SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-Q
(x) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934 For the quarterly period ended October 17, 1998.
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period_______________________ to___________________.
Commission file number: 0-16900
RICHFOOD HOLDINGS, INC.
Incorporated under the laws I.R.S. Employer Identification
of Virginia No. 54-1438602
4860 Cox Road, Suite 300
Glen Allen, VA 23060
Telephone Number (804) 915-6000
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 November
24, 1998, was as follows:
Common Stock, without par value: 47,682,805 shares.
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PART I - FINANCIAL INFORMATION
ITEM 1. Financial Statements.
RICHFOOD HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(Dollar amounts in thousands, except per share data)
- -------------------------------------------------------------------------------------------------------------------
<CAPTION>
(Unaudited)
Second Quarter Ended
-----------------------------------------------------------
October 17, October 18,
1998 1997
(12 weeks) % (12 weeks) %
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Sales $ 909,206 100.00 $ 719,474 100.00
Costs and expenses:
Cost of goods sold 742,659 81.68 640,977 89.09
Operating and adminis-
trative expenses 131,367 14.44 53,978 7.50
Interest expense 11,420 1.26 927 0.13
Interest income (859) (0.09) (915) (0.13)
----------- ------ ----------- ------
Earnings before income taxes 24,619 2.71 24,507 3.41
Income taxes 9,540 1.05 9,497 1.32
----------- ------ ----------- ------
Net earnings $ 15,079 1.66 $ 15,010 2.09
=========== ====== =========== ======
Net earnings per
common share $ .32 $ .32
=========== ===========
Net earnings per
common share-
assuming dilution $ .32 $ .31
=========== ===========
Cash dividends declared
per common share $ .05 $ .04
=========== ===========
See accompanying Notes to the Consolidated Financial Statements.
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<TABLE>
RICHFOOD HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(Dollar amounts in thousands, except per share data)
- -------------------------------------------------------------------------------------------------------------------
<CAPTION>
(Unaudited)
Year-to-Date
-----------------------------------------------------------
October 17, October 18,
1998 1997
(24 weeks) % (24 weeks) %
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Sales $ 1,810,509 100.00 $ 1,458,599 100.00
Costs and expenses:
Cost of goods sold 1,488,323 82.20 1,300,710 89.18
Operating and adminis-
trative expenses 255,642 14.12 109,695 7.52
Interest expense 21,537 1.19 1,781 0.12
Interest income (1,664) (0.09) (1,856) (0.13)
----------- ------ ----------- ------
Earnings before income taxes 46,671 2.58 48,269 3.31
Income taxes 18,306 1.01 18,753 1.29
----------- ------ ----------- ------
Net earnings $ 28,365 1.57 $ 29,516 2.02
=========== ====== =========== ======
Net earnings per
common share $ .60 $ .62
=========== ===========
Net earnings per
common share-
assuming dilution $ .59 $ .62
=========== ===========
Cash dividends declared
per common share $ .10 $ .08
=========== ===========
See accompanying Notes to the Consolidated Financial Statements.
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<TABLE>
RICHFOOD HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollar amounts in thousands)
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
October 17, May 2,
1998 1998
(Unaudited)
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 11,768 $ 39,968
Receivables, less allowance for doubtful
accounts of $3,442 (fiscal 1998 - $3,393) 111,468 101,454
Inventories 261,889 194,875
Assets held for sale 30,220 -
Other current assets 25,628 20,675
----------- ------------
Total current assets 440,973 356,972
----------- ------------
Notes receivable, less allowance for
doubtful accounts of $1,399 (fiscal 1998 - $1,654) 34,670 22,767
Assets held for sale 30,513 26,342
Property and equipment, net 263,261 187,288
Goodwill, net 586,008 263,369
Other assets 94,186 52,113
----------- ------------
Total assets $ 1,449,611 $ 908,851
=========== ===========
Liabilities and Shareholders' Equity
Current liabilities:
Current installments of long-term debt
and capital lease obligations $ 16,121 $ 16,684
Accounts payable 232,949 209,009
Accrued expenses and other current liabilities 117,882 76,942
----------- ------------
Total current liabilities 366,952 302,635
----------- ------------
Long-term debt and capital lease obligations 709,946 253,087
Deferred credits and other 22,515 28,915
Shareholders' equity:
Preferred stock, without par value:
Authorized shares - 5,000,000;
none issued or outstanding - -
Common stock, without par value:
Authorized shares - 90,000,000;
issued and outstanding shares
47,678,305 and 47,658,964 90,854 90,729
Retained earnings 259,344 233,485
----------- ------------
Total shareholders' equity 350,198 324,214
----------- ------------
Total liabilities and shareholders' equity $ 1,449,611 $ 908,851
=========== ============
See accompanying Notes to the Consolidated Financial Statements.
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<TABLE>
RICHFOOD HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollar amounts in thousands)
- -------------------------------------------------------------------------------------------------------------------
<CAPTION>
(Unaudited)
October 17, October 18,
1998 1997
(24 weeks) (24 weeks)
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Operating activities:
Net earnings $ 28,365 $ 29,516
Adjustments to reconcile net earnings to net cash
(used for) provided by operating activities:
Depreciation and amortization 25,122 14,807
Provision for doubtful accounts 1,593 1,814
Other, net (1,807) (54)
Changes in operating assets and liabilities,
net of effects of acquisitions:
Receivables (14,857) (10,665)
Inventories (34,758) (8,974)
Other current assets 127 1,102
Accounts payable, accrued expenses
and other liabilities (18,183) 5,816
---------- ----------
Net cash (used for) provided by operating activities (14,398) 33,362
---------- ----------
Investing activities:
Acquisitions, net of cash acquired (182,701) -
Proceeds from sale of assets held for sale 8,179 -
Purchases of property and equipment (29,607) (10,176)
Issuance of notes receivable (7,109) (4,636)
Collections on notes receivable 1,694 2,692
Other, net (6,126) (5,707)
---------- ----------
Net cash used for investing activities (215,670) (17,827)
---------- ----------
Financing activities:
Net proceeds from revolving credit facilities 35,000 -
Proceeds from issuance of long-term debt 200,000 -
Principal repayments on long-term debt
and capital lease obligations (29,055) (10,277)
Proceeds from issuance of common stock
under employee stock incentive plans 213 922
Cash dividends paid on common stock (4,290) (3,322)
---------- ----------
Net cash provided by (used for) financing activities 201,868 (12,677)
---------- ----------
Net (decrease) increase in cash and cash equivalents (28,200) 2,858
Cash and cash equivalents at beginning of period 39,968 10,416
----------- -----------
Cash and cash equivalents at end of period $ 11,768 $ 13,274
========== ==========
See accompanying Notes to the Consolidated Financial Statements.
</TABLE>
5
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RICHFOOD HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Note 1. The consolidated financial statements of Richfood Holdings, Inc. and
subsidiaries (the "Company") presented herein are unaudited (except
for the consolidated balance sheet as of May 2, 1998, which has been
derived from the audited consolidated balance sheet as of that date)
and have been prepared by the Company pursuant to the rules and
regulations of the Securities and Exchange Commission. The accounting
policies and principles used to prepare these interim consolidated
financial statements are consistent in all material respects with
those reflected in the consolidated financial statements included in
the Annual Report on Form 10-K for the fiscal year ended May 2, 1998
("fiscal 1998"). In the opinion of management, such consolidated
financial statements include all adjustments, consisting of normal
recurring adjustments and the use of estimates, necessary to
summarize fairly the Company's financial position and results of
operations. Certain information and note disclosures normally
included in consolidated financial statements prepared in accordance
with generally accepted accounting principles have been omitted
pursuant to such rules and regulations. These consolidated financial
statements should be read in conjunction with the consolidated
financial statements and notes thereto of the Company included in its
Annual Report on Form 10-K for fiscal 1998. The results of operations
for the twelve and twenty-four week periods ended October 17, 1998,
may not be indicative of the results that may be expected for the
fiscal year ending May 1, 1999 ("fiscal 1999").
Note 2. On May 18, 1998, a wholly-owned subsidiary of the Company acquired
all of the outstanding shares of Dart Group Corporation ("Dart") for
$160 per share, net to the seller in cash, or approximately $201.0
million (the "Dart Acquisition"). The purchase price has been
allocated to the assets acquired and liabilities assumed based on
their estimated fair values according to preliminary valuations.
Dart, headquartered in Landover, Maryland, was comprised, at the time
of acquisition, of: Shoppers Food Warehouse Corporation ("Shoppers"),
a 100% owned chain of 37 price impact supermarkets operating in the
greater Washington, DC metropolitan area; Trak Auto Corporation
("Trak"), a publicly-owned retailer of auto parts (67.1% owned by
Dart); Crown Books Corporation ("Crown"), a publicly-owned retailer
of popular books (52.3% owned by Dart); and Total Beverage
Corporation ("Total Beverage"), a discount beverage retailer (100%
owned by Dart). At the time of the Dart Acquisition, Shoppers had
outstanding $200 million in principal amount of 9 3/4% Senior Notes
due 2004. The Company accounted for the acquisition under the
purchase method of accounting and, accordingly, the results of
operations of Dart and Shoppers have been included in the Company's
Consolidated Statements of Earnings since the date of acquisition.
The results of operations of Trak, Crown and Total Beverage are
excluded from the Consolidated Statement of Earnings for the period
ended October 17, 1998, in accordance with Emerging Issues Task Force
Issue No. 87-11: "Allocation of Purchase Price to Assets to be Sold."
Total Beverage was sold by Dart to an unaffiliated third party on May
22, 1998 for approximately $8.2 million. As it is the Company's
intention to dispose of Trak within one year from the date of
acquisition, Trak is classified as a current asset held for sale in
the Company's Consolidated Balance Sheet at its estimated net
realizable value. Crown filed a voluntary petition for protection
under Chapter 11 of the United States Bankruptcy Code on July 14,
1998.
On March 4, 1998, a wholly-owned subsidiary of the Company acquired
substantially all of the assets and assumed certain liabilities of
Farm Fresh, Inc., a privately held supermarket chain headquartered in
Norfolk, Virginia ("Farm Fresh"). The Company did not assume Farm
Fresh's indebtedness for borrowed money or lease obligations for
previously closed stores or stores that were closed in connection
with the transaction. The Company accounted for the acquisition under
the purchase method of accounting and, accordingly, the results of
operations of the acquired business have been included in the
Company's Consolidated Statement of Earnings since the date of
acquisition.
6
<PAGE>
The following unaudited pro forma financial information presents a
summary of consolidated results of operations of the Company, Dart
(excluding the operations of Trak, Crown and Total Beverage) and Farm
Fresh as if the acquisitions had occurred at the beginning of fiscal
1998, with pro forma adjustments to give effect to amortization of
goodwill, interest expense on acquisition debt and certain other
adjustments, together with related tax effects. This pro forma
information is presented for informational purposes only and is not
necessarily indicative of the combined results of operations that
would have occurred had the transactions been consummated on that
date or that may be obtained in the future. The purchase price of
Dart has been allocated to the assets acquired and liabilities
assumed based on their estimated fair values according to preliminary
valuations. Such estimated values may change as the valuations are
finalized and more facts become known.
<TABLE>
<CAPTION>
(in thousands, except per share data) Twelve weeks ended Twenty-four weeks ended
October 17, October 18, October 17, October 18,
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Sales $ 909,206 $ 926,442 $ 1,830,911 $ 1,881,443
Earnings before extraordinary loss
and cumulative effect of accounting
change $ 15,079 $ 13,598 $ 28,153 $ 29,473
Extraordinary loss, net of tax - (3,126) - (3,126)
Cumulative effect of accounting
change, net of tax - 1,729 - 1,729
----------- ----------- ------------ ------------
Net earnings $ 15,079 $ 12,201 $ 28,153 $ 28,076
=========== =========== ============ ============
Per Common Share Data:
Earnings before extraordinary loss and
cumulative effect of accounting change $ 0.32 $ 0.29 $ 0.59 $ 0.62
Extraordinary loss, net of tax - (0.07) - (0.07)
Cumulative effect of accounting
change, net of tax - 0.04 - 0.04
----------- ----------- ----------- ------------
Net earnings $ 0.32 $ 0.26 $ 0.59 $ 0.59
=========== =========== =========== ============
Earnings before extraordinary loss and
cumulative effect of accounting change
--assuming dilution $ 0.32 $ 0.29 $ 0.59 $ 0.62
Extraordinary loss, net of - (0.07) - (0.07)
tax--assuming dilution
Cumulative effect of accounting change,
net of tax--assuming dilution
- 0.04 - 0.04
----------- ----------- ----------- ------------
Net earnings--assuming dilution $ 0.32 $ 0.26 $ 0.59 $ 0.59
=========== =========== =========== ============
</TABLE>
7
<PAGE>
Note 3. The following table sets forth the computation of basic and diluted
earnings per share for the twelve and twenty-four week periods ended
October 17, 1998, and October 18, 1997, respectively:
<TABLE>
<CAPTION>
(dollars in thousands, except per Twelve weeks ended Twenty-four weeks ended
share data) October 17, October 18, October 17, October 18,
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
NUMERATOR:
Net Earnings $ 15,079 $ 15,010 $ 28,365 $ 29,516
=========== =========== ============ ============
DENOMINATOR:
Denominator for basic earnings per
share--weighted average common shares 47,675,627 47,505,909 47,671,230 47,470,114
Effect of dilutive securities:
Stock options 116,653 231,432 137,928 25,429
----------- ----------- ------------ ------------
Denominator for diluted earnings
per share--adjusted weighted average
common shares 47,792,280 47,737,341 47,809,158 47,695,543
=========== =========== ============ ============
Net earnings per common share--basic $ 0.32 $ 0.32 $ 0.60 $ 0.62
=========== =========== ============ ============
Net earnings per common share--diluted $ 0.32 $ 0.31 $ 0.59 $ 0.62
=========== =========== ============ ============
</TABLE>
Note 4. Effective May 3, 1998, the Company adopted the provisions of
Statement of Financial Accounting Standards No. 131, "Disclosures
about Segments of an Enterprise and Related Information." The Company
has significant operations principally in two industry segments: the
wholesale grocery division and the retail grocery division.
The Company's wholesale grocery division is the largest wholesale
food distributor in the Mid-Atlantic operating region. This segment
distributes a full range of grocery, dairy, frozen food, produce,
meat and non-food items to the Company's retail grocery division and
to chain and independent retailers throughout the region from its two
principal distribution centers located in Richmond, Virginia and
Harrisburg, Pennsylvania. This segment also includes the Company's
fluid dairy operations located in Richmond, Virginia.
The Company's retail grocery division consists primarily of three
grocery store chains: 43 Farm Fresh supermarkets located primarily in
Virginia's Hampton Roads region; 38 Shoppers Food Warehouse price
impact warehouse-style supermarkets in the Washington, D.C.
metropolitan area; and 18 Metro grocery stores in the Baltimore
metropolitan area.
The accounting policies of the segments are the same as those
described in Note 1. The Company evaluates performance based on a
measurement of operating profit (defined as sales less cost of goods
sold and operating and administrative expenses). The Company
generally accounts for intersegment sales and transfers at current
market prices as if the sales or transfers were to unaffiliated third
parties. General corporate expenses are not allocated between the
wholesale grocery and retail grocery segments.
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<TABLE>
The following table summarizes key segment information and reconciles
segment results to consolidated financial results:
<CAPTION>
(dollar amounts in thousands) Twelve weeks ended Twenty-four weeks ended
October 17, October 18, October 17, October 18,
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Sales:
Wholesale grocery $ 743,446 $ 689,574 $ 1,457,729 $ 1,397,850
Intersegment sales (238,436) (41,494) (442,460) (84,525)
------------ ------------ ------------- ------------
Wholesale grocery sales to
external customers 505,010 648,080 1,015,269 1,313,325
Retail grocery 404,196 71,394 795,240 145,274
------------ ------------ ------------- ------------
Total sales $ 909,206 $ 719,474 $ 1,810,509 $ 1,458,599
============= ============ ============= ============
Operating Profit:
Wholesale grocery $ 26,588 $ 24,816 $ 53,512 $ 48,535
Retail grocery 11,218 1,161 18,372 2,672
General corporate expense (2,626) (1,458) (5,340) (3,013)
------------ ------------ ------------- ------------
Total operating profit 35,180 24,519 66,544 48,194
Interest expense (11,420) (927) (21,537) (1,781)
Interest income 859 915 1,664 1,856
------------ ------------ ------------- ------------
Earnings before income taxes $ 24,619 $ 24,507 $ 46,671 $ 48,269
============= ============ ============= ============
Capital expenditures:
Wholesale grocery $ 2,267 $ 2,176 $ 4,873 $ 6,396
Retail grocery 10,533 2,497 24,734 3,780
------------ ------------ ------------- ------------
Total capital expenditures $ 12,800 $ 4,673 $ 29,607 $ 10,176
============= ============ ============= ============
</TABLE>
October 17, May 2,
1998 1998
---- ----
Total identifiable assets:
Wholesale grocery $ 462,463 $ 491,928
Retail grocery 987,148 416,923
------------ ------------
Total assets $ 1,449,611 $ 908,851
============= ============
Note 5. The Company is party to various legal actions that are incidental to
its business. While the outcome of such legal actions cannot be
predicted with certainty, the Company believes that the outcome of
any of these proceedings, or all of them combined, will not have a
material adverse effect on its consolidated financial position or
results of operations.
ITEM 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
Results of Operations
- ---------------------
Sales of $909.2 million for the twelve week period ended October 17,
1998, consisted of $743.4 million of wholesale grocery sales and $404.2 million
of retail grocery sales. Wholesale grocery sales included $238.4 million of
sales to the Company's retail grocery division. Wholesale grocery sales to
external customers for the second quarter of fiscal 1999 decreased $143.1
million from the comparable period in fiscal 1998 due primarily to the
exclusion, from grocery sales to external customers in the current period, of
sales to the Company's Farm Fresh and Shoppers stores, since their March 4,
1998, and May 18, 1998, acquisition dates, respectively. Total wholesale grocery
9
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sales for the second quarter of fiscal 1999 increased $53.9 million, or 7.8%,
over sales of $689.6 million in the second quarter of fiscal 1998. This increase
was primarily attributable to incremental wholesale sales to the Company's
Shoppers and Farm Fresh retail chains which were acquired on May 18, 1998, and
March 4, 1998, respectively.
Retail grocery sales increased to $404.2 million for the twelve-week
period ended October 17, 1998, compared to sales of $71.4 million for the second
quarter of fiscal 1998, primarily due to sales generated by the Company's newly
acquired Shoppers and Farm Fresh retail chains. Metro sales for the second
quarter of fiscal 1999 increased $1.7 million over the second quarter of fiscal
1998 due primarily to the opening of a new store and a 1.0% increase in
comparable store sales.
Sales of $1,810.5 million for the twenty-four week period ended October
17, 1998, consisted of $1,457.7 million of wholesale grocery sales and $795.2
million of retail grocery sales. Wholesale grocery sales included $442.5 million
of sales to the Company's retail grocery division. Wholesale grocery sales to
external customers for the twenty-four weeks ended October 17, 1998, decreased
$298.1 million from the comparable period in fiscal 1998 due primarily to the
exclusion, from grocery sales to external customers in the current period, of
sales to the Company's Farm Fresh and Shoppers stores since their March 4, 1998,
and May 18, 1998, acquisition dates, respectively. Total wholesale grocery sales
for the first twenty-four weeks of fiscal 1999 increased $59.9 million, or 4.3%,
over sales of $1,397.9 million in the first twenty-four weeks of fiscal 1998.
This increase was primarily attributable to incremental wholesale sales to the
Company's Shoppers and Farm Fresh retail chains, which were acquired on May 18,
1998, and March 4, 1998, respectively, offset in part by the expiration of the
Acme Markets, Inc. supply agreement in June 1997 and the effect of competitive
openings on the Company's independent retail grocery customers.
Retail grocery sales increased to $795.2 million for the twenty-four
week period ended October 17, 1998, compared to sales of $145.3 million for the
first twenty-four weeks of fiscal 1998, primarily due to sales generated by the
Company's newly acquired Shoppers and Farm Fresh retail chains. Metro sales for
the twenty-four weeks ended October 17, 1998 increased $6.7 million over sales
of $139.2 million in the first twenty-four weeks of fiscal 1998 primarily due to
the opening of one new store and a 1.5% increase in comparable store sales.
Gross margin was 18.32% and 17.80% of sales, respectively, for the
twelve and twenty-four week periods ended October 17, 1998, compared to 10.91%
and 10.82% of sales, respectively, for the same periods last fiscal year. The
increase in gross margin was primarily attributable to the inclusion of higher
retail gross margins as a result of the Shoppers and Farm Fresh acquisitions.
Operating and administrative expenses for the twelve-week period ended
October 17, 1998, were $131.4 million, or 14.44% of sales, compared to $54.0
million, or 7.50% of sales, for the second quarter of fiscal 1998. Operating and
administrative expenses for the twenty-four week period ended October 17, 1998,
were $255.6 million, or 14.12% of sales, compared to $109.7 million, or 7.52% of
sales, for the comparable period last fiscal year. The increase in operating and
administrative expenses as a percent of sales for both the twelve and
twenty-four week periods ended October 17, 1998 was primarily attributable to
the inclusion of Shoppers' and Farm Fresh's higher retail operating and
administrative expense ratios.
Interest expense for the twelve and twenty-four week periods ended
October 17, 1998, was $11.4 million and $21.5 million, respectively, compared to
$0.9 million and $1.8 million, respectively, for the same periods last fiscal
year. This increase was primarily due to incremental interest expense related to
increased indebtedness incurred to finance the Company's Farm Fresh and Dart
acquisitions. The Farm Fresh acquisition was financed with proceeds from a $250
million, five-year, senior unsecured revolving credit facility (the "$250
million facility"). On May 12, 1998, the Company entered into an agreement with
a syndicate of commercial banks that provided $450 million of senior unsecured
10
<PAGE>
credit facilities (the "Facilities"), consisting of a $250 million, five-year
revolving credit facility (the "Revolver") and a $200 million, 18-month term
loan (the "Term Loan"). Proceeds from the Facilities were used to finance the
Dart Acquisition and to repay the outstanding balance of $192 million under the
$250 million facility. At the time of the Dart Acquisition, Shoppers had
outstanding $200 million in principal amount of 9 3/4% Senior Notes due 2004.
The Company's effective income tax rate was 38.75% and 39.22% for the
twelve and twenty-four week periods ended October 17, 1998, respectively,
compared to 38.75% and 38.85% for the same periods last fiscal year.
Net earnings for the twelve week period ended October 17, 1998, of
$15.1 million, or $0.32 per share, assuming dilution, increased from net
earnings of $15.0 million, or $0.31 per share, assuming dilution, for the second
quarter of fiscal 1998. Net earnings for the twenty-four week period ended
October 17, 1998, were $28.4 million, or $0.59 per share, assuming dilution, a
3.9% decrease from net earnings of $29.5 million, or $0.62 per share, assuming
dilution, for the same period last fiscal year. This decrease is primarily due
to the initial dilutive effect in the first quarter of fiscal 1999 of the recent
Dart and Farm Fresh acquisitions.
Liquidity and Capital Resources
- -------------------------------
Net cash used for operating activities for the twenty-four week period
ended October 17, 1998, was $14.4 million. This amount included net earnings of
$28.4 million and depreciation and amortization of $25.1 million. These amounts
were offset by changes in working capital accounts primarily attributable to the
effects of seasonal demands and inventory buying opportunities in the wholesale
business.
Net cash used for investing activities of $215.7 million for the
twenty-four week period ended October 17, 1998, primarily consisted of
approximately $182.7 million, net of cash acquired, used for the Dart
Acquisition. Capital expenditures were $29.6 million for the twenty-four week
period ended October 17, 1998, and included $24.7 million and $4.9 million for
the retail and wholesale grocery divisions, respectively. Capital expenditures
for the retail grocery division primarily consisted of approximately $15 million
for the conversion of Farm Fresh warehouse format stores to its conventional
store format and other Farm Fresh store remodels. In addition, retail capital
expenditures included capital employed for one new Metro store (which opened in
November 1998) and one new Shoppers store (which opened in July 1998). Capital
expenditures for the wholesale grocery division primarily consisted of $1.7
million for the installation of ultra-high temperature manufacturing
technologies at the Company's fluid dairy plant. Customer notes issued were $7.1
million for the period, offset in part by collections on customer notes of $1.7
million. Proceeds from the sale of assets held for sale consisted of $8.2
million from the sale of Total Beverage on May 22, 1998.
Net cash provided by financing activities of $201.9 million for the
twenty-four week period ended October 17, 1998, consisted primarily of proceeds
from the issuance of long-term debt of $200.0 million under the Term Loan and
net proceeds from borrowings under revolving credit facilities of $35.0 million,
which were offset in part by principal payments on long-term debt and capital
lease obligations of $29.1 million. The $29.1 million of principal payments on
long term debt and capital lease obligations consisted primarily of a $9.0
million principal payment on the Company's 6.15% Senior Notes, a $7.2 million
partial redemption of Shoppers' 9 3/4% Senior Notes and a $7.0 million principal
repayment on the Term Loan.
The Company's total debt was $726.1 million at October 17, 1998,
compared to $269.8 million at May 2, 1998. The increase in total debt was
primarily attributable to indebtedness incurred to finance the Dart acquisition.
11
<PAGE>
Shareholders' equity increased to $350.2 million at October 17, 1998, from
$324.2 million at May 2, 1998. The ratio of total debt to total capitalization
(defined as total debt plus shareholders' equity) was 0.67 to 1 at October 17,
1998, and 0.45 to 1 at May 2, 1998.
The Company believes that it has the ability to continue to generate
adequate funds from its operations and through borrowings under its long-term
debt facilities to maintain its competitive position and expand its business.
Year 2000 Compliance
- --------------------
The "Year 2000" issue is the result of computer systems and software
programs using only two digits rather than four to define a year. As a result,
computer systems that have date-sensitive software may recognize a date using
"00" as the year 1900 rather than the year 2000. Unless remedied, the Year 2000
issue could result in system failures, miscalculations, and the inability to
process necessary transactions or engage in similar normal business activities.
In addition to computer systems and software, any equipment using embedded
chips, such as switchgear, controllers and telephone exchanges, could also be at
risk.
During 1997, the Company developed, and began implementing, a
strategic, long-term information technology plan (the "Strategic Plan") to
upgrade its core application systems. Concurrently, it has developed and is
implementing, a plan (the Y2K Plan") to ensure that its information systems are
Year 2000 compliant. The Y2K Plan focuses on the following three major areas:
o Information technology systems ("IT").
o Embedded technology and other systems ("Non-IT").
o Key third party relationships.
Based on the Strategic Plan and assessments conducted as part of the
Y2K Plan, the Company determined that it would be necessary to modify or replace
portions of its software and certain hardware systems so that such systems will
properly recognize dates beyond December 31, 1999. The Company presently
believes that with the modification or replacement of existing software and
certain hardware systems, the Year 2000 issue can be significantly mitigated.
However, if such modifications and replacements are not made, or are not
completed in a timely manner, the Year 2000 issue could have a material adverse
impact on the results of operations of the Company.
The Y2K Plan consists of two distinct components: the Wholesale Grocery
Division Plan, which addresses Year 2000 issues relating to the Company's
wholesale grocery division; and the Retail Grocery Division Plan, which
addresses Year 2000 issues relating to the Company's retail grocery division.
The Wholesale Grocery Division Plan
- -----------------------------------
The Wholesale Grocery Division Plan consists of the following four
phases:
o Assessment - locating, listing and prioritizing the specific
technology that is potentially subject to Year 2000 issues,
assessing the actual exposure of such technology to the Year
2000 issue, and planning/scheduling the allocation of
internal and third party resources for the remediation
effort.
o Remediation of non-compliant systems - selecting and
executing the method necessary to resolve the Year 2000
issues that were identified, including replacement, upgrade,
repair or abandonment.
12
<PAGE>
o Testing - testing the remediated or converted technology to
determine the efficacy of the resolutions.
o Implementation - placing remediated technology into
operation.
The assessment phase has been completed with respect to IT and Non-IT
systems that the Company believes could be significantly affected by the Year
2000 issue. The assessment indicated that most of the wholesale grocery
division's significant IT systems could be affected, particularly accounting,
billing, procurement, warehouse management and distribution systems, human
resources and payroll and that software, hardware and equipment using embedded
chips in production and manufacturing systems are also at risk.
With respect to IT systems, the Wholesale Grocery Division Plan
utilizes both internal and external resources to remediate, test and implement
the modification and/or replacement of its software and hardware. The
remediation phase is approximately 50% complete and is expected to be completed
by early 1999. The testing and implementation phases are approximately 10%
complete and are expected to be completed by mid 1999.
With respect to Non-IT systems, the remediation phase of the Wholesale
Grocery Division Plan is approximately 40% complete. Once testing is complete,
compliant equipment will be ready for immediate use. Remediation, testing and
implementation of non-compliant equipment is expected to be completed by mid
1999.
Because of the interdependence of information systems today, Year 2000
compliant companies may be affected by the Year 2000 readiness of their material
suppliers, customers and other third parties. As part of the wholesale grocery
division's evaluation of the Year 2000 readiness of its suppliers, customers and
other third parties, the division expects to query its significant service
vendors and subcontractors in order to validate Year 2000 compliance by mid
1999. It is not anticipated that product vendors will be queried since, in most
instances, substitute products can be obtained from other vendors in the event
that the division's primary vendors are not Year 2000 compliant in a timely
manner. However, the Company's wholesale grocery division has been working with
significant third parties that interface directly with the division to validate
Year 2000 compliance. The remediation phase is approximately 25% complete, with
implementation scheduled for January 1999. Although management has not yet
determined the risk associated with the failure of any such party to become Year
2000 compliant, such failure could have a material adverse effect on the
Company's results of operations or financial position.
Total costs associated with the Wholesale Grocery Division Plan are
expected to be approximately $5.2 million. Pursuant to the existing Strategic
Plan, approximately $3.1 million has, or is expected to be, capitalized in
accordance with GAAP, with approximately $0.9 million capitalized during the
twenty-four weeks ended October 17, 1998. This includes the acceleration of
approximately $2.9 million of planned capital expenditures relating to computer
systems and software, primarily procurement, warehousing management and
distribution systems, human resources, and payroll software. To date, the
division has spent approximately $2.9 million of the total cost and expects to
spend the majority of the remaining costs over the next 12 months. All
expenditures related to the Wholesale Grocery Division Plan will be funded by
cash flow from operations and are not expected to impact other operating or
investment plans. Management does not believe that any of the wholesale grocery
division's material information technology projects have been deferred due to
the Y2K Plan.
13
<PAGE>
The Retail Grocery Division Plan
- --------------------------------
The Retail Grocery Division Plan involves the following three phases:
o Assessment -- locating, listing and prioritizing the
specific technology that is potentially subject to Year 2000
issues, assessing the actual exposure of such technology to
the Year 2000 issue, and planning/scheduling the allocation
of internal and third party resources for the remediation
effort.
o Remediation/Testing of non-compliant systems - selecting and
executing the method necessary to resolve the Year 2000
issues that were identified, including replacement, upgrade,
repair or abandonment and; testing the remediated or
converted technology to determine the efficacy of the
resolutions.
o Implementation - placing remediated technology into
operation.
The assessment phase has been completed with respect to IT and Non-IT
systems that the Company believes could be adversely affected by the Year 2000
issue. The assessment indicated that many of the division's significant
information systems could be adversely affected, particularly the general
ledger, human resources, payroll, point of sale and pharmacy systems. Non-IT
systems, including telephones, loss-prevention and food production systems, are
also being validated but do not present a significant risk to the retail
business.
With respect to IT systems, the remediation/testing phase is
approximately 40% complete, with an expected completion date of early 1999, and
the implementation phase is expected to continue until September 1999. Certain
point of sale software systems and all time and attendance systems will be
upgraded or replaced during 1999. Additionally, human resources, payroll and
general ledger system software upgrades are expected to be completed by mid
1999.
The majority of the retail grocery division's Non-IT systems are
currently Year 2000 compliant; however, certain systems, which include
telephones, will need to be upgraded or replaced. The Non-IT systems
remediation/testing phase is approximately 50% complete and full implementation
is expected by mid 1999.
As part of the retail grocery division's evaluation of the Year 2000
readiness of its material suppliers, customers and other third parties, the
division has not identified any class of third party providers that could
materially impact the division's results of operations in the event of their
failure to become Year 2000 compliant. However, there can be no assurance that
the failure of any unrelated third parties to become Year 2000 compliant in a
timely manner would not result in a material adverse effect on the Company's
results of operations or financial position.
Total costs associated with the Retail Grocery Division Plan are
expected to be approximately $5.8 million. Pursuant to the existing Strategic
Plan, approximately $3.9 million has, or is expected to be, capitalized in
accordance with GAAP, with approximately $0.8 million capitalized during the
twenty-four weeks ended October 17, 1998. This includes the acceleration of
approximately $2.5 million of planned capital expenditures relating to computer
systems, primarily point of sale equipment. To date, the division has spent
approximately $1.4 million of the total cost and expects to spend the majority
of the remaining costs over the next 12 months. All expenditures related to the
Retail Grocery Plan will be funded by cash flow from operations and are not
expected to impact other operating or investment plans. Management does not
believe that any of the Retail Grocery Division's material information
technology projects have been deferred due to the Y2K Plan.
14
<PAGE>
The aforementioned costs of the Y2K Plan and the completion dates for
both the wholesale and retail grocery divisions are based on management's best
estimates, which were derived from assumptions of future events, including the
availability of resources, key third party modification plans and other factors.
There can be no assurance that these estimates will prove to be accurate, and
actual results could vary due to uncertainties.
Although the Y2K Plan is expected to be adequate to address the
Company's Year 2000 concerns, the Company could experience a material adverse
effect on its results of operations or financial position if its Year 2000
compliance schedule is not met, if the costs to remediate the Company's Year
2000 issues significantly exceed current estimates or if material suppliers,
customers and other businesses encounter serious problems in their Year 2000
remediation efforts. Therefore, the Company is in the process of developing
plans to address such contingencies, with a focus on mission critical systems.
The Company expects to complete its contingency plans in mid 1999 and expects
that such plans may include provisions relating to, among other things, manual
workarounds, stockpiling inventories and adjusting staffing strategies, and will
describe the communications, operations and IT activities that will be utilized
if the Company's contingency plans must be executed.
The Company's Year 2000 efforts are ongoing and the Y2K Plan will
continue to evolve as new information becomes available. The failure to correct
a material Year 2000 issue could result in an interruption in certain normal
business activities and operations. Due to the general uncertainty inherent in
the Year 2000 issue, resulting in part from the uncertainty of the Year 2000
readiness of third parties upon whom the Company relies, the Company is unable
to determine at this time whether the consequences of Year 2000 failures will
have a material adverse impact on the Company's results of operations. However,
the Company believes that, with the implementation of the Y2K Plan as scheduled,
the possibility of significant interruptions of normal operations should be
reduced.
15
<PAGE>
PART II - OTHER INFORMATION
ITEM 6. Exhibits and Reports on Form 8-K
(a) Exhibits.
Exhibit 27.1 - Financial Data Schedule
(b) Reports on Form 8-K.
Current Report on Form 8K/A1, dated July 27, 1998, amending the
Registrant's Current Report on Form 8-K, filed on May 28, 1998, to provide
the pro forma financial information required by Item 7.
Current Report on Form 8K/A2, dated September 30, 1998, amending the
Registrant's Current Report on Form 8K/A1, filed July 27, 1998, to provide
the Registrant's Unaudited Pro Forma Condensed Statement of Earnings for
the twelve weeks ended July 25, 1998.
16
<PAGE>
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.
RICHFOOD HOLDINGS, INC.
Date: December 1, 1998 By /s/ John C. Belknap
-------------------------
John C. Belknap
Executive Vice President
and Chief Financial Officer
17
<PAGE>
EXHIBIT INDEX
Exhibit 27.1 Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY INFORMATION EXTRACTED FROM THE COMPANY'S
CONSOLIDATED FINANCIAL STATEMENTS FOR THE TWENTY-FOUR WEEK PERIOD ENDED OCTOBER
17, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> MAY-01-1999
<PERIOD-END> OCT-17-1998
<CASH> 11,768
<SECURITIES> 0
<RECEIVABLES> 114,910
<ALLOWANCES> 3,442
<INVENTORY> 261,889
<CURRENT-ASSETS> 440,973
<PP&E> 392,476
<DEPRECIATION> 129,215
<TOTAL-ASSETS> 1,449,611
<CURRENT-LIABILITIES> 366,952
<BONDS> 0
<COMMON> 90,854
0
0
<OTHER-SE> 259,344
<TOTAL-LIABILITY-AND-EQUITY> 1,449,611
<SALES> 1,810,509
<TOTAL-REVENUES> 1,810,509
<CGS> 1,488,323
<TOTAL-COSTS> 1,488,323
<OTHER-EXPENSES> 255,642
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 21,537
<INCOME-PRETAX> 46,671
<INCOME-TAX> 18,306
<INCOME-CONTINUING> 28,365
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 28,365
<EPS-PRIMARY> 0.60
<EPS-DILUTED> 0.59
</TABLE>
