<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 APRIL 3, 1999
[ ] 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 (X) No ( )
The number of shares outstanding of the registrant's common stock, par value
$0.25 per share, as of April 13, 1999 was 30,022,252 shares
<PAGE>
RANDALL'S FOOD MARKETS, INC.
INDEX
<TABLE>
<CAPTION>
PAGE NO.
--------
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Independent Accountants' Report 2
Condensed Consolidated Balance Sheets at April 3, 1999 and
June 27, 1998 3
Condensed Consolidated Statements of Income for the Forty and
Twelve Week Periods Ended April 3, 1999 and April 4, 1998 4
Condensed Consolidated Statements of Cash Flows for the Forty
Week Periods Ended April 3, 1999 and April 4, 1998 5
Notes to Condensed Consolidated Financial Statements for the Forty and Twelve
Week Periods Ended April 3, 1999 and April 4, 1998 6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 11
Item 3. Quantitative and Qualitative Disclosures about Market Risk 17
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 17
Item 2. Changes in Securities 19
Item 3. Defaults upon Senior Securities 19
Item 4. Submission of Matters to a Vote of Security Holders 19
Item 5. Other Information 19
Item 6. Exhibits and Reports on Form 8-K 19
SIGNATURES 20
</TABLE>
1
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1.
Independent Accountants' Report
To the Board of Directors and Stockholders of
Randall's Food Markets, Inc.
Houston, Texas
We have reviewed the accompanying condensed consolidated balance sheet of
Randall's Food Markets, Inc. and subsidiaries as of April 3, 1999, and the
related condensed consolidated statement of income for the twelve-week period
then ended. These financial statements are the responsibility of the Company's
management.
We conducted our review in accordance with standards established by the American
Institute of Certified Public Accountants. A review of interim financial
information consists principally of applying analytical procedures to financial
data and of making inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit conducted in accordance
with generally accepted auditing standards, the objective of which is the
expression of an opinion regarding the financial statements taken as a whole.
Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to such condensed consolidated financial statements for them to be in
conformity with generally accepted accounting principles.
We have previously audited, in accordance with generally accepted auditing
standards, the consolidated balance sheet of Randall's Food Markets, Inc. and
subsidiaries as of June 27, 1998, and the related consolidated statements of
income, stockholders' equity, and cash flows for the year then ended (not
presented herein); and in our report dated August 14, 1998, we expressed an
unqualified opinion on those consolidated financial statements. In our opinion,
the information set forth in the accompanying condensed consolidated balance
sheet as of June 27, 1998 is fairly stated, in all material respects, in
relation to the consolidated balance sheet from which it has been derived.
DELOITTE & TOUCHE LLP
Houston, Texas
April 30, 1999
2
<PAGE>
RANDALL'S FOOD MARKETS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
APRIL 3, 1999 AND JUNE 27, 1998
(In Thousands)
<TABLE>
<CAPTION>
APRIL 3, 1999 JUNE 27, 1998
------------- -------------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 43,259 $ 36,243
Receivables, net 54,729 44,187
Merchandise inventories, net 194,786 166,332
Prepaid expenses and other 6,579 5,986
Deferred tax assets 6,279 11,792
----------- -----------
Total current assets 305,632 264,540
Property and equipment, net 457,136 365,853
Goodwill, net 213,059 217,968
Other assets, net 36,091 35,386
----------- -----------
Total $ 1,011,918 $ 883,747
----------- -----------
----------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt and obligations under capital leases $ 4,553 $ 4,544
Accounts payable 142,976 135,834
Accrued expenses and other 129,748 136,477
Accrued income taxes 5,474 --
----------- -----------
Total current liabilities 282,751 276,855
Long-term debt, net of current maturities 375,653 276,447
Obligations under capital leases, net of current maturities 58,452 61,515
Other liabilities 28,533 32,485
----------- -----------
Total liabilities 745,389 647,302
----------- -----------
CONTINGENCIES (See Note 3)
REDEEMABLE COMMON STOCK, $17.24 and $13.30 redemption value per share,
387,651 shares issued and outstanding at April 3, 1999 and June 27, 1998 6,683 5,155
----------- -----------
STOCKHOLDERS' EQUITY:
Common stock, $0.25 par value 75,000,000 shares authorized; 29,654,690 shares
issued and 29,636,308 shares outstanding at April 3, 1999 and 29,697,979
shares issued and 29,679,597 shares outstanding at June 27, 1998 7,414 7,425
Additional paid-in capital 173,908 174,337
Stockholders' notes receivable (6,299) (6,213)
Retained earnings 85,254 56,506
Restricted common stock (213) (547)
Treasury stock, 18,382 shares at cost (218) (218)
----------- -----------
Total stockholders' equity 259,846 231,290
----------- -----------
Total $ 1,011,918 $ 883,747
----------- -----------
----------- -----------
</TABLE>
The accompanying notes are an integral part of these
condensed consolidated financial statements
3
<PAGE>
RANDALL'S FOOD MARKETS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
FOR THE FORTY AND TWELVE WEEK PERIODS ENDED
APRIL 3, 1999 AND APRIL 4, 1998
(In Thousands)
(Unaudited)
<TABLE>
<CAPTION>
40 WEEKS ENDED 12 WEEKS ENDED
------------------------------- -------------------------------
APRIL 3, 1999 APRIL 4, 1998 APRIL 3, 1999 APRIL 4, 1998
------------- -------------- ------------- -------------
<S> <C> <C> <C> <C>
NET SALES $1,997,241 $1,851,817 $ 602,917 $ 552,524
COSTS OF SALES 1,442,535 1,345,145 436,504 399,500
---------- ---------- ---------- ----------
GROSS PROFIT 554,706 506,672 166,413 153,024
OPERATING EXPENSES:
Selling, general and
administrative expenses 429,037 412,698 124,623 124,760
Depreciation and amortization 45,996 37,969 14,795 11,660
---------- ---------- ---------- ----------
Total operating expenses 475,033 450,667 139,418 136,420
---------- ---------- ---------- ----------
OPERATING INCOME 79,673 56,005 26,995 16,604
INTEREST EXPENSE, net 26,424 25,612 8,164 7,599
---------- ---------- ---------- ----------
INCOME BEFORE INCOME TAXES 53,249 30,393 18,831 9,005
PROVISION FOR INCOME TAXES 22,974 13,942 8,021 4,143
---------- ---------- ---------- ----------
NET INCOME $ 30,275 $ 16,451 $ 10,810 $ 4,862
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
</TABLE>
The accompanying notes are an integral part of these condensed
consolidated financial statements.
4
<PAGE>
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE FORTY WEEK PERIODS ENDED
APRIL 3, 1999 AND APRIL 4, 1998
(In Thousands)
(Unaudited)
<TABLE>
<CAPTION>
APRIL 3, 1999 APRIL 4, 1998
------------------- ----------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 30,275 $ 16,451
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 45,996 37,969
Other 5,016 4,372
Change in assets and liabilities, net (35,147) 11,132
--------- ---------
Net cash provided by operating activities 46,140 69,924
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (176,137) (64,040)
Proceeds from sale of assets 39,954 23,230
Other 211 596
--------- ---------
Net cash used in investing activities (135,972) (40,214)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from long-term debt 263,000 --
Repayments of long-term debt (163,798) (3,269)
Reduction in obligations under capital leases (2,830) (2,933)
Other 476 694
--------- ---------
Net cash provided by (used in) financing activities 96,848 (5,508)
--------- ---------
NET INCREASE IN CASH AND CASH EQUIVALENTS 7,016 24,202
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 36,243 23,115
--------- ---------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 43,259 $ 47,317
--------- ---------
--------- ---------
</TABLE>
The accompanying notes are an integral part of these condensed
consolidated financial statements.
5
<PAGE>
RANDALL'S FOOD MARKETS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE FORTY AND TWELVE WEEK PERIODS ENDED
APRIL 3, 1999 AND APRIL 4, 1998 (UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying condensed consolidated balance sheet of Randall's Food
Markets, Inc. and subsidiaries (the "Company") at June 27, 1998 has been derived
from the Company's audited financial statements at that date. The condensed
consolidated balance sheet at April 3, 1999, the condensed consolidated
statements of income for the forty and twelve week periods ended April 3, 1999
and April 4, 1998 and the condensed consolidated statements of cash flows for
the forty week periods ended April 3, 1999 and April 4, 1998 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 forty and twelve week periods ended April 3, 1999 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 Annual
Report on Form 10-K for the year ended June 27, 1998.
Certain reclassifications have been made to the prior period's
financial statements to conform to the current period presentation.
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
planned closure, replacement or sale of certain of its stores. Such charge
included $3.7 million relating to stores that were closed or sold prior to the
fourth quarter of Fiscal Year 1997 and $29.1 million relating to 20 stores that
the Company planned to close, replace or sell at various dates from June 1997 to
June 1999. The $32.8 million 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 (both of which were included in
operating expenses during Fiscal Year 1997).
As of April 3, 1999, 15 out of the 20 stores included in the Fiscal Year
1997 reserve had been closed, replaced or sold. During the 40 weeks ended April
3, 1999, the Company charged against the reserve $0.5 million for inventory
write-offs, $5.3 million for lease termination costs and $7.3 million for asset
write-offs, or a total of $13.1 million related to the 15 stores closed,
replaced or sold as of April 3, 1999.
During the twelve weeks ended April 3, 1999, the Company decided not to
close two of the 20 stores included in the Fiscal Year 1997 reserve. The related
reserve for such stores amounted to $4.3 million representing $0.6 million in
inventory write-offs, $0.4 million in lease termination costs and $3.3 million
in asset write-offs. The reserve was adjusted for such amounts resulting in a
reduction in selling, general and administrative expenses during the 12 weeks
ended April 3, 1999.
6
<PAGE>
Of the three remaining stores, as of April 3, 1999, included in the Fiscal
Year 1997 reserve, one was closed on April 10, 1999 and the remaining two stores
are expected to be closed during the fourth quarter of the fiscal year ending
June 26, 1999 ("Fiscal Year 1999"). The Company does not anticipate a material
impact on its future revenues and operating results as a result of activities
from the closing of such stores . The aggregate revenue and operating loss for
the 12 weeks ended April 3, 1999 from the one store to be closed for which the
Company does not plan a replacement store were $2.7 million and $0.3 million,
respectively, and the revenue and operating loss from such store for the 40
weeks ended April 3, 1999 were $9.7 million and $0.8 million, respectively. At
April 3, 1999, the aggregate carrying value, net of the closed store reserve, of
the fixed assets of stores closed and remaining to be closed under the plan was
$0.8 million, or less than 0.1% of the Company's total assets.
The number of stores closed, replaced or sold in connection with the plan during
each fiscal period since the plan's inception is as follows:
<TABLE>
<S> <C>
Stores to be closed per original plan 20
Closures during the fourth quarter of Fiscal Year 1997 (2)
Closures during Fiscal Year 1998 (10)
Closures during Fiscal Quarter Ended October 18, 1998 (3)
Closures during Fiscal Quarter Ended January 9, 1999 -
Closures during Fiscal Quarter Ended April 3, 1999 -
Stores not closing (2)
--------
Stores remaining to be closed at April 3, 1999 3
--------
--------
</TABLE>
Activity in the reserve since June 28, 1997 is as follows (in thousands):
<TABLE>
LEASE ASSET
INVENTORY TERMINATION WRITE OFFS TOTAL
-------------- ------------------ --------------- -------------
<S> <C> <C> <C> <C>
Reserve/expense recorded in FY 1997 $ 3,000 $11,745 $18,047 $32,792
Charges to the reserve during FY 1998 (1,407) (1,600) (3,483) (6,490)
-------------- ------------------ --------------- -------------
Remaining reserve at June 27, 1998 1,593 10,145 14,564 26,302
-------------- ------------------ --------------- -------------
Charges to the reserve during the 16 weeks
ended October 17, 1998 (449) (1,824) (4,642) (6,915)
Charges to the reserve during the 12 weeks
ended January 9, 1999 (27) (3,423) (2,685) (6,135)
Charges to the reserve during the 12 weeks
ended April 3, 1999 - (38) - (38)
Reversal of unused reserves (556) (401) (3,295) (4,252)
-------------- ------------------ --------------- -------------
Charges to the reserve during the 40 weeks
ended April 3, 1999 (1,032) (5,686) (10,622) (17,340)
-------------- ------------------ --------------- -------------
Remaining reserve at April 3, 1999 $561 $4,459 $3,942 $8,962
-------------- ------------------ --------------- -------------
-------------- ------------------ --------------- -------------
</TABLE>
7
<PAGE>
During the 12 weeks ended April 3, 1999, the Company recorded a charge of
approximately $3.7 million relating to three stores, not included in the Fiscal
Year 1997 reserve, that the Company will close or replace during the remainder
of Fiscal Year 1999. The $3.7 million charge included approximately $0.7 million
charged to cost of sales for estimated inventory losses and $3.0 million charged
to selling, general and administrative expenses, including estimated lease
termination costs of approximately $0.6 million, asset impairment of
approximately $1.9 million and other expenses associated with store closings of
approximately $0.5 million. Two of these three stores were closed on April 10,
1999 and the remaining store, which will be replaced, is currently scheduled to
be closed during the fourth quarter of Fiscal Year 1999. The aggregate revenue
and operating loss for the 12 weeks ended April 3, 1999 from the two stores that
the Company does not plan to replace were $5.4 million and $0.6 million,
respectively, and the revenue and operating loss from such stores for the 40
weeks ended April 3, 1999 were $20.3 million and $2.1 million, respectively. At
April 3, 1999, the aggregate carrying value, net of the closed store reserve, of
the fixed assets of these three stores was $3.9 million, or less than 0.4% of
the Company's total assets.
3. CONTINGENCIES
MSP LITIGATION-Following the Company's acquisition of Cullum
Companies, Inc. in August 1992, the Company terminated the 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, that such damages may range from approximately $37.4 million
to $70.6 million. On June 16, 1998, the Court certified the case as a class
action for the limited issue of determining if the MSP was 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 Court defined the class as
all persons who, on the date of the termination of the MSP, were participants
in the MSP and were employed by Randall's Food Markets, Inc. The trial of the
limited class action issue was conducted before the Court, sitting without a
jury, on October 26, 1998. Upon order of the Court, both parties submitted
post-trial briefs on November 6, 1998. On February 18, 1999, the Court ruled
on the limited class action issue finding that the MSP was not an exempt top
hat plan. In addition, the Court requested on the same date a joint statement
from the parties concerning future scheduling. The parties submitted the
requested joint statement, but the Court has not yet issued any scheduling
orders. On March 4, 1999, the Company filed a motion requesting that the
Court amend its order to allow an interim appeal and confirm that the Company
did not stipulate that it bore the burden of proof at the trial. On March 26,
1999, the Court denied the motion for an interim appeal and confirmed that
the Company bore the burden of proof at the trial. When the Court certified
the limited class issue, it stated that once that issue was resolved, it
would make an evaluation as to whether any other issues should be dealt with
in a class action context.
8
<PAGE>
On April 8, 1999, the Plaintiffs filed a new Motion for Class Certification,
seeking class action treatment on all remaining issues. In addition, on April
8, 1999, the plaintiffs filed a new damages model in which they appear to
seek total damages of approximately $65.1 million with prejudgement interest
of approximately $28.0 million. Supplementally, the plaintiffs have provided
to the Company an additional schedule indicating that damages allegedly
sustained may range from $65.1 million to $72.4 million, and assuming
reinvestment, such damages may approximate $200 million. The Company filed
its brief in opposition to the Motion on April 28, 1999 and will oppose the
request by the Plaintiffs for class certification of further issues. 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.
FLEMING DISPUTE - On July 30, 1997, the Company initiated an arbitration
proceeding before the American Arbitration Association against Fleming
Companies, Inc. ("Fleming"), one of its long-time suppliers, alleging, among
other things, that Fleming violated the terms of a supply agreement signed in
1993. On July 7, 1998, the arbitration panel unanimously found that Fleming
materially breached the supply agreement and the contract was terminated as of
July 7, 1998 without payment of any termination fee. The Company and Fleming
entered into a transition agreement, effective September 25, 1998, which
provides for a continued supply of products from Fleming while the Company moves
to self-distribution.
JOHN PAUL MITCHELL LAWSUIT - On August 26, 1998, a jury in the 126th
District Court, Travis County, Texas, returned a verdict against the Company and
a co-defendant, Jade Drug Company, Inc. ("Jade"), finding both parties
intentionally conspired with each other to interfere with contracts between John
Paul Mitchell Systems ("Mitchell") and one or more of its distributors and/or
salons. The jury found the Company guilty of having in its possession, selling
or offering for sale Mitchell products that it knew, or that a reasonable person
in the position of the Company would know, had serial numbers or other permanent
identification markings removed, altered or obliterated. The jury found that the
company unfairly competed with Mitchell by purchasing and distributing the
products and infringed on Mitchell's trademark. The jury also found that the
harm caused Mitchell resulted from malice.
The jury awarded Mitchell and its co-plaintiff, Ultimate Salon Services
Inc., (together, the "Plaintiffs") $3.25 million in joint and several damages
from the Company and Jade, $4.5 million in exemplary damages from the Company
and $3.0 million in actual damages and $4.5 million in exemplary damages from
Jade.
The Company and Jade filed motions with the trial court judge to disregard
the jury's verdict. On November 19, 1998, the trial court judge overturned the
jury's verdict, entered judgement in favor of the Company and Jade, ordered that
the Plaintiffs recover nothing and ordered that the Plaintiffs pay the Company
and Jade all of their court costs. On December 18, 1998, the Plaintiffs filed a
motion for a new trial. On February 2, 1999, the trial court judge denied such
motion by operation of law. On February 16, 1999, the Plaintiffs filed their
notice of appeal with the court. Both parties will now file briefs with the
Austin Court of Appeals. Although the outcome of this matter cannot be
predicted with certainty, management believes an unfavorable outcome will not
have a material adverse effect on the Company, its operations, its financial
condition or its cash flows.
Other than the foregoing matters, the Company believes it is not a
party to any pending legal proceedings, including ordinary litigation incidental
to the conduct of its business and the ownership of its property, the adverse
determination of which would have a material adverse effect on the Company, its
operations, its financial condition or its cash flows.
9
<PAGE>
4. RECENT PRONOUNCEMENTS
In April 1998, the American Institute of Certified Public Accountants
issued Statement of Position 98-5, "REPORTING ON THE COSTS OF START-UP
ACTIVITIES", ("SOP 98-5") which requires that costs incurred for start-up
activities should be charged to operations as incurred. Although the Company has
not fully assessed the impact of adopting SOP 98-5, the Company does not believe
that such adoption will have a material impact on its financial statements. The
Company is required to adopt SOP 98-5 in its fiscal year ending June 24, 2000.
Initial application of SOP 98-5 will be reported as a cumulative effect of an
accounting change.
10
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The Company currently 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 full operation in each of the current fiscal periods and the
comparable periods 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. Identical-store sales is
defined as net sales for stores in full operation in each of the current fiscal
periods and the comparable periods of the prior fiscal year, excluding expansion
and replacement stores.
Presented below is a table showing the percentage of net sales represented
by certain items in the Company's condensed consolidated statements of income
(dollars in thousands):
<TABLE>
<CAPTION>
40 WEEKS ENDED 12 WEEKS ENDED
--------------------------------------------- -----------------------------------------
APRIL 3, 1999 APRIL 4, 1998 APRIL 3, 1999 APRIL 4, 1998
---------------------- ---------------------- -------------------- -------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales $ 1,997,241 100.0% $ 1,851,817 100.0% $ 602,917 100.0% $ 552,524 100.0%
Cost of sales 1,442,535 72.2% 1,345,145 72.6% 436,504 72.4% 399,500 72.3%
----------- ------ ----------- ------ --------- ------ --------- ------
Gross profit 554,706 27.8% 506,672 27.4% 166,413 27.6% 153,024 27.7%
Selling, general and administrative
expenses 429,037 21.5% 412,698 22.3% 124,623 20.7% 124,760 22.6%
Depreciation and amortization 45,996 2.3% 37,969 2.1% 14,795 2.5% 11,660 2.1%
----------- ------ ----------- ------ --------- ------ --------- ------
Operating income 79,673 4.0% 56,005 3.0% 26,995 4.5% 16,604 3.0%
Interest expense, net 26,424 1.3% 25,612 1.4% 8,164 1.4% 7,599 1.4%
----------- ------ ----------- ------ --------- ------ --------- ------
Income before income taxes 53,249 2.7% 30,393 1.6% 18,831 3.1% 9,005 1.6%
Provision for income taxes 22,974 1.2% 13,942 0.8% 8,021 1.3% 4,143 0.7%
----------- ------ ----------- ------ --------- ------ --------- ------
Net income $ 30,275 1.5% $ 16,451 0.9% $ 10,810 1.8% $ 4,862 0.9%
----------- ------ ----------- ------ --------- ------ --------- ------
----------- ------ ----------- ------ --------- ------ --------- ------
EBITDA $ 127,669 6.4% $ 95,674 5.2% $ 42,600 7.1% $ 28,774 5.2%
----------- ------ ----------- ------ --------- ------ --------- ------
----------- ------ ----------- ------ --------- ------ --------- ------
</TABLE>
NET SALES - Net sales for the forty weeks ended April 3, 1999 ("Fiscal Year to
Date 1999") increased by $145.4 million or 7.9% compared to the forty weeks
ended April 4, 1998 ("Fiscal Year to Date 1998"). Such increase is partially
attributable to additional sales of $47.4 million generated from the opening of
three new stores (excluding three replacement stores) during Fiscal Year to Date
1999 and the operation during such period of two stores (excluding two
replacement stores) opened during the fiscal year ended June 27, 1998 ("Fiscal
Year 1998") which were not in operation during the entire comparable period of
Fiscal Year to Date 1998. In addition, the Company experienced an increase in
same-store sales of approximately $144.4 million in Fiscal Year to Date 1999 as
compared to Fiscal Year to Date 1998. These increases were offset by a decline
of approximately $44.9 million generated from closed and temporarily closed
stores that are excluded from same-store sales.
Net sales during the 12 weeks ended April 3, 1999 ("Third Quarter 1999")
increased by $50.4 million or 9.1% as compared to the 12 weeks ended April 4,
1998 ("Third Quarter 1998"). Such increase is partially attributable to
additional sales of approximately $20.0 million generated from the opening of
three new stores (excluding three replacement stores) during Fiscal Year to Date
1999 and the operation during Third Quarter 1999 of one store (excluding two
replacement stores) opened during Fiscal Year 1998 which was not in operation
during Third Quarter 1998. In addition, the Company experienced an increase in
same-store sales of approximately $36.0 million during Third Quarter 1999 as
compared to Third Quarter 1998. These increases were offset by a decline of $4.6
million generated from closed and temporarily closed stores that are excluded
from same-store sales.
11
<PAGE>
The Company's same-store sales during Fiscal Year to Date 1999 and Third
Quarter 1999 increased approximately 8.1% and 6.6%, respectively, compared to
increases of 2.5% and 3.9% for Fiscal Year to Date 1998 and Third Quarter 1998,
respectively. Such improvements are due primarily to the store remodeling and
expansion program, the contribution of replacement stores, the success of
merchandising, marketing and customer service initiatives and favorable economic
conditions. Such sales increases were also favorably impacted by the Easter
holiday falling in Third Quarter 1999 versus the fourth quarter of the fiscal
year ended June 27, 1998. Identical-store sales increased approximately 5.4% and
3.5% during Fiscal Year to Date 1999 and Third Quarter 1999, respectively,
compared to increases of 1.5% and 3.3% for Fiscal Year to Date 1998 and Third
Quarter 1998, respectively. The Company anticipates that the rate of improvement
in same-store sales and identical-store sales will decline in future periods as
such sales are compared to stronger sales of comparable periods of the previous
year.
GROSS PROFIT - Gross profit for Fiscal Year to Date 1999 and Third Quarter 1999
increased by $48.0 million or 9.5% and $13.4 million or 8.7%, respectively,
compared to the corresponding periods of the prior year. The dollar increases in
gross profit are primarily attributable to the increased sales volume during the
Fiscal Year 1999 periods. Gross profit as a percentage of net sales increased to
27.8% for Fiscal Year to Date 1999 from 27.4% for Fiscal Year to Date 1998. 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 offered by such stores.
Gross profit as a percentage of net sales decreased to 27.6% for Third Quarter
1999 from 27.7% for Third Quarter 1998. Such decrease during the Third Quarter
1999 was primarily due to a charge for estimated inventory losses in the amount
of $0.7 million relating to three stores that the Company has decided to close
or replace during the remainder of fiscal year ending June 26, 1999 ("Fiscal
Year 1999") and to an increase of $0.3 million in the LIFO provision.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES - Selling, general and
administrative expenses increased $16.3 million or 4.0% during Fiscal Year to
Date 1999 and as a percentage of net sales decreased to 21.5% for Fiscal Year to
Date 1999 from 22.3% for Fiscal Year to Date 1998. This decrease, as a
percentage of net sales, was due primarily to the Company's focus on expense
management and the increase in net sales. Selling, general and administrative
expenses decreased $0.1 million or 0.1% during Third Quarter 1999 compared to
the same period of the prior year and as a percentage of sales, decreased to
20.7% for Third Quarter 1999 from 22.6% for Third Quarter 1998. These Third
Quarter 1999 decreases resulted from the factors discussed above as well as from
approximately $1.6 million awarded the Company in two lawsuits. Selling, general
and administrative expenses for Fiscal Year to Date 1999 and Third Quarter 1999
were also reduced by approximately $4.3 million due to the reversal of a portion
of a reserve that was recorded in the fiscal year ended June 28, 1997 ("Fiscal
Year 1997") for planned store closures. This reversal relates to two stores
which the Company decided not to close that were part of the Fiscal Year 1997
reserve. These decreases in selling, general and administrative expenses were
offset to some degree by a charge of approximately $3.0 million relating to
three stores, not included in the Fiscal Year 1997 reserve, that the Company has
decided to close or replace during the remainder of Fiscal Year 1999. Of these
three stores, two were closed on April 10, 1999 and the remaining store is
expected to be closed during the remainder of Fiscal Year 1999. The aggregate
revenue and operating loss for Third Quarter 1999 from the two of these three
stores that the Company does not plan to replace were $5.4 million and $0.6
million, respectively, and the revenue and operating loss from such stores for
Fiscal Year to Date 1999 were $20.3 million and $2.1 million, respectively. At
April 3, 1999, the aggregate carrying value, net of the closed store reserve, of
the fixed assets of these three stores was $3.9 million, or less than 0.4% of
the Company's total assets.
12
<PAGE>
EBITDA (EARNINGS BEFORE NET INTEREST EXPENSE, INCOME TAXES, DEPRECIATION,
AMORTIZATION AND LIFO PROVISION) AND OPERATING INCOME - EBITDA for Fiscal Year
to Date 1999 and Third Quarter 1999 increased by $32.0 million or 33.4% and
$13.8 million or 48.1%, respectively, compared to the same periods of the prior
year. EBITDA as a percentage of net sales increased to 6.4% for Fiscal Year to
Date 1999 from 5.2% for Fiscal Year to Date 1998 and increased to 7.1% for Third
Quarter 1999 from 5.2% for Third Quarter 1998. Operating income for Fiscal Year
to Date 1999 and Third Quarter 1999 increased by $23.7 million or 42.3% and
$10.4 million or 62.6%, respectively, compared to the corresponding periods of
the prior year. Such increases are primarily attributable to the growth in
sales, increases in gross profit and reduction in the rate of selling, general
and administrative expenses described above.
DEPRECIATION AND AMORTIZATION - Depreciation and amortization expense for Fiscal
Year to Date 1999 and Third Quarter 1999 increased by $8.0 million or 21.1% and
$3.1 million or 26.9%, respectively, compared to the same periods of the prior
year. Depreciation and amortization expense, as a percentage of net sales,
increased to 2.3% for Fiscal Year to Date 1999 from 2.1% for Fiscal Year to Date
1998 and increased to 2.5% for Third Quarter 1999 from 2.1% for Third Quarter
1998. Such increases are primarily due to new store openings, the remodeling of
certain existing stores and the expansion of the Company's distribution network
in connection with the Company's capital expenditure program that began in
Fiscal Year 1998. This trend is expected to continue as the Company continues
its capital expenditure program. See "Liquidity and Capital Resources".
INTEREST EXPENSE, NET - Net interest expense for Fiscal Year to Date 1999 and
Third Quarter 1999 increased by $0.8 million or 3.2% and $0.6 million or 7.4%,
respectively, compared to the same periods of the prior year, due primarily to
increased utilization of the Company's revolving credit facility available under
its bank credit agreement.
PROVISION FOR INCOME TAXES - The provision for income taxes for Fiscal Year to
Date 1999 and Third Quarter 1999 was $23.0 million and $8.0 million,
respectively, compared to $13.9 million and $4.1 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 1999 and Third Quarter 1999
increased $13.8 million or 84.0% and $5.9 million or 122.3%, 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 $150.0 million aggregate principal amount outstanding of
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 lease financing agreements. As of April 3, 1999, the Company had
approximately $124.7 million available (net of approximately $0.3 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, borrowings under the Revolver and proceeds from lease financing
arrangements will adequately provide for the Company's working capital and debt
service needs and will be sufficient to fund its expected capital expenditures.
13
<PAGE>
During Fiscal Year to Date 1999 and Fiscal Year to Date 1998, operating
activities provided net cash of approximately $46.1 million and $69.9 million,
respectively. Net cash provided by operations during Fiscal Year to Date 1999
resulted primarily from net income during the period (adjusted for the non-cash
impact of depreciation and amortization) and increases in accounts payable,
offset to some extent by increases in merchandise inventories and accounts
receivable. Net cash provided by operations during Fiscal Year to Date 1998
resulted primarily from net income (adjusted for the non-cash impact of
depreciation and amortization), the collection of a $10.0 million federal income
tax receivable, and increases in accounts payable and accrued expenses, offset
to some extent by increases in merchandise inventories and accounts receivable.
Financing activities provided approximately $96.8 million during Fiscal Year to
Date 1999, primarily from borrowings under the credit agreement offset by a
reduction of debt and capital lease obligations. During Fiscal Year to Date
1998, financing activities utilized approximately $5.5 million, primarily due to
debt reduction.
Cash used in investing activities during Fiscal Year to Date 1999 and
Fiscal Year to Date 1998 consisted primarily of capital expenditures of
approximately $176.1 million and $64.0 million, respectively, offset to some
extent by proceeds from asset sales of approximately $40.0 million and $23.2
million during Fiscal Year to Date 1999 and Fiscal Year to Date 1998,
respectively. 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 the Company's warehousing and
distribution network and computer equipment.
During Fiscal Year 1998, the Company embarked upon a program to accelerate
its store development and remodeling and to optimize its distribution network.
Such program has resulted in a level of capital expenditures in excess of
historical levels. During Fiscal Year to Date 1999, the Company made capital
expenditures of approximately $176.1 million primarily for the construction of
new stores, purchase of land, remodel or renovation of existing stores,
expansion of its distribution network, and computer hardware and software
expenditures. The Company currently expects to make additional expenditures of
approximately $72.0 million for such capital assets for the remainder of the
fiscal year ending June 26, 1999 ("Fiscal Year 1999"). The Company anticipates
funding its future capital expenditures and expansion program with cash flow
from operations, borrowings under the Revolver and proceeds from lease financing
arrangements, including a five-year, $50.0 million synthetic lease arrangement
that the Company entered into on September 10, 1998.
During Fiscal Year 1998, the Company commenced expansion of its
distribution network in a strategic shift toward self-distribution. The
transition to self-distribution is expected to increase the operational and
purchasing efficiencies of the Company's distribution network and lower the
Company's overall cost of sales, although no assurance can be given in this
regard. To date, the Company has completed the transition to its new
distribution center in Roanoke, Texas, including the receipt and shipment of dry
grocery inventory previously purchased from The Fleming Companies, Inc.
("Fleming") distribution center in Dallas, Texas. With the exception of a new
freezer, the Company has also completed the expansion of the Telge Road facility
in Houston, Texas and is beginning to transition the receipt and shipment of dry
grocery inventory from the Fleming distribution center in Houston, Texas. The
Company has not experienced any disruption to its supply of product as a result
of such progress. While the Company has distributed products to its stores for
many years, the expansion and move to self-distribution present multiple risks
that could potentially have an adverse impact on the Company's financial results
for a particular quarter or annual reporting period. Such risks include, but are
not limited to, increased borrowings due to the build-up of excess inventory
levels and lower sales, gross margin and net income due to the potential
disruptions of product delivery and sourcing to the stores. Although there can
be no assurance, management believes that its extensive planning process,
progress on the transition to date and prior experience in distribution reduce
the risks of a significant disruption of supply for the duration of the
transition.
14
<PAGE>
NEW ACCOUNTING STANDARDS - In April 1998, the American Institute of Certified
Public Accountants issued Statement of Position 98-5, "REPORTING ON THE COSTS OF
START-UP ACTIVITIES", ("SOP 98-5") which requires that costs incurred for
start-up activities should be charged to operations as incurred. Although the
Company has not fully assessed the impact of adopting SOP 98-5, the Company does
not believe that such adoption will have a material impact on its financial
statements. The Company is required to adopt SOP 98-5 in its fiscal year ending
June 24, 2000. Initial application of SOP 98-5 will be reported as a cumulative
effect of an accounting change.
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.
YEAR 2000 COMPLIANCE - The year 2000 issue is the result of computer programs
being written using two digits rather than four to define the applicable year,
as well as hardware designed with similar constraints. Some of the Company's
computer programs and hardware that have date-sensitive functions may recognize
a date using "00" as the year 1900 rather than the year 2000. This could result
in a system failure or miscalculations causing disruptions in operations
including, among other things, a temporary inability to process transactions,
receive invoices, make payments or engage in similar normal business activities.
In February 1997, the Company began a project, under the direction of the
Company's Chief Information Officer, to address the year 2000 issue. The Company
is utilizing both internal and external resources to identify, upgrade and test
the Company's hardware, software, systems and processes ("IT systems") for year
2000 compliance. In July 1997, the Company completed the identification phase of
its project with a comprehensive inventory and impact assessment of its IT
systems. Such phase identified various IT systems requiring upgrades in order to
be year 2000 compliant. To complete the upgrade and testing phases, the Company
developed the Y2K Migration Plan (the "Y2K Plan"). The Y2K Plan is currently
underway and expected to be substantially complete by the end of Fiscal Year
1999. Presently, approximately 75% of the Company's IT systems that were
determined to be non-compliant have been upgraded and tested, and are now
believed to be year 2000 compliant. Year 2000 upgrades have been prioritized to
complete all critical systems in the early phases of the Y2K Plan.
The Company currently expects to expense approximately $2.0 million in
Fiscal Year 1999 for the cost of upgrading its IT systems under the Y2K Plan. To
date, the Company has expensed less than $1.5 million. In addition, the Company
currently expects to invest approximately $23.0 million for hardware and
software programs to replace systems that are inefficient and in need of
replacement regardless of their year 2000 compliance status. During the forty
weeks ended April 3, 1999, the Company invested approximately $17.6 million for
such hardware and software programs that are Year 2000 compliant. The Company
currently expects to make additional such purchases of approximately $5.0
million during the remainder of Fiscal Year 1999. The Company expects to fund
the Y2K Plan and hardware and software purchases with cash flows generated from
operations and borrowings under the Revolver.
The Company is also currently assessing the year 2000 readiness of its
non-information technology systems and equipment, such as refrigeration units,
ovens, scales, safes and other equipment ("non-IT systems") which may include
imbedded technology such as microcontrollers that are not year 2000 compliant.
The Company currently intends to complete its plan to address such non-IT
systems issues by the end of Fiscal Year 1999 and expects that such systems will
be year 2000 compliant before calendar year 2000. The cost of achieving such
compliance is not currently expected to have a material impact on the Company's
financial position, results of operations or cash flows.
15
<PAGE>
The Company has suppliers and other third parties, such as utility
companies, that it relies on for business operations and currently expects those
suppliers and other third parties are taking the appropriate action for year
2000 compliance. The Company cannot provide assurance that the failure of such
suppliers and other third parties to address the year 2000 issue will not have
an adverse impact on the Company. While the Company has limited ability to test
and control its suppliers' and other third parties' year 2000 readiness, the
Company is contacting major suppliers and critical other third parties and
obtaining and assessing whether they will be year 2000 compliant. Based on the
responses, the Company will develop contingency plans to reduce the impact of
transactions with non-compliant major suppliers and other critical parties.
Although there can be no assurance that multiple business disruptions caused by
technology failures can be adequately anticipated, the Company is identifying
second and third sources of supply for major suppliers to minimize the risk of
business interruptions.
The Company intends for its year 2000 date conversion project for both its
IT systems and non-IT systems to be completed on a timely basis so as to not
significantly impact business operations. However, if the Company or any
critical third parties do not complete necessary upgrades as planned, the year
2000 issue may have a material impact on the Company, including, among other
things, a temporary inability to procure and distribute product, process
transactions, receive invoices, make payments, refrigerate perishable products
or engage in similar normal business activities. The Company is currently
assessing the potential impact of such year 2000-related issues and will develop
contingency plans to mitigate the risk of any scenario that may have a material
impact on the Company. The Company intends to formalize such contingency plans
by the fourth quarter of calendar year 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 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 "looking forward", "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: heightened competition, including specifically the intensification
of price competition and the expansion, renovation and opening of new stores by
competitors; failure to obtain new customers or retain existing customers;
inability to carry out strategies to accelerate new store development and
remodeling programs, reduce operating costs, differentiate products and
services, leverage the frequent shopper program and increase private label
sales; insufficiency of financial resources to renovate and expand the store
base; increase in leverage and interest expense due to the expansion and
remodeling program; outcome of the MSP Litigation and the John Paul Mitchell
Litigation; issues arising in connection with the Y2K Plan; prolonged dispute
with labor; economic downturn in the State of Texas; loss or retirement of key
executives; transition to self distribution; higher selling, general and
administrative expenses occasioned by the need for additional advertising,
marketing, administrative or management information systems expenditures;
adverse publicity and news coverage.
16
<PAGE>
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.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
During the 16 weeks ended October 17, 1998, the Company entered into two
interest rate swap agreements to hedge interest rate costs and risks associated
with variable interest rates. Such agreements effectively convert variable-rate
debt, to the extent of the notional amount, to fixed-rate debt with effective
per annum interest rates of 5.493% and 5.295%, with respect to the London
Interbank Offered Rate portion of such borrowings. The aggregate notional
principal amount of such agreements is $100.0 million, $50.0 million of which
became effective August 25, 1998 and matures August 25, 2001, and $50.0 million
of which became effective September 2, 1998 and matures September 2, 2001. The
counterparty to such agreements can terminate either agreement after two years,
at its sole discretion. The counterparty to such agreements is a major financial
institution, and therefore, credit losses from counterparty nonperformance are
not anticipated.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
MSP LITIGATION-Following the Company's acquisition of Cullum Companies,
Inc. in August 1992, the Company terminated the 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, that such damages may range from approximately $37.4 million to $70.6
million. On June 16, 1998, the Court certified the case as a class action for
the limited issue of determining if the MSP was 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 Court defined the class as all persons
who, on the date of the termination of the MSP, were participants in the MSP
and were employed by Randall's Food Markets, Inc. The trial of the limited
class action issue was conducted before the
17
<PAGE>
Court, sitting without a jury, on October 26, 1998. Upon order of the Court,
both parties submitted post-trial briefs on November 6, 1998. On February 18,
1999, the Court ruled on the limited class action issue finding that the MSP
was not an exempt top hat plan. In addition, the Court requested on the same
date a joint statement from the parties concerning future scheduling. The
parties submitted the requested joint statement, but the Court has not yet
issued any scheduling orders. On March 4, 1999, the Company filed a motion
requesting that the Court amend its order to allow an interim appeal and
confirm that the Company did not stipulate that it bore the burden of proof
at the trial. On March 26, 1999, the Court denied the motion for an interim
appeal and confirmed that the Company bore the burden of proof at the trial.
When the Court certified the limited class issue, it stated that once that
issue was resolved, it would make an evaluation as to whether any other
issues should be dealt with in a class action context. On April 8, 1999, the
Plaintiffs filed a new Motion for Class Certification, seeking class action
treatment on all remaining issues. In addition, on April 8, 1999, the
plainiffs filed a new damages model in which they appear to seek total
damages of approximately $65.1 million with prejudgement interest of
approximately $28.0 million. Supplementally, the plaintiffs have provided to
the Company an additional schedule indicating that damages allegedly
sustained may range from $65.1 million to $72.4 million, and assuming
reinvestment, such damages may approximate $200 million. The Company filed
its brief in opposition to the Motion on April 28, 1999 and will oppose the
request by the Plaintiffs for class certification of further issues. 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.
FLEMING DISPUTE - On July 30, 1997, the Company initiated an arbitration
proceeding before the American Arbitration Association against Fleming
Companies, Inc. ("Fleming"), one of its long-time suppliers, alleging, among
other things, that Fleming violated the terms of a supply agreement signed in
1993. On July 7, 1998, the arbitration panel unanimously found that Fleming
materially breached the supply agreement and that the contract was terminated as
of July 7, 1998 without payment of any termination fee. The Company and Fleming
entered into a Transition Agreement, effective September 25, 1998, which
provides for a continued supply of products from Fleming while the Company moves
into self-distribution.
JOHN PAUL MITCHELL LAWSUIT - On August 26, 1998, a jury in the 126th
District Court, Travis County, Texas, returned a verdict against the Company and
a co-defendant, Jade Drug Company, Inc. ("Jade"), finding both parties
intentionally conspired with each other to interfere with contracts between John
Paul Mitchell Systems ("Mitchell") and one or more of its distributors and/or
salons. The jury found the Company guilty of having in its possession, selling
or offering for sale Mitchell products that it knew, or that a reasonable person
in the position of the Company would know, had serial numbers or other permanent
identification markings removed, altered or obliterated. The jury found that the
company unfairly competed with Mitchell by purchasing and distributing the
products and infringed on Mitchell's trademark. The jury also found that the
harm caused Mitchell resulted from malice.
The jury awarded Mitchell and its co-plaintiff, Ultimate Salon Services
Inc., (together, the "Plaintiffs") $3.25 million in joint and several damages
from the Company and Jade, $4.5 million in exemplary damages from the Company
and $3.0 million in actual damages and $4.5 million in exemplary damages from
Jade.
The Company and Jade filed motions with the trial court judge to disregard
the jury's verdict. On November 19, 1998, the trial court judge threw out the
jury's verdict, entered judgement in favor of the Company and Jade, ordered that
the Plaintiffs recover nothing and ordered that the Plaintiffs pay the Company
and Jade all of their court costs. On December 18, 1998, the Plaintiffs filed a
motion for a new trial. On February 2, 1999, the trial court judge denied such
motion by operation of law. On February 16, 1999, the Plaintiffs filed their
notice of appeal with the court. Both parties will now file briefs with the
Austin Court of Appeals. Although the outcome of this matter cannot be
predicted with certainty, management believes an unfavorable outcome will not
have a material adverse effect on the Company, its operations, its financial
condition or its cash flows.
18
<PAGE>
Other than the foregoing matters, the Company believes it is not a party
to any pending legal proceedings, including ordinary litigation incidental to
the conduct of its business and the ownership of its property, the adverse
determination of which would have a material adverse effect on the Company, its
operations, its financial condition or its cash flows.
ITEM 2. CHANGES IN SECURITIES
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
A. Exhibits
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
<S> <C>
15.1 Letter in lieu of consent of Deloitte & Touche LLP, independent accountants
27 Financial Data Schedule
</TABLE>
B. Reports on Form 8-K
On March 8, 1999, The Company filed a Form 8-K reporting
developments in the Company's MSP Litigation.
19
<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: May 17, 1999 /S/ R. RANDALL ONSTEAD, JR.
-------------------------------------
R. Randall Onstead, Jr.,
Chairman and Chief Executive Officer
Date: May 17, 1999 /S/ MICHAEL M. CALBERT
-------------------------------------
Michael M.Calbert,
Senior Vice President and Chief
Financial Officer
20
<PAGE>
Exhibit 15.1
May 17, 1999
Randall's Food Markets, Inc.
3663 Briarpark
Houston, Texas
We have made a review, in accordance with standards established by the American
Institute of Certified Public Accountants, of the unaudited interim financial
information of Randall's Food Markets, Inc. and subsidiaries for the twelve-week
period ended April 3, 1999, as indicated in our report dated April 30, 1999;
because we did not perform an audit, we expressed no opinion on that
information.
We are aware that our report referred to above, which is included in your
Quarterly Report on Form 10-Q for the quarter ended April 3, 1999, is
incorporated by reference in Registration Statement No. 333-70771 on Form S-8.
We also are aware that the aforementioned report, pursuant to Rule 436 (c) under
the Securities Act of 1933, is not considered a part of the Registration
Statement prepared or certified by an accountant or a report prepared or
certified by an accountant within the meaning of Sections 7 and 11 of the Act.
DELOITTE & TOUCHE LLP
Houston, Texas
21
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM CONDENSED
CONSOLIDATED BALANCE SHEETS, CONDENSED CONSOLIDATED STATEMENTS OF INCOME, THE
CONSENSED CONSOLIDATED STATEMENTS OF CASH FLOW 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-26-1999
<PERIOD-START> JUN-28-1998
<PERIOD-END> APR-03-1999
<CASH> 43,259
<SECURITIES> 0
<RECEIVABLES> 54,729
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0
0
<COMMON> 14,097
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<TOTAL-REVENUES> 602,917
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<INCOME-TAX> 8,021
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<EPS-PRIMARY> 0
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</TABLE>
