<PAGE> 1
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 October 31, 1998
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Transition Period from ____________to __________
Commission File Number 0-6544
--------------------------------
BRUNO'S, INC.
(Debtor-in-Possession as of February 2, 1998)
(Exact name of registrant as specified in its charter)
--------------------------------
STATE OF INCORPORATION: ALABAMA I.R.S. EMPLOYER I.D. NO. 63-0411801
ADDRESS OF PRINCIPAL EXECUTIVE OFFICE (INCLUDING ZIP CODE)
800 Lakeshore Parkway, Birmingham, Alabama 35211
REGISTRANT'S TELEPHONE NUMBER INCLUDING AREA CODE
(205) 940-9400
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, and (2) has been subject to such filing
requirements for the past 90 days.
Yes (X) No ( )
NUMBER OF OUTSTANDING SHARES OF COMMON STOCK
AS OF DECEMBER 9, 1998 IS 25,507,982
<PAGE> 2
Commission File No. 0-6544
BRUNO'S, INC.
(DEBTOR-IN-POSSESSION)
INDEX
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION PAGE NO.
--------
<S> <C>
Item 1. Financial Statements:
Condensed Consolidated Balance Sheets at 2
October 31, 1998 and January 31, 1998
Condensed Consolidated Statements of Operations for the Thirty-Nine 3
(39) and Thirteen (13) Week Periods Ended October 31, 1998 and
November 1, 1997
Condensed Consolidated Statements of Cash Flows for the
Thirty-Nine (39) Week Periods Ended October 31, 1998 and 4
November 1, 1997
Notes to Condensed Consolidated Financial Statements 5
Item 2. Management's Discussion and Analysis of Financial Condition 12
and Results of Operations
Item 3. Quantitative and Qualitative Disclosures about Market Risks 23
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 23
Item 2. Change in Securities 23
Item 3. Defaults Upon Senior Securities 23
Item 4. Submission of Matters to a Vote of Security Holders 23
Item 5. Other Information 23
Item 6. Exhibits and Reports on Form 8-K 24
Signature Page 25
Index of Exhibits
</TABLE>
1
<PAGE> 3
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
BRUNO'S, INC.
(Debtor-in-Possession)
CONDENSED CONSOLIDATED BALANCE SHEETS
AS OF OCTOBER 31, 1998 AND JANUARY 31, 1998
(In Thousands Except Share and Per Share Amounts)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
October 31, January 31,
1998 1998
(unaudited) (unaudited)
----------- -----------
<S> <C> <C>
ASSETS:
Current assets:
Cash and cash equivalents $ 50,118 $ 2,888
Receivables 28,703 13,418
Inventories, net of LIFO reserve 183,714 180,274
Vendor deposits 26,669 --
Prepaid expenses and other 11,425 7,341
--------- ---------
Total current assets 300,629 203,921
--------- ---------
Property and equipment, net of accumulated
depreciation of $305,593 and $332,369,
respectively 292,897 377,670
--------- ---------
Intangibles and other assets, net 43,352 41,374
--------- ---------
Total $ 636,878 $ 622,965
========= =========
LIABILITIES AND DEFICIENCY IN NET ASSETS:
Liabilities not subject to compromise
Current liabilities:
Current maturities of capitalized lease obligations $ 4,264 $ 4,028
Accounts payable 72,141 105,011
Accrued payroll and related expenses 14,822 12,294
Accrued interest -- 24,727
Other accrued expenses 40,315 49,470
--------- ---------
Total current liabilities 131,542 195,530
--------- ---------
Noncurrent liabilities:
Long-term debt -- 858,630
Capitalized lease obligations 8,088 11,906
Other noncurrent liabilities 31,544 41,948
--------- ---------
Total noncurrent liabilites 39,632 912,484
--------- ---------
Liabilities subject to compromise 989,863 --
--------- ---------
Deficiency in net assets:
Common Stock, $.01 par value, 60,000,000
shares authorized; 25,507,982 issued and
outstanding at October 31, 1998, and January 31, 1998 255 255
Paid-in capital (586,944) (586,944)
Retained earnings 64,199 103,411
Shareholders' notes receivable (1,669) (1,771)
--------- ---------
Total deficiency in net assets (524,159) (485,049)
--------- ---------
Total $ 636,878 $ 622,965
========= =========
</TABLE>
See notes to condensed consolidated financial statements.
2
<PAGE> 4
BRUNO'S, INC. Commission File No. 0-6544
(Debtor-in-Possession)
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THIRTY-NINE AND THIRTEEN WEEK PERIODS ENDED
OCTOBER 31, 1998 AND NOVEMBER 1, 1997
(In Thousands Except Share and Per Share Amounts)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
October 31, November 1, October 31, November 1,
1998 1997 1998 1997
(39 Weeks) (39 Weeks) (13 Weeks) (13 Weeks)
(unaudited) (unaudited) (unaudited) (unaudited)
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
NET SALES $ 1,434,571 $ 1,940,751 $ 440,549 $ 610,098
----------- ----------- ---------- ----------
COST AND EXPENSES:
Cost of products sold 1,122,750 1,512,369 346,740 483,665
Store operating, selling
and administrative expenses 306,441 392,507 92,238 135,606
Depreciation and amortization 38,426 45,292 11,583 15,131
Interest expense, net
(contractual interest for
1998 estimated at $63,573)
for the 39 week period and
$21,199 for the 13 week
period) 2,567 65,131 1,023 22,429
Gain on sale of Seessel's (1,959) -- (1,959) --
Impairment of long-lived assets -- 11,448 -- 11,448
Reorganization items 5,558 -- (15,993) --
----------- ---------- ----------- ---------
Total cost and expenses 1,473,783 2,026,747 433,632 668,279
----------- ---------- ----------- ---------
Income/(loss) before income taxes (39,212) (85,996) 6,917 (58,181)
INCOME TAXES -- 7,792 -- 7,792
----------- ---------- ----------- ---------
Net income (loss) $ (39,212) $ (93,788) $ 6,917 $ (65,973)
=========== ========== =========== =========
NET INCOME (LOSS) PER BASIC AND
DILUTED COMMON SHARES $ (1.54) $ (3.70) $ 0.27 $ (2.60)
=========== ========== ========== ==========
CASH DIVIDENDS PER COMMON SHARE $ -- $ -- $ -- $ --
=========== ========== ========== ==========
WEIGHTED AVERAGE BASIC AND DILUTED
COMMON SHARES OUTSTANDING 25,507,982 25,353,090 25,507,982 25,402,487
=========== ========== ========== ==========
</TABLE>
See notes to condensed consolidated financial statements.
3
<PAGE> 5
BRUNO'S, INC.
(Debtor-in-Possession)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THIRTY-NINE WEEK PERIODS ENDED OCTOBER 31, 1998 AND
NOVEMBER 1, 1997
(Amounts in Thousands)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
OCTOBER 31, NOVEMBER 1,
1998 1997
(39 WEEKS) (39 WEEKS)
(UNAUDITED) (UNAUDITED)
----------- -----------
<S> <C> <C>
OPERATING ACTIVITIES:
Net loss $ (39,212) $ (93,788)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization (including amortization of debt issuance costs) 38,919 48,419
Noncash impairment and other special charges 5,903 34,032
Change in assets and liabilities (21,018) (50,433)
--------- ---------
Total adjustments 23,804 32,018
--------- ---------
Net cash used in operating activities (15,408) (61,770)
--------- ---------
INVESTING ACTIVITIES:
Proceeds from sale of assets 81,807 27,400
Capital expenditures (15,679) (56,461)
--------- ---------
Net cash provided by/(used in) investing activities 66,128 (29,061)
--------- ---------
FINANCING ACTIVITIES:
Reductions of long-term debt -- (222)
Net borrowings under revolving credit facilities -- 91,500
Reductions of prepetition capitalized lease obligations (3,490) (2,885)
Sale of common stock, net -- 697
--------- ---------
Net cash provided by/(used in) financing activities (3,490) 89,090
--------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 47,230 (1,741)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 2,888 4,908
--------- ---------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 50,118 $ 3,167
========= =========
</TABLE>
See notes to condensed consolidated financial statements.
4
<PAGE> 6
Commission File No. 0-6544
BRUNO'S, INC.
(DEBTOR-IN-POSSESSION)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THIRTY-NINE AND THIRTEEN WEEK PERIODS ENDED
OCTOBER 31, 1998 AND NOVEMBER 1, 1997
(IN THOUSANDS EXCEPT SHARE AND PER SHARE AMOUNTS)
1. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements include the
accounts of Bruno's, Inc. (the "Company") and its wholly owned subsidiaries.
Significant inter-company balances and transactions have been eliminated in
consolidation. Operating results for the thirty-nine weeks ended October 31,
1998, are not necessarily indicative of the results that may be expected for the
entire fiscal year. The unaudited condensed 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 fiscal year ended
January 31, 1998.
On February 2, 1998, the Company and its 11 subsidiaries each filed a petition
for reorganization under chapter 11 of title 11 of the United States Bankruptcy
Code (the "Bankruptcy Code"). The petitions were filed in the United States
Bankruptcy Court for the District of Delaware (the "Bankruptcy Court") under
case numbers 98-212(SLR) through 98-223(SLR) (the "Chapter 11 Cases"). The
Chapter 11 Cases have been procedurally consolidated for administrative
purposes. The Company and its subsidiaries are currently operating their
businesses and managing their properties as debtors-in-possession pursuant to
the Bankruptcy Code. The accompanying condensed consolidated financial
statements have been prepared on a going concern basis of accounting and in
accordance with AICPA Statement of Position 90-7. The Company's recent losses
from operations, significant deficiency in net assets, and the related Chapter
11 Cases raise substantial doubt about the Company's ability to continue as a
going concern.
Under the provisions of the Bankruptcy Code, the Company has an exclusive period
during which only it may propose and file and solicit acceptances of a plan of
reorganization. The original exclusive period for the Company to propose a plan
of reorganization expired on June 3, 1998, but the Bankruptcy Court, at the
request of the Company, has extended the exclusive period until January 15,
1999. The Company plans to request the Bankruptcy Court to grant an additional
extension of the exclusive period. After the Company files its plan of
reorganization, the Company will have an additional 60 days to solicit the
necessary acceptances of the plan of reorganization. If the Company fails to
file a plan of reorganization during the exclusive period or, after such plan
has been filed, if the Company fails to obtain acceptance of such plan from the
requisite impaired classes of creditors and equity security holders during the
exclusive solicitation period, any party in interest, including a creditor, an
equity security holder, a committee of creditors or equity security holders, or
an indenture trustee, may file its own plan of reorganization for the Company.
5
<PAGE> 7
In the opinion of management, the accompanying unaudited consolidated financial
statements contain all adjustments necessary for a fair statement of the
consolidated financial position and results of operations of the Company for the
interim periods.
2. DEFERRED TAX ASSET AND VALUATION RESERVE
During the prior year, the Company re-evaluated its deferred tax asset to
determine the need for any valuation allowance which may be appropriate in light
of the Company's projections for taxable income and the expiration dates of the
Company's net operating loss carryforwards. Based on the results of this
evaluation, the Company recorded an additional $7.8 million valuation allowance
in the quarter ended November 1, 1997, which fully reserved the Company's net
deferred tax asset to reflect the determination that its deferred tax asset may
not be realized. The Company has continued to review this valuation adjustment
on a quarterly basis and make adjustments as appropriate. Based upon projections
over the periods in which deferred tax assets are deductible, at October 31,
1998, management believes it is more likely than not that the net deferred tax
asset will not be realized. Accordingly, the Company has fully reserved its net
deferred tax assets.
3. CONTINGENCIES
The Company is a party to various legal and taxing authority proceedings
incidental to its business. In the opinion of management, the ultimate liability
with respect to these proceedings will not materially affect the financial
position or results of operations of the Company.
4. DEBTOR-IN-POSSESSION FINANCING
Subsequent to the filing of the Chapter 11 Cases, the Company entered into a
Revolving Credit and Guaranty Agreement (the "Loan Agreement") with The Chase
Manhattan Bank ("Chase") to provide secured debtor-in-possession financing. The
Loan Agreement, as amended, provides for borrowings dependent upon the Company's
level of inventory, real estate and claims from certain vendors. On August 12,
1998, the Company voluntarily reduced the maximum borrowings under the Loan
Agreement from $200 million to $175 million pursuant to the Loan Agreement. This
reduction was made because the Company does not believe it will need the
additional borrowing capacity and because the reduction will result in a
decrease in the fees paid by the Company under the Loan Agreement. The maximum
borrowings under the Loan Agreement include a subfacility of $32 million for the
issuance of letters of credit. The Loan Agreement grants a security interest in
substantially all of the Company's assets. Under the Loan Agreement, certain
vendors who have agreed to provide the Company, among other things, with a line
of credit and acceptable credit terms (the "Participating Vendors") are secured
on a pari passu basis with the security interest granted to Chase and the other
lenders. All obligations under the Loan Agreement will be afforded
"super-priority" administrative expense status in the Chapter 11 Cases. Advances
under the Loan Agreement bear interest at Chase's Alternative Base Rate (as
defined in the Loan Agreement) plus 3/4 of 1%.
The Loan Agreement contains certain restrictive covenants which, among other
things, require the Company to maintain a minimum cumulative EBITDA as defined
in the Loan Agreement and as measured at the end of each of the Company's fiscal
periods. The restrictive covenants also limit the Company's capital expenditures
and dividends and the ability of the Company to
6
<PAGE> 8
grant liens and incur additional indebtedness. On October 31, 1998, the Company
and the requisite lending institutions under the Loan Agreement entered into the
Fifth Amendment to the Loan Agreement (the "Fifth Amendment"). The Fifth
Amendment, among other things, amended the minimum cumulative EBITDA covenants
contained in the Loan Agreement and established minimum cumulative EBITDA and
capital expenditure covenants for the fiscal year ended January 29, 2000. As of
October 31, 1998, the Company was in compliance with the covenants contained in
the Loan Agreement as amended.
The Loan Agreement will terminate upon the earlier of consummation of a plan of
reorganization in the Chapter 11 Cases, February 1, 2000 or a Prepayment Date
(as such term is defined in the Loan Agreement). All borrowings under the Loan
Agreement will become due 30 days after termination.
At October 31, 1998, the Company had no direct borrowings outstanding under the
Loan Agreement but had utilized $7.6 million of its availability under the Loan
Agreement to issue letters of credit. Total availability under the Loan
Agreement at October 31, 1998 was $167.4 million. Trade payables owed to
Participating Vendors in the aggregate amount of $20.4 million did not reduce
the Company's availability under the Loan Agreement because the Company's
borrowing base, as defined in the Loan Agreement, exceeded the $175 million
limitation on borrowings under the Loan Agreement.
5. DISTRIBUTION CENTER ACCIDENT
On April 21, 1998, the refrigeration equipment in the Company's distribution
facility was damaged as the result of an accident that caused a leak of
refrigeration gas and a fire in the distribution facility's compressor room. The
refrigeration equipment was repaired and became operational on May 24, 1998.
During the period when the refrigeration equipment was out-of-service, the
Company was not able to supply its stores with perishable merchandise from the
Company's distribution facility. The Company made temporary arrangements with
third party suppliers and distributors to supply the Company's stores with
perishable merchandise. The Company, however, was not able to maintain adequate
levels of perishable inventories at all times in its stores while the
refrigeration equipment was out-of-service. The reduction in store-level
perishable inventories resulted in a loss of customers and sales. Subject to a
deductible of $100,000, the Company believes that it has insurance to cover (i)
the cost of repairing or replacing the damaged equipment, (ii) business
interruption losses resulting from the Company's inability to receive or ship
perishable merchandise from the Company's distribution facility, and (iii) the
additional expenses incurred by the Company to supply the Company's stores with
perishable merchandise. As of October 31, 1998, the Company had recorded $16.4
million of insurance reimbursement receivables for costs and losses relating to
the accident and had received $9.0 million from the Company's insurance carrier
as a partial payment against such receivables. The $16.4 million of costs and
losses recorded by the Company do not include business interruption losses
because the Company cannot currently estimate the amount of these losses. The
Company cannot currently estimate the full amount of its losses attributable to
the accident, and there can be no assurance that the Company will ultimately
recover all of these losses.
7
<PAGE> 9
6. LIABILITIES SUBJECT TO COMPROMISE
Liabilities subject to compromise refer to liabilities incurred prior to the
commencement of the Chapter 11 Cases. These liabilities consist primarily of
amounts outstanding under the Company's prior short-term borrowings and
long-term debt and also include accounts payable, accrued interest, amounts
accrued for rejected leases, and other accrued expenses. These amounts represent
management's best estimate of known or potential claims to be resolved in
connection with the Chapter 11 Cases. Such claims remain subject to future
adjustments based on negotiations, actions of the Bankruptcy Court, further
developments with respect to disputed claims, or other events. Payment terms for
these amounts, which are considered long-term liabilities at this time, will be
established in connection with the Chapter 11 Cases.
The Company has received approval from the Bankruptcy Court to pay or otherwise
honor certain of its prepetition obligations, including prepetition wages,
vacation pay, employee benefits and reimbursement of employee business expenses.
The Bankruptcy Court also has authorized the Company to pay up to $23.0 million
of prepetition obligations to critical vendors to aid the Company in maintaining
the normal flow of merchandise to its stores. As of October 31, 1998, the
Company had made $19.3 million of such payments.
7. REORGANIZATION ITEMS
Expenses and income directly incurred or realized as a result of the Chapter 11
Cases have been segregated from the normal operations and are disclosed
separately. The major components are as follows:
<TABLE>
<CAPTION>
39 WEEKS ENDED 13 WEEKS ENDED
OCTOBER 31, 1998 OCTOBER 31, 1998
---------------- ----------------
<S> <C> <C>
Restructuring charges (income) $ (2,656) $(18,560)
Professional fees and administrative
items 9,000 3,000
Interest income (786) (433)
-------- --------
$ 5,558 $(15,993)
======== ========
</TABLE>
RESTRUCTURING INCOME, NET:
In connection with the Chapter 11 Cases, and based on an analysis of the
Company's market strategy, geographic positioning, and store level return on
assets, the Company, on July 30, 1998, subject to approval by the Bankruptcy
Court and other conditions, entered into an agreement to sell 15 stores,
including one new store which had not commenced business, to Albertson's, Inc.
of Boise, Idaho. Eleven of the stores are located in the Nashville, Tennessee
market area, and four are located in the Chattanooga, Tennessee market. The
agreement originally established the purchase price for the assets to be sold at
$34.4 million plus the value of the store-level inventory. Following the
execution of the agreement, the Bankruptcy Court established procedures to allow
other interested parties to make competing offers for the 15 stores. As a
8
<PAGE> 10
result of this process, on August 13, 1998, the original purchase price of $34.4
million was increased to $35.9 million with all other terms remaining
substantially the same. The sale of the 15 stores to Albertson's was consummated
on August 24, 1998. In addition to selling the 15 stores to Albertson's, the
Company granted to Albertson's an option to purchase the real property on which
three of the stores are located for $11.5 million. Albertson's exercised its
option on August 24, 1998, and this transaction was consummated on September 23,
1998. The sale of the stores and real property to Albertson's resulted in a net
gain recorded in the quarter ended October 31, 1998 of $16.2 million, which
includes a restructuring gain of $18.3 million offset by inventory markdowns of
$2.1 million reflected as a special charge in cost of products sold.
The Company, on July 30, 1998, also announced its plans to close or sell an
additional 20 stores consisting of 10 stores in Alabama, five in Florida, three
in Mississippi and two in Georgia. On August 8, 1998, the Bankruptcy Court
approved the Company's plans to close these 20 stores. Additional approval of
the Bankruptcy Court will be required before any store can be sold. As of
December 9, 1998, the Company had closed 19 of the 20 stores. The Company, with
the approval of the Bankruptcy Court, has sold the real property and the
improvements thereon on which two of the 19 closed stores are located. In the
quarter ended August 1, 1998, the Company recorded estimated losses of $21.4
million associated with the scheduled sale or closure of the 20 stores. Included
in the estimated losses were $17.6 million of restructuring charges recorded to
cover (i) the reduction of fixed assets to net realizable value in the closed
stores and (ii) the anticipated liability for ongoing store operations such as
rent and employee costs, among other things. The remaining $3.8 million relates
to inventory markdowns reflected as a special charge in cost of products sold.
Also included in restructuring income, net, for both the quarter and
year-to-date periods are net gains related to the sale of certain excess
properties.
PROFESSIONAL FEES AND ADMINISTRATIVE ITEMS:
Professional fees and administrative items relate to legal, accounting, other
professional and employee costs directly attributable to the Chapter 11 Cases.
INTEREST INCOME:
This amount represents interest associated with the accumulation of cash and
short-term investments subsequent to the filing of the Chapter 11 Cases.
8. IMPAIRMENT AND OTHER SPECIAL CHARGES
CURRENT FISCAL YEAR
For the quarter ended October 31, 1998, the Company recorded special charges of
$2.1 million (reflected in cost of products sold) in connection with the current
year sale of stores to Albertson's. For the year-to-date period, the Company has
recorded special charges of $5.9 million (reflected in cost of products sold) in
connection with the current year sale of stores to Albertson's and the sale or
closure of 20 additional stores. These events are more fully described in NOTE 7
above.
9
<PAGE> 11
PRIOR FISCAL YEAR
During the thirteen-week period ended November 1, 1997, the Company recorded
$36.9 million in impairment and other special charges which impact four separate
lines of the condensed consolidated statement of operations.
The Company recognized $11.4 million of impairment charges during the prior year
period consisting of (i) a $6.1 million reduction in the carrying value of
certain of the Company's excess properties which were identified for sale to
reflect the current fair market value of such properties, (ii) a write-off of
$3.1 million in franchise rights associated with the termination of the
franchise agreement between the Company and Piggly Wiggly Company, and (iii) a
write-off of $2.2 million of old point-of-sale equipment which is no longer
being utilized.
The provision for cost of products sold in the prior fiscal year includes $7.8
million of special charges consisting primarily of a retail markdown of store
level inventory required to implement the Company's new price reduction program.
Selling, general and administrative expenses in the prior fiscal year include
$9.9 million of special charges consisting of (i) a $4.0 million increase to
general liability insurance reserves to reflect better estimates of the ultimate
actuarial liability for certain claims incurred between 1988 and 1995, (ii) a
$2.9 million charge to provide for certain personnel related matters including
the severance arrangement with the former Chief Executive Officer and the
signing bonus and various fees and expenses associated with the hiring of a new
Chief Executive Officer, and (iii) $3.0 million of other miscellaneous items.
The provision for income taxes for the thirteen week period ended November 1,
1997 represents an increase of $7.8 million in the valuation allowance to fully
reserve the Company's net deferred tax assets at November 1, 1997. See "DEFERRED
TAX ASSET AND VALUATION RESERVE" above.
9. GAIN ON SALE OF SEESSEL'S
The Company, on January 30, 1998, sold all of the outstanding shares of common
stock of Seessel Holdings, Inc. ("Seessel's") to Albertson's, Inc. for $88.0
million subject to a purchase price adjustment based on changes in Seessel's
working capital from a predetermined date. The Company recorded a gain of $16.6
million in the prior year which was net of an estimated purchase price decrease
of $8.4 million. During the quarter ended October 31, 1998, the Company and
Albertson's agreed that the purchase price decrease would be $6.5 million
resulting in an additional gain on the sale of Seessel's of $1.9 million.
10. RECENT PRONOUNCEMENTS OF FASB
In June 1997, the Financial Accounting Standards Board ("FASB") issued SFAS No.
130, "Reporting Comprehensive Income," and SFAS No. 131, "Disclosures About
Segments of an Enterprise and Related Information," which will be effective for
the Company in its current fiscal year. Management does not expect the adoption
of these Statements to have a material impact on the Company's disclosures and
financial statements.
10
<PAGE> 12
In June 1998, SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities," was issued. This Statement requires that all derivatives be
recognized in the statement of financial position as either assets or
liabilities and measured at fair value. In addition, all hedging relationships
must be designated, reassessed and documented pursuant to the provisions of SFAS
No. 133. This Statement will be effective for the Company in its fiscal year
beginning January 30, 2000. The Company's management has not determined the
effect of SFAS No. 133 on its financial statements.
11
<PAGE> 13
Commission File No. 0-6544
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following is management's discussion and analysis of significant factors
affecting the Company's operating results during the periods included in the
accompanying condensed consolidated statements of operations.
A table showing the percentage of net sales represented by certain items in the
Company's condensed consolidated statements of operations is as follows:
<TABLE>
<CAPTION>
OCTOBER 31, NOVEMBER 1, OCTOBER 31, NOVEMBER 1,
1998 1997 1998 1997
(39 WEEKS) (39 WEEKS) (13 WEEKS) (13 WEEKS)
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net sales 100.00% 100.00% 100.00% 100.00%
Cost of products sold 78.26% 77.93% 78.71% 79.28%
Store operating, selling, and administrative expenses 21.36% 20.22% 20.94% 22.23%
------ ------ ------ ------
EBITDA(1) 0.38% 1.85% 0.36% -1.50%
Depreciation and amortization 2.68% 2.33% 2.63% 2.48%
Interest expense, net 0.18% 3.36% 0.23% 0.00%
Gain on sale of Seessel's -0.14% 0.00% -0.44% 3.68%
Impairment of long-lived assets 0.00% 0.59% 0.00% 1.88%
Reorganization items 0.39% 0.00% -3.63% 0.00%
------ ------ ------ ------
Income (loss) before income taxes -2.73% -4.43% 1.57% -9.54%
Income taxes 0.00% 0.40% 0.00% 1.28%
------ ------ ------ ------
Net income (loss) -2.73% -4.83% 1.57% -10.81%
====== ====== ====== ======
</TABLE>
A summary of the changes in certain items included in the condensed statements
of operations for the thirty-nine and thirteen week periods ended October 31,
1998 as compared to the thirty-nine and thirteen week periods ended November 1,
1997 is as follows (dollars in thousands):
<TABLE>
<CAPTION>
Thirty-Nine Weeks Thirteen Weeks
Ended October 31, 1998 Ended October 31, 1998
Amounts % Change Amounts % Change
--------- ------- --------- --------
<S> <C> <C> <C> <C>
Net sales $(506,180) -26.08% $(169,549) -27.79%
Cost of products sold (389,619) -25.76% (136,925) -28.31%
Store operating, selling, and administrative expenses (86,066) -21.93% (43,368) -31.98%
--------- ------ --------- -------
EBITDA(1) (30,495) -85.00% 10,744 -117.13%
Depreciation and amortization (6,866) -15.16% (3,548) -23.45%
Interest expense, net (62,564) -96.06% (21,406) -95.44%
Gain on sale of Seessel's (1,959) N/A (1,959) N/A
Impairment of long-lived assets (11,448) N/A (11,448) N/A
Reorganization items 5,558 N/A (15,993) N/A
--------- ------ --------- -------
Income (loss) before income taxes 46,784 N/A 65,098 N/A
Income taxes (7,792) N/A (7,792) N/A
--------- ------- --------- -------
Net income (loss) $ 54,576 N/A $ 72,890 N/A
========= ======= ========= =======
</TABLE>
(1) EBITDA -- For purposes of this document, EBITDA is defined as net sales
reduced by cost of products sold and store operating, selling and
administrative expenses. EBITDA is presented because it is a widely
accepted financial indicator of a company's ability to service and/or incur
indebtedness. However, EBITDA should not be construed as an alternative to
net income as a measure of a Company's operating results or to operating
cash flow as a measure of liquidity. This methodology may not be consistent
with a similarly captioned item presented by other companies.
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<PAGE> 14
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (DOLLARS IN THOUSANDS)
GENERAL
As of October 31, 1998, the Company operated a chain of 164 supermarkets and
combination food and drug stores. The Company also operated eight retail liquor
stores. As of November 1, 1997, the Company operated 220 supermarkets and
combination food and drug stores as well as nine retail liquor stores.
On February 2, 1998, the Company and its 11 subsidiaries each filed a petition
for reorganization under chapter 11 of title 11 of the Bankruptcy Code. The
Chapter 11 Cases have been procedurally consolidated for administrative
purposes. The Company and its subsidiaries are currently operating their
businesses and managing their properties as debtors-in-possession pursuant to
the Bankruptcy Code. Both before and after the commencement of the Chapter 11
Cases, the Company has taken steps to restructure its operations and to improve
profitability. These steps include but are not limited to implementing price
reduction strategies, improving inventory levels in the Company's stores,
selling excess properties, and continuing to analyze and review the Company's
market strategy, geographic positioning, and store level return on assets. As a
result of this review, the Company sold 15 stores to Albertson's, Inc. and
closed an additional 19 stores. These transactions are described below under the
heading "DIVESTITURES - CURRENT FISCAL YEAR". The Company is considering the
sale or closure of additional stores that do not fall within the Company's
market strategy or geographic positioning or that do not perform at or above the
Company's expected store level return on assets.
DIVESTITURES - - CURRENT FISCAL YEAR
On July 30, 1998, based on an analysis of the Company's market strategy,
geographic positioning, and store level return on assets, the Company, subject
to approval by the Bankruptcy Court and other conditions, entered into an
agreement to sell 15 stores, including one new store which had not commenced
business, to Albertson's, Inc. of Boise, Idaho. Eleven of the stores are located
in the Nashville, Tennessee market area, and four are located in the
Chattanooga, Tennessee market. The agreement originally established the purchase
price for the assets to be sold at $34.4 million plus the value of the
store-level inventory. Following the execution of the agreement, the Bankruptcy
Court established procedures to allow other interested parties to make competing
offers for the 15 stores. As a result of this process, on August 13, 1998, the
original purchase price of $34.4 million was increased to $35.9 million with all
other terms remaining substantially the same. The sale of the 15 stores to
Albertson's was consummated on August 24, 1998. In addition to selling the 15
stores to Albertson's, the Company granted to Albertson's an option to purchase
the real property on which three of the stores are located for $11.5 million.
Albertson's exercised its option on August 24, 1998, and this transaction was
consummated on September 23, 1998. The sale of the stores and real property to
Albertson's resulted in a net gain recorded in the quarter ended October 31,
1998 of $16.2 million, which includes restructuring income, net, of $18.3
million offset by inventory markdowns of $2.1 million reflected as a special
charge in cost of products sold.
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<PAGE> 15
The Company, on July 30, 1998, also announced its plans to close or sell an
additional 20 stores consisting of 10 stores in Alabama, five in Florida, three
in Mississippi and two in Georgia. On August 8, 1998, the Bankruptcy Court
approved the Company's plans to close these 20 stores. Additional approval of
the Bankruptcy Court will be required before any store can be sold. As of
December 9, 1998, the Company had closed 19 of the 20 stores. The Company, with
the approval of the Bankruptcy Court, has sold the real property and the
improvements thereon on which two of the 19 closed stores are located. In the
quarter ended August 1, 1998, the Company recorded estimated losses of $21.4
million associated with the scheduled sale or closure of the 20 stores. Included
in the estimated losses were $17.6 million of restructuring charges recorded to
cover (i) the reduction of fixed assets to net realizable value in the closed
stores and (ii) the anticipated liability for ongoing store operations such as
rent and employee costs, among other things. The remaining $3.8 million relates
to inventory markdowns reflected as a special charge in cost of products sold.
ACQUISITIONS AND DIVESTITURES - - PRIOR FISCAL YEAR
On January 13, 1998, the Company entered into an agreement to sell Seessel
Holding's, Inc., a wholly owned subsidiary of the Company ("Seessel's"), to
Albertson's, Inc. for $88.0 million subject to a purchase price adjustment based
on changes in Seessel's working capital from a predetermined date. The
transaction was consummated on January 30, 1998 and a gain of $16.6 million was
recorded during the fiscal year ended January 31, 1998. The gain was net of an
estimated purchase price decrease of $8.4 million. During the quarter ended
October 31, 1998, the Company and Albertson's agreed that the purchase price
decrease would be $6.5 million resulting in an additional gain on the sale of
Seessel's of $1.9 million, which is reflected in "Gain on Sale of Seessel's"
in the accompanying Condensed Consolidated Statements of Operations. Because the
sale of Seessel's was consummated prior to the commencement of the Chapter 11
Cases, the $6.5 million purchase price adjustment is included in liabilities
subject to compromise in the accompanying Condensed Consolidated Balance Sheet.
On January 6, 1998, the Company entered into an agreement to sell 13 stores in
Georgia to Ingles Markets, Incorporated ("Ingles"). The Company was required by
the agreement to close the 13 stores prior to the sale of the stores to Ingles.
All of the stores were closed on or before January 27, 1998, and the stores were
sold to Ingles on March 12, 1998. A loss of $26.6 million was recorded during
the fiscal year ended January 31, 1998 as a result of this transaction.
On January 26, 1998, the Company entered into an agreement to purchase four
stores in Alabama from Delchamps, Inc. ("Delchamps"). This transaction was
consummated on February 17, 1998. Subsequently, the Company closed three of its
stores and relocated those stores into three of the stores purchased from
Delchamps. The Company increased the closed store accrual by $5.2 million during
the fiscal year ended January 31, 1998 to reflect the estimated loss on closing
the three stores.
SPECIAL CHARGES -- CURRENT FISCAL YEAR
For the quarter ended October 31, 1998, the Company recorded special charges of
$2.1 million (reflected in cost of products sold) in connection with the current
year sale of stores to Albertson's. For the year-to-date period, the Company has
recorded special charges of $5.9
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<PAGE> 16
million (reflected in cost of products sold) in connection with the current year
sale of stores to Albertson's and the sale or closure of 20 additional stores in
the current year. These events are more fully described above in NOTE 7 OF THE
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
IMPAIRMENT AND OTHER SPECIAL CHARGES -- PRIOR FISCAL YEAR
During the thirteen-week period ended November 1, 1997, the Company recorded
$36.9 million in impairment and other special charges which impact four separate
lines of the Condensed Consolidated Statement of Operations.
The Company recognized $11.4 million of impairment charges during the prior year
period consisting of (i) a $6.1 million reduction in the carrying value of
certain of the Company's excess properties which were identified for sale to
reflect the current fair market value of such properties, (ii) a write-off of
$3.1 million in franchise rights associated with the termination of the
franchise agreement between the Company and Piggly Wiggly Company, and (iii) a
write-off of $2.2 million of old point-of-sale equipment which is no longer
being utilized.
The provision for cost of products sold in the prior fiscal year includes $7.8
million of special charges consisting primarily of a retail markdown of store
level inventory required to implement the Company's new price reduction program.
Selling, general and administrative expenses in the prior fiscal year include
$9.9 million of special charges consisting of (i) a $4.0 million increase to
general liability insurance reserves to reflect better estimates of the ultimate
actuarial liability for certain claims incurred between 1988 and 1995, (ii) a
$2.9 million charge to provide for certain personnel related matters including
the severance arrangement with the former Chief Executive Officer and the
signing bonus and various fees and expenses associated with the hiring of a new
Chief Executive Officer, and (iii) $3.0 million of other miscellaneous items.
The provision for income taxes for the thirteen week period ended November 1,
1997 represents an increase of $7.8 million in the valuation allowance to fully
reserve the Company's net deferred tax assets at November 1, 1997. See NOTE 2 OF
THE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
RESULTS OF OPERATIONS (UNAUDITED)
NET SALES
Net sales decreased $169.5 million and $506.2 million in the quarter and
year-to-date periods ended October 31, 1998 as compared to the comparable
periods of the prior year. Approximately $70.0 million and $235.0 million of the
decrease in the quarter and year-to-date periods, respectively, was due to the
reduction in the number of stores operated by the Company as a result of the
divestitures described above under the heading "ACQUISITIONS AND DIVESTITURES -
PRIOR FISCAL YEAR". Approximately $55.0 million of the decrease for both the
quarter and year-to-date periods was due to the current year sale of stores to
Albertson's and the closure of 19 additional stores as described above under the
heading "DIVESTITURES - CURRENT FISCAL Year". Comparable store sales (which
exclude sales from stores which have been sold or
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<PAGE> 17
closed) decreased 8.2% and 12.3% in the quarter and year-to-date periods ended
October 31, 1998 from the prior year due in part to increased competitive
activity in the Company's trade areas. Other factors that may have contributed
to the decrease in comparable store sales include the disruption caused by the
commencement of the Chapter 11 Cases and the accident which occurred in the
Company's distribution center on April 21, 1998. SEE NOTES 1 AND 5 OF THE NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS. As a result of the distribution
center accident, the Company was not able to supply its stores with perishable
merchandise from the Company's distribution center from April 21, 1998 through
May 24, 1998. Although the Company made temporary arrangements for perishable
merchandise with third party suppliers and distributors, the Company was not
able to maintain adequate levels of perishable inventories at all times in its
stores. The reduction in store-level perishable inventories resulted in a loss
of customers and sales. In addition, the Company's sales continue to be affected
by the loss of customers in 1997 due to increases in the Company's prices to
levels that were not competitive, a reduced level of promotional activity,
product shortages in the Company's stores resulting from distribution problems
and efforts to control inventory, and reduced levels of customer service due to
the Company's efforts to control payroll costs. The Company has adopted and
implemented strategies to address the factors within the Company's control that
have contributed to the decline in sales. There can be no assurance that these
strategies will increase sales or will not otherwise have an adverse effect on
the Company's business.
GROSS PROFIT
Gross profit (net sales less cost of products sold) as a percentage of net sales
was 21.3% for the thirteen week period ended October 31, 1998 compared to 20.7%
in the comparable period of the prior year. Both the current year and prior year
gross profit were impacted by the special charges described above under the
headings "SPECIAL CHARGES - CURRENT FISCAL YEAR" AND "IMPAIRMENT AND OTHER
SPECIAL CHARGES - PRIOR FISCAL YEAR". Cost of products sold for the current
quarter includes $2.1 million of special charges representing inventory
markdowns related to the 15 stores sold to Albertson's, and cost of products
sold in the prior year includes $7.8 million of special charges. Excluding the
impact of these special charges, gross profit was 21.8% for the thirteen week
period ended October 31, 1998 compared to 22.0% in the comparable period of the
prior year.
Gross profit for the thirty-nine week period ended October 31, 1998 was 21.7%
compared to 22.1% for the comparable period of the prior year. Like the quarter,
both the current year and prior year periods were impacted by the special
charges described above under the headings "SPECIAL CHARGES -- CURRENT FISCAL
YEAR" AND "IMPAIRMENT AND OTHER SPECIAL CHARGES - PRIOR FISCAL YEAR". In the
current year, cost of products sold includes $5.9 million of special charges
representing inventory markdowns, and cost of products sold in the prior year
includes $7.8 million of special charges. Excluding the impact of these special
charges, gross profit was 22.2% for the thirty-nine week period ended October
31, 1998 compared to 22.5% in the comparable period of the prior year.
STORE OPERATING, SELLING AND ADMINISTRATIVE EXPENSES
Store operating, selling, and administrative expenses as a percent of net sales
were 20.9% and 21.4% for the quarter and year-to-date periods ended October 31,
1998 compared to 22.2% and 20.2% for the comparable periods of the prior year.
Included in prior year expenses for both the
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<PAGE> 18
quarter and year-to-date periods were special charges of $9.9 million described
above under the heading "IMPAIRMENT AND OTHER SPECIAL CHARGES - PRIOR FISCAL
YEAR". Excluding the impact of these special charges, prior year administrative
expenses as a percent of net sales were 20.6% and 19.7%, respectively. The
current quarter and year-to-date percentage increases were due largely to the
impact of fixed costs on lower net sales.
EBITDA
EBITDA (as defined on page 12) increased by $10.7 million in the quarter ended
October 31, 1998 compared to the comparable period of the prior year. Excluding
the impact of the special charges of $2.1 million and $17.7 million in the
current and prior year quarters, respectively, EBITDA decreased by $4.9 million.
This decrease resulted primarily from the impact of lower net sales and lower
gross profit as discussed above..
For the year-to-date period, EBITDA decreased by $30.5 million compared to the
comparable period of the prior year. Excluding the impact of special charges of
$5.9 and $17.7 million in the current and prior year periods, respectively,
EBITDA decreased by $42.3 million. This decrease resulted primarily from the
impact of lower net sales and lower gross profit as discussed above.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization for the quarter ended October 31, 1998 was $11.6
million compared to $15.1 million in the comparable period of the prior year.
Depreciation and amortization for the current year-to-date period was $38.4
million compared to $45.3 million in the prior year. The decrease in
depreciation and amortization resulted primarily from the sale of stores
described under the headings "DIVESTITURES - CURRENT FISCAL YEAR" and
"ACQUISITIONS AND DIVESTITURES - PRIOR FISCAL YEAR".
INTEREST EXPENSE
As a result of the commencement of the Chapter 11 Cases, the Company ceased
accruing interest on its short-term borrowings and long-term debt outstanding at
January 31, 1998. Interest expense in the current year relates primarily to
equipment owned under capital leases.
GAIN ON SALE OF SEESSEL'S
The Company, on January 30, 1998, completed the sale of Seessel's to Albertson's
for $88.0 million subject to a purchase price adjustment. SEE "ACQUISITIONS AND
DIVESTITURES - PRIOR FISCAL YEAR". The Company recorded a gain of $16.6 million
in the prior year which was net of an estimated purchase price decrease of $8.4
million. During the quarter ended October 31, 1998, the Company and Albertson's
agreed that the purchase price decrease would be $6.5 million resulting in an
additional gain on the sale of Seessel's of $1.9 million. This gain is reflected
in "Gain on Sale of Seessel's" in the accompanying Condensed Consolidated
Statements of Operations.
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REORGANIZATION ITEMS
The Company recorded income from reorganization items of $16.0 million during
the quarter ended October 31, 1998. The Company recorded gains from
restructuring income of $18.6 million related primarily to the sale of 15 stores
to Albertson's as described above under the heading "DIVESTITURES -- CURRENT
FISCAL YEAR". These gains were offset by $3.0 million of professional fees and
administrative items. Also included under reorganization items is $433,000 in
interest income associated with the accumulation of cash and short-term
investments subsequent to the filing of the Chapter 11 Cases.
For the year-to-date period, the Company has recorded expense from
reorganization items of $5.6 million, including $2.7 million of restructuring
income. The restructuring income relates primarily to the gain on the sale of 15
stores to Albertson's offset by the estimated losses associated with the sale or
closure of 20 additional stores. Also included under reorganization items for
the year-to-date period is $9.0 million of professional fees and administrative
items offset by $786,000 in interest income associated with the accumulation of
cash and short-term investments subsequent to the filing of the Chapter 11
Cases.
INCOME TAXES
Management believes that it is more likely than not that deferred tax assets
created by losses during the thirty-nine week period ended October 31,1998 will
not be realized through future taxable income. Therefore, the Company has
increased its valuation allowance, which was established during the prior year,
to fully reserve the potential tax benefits resulting from these losses. As a
result, the effective tax rate for the quarter ended October 31, 1998 was zero
and no tax benefit was recorded for the year-to-date period ended October 31,
1998.
LIQUIDITY AND CAPITAL RESOURCES
The Company and its subsidiaries are parties to a Revolving Credit and Guaranty
Agreement dated as of February 2, 1998, as amended by the First Amendment
thereto dated as of March 5, 1998, the Second Amendment thereto dated as of
March 25, 1998, the Third Amendment thereto dated as of April 17, 1998, the
Fourth Amendment thereto dated as of July 31, 1998, and the Fifth Amendment
thereto dated as of October 31, 1998 and as may be amended hereafter (the "Loan
Agreement"). The lenders who are parties to the Loan Agreement include The Chase
Manhattan Bank ("Chase"), which serves as agent for itself and the other lenders
party thereto. The Loan Agreement was entered into subsequent to the
commencement of the Chapter 11 Cases and will terminate upon the earlier of
consummation of a plan of reorganization in the Chapter 11 Cases, February 1,
2000, or the Prepayment Date (as such term is defined in the Loan Agreement).
The Loan Agreement provides the Company with a revolving line of credit for
loans and letters of credit. The amount that the Company is permitted to borrow
under the Loan Agreement depends upon the level of the Company's inventory, real
estate and claims from certain vendors. On August 12, 1998, the Company
voluntarily reduced the maximum borrowings under the Loan Agreement from $200
million to $175 million pursuant to the Loan Agreement. This reduction was made
because the Company does not believe it will need the additional borrowing
capacity and because the reduction will result in a decrease in the fees paid by
the Company under the Loan Agreement. The maximum borrowings under the Loan
Agreement include a subfacility of $32 million for the issuance of letters of
credit. The Company will use all amounts borrowed under the Loan Agreement for
its ongoing working
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<PAGE> 20
capital needs and for other general corporate purposes of the Company and its
subsidiaries. The subsidiaries of the Company are guarantors of the Company's
obligations under the Loan Agreement.
The Loan Agreement contains certain restrictive covenants which, among other
things, require the Company to maintain a minimum cumulative EBITDA as defined
in the Loan Agreement and as measured at the end of each of the Company's fiscal
periods. The restrictive covenants also limit the Company's capital expenditures
and dividends and the ability of the Company to grant liens and incur additional
indebtedness. On October 31, 1998, the Company and the requisite lending
institutions under the Loan Agreement entered into the Fifth Amendment to the
Loan Agreement (the "Fifth Amendment"). The Fifth Amendment, among other things,
amended the minimum cumulative EBITDA covenants contained in the Loan Agreement
and established minimum cumulative EBITDA and capital expenditure covenants for
the fiscal year ended January 29, 2000. As of October 31, 1998, the Company was
in compliance with the covenants contained in the Loan Agreement as amended.
At October 31, 1998, the Company had no direct borrowings outstanding under the
Loan Agreement but had utilized $7.6 million of its availability under the Loan
Agreement to issue letters of credit. Total availability under the Loan
Agreement at October 31, 1998 was $167.4 million. Trade payables owed to
Participating Vendors in the aggregate amount of $20.4 million did not reduce
the Company's availability under the Loan Agreement because the Company's
borrowing base, as defined in the Loan Agreement, exceeded the $175 million
limitation on borrowings under the Loan Agreement. The Company expects that its
cash flow from operations and borrowings under the Loan Agreement will provide
it with sufficient liquidity to conduct its operations while the Chapter 11
Cases are pending. The Company's long-term liquidity and the adequacy of the
Company's capital resources cannot be determined until a plan of reorganization
has been developed and confirmed in connection with the Chapter 11 Cases.
Operating activities used $15.4 million in cash for the thirty-nine week period
ended October 31, 1998 compared to $61.8 million for the comparable period of
the prior year. The use of cash in the current year is attributable primarily to
(i) the reduction in EBITDA discussed above, and (ii) amounts paid in advance to
vendors in order to expedite the delivery of inventory to the Company. The prior
year use of $61.8 million in cash resulted from (i) the reduction in EBITDA
discussed above, (ii) the payment of accrued interest on the Company's debt
outstanding prior to the commencement of the Chapter 11 Cases, and (iii)
increased inventory levels in the Company's stores.
Cash flows provided by investing activities were $66.1 million in the
thirty-nine week period ended October 31, 1998 compared to a use of $29.1
million in the comparable period of the prior year. Capital expenditures were
$15.7 million for the current year compared to $56.5 million in the prior year.
The Company's capital expenditures are primarily related to the remodeling of
stores and investments in systems technology. The Company believes that capital
expenditures for the remainder of the current fiscal year will be financed
through cash flows from operations, existing cash balances and, if necessary,
borrowings under the Loan Agreement. Cash flows from investing activities for
the thirty-nine week period ended October 31, 1998 include $81.8 million in
proceeds related to the sale of stores and excess property, including the sale
of 13 stores in Georgia to Ingles (which was consummated in March 1998). SEE
"DIVESTITURES -- CURRENT FISCAL YEAR" AND "ACQUISITIONS AND DIVESTITURES --
PRIOR FISCAL YEAR". Cash flows
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<PAGE> 21
from investing activities for the thirty-nine week period ended November 1, 1997
included $27.4 million in proceeds from the sale of property.
Financing activities used $3.5 million in cash for the thirty-nine week period
ended October 31, 1998 and generated $89.1 million in cash during the comparable
period of the prior year. Current year financing activities reflect repayments
of the Company's capitalized lease obligations. Prior year financing activities
primarily consisted of $91.5 million in borrowings under the credit facility
available to the Company prior to the commencement of the Chapter 11 Cases
offset by repayments of the Company's capitalized lease obligations.
YEAR 2000
The Year 2000 issue refers to computer programs and microcontrollers which could
fail to execute properly at the turn of the century due to flaws in design.
Computer programs written using two digits (rather than four) to define the
applicable year are typical examples of such design flaws. Any programs written
in this manner recognize a date using "00" as the year 1900 rather than the year
2000. Such design flaws could cause the computer systems and equipment used by
the Company to malfunction with the result that the Company could not conduct
its operations in a normal manner. Some of the computer programs and
microcontrollers owned or leased by the Company will need to be modified or
replaced in order to address the Year 2000 issue.
The Company has retained a third party contractor to identify and correct Year
2000 problems involving the Company's internal computer systems. Systems which
require modification or replacement have been identified and a plan for
addressing issues has been established. Following identification and planning,
the major project phases are correction, testing and implementation. Four
general categories of internal computer systems are being addressed: Store
Systems, Networks and Servers, Mainframe Applications, and Mainframe Systems and
Hardware. A considerable number of systems already have been modified or
replaced, and it is anticipated that most of the remaining changes that are
necessary will be completed by the end of July 1999. Changes in the Company's
Store Systems to address the Year 2000 problem are scheduled to be completed in
September 1999.
In addition to addressing the Year 2000 problem with respect to the Company's
internal computer systems, the Company is currently seeking to identify other
non-information technology systems which could be affected by the Year 2000
issue. Examples of such other systems are time clocks, refrigeration systems,
and heating and air conditioning systems. After identifying any such systems
that could fail at the turn of the century, the Company will develop a plan to
modify or replace the software or microcontrollers containing the Year 2000
design flaws. The Company does not currently have estimated completion dates for
modifying or replacing such systems.
The Company also could be adversely affected if Year 2000 design flaws are
contained in the computer systems or microcontrollers used by the Company's
vendors and suppliers, including merchandise vendors, utilities, and service
providers. The Company is currently developing a list of critical vendors and
suppliers who might be unable to continue to supply necessary goods and services
to the Company if such vendors and suppliers do not take appropriate action to
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<PAGE> 22
address the Year 2000 issue. The Company will seek assurance from each such
critical vendor and supplier that all necessary steps are being taken by them to
address the Year 2000 issue.
Based on current estimates, the Company anticipates that it will incur costs of
approximately $15 million relating to Year 2000 issues for its internal computer
systems. Approximately $5.0 million of these costs had been incurred as of
October 31, 1998. The Company has deferred several systems development projects
to minimize the impact of Year 2000 compliance costs, but the Company does not
expect that such deferral will have a significant effect on the Company's
financial condition and results of operations. The cost of correcting the Year
2000 problem in other non-information technology systems, such as time clocks,
refrigeration systems and heating and air conditioning systems, will be
estimated after the Company has completed the identification and planning phases
for such systems. The Company believes that the costs of addressing the Year
2000 issue will be financed through cash flows from operations, existing cash
balances and, if necessary, borrowings under the Loan Agreement.
If the Company fails adequately to address the Year 2000 issue, the Company,
under the most reasonably likely worst case scenario, would be unable to process
transactions such as sales, purchasing, transfers and payments in an efficient,
automated manner. In addition, other systems such as refrigeration systems and
heating and air conditioning systems could fail. The failure of these systems
could seriously disrupt the Company's business. Finally, the Company could
experience product shortages and an interruption of necessary services if
certain outside providers of goods and services fail to address the Year 2000
issue.
The Company does not currently have a contingency plan dealing with the most
reasonably likely worst case scenario involving the Year 2000 issue. The
Company, however, plans to develop such a contingency plan by July 1999. The
contingency plan will consider alternate sourcing, systems and procedures.
RECENT PRONOUNCEMENTS OF FASB
In June 1997, the Financial Accounting Standards Board ("FASB") issued SFAS No.
130, "Reporting Comprehensive Income," and SFAS No. 131, "Disclosures About
Segments of an Enterprise and Related Information," which will be effective for
the Company in its current fiscal year. Management does not expect the adoption
of these Statements to have a material impact on the Company's disclosures and
financial statements.
In June 1998, SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities," was issued. This Statement requires that all derivatives be
recognized in the statement of financial position as either assets or
liabilities and measured at fair value. In addition, all hedging relationships
must be designated, reassessed and documented pursuant to the provisions of SFAS
No. 133. This Statement will be effective for the Company in its fiscal year
beginning January 30, 2000. The Company's management has not determined the
effect of SFAS No. 133 on its financial statements.
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CAUTIONARY STATEMENTS
The Private Securities Litigation Reform Act of 1995 provides a "safe harbor"
for forward-looking statements to encourage companies to provide prospective
information about their companies without fear of litigation so long as those
statements are identified as forward-looking and are accompanied by meaningful
cautionary statements identifying important factors that could cause actual
results to differ materially from those projected in the statement. When used in
this Form 10-Q Report, the words "believe", "expect", "anticipate", "estimate"
and similar expressions are intended to identify forward-looking statements. The
Company desires to take advantage of the "safe harbor" provisions of the Private
Securities Litigation Reform Act of 1995 in connection with the forward-looking
statements contained in this Form 10-Q Report. Accordingly, the Company hereby
identifies the following important factors which could cause the Company's
financial results to differ materially from any such results which might be
projected, forecast, estimated or budgeted by the Company in forward-looking
statements:
(a) Heightened competition, including specifically the
intensification of price competition; the entry of new
competitors; and the expansion, renovation and opening of
new stores by new and existing competitors.
(b) Failure to obtain new customers or retain existing
customers.
(c) Inability to carry out marketing, sales and capital plans.
(d) Insufficiency of financial resources to renovate and expand
the Company's store base.
(e) Prolonged dispute with labor.
(f) Economic downturn in the Southeast region.
(g) Loss or retirement of key executives.
(h) Higher selling, general and administrative expenses
occasioned by the need for additional advertising,
marketing, administrative, or management information systems
expenditures.
(i) Adverse publicity and news coverage.
(j) Adverse effects resulting from the commencement and
prosecution of the Chapter 11 Cases.
(k) Adverse effects resulting from Year 2000 compliance problems
experienced by the Company or its significant vendors.
(l) Adverse effects resulting from the accident at the Company's
distribution facility in April 1998.
22
<PAGE> 24
The foregoing review of 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 RISKS
Not Applicable
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is party to the Chapter 11 Cases, which commenced on February 2,
1998. The Company also is a party to various other legal and taxing authority
proceedings incidental to its business. In the opinion
of management, the ultimate liability with respect to these other proceedings
will not materially affect the financial position or results of operations of
the Company.
ITEM 2. CHANGE IN SECURITIES
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
The Company commenced the Chapter 11 Cases on February 2, 1998. As a result of
filing the Chapter 11 Cases, no principal or interest payments will be made on
indebtedness incurred by the Company prior to February 2, 1998 until a plan of
reorganization defining the repayment terms has been approved by the Bankruptcy
Court. Accordingly, the Company did not make the semi-annual $21.0 million
interest payments due on February 2, 1998 and July 31, 1998 under the Company's
10 1/2% Senior Subordinated Notes. In addition, the Company has not paid $3.7
million in accrued interest on the Company's other debt outstanding at January
31, 1998.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
None
23
<PAGE> 25
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) EXHIBITS
<TABLE>
<CAPTION>
Exhibit
Number Description
------ -----------
<S> <C>
10.39 Fifth Amendment dated as of October 31, 1998 to the
Revolving Credit Agreement dated as of February 2, 1998
among the Company, the subsidiaries of the Company, the
financial institutions party thereto and The Chase Manhattan
Bank, as Agent.
27 Financial Data Schedule (for SEC use only)
</TABLE>
(B) REPORTS ON FORM 8-K
None
24
<PAGE> 26
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
BRUNO'S, INC.
/s/ James J. Hagan
-----------------------
James J. Hagan,
Executive Vice President and
Chief Financial Officer
Dated: December 14, 1998
25
<PAGE> 27
BRUNO'S, INC.
FORM 10-Q REPORT
(FOR QUARTER ENDED OCTOBER 31, 1998)
INDEX OF EXHIBITS
<TABLE>
<CAPTION>
Exhibit Number Description
-------------- -----------
<S> <C>
10.39 Fifth Amendment dated as of October 31, 1998 to the
Revolving Credit Agreement dated as of February 2, 1998
among the Company, the subsidiaries of the Company, the
financial institutions party thereto and The Chase Manhattan
Bank, as Agent.
27 Financial Data Schedule (for SEC use only)
</TABLE>
<PAGE> 1
EXHIBIT 10.39
FIFTH AMENDMENT
TO REVOLVING CREDIT
AND GUARANTY AGREEMENT
FIFTH AMENDMENT, dated as of October 31, 1998 (the "Amendment"), to
the REVOLVING CREDIT AND GUARANTY AGREEMENT, dated as of February 2, 1998, among
BRUNO'S, INC., an Alabama corporation (the "Borrower"), a debtor and
debtor-in-possession under Chapter 11 of the Bankruptcy Code, the Guarantors
named therein (the "Guarantors"), THE CHASE MANHATTAN BANK, a New York banking
corporation ("Chase"), each of the other financial institutions party thereto
(together with Chase, the "Banks"), THE CHASE MANHATTAN BANK, as Agent (in such
capacity, the "Agent") for the Banks, and THE CIT GROUP/BUSINESS CREDIT, INC.
and FIRST UNION NATIONAL BANK, as Co-Agents.
W I T N E S S E T H:
WHEREAS, the Borrower, the Guarantors, the Banks, the Agent and the
Co-Agents are parties to that certain Revolving Credit and Guaranty Agreement,
dated as of February 2, 1998, as amended by the First Amendment to Revolving
Credit and Guaranty Agreement dated as of March 5, 1998, the Second Amendment to
Revolving Credit and Guaranty Agreement dated as of March 25, 1998, the Third
Amendment to Revolving Credit and Guaranty Agreement dated as of April 21, 1998
and the Fourth Amendment to Revolving Credit and Guaranty Agreement dated as of
July 31, 1998 (as the same may be further amended, modified or supplemented from
time to time, the "Credit Agreement");
WHEREAS, the Borrower and the Guarantors have requested that from and
after the Effective Date (as hereinafter defined) of this Amendment, the Credit
Agreement be amended subject to and upon the terms and conditions set forth
herein;
NOW, THEREFORE, it is agreed:
1. As used herein all terms that are defined in the Credit
Agreement shall have the same meanings herein.
2. Section 6.04 of the Credit Agreement is hereby amended to
read in its entirety as follows:
"Capital Expenditures. Make Capital Expenditures (x) in an
aggregate amount in excess of $65,000,000 for the fiscal year ending
January 30, 1999 (in accordance with and as described in Schedule
6.04) or (y) during any fiscal quarter ending on each of the dates
listed below, in an aggregate amount in excess of the amount specified
opposite such date:
1
<PAGE> 2
<TABLE>
<CAPTION>
Capital
Quarter Ending Expenditures
-------------- ------------
<S> <C>
May 1, 1999 $13,355,000
July 31, 1999 12,580,000
October 30, 1999 14,855,000
January 29, 2000 8,180,000
</TABLE>
If the amount that is expended for Capital Expenditures during
any of the fiscal quarters appearing in the table set forth above
is less than the permitted amount thereof for such fiscal
quarter, 100% of the unused portion thereof may be carried over
to and expended in the succeeding fiscal quarters in addition to
the amounts that are otherwise permitted to be expended in such
succeeding fiscal quarters."
3. Section 6.05 of the Credit Agreement is hereby amended by
(x) deleting the designation "(a)" appearing in the first line
thereof, (y) deleting subsection (b) thereof in its entirety and (z)
restating the portion of the table appearing therein that begins with
the line "October 31, 1998" to read in its entirety (together with the
sentence appearing below) as follows:
<TABLE>
<CAPTION>
"Period Ending EBITDA
-------------- ------
<S> <C>
October 31, 1998 $ 8,000,000
November 28, 1998 9,800,000
December 26, 1998 12,000,000
January 30, 1999 13,800,000
February 27, 1999 15,900,000
March 27, 1999 18,000,000
May 1, 1999 20,600,000
May 29, 1999 22,500,000
June 26, 1999 24,300,000
July 31, 1999 26,600,000
August 28, 1999 28,200,000
September 25, 1999 29,900,000
October 30, 1999 32,000,000
November 27, 1999 34,600,000
December 25, 1999 37,200,000
January 29, 2000 40,400,000
</TABLE>
In addition, the Borrower shall not permit EBITDA for any of the
above periods ending on or after October 31, 1998 to be
negative."
2
<PAGE> 3
4. This Amendment shall not become effective until the date (the
"Effective Date") on which this Amendment shall have been executed by the
Borrower, the Guarantors and Banks constituting the Required Banks, and the
Agent shall have received evidence satisfactory to it of such execution.
5. The Borrower agrees that its obligations set forth in Section
10.05 of the Credit Agreement shall extend to the preparation, execution and
delivery of this Amendment.
6. This Amendment shall be limited precisely as written and shall
not be deemed (a) to be a consent granted pursuant to, or a waiver or
modification of, any other term or condition of the Credit Agreement or any of
the instruments or agreements referred to therein or (b) to prejudice any right
or rights which the Agent or the Banks may now have or have in the future under
or in connection with the Credit Agreement or any of the instruments or
agreements referred to therein. Whenever the Credit Agreement is referred to in
the Credit Agreement or any of the instruments, agreements or other documents or
papers executed or delivered in connection therewith, such reference shall be
deemed to mean the Credit Agreement as modified by this Amendment.
7. This Amendment may be executed in any number of counterparts and
by the different parties hereto in separate counterparts, each of which when so
executed and delivered shall be deemed to be an original and all of which taken
together shall constitute but one and the same instrument.
8. This Amendment shall in all respects be construed in accordance
with and governed by the laws of the State of New York applicable to contracts
made and to be performed wholly within such State.
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be
duly executed as of the day and the year first above written.
BORROWER:
BRUNO'S, INC.
By: /s/ John Stakel
---------------
Title: Vice President/Treasurer
GUARANTORS:
PWS HOLDING CORPORATION
By: /s/ John Stakel
---------------
Title: Vice President/Treasurer
3
<PAGE> 4
FOOD MAX OF MISSISSIPPI, INC.
By: /s/ John Stakel
---------------
Title: Vice President/Treasurer
A.F. STORES, INC.
By: /s/ John Stakel
---------------
Title: Vice President/Treasurer
BR AIR, INC.
By: /s/ John Stakel
---------------
Title: Vice President/Treasurer
FOOD MAX OF GEORGIA, INC.
By: /s/ John Stakel
---------------
Title: Vice President/Treasurer
FOOD MAX OF TENNESSEE, INC.
By: /s/ John Stakel
---------------
Title: Vice President/Treasurer
FOODMAX, INC.
By: /s/ John Stakel
---------------
Title: Vice President/Treasurer
LAKESHORE FOODS, INC.
By: /s/ Walter M. Grant
-------------------
Title: Secretary
BRUNO'S FOOD STORES, INC.
By: /s/ John Stakel
---------------
Title: Vice President/Treasurer
GEORGIA SALES COMPANY
By: /s/ John Stakel
---------------
Title: Vice President/Treasurer
4
<PAGE> 5
SSS ENTERPRISES, INC.
By: /s/ John Stakel
---------------
Title: Vice President/Treasurer
THE CHASE MANHATTAN BANK,
INDIVIDUALLY AND AS AGENT
By: /s/ Norma C. Corio
------------------
Title: Managing Director
THE CIT GROUP/BUSINESS CREDIT,
INC., INDIVIDUALLY AND AS CO-AGENT
By: /s/ Christopher Hill
--------------------
Title: Assistant Vice President
FIRST UNION NATIONAL BANK,
INDIVIDUALLY AND AS CO-AGENT
By: /s/ Julie Bouhuys
-----------------
Title: Senior Vice President
FOOTHILL CAPITAL CORPORATION
By: /s/ Victor Barwig
-----------------
Title: Vice President
BNY FINANCIAL CORPORATION
By: /s/ S. Cirelli
--------------
Title: Senior Vice President
5
<PAGE> 6
THE TRAVELERS INSURANCE COMPANY
By: /s/ A.W. Carnduff
-----------------
Title: Second Vice President
BHF-BANK AKTIENGESELLSCHAFT
By: /s/ Thomas J. Scifo
-------------------
Title: Assistant Vice President
By: /s/ John Sykes
--------------
Title: Vice President
BANKAMERICA BUSINESS CREDIT, INC.
By: /s/ Ira A. Mermelstein
----------------------
Title: Vice President
CREDIT AGRICOLE INDOSUEZ
By: /s/ Dean Balice
---------------
Title: Senior Vice President
By: /s/ David Bouhl
---------------
Title: First Vice President
IBJ SCHRODER BUSINESS CREDIT CORPORATION
By: /s/ Wing C. Louie
-----------------
Title: Vice President
LASALLE BUSINESS CREDIT, INC.
By:
------------------
Title:
6
<PAGE> 7
JACKSON NATIONAL LIFE
INSURANCE COMPANY
BY: PPM FINANCE, INC.,
Attorney-in-Fact
By: /s/ James Gurgone
-----------------
Title: Vice President
DIME COMMERCIAL CORP.
By: /s/ Robert Love
---------------
Title: Vice President
RABOBANK NEDERLAND, NEW YORK BRANCH
By:
-------------------------
Title:
By:
-------------------------
Title:
7
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY INFORMATION EXTRACTED FROM THE FINANCIAL
STATEMENTS OF BRUNO'S, INC. FOR THE THIRTY-NINE WEEK PERIOD ENDED
OCTOBER 31, 1998, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JAN-30-1999
<PERIOD-START> FEB-01-1998
<PERIOD-END> OCT-31-1998
<CASH> 50,118
<SECURITIES> 0
<RECEIVABLES> 29,220
<ALLOWANCES> (517)
<INVENTORY> 183,714
<CURRENT-ASSETS> 300,629
<PP&E> 292,897
<DEPRECIATION> 305,593
<TOTAL-ASSETS> 636,878
<CURRENT-LIABILITIES> 131,542
<BONDS> 400,000
0
0
<COMMON> 255
<OTHER-SE> (524,414)
<TOTAL-LIABILITY-AND-EQUITY> 636,878
<SALES> 1,434,571
<TOTAL-REVENUES> 1,434,571
<CGS> 1,122,750
<TOTAL-COSTS> 1,122,750
<OTHER-EXPENSES> 348,466
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,567
<INCOME-PRETAX> (39,212)
<INCOME-TAX> 0
<INCOME-CONTINUING> (39,212)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (39,212)
<EPS-PRIMARY> (1.54)
<EPS-DILUTED> (1.54)
</TABLE>
