SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly period ended June 30, 1999
Commission File No. __________
RICHMONT MARKETING SPECIALISTS INC.
(Exact name of registrant as specified in its charter)
Delaware 75-2728359
(State or Other Jurisdiction (I.R.S. Employer
of Incorporation) Identification No.)
17855 North Dallas Parkway
Suite 200
Dallas, TX 75287
(Address of Principal Executive Offices) (Zip Code)
(972) 349-6200
(Registrant's Telephone Number, including Area Code)
NOT APPLICABLE
(Former Name or Former Address, If Changed Since Last Report)
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
as of August 1, 1999 was 137,625.
RICHMONT MARKETING SPECIALISTS INC.
INDEX
Part I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements (Unaudited).......................3
Condensed Consolidated Balance Sheets
December 31, 1998 and June 30, 1999...............................3
Condensed Consolidated Statements of Operations
Three months ended June 30, 1999 and 1998;
six months ended June 30, 1999 and 1998..........................4
Condensed Consolidated Statements of Cash Flows
Six months ended June 30, 1999 and 1998...........................5
Notes to Condensed Consolidated Financial
Statements - June 30, 1999........................................6
Item 2. Management's Discussion and Analysis of Financial
Conditions and Results of Operations................................8
Item 3. Quantitative and Qualitative Disclosures about Market Risk.........13
PART II. OTHER INFORMATION
Item 1. Legal Proceedings..................................................13
Item 2. Changes in Securities and Use of Proceeds..........................13
Item 3. Defaults upon Senior Securities....................................14
Item 4. Submission of Matters to a Vote of Security Holders................14
Item 5. Other Information..................................................14
Item 6. Exhibits and Reports on Form 8-K...................................14
Signatures..................................................................15
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
Richmont Marketing Specialists Inc.
Condensed Consolidated Balance Sheets
<TABLE>
<CAPTION>
June 30, 1999 December 31, 1998
------------- -----------------
Assets (Unaudited) (Note 1)
<S> <C> <C>
Current Assets:
Cash and cash equivalents $9,020,893 $26,633,832
Accounts receivable, net of allowance for
doubtful accounts of $4,025,801 and
$5,225,079 as of June 30, 1999 and
December 31, 1998, respectively 30,222,826 28,295,152
Current portion of notes receivable - 110,438
Deferred taxes 1,932,286 1,932,286
Prepaid expenses and other current assets 1,711,088 967,164
--------- -----------
Total current assets 42,887,093 57,938,872
Other assets 6,963,565 7,047,070
Property and equipment, net 21,886,692 23,019,089
Intangible assets 79,243,048 86,756,991
---------- ----------
Total assets $150,980,398 $174,762,022
============ ============
Liabilities and Shareholders' Equity (Deficit)
Current Liabilities:
Accounts payable $3,183,372 $5,085,651
Accrued expenses 8,812,224 8,980,959
Promotional advances 2,034,358 1,566,308
Current portion of long-term obligations 9,386,245 9,434,064
--------- ---------
Total current liabilities 23,416,199 25,066,982
Deferred taxes 9,362,561 10,025,601
Long-term obligations less current portion:
Notes payable 118,652,418 119,500,145
Lease obligations 959,165 1,421,609
Covenants not to compete 9,188,024 10,550,070
Deferred compensation liabilities 30,828,791 30,324,378
---------- ----------
159,628,398 161,796,202
Other liabilities 687,447 901,075
Commitments and contingencies - -
Redeemable common stock - -
Shareholders' equity (deficit):
Common stock, $.01 stated value:
Authorized shares - 10,000,000
Issued shares - 197,474 as of June 30, 1999
and December 31, 1998. 1,975 1,975
Additional paid-in capital 31,305,469 31,305,469
Retained deficit (71,916,284) (52,829,915)
Treasury stock at cost - 59,839 shares as of
June 30, 1999 and December 31, 1998. (1,505,367) (1,505,367)
----------- -----------
Total shareholders' equity (deficit) (42,114,207) (23,027,838)
------------ ------------
Total liabilities and shareholders' equity $150,980,398 $174,762,022
============ ============
</TABLE>
See notes to condensed consolidated financial statements
Richmont Marketing Specialists Inc.
Condensed Consolidated Statements of Operations
(Unaudited)
<TABLE>
<CAPTION>
Three months ended June 30, Six months ended June 30,
--------------------------- ---------------------------
1999 1998 1999 1998
----------- ---------- ------------ ------------
<S> <C> <C> <C> <C>
Revenue $53,087,976 $53,051,716 $105,591,359 $106,141,297
Expenses:
Salaries 28,442,708 29,001,021 57,350,466 58,416,888
Fringe benefits 5,013,022 4,475,329 10,194,780 9,449,676
Automobiles and related expenses 4,731,199 4,472,492 9,492,342 9,127,740
Sales and marketing 3,630,154 3,473,566 7,420,318 6,702,843
Lease termination charge - 1,700,000 - 1,700,000
General and administrative 7,995,828 7,113,945 17,168,715 14,088,510
Depreciation and amortization 7,433,750 7,689,539 14,713,408 17,329,705
----------- ---------- ----------- -----------
Total expenses 57,246,661 57,925,892 116,340,029 116,815,362
----------- ---------- ----------- -----------
Operating loss (4,158,685) (4,874,176) (10,748,670) (10,674,065)
Other income (expense):
Interest expense (4,104,813) (4,266,133) (8,402,343) (8,581,756)
Other income (expense) (12,195) 569,925 300,755 1,323,575
----------- ---------- ----------- -----------
Loss before income taxes (8,275,693) (8,570,384) (18,850,258) (17,932,246)
Income tax expense (benefit) (439,581) 10,401 (801,965) 24,631
----------- ---------- ----------- -----------
Loss before extraordinary item (7,836,112) (8,580,785) (18,048,293) (17,956,877)
Extraordinary loss, net of tax (1,038,076) - (1,038,076) -
----------- ---------- ----------- -----------
Net loss $(8,874,188) $(8,580,785) $(19,086,369) $(17,956,877)
=========== ========== =========== ===========
Loss per share before extraordinary item $(56.94) $(62.34) $(131.13) $(130.47)
Extraordinary loss per share (7.54) - (7.54) -
----------- ---------- ----------- -----------
Net loss per share $(64.48) $(62.34) $(138.67) $(130.47)
=========== ========== =========== ===========
</TABLE>
See notes to condensed consolidated financial statements
Richmont Marketing Specialists Inc.
Consolidated Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
Six months ended June 30,
1999 1998
------------- -------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net loss $(19,086,369) $(17,956,877)
Adjustments to reconcile net loss to net cash
used in operating activities:
Provision for losses on accounts receivable 6,832,175 5,965,582
Compensation expense for stock appreciation
rights 111,807 -
Compensation expense related to deferred
compensation plans (296,611) 22,669
Restructure expense related to lease obligations - 1,700,000
Amortization of intangible assets 11,841,109 14,637,013
Depreciation 2,872,299 2,692,692
Imputed interest expense on deferred compensation
and deferred payment agreements and covenants
not to compete 550,711 1,418,757
Amortization of debt issue costs 266,760 264,511
Loss (gain) on disposal of assets 221,325 (128,191)
Deferred income taxes (840,171) (276,703)
Extraordinary loss related to debt restructure 1,038,076 -
Changes in operating assets and liabilities:
Accounts and notes receivable (8,350,123) (7,247,172)
Prepaid expenses and other current assets (777,070) (281,095)
Other assets (386,729) (549,425)
Accounts payable and accrued expenses (2,136,279) (2,590,111)
Income taxes payable - (871,508)
Promotional advances 222,376 833,687
----------- -----------
Net cash used in operating activities (7,916,714) (2,366,171)
INVESTING ACTIVITIES:
Purchase of property and equipment (2,507,164) (3,942,471)
Proceeds from sale of assets 599,689 524,655
Cash used in purchase of businesses, net of cash
acquired (1,728,391) -
----------- ------------
Net cash used in investing activities (3,635,866) (3,417,816)
FINANCING ACTIVITIES:
Payment of professional fees related to issuance
and registration of senior subordinated notes (188,764) (310,567)
Principal payments on covenants not to compete
and deferred payment agreements (2,615,384) (2,970,660)
Principal payments on debt and lease obligations (3,256,211) (2,955,322)
----------- -----------
Net cash used in financing activities (6,060,359) (6,236,549)
----------- -----------
Net decrease in cash and cash equivalents (17,612,939) (12,020,536)
Cash and cash equivalents at beginning of period 26,633,832 41,393,614
---------- ----------
Cash and cash equivalents at end of period $9,020,893 $29,373,078
========== ===========
</TABLE>
See notes to condensed consolidated financial statements
Richmont Marketing Specialists Inc.
Notes to Condensed Consolidated Financial Statements
June 30, 1999
(Unaudited)
1. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have
been prepared by Richmont Marketing Specialists Inc. (the "Company") in
accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10Q and Article 10
of Regulation S-X. Accordingly, they do not include all of the information
and footnotes required by generally accepted accounting principles for
complete financial statements. In the opinion of management, all
adjustments consisting of normal recurring adjustments necessary to present
fairly the financial position, results of operations and cash flows of the
Company for the periods indicated have been made. The results of operations
for the interim periods in 1999 are not necessarily indicative of the
results that may be expected for the year ended December 31, 1999.
The balance sheet at December 31, 1998 has been derived from the
audited financial statements at that date, but does not include all of the
information and footnotes required by generally accepted accounting
principles for complete financial statements.
These financial statements should be read in conjunction with the
Company's audited historical consolidated financial statements and notes
thereto for the year ended December 31, 1998 included in the Company's
Registration Statement on Form S-4 as filed by the Company with the
Securities and Exchange Commission on June 21, 1999, as amended
(Registration No. 333-74261).
The financial statements present consolidated financial information
for the Company and its subsidiaries. Separate financial statements for
each of the subsidiaries of the Company have not been presented because
management of the Company has determined that such information is not
material.
Certain prior year balances have been reclassified to conform to
current year presentation.
2. EARNINGS PER SHARE
Per share amounts are computed based on 137,625 common shares
outstanding for all periods presented.
3. INTANGIBLE ASSETS
Intangible assets include goodwill, covenants not to compete,
principal relationships, and trained workforce. Goodwill represents the
excess of the purchase price over the fair value of net assets of various
businesses acquired. Effective January 1, 1998, the Company revised the
estimated life of its goodwill related to prior acquisitions from ten to
five years. As a result of this change, unamortized goodwill relating to
acquisitions prior to January 1, 1993 was written off in the first quarter
of 1998. The net loss for the six months ended June 30, 1998 would have
decreased by $1.6 million (or $11.62 per common share) without this change.
4. LINES OF CREDIT
On October 14, 1997, the Company entered into a bank credit
facility. On December 18, 1997, this facility was amended and restated and
further amended on August 12, 1998 effective June 30, 1998 and on March 3,
1999 effective October 1, 1998 (collectively, the "Credit Agreement"). The
Credit Agreement provides for borrowings not to exceed the lesser of
$25,000,000 or a maximum borrowing base calculated on certain percentages
of eligible accounts receivable. Any amounts borrowed under this facility
are secured by a pledge of substantially all of the Company's assets.
The Credit Agreement requires the Company to maintain certain
financial ratios and meet certain indebtedness tests. As of June 30, 1999,
the Company was in default of certain covenant requirements of the Credit
Agreement. The Company plans to terminate the credit facility concurrently
with its impending merger with Merkert American (please see Note 7 below).
As of June 30, 1999, there were no borrowings under the facility;
however, a $1.3 million letter of credit was outstanding.
5. SENIOR SUBORDINATED NOTES
On December 19, 1997, the Company issued $100 million of 10 1/8%
Senior Subordinated Notes due 2007 (the "Issued Notes").
In accordance with the Issued Notes' Exchange and Registration
Rights Agreement, the Company filed a Registration Statement on Form S-4
with the Securities and Exchange Commission on June 21, 1999 to register
$100 million of new notes (the "Registered Notes"). Subsequently, the
Company completed an exchange of the Issued Notes for the Registered Notes.
The Registered Notes are identical in all material respects to the Issued
Notes, except for transfer restrictions and registration rights.
6. INCOME TAXES
The Company's income tax provision varies from the statutory rate
primarily because of the difference in book and tax treatment of intangible
assets, the non-deductibility of certain portions of meal and entertainment
expenses and officer's life insurance premiums, state income taxes imposed
by the various states on the Company's operations and the valuation
allowance provided for deferred tax assets that may not be deductible in
the future.
7. MERGER AGREEMENT
On April 28, 1999, the Company signed a definitive Merger Agreement
with Merkert American Corporation, a Canton, Massachusetts-based food
broker. Under the terms of the agreement, Richmont Marketing Specialist
will merge with and into Merkert American Corporation. In the merger,
stockholders of the Company would receive approximately 6.7 million shares
of Merkert American common stock in exchange for their shares of common
stock of the Company. In addition, options to purchase an additional
800,000 shares will be issued to certain individuals employed by or
associated with the Company. This number may be increased to a maximum of
995,000 shares depending upon the market price of Merkert American's common
stock at the time of the merger. Merkert American will be the surviving
corporation in the merger, and will be treated as the acquiring entity for
accounting purposes.
The transaction is subject to customary conditions and approvals
and is expected to close in the third quarter of 1999.
The combined company may recognize certain restructuring costs in
connection with the merger, including costs associated with the elimination
of duplicative facilities and employees.
8. ACQUISITIONS
On April 21, 1999, the Company purchased all of the issued and
outstanding stock of Timmons-Sheehan, Inc., a Minnesota-based food broker,
in exchange for $1.7 million cash and notes payable to certain key
employees of $2.7 million. The Company recorded goodwill of approximately
$4 million in connection with this acquisition. The purchase price
allocation related to this acquisition is based on preliminary estimates of
fair market values. The acquisition was accounted for using the purchase
method. The operating results of the acquired company have been included in
the consolidated results of the Company's operations since the date of
acquisition.
The Company signed a Stock Purchase Agreement with Paul Inman
Associates, Inc. ("Inman") to acquire all of the outstanding capital stock
of Inman for a purchase price of approximately $12 million. The transaction
is subject to customary conditions and approvals. Per the agreement, the
purchase is scheduled to close simultaneous with the closing of the merger
with Merkert American or November 11, 1999, whichever occurs first. The
Company is currently negotiating an amendment to the Stock Purchase
Agreement which would permit the closing to occur at a later date
regardless of the timing of the consummation of the Merkert transaction.
In the event that the purchase does not occur, the Company may be required
to pay a transaction break-up fee of $500,000 to the holders of the capital
stock of Inman.
9. EXTRAORDINARY LOSS
During the second quarter of 1999, the Company completed
modifications of certain outstanding notes payable, covenants not to
compete and deferred compensation liabilities and payment agreements. These
transactions were accounted for as an extinguishment of debt and as a
result an extraordinary loss of approximately $1 million was recorded. No
tax benefit was recorded.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND
RESULTS OF OPERATIONS.
This Report on Form 10-Q contains forward-looking statements within
the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended. The words,
"believe," "expect," "anticipate," "intend," "estimate," "assume" and
similar expressions, which are predictions or indications of future events
or trends that do not relate solely to historical matters, identify
forward-looking statements. Reliance should not be placed on
forward-looking statements because they involve known and unknown risks,
uncertainties and other items that are sometimes beyond the control of the
Company. These items may cause actual results, performance or achievements
of the Company to differ from the anticipated future results, performance
or achievements expressed or implied by such forward-looking statements.
Overview
Richmont Marketing Specialists Inc. (the "Company") is one of the
largest food brokers in the United States, with operations covering the
western, southeastern, south central, north central and mid-Atlantic
regions of the United States. The Company provides a comprehensive array of
sales, marketing, merchandising and order management services to over 1,700
manufacturers of consumer goods and products (known as the "Principals").
The Company markets the products of these Principals to leading retailers
and wholesalers (known as the "Customers") that operate in a variety of
trade channels, including grocery stores, mass merchandisers, membership
warehouses, drug stores and convenience stores. The Company is generally
paid a percentage of product sales made by Principals to Customers. This
percentage is normally a commission of 3-5% for Principal accounts for
which the Company renders full services. The Company does not assume
ownership of the products it markets for Principals.
As part of its growth strategy, the Company has been a leader in
pursuing consolidation opportunities within the food brokerage industry.
Since the beginning of 1996, the Company has completed 15 acquisitions of
local and regional food brokerage companies. In April 1999, the Company
acquired Timmons-Sheehan, Inc., a food brokerage company located in
Minneapolis, Minnesota, for a total purchase price of $4.4 million, which
included consideration of $1.7 million in cash and $2.7 million in
long-term debt. The food brokerage companies that the Company has acquired
generally had operating cost structures similar to that of the Company,
except for large compensation expenses that were eliminated as a result of
the acquisitions.
On April 28, 1999, the Company signed a definitive Merger Agreement
with Merkert American Corporation, a Canton, Massachusetts-based food
broker with annual revenues totaling approximately $220 million for the
year ended December 31, 1998. The transaction is subject to customary
conditions and approvals and is expected to close in the third quarter of
1999.
The following discussion and analysis of the financial condition
and results of operations of the Company should be read in conjunction with
the Company's historical consolidated financial statements and notes
thereto included in the Form S-4 Registration Statement as filed by the
Company with the Securities and Exchange Commission on June 21, 1999.
Historical Results of Operations
Three Months Ended June 30, 1999 Compared to Three Months Ended June 30, 1998
The Company's revenue for the quarters ended June 30, 1999 and 1998
remained consistent at $53.1 million. The Company's operating expenses
decreased to $57.2 million for the quarter ended June 30, 1999, as compared
to $57.9 million for the same period in 1998.
The 1998 results include a nonrecurring lease termination charge of
$1.7 million that was recorded in connection with management's approval of a
plan to consolidate redundant offices that had resulted from prior business
acquisitions and vacate the offices. The Company vacated these offices
prior to June 30, 1998. The lease terminations occurred in Dallas, Houston,
and San Antonio, Texas, as well as Charlotte, North Carolina. The charges
represent the rental payments under the respective lease agreements of
abandoned office space that had no substantive benefit to the Company.
Operating expenses (excluding amortization and depreciation and the
lease termination charge), as a percentage of revenue, increased to 93.8%
for the quarter ended June 30, 1999, as compared to 91.5% for the same
period in 1998. This increase was due to increased travel and communication
costs associated with market expansion and the Company's ongoing efforts to
improve and maintain its information systems. As a result of the above
factors, the Company's operating loss decreased to $4.2 million for the
quarter ended June 30, 1999, as compared to $4.9 million for the same
period in 1998.
Interest expense was $4.1 million for the quarter ended June 30,
1999, as compared to $4.3 million for the same period in 1998.
Approximately $2.5 million of the interest in each period related to the
outstanding 10 1/8% Senior Subordinated Notes due 2007. The remainder
related primarily to acquisition-related debt.
Other income (expense) decreased to an expense of $.01 million for
the quarter ended June 30, 1999, as compared to income of $.6 million for
the same period in 1998. This decrease primarily resulted from the decline
in interest income due to reduced cash balances.
The tax benefit for the quarter ended June 30, 1999 was $.4
million, as compared to a tax expense of $.01 million for the same period
in 1998. The Company records a tax to the extent net deferred tax assets
are expected to be realized in future periods.
The Company's loss before extraordinary items decreased to $7.8
million for the quarter ended June 30, 1999, as compared to $8.6 million
for the same period in 1998. The 1999 results include an extraordinary loss
of approximately $1 million as discussed in the Notes to Condensed
Consolidated Financial Statements. As a result of this extraordinary item
and the factors noted above, the Company's net loss increased to $8.9
million for the quarter ended June 30, 1999, as compared to $8.6 million
for the same period in 1998.
Six Months Ended June 30, 1999 Compared to Six Months Ended June 30, 1998
The Company's revenue decreased to $105.6 million for the six
months ended June 30, 1999, as compared to $106.1 million for the same
period in 1998. This decrease, which primarily occurred in the first
quarter of 1999, reflects the volatility associated with the consolidation
of retailers, food companies, and brokers in their respective industries.
This volatility can affect the relationship between brokers and food
companies, sometimes resulting in gains or losses of representation.
The Company's operating expenses decreased to $116.3 million for
the six months ended June 30, 1999, as compared to $116.8 million for the
same period in 1998. The 1998 results include nonrecurring amortization
expense of $1.6 million resulting from a change in accounting estimate as
discussed in the Notes to the Condensed Consolidated Financial Statements
and a nonrecurring lease termination charge of $1.7 million as previously
discussed. Operating expenses (excluding amortization and depreciation and
the nonrecurring charges), as a percentage of revenue, increased to 96.2%
for the six months ended June 30, 1999, as compared to 92.1% for the same
period in 1998. This increase was due to increased travel, equipment and
communication costs associated with market expansion and the Company's
ongoing efforts to improve and maintain its information systems. As a
result of the above factors, the Company's operating loss for the six
months ended June 30, 1999 and 1998 was $10.7 million.
Interest expense decreased to $8.4 million for the six months ended
June 30, 1999, as compared to $8.6 million for the same period in 1998.
Approximately $5.1 million of the interest in both periods related to the
Senior Subordinated Notes. The remainder was related primarily to
acquisition-related debt.
Other income (expense) decreased to income of $.3 million for the
six months ended June 30, 1999, as compared to income of $1.3 million for
the same period in 1998. This decrease primarily resulted from the decline
in interest income due to reduced cash balances.
The tax benefit for the six months ended June 30, 1999 was $.8
million, as compared to a tax expense of $.02 million for the same period
in 1998. The Company records a tax to the extent net deferred tax assets
are expected to be realized in future periods.
The Company's loss before extraordinary items for the six months
ended June 30, 1999 and 1998 was $18.0 million. The 1999 results included
an extraordinary loss of approximately $1 million as discussed in the Notes
to the Condensed Consolidated Financial Statements. As a result of the
above factors, the Company's net loss increased to $19.1 million for the
six months ended June 30, 1999, as compared to $18.0 million for the same
period in 1998.
Liquidity and Capital Resources
In December 1997, the Company completed the issuance of $100
million of the Issued Notes. The proceeds were used to acquire the common
stock of Atlas for $19.8 million in cash and repay approximately $13.8
million of existing Atlas indebtedness. Proceeds were also used to repay
approximately $15.5 million of existing Company indebtedness, pay various
debt issue and registration costs of approximately $5.5 million, and
purchase $3.1 million in software for accounting and human resource
applications. The Company is using the remaining proceeds primarily for
anticipated future acquisitions, working capital, and general corporate
purposes.
Net cash used in operating activities was $7.9 million for the six
months ended June 30, 1999, as compared to $2.4 million for the same period
in 1998. This increase resulted primarily from decreased revenues and the
increase in operating expenses excluding amortization and depreciation and
the lease termination charges described above.
Net cash used in investing activities increased to $3.6 million for
the six months ended June 30, 1999, as compared to $3.4 million for the
same period in 1998. This increase was due to the purchase of
Timmons-Sheehan, Inc. in 1999. The increase was partially offset by the
decline in capital expenditures to $2.5 million for the six months ended
June 30, 1999, as compared to $3.9 million for the same period in 1998. The
1998 expenditures included $2.2 million in payments related to the
conversion to the Company's new accounting and human resources information
systems. The Company expects that it will continue to make capital
expenditures for information systems that are required to accommodate the
evolving information needs associated with the Company's growth.
Net cash used in financing activities decreased slightly to $6.1
million for the six months ended June 30, 1999, as compared to $6.2 million
for the same period in 1998. This decrease resulted from the payment of
registration and professional fees related to the Senior Subordinated Notes
in 1998.
The Company's long-term and short-term obligations totaled $169.7
million as of June 30, 1999, as compared to $172.1 million as of December
31, 1998. The obligations as of June 30, 1999 included $100 million due
under the Senior Subordinated Notes, approximately $23.5 million payable
under promissory notes relating to the purchase price of acquired
companies, approximately $11.7 million due under covenants not to compete,
approximately $32.6 million payable in deferred compensation and deferred
payment arrangements and approximately $1.9 million in lease and other long
term obligations. The Company estimates that the total principal and
interest payments for the next five years under these various obligations
will be approximately $21 million in 1999, $24 million in 2000, $24 million
in 2001, $23 million in 2002 and $22 million in 2003.
The Company has a bank credit facility ("Credit Agreement") that
provides for borrowings not to exceed the lesser of $25,000,000 or a
maximum borrowing base calculated on certain percentages of eligible
accounts receivable. As of June 30,1999, the Company was in default of
certain covenant requirements of the Credit Agreement. The Company plans to
terminate the credit facility concurrently with its impending merger with
Merkert American. Amounts outstanding under this facility are
collateralized by substantially all of the Company's assets.
As of June 30, 1999, there were no borrowings under the existing
credit facility; however, a $1.3 million letter of credit was outstanding.
The Company believes that cash flows provided by operations,
together with existing cash and amounts that could be available under the
senior credit facility, should be sufficient to fund the Company's future
debt service requirements, working capital needs, capital expenditures, and
other operating expenses. The Company's future operating performance and
ability to service or refinance the Issued Notes will be subject to future
economic conditions and to financial, business, and other factors, many of
which are beyond the Company's control.
Seasonality
Historically, the Company's revenue has been fairly consistent
throughout the year, with a seasonal increase realized during the fourth
quarter of each year due to increased sales during the holiday season.
Future seasonal and quarterly fluctuations could have a material adverse
effect on the Company's business, financial condition, and results of
operations. The Company does not believe that its revenues have been
materially affected by inflation or changing prices.
Certain Factors Affecting Future Operating Results
This report on Form 10-Q contains forward-looking statements within
the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended. Actual
results or developments could differ materially from those projected in
such forward-looking statements as a result of certain factors set forth in
this section and elsewhere in this report.
Some of the factors that might cause these differences include, but
are not limited to, the following: the degree to which the Company is
leveraged may affect its ability to obtain additional financing for future
working capital needs, capital expenditures and acquisitions as well as
limit its flexibility to respond to changing marketing conditions; the
Company's inability to resolve representation conflicts with food
companies; the Company's inability to successfully identify and integrate
acquisition candidates.
Year 2000 Compliance
The year 2000 issue exists because many computer systems and
applications currently use two-digit date fields to designate a year. As
the century date change occurs, date sensitive systems recognize the year
2000 as 1900 or not at all. The inability to recognize or properly respond
to the year 2000 issue may cause information technology (IT) systems and
non-IT systems to incorrectly process data resulting in among other things,
a temporary inability to process transactions or otherwise engage in normal
business activities. Non-IT systems include climate control, copy machines,
telephone systems and other comparable systems.
Our business depends largely upon the ability of customers,
including grocery stores and mass merchandisers, to place orders through us
for our principal's products. Approximately eighty percent of all sales
placed through us are done so electronically. Upon our receipt of these
orders, we process and forward these orders electronically to our
principals. This order management system only works efficiently if our
computer systems and those of our customers and principals are functioning
properly. Through our order management system, we also maintain records
regarding the sales volume we place, which is necessary in determining our
earned commissions.
We have completed our assessment of both our IT and non-IT systems
for potential exposure to problems associated with year 2000 issues. Our
assessment and evaluation efforts have included extensive testing of both
IT and non-IT systems, discussions with third parties and participation in
industry-wide committees dedicated to addressing year 2000 issues and other
research.
Primarily as a result of the implementation of upgrades of the
order management system and the migration to PeopleSoft financial systems
in 1998, we believe that we have substantially reduced our potential
exposure to operational disruptions resulting from year 2000 issues. Both
the order management system and PeopleSoft are year 2000 compliant.
PeopleSoft includes accounting and human resource applications. The
conversion to PeopleSoft was part of our overall plan to integrate the
operations of recently acquired businesses and not in response to year 2000
issues. Similarly, all of the costs incurred relating to the improvement of
our order management system were incurred in connection with planned
upgrading activities rather than in response to the results of our year
2000 compliance evaluation.
The order management system for operations that were acquired from
Atlas was fully converted in June 1999. Replacements for personal
computers, which were not year 2000 compliant, have recently been purchased
at a cost of approximately $128,000. Following this upgrade and these
installations, we believe all of our IT systems will be compliant.
In addition to our IT systems, we are upgrading our non-IT systems.
Testing was conducted on our telephone systems in each of our offices.
Fourteen systems were found to be non-compliant. Each of these systems will
be replaced with new systems by September 30, 1999 at an approximate cost
of $200,000. We have engaged in communications with the property management
companies of our leased properties to assess their plans to ensure that our
facilities will be year 2000 compliant. We will continue these
communications until we gain assurances that these systems within our
facilities will be fully operational in year 2000.
Assuming the satisfactory operations of universal providers, such
as utility and telephone companies, our most reasonably likely worst case
will be the failure of our principals and customers to remedy their own
year 2000 issues. Although we have initiated efforts to communicate with
these parties regarding their year 2000 compliance plans, we have not
received written assurances that they have addressed and corrected all
expected year 2000 problems which may have a material adverse effect on us.
Our own testing and evaluation efforts of our IT systems, including our
order management system, have included some of our key principals and
customers. All test orders have been completed successfully. We will
continue this testing and to gain assurances that these third party
systems, particularly those related to electronic order management, will be
operational.
We have not completed a comprehensive written contingency plan in
the event that we have not achieved year 2000 compliance including the
receipt of sufficient assurances from our customers, principals and
third-party vendors that they are ready. We expect to have one completed by
October 1, 1999. Our order management system currently includes the ability
to fax orders, which some customers currently use. In preparation for the
possibility that all or some orders may not be capable of being
electronically transmitted, approximately 15 additional fax machines will
be installed and trained personnel put in place to receive, process and
transmit orders by fax. Future contingency plans will also include a plan
to have employees personally pick up and deliver orders if necessary.
We have not delayed any planned projects as a result of year 2000
issues.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
There has been no change in the Company's market risk as disclosed
in the Company's audited historical consolidated financial statements and
notes thereto for the year ended December 31, 1998.
The interest rate on the Company's Senior Credit Facility is
subject to fluctuations in the interest market. As of June 30, 1999,
however, the Company had no borrowings under its senior facility. The
Company does not believe that the market risk is material to its
consolidated financial statements.
PART II
ITEM 1. LEGAL PROCEEDINGS
None.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
None.
ITEM 3. DEFAULTS ON SENIOR SECURITIES.
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
In December 1997, concurrently with the sale by Richmont Marketing
Specialists Inc. of $100 million of its unregistered 10 1/8% Senior
Subordinated Notes due 2007, it entered into an Exchange and Registration
Rights Agreement with the initial purchaser of those notes. Under the terms
of that agreement, Richmont Marketing Specialists agreed to file a
registration statement regarding the exchange of those notes for new notes
registered under the Securities Act of 1933, and to offer the holders of
the old notes an opportunity to exchange their unregistered notes for
registered notes.
The registration statement (the "Registration Statement") relating
to the notes issued in the exchange offer was declared effective by the
Securities and Exchange Commission on June 18, 1999 (Reg. No. 333-74261). A
complete description of the exchange offer, and the terms of the securities
offered thereby, is included in the Registration statement. On June 21,
1999, Richmont Marketing Specialists commenced the exchange offer. All of
the holders of the old notes exchanged their notes for registered notes
issued in the exchange offer. The exchange offer was completed on July 21,
1999.
ITEM 5. OTHER INFORMATION.
Merger with Merkert American Corporation.
On April 28, 1999, Richmont Marketing Specialists entered into a
definitive merger agreement with Merkert American Corporation, a
publicly-traded food brokerage firm based in Massachusetts. Merkert
American represents more than 750 manufacturers and operates in 25 states,
primarily in the northeast, mid-Atlantic and southeastern portions of the
country. The merger of Richmont Marketing Specialists with and into Merkert
American will create the first food brokerage firm with national coverage.
Management believes that the combined company will have the resources and
geographic presence to represent manufacturers on a nationwide basis and
have a competitive advantage over local and regional food brokerage
companies. The combined company intends to operate under the name of
"Marketing Specialists Corporation" after the merger is completed.
Under the terms of merger agreement, Richmont Marketing Specialists
will merge with and into Merkert American. At the time of the merger,
shareholders of Richmont Marketing Specialists will exchange each of their
shares of common stock of Richmont Marketing Specialists for a number of
shares of Merkert American common stock equal to the quotient obtained by
dividing 6,705,551 by the total number of shares of Richmont Marketing
Specialists common stock issued and outstanding immediately prior to the
merger. Based on the number of shares of common stock of Richmont Marketing
Specialists currently outstanding, each share of common stock of Richmont
Marketing Specialists will convert into 48.7198 shares of Merkert American
common stock in the merger.
Following the merger, the former stockholders of Merkert American
will own approximately 52.8% of the outstanding common stock of the
combined company and the former stockholders of Richmont Marketing
Specialists will own approximately 47.2% of the outstanding common stock of
the combined company.
Upon consummation of the merger, the combined company will grant
stock options to purchase a total of 800,000 shares of Merkert American
common stock to individuals employed by or associated with Richmont
Marketing Specialists. This number may be increased to a maximum of 995,000
shares depending on the market price of Merkert American's common stock at
the time of the merger.
In connection with the merger, and as a condition to it, Merkert
American's board of directors will be expanded to nine members, classified
into three classes with staggered three-year terms. Upon consummation of
the merger, the Richmont Marketing Specialists stockholders and two
stockholders of Merkert American will enter into a voting agreement to vote
in favor of five nominees for election to Merkert American's board of
directors that are designated by Richmont Marketing Specialists' largest
shareholder, provided that such nominees are reasonably acceptable to the
two Merkert stockholders. Four members of Merkert American's current board
will make up the remainder of the board of directors of the combined
entity. The executive offices of the combined company will be split among
current members of management of Merkert American and members of management
of Richmont Marketing Specialists.
Upon consummation of the merger, the combined company may pay to
Richmont Capital Partners I, L.P. a fee of $500,000 for financial services
rendered to Richmont Marketing Specialists in connection with the merger.
The combined company will also enter into a joint advisory agreement with
Richmont Capital Partners I, L.P. and Monroe and Company, LLC, under which
those entities will provide financial advisory and consulting services to
the combined entities.
Before the merger can occur, several conditions must be fulfilled or
waived by the appropriate parties., including obtaining the requisie
stockholder approvals and Merkert's assumption of Richmont Marketing
Specialists' obligations of the 10 1/8% Senior
Subordinated Notes due 2007.
Richmont Marketing Specialists and Merkert American Corporation are
working to consummate the merger in the third quarter of 1999.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
27.1 Financial Data Schedule
(b) Reports on Form 8-K
None.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
August 13, 1999 Richmont Marketing Specialists Inc.
Registrant
/s/ Timothy M. Byrd
-----------------------------------
Timothy M. Byrd
Chief Administrative Officer
/s/ Ronald L. Smith
-----------------------------------
Ronald L. Smith
Chief Financial Officer
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 9,021
<SECURITIES> 0
<RECEIVABLES> 34,249
<ALLOWANCES> 4,026
<INVENTORY> 0
<CURRENT-ASSETS> 42,887
<PP&E> 37,119
<DEPRECIATION> 15,232
<TOTAL-ASSETS> 150,980
<CURRENT-LIABILITIES> 23,416
<BONDS> 159,628
0
0
<COMMON> 2
<OTHER-SE> (42,116)
<TOTAL-LIABILITY-AND-EQUITY> 150,980
<SALES> 105,591
<TOTAL-REVENUES> 112,424
<CGS> 0
<TOTAL-COSTS> 101,627
<OTHER-EXPENSES> 14,713
<LOSS-PROVISION> 6,832
<INTEREST-EXPENSE> 8,402
<INCOME-PRETAX> (18,850)
<INCOME-TAX> (802)
<INCOME-CONTINUING> (18,048)
<DISCONTINUED> 0
<EXTRAORDINARY> (1,038)
<CHANGES> 0
<NET-INCOME> (19,086)
<EPS-BASIC> (64.48)
<EPS-DILUTED> 0
</TABLE>
