,379 3,942
Current obligations under capital leases 1,898 1,192
Current maturities of long-term debt 316 323
- ------------------------------------------------------- ---------- -----------
Total current liabilities 51,408 49,260
- ------------------------------------------------------- ---------- -----------
Long-term obligations under capital leases 36,965 20,808
Long-term debt 26,204 16,569
Deferred income taxes 1,114 1,103
Shareholders' investment:
Common stock, $0.05 par value,
authorized 20,000,000 shares, issued
8,750,342 shares in 2002 and 2001 438 438
Additional paid-in capital 15,527 15,371
Retained earnings 82,030 75,840
Treasury stock at cost, 3,648,744 shares
in 2002 and 3,584,897 shares in 2001 (42,513) (41,069)
- ------------------------------------------------------- ---------- -----------
Total shareholders' investment 55,482 50,580
- ------------------------------------------------------- ---------- -----------
Total liabilities and shareholders' investment $ 171,173 $ 138,320
======================================================= ========== ===========
See notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF EARNINGS
For fiscal years 2002, 2001 and 2000
(In thousands, except per share data)
- --------------------------------------- ----------- ----------- -----------
2002 2001 2000
- --------------------------------------- ----------- ----------- -----------
Net sales $ 619,075 $ 574,232 $ 496,344
Cost of products sold 500,706 470,857 413,738
- --------------------------------------- ----------- ----------- -----------
Gross profit 118,369 103,375 82,606
Selling and administrative expenses 95,620 83,387 65,206
Depreciation and amortization 7,771 6,913 5,282
- --------------------------------------- ----------- ----------- -----------
Operating income 14,978 13,075 12,118
Interest income 111 605 1,349
Interest expense (1,982) (1,368) (852)
- --------------------------------------- ----------- ----------- -----------
Earnings before income taxes 13,107 12,312 12,615
Provision for income taxes 5,062 4,676 4,792
- --------------------------------------- ----------- ----------- -----------
Net earnings $ 8,045 $ 7,636 $ 7,823
- --------------------------------------- ----------- ----------- -----------
Earnings per share - basic $1.56 $1.46 $1.32
======================================= =========== =========== ===========
Earnings per share - diluted $1.54 $1.45 $1.31
======================================= =========== =========== ===========
See notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For fiscal years 2002, 2001 and 2000
(In thousands)
- --------------------------------------------- ---------- ---------- ---------
2002 2001 2000
- --------------------------------------------- ---------- ---------- ---------
Cash flows from operating activities:
Net earnings $ 8,045 $ 7,636 $ 7,823
Adjustments to reconcile net earnings to
net cash provided by operating activities:
Depreciation and amortization 7,771 6,913 5,282
Deferred income taxes 178 (115) (177)
Changes in assets and liabilities, net
of acquisition:
Receivables, net (3,383) 1,462 (4,915)
Inventories (1,730) (4,450) 2,054
Other current assets (4,161) (3,818) 544
Accounts payable 1,182 744 8,155
Accrued liabilities 424 (3,014) 2,555
- --------------------------------------------- ---------- ---------- ---------
Net cash provided by operating activities 8,326 5,358 21,321
- --------------------------------------------- ---------- ---------- ---------
Cash flows from investing activities:
Acquisition, net of cash acquired - (27,505) -
Capital expenditures (13,673) (5,983) (5,345)
Receipt of principal amounts under
capital subleases 753 367 326
Sale of assets and other 42 2,188 8
- --------------------------------------------- ---------- ---------- ---------
Net cash used in investing activities (12,878) (30,933) (5,011)
- --------------------------------------------- ---------- ---------- ---------
Cash flows from financing activities:
Net change in revolver activity 11,750 13,650 -
Payment for acquisition of
treasury stock (2,315) (9,662) (6,067)
Payment of cash dividends (1,855) (1,868) (2,141)
Principal payments on capital lease
obligations (1,535) (905) (696)
Principal payments on long-term debt (296) (242) (156)
Receipt for private placement sale of
treasury stock - 3,300 -
Exercise of stock options 772 1,078 1,602
Long-term debt borrowing 681 335 -
Other financing activities 99 81 24
- --------------------------------------------- ---------- ---------- ---------
Net cash provided by (used in)
financing activities 7,301 5,767 (7,434)
- --------------------------------------------- ---------- ---------- ---------
Cash and equivalents:
Net change 2,749 (19,808) 8,876
Balance, beginning of year 11,501 31,309 22,433
- --------------------------------------------- ---------- ---------- ---------
Balance, end of year $ 14,250 $ 11,501 $ 31,309
============================================= ========== ========== =========
See notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' INVESTMENT
For fiscal years 2002, 2001 and 2000
(In thousands, except share and per share data)
- ------------------------------------------------------------------------------------------------------
Common Stock Additional Total
$0.05 par Paid-in Retained Treasury Shareholders'
value Capital Earnings Stock Investment
- ------------------------------------------------------------------------------------------------------
Balances at January 1, 2000 $ 438 $ 14,961 $ 64,390 $ (31,425) $ 48,364
- ------------------------------------------------------------------------------------------------------
Net earnings - - 7,823 - 7,823
Cash dividends, common stock
$0.36 per share - - (2,141) - (2,141)
Acquisition of 558,540 shares
of treasury stock - - - (6,067) (6,067)
Issuance of 200,100 shares of
treasury stock upon exercise
of stock options - - - 1,602 1,602
Tax benefits from exercise of
stock options - 213 - - 213
Other - - - 24 24
- ------------------------------------------------------------------------------------------------------
Balances at December 30, 2000 438 15,174 70,072 (35,866) 49,818
- ------------------------------------------------------------------------------------------------------
Net earnings - - 7,636 - 7,636
Cash dividends, common stock
$0.36 per share - - (1,868) - (1,868)
Acquisition of 742,998 shares
of treasury stock - - - (9,662) (9,662)
Issuance of 200,000 shares
of treasury stock in private
placement sale - - - 3,300 3,300
Issuance of 117,000 shares of
treasury stock upon exercise
of stock options - - - 1,078 1,078
Tax benefits from exercise of
stock options - 197 - - 197
Other - - - 81 81
- ------------------------------------------------------------------------------------------------------
Balances at December 29, 2001 $ 438 $ 15,371 $ 75,840 $ (41,069) $ 50,580
- ------------------------------------------------------------------------------------------------------
Net earnings - - 8,045 - 8,045
Cash dividends, common
stock $0.36 per share - - (1,855) - (1,855)
Acquisition of 135,597 shares
of treasury stock - - - (2,315) (2,315)
Issuance of 65,700 shares of
treasury stock upon exercise
of stock options - - - 772 772
Tax benefits from exercise of
stock options - 156 - - 156
Other - - - 99 99
- ------------------------------------------------------------------------------------------------------
Balances at December 28, 2002 $ 438 $ 15,527 $ 82,030 $ (42,513) $ 55,482
======================================================================================================
See notes to consolidated financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For fiscal years 2002, 2001 and 2000
Note 1
Description of Business
At the Schultz Sav-O Stores, Inc. annual shareholder meeting held on May
30, 2001, the shareholders of Schultz Sav-O Stores, Inc. approved a plan of
share exchange to create a holding company, Fresh Brands, Inc. ("FBI"). After
the share exchange, each Schultz Sav-O Stores, Inc. shareholder received one
share of Fresh Brands, Inc. stock for every share of Schultz Sav-O Stores, Inc.
stock that he or she owned. On June 4, 2001, our stock began trading on the
Nasdaq National Market System under the symbol "FRSH".
As a result of the share exchange, Schultz Sav-O Stores, Inc. became a
wholly owned subsidiary of FBI. Schultz Sav-O Stores subsequently changed its
name to Fresh Brands Distributing, Inc. ("FBDI"). FBDI, located in Sheboygan,
Wisconsin, is engaged in the food distribution business through franchised and
corporate Piggly Wiggly(R) retail supermarkets and as a supplier to independent
food stores. Dick's(R) Supermarkets, Inc. ("DSI"), a wholly owned subsidiary of
FBI located in Platteville, Wisconsin operates corporate retail Dick's
Supermarkets and is a wholesale supplier of bakery and deli goods. FBDI and DSI
provide delivery of wholesale goods to corporate retail stores and other
customers through PW Trucking, Inc., a wholly owned subsidiary of FBDI. The
corporate-owned and franchised retail supermarkets operating under the Piggly
Wiggly and Dick's Supermarkets brands and independent food stores we supply are
located throughout Wisconsin and northern Illinois.
Note 2
Summary of Significant Accounting Policies
Fiscal year
Our fiscal year ends on the Saturday closest to December 31. The 2002, 2001
and 2000 fiscal years were 52-week periods ended December 28, 2002, December 29,
2001 and December 30, 2000, respectively.
Principles of consolidation
The consolidated financial statements include the accounts of FBI and its
wholly-owned subsidiaries FBDI, DSI (from date of acquisition of June 16, 2001)
and PW Trucking, Inc. Intercompany accounts and transactions have been
eliminated.
Revenue recognition
Wholesale revenue is recognized at the time products are shipped, as
shipments are F.O.B. shipping point. Retail revenue is recognized at the point
of sale.
Vendor Marketing Funds
Vendor marketing funds consist of allowances provided to us by vendors
including slotting allowances, rebates and various other allowances. Earnings
from these funds are recognized when the earning process is complete based on
the terms of the underlying agreements with our vendors. Vendor marketing funds
represent a reduction in "Cost of products sold" in our Consolidated Statements
of Earnings
Cash and equivalents
Cash and equivalents consist of demand deposits at commercial banks and
highly liquid investments with a maturity of three months or less when
purchased. Cash equivalents are stated at cost which approximates market value.
Receivables
We record receivables primarily from our wholesale customers, most of which
are franchisees. We monitor the financial viability of our customers and provide
an allowance for doubtful accounts related to both credit worthiness and retail
subsidies that are provided to these customers. Receivables are shown net of the
allowance for doubtful accounts of $4,505,000 and $3,450,000 at December 28,
2002 and December 29, 2001, respectively.
Inventories
Inventories, substantially all of which consist of food, groceries and
related products for resale, are stated at the lower of cost or market value.
Cost is determined primarily on the last-in, first-out (LIFO) method. At FBDI,
for meat and produce, cost is determined on the first-in, first-out (FIFO)
method. At December 28, 2002 and December 29, 2001, 87% and 84%, respectively,
of all inventories were accounted for under the LIFO method. During fiscal 2002,
FBDI and DSI changed to a simplified LIFO method based on the IRC Reg.
ss.1.472-8. Since the internally generated indexes were similar to the
government published indexes used with simplified LIFO, there was no material
adjustment to LIFO due to the change. The change to simplified LIFO was
advantageous because of the ability to use published indexes which are more
readily available.
The excess of current cost over the stated LIFO cost of inventory was
$10,006,000 and $9,704,000 at December 28, 2002 and December 29, 2001,
respectively.
Goodwill
Goodwill is comprised of amounts paid in excess of the fair value of
acquired net assets. For fiscal 2002, we adopted SFAS No. 142, "Goodwill and
Other Intangible Assets". Under SFAS No. 142, goodwill and intangible assets
deemed to have indefinite lives are no longer amortized, but are subject to
impairment tests at least annually in accordance with this statement. During
fiscal 2002, we performed the first of the required impairment tests of
goodwill. As a result of the test, it was deemed that there was no goodwill
impairment. Goodwill amortization expense was $602,000 and $59,000 for fiscal
2001 and 2000, respectively. The following table shows what net earnings would
have been had SFAS No. 142 been applied in comparable prior year periods:
------------------------------ --------- --------- ---------
2002 2001 2000
------------------------------ --------- --------- ---------
Reported net earnings $ 8,045 $ 7,636 $ 7,823
Add back:
Goodwill amortization, net
of tax of $234 and $23 - 368 36
------------------------------ --------- --------- ---------
Adjusted net income 8,045 8,004 7,859
------------------------------ --------- --------- ---------
Earnings per share - Basic
Reported net earnings 1.56 1.46 1.32
Adjusted net earnings 1.56 1.53 1.32
------------------------------ --------- --------- ---------
Earnings per share -
diluted
Reported net earnings 1.54 1.45 1.31
Adjusted net earnings 1.54 1.53 1.32
============================== ========= ========= =========
Other current assets
Other current assets at December 28, 2002 and December 29, 2001 consisted
of the following:
(In thousands)
---------------------------- ----------- -----------
2002 2001
---------------------------- ----------- -----------
Prepaid expenses $ 1,364 $ 1,268
Receivable under capital
subleases 1,082 526
Retail systems and
supplies for resale 1,099 426
---------------------------- ----------- -----------
Other current assets $ 3,545 $ 2,220
============================ =========== ===========
Receivables under capital subleases represent amounts due to us under
sublease agreements with our franchised supermarkets (see note 8). The subleases
are established with the franchisees using terms similar to those existing under
the primary lease agreement we have with the original lessor.
Land and building held for resale
Land and building held for resale consists of costs incurred for retail
facility projects which are completed in less than one year. Project costs which
we fund are accumulated until project completion. Upon project completion, and
the subsequent sale of the facility, lease arrangements are established.
Property and equipment, net
Property and equipment are stated at cost, net of depreciation and
amortization. Depreciation and amortization are computed using the straight-line
method over the estimated useful lives of the assets. Equipment generally has a
useful life of 4 to 7 years; computer hardware and software have a useful life
of 3 to 7 years; buildings and land improvements have a useful life of 10 to 35
years; and leasehold improvements generally have a useful life of 10 to 20
years. Facility remodeling and upgrade costs on leased stores are capitalized as
leasehold improvements and are amortized over the shorter of the remaining lease
term or the useful life of the asset. Upon disposal, the appropriate asset cost
and accumulated depreciation or amortization are retired. Gains and losses on
disposition are included in earnings. Periodically, we evaluate all long-lived
assets for impairment using the guidelines of SFAS 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets". This statement requires that all
long-lived assets be reviewed for impairment whenever events or changes in
circumstances indicate the carrying amount of an asset may not be recoverable.
Management considers such factors as current results, trends and future
prospects, current market value, and other economic and regulatory factors, in
performing these analyses. Recoverability of assets to be held and used is
measured by comparison of the carrying value of an asset to the undiscounted
future cash flows expected to be generated by the asset. If the carrying value
of an asset exceeds its estimated undiscounted future cash flows, an impairment
provision is recognized to the extent that the book value exceeds fair market
value. Assets to be disposed of are reported at the lower of the carrying amount
or the fair value of the asset, less all associated costs of disposition. In
addition, SFAS No. 144 requires companies to separately report discontinued
operations and extends that reporting to a component of an entity that either
has been disposed of (by sale, abandonment, or in a distribution to owners) or
is classified as held for sale.
In fiscal 2001, an impairment loss of $200,000 was recorded. No assets were
determined to be impaired in fiscal 2002 or 2000.
Property and equipment, net of accumulated depreciation and amortization at
December 28, 2002 and December 29, 2001 consisted of the following:
(In thousands)
--------------------------------- ----------- -----------
2002 2001
--------------------------------- ----------- -----------
Land and buildings $ 14,053 $ 15,639
Leasehold improvements 8,543 8,344
Equipment and fixtures 52,601 46,469
--------------------------------- ----------- -----------
$ 75,197 $ 70,452
Less accumulated depreciation
and amortization (46,968) (43,939)
--------------------------------- ----------- -----------
Property and equipment, net $ 28,229 $ 26,513
================================= =========== ===========
Other noncurrent assets
Other noncurrent assets, net of accumulated amortization of $4,618,000 and
$3,821,000 at December 28, 2002 and December 29, 2001 consisted of the
following:
(In thousands)
--------------------------------- ----------- -----------
2002 2001
--------------------------------- ----------- -----------
Capitalized software, net $ 5,813 $ 3,036
Other intangibles, net 662 237
--------------------------------- ----------- -----------
Total $ 6,475 $ 3,273
================================= =========== ===========
We capitalize certain costs associated with the development and
implementation of software. When events and circumstances warrant, we review the
carrying value of capitalized software costs. Capitalized software generally has
a useful life of 3 to 7 years. A loss may be recognized when the value of
estimated undiscounted cash flow benefit related to the asset falls below the
unamortized cost.
Accounts payable
Accounts payable includes $10,773,000 and $10,709,000 at December 28, 2002
and December 29, 2001, respectively, of issued checks that have not cleared our
disbursing bank accounts.
Self-Insurance
The company is primarily self-insured for workers' compensation and general
liability claims. The self-insurance claim liability is determined based on
claims filed and an estimate of claims incurred but not yet reported.
Projections of the losses are employed due to the high degree of variability in
the liability estimates. Some factors affecting the uncertainty of claims
include the timeframe of development, settlement patterns, litigation and
adjudication direction and medical treatment and cost trends. The liability is
not discounted.
Retail repositioning reserve
Estimated repositioning and termination expenses associated with the
closure, replacement or disposal of stores, consisting primarily of lease
payments, related facility costs (taxes, utilities and maintenance) and
severance payments are charged to selling and administrative expenses upon the
decision to close, replace or dispose of a store as soon as the amounts are
reasonably estimated. At December 28, 2002 and December 29, 2001, the remaining
retail repositioning reserve was $150,000 and $300,000, respectively. These
amounts are included in other accrued liabilities on the consolidated balance
sheets. It is expected that these costs will be completely expended by the end
of 2003.
Financial instruments
Our financial instruments consist of various debt facilities and cash
equivalents. At December 28, 2002, the fair market value of the financial
instruments was not materially different from the carrying value based on review
of market quotes, where available, and market yields for similar instruments.
Supplementary disclosure of cash flow information
Interest and taxes paid included in our cash flow from operations were as
follows:
(In thousands)
----------------- ---------- ---------- ----------
2002 2001 2000
----------------- ---------- ---------- ----------
Interest paid $ 2,051 $ 1,352 $ 851
Taxes paid 3,537 5,523 4,873
----------------- ---------- ---------- ----------
Non-cash investing and financing activities include capital lease
obligations incurred for properties of $18,608,000, $13,933,000 and $0 for 2002,
2001 and 2000, respectively. Offsetting capital sublease receivables for 2002
and 2001 were $14,572,000 and $5,772,000, respectively.
Use of estimates
The preparation of consolidated financial statements in conformity with
accounting principles generally accepted in the United States of America
requires management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the consolidated financial statements and the reported amounts of revenues and
expenses during the reporting periods. Actual results could differ from those
estimates.
Advertising costs
Costs incurred for producing and communicating advertising are generally
expensed when incurred.
Shipping and handling fees and costs
We have historically presented shipping revenues as a component of net
sales and the related costs of transporting goods to the warehouse as part of
cost of products sold and the costs of shipping goods to customers as part of
selling and administrative expenses. Shipping and handling costs included in
selling and administrative expenses were $8,106,000, $6,660,000 and $5,567,000,
in 2002, 2001, and 2000, respectively.
Reclassifications
Certain 2001 and 2000 amounts previously reported have been reclassified to
conform to the 2002 presentation.
New accounting pronouncements
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations." This Statement addresses financial accounting and
reporting for obligations associated with the retirement of tangible long-lived
assets and the associated asset retirement costs. It applies to legal
obligations associated with the retirement of long-lived assets that result from
the acquisition, construction, development and/or the normal operation of a
long-lived asset, except for certain obligations of lessees. Under SFAS No. 143,
a legal obligation is an obligation that a party is required to settle as a
result of an existing or enacted law, statute, ordinance, or written or oral
contract or by legal construction of a contract under the doctrine of promissory
estoppel. SFAS No. 143 requires that the fair value of a liability for an asset
retirement obligation be recognized in the period in which it is incurred if a
reasonable estimate of fair value can be made. The associated asset retirement
costs are capitalized as part of the carrying amount of the long-lived asset.
The liability is discounted and accretion expense is recognized using the
credit-adjusted risk-free interest rate in effect when the liability was
initially recognized. This Statement is effective for financial statements
issued for fiscal years beginning after June 15, 2002.
In May 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements
No. 4, 44, and 64, Amendment of FASB Statement No. 13 and Technical
Corrections." The most significant provision of SFAS No. 145 addresses the
termination of extraordinary item treatment for gains and losses on early
retirement of debt. The Company will be required to adopt the provisions of this
standard beginning on December 29, 2002.
In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities". SFAS No. 146 nullifies EITF 94-3.
Under SFAS No. 146, companies will record exit or disposal costs when they are
"incurred" and can be measured at fair value, and they will subsequently adjust
the recorded liability for changes in estimated fair value. SFAS No. 146 also
revises accounting for specified employee and contract terminations that are
part of restructuring activities. SFAS No. 146 is effective for exit and
disposal activities that are initiated after December 31, 2002, earlier
application is encouraged. The Company believes that the adoption of SFAS No.
146 will not have a significant impact on its consolidated financial statements.
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock Based
Compensation - Transition and Disclosure - an amendment of FASB statement No.
123." This statement amends SFAS No. 123 to provide alternative methods of
transition for a voluntary change to the fair value based method of accounting
for stock-based employee compensation. In addition, this Statement amends the
disclosure requirements of Statement 123 to require prominent disclosures in
both annual and interim financial statements about the method of accounting for
stock-based employee compensation and the effect of the method used on reported
results. SFAS No. 148 provides for voluntary adoption of the fair value method
for entities with fiscal years ending after December 15, 2002. We have elected
to continue to use the intrinsic value method for the fiscal year ending
December 28, 2002 but have adopted the prominent disclosure provisions.
In November 2002, the FASB issued Interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others" which addresses, among other things, the
disclosure to be made by a guarantor in its interim and annual financial
statements
about its obligations under guarantees. These disclosure requirements are
included in note 6 to the consolidated financial statements. The Interpretation
also requires the recognition of a liability by a guarantor at the inception of
certain guarantees.
The Interpretation requires the guarantor to recognize a liability for the
non-contingent component of the guarantee, that is the obligation to stand ready
to perform in the event that specified triggering events or conditions occur.
The initial measurement of this liability is the fair value of the guarantee at
inception. The recognition of the liability is required even it is not probable
that payments will be required under the guarantee or if the guarantee was
issued with a premium payment or as part of a transaction with multiple
elements.
As noted above the Company has adopted the disclosure requirements of the
Interpretation (see note 6) and will apply the recognition and measurement
provision for all guarantees entered into or modified after December 28, 2002.
Note 3
Acquisition
On June 16, 2001, we acquired all of the outstanding common stock of DSI
for approximately $30.2 million in cash (including assumption of funded debt).
This acquisition has been accounted for under the purchase method of accounting,
and the results of DSI have been included in our results from the date of
acquisition. The purchase price was allocated to the fair market value of the
assets acquired and the liabilities assumed. The purchase price allocation
resulted in the recognition of goodwill of approximately $20.2 million.
Note 4
Long-Term Debt
We entered into a loan agreement in June 2001 providing unsecured revolving
credit facilities totaling $35,000,000 which expires April 30, 2004. This
arrangement provides for borrowings at interest rates based on either the bank's
prime rate or adjusted LIBOR plus 1%. Quarterly commitment fees are also paid at
a rate of .0625% based on the average daily unused amount of the revolving
credit facility. At December 28, 2002, the interest rate was 2.88% compared to
3.12% at December 29, 2001. There are no compensating balance requirements. At
December 28, 2002 we had related debt outstanding from the revolving line of
credit of $25,400,000 compared to $13,650,000 at December 29, 2001.
Long-term debt at December 28, 2002 and December 29, 2001 consisted of the
following:
(In thousands)
------------------------------- ---------- ----------
2002 2001
------------------------------- ---------- ----------
Revolving line of credit $ 25,400 $ 13,650
Mortgage note, 9.675%, due in
monthly installments of
$33 including interest due
through June 2012 - 2,618
Note payable, 3.0%, due in
monthly installments of $5
including interest due
through July 2006 240 304
Note payable, 3.0%, due in
monthly installments of
$12 including interest due
through 2007 681 -
Note payable, 2.0%, due in
monthly installments of $8
including interest due
through 2004 166 254
Land contract, 10.0%, due in
annual installments of $33
through March 2003 33 66
------------------------------- ---------- ----------
26,520 16,892
Less current maturities (316) (323)
------------------------------- ---------- ----------
Long-term debt $ 26,204 $ 16,569
=============================== ========== ==========
At December 28, 2002, the fair value of the long-term debt was not
materially different from carrying value. The revolving credit and term note
agreements are collateralized by the net assets of the company and contains
various covenants including, among others, the maintenance of defined working
capital, net worth requirements, certain fixed charge coverage ratios,
restrictions against pledging of or liens upon certain assets, mergers,
significant changes in ownership and limitations on restricted payments. At
December 28, 2002, we were in compliance with the requirements of all of our
debt covenants.
The total amount of long-term debt due in each of the fiscal years 2003
through 2007 will be $316,000, $25,679,000, $206,000, $175,000 and $144,000
respectively.
Interest expense consisted of the following:
(In thousands)
-------------------- ----------- ----------- ----------
2002 2001 2000
-------------------- ----------- ----------- ----------
Imputed interest-
capital leases $ 1,160 $ 726 $ 565
Interest on
long-term debt 821 584 287
Other 1 58 -
-------------------- ----------- ----------- ----------
Interest expense $ 1,982 $ 1,368 $ 852
==================== =========== =========== ==========
Note 5
Income Taxes
The difference between the statutory federal income tax rate and the
effective rate is summarized as follows:
---------------------------- ---------- ---------- ----------
2002 2001 2000
---------------------------- ---------- ---------- ----------
Federal income tax 34.0% 34.0% 34.0%
State income taxes,
net of federal income
tax benefit 5.1 4.7 4.8
Other, net (0.5) (0.7) (0.8)
---------------------------- ---------- ---------- ----------
Effective income tax rate 38.6% 38.0% 38.0%
============================ ========== ========== ==========
Components of the provision for income taxes consisted of the following:
(In thousands)
---------------------------- ---------- ---------- ----------
2002 2001 2000
---------------------------- ---------- ---------- ----------
Currently payable
Federal $ 3,964 $ 3,888 $ 4,019
State 920 903 950
Deferred 178 (115) (177)
---------------------------- ---------- ---------- ----------
Provision for
income taxes $ 5,062 $ 4,676 $ 4,792
============================ ========== ========== ==========
The components of deferred income tax assets and liabilities at December
28, 2002 and December 29, 2001 were as follows:
(In thousands)
---------------------------------- ------------ ------------
2002 2001
---------------------------------- ------------ ------------
Deferred income tax assets:
Bad debt reserve $ 1,757 $ 1,346
Accrued insurance 1,114 1,238
Capital leases 951 770
Vacation pay 1,015 964
Retail repositioning reserve 59 117
Other 346 895
---------------------------------- ------------ ------------
Total deferred income tax 5,242 5,330
assets
---------------------------------- ------------ ------------
Deferred income tax
liabilities:
Property and equipment (2,065) (1,887)
Pension - (87)
---------------------------------- ------------ ------------
Total deferred income tax
liabilities (2,065) (1,974)
---------------------------------- ------------ ------------
Net deferred income tax assets $ 3,177 $ 3,356
================================== ============ ============
We currently are not required to establish a valuation allowance for our
deferred income tax assets. The net deferred income tax assets as of December
28, 2002 and December 29, 2001 were classified in the consolidated balance
sheets as follows:
(In thousands)
---------------------------------- ------------ ------------
2002 2001
---------------------------------- ------------ ------------
Current deferred income tax
asset $ 4,291 $ 4,459
Noncurrent deferred income tax
liability (1,114) (1,103)
---------------------------------- ------------ ------------
Net deferred income tax assets $ 3,177 $ 3,356
================================== ============ ============
Note 6
Commitments and Contingent Liabilities
As of December 28, 2002, we were contingently liable under guarantees of
bank note agreements of wholesale customers totaling $15,387,000. All of the
loan guarantees are substantially collateralized, principally with equipment and
inventory, and to a lesser extent, with building facilities.
Capital expenditure commitments for 2003 are approximately $14,800,000.
Note 7
Retirement Plans
We have a trusteed retirement savings defined contribution plan, which
includes provisions of Section 401(k) of the Internal Revenue Code, for the
benefit of our non-union eligible employees. For FBDI, annual provisions were
based on a mandatory 5% of eligible participant compensation and additional
amounts at the sole discretion of the Board of Directors. For DSI, annual
provisions are based on 1% of eligible participant compensation. Provisions for
fiscal years 2002, 2001 and 2000 were $953,000, $1,317,000 and $975,000,
respectively. Both plans allow participants to make pretax contributions. We
then match certain percentages of employee contributions. Our matching
contributions for 2002, 2001 and 2000 were $340,000, $230,000 and $95,000.
We have union-administered multi-employer pension plans covering all hourly
paid employees represented by collective bargaining agreements. Total pension
expense was $2,216,000, $2,010,000 and $1,814,000 in fiscal years 2002, 2001 and
2000, respectively.
Note 8
Leases
We lease most of our retail stores under lease agreements with original
lease periods of 15 to 20 years and typically with five-year renewal options.
Exercise of such options is dependent on, among others factors, the level of
business conducted at the location. Executory costs, such as maintenance and
real estate taxes, are generally our responsibility. In a majority of
situations, we will enter into a lease for a store and sublease the store to a
wholesale customer. When leases of this type are established, the future minimum
lease payments due under the capital lease arrangements with our customers are
recorded on our consolidated balance sheets as sublease receivables.
Additionally, we lease transportation equipment, principally tractors and
trailers, corporate office space and certain office equipment. Some real estate
leases contain contingent rental provisions based on sales volume at retail
stores and some equipment leases contain contingent rental provisions based on
miles traveled for tractors and trailers. Contingent rental expense associated
with our capital leases and sublease income was not material to our consolidated
financial statements.
Capitalized leases were calculated using interest rates appropriate at the
inception of each lease. A summary of real property utilized by us under capital
leases at December 28, 2002 and December 29, 2001 is as follows:
(In thousands)
---------------------------------- ----------- -----------
2002 2001
---------------------------------- ----------- -----------
Investments in leased property
under capital leases $ 18,710 $ 14,675
Less accumulated amortization (5,075) (4,071)
---------------------------------- ----------- -----------
Property under capital leases, net $ 13,635 $ 10,604
================================== =========== ===========
Amortization of leased property under capital leases, included in selling
and administrative expenses, amounted to $1,023,000, $619,000 and $411,000 in
fiscal years 2002, 2001 and 2000, respectively.
The following is a schedule of future minimum lease payments under capital
leases and subleases and the present value of such payments as of December 28,
2002:
(In thousands)
---------------------------------- ----------- -----------
Capital Capital
Lease Sublease
Obligations Receivables
---------------------------------- ----------- -----------
2003 4,592 2,671
2004 4,396 2,676
2005 4,438 2,685
2006 4,350 2,580
2007 4,333 2,532
2008-2022 40,619 24,345
---------------------------------- ----------- -----------
Total minimum lease payments 62,728 37,489
Less interest (23,865) (14,075)
---------------------------------- ----------- -----------
Present value of minimum
lease payments and amounts
receivable 38,863 23,414
Less current portion (1,898) (1,082)
---------------------------------- ----------- -----------
Long-term obligations and
receivable $ 36,965 $ 22,332
================================== =========== ===========
The following is a schedule of future minimum lease payments required under
operating leases for retail stores, transportation equipment, corporate office
space and office equipment that have noncancelable operating lease terms in
excess of one year as of December 28, 2002:
(In thousands)
------------------------------------- ---------------
2003 $ 11,835
2004 11,185
2005 10,502
2006 10,076
2007 9,948
2008-2022 69,185
------------------------------------- ---------------
$ 122,731
Total minimum lease payments
Less minimum amounts receivable
under noncancelable subleases (91,266)
------------------------------------- ---------------
Net minimum lease payments $ 31,465
===================================== ===============
Rental expenses, net of rental income from subleases, for all operating
leases amounted to $7,024,000, $6,166,000 and $5,260,000 in fiscal years 2002,
2001 and 2000, respectively. These amounts include $1,278,000, $1,215,000 and
$1,035,000, respectively, for contingent rentals.
Note 9
Stock Option Plans
We have stock option plans which provide for the grant of either incentive
or nonqualified stock options to key employees and nonqualified options to our
independent directors. The exercise price of each
option is equal to the market price of our stock on the date of grant. Options
granted prior to year 2000, are exercisable for seven years from the date of
grant. Options granted beginning in January 2000, are exercisable for ten years
from the date of grant. The options granted to our key employees vest ratably
over the first three years and the options granted to our independent directors
vest immediately. Such vesting may be accelerated by the Stock Option Committee
of the Board of Directors or upon a change in control of FBI, as defined by the
plans.
We have adopted the disclosure requirements of SFAS No. 123. Had we
determined compensation cost based on the fair value at the grant date for stock
options under SFAS No. 123, our net earnings would have been reduced to the
following pro forma amounts below:
(In thousands)
---------------------------- -------- -------- --------
2002 2001 2000
---------------------------- -------- -------- --------
Net earnings
As reported $8,045 $7,636 $7,823
Pro forma 7,474 7,241 7,487
---------------------------- -------- -------- --------
Earnings per share-diluted
As reported $1.54 $1.45 $1.31
Pro forma $1.44 $1.37 $1.26
============================ ======== ======== ========
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option-pricing model with the following weighted average
assumptions used for grants in 2002, 2001 and 2000:
(In thousands)
---------------------------- --------- --------- ---------
2002 2001 2000
---------------------------- --------- --------- ---------
Dividend yield 2.35% 2.25% 2.00%
Expected volatility 31.13% 28.22% 25.01%
Risk-free interest rate 4.39% 5.05% 6.57%
Expected term of grant 6.5 years 7.0 years 5.5 years
============================ ========= ========= =========
The fair values of each option granted in 2002, 2001 and 2000 were $5.45,
$3.85 and $3.48, respectively.
As of December 28, 2002, no incentive stock options have been granted.
Following is a summary of the status of nonqualified stock options for the
fiscal years 2002, 2001 and 2000:
(In thousands)
-------------------------- ----------- ----------------
Weighted
Number Average
of Shares Exercise Prices
-------------------------- ----------- ----------------
Shares under option at
January 1, 2000 644,200 $11.70
Granted 187,200 11.84
Exercised (200,100) 8.01
Forfeited (28,600) 14.38
-------------------------- ----------- ----------------
Shares under option at
December 30, 2000 602,700 12.85
Granted 332,000 12.56
Exercised (117,000) 9.22
Forfeited (189,000) 14.38
-------------------------- ----------- ----------------
Shares under option at
December 29, 2001 628,700 12.91
Granted 174,000 18.22
Exercised (65,700) 11.75
Forfeited (20,167) 14.87
-------------------------- ----------- ----------------
Shares under option at
December 28, 2002 716,833 14.25
========================== =========== ================
The range of options outstanding at December 28, 2002 is as follows:
- ---------------------------------- ------------ ------------- ---------
Price Range per Share $9.67-$14.25 $15.00-$18.85 Total
- ---------------------------------- ------------ ------------- ---------
Number of options outstanding 408,833 308,000 716,833
Weighted average exercise price
outstanding $11.97 $17.28 $14.25
Number of options exercisable 193,843 168,000 361,843
Weighted average exercise price
exercisable $12.12 $16.05 $13.94
Weighted average remaining
contractual life (in years) 7.95 6.71 7.41
================================== ============ ============= =========
When options are exercised, we realize certain income tax benefits. These
benefits resulted in a decrease in current income taxes payable and a
corresponding increase in additional paid-in capital.
Our nonqualified stock options were exercisable at weighted average per
share prices of $13.94, $14.15 and $12.09 at December 28, 2002, December 29,
2001 and December 30, 2000, respectively.
Note 10
Common Stock
On October 11, 2001, the Board of Directors declared a dividend of one
common share purchase right for each outstanding share of our common stock, par
value $.05. The dividend was payable on November 23, 2001 to the shareholders of
record on November 9, 2001. The rights will be exercisable only if a person or
group acquires 20% or more of our common stock or announces a tender offer,
consummation of which would result in ownership by a person or group of 20% or
more of the common stock. Each right will initially entitle shareholders to buy
one share of our common stock at an initial exercise price of $50.00 per share,
subject to adjustment. The rights do not have any voting rights or receive
dividends and may be redeemed at a price of $.001 per right. If any person
becomes a 20% or more shareholder of FBI, each right, other than those owned by
the 20% shareholder, will (subject to certain limitations) entitle its holder to
purchase, at the rights' then-current exercise price, a number of common shares
of FBI or of the acquirer having a market value at that time of twice the
rights' per share exercise price. The Board of Directors is also authorized to
reduce the 20% threshold to not less than 10%. The rights expire on November 9,
2011, subject to extension.
Note 11
Earnings Per Share
Basic earnings per share is computed by dividing net earnings by the
weighted average number of shares of common stock outstanding during the year.
Diluted earnings per share is computed by dividing net earnings by the weighted
average number of shares of common stock outstanding and common stock
equivalents during the year. Common stock equivalents used in computing diluted
earnings per share related to stock options which, if exercised, would have a
dilutive effect on earnings per share. We had antidilutive shares for 2002, 2001
and 2000 of 174,000, 217,500 and 441,000, respectively.
Our calculations of earnings per share-basic and earnings per share-diluted
were as follows:
(In thousands)
-------------------------- --------- --------- ---------
2002 2001 2000
-------------------------- --------- --------- ---------
Net earnings available for
common shareholders $ 8,045 $ 7,636 $ 7,823
Weighted average shares
outstanding 5,150 5,228 5,935
Earnings per share-basic $1.56 $1.46 $1.32
-------------------------- --------- --------- ---------
Net earnings available for
common shareholders $ 8,045 $ 7,636 $ 7,823
Weighted average shares
outstanding 5,150 5,228 5,935
Stock options' dilutive
effect 81 41 16
Weighted average shares and
equivalents outstanding 5,231 5,269 5,951
Earnings per share-diluted $1.54 $1.45 $1.31
========================== ========= ========= =========
Note 12
Segment Reporting
Our operations are classified into two reportable business segments,
wholesale and retail. The operational performance of both wholesale and retail
segments are managed and evaluated by management.
The wholesale segment represents our business activities relating to food
wholesale distribution. At December 28, 2002, we provided products to 74
franchised units, 27 corporate stores and a number of independent retail stores.
The wholesale segment includes warehousing, transportation, manufacturing and
other logistical functions, and derives its revenues primarily from the sale of
groceries, produce, dairy, meat and cigarette products to our franchised,
corporate and independent retail customers. Topco LLC was a major supplier to
our wholesale segment in 2002 providing nearly 12% of total inventory for each
of the last three years. Inventory purchases from Topco for 2002, 2001 and 2000
were $58,193,000, $55,703,000 and $50,442,000, respectively. The retail segment
relates to our retail supermarket activities. Revenues are realized through the
sale of groceries, dairy, produce, meat, bakery, deli and other merchandise by
our corporate retail stores to retail consumers.
The accounting policies of the two segments are the same as those described
in the Summary of Significant Accounting Policies. Our management utilizes
several measurement tools in evaluating each segment's performance and each
segment's resource requirements. However, the principal measurement tools are
consistent with our consolidated financial
statements and accordingly are reported on a similar basis. Wholesale operating
profits on sales through our corporate stores are allocated to the retail
segment. The "corporate" heading includes corporate-related items, principally
cash and equivalents. As it relates to operating income, the "corporate" heading
includes corporate-related items allocated to the appropriate segments.
Summarized financial information concerning our reportable segments is
shown in the following table:
(In thousands)
------------------------------ ---------- ---------- ----------
Sales 2002 2001 2000
------------------------------ ---------- ---------- ----------
Wholesale sales $ 471,635 $ 451,934 $ 409,437
Inter/Intracompany Sales (157,768) (143,156) (114,910)
------------------------------ ---------- ---------- ----------
Net wholesale sales 313,867 308,778 294,527
Retail sales 305,208 265,454 201,817
------------------------------ ---------- ---------- ----------
Total $ 619,075 $ 574,232 $ 496,344
============================== ========== ========== ==========
------------------------------ ---------- ---------- ----------
Earnings before income taxes 2002 2001 2000
------------------------------ ---------- ---------- ----------
Wholesale $ 9,850 $ 9,969 $ 9,204
Retail 5,128 3,106 2,914
------------------------------ ---------- ---------- ----------
Total operating income 14,978 13,075 12,118
Interest income 111 605 1,349
Interest expense (1,982) (1,368) (852)
------------------------------ ---------- ---------- ----------
Earnings before income taxes $ 13,107 $ 12,312 $ 12,615
============================== ========== ========== ==========
------------------------------ ---------- ---------- ----------
Capital Expenditures 2002 2001 2000
------------------------------ ---------- ---------- ----------
Wholesale $ 4,282 $ 1,569 $ 378
Retail 4,408 3,175 2,214
Corporate 4,983 1,239 2,753
------------------------------ ---------- ---------- ----------
Total $ 13,673 $ 5,983 $ 5,345
============================== ========== ========== ==========
------------------------------ ---------- ---------- ----------
Depreciation and Amortization 2002 2001 2000
------------------------------ ---------- ---------- ----------
Wholesale $ 984 $ 926 $ 829
Retail 4,113 4,705 3,001
Corporate 2,674 1,282 1,452
------------------------------ ---------- ---------- ----------
Total $ 7,771 $ 6,913 $ 5,282
============================== ========== ========== ==========
------------------------------ ---------- ---------- ----------
Identifiable Assets 2002 2001 2000
------------------------------ ---------- ---------- ----------
Wholesale $ 45,181 $ 38,556 $ 31,185
Retail 73,442 69,403 28,077
Corporate 52,550 30,361 44,960
------------------------------ ---------- ---------- ----------
Total $ 171,173 $ 138,320 $ 104,222
============================== ========== ========== ==========
Unaudited Quarterly Financial Information
We generally include sixteen weeks in our first quarter and twelve weeks in
each subsequent quarter. Summarized quarterly and annual financial information
for fiscal years 2002 and 2001 follows:
- --------------------------------------------------------------------------------
(Dollars and shares in thousands,
except per share data) Fiscal Year Ended December 28, 2002
- --------------------------------------------------------------------------------
First Second Third Fourth Year
- ------------------------------ -------- -------- -------- -------- --------
Net sales $184,139 $146,921 $141,860 $146,155 $619,075
Gross profit 35,916 29,137 28,172 25,144 118,369
Net earnings 1,914 1,910 1,443 2,778 8,045
Earnings per share - basic 0.37 0.37 0.28 0.54 1.56
Earnings per share - diluted 0.36 0.36 0.28 0.54 1.54
Weighted average shares and
equivalents outstanding 5,265 5,270 5,207 5,175 5,231
- ------------------------------ -------- -------- -------- -------- --------
- --------------------------------------------------------------------------------
(Dollars and shares in thousands,
except per share data) Fiscal Year Ended December 29, 2001
- --------------------------------------------------------------------------------
First Second Third Fourth Year
- ------------------------------ -------- -------- -------- -------- --------
Net sales $153,821 $130,681 $144,042 $145,688 $574,232
Gross profit 26,006 23,064 28,321 25,984 103,375
Net earnings 1,855 1,741 1,490 2,550 7,636
Earnings per share - basic 0.34 0.33 0.30 0.50 1.46
Earnings per share - diluted 0.34 0.33 0.29 0.50 1.45
Weighted average shares and
equivalents outstanding 5,519 5,251 5,097 5,133 5,269
- ------------------------------ -------- -------- -------- -------- --------
Common Stock Information
Our common stock is traded over-the-counter on the Nasdaq Stock Market
under the symbol FRSH. There are approximately 1,400 shareholders of our common
stock. An analysis of high and low stock prices by quarter for the last three
years is as follows:
- ------- -------------- -------------- -------------- -------------- --------------
First Quarter Second Quarter Third Quarter Fourth Quarter Year
- ------- -------------- -------------- -------------- -------------- --------------
High Low High Low High Low High Low High Low
- ------- ------ ------ ------ ------ ------ ------ ------ ------ ------ ------
2002 $21.53 $16.33 $18.72 $16.71 $17.30 $13.46 $15.61 $13.29 $21.53 $13.29
2001 13.00 9.75 14.75 11.75 16.75 13.70 18.99 14.00 18.99 9.75
2000 13.00 9.88 12.00 10.13 12.38 10.50 12.00 10.63 13.00 9.88
- ------- ------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Cash dividends paid per share were:
- ------ ------------- -------------- ------------- -------------- -----
First Quarter Second Quarter Third Quarter Fourth Quarter Year
- ------ ------------- -------------- ------------- -------------- -----
2002 $0.09 $0.09 $0.09 $0.09 $0.36
2001 0.09 0.09 0.09 0.09 0.36
2000 0.09 0.09 0.09 0.09 0.36
- ------ ------------- -------------- ------------- -------------- -----
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Special Note Regarding Forward-Looking Statements
Certain matters discussed in this report are "forward-looking statements"
intended to qualify for the safe harbors from liability established by the
Private Securities Litigation Reform Act of 1995. These forward-looking
statements can generally be identified as such because the context of the
statement will include words such as we believe, anticipate, expect or words of
similar import. Similarly, statements that describe our future plans,
objectives, strategies or goals are also forward-looking statements.
Specifically, forward-looking statements include statements about (a) our
strategic plan, including our five-year compound annual sales growth goals; (b)
our plans to replace or remodel existing supermarkets, open additional corporate
supermarkets and convert existing supermarkets to franchised supermarkets; (c)
the expected effect of such plans on our sales and earnings; (d) our
expectations regarding changes in our sales, gross margin, operating expenses
and other measures of our performance in 2003; (e) the effect that our business
information technology systems replacement project is expected to have upon our
earnings; (f) the possibility that we might incur additional repositioning costs
associated with underperforming and non-competitive supermarkets; and (g) the
likelihood that we will not continue to repurchase as many shares of our common
stock as we have in the past. Such forward-looking statements are subject to
certain risks and uncertainties that may materially adversely affect the
anticipated results. Such risks and uncertainties include, but are not limited,
to the following: (1) the presence of intense competitive market activity in our
market areas, including competition from warehouse club stores and deep discount
supercenters; (2) the cost and results of our new business information
technology systems replacement project; (3) our ability to identify and develop
new market locations and/or acquisition candidates for expansion purposes and
successfully open new market locations and/or acquire acquisition candidates in
accretive transactions; (4) our continuing ability to obtain reasonable vendor
marketing funds for promotional purposes; (5) the potential purchase of a
significant number of our franchised supermarkets; (6) our continuing ability to
purchase merchandise, equipment and supplies through a purchasing cooperative at
prices lower than what are otherwise available; (7) our ability to continue to
recruit, train and retain quality franchise and corporate supermarket operators;
(8) the potential recognition of repositioning charges resulting from potential
closures, conversions and consolidations of our supermarkets due principally to
the competitive nature of the industry and to the quality of our supermarket
operators; and (9) our ability to integrate and assimilate the acquisition of
Dick's Supermarkets, Inc. and to achieve, on a timely basis, the anticipated
benefits and synergies thereof. We discuss these and other risk factors in Item
1 - Business - Risk Factors in our annual report on Form 10-K for our fiscal
year ended on December 28, 2002. Shareholders, potential investors and other
readers are urged to consider these factors carefully in evaluating the
forward-looking statements made herein and are cautioned not to place undue
reliance on such forward-looking statements. The forward-looking statements made
herein are only made as of the date of this report and we disclaim any
obligation to publicly update such forward-looking statements to reflect
subsequent events or circumstances.
Our Business
General
We are a supermarket retailer and grocery wholesaler through
corporate-owned, franchised and independent supermarkets. At the end of 2002, we
owned and operated 27 supermarkets and franchised an additional 74 supermarkets,
an increase of 2 franchised supermarkets since the end of 2001. These corporate
and franchised supermarkets are sometimes collectively referred to in this Form
10-K as "our" supermarkets. Nineteen of our corporate supermarkets operate under
the Piggly Wiggly(R) banner and eight of them operate under the Dick's(R)
Supermarkets banner. All of our franchised supermarkets operate under the Piggly
Wiggly banner. We are the primary supplier to all 101 supermarkets and also
serve as a wholesaler to a number of smaller, independently operated
supermarkets and convenience stores. All of our supermarkets and other wholesale
customers are located in Wisconsin and northern Illinois.
Our operations are classified into two segments, wholesale and retail. Our
wholesale business derives its revenues primarily from the sale of groceries,
produce, dairy, meat, bakery and deli items and other products to our franchised
supermarkets and independent retail customers. We also supply these products to
our corporate supermarkets, but those revenues are eliminated for accounting
purposes in consolidation. We supply grocery, frozen food, and produce to our
supermarkets through two distribution centers in Sheboygan, Wisconsin, which
have an aggregate square footage of approximately 425,000 square feet. We also
provide our supermarkets with fresh, frozen and processed meats, dairy, eggs and
deli items through a third-party distribution facility in Milwaukee, Wisconsin.
Additionally, we distribute items made in our Platteville, Wisconsin centralized
bakery/deli production facility.
Our retail business consists of our 27 corporate supermarkets. We earn our
retail revenues by selling products purchased from our wholesale segment and
other merchandise to retail consumers. Compared to our wholesale segment, our
retail segment generates higher gross profit margins, but has higher selling and
administrative expenses.
Our Growth Goals and Initiatives
Historically, our revenue growth came in one of three ways. First, we
increased our retail sales by expanding the size of our corporate supermarkets
and replacing some of our corporate supermarkets with new, larger and more
competitive supermarkets. Second, our wholesale business grew as some of our
franchisees similarly expanded or replaced their supermarkets. Finally, we
converted independent supermarkets in and around our market areas to our Piggly
Wiggly(R) brand name. This approach led to a compound annual revenue
growth rate of approximately 2.7% during the five-year period ending in 2000.
In 2001, under the guidance of our Board of Directors, we adopted a new
strategic plan which included a goal of trying to achieve a 15% compound annual
growth rate in revenue for the five years beginning in 2001. Because the types
of expansion opportunities that we had pursued in the past are relatively
limited in and around our existing market areas and only resulted in nominal
historical revenue growth, we decided to actively explore acquisitions of
multiple-store supermarket chains, both within and outside of our current market
areas, to help us achieve our revenue growth goals.
In June 2001, we completed the acquisition of Dick's Supermarkets, Inc.,
our first multiple-store supermarket chain acquisition. In 2001, our revenue
increased by 15.7% largely as a result of this acquisition and we achieved our
2001 revenue growth goal. Although we identified and explored acquiring several
multiple-store supermarket chains and other opportunities in 2002, we did not
acquire any of them. As a result, our revenue increased by 7.8% in 2002 and we
did not meet our 2002 revenue growth goal.
We still intend to pursue our growth targets by executing our strategic
plan. However, we only intend to effect acquisitions that we believe can be
accretive to our earnings and can increase shareholder value. While we have
identified several potential acquisition candidates that appear to fit our
criteria, we will continue to carefully review all potential acquisition
candidates to ensure that our acquisitions are in the best interests of us and
our shareholders. There is no assurance that we will be able to acquire any of
them or, if we do, that such acquisitions will allow us to achieve our revenue
growth goal, will be accretive to our earnings and increase our shareholder
value.
Growth Initiatives in 2002
In 2002 we made major improvements in our distribution operations,
including moving our health and beauty care and general merchandise operations
out of our existing distribution center and into a new 55,000 square foot
facility. This freed up space for an expansion of our produce and grocery
operations. We also expanded our warehouse capacity by approximately 30%.
Some of our other significant growth-related accomplishments in 2002
included:
o Converting formerly independent operators into Piggly Wiggly franchised
supermarkets in Cambridge and Oostburg, Wisconsin in August and November,
2002, respectively;
o Closing older franchised supermarkets and replacing them with new, larger
and more competitive supermarkets in West Bend and Howard, Wisconsin in
October and November, 2002, respectively; and
o Opening a replacement corporate supermarket in Zion, Illinois in January
2002.
Growth Initiatives in 2003
In early 2004, we expect to open a new 40,000 square foot central deli and
bakery operation in Platteville, Wisconsin. This new facility, which is
approximately twice the size of our existing facility, will enable us to better
serve our existing supermarkets and build the infrastructure to support our
expected growth.
The following projects are scheduled for completion in 2003:
o Expansion of the square footage of selling space of our Mosinee, Cross
Plains and Mayville, Wisconsin franchised supermarkets;
o Replacement of existing franchised supermarkets with new, larger and more
competitive supermarkets in Omro, Union Grove and Juneau, Wisconsin;
o Expansion of the square footage of selling of one of our Racine, Wisconsin
corporate supermarkets;
o Replacement of a corporate supermarket with a new, larger and more
competitive supermarket with a Pig Stop(R) gas station in Sheboygan,
Wisconsin; and
o Opening new market corporate supermarkets in Kenosha, Wisconsin and
Maquoketa, Iowa.
We expect the increased sales from these projects will help at least
partially offset the expected continued decreased sales in our supermarkets that
face heightened competition.
Results of Operations
The following tables set forth certain information regarding our results
from 2000 through 2002 (in thousands, except per share data):
- --------------------------- --------- --------- --------- ------------------- -------------------
Variance Variance
- --------------------------- --------- --------- --------- ------------------- -------------------
2002 2001 2002 2001
2002 2001 2000 vs. 2001 vs. 2000 vs. 2001 vs. 2000
- --------------------------- --------- --------- --------- -------- --------- -------- --------
Net sales $ 619,075 $ 574,232 $ 496,344 $ 44,843 $ 77,888 7.8% 15.7%
Retail sales 305,208 265,454 201,817 39,754 63,637 15.0% 31.5%
Wholesale sales 313,867 308,778 294,527 5,089 14,251 1.6% 4.8%
Gross profit 118,369 103,375 82,606 14,994 20,769 14.5% 25.1%
Selling and
administrative expenses 95,620 83,387 65,206 12,233 18,181 14.7% 27.9%
Depreciation and
amortization 7,771 6,913 5,282 858 1,631 12.4% 30.9%
Operating income 14,978 13,075 12,118 1,903 957 14.6% 7.9%
Earnings before income
taxes 13,107 12,312 12,615 795 (303) 6.5% (2.4%)
Net earnings 8,045 7,636 7,823 409 (187) 5.4% (2.4%)
Diluted earnings per share $ 1.54 $ 1.45 $ 1.31 $ 0.09 $ 0.14 6.2% 10.7%
- --------------------------- --------- --------- --------- -------- --------- -------- --------
- ------------------------------ -------- -------- -------- ------------------
Variance
- ------------------------------ -------- -------- -------- ------------------
2002 2001
2002 2001 2000 vs. 2001 vs. 2000
- ------------------------------ -------- -------- -------- -------- --------
Net sales 100.0% 100.0% 100.0% N/A N/A
Retail sales 49.3% 46.2% 40.7% 3.1% 5.5%
Wholesale sales 50.7% 53.8% 59.3% (3.1%) (5.5%)
Gross profit 19.1% 18.0% 16.6% 1.1% 1.4%
Selling and administrative
expenses 15.4% 14.5% 13.1% 0.9% 1.4%
Operating income 2.4% 2.3% 2.4% 0.1% (0.1%)
Earnings before income
taxes 2.1% 2.1% 2.5% 0.0% (0.4%)
Net earnings 1.3% 1.3% 1.6% 0.0% (0.3%)
- ------------------------------ -------- -------- -------- -------- --------
2002 vs. 2001
Retail Sales
The increase in our retail sales for 2002 compared to 2001 was primarily
due to:
o Our acquisition of the Dick's Supermarket chain added $97.7 million to our
retail sales for 2002, compared to $54.7 million for 2001 (when we only
realized about six months of retail sales from Dick's); and
o Sales at our new replacement corporate supermarkets in Sheboygan, Wisconsin
and Zion, Illinois that opened in August 2001 and January 2002,
respectively, were higher than sales at the supermarkets they replaced.
The increase in our retail sales as a result of these factors was partially
offset by:
o Increased intense competitive activity in certain of our market areas,
including competitive store openings affecting about one-third of our
corporate stores and several of our franchised stores;
o Overall softness of the economy and rising unemployment rates, which reduce
discretionary spending and tend to cause retail shoppers to reduce their
spending by purchasing less expensive products from our supermarkets.
Due primarily to the above factors, same store sales for our corporate and
franchised supermarkets were virtually flat for 2002 compared to 2001. Same
store sales represent sales of all corporate and franchised Piggly Wiggly
supermarkets that were open throughout 2002 and 2001. Because the Dick's
acquisition occurred in the second quarter of 2001, our Dick's sales were
included in our same store sales figures for the second half of 2002 only. The
inclusion of our Dick's stores, which have faced especially intense competition
from several competitive store openings, in our same store sales comparisons
contributed to our lower than expected same store sales. In contrast, in 2001,
we achieved significant same store sales increases in part because of
competitive store closures in several of
our markets. Based on our internal wholesale price index, inflation has not had
any significant effect on our retail sales in 2002.
Net Wholesale Sales
Our net wholesale sales for 2002 increased nominally compared to 2001. The
increase was largely due to our conversion of independent supermarkets to Piggly
Wiggly supermarkets in Howard and Nekoosa, Wisconsin in October 2001 and in
Cambridge, Wisconsin in August 2002. Additionally, our wholesale sales increased
due to our March 2002 addition of a wholesale customer in Oostburg, Wisconsin
that became a franchised supermarket in the fourth quarter of 2002. These
increases were offset by wholesale sales decreases due to the continued softness
in the economy, and competitive store openings in several of our markets, which
decreased customer count at several of our franchised supermarkets and the
amount that customers, on average, spent at these supermarkets. Based on our
internal wholesale price index, inflation has not had any significant effect on
our wholesale sales in 2002.
Gross Margin
The significant improvement in our gross margin during 2002 was
attributable primarily to the increase in our mix of retail sales to total sales
resulting from the Dick's acquisition, a change in the mix of items sold and
reduced sale markdowns in our supermarkets.
Selling and Administrative Expenses
Our selling and administrative expenses increased significantly, as a
percent of sales, during 2002 compared to 2001. This increase was attributable
to:
o An increase in our percentage of retail sales to total sales resulting from
the Dick's acquisition;
o A one-time $166,000 special assessment imposed by the Illinois United Food
and Commercial Workers Health Benefits Fund to eliminate the amount by
which the plan's liabilities exceed the value of its assets (we will pay
this special assessment over the next two years, but we recognized the
entire charge in 2002);
o Costs of $200,000 associated with our recent reaudit of our consolidated
financial statements; and
o A loss of $220,000 recognized on the sale of vacant real estate.
Like many employers, we continue to be faced with the prospect of
significant increases in our health care costs. The impact of these increases
during 2002 was mitigated, in part, by our fall 2001 introduction of employee
health plan cost sharing.
Due to the competitive nature of the supermarket industry, some of our
supermarkets continue to experience operational challenges in their
marketplaces. As a result, some of these supermarkets have experienced financial
and operational difficulties. In order to further improve our overall financial
results, we actively evaluate various business alternatives to these operations.
These alternatives include selling these supermarkets, converting franchised
supermarkets into corporate supermarkets (and vice versa), closing supermarkets
and implementing other operational changes. While we did not incur any
significant retail repositioning expenses during the past few years,
implementing any of these alternatives could result in our incurring significant
repositioning or restructuring charges in 2003.
From time to time, we incur significant realization charges or write-offs
related to our underperforming supermarkets and wholesale customers. Our total
2002 and 2001 realization charges relating to wholesale bad debts and retail
subsidies were $1.5 million and $2.1 million, respectively. These charges were
included as a part of selling and administrative expense in our consolidated
statements of earnings. The retail subsidy part of these charges, which was
$430,000 for 2002 and $1.1 million for 2001, and represents a discretionary
amount provided to certain new or underperforming retailers generally offset
against our outstanding receivables balance for the store provided the subsidy.
Earnings
Our increase in earnings was primarily due to the elimination of goodwill
amortization as required by SFAS No. 142 (see note 2 to our consolidated
financial statements). This was partially offset by increased interest expense.
Our interest expenses increased due to our increased borrowings under our
revolving line of credit to fund our on-going business information systems
project and working capital requirements.
Our earnings per share increased in 2002, compared to 2001, due to an
increase in our earnings and a nominal decrease in our weighted average common
shares and equivalents. The decrease in our diluted weighted average
common shares and equivalents to 5,231,000 for 2002 from 5,269,000 for 2001 was
due to repurchases of our shares, which was partially offset by the sale of
shares to two local investors during the fourth quarter of 2001. Since our stock
repurchase program commenced in January 1992, we have repurchased nearly 4.8
million shares, or approximately half of our common stock that was then
outstanding. As of the end of 2002, $4.6 million remained available under our
Board-authorized $30.0 million share repurchase plan. Because we intend to try
to grow our business more rapidly than in the past, depending upon market
conditions, the prevailing price of our shares, our cash requirements, the terms
of our credit agreements and other factors, it is likely that we will repurchase
fewer shares of our common stock in the future.
Many of our peer companies measure the profitability of their sales using
their net earnings to sales ratio. This ratio represents the net earnings margin
realized from each dollar of sales. Our net earnings to sales was 1.30% during
2002, compared to 1.33% during 2001. This nominal decrease was primarily due to
increased competition in some of our retail markets. Increased competition
decreases our net earnings to sales ratio by decreasing customer count,
requiring us to lower prices on certain products and causing customers to
decrease the amount that they spend at our supermarkets.
2001 vs. 2000
Net Sales
Information regarding our 2001 and 2000 sales is set forth in the following
table (in thousands):
---------------------------- ---------------- ----------------
2001 2000
---------------------------- ---------------- ----------------
Net wholesale sales $308,778 $294,527
Retail sales 265,454 201,817
---------------------------- ---------------- ----------------
Total sales $574,232 $496,344
============================ ================ ================
During 2001, our annual sales were a record $574.2 million, compared to
$496.3 million for 2000. The increase of $77.9 million, or 15.7%, was due to
increases in both wholesale and retail sales volume. Based on our internal
wholesale price index, inflation did not have a significant effect on our sales
in 2001. Same store sales for our corporate and franchised supermarkets
increased 3.4% in 2001. Same store sales represent sales of all corporate and
franchised Piggly Wiggly supermarkets that were open throughout 2001 and 2000.
Retail Sales
Retail sales increased $63.6 million, or 31.5%, to $265.5 million in 2001,
compared to $201.8 million in 2000. Our retail sales improved because:
o The acquisition of Dick's Supermarkets added $54.7 million to our retail
sales. This acquisition was the primary factor contributing to our retail
sales growth in 2001.
o The sales at our new flagship corporate supermarket in Sheboygan, Wisconsin
that opened in August 2001 were significantly higher than sales at the
supermarket it replaced.
o The success of the Piggly Wiggly Preferred Power Pricing marketing and
promotional program, which was initiated in January 2001, increased our
retail sales.
o The replacement of a corporate supermarket in Racine, Wisconsin with a new,
larger and more competitive supermarket in 2000 increased our retail sales
in 2001, the first full year that it was open.
o Supermarket closures by competitors over the past year helped improve the
results of our corporate supermarkets in these markets.
Net Wholesale Sales
Net wholesale sales increased $14.3 million, or 4.8%, to $308.8 million in
2001, compared to $294.5 million in 2000. Wholesale sales to all of our
corporate supermarkets are deducted from our total wholesale sales to calculate
our "net" wholesale sales. A major reason that our net wholesale sales increased
in 2001 is that we opened three new market franchised supermarkets in 2001.
These three new supermarkets added nearly $2.7 million, or 0.9%, to our 2001 net
wholesale sales. In addition, our two replacement franchised supermarkets
increased our wholesale sales by approximately $2.4 million, or 0.8%, compared
to 2000.
Net wholesale sales were, however, negatively impacted by the loss of $4.6
million, or 1.5%, of our 2000 net wholesale sales as a result of the April 2001
closing of two underperforming and non-competitive franchised supermarkets and
the July 2001 closing of one of our independent wholesale customers.
Gross Margin
Our gross margin increased from 16.6% in 2000 to 18.0% in 2001. This
significant improvement was attributable to the increase in our mix of retail
sales to total sales that resulted from the Dick's acquisition.
Selling and Administrative Expenses
Our selling and administrative expenses, as a percent of sales, increased
to 14.5% in 2001, compared to 13.1% in 2000. Most importantly, the increase in
our mix of retail sales to total sales resulting from the Dick's acquisition led
to a corresponding and anticipated increase in our selling and administrative
expenses.
Our total 2001 and 2000 realization charges relating to wholesale bad debts
and retail subsidies were $2.1 million and $1.7 million, respectively. These
charges were included as a part of selling and administrative expense in our
consolidated statements of earnings. The retail subsidy part of these charges
was $1.1 million for 2001 and $1.5 million for 2000.
Earnings
Our 2001 operating income increased $1.0 million, or 7.9%, to $13.1
million, compared to $12.1 million in 2000. As a percent of sales, our operating
income in 2001 was 2.3%, compared to 2.4% in 2000. After allocating wholesale
operating profits on sales from our corporate supermarkets to our retail
segment, our wholesale segment generated operating income of $10.0 million in
2001, an increase of $0.8 million, or 8.3%, compared to $9.2 million in 2000.
Our retail segment generated operating income of $3.1 million, an increase of
$0.2 million, or 6.6%, compared to $2.9 million in 2000.
Our 2001 earnings before income taxes decreased $0.3 million, or 2.4%, to
$12.3 million, compared to $12.6 million in 2000. As a percent of sales,
earnings before income taxes decreased to 2.1% in 2001, compared to 2.5% in
2000. Net earnings for 2001 decreased $0.2 million, or 2.4%, to $7.6 million,
compared to $7.8 million in 2000. As anticipated, the Dick's acquisition
resulted in only a nominal increase in our 2001 net earnings.
Our depreciation and amortization in 2001 was $6.9 million, including
nearly $0.5 million of goodwill amortization and an additional $0.5 million of
other depreciation that resulted from the Dick's acquisition.
Our 2001 net earnings to sales ratio was 1.33%, compared to 1.58% in 2000.
The decrease in our net earnings to sales ratio was primarily due to the
increase of approximately $54.7 million of retail sales that resulted from the
Dick's acquisition without a corresponding proportional increase in earnings.
As a result of continued stock repurchases in 2001, our diluted earnings
per share for 2001 increased 10.7% to $1.45 from $1.31 in 2000. Our weighted
average common shares and equivalents were 5,269,000 and 5,951,000 for 2001 and
2000, respectively.
Liquidity and Capital Resources
Summary
At December 28, 2002, we had cash and equivalents totaling $14.3 million.
At the end of 2001, cash and equivalents aggregated $11.5 million. Our net cash
inflow of approximately $2.8 million was attributable to various operational,
investing and financing activities described below. Our working capital position
at December 28, 2002 was $28.8 million, compared to $19.1 million at December
29, 2001. Our current ratio at December 28, 2002 was 1.56 to 1.00, compared to
1.39 to 1.00 at December 29, 2001. As of December 28, 2002, we had unsecured
revolving bank credit facilities aggregating $35.0 million, with $9.6 million
remaining available for use. Our revolving facility requires us to maintain
certain minimum levels of working capital and net worth. The facility also
requires us to meet or exceed certain ratios intended to measure our ability to
repay amounts we may borrow under the facility. Finally, the credit facility
contains limitations upon our ability to take certain other actions, such as
borrowing additional funds from other lenders. Our current working capital
levels provide us with a very favorable and strong liquidity position.
Cash Flows From Operating Activities
The cash inflows from our wholesale segment occur when our retail
supermarket customers pay us. The cash disbursements from both of our segments
occur when we pay our suppliers. Because these payments are relatively large,
our cash inflows and outflows fluctuate depending on the timing of the receipt
of payments from our wholesale customers and the timing of payments to our
suppliers. For 2002, our net cash generated from operations was $8.3 million,
compared to $5.4 million for 2001.
Cash Flows From Investing Activities
For 2002, our net cash outflows from investing activities totaled $12.9
million, compared to $30.9 million for 2001. Our acquisition of Dick's
Supermarkets accounted for $27.5 million of our 2001 investing cash outflow. For
2002, investing cash outflows for capital items was nearly $13.7 million,
compared to $6.0 million for 2001. Approximately $4.2 million of our investing
outflow for 2002 related to expenditures from the expansion of our distribution
centers and approximately $4.3 million of our capital expenditures were for our
ongoing systems project. Additionally, expenditures for retail equipment and
fixtures for 2002, including those associated with Dick's, were approximately
$4.4 million and corporate office technology expenditures were approximately $.8
million.
Cash Flows From Financing Activities
For 2002, our net cash inflows from financing activities totaled
approximately $7.3 million compared to nearly $5.8 million for 2001. Additional
borrowing under our revolving credit facility was the primary source of
financing cash inflows in 2002 and 2001. In the second quarter of 2001, we
entered into a $35.0 million bank revolving credit facility. We borrowed $12.5
million under our revolving credit facility to fund a portion of the purchase
price of Dick's Supermarkets, Inc. in June of 2001. Subsequently, in both 2001
and 2002 we borrowed additional amounts to fund our systems project and working
capital requirements, including our increased working capital requirements due
to the Dick's acquisition. We owed approximately $25.4 million under our
revolving credit facility at the end of 2002, compared to approximately $13.7
million owed at the end of 2001.
The increase in our net financing cash inflow in comparison to 2001 was
also due to the lower number of shares of common stock repurchased. In 2002 we
repurchased approximately 136,000 shares of our common stock for an aggregate
price of $2.3 million (an average per share price of $17.07) compared to
approximately 743,000 shares aggregating $9.7 million for 2001 (an average per
share price of $13.00).
Our ratio of total liabilities to shareholders' investment at the end of
2002 was up from the end of 2001 to 2.09 from 1.73.
As of December 28, 2002 approximately $4.6 million of the Board of
Directors' authorized $30.0 million stock repurchase program remained available
for additional stock repurchases.
Major 2003 Commitments
During the second quarter of 2001, we announced a $15.0 million, three-year
capital expenditure project to replace and expand our current business
information systems. The new systems are expected to support our growth plans
and provide improved operational efficiencies and cost savings. The project,
which is expected to be rolled-out over a three-year period, includes four
critical phases. The first two phases, the core infrastructure and the systems
related to our wholesale business operations, are expected to be completed
during the first quarter of 2003. The final two phases, related to our retail
pricing and promotional card marketing, and human resources, payroll and
financial reporting systems, are projected to be completed by the end of 2005.
We have also expanded this project to include the front-end systems of our
stores, including our point-of-sale equipment and software. This expansion will
add approximately $5.0 million to the total project cost. Each project is
expected to be funded partially with cash generated by our operations. In
addition, other financing sources are available to us, including borrowings
under our existing revolving credit agreement. Expenditures and commitments for
the systems project were approximately $2.7 million during 2001 and
approximately $4.3 million during 2002.
Our 2003 capital budget is approximately $14.8 million, compared to our
actual 2002 spending of $13.7 million. Approximately $7.9 million of our 2003
budget has been committed for corporate retail projects, upgrades and
replacement supermarkets, $1.3 million for the distribution center and
bakery/deli manufacturing facility, $4.4 million has been committed to our
business systems project and $1.2 million has been committed for other
technology-related projects and office renovations. Our 2003 capital budget does
not include any amounts that may be required to acquire any multiple-store
supermarket chains or fund any similar opportunities.
Other Capital Commitments - Contractual Obligations
The following chart sets forth information regarding our major contractual
obligations (in thousands):
- ----------------------------- -------------------------------------------------
Contractual Obligations Payments Due by Period
- ----------------------------- -------------------------------------------------
Less Than Years Years After 5
Total 1 Year 1-3 4-5 Years
- ----------------------------- -------- --------- -------- -------- --------
Operating lease obligations $122,731 $ 11,835 $ 31,763 $ 19,426 $ 59,707
Capital lease obligations 62,728 4,592 13,184 8,524 36,428
Long-term debt 26,520 316 26,060 144 -
Total contractual obligations $211,979 $ 16,743 $ 71,007 $ 28,094 $ 96,135
- ----------------------------- -------- --------- -------- -------- --------
Operating Lease Obligations
We have operating leases for both real estate and equipment used by our
wholesale and retail segments. The majority of our operating lease obligations
are related to leases of our supermarkets. We lease all of our corporate
supermarkets and approximately 80% of our franchised supermarkets. We sublease
each of our franchised supermarkets to one of our franchisees under a sublease
with terms similar to those that we have with our landlords. We enter into these
transactions because they serve as "credit enhancements" that allow our
franchisees, most of whom own only one or two supermarkets, to obtain lease
terms through us that are more favorable to them than if we did not effectively
guaranty their rent payments. Our other operating lease obligations relate to
leases for corporate office space, transportation equipment (including tractors
and trailers) and certain office equipment.
In 2002, our operating lease obligations (which included both real estate
and equipment subleases) decreased from $142.9 million to $122.7 million
primarily due to lease payments made during 2002. The amount owed to us in 2002
by our franchisees under real estate subleases decreased from $100.3 million to
$91.3 million. Forty-eight different franchisees have entered into subleases
with us and no single franchisee (or group of related franchisees) owes us more
than $4.0 million under subleases. In addition to the amounts set forth in the
table above, some of our operating leases contain contingent rent provisions
based on sales volume (for supermarkets) or miles traveled (for transportation
equipment). Contingent rent paid in 2002 and 2001 was $1.3 million and $1.2
million, respectively.
Capital Lease Obligations
Under generally accepted accounting principles, leases are categorized as
"capital leases" if any of these conditions occur: (a) the lease transfers
ownership to us; (b) the lease contains a purchase option with a price that is
well below the expected market price; (c) the lease term is equal to 75% or more
of the estimated life of the asset being leased; or (d) the present value of the
lease payments on the date the lease is entered into equals or exceeds 90% of
the market value of the leased property. Our lease for one of our distribution
centers and 19 of our 80 supermarket leases are accounted for as capital leases
because the present value of the total rent payments equaled or exceeded 90% of
the market value of the leased property on the date that the leases were first
entered into.
In 2002, the amount we owed under our supermarket and distribution center
capital leases increased 64.2% from $38.2 million to $62.7 million, and the
amount owed to us by our franchisees under related supermarket subleases
increased 141.7% from $17.5 million to $37.5 million. These increases were due
to six new supermarket leases that we entered into in 2002 being categorized as
capital leases. In the past, such leases would have likely been treated as
operating leases. Our new leases were accounted for as capital leases because of
the substantial decrease in the interest rate that we used to calculate the
present value of the payments under our leases. This decreased interest rate was
the result of a decrease in our borrowing rate.
Under generally accepted accounting principles, obligations under capital
leases, but not operating leases, are recorded as long-term liabilities on our
consolidated balance sheets. The present value of our long-term obligations
under our capital leases, as of December 28, 2002, was $37.0 million. In
addition, $1.9 million of
rent payments are due under our capital leases in 2003. The liabilities related
to our capital leases recorded on our December 28, 2002 consolidated balance
sheet is $23.8 million lower than the total amounts due under these leases
because, under generally accepted accounting principles, we must record the
present value of these payments in our consolidated balance sheet.
Long-Term Debt
Approximately $25.4 million of the debt included in the table above is an
amount we borrowed under our $35.0 million revolving credit facility. Because
our revolving credit facility expires on April 30, 2004, we have included the
amounts we owe under this agreement as a debt that must be repaid in the next
1-3 years. However, as is customary with revolving loan agreements, it is likely
that we will seek to extend the term of this facility prior to its expiration
date. If the term of this facility is extended, we will not have to repay the
amounts due under this facility until the new expiration date.
Other Capital Commitments - Other Commercial Commitments
The following chart sets forth information regarding certain of our
contingent commercial commitments (in thousands):
- ----------------------------- -------------------------------------------------
Other Commercial Commitments Amount of Commitment Expiration by Period
- ----------------------------- -------------------------------------------------
Less Than Years Years After 5
Total 1 Year 1-3 4-5 Years
- ----------------------------- -------- --------- -------- -------- --------
Standby letters of credit $ 3,475 $ - $ 3,475 $ - $ -
- ----------------------------- -------- --------- -------- -------- --------
Guarantees 15,387 6,351 7,135 1,901 -
- ----------------------------- -------- --------- -------- -------- --------
Total commercial commitments $ 18,862 $ 6,351 $ 10,610 $ 1,901 $ -
- ----------------------------- -------- --------- -------- -------- --------
Standby Letters of Credit
We self-insure a portion of our workers' compensation and general liability
claims. We currently have two standby letters of credit for $2.0 million and
$1.5 million, both of which were established in connection with these
self-insurance programs. Our letters of credit provide funds to cover claims if
we are unable to pay. Letters of credit of this type are common when a company
self-insures these types of liabilities. Although both of our letters of credit
expire on December 31, 2003, we expect to renegotiate these letters of credit or
enter into one or more letters of credit effective as of January 1, 2004.
Wholesale Customer Guarantees
We typically provide short-term financing to our franchisees and some of
our wholesale customers for costs associated with the purchase of facilities,
equipment and inventory for new or remodeled franchised supermarkets. This
financing is typically refinanced within one to two months following project
completion with bank loans guaranteed by us. All of these loan guarantees are
collateralized, principally by the franchisee's equipment and inventory and, in
some cases, with their building facilities.
Critical Accounting Policies
The following are certain important accounting policies we used to prepare
our consolidated financial statements. You should also review our notes to
consolidated financial statements for information regarding our other accounting
polices.
Receivables
The majority of our receivables are from our wholesale customers, most of
which are our franchisees. We record our receivables net of the allowance for
doubtful accounts. We establish reserves for doubtful accounts whenever we
believe that we may not be paid in full by one or more of our customers. Our
allowances for doubtful accounts were $4.5 million at the end of 2002 compared
to $3.5 million at the end of 2001.
Inventory
Many companies value their inventory based on the lower of their cost or
market value. Most companies use one of two methods to determine their inventory
cost. The first such method is the "last-in, first-out," or LIFO, method. Under
the LIFO method, the cost assigned to the items sold is based on the cost of the
most recent items purchased. As a result, the cost of the first such items
purchased remain in inventory and the cost of these items are used to value
ending inventory. The second method is the "first-in, first-out," or FIFO,
method. Under the FIFO method, the value of items sold is based on the cost of
the first such items purchased. As a result, the cost of the last such items
purchased remain in inventory and the cost of these items are used to value
ending inventory. During periods of inflation, the use of the LIFO method will
result in higher cost of products sold, lower ending inventory values and lower
earnings compared to the FIFO method.
We value our inventory at the lower of our cost or market value. At
December 28, 2002, the cost of approximately 87% of our inventory was valued
using the LIFO method and 13% of our inventory was valued using the FIFO method.
During 2002, our "LIFO reserve" increased from $9.7 million to $10.0 million.
This means that if we used the FIFO method rather than the LIFO method, our 2002
earnings would have been increased by approximately $0.3 million.
Self-Insurance
The company is primarily self-insured for workers' compensation and general
liability claims. The self-insurance claim liability is determined based on
claims filed and an estimate of claims incurred but not yet reported.
Projections of the losses are employed due to the high degree of variability in
the liability estimates. Some factors affecting the uncertainty of claims
include the timeframe of development, settlement patterns, litigation and
adjudication direction and medical treatment and cost trends. The liability is
not discounted.
Retail Repositioning Reserve
We estimate our future retail repositioning expenses associated with
underperforming, non-competitive supermarkets based on our evaluation of the
performance of each of our supermarkets and establish an appropriate reserve for
such amounts. At the end of 2002, our retail repositioning reserve was $0.2
million. The majority of this reserve represents our estimate of the cost of
maintaining the real estate of recently closed supermarkets. In addition, we may
implement operational changes with respect to one or more of our supermarkets
(such as converting one or more franchised supermarkets into corporate
supermarkets (or vice versa), closing them or implementing other operational
changes) in 2003. If any of these possibilities occur, our actual costs would
exceed this reserve.