<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------------
FORM 10-Q
------------------------------
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JANUARY 10, 1998
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ____________ TO __________
Commission File number 333-35457
---------
------------------------------------------------------
RANDALL'S FOOD MARKETS, INC.
(Exact name of registrant as specified in its charter)
------------------------------------------------------
Texas 74-2134840
------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
3663 Briarpark, Houston, Texas 77042
-----------------------------------------------------------
Address of principal executive offices (including zip code)
(713) 268-3500
--------------------------------------------------
Registrant's telephone number, including area code
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes ( ) No (X)
The number of shares outstanding of the registrant's common stock, par value
$0.25 per share, as of January 31, 1998 was 30,116,323 shares
<PAGE>
RANDALL'S FOOD MARKETS, INC.
INDEX
<TABLE>
PAGE NO.
--------
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements:
Condensed Consolidated Balance Sheets at January 10, 1998 and
June 28, 1997 2
Condensed Consolidated Statements of Operations for the Twenty-eight (28)
and Twelve (12) Week Periods Ended January 10, 1998 and January 11, 1997 3
Condensed Consolidated Statements of Cash Flows for the Twenty-eight (28)
Week Periods Ended January 10, 1998 and January 11, 1997 4
Notes to Condensed Consolidated Financial Statements 5
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 8
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 12
Item 2. Changes in Securities 14
SIGNATURES 15
</TABLE>
1
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
RANDALL'S FOOD MARKETS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
JANUARY 10, 1998 AND JUNE 28, 1997
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
JANUARY 10, JUNE 28,
1998 1997
---- ----
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 47,785 $ 23,115
Receivables, net 48,450 44,664
Merchandise inventories 173,753 164,174
Prepaid expenses and other 11,234 9,703
Deferred tax assets 15,029 21,109
----------- -----------
Total current assets 296,251 262,765
Property and equipment, net 313,697 336,548
Goodwill, net 220,913 224,350
Other Assets, net 38,965 38,711
----------- -----------
$ 869,826 $ 862,374
----------- -----------
----------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Current maturities of long-term debt and
capitalized lease obligations $ 4,830 $ 4,940
Accounts payable 119,536 112,026
Accrued expenses and other 133,687 131,736
Accrued income taxes 7,311 2,634
----------- -----------
Total current liabilities 265,364 251,336
Long-term debt, net of current maturities 276,515 279,729
Obligations under capital leases, net of
current maturities 62,873 77,479
Deferred income tax liability 6,837 11,067
Other liabilities 28,235 24,400
----------- -----------
Total liabilities 639,824 644,011
----------- -----------
COMMITMENTS & CONTINGENCIES (See Note 4)
REDEEMABLE COMMON STOCK, $10.95 and $12.11 redemption value,
413,022 and 413,022 shares issued and outstanding, respectively 4,523 5,002
----------- -----------
STOCKHOLDERS' EQUITY:
Common stock, $0.25 par value 30,118,308 and 29,714,261 shares
issued and outstanding, respectively 7,427 7,326
Additional paid-in capital 174,214 169,823
Stockholders' notes receivable (3,430) 0
Retained earnings 48,275 36,212
Restricted common stock (785) 0
Treasury stock (222) 0
----------- -----------
Total stockholders' equity 225,479 213,361
----------- -----------
$ 869,826 $ 862,374
----------- -----------
----------- -----------
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
2
<PAGE>
RANDALL'S FOOD MARKETS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE TWENTY-EIGHT AND TWELVE WEEK PERIODS ENDED
JANUARY 10, 1998 AND JANUARY 11, 1997
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
28 WEEKS ENDED 12 WEEKS ENDED
------------------------ -------------------------
JANUARY 10, JANUARY 11, JANUARY 10, JANUARY 11,
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
NET SALES $1,299,293 $1,259,046 $579,916 $575,341
COSTS OF SALES 945,645 920,643 422,706 419,719
---------- ---------- -------- --------
GROSS PROFIT 353,648 338,403 157,210 155,622
OPERATING EXPENSES:
Store operating, selling and
administrative expenses 287,938 283,033 124,663 128,124
Depreciation and amortization 26,309 23,882 11,192 10,568
---------- ---------- -------- --------
Total operating expenses 314,247 306,915 135,855 138,692
---------- ---------- -------- --------
OPERATING INCOME 39,401 31,488 21,355 16,930
INTEREST EXPENSE, net 18,013 19,851 7,491 8,689
---------- ---------- -------- --------
INCOME BEFORE INCOME TAXES 21,388 11,637 13,864 8,241
PROVISION FOR INCOME TAXES (9,799) (5,879) (6,019) (3,691)
---------- ---------- -------- --------
NET INCOME $ 11,589 $ 5,758 $ 7,845 $ 4,550
---------- ---------- -------- --------
---------- ---------- -------- --------
</TABLE>
The accompanying notes are an integral part
of these consolidated financial statements.
3
<PAGE>
RANDALL'S FOOD MARKETS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE TWENTY-EIGHT WEEK PERIODS ENDED
JANUARY 10, 1998 AND JANUARY 11, 1997
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
28 WEEKS ENDED
-------------------------
JANUARY 10, JANUARY 11,
1998 1997
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 11,589 $ 5,758
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 26,309 23,882
Amortization of debt issuance costs 1,100 -
LIFO reserve 1,190 1,129
Deferred tax benefit (provision) 1,850 (1,625)
Other (822) 149
Change in assets and liabilities, net 9,152 26,045
-------- --------
Net cash provided by operating activities 50,368 55,338
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (44,770) (41,112)
Proceeds from sale of assets 22,902 32,124
Other 1,278 169
-------- --------
Net cash (used) in investing activities (20,590) (8,819)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net repayment of debt (3,199) (23,245)
Additions to (reductions in) obligations under capital lease (2,111) 6,848
Other 202 (1,061)
-------- --------
Net cash (used in) financing activities (5,108) (17,458)
-------- --------
NET INCREASE IN CASH AND CASH EQUIVALENTS 24,670 29,061
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 23,115 31,686
-------- --------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 47,785 $ 60,747
-------- --------
-------- --------
</TABLE>
The accompanying notes are an integral part
of these consolidated financial statements.
4
<PAGE>
RANDALL'S FOOD MARKETS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE TWENTY-EIGHT AND TWELVE WEEK PERIODS ENDED
JANUARY 10, 1998 AND JANUARY 11, 1997 (UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying condensed consolidated balance sheet of Randall's Food
Markets, Inc. and subsidiaries (the "Company") at June 28, 1997 has been
derived from the Company's audited financial statements at that date. The
condensed consolidated balance sheet at January 10, 1998, the condensed
consolidated statements of operations for the twenty-eight and twelve week
periods ended January 10, 1998 and January 11, 1997 and the condensed
consolidated statements of cash flows for the twenty-eight week periods ended
January 10, 1998 and January 11, 1997 are unaudited. In the opinion of
management, such condensed consolidated financial statements contain all
adjustments, consisting only of normal recurring adjustments, necessary for a
fair statement of the consolidated financial position and results of
operations of the Company for the interim periods. Operating results for the
twenty-eight and twelve week periods ended January 10, 1998 are not
necessarily indicative of the operating results that may be expected for a
full fiscal year.
Certain information and footnote disclosures normally included in annual
financial statements presented in accordance with generally accepted
accounting principles have been omitted. The accompanying condensed
consolidated financial statements should be read in conjunction with the
consolidated financial statements and footnotes thereto included in the
Company's Form S-4 as declared effective by the Securities and Exchange
Commission on January 12, 1998 (Registration No. 333-35457).
2. STORE CLOSING COSTS
During the fiscal year ended June 28, 1997 ("Fiscal Year 1997"), the
Company recorded a charge of approximately $32.8 million in connection with
the closure, replacement or sale of certain of its stores. Such charge
included estimated inventory losses of approximately $3.0 million (included
in cost of sales during Fiscal Year 1997), estimated lease termination costs
of approximately $11.7 million and asset write-offs of approximately $18.1
million (included in operating expenses during Fiscal Year 1997).
Approximately $3.7 million of such charge related to stores that were closed
or sold in Fiscal Year 1997 and approximately $29.1 million related to stores
the Company plans to close, replace or sell during the fiscal years ending
June 27, 1998 and June 26, 1999. During the twenty-eight weeks ended January
10, 1998, the Company closed eight stores and charged approximately $4.0
million of related closure costs against the accrual recorded in connection
with the charge in Fiscal Year 1997.
3. STOCK PURCHASE AND OPTION PLAN
During the 28 weeks ended January 10, 1998, the Company adopted the 1997
Stock Purchase and Option Plan for Key Employees of Randall's Food Markets,
Inc. and Subsidiaries (the "1997 Plan"). The 1997 Plan authorizes grants of
stock and stock options covering 2.4 million shares of the Company's common
stock. Grants or awards under the 1997 Plan may take the form of purchased
stock, restricted stock,
5
<PAGE>
incentive or non-qualified stock options, or other types of rights specified
in the 1997 Plan and are typically issued at prices greater than or equal to
the fair market value of the Company's common stock at the time of such
grants and awards.
During the twenty-eight weeks ended January 10, 1998, the Company sold
approximately 318,000 shares of common stock under the 1997 Plan to key
executives and certain members of management at a price of $12.11 per share.
As consideration, the Company accepted payment of cash or a combination of
cash and notes receivable from the purchasers. The notes receivable bear
interest at 6.1% per annum. At January 10, 1998, the Company held notes
receivable from management stockholders in the aggregate amount of
approximately $3.4 million. These notes receivable are shown as a reduction
of stockholders' equity in the accompanying condensed consolidated balance
sheet.
4. CONTINGENCIES
Following the Company's acquisition of Cullum Companies, Inc. ("Cullum")
in August 1992, the Company terminated Cullum's Management Security Plan for
Cullum Companies, Inc. ("the MSP"). In respect of such termination, the
Company paid MSP participants the greater of (i) the amount of such
participant's deferral or (ii) the net present value of the participant's
accrued benefit, based upon the participant's current salary, age and years
of service. Thirty-five of the former MSP participants have instituted a
claim against the Company on behalf of all persons who were participants in
the MSP on its date of termination (which is alleged by plaintiffs to be
approximately 250 persons). On May 7, 1997, the plaintiffs filed an amended
complaint for the court to recognize their action as a class action, to
recover additional amounts under the MSP, for a declaration of rights under
an employee pension benefit plan and for breach of fiduciary duty. The
plaintiffs assert that the yearly plan agreement executed by each participant
in the MSP was a contract for a specified retirement and death benefit set
forth in such plan agreements and that such benefits were vested and
nonforfeitable. A pre-trial order in the MSP litigation, which was submitted
to the court on October 22, 1997, states that an expert for the plaintiffs,
assuming class certification, may testify that the damages allegedly
sustained by the plaintiff class may range from approximately $18.0 million
to $37.2 million and, assuming that a court were to award additional damages
based on a rate of return achieved by an equity index over the relevant
period, such damages may range from approximately $37.4 million to $70.6
million. On December 30, 1997, the court issued an order denying the
plaintiffs' summary judgment motion on the plaintiffs' claim that the MSP was
not an exempt "top hat plan" (a plan which is unfunded and maintained by an
employer primarily for the purpose of providing deferred compensation for a
select group of management or highly compensated employees). The order also
granted the Company's summary judgment motions on two of the plaintiffs'
ancillary claims, but did not address the plaintiffs' request for
certification as a class action. The judge scheduled a pre-trial conference
with the parties for January 22, 1998 which has subsequently been rescheduled
to May 28, 1998. The Company currently expects the trial to commence in
calendar year 1998. Based upon current facts, the Company is unable to
estimate any meaningful range of possible loss that could result from an
unfavorable outcome of the MSP litigation. It is possible that the Company's
results of operations or cash flows in a particular quarterly or annual
period or its financial position could be materially affected by an ultimate
unfavorable outcome of the MSP litigation. However, the Company intends to
vigorously contest the MSP claim and, although there can be no assurance,
management currently does not anticipate an unfavorable outcome based on
management's independent analysis of the facts relating to such litigation.
On July 30, 1997, the Company initiated an arbitration proceeding against
Fleming Companies, Inc. ("Fleming"), one of its long-time suppliers. In the
action, the Company alleges, among other things, that Fleming violated the
terms of a supply agreement signed in 1993. Under the terms of the supply
agreement,
6
<PAGE>
the Company was to purchase groceries and other items at Fleming's cost, plus
a small markup. Among the violations alleged by the Company are claims that
Fleming wrongfully manipulated its costing procedures, which resulted in
overcharges, and then unilaterally changed the overall pricing formula.
Additionally, the Company alleged that Fleming failed to provide supporting
documentation for purchases as required under the contract. Since 1993 when
the supply agreement was signed, the Company has purchased approximately $2.3
billion in products from Fleming. Based on the supporting documents provided
to the Company by Fleming to date, the Company will be seeking a substantial
amount of damages from Fleming and termination of the supply agreement.
Fleming has filed an answer denying each allegation and a counterclaim
alleging that the Company failed to purchase the quantities required by the
supply agreement.
The Company is involved in other various claims and disputes arising in
the normal course of business. Management is not currently able to estimate
the range of possible loss, if any, that may result from such matters.
However, management believes that the Company has meritorious defenses and/or
insurance coverage against such matters and does not believe that the outcome
of any such proceedings will have a material effect on the Company's results
of operations, financial condition or cash flow.
5. RECENT PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board (the "FASB") issued
Statement on Financial Accounting Standard ("SFAS") No. 130, "Reporting
Comprehensive Income", which requires the reporting and display of
comprehensive income and its components in an entity's financial statements.
SFAS No. 130 is not expected to materially impact the Company's financial
statements. In June 1997 the FASB also issued SFAS No. 131, "Disclosures
about Segments of an Enterprise and Related Information", which specifies
revised guidelines for determining an entity's operating segments and the
type and level of financial information required to be disclosed. Management
believes that the implementation of SFAS No. 131 will not have a significant
impact on the Company's financial statements. The Company is required to
adopt SFAS No. 130 and SFAS No. 131 in its fiscal year ending June 26, 1999.
7
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion and analysis of the results of operations of the
Company covers certain periods before completion of certain financings and
related transactions whereby RFM Acquisition LLC ("RFM Acquisition"), a
Delaware limited liability company organized at the direction of Kohlberg
Kravis Roberts & Co., L.P., invested $225.0 million in the Company, as
consideration for the Company's issuance to RFM Acquisition of 18,579,686
shares of the Company's common stock, par value $0.25 per share (the "Common
Stock") and a 25-year option to purchase 3,606,881 shares of Common Stock at
$12.11 per share, subject to adjustments (including the related financings and
related transactions, the "Recapitalization"). Accordingly, the discussion and
analysis of periods for the 28 weeks ended January 11, 1997 and the 12 weeks
ended January 11, 1997 do not reflect the significant impact that the
Recapitalization, has had and will continue to have on the Company. However,
since the Recapitalization occurred prior to the close of the fiscal year
ending June 28, 1997 ("Fiscal Year 1997"), the balance sheet of the Company as
of June 28, 1997, and hence the discussion of liquidity and capital resources,
reflects the impact of the Recapitalization. See the discussion below under
"Liquidity and Capital Resources" for further discussion relating to the impact
that the Recapitalization had and may in the future have on the Company.
The Company operates a chain of 114 supermarkets primarily under the
RANDALLS and TOM THUMB banners in the Houston, Dallas/Fort Worth and Austin
metropolitan areas. The Company operates on a 52 or 53 week fiscal year ending
on the last Saturday of each June. Same store sales is defined as net sales
for stores in operation in each of the entire current fiscal period and the
comparable period of the prior fiscal year. Replacement stores are included in
the same store sales calculation. A replacement store is defined as a store
that is opened to replace a store that is closed nearby. At the close of
Fiscal Year 1997, the Company recorded a charge of $32.8 million relating to
stores to be closed, replaced or sold. During the twenty-eight weeks ended
January 10, 1998, the Company closed, replaced or sold eight stores.
Presented below is a table showing the percentage of net sales represented by
certain items in the Company's consolidated condensed statements of operations
(dollars in thousands):
<TABLE>
28 WEEKS ENDED 28 WEEKS ENDED 12 WEEKS ENDED 12 WEEKS ENDED
JANUARY 10, 1998 JANUARY 11, 1997 JANUARY 10, 1998 JANUARY 11, 1997
------------------ ------------------ ---------------- ----------------
<S> <C> <C> <C> <C>
Net sales $1,299,293 100.0% $1,259,046 100.0% $579,916 100.0% $575,341 100.0%
Cost of sales 945,645 72.8% 920,643 73.1% 422,706 72.9% 419,719 73.0%
---------- ---------- -------- --------
Gross profit 353,648 27.2% 338,403 26.9% 157,210 27.1% 155,622 27.0%
Store operating, selling and
administrative expenses 287,938 22.2% 283,033 22.5% 124,663 21.5% 128,124 22.3%
EBITDA 65,710 5.1% 55,370 4.4% 32,547 5.6% 27,498 4.8%
Depreciation and amortization 26,309 2.0% 23,882 1.9% 11,192 1.9% 10,568 1.8%
Operating Income 39,401 3.0% 31,488 2.5% 21,355 3.7% 16,930 2.9%
Interest expense, net 18,013 1.4% 19,851 1.6% 7,491 1.3% 8,689 1.5%
(Provision) for income taxes (9,799) (0.8%) (5,879) (0.5%) (6,019) (1.0%) (3,691) (0.6%)
Net income $ 11,589 0.9% $ 5,758 0.5% $ 7,845 1.4% $ 4,550 0.8%
</TABLE>
FISCAL YEAR TO DATE 1998 COMPARED TO FISCAL YEAR TO DATE 1997
NET SALES - Net sales for the twenty-eight weeks ended January 10, 1998
("Fiscal Year to Date 1998") increased by $40.2 million (3.2%) compared to the
twenty-eight weeks ended January 11, 1997 ("Fiscal Year to Date 1997"). Such
increase is partially attributable to additional sales of $62.2 million
generated from the opening of one new store during Fiscal Year to Date 1998 and
the operation during such period of six stores (excluding four replacement
stores) opened during the fiscal year ended June 28, 1997 ("Fiscal Year 1997")
which were not in operation during the comparable period. In addition, the
Company experienced an
8
<PAGE>
increase in same store sales of approximately $19.6 million in Fiscal Year to
Date 1998 as compared to Fiscal Year to Date 1997. These increases were offset
by a decline of approximately $41.6 million generated from the closing of
eight stores during Fiscal Year to Date 1998 and five stores (excluding four
replacement stores) in Fiscal Year 1997 which were operating during Fiscal
Year to Date 1997.
Net sales during the 12 weeks ended January 10, 1998 ("Second Quarter 1998")
increased by $4.6 million, or 0.8%, as compared to the 12 weeks ended January
11, 1997 ("Second Quarter 1997"). Such increase is partially attributable to
additional sales of approximately $20.8 million generated from the opening of
one new store during Fiscal Year to Date 1998 and the operation during Second
Quarter 1998 of four stores (excluding four replacement stores) opened during
Fiscal Year 1997 which were not in operation during the comparable period. In
addition, the Company experienced an increase in same store sales of
approximately $9.8 million during Second Quarter 1998 as compared to Second
Quarter 1997. These increases were offset by a decline of $26.0 million
resulting from the closing of eight stores during Fiscal Year to Date 1998 and
one store (excluding four replacement stores) in Fiscal Year 1997 which was
operating during Second Quarter 1997.
The Company's trend in same store sales has improved from decreases of
approximately 3.6% and 1.3% during the first and second fiscal quarters,
respectively, of Fiscal Year 1997 to increases of approximately 2.0% and 1.8%,
respectively, during the corresponding quarters of Fiscal Year to Date 1998.
This improvement has resulted from the success of the frequent shopper program
introduced in October 1996, other marketing and operational initiatives and the
contribution of four replacement stores.
The Company cannot predict whether the improvement in the trend in same
store sales that has occurred in Fiscal Year to Date 1998 will continue in
future periods, and as a result, there can be no assurance that such trend will
continue or will not be reversed in future periods.
GROSS PROFIT - Gross profit for Fiscal Year to Date 1998 and Second Quarter
1998 increased by $15.3 million (4.5%) and $1.6 million (1.0%), respectively,
compared to the corresponding periods of the prior year. The dollar increase
in gross profit is primarily attributable to the increased sales volume during
the Fiscal Year 1998 periods. Gross profit as a percentage of net sales
increased to 27.2% for Fiscal Year to Date 1998 from 26.9% for Fiscal Year to
Date 1997 and increased to 27.1% for Second Quarter 1998 from 27.0% for Second
Quarter 1997. Such increases are primarily due to more effective promotional
efforts and higher gross margins at new and replacement stores. Such higher
gross margins at new and replacement stores are due primarily to their more
expansive specialty departments and broader range of products and services.
STORE OPERATING, SELLING AND ADMINISTRATIVE EXPENSES - Store operating, selling
and administrative expenses increased $4.9 million (1.7%) during Fiscal Year to
Date 1998 and decreased $3.5 million (2.7%) during Second Quarter 1998 compared
to the same periods of the prior year. Store operating, selling and
administrative expenses as a percentage of net sales decreased to 22.2% for
Fiscal Year to Date 1998 from 22.5% for Fiscal Year to Date 1997 and decreased
to 21.5% for Second Quarter 1998 from 22.3% for Second Quarter 1997. Such
decrease as a percentage of net sales is due primarily to the Company's expense
management efforts.
EBITDA (EARNINGS BEFORE INTEREST, TAXES, DEPRECIATION AND AMORTIZATION
EXPENSES) AND OPERATING INCOME - EBITDA for Fiscal Year to Date 1998 and Second
Quarter 1998 increased by $10.3 million (18.7%) and $5.1 million (18.4%),
respectively, compared to the same periods of the prior year. EBITDA as a
percentage of net sales increased to 5.1% for Fiscal Year to Date 1998 from
4.4% for Fiscal Year to Date 1997 and increased to 5.6% for Second Fiscal
Quarter 1998 from 4.8% for Second Fiscal Quarter 1997. Operating income for
Fiscal Year to Date 1998 and Second Quarter 1998 increased by $7.9 million
(25.1%) and $4.4 million (26.1%), respectively, compared to the corresponding
periods of the prior year. Such increases are
9
<PAGE>
primarily attributable to the increases in gross profit and decreases in store
operating, selling and administrative expenses, as described above.
DEPRECIATION AND AMORTIZATION - Depreciation and amortization expense for
Fiscal Year to Date 1998 and Second Quarter 1998 increased by $2.4 million
(10.2%) and $0.6 million (5.9%). Depreciation and amortization expense, as a
percentage of net sales, increased to 2.0% for Fiscal Year to Date 1998 from
1.9% for Fiscal Year to Date 1997 and increased to 1.9% for Second Quarter 1998
from 1.8% for Second Quarter 1997. Such increases are primarily due to new
store openings and the remodeling of certain existing stores in Fiscal Year
1997 and Fiscal Year to Date 1998.
INTEREST EXPENSE, NET - Net interest expense for Fiscal Year to Date 1998 and
Second Quarter 1998 declined by $1.8 million (9.3%) and $1.2 million (13.8%),
respectively, compared to the same periods of the prior year, due primarily to
a net reduction of debt.
PROVISION FOR INCOME TAXES - The provision for income taxes for Fiscal Year to
Date 1998 and Second Quarter 1998 was $9.8 million and $6.0 million,
respectively, compared to $5.9 million and $3.7 million, respectively, for the
corresponding periods of the prior year. Such increases are primarily due to
the Company's increased pre-tax income.
NET INCOME - Net income for Fiscal Year to Date 1998 and Second Quarter 1998
increased $5.8 million (101.3%) and $3.3 million (72.4%), respectively,
compared to the corresponding periods of the prior year due primarily to the
combined impact of the factors discussed above.
LIQUIDITY AND CAPITAL RESOURCES- The Company is a holding company, and as a
result, its operating cash flow and its ability to service its indebtedness,
including the Company's 9-3/8% Series B Senior Subordinated Notes due 2007, are
dependent upon the operating cash flow of its subsidiaries and the payment of
funds by such subsidiaries to the Company in the form of loans, dividends or
otherwise.
The Company's principal sources of liquidity are expected to be cash flow
from operations, borrowings under the $225.0 million revolving credit facility
("Revolver") available under the Company's current bank credit agreement and
proceeds from the sale leaseback of real estate properties. As of January 10,
1998, the Company had approximately $224.0 million available (net of
approximately $1.0 million of outstanding letters of credit) to be borrowed
under the Revolver. Management anticipates that the Company's principal uses
of liquidity will be to provide working capital, meet debt service requirements
and finance the Company's expansion and remodeling plans. Management believes
that cash flows generated from operations and borrowings under the Revolver
will adequately provide for its working capital and debt service needs and will
be sufficient to fund the Company's expected capital expenditures.
During Fiscal Year to Date 1998 and Fiscal Year to Date 1997, operating
activities provided net cash of approximately $50.4 million and $55.3 million,
respectively. Financing activities utilized approximately $5.1 million during
Fiscal Year to Date 1998, primarily for the reduction of debt and capital lease
obligations. During Fiscal Year to Date 1997, financing activities utilized
approximately $17.5 million, primarily due to debt reduction.
Cash flows used in investing activities during Fiscal Year to Date 1998 were
$20.6 million, including capital expenditures of approximately $44.8 million,
which were partially offset by proceeds from the sale of assets in the amount
of approximately $22.9 million. Capital expenditures primarily include
expenditures related to the construction of new stores, the purchase of real
estate, the remodeling of existing stores, ongoing store expenditures for
equipment and capitalized maintenance, as well as expenditures relating to
warehousing and distribution equipment and computer equipment. To finance
store development, the
10
<PAGE>
Company has traditionally purchased real estate and constructed stores from
operating cash flows and from the proceeds of its revolving credit facility
and then entered into sale leaseback transactions, the proceeds of which were
applied to reduce debt incurred to construct the stores. During Fiscal Year
to Date 1998 and Fiscal Year to Date 1997, capital expenditures were
approximately $44.8 million and $41.1 million, respectively. Proceeds from
asset sales were approximately $22.9 million during Fiscal Year to Date 1998
compared to $32.1 million during Fiscal Year to Date 1997.
During Fiscal Year to Date 1998, the Company has embarked upon a program
to accelerate its store development and remodeling and to optimize its
distribution system. This program is expected to result in a level of
capital expenditures significantly in excess of historical levels. During
Fiscal Year to Date 1998, the Company has completed construction of one new
store, commenced construction of five new stores and purchased land for two
new stores. During the remainder of the fiscal year ending June 27, 1998,
the Company expects to make approximately $55.0 million in additional
expenditures to continue or complete construction of the five stores
currently under construction, commence construction of five additional new
stores and purchase land for two additional new stores. Depending on store
size and format, the cost to build and open a new store ranges from
approximately $8.0 million to $12.0 million. The Company has also completed
the remodeling or renovation of eighteen existing stores during Fiscal Year
to Date 1998 and currently expects to make approximately $26.0 million in
additional expenditures to complete or commence the remodeling of an
additional sixteen stores during the remainder of the fiscal year ending June
27, 1998. The Company also plans to commence the expansion of its
distribution system during the third quarter of Fiscal Year 1998. Such
expansion is expected to be completed during the fiscal year ending June 26,
1999 and is currently expected to cost approximately $25.5 million. The
Company currently expects to incur approximately $4.0 million of such costs
during the remainder of Fiscal Year 1998. As of January 10, 1998, the
Company had approximately $53.0 million of commitments to make capital
expenditures. The Company anticipates funding its future capital expenditures
with cash flow from operations, borrowings under the Revolver and proceeds
from sale leaseback transactions.
EFFECTS OF INFLATION - The Company's primary costs, inventory and labor, are
affected by a number of factors that are beyond its control, including
availability and price of merchandise, the competitive climate and general
and regional economic conditions. As is typical of the supermarket industry,
the Company has generally been able to maintain gross profit margins by
adjusting retail prices, but competitive conditions may from time to time
render the Company unable to do so while maintaining its market share.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board (the "FASB") issued
Statement on Financial Accounting Standard ("SFAS") No. 130, "REPORTING
COMPREHENSIVE INCOME", which requires the reporting and display of
comprehensive income and its components in an entity's financial statements.
SFAS No. 130 is not expected to materially impact the Company's financial
statements. In June 1997 the FASB also issued SFAS No. 131, "DISCLOSURES
ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION", which specifies
revised guidelines for determining an entity's operating segments and the
type and level of financial information required to be disclosed. Management
believes that the implementation of SFAS No. 131 will not have a significant
impact on the Company's financial statements. The Company is required to
adopt SFAS No. 130 and SFAS No. 131 in its fiscal year ending June 26, 1999.
CAUTIONARY STATEMENT FOR PURPOSES OF THE "SAFE HARBOR" PROVISIONS OF THE
PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
The Private Securities Litigation Reform Act of 1995 provides a "safe harbor"
for certain forward-looking statements. The factors discussed below, among
others, could cause actual results to differ materially from
11
<PAGE>
those contained in forward-looking statements made in this report, including,
without limitation, in "Management's Discussion and Analysis of Financial
Condition and Results of Operations," in the Company's related press release
and in oral statements made by authorized officers of the Company. When used
in this report, any press release or oral statements, the words "estimate,"
"project," "anticipate," "expect," "intend," "believe" and similar
expressions are intended to identify forward-looking statements. All of
these forward-looking statements are based on estimates and assumptions made
by management of the Company, which, although believed to be reasonable, are
inherently uncertain. Therefore, undue reliance should not be placed upon
such estimates and statements. No assurance can be given that any of such
statements or estimates will be realized and actual results will differ from
those contemplated by such forward-looking statements. Accordingly, the
Company hereby identifies the following important factors which could cause
the Company's financial results to differ materially from any such results
which might be projected, forecast, estimated or budgeted by the Company in
forward-looking statements:
(a) Heightened competition, including specifically the intensification
of price competition and the expansion, renovation and opening of
new stores by competitors.
(b) Failure to obtain new customers or retain existing customers.
(c) Inability to carry out strategies to accelerate new store
development and remodeling programs, reduce operating costs,
differentiate products and services, leverage frequent shopper
program and increase private label sales.
(d) Insufficiency of financial resources to renovate and expand store
base.
(e) Outcome of the MSP litigation.
(f) Prolonged dispute with labor.
(g) Economic downturn in the State of Texas.
(h) Loss or retirement of key executives.
(i) Higher selling, general and administrative expenses occasioned by
the need for additional advertising, marketing, administrative, or
management information systems expenditures.
(j) Adverse publicity and news coverage.
The foregoing review of the factors pursuant to the Private Litigation
Securities Reform Act of 1995 should not be construed as exhaustive or as any
admission regarding the adequacy of disclosures made by the Company prior to
this filing.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Following the Company's acquisition of Cullum Companies, Inc. ("Cullum")
in August 1992, the Company terminated Cullum's Management Security Plan for
Cullum Companies, Inc. ("the MSP"). In respect of such termination, the
Company paid MSP participants the greater of (i) the amount of such
participant's deferral and (ii) the present value of the participant's
accrued benefit, based upon the participant's current salary, age and years
of service. Thirty-five of the former MSP participants have
12
<PAGE>
instituted a claim against the Company on behalf of all persons who were
participants in the MSP on its date of termination (which is alleged by
plaintiffs to be approximately 250 persons). On May 7, 1997, the plaintiffs
filed an amended complaint for the court to recognize their action as a class
action, to recover additional amounts under the MSP, for a declaration of
rights under an employee pension benefit plan and for breach of fiduciary
duty. The plaintiffs assert that the yearly plan agreement executed by each
participant in the MSP was a contract for a specified retirement and death
benefit set forth in such plan agreements and that such benefits were vested
and nonforfeitable. A pre-trial order in the MSP litigation, which was
submitted to the court on October 22, 1997, states that an expert for the
plaintiffs, assuming class certification, may testify that the damages
allegedly sustained by the plaintiff class may range from approximately $18.0
million to $37.2 million and, assuming that a court were to award additional
damages based on a rate of return achieved by an equity index over the
relevant period, such damages may range from approximately $37.4 million to
$70.6 million. On December 30, 1997, the court issued an order denying the
plaintiffs' summary judgment motion on the plaintiffs' claim that the MSP was
not an exempt "top hat plan" (a plan which is unfunded and maintained by an
employer primarily for the purpose of providing deferred compensation for a
select group of management or highly compensated employees). The order also
granted the Company's summary judgment motions on two of the plaintiffs'
ancillary claims, but did not address the plaintiffs' request for
certification as a class action. The judge scheduled a pre-trial conference
with the parties for January 22, 1998 which has subsequently been rescheduled
to May 8, 1998. The Company currently expects the trial to commence in
calendar year 1998. Based upon current facts, the Company is unable to
estimate any meaningful range of possible loss that could result from an
unfavorable outcome of the MSP litigation. It is possible that the Company's
results of operations or cash flows in a particular quarterly or annual
period or its financial position could be materially affected by an ultimate
unfavorable outcome of the MSP litigation. However, the Company intends to
vigorously contest the MSP claim and, although there can be no assurance,
management currently does not anticipate an unfavorable outcome based on
management's independent analysis of the facts relating to such litigation.
On July 30, 1997, the Company initiated an arbitration proceeding against
Fleming Companies, Inc. ("Fleming") one of its long-time suppliers. In the
action, the Company alleges, among other things, that Fleming violated the
terms of a supply agreement signed in 1993. Under the terms of the supply
agreement, the Company was to purchase groceries and other items at Fleming's
cost, plus a small markup. Among the violations alleged by the Company are
claims that Fleming wrongfully manipulated its costing procedures, which
resulted in overcharges, and then unilaterally changed the overall pricing
formula. Additionally, the Company alleged that Fleming failed to provide
supporting documentation for purchases as required under the contract. Since
1993 when the supply agreement was signed, the Company has purchased
approximately $2.3 billion in products from Fleming. Based on the supporting
documents provided to the Company by Fleming to date, the Company will be
seeking a substantial amount of damages from Fleming and termination of the
supply agreement. Fleming has filed an answer denying each allegation and a
counterclaim alleging that the Company failed to purchase the quantities
required by the supply agreement.
The Company is involved in other various claims and disputes arising in
the normal course of business. Management is not currently able to estimate
the range of possible loss, if any, that may result from such matters.
However, management believes that the Company has meritorious defenses and/or
insurance coverage against such matters and does not believe that the outcome
of any such proceedings will have a material effect on the Company's results
of operations, financial condition or cash flow.
13
<PAGE>
ITEM 2. CHANGES IN SECURITIES
During the twenty-eight weeks ended January 10, 1998, the Company issued
approximately 318,000 shares of the Company's common stock, par value $0.25
per share ("Common Stock") to certain members of management for aggregate
consideration of approximately $3.9 million. During such period, the Company
also issued options to purchase approximately 966,000 shares of Common Stock
to such members of management. The exercise price of such options granted
was $12.11 per share. None of these securities were registered under the
Securities Act.
Such issuances of Common Stock and options to purchase Common Stock were
made pursuant to the 1997 Stock Purchase and Option Plan for Key Employees of
Randall's Food Markets, Inc. and Subsidiaries. In each of the above
instances, exemption from registration under the Securities Act was based
upon the grounds that the issuance of such securities did not involve a
public offering within the meaning of Section 4(2) of the Securities Act.
14
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Quarterly Report to be signed on its behalf
by the undersigned, thereunto duly authorized.
RANDALL'S FOOD MARKETS, INC.
(Registrant)
Date: February 26, 1998 /s/ R. RANDALL ONSTEAD JR.
------------------------------------------
R. Randall Onstead, Jr.,
President and Chief Executive Officer
Date: February 26, 1998 /s/ MICHAEL M. CALBERT
------------------------------------------
Michael M. Calbert,
Chief Financial Officer and Senior Vice
President
15
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM CONDENSED
CONSOLIDATED BALANCE SHEETS, CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND
THE CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS FOR RANDALL'S FOOD MARKETS,
INC. AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> OTHER
<FISCAL-YEAR-END> JUN-27-1998
<PERIOD-START> OCT-19-1997
<PERIOD-END> JAN-10-1998
<CASH> 47,785
<SECURITIES> 0
<RECEIVABLES> 48,450
<ALLOWANCES> 0
<INVENTORY> 173,753
<CURRENT-ASSETS> 296,251
<PP&E> 313,697
<DEPRECIATION> 0
<TOTAL-ASSETS> 869,826
<CURRENT-LIABILITIES> 265,364
<BONDS> 339,388
0
0
<COMMON> 11,950
<OTHER-SE> 218,052
<TOTAL-LIABILITY-AND-EQUITY> 869,826
<SALES> 579,916
<TOTAL-REVENUES> 579,916
<CGS> 422,706
<TOTAL-COSTS> 135,855
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 7,491
<INCOME-PRETAX> 13,864
<INCOME-TAX> 6,019
<INCOME-CONTINUING> 7,845
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 7,845
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
