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 January 9, 1999.
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 February
16, 1999, was as follows:
Common Stock, without par value: 47,730,744 shares.
<PAGE>
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)
- ------------------------------------------------------------------------------
(Unaudited)
Third Quarter Ended
--------------------------------------------
January 9, January 10,
1999 1998
(12 weeks) % (12 weeks) %
- ------------------------------------------------------------------------------
Sales $ 946,649 100.00 $ 743,951 100.00
Costs and expenses:
Cost of goods sold 774,637 81.83 661,828 88.96
Operating and adminis-
trative expenses 129,491 13.68 53,789 7.23
Interest expense 11,479 1.21 778 0.10
Interest income (687) (0.07) (867) (0.11)
--------- ------ -------- ------
Earnings before income taxes 31,729 3.35 28,423 3.82
Income taxes 12,295 1.30 10,843 1.46
---------- --------- --------- ---------
Net earnings $ 19,434 2.05 $ 17,580 2.36
========== ========= ========== =========
Net earnings per
common share $ .41 $ .37
========== ==========
Net earnings per
common share-
assuming dilution $ .41 $ .37
========== ==========
Cash dividends declared
per common share $ .05 $ .04
========== ==========
See accompanying Notes to the Consolidated Financial Statements.
<PAGE>
RICHFOOD HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(Dollar amounts in thousands, except per share data)
- ------------------------------------------------------------------------------
(Unaudited)
Year-to-Date
--------------------------------------------
January 9, January 10,
1999 1998
(36 weeks) % (36 weeks) %
- ------------------------------------------------------------------------------
Sales $ 2,757,158 100.00 $ 2,202,550 100.00
Costs and expenses:
Cost of goods sold 2,262,960 82.08 1,962,538 89.10
Operating and adminis-
trative expenses 385,133 13.97 163,484 7.42
Interest expense 33,016 1.20 2,559 0.12
Interest income (2,351) (0.09) (2,723) (0.12)
--------- ------ -------- ------
Earnings before income taxes 78,400 2.84 76,692 3.48
Income taxes 30,601 1.11 29,596 1.34
---------- --------- --------- ---------
Net earnings $ 47,799 1.73 $ 47,096 2.14
========== ========= ========== =========
Net earnings per
common share $ 1.00 $ .99
========== ==========
Net earnings per
common share-
assuming dilution $ 1.00 $ .99
========== ==========
Cash dividends declared
per common share $ .15 $ .12
========== ==========
See accompanying Notes to the Consolidated Financial Statements.
<PAGE>
RICHFOOD HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollar amounts in thousands)
- ------------------------------------------------------------------------------
January 9, May 2,
1999 1998
(Unaudited)
- ------------------------------------------------------------------------------
Assets
Current assets:
Cash and cash equivalents $ 12,670 $ 39,968
Receivables, less allowance for doubtful
accounts of $3,403 (fiscal 1998 - $3,393) 127,817 101,454
Inventories 257,673 194,875
Assets held for sale 30,088 -
Other current assets 24,545 20,675
----------- ----------
Total current assets 452,793 356,972
----------- ----------
Notes receivable, less allowance for
doubtful accounts of $1,349 (fiscal 1998 - $1,654) 34,365 22,767
Assets held for sale 30,554 26,342
Property and equipment, net 240,758 187,288
Goodwill, net 591,942 263,369
Other assets 90,670 52,113
----------- ----------
Total assets $ 1,441,082 $ 908,851
=========== ===========
Liabilities and Shareholders' Equity
Current liabilities:
Current installments of long-term debt
and capital lease obligations $ 208,565 $ 16,684
Accounts payable 197,040 209,009
Accrued expenses and other current liabilities 132,848 76,942
----------- ----------
Total current liabilities 538,453 302,635
----------- ----------
Long-term debt and capital lease obligations 510,882 253,087
Deferred credits and other 24,312 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
47,682,993 and 47,658,964 90,919 90,729
Retained earnings 276,516 233,485
----------- ----------
Total shareholders' equity 367,435 324,214
----------- ----------
Total liabilities and shareholders' equity $ 1,441,082 $ 908,851
=========== ===========
See accompanying Notes to the Consolidated Financial Statements.
<PAGE>
RICHFOOD HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollar amounts in thousands)
- ------------------------------------------------------------------------------
(Unaudited)
January 9, January 10,
1999 1998
(36 weeks) (36 weeks)
- ------------------------------------------------------------------------------
Operating activities:
Net earnings $ 47,799 $ 47,096
Adjustments to reconcile net earnings to net cash
(used for) provided by operating activities:
Depreciation and amortization 38,632 21,807
Provision for doubtful accounts 2,493 2,919
Other, net (1,823) 13
Changes in operating assets and liabilities,
net of effects of acquisitions:
Receivables (28,092) (4,654)
Inventories (30,692) (767)
Other current assets 1,808 2,097
Accounts payable, accrued expenses
and other liabilities (47,098) (1,628)
---------- ---------
Net cash (used for) provided by operating activities (16,973) 66,883
---------- ---------
Investing activities:
Acquisitions, net of cash acquired (182,701) -
Proceeds from sale of assets held for sale 8,179 -
Purchases of property and equipment (45,865) (15,082)
Proceeds from sale of property and equipment 28,234 -
Issuance of notes receivable (12,305) (8,440)
Collections on notes receivable 2,761 4,614
Other, net (6,325) (7,714)
---------- ---------
Net cash used for investing activities (208,022) (26,622)
---------- ---------
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 (30,920) (10,617)
Proceeds from issuance of common stock
under employee stock incentive plans 291 1,174
Cash dividends paid on common stock (6,674) (5,224)
---------- ---------
Net cash provided by (used for) financing activities 197,697 (14,667)
---------- ---------
Net (decrease) increase in cash and cash equivalents (27,298) 25,594
Cash and cash equivalents at beginning of period 39,968 10,416
---------- ----------
Cash and cash equivalents at end of period $ 12,670 $ 36,010
========== ==========
See accompanying Notes to the Consolidated Financial Statements.
<PAGE>
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 thirty-six week periods ended January
9, 1999, 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 twelve
and thirty-six week periods ended January 9, 1999, 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
<PAGE>
operations of the acquired business have been included in the Company's
Consolidated Statement of Earnings since the date of acquisition.
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 Thirty-six weeks ended
January 9, January 10, January 9, January 10,
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Sales $ 946,649 $ 943,987 $ 2,777,560 $ 2,825,430
Earnings before extraordinary loss and
cumulative effect of accounting change $ 19,434 $ 11,013 $ 47,587 $ 40,486
Extraordinary loss, net of tax - - - (3,126)
Cumulative effect of accounting change,
net of tax - - - 1,729
--------- ---------- ----------- -----------
Net earnings $ 19,434 $ 11,013 $ 47,587 $ 39,089
========= ========== =========== ===========
Per Common Share Data:
Earnings before extraordinary loss and
cumulative effect of accounting change $ 0.41 $ 0.23 $ 1.00 $ 0.85
Extraordinary loss, net of tax - - - (0.07)
Cumulative effect of accounting
change, net of tax - - - 0.04
--------- ---------- ----------- -----------
Net earnings $ 0.41 $ 0.23 $ 1.00 $ 0.82
========= ========== =========== ===========
Earnings before extraordinary loss
and cumulative effect of accounting
change--assuming dilution $ 0.41 $ 0.23 $ 1.00 $ 0.85
Extraordinary loss, net of tax
--assuming dilution - - - (0.07)
Cumulative effect of accounting
change, net of tax--assuming
dilution - - - 0.04
--------- ---------- ----------- -----------
Net earnings--assuming dilution $ 0.41 $ 0.23 $ 1.00 $ 0.82
========= ========== =========== ===========
</TABLE>
<PAGE>
Note 3. The following table sets forth the computation of basic and diluted
earnings per share for the twelve and thirty-six week periods ended
January 9, 1999, and January 10, 1998, respectively:
<TABLE>
<CAPTION>
(dollars in thousands, Twelve weeks ended Thirty-six weeks ended
except per share data)
January 9, January 10, January 9, January 10,
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
NUMERATOR:
Net Earnings $ 19,434 $ 17,580 $ 47,799 $ 47,096
========== ========== ========== ==========
DENOMINATOR:
Denominator for basic
earnings per share
--weighted average
common shares 47,682,698 47,536,579 47,675,053 47,492,269
========== ========== ========== ==========
Effect of dilutive securities:
Stock options 103,108 264,167 149,094 227,858
---------- ---------- ---------- ----------
Denominator for diluted
earnings per share--adjusted
weighted average
common shares 47,785,806 47,800,746 47,824,147 47,720,127
========== ========== ========== ==========
Net earnings per common
share--basic $ 0.41 $ 0.37 $ 1.00 $ 0.99
========== ========== ========== ==========
Net earnings per common
share--diluted $ 0.41 $ 0.37 $ 1.00 $ 0.99
========== ========== ========== ==========
</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: 42 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.
<PAGE>
The following table summarizes key segment information and reconciles
segment results to consolidated financial results:
<TABLE>
<CAPTION>
(dollar amounts in thousands) Twelve weeks ended Thirty-six weeks ended
January 9, January 10, January 9, January 10,
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Sales:
Wholesale grocery $ 778,948 $ 712,861 $ 2,236,677 $ 2,110,711
Intersegment sales (251,886) (46,852) (694,346) (131,377)
----------- ---------- ----------- -----------
Wholesale grocery sales
to external customers 527,062 666,009 1,542,331 1,979,334
Retail grocery 419,587 77,942 1,214,827 223,216
----------- ---------- ----------- -----------
Total sales $ 946,649 $ 743,951 $ 2,757,158 $ 2,202,550
=========== ========== =========== ===========
Operating Profit:
Wholesale grocery $ 32,035 $ 27,650 $ 85,548 $ 76,185
Retail grocery 13,693 2,320 32,065 4,992
General corporate expense (3,207) (1,636) (8,548) (4,649)
----------- ---------- ----------- -----------
Total operating profit 42,521 28,334 109,065 76,528
Interest expense (11,479) (778) (33,016) (2,559)
Interest income 687 867 2,351 2,723
----------- ---------- ----------- -----------
Earnings before income taxes $ 31,729 $ 28,423 $ 78,400 $ 76,692
=========== ========== =========== ===========
Capital expenditures:
Wholesale grocery $ 4,920 $ 2,866 $ 9,793 $ 9,262
Retail grocery 11,338 2,040 36,072 5,820
----------- ---------- ----------- -----------
Total capital expenditures $ 16,258 $ 4,906 45,865 $ 15,082
=========== ========== =========== ===========
</TABLE>
January 9, May 2,
1999 1998
--------- -------
Total identifiable assets:
Wholesale grocery $ 489,745 $ 491,928
Retail grocery 951,337 416,923
------------ -----------
Total assets $ 1,441,082 $ 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 $946.6 million for the twelve week period ended January 9, 1999,
consisted of $778.9 million of wholesale grocery sales and $419.6 million of
retail grocery sales. Wholesale grocery sales included $251.9 million of sales
to the Company's retail grocery division. Wholesale grocery sales to external
customers of $527.1 million for the third quarter of fiscal 1999 decreased
$138.9 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. Excluding the effect of the
Farm Fresh and Shoppers acquisitions, wholesale sales to external customers for
the third quarter of fiscal 1999 increased 2.5% over the comparable period in
fiscal 1998. Total wholesale grocery sales for the third quarter of fiscal 1999
increased $66.1 million, or 9.3%, over sales of $712.9 million in the third
quarter of fiscal 1998. This increase was primarily attributable to incremental
wholesale sales to the Shoppers and Farm Fresh retail chains following their
acquisition by the Company.
<PAGE>
Retail grocery sales increased to $419.6 million for the twelve-week
period ended January 9, 1999, compared to sales of $77.9 million for the third
quarter of fiscal 1998, primarily due to sales generated by the Company's
Shoppers and Farm Fresh retail chains. Sales for the Company's Metro retail
chain during the third quarter of fiscal 1999 increased $4.6 million over the
third quarter of fiscal 1998, due primarily to the opening of two new stores.
Metro's same store sales for the twelve week period ended January 9, 1999, were
substantially unchanged from the comparable period in fiscal 1998.
Sales of $2,757.1 million for the thirty-six week period ended January 9,
1999, consisted of $2,236.7 million of wholesale grocery sales and $1,214.8
million of retail grocery sales. Wholesale grocery sales included $694.3 million
of sales to the Company's retail grocery division. Wholesale grocery sales to
external customers of $1,542.3 million for the thirty-six weeks ended January 9,
1999, decreased $437.0 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 thirty-six weeks of fiscal 1999 increased
$126.0 million, or 6.0%, over sales of $2,110.7 million in the first thirty-six
weeks of fiscal 1998. This increase was primarily attributable to incremental
wholesale sales to the Company's Shoppers and Farm Fresh retail chains following
their acquisition by the Company and new stores opened by the Company's large
regional chain customer base. These increases were 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 $1,214.8 million for the thirty-six week
period ended January 9, 1999, compared to sales of $223.2 million for the first
thirty-six weeks of fiscal 1998, primarily due to sales generated by the
Shoppers and Farm Fresh retail chains following their acquisition by the
Company. Metro sales for the thirty-six weeks ended January 9, 1999, increased
$11.3 million over sales of $214.3 million in the first thirty-six weeks of
fiscal 1998, primarily due to the opening of two new stores and a 1.0% increase
in comparable store sales.
Gross margin was 18.17% and 17.92% of sales, respectively, for the twelve
and thirty-six week periods ended January 9, 1999, compared to 11.04% and 10.90%
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
January 9, 1999, were $129.5 million, or 13.68% of sales, compared to $53.8
million, or 7.23% of sales, for the third quarter of fiscal 1998. Operating and
administrative expenses for the thirty-six week period ended January 9, 1999,
were $385.1 million, or 13.97% of sales, compared to $163.5 million, or 7.42% 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 thirty-six
week periods ended January 9, 1999 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 thirty-six week periods ended January
9, 1999, was $11.5 million and $33.0 million, respectively, compared to $0.8
million and $2.6 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
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.
<PAGE>
The Company's effective income tax rate was 38.75% and 39.03% for the
twelve and thirty-six week periods ended January 9, 1999, respectively, compared
to 38.15% and 38.59% for the same periods last fiscal year.
Net earnings for the twelve week period ended January 9, 1999, of $19.4
million, or $0.41 per share, assuming dilution, increased from net earnings of
$17.6 million, or $0.37 per share, assuming dilution, for the third quarter of
fiscal 1998. Net earnings for the thirty-six week period ended January 9, 1999,
were $47.8 million, or $1.00 per share, assuming dilution, a 1.5% increase from
net earnings of $47.1 million, or $0.99 per share, assuming dilution, for the
same period last fiscal year.
Liquidity and Capital Resources
- -------------------------------
Net cash used for operating activities for the thirty-six week period
ended January 9, 1999, was $17.0 million. This amount included net earnings of
$47.8 million and depreciation and amortization of $38.6 million, offset by
changes in working capital accounts primarily attributable to inventory buying
opportunities in the wholesale business.
Net cash used for investing activities of $208.0 million for the
thirty-six week period ended January 9, 1999, primarily consisted of
approximately $182.7 million, net of cash acquired, used for the Dart
Acquisition. Capital expenditures were $45.9 million for the thirty-six week
period ended January 9, 1999, and included $36.1 million and $9.8 million for
the retail and wholesale grocery divisions, respectively. Capital expenditures
for the retail grocery division primarily consisted of approximately $20.9
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 two new Metro stores
(which both opened in November 1998) and one new Shoppers store (which opened in
July 1998). Capital expenditures for the wholesale grocery division primarily
consisted of two projects that are currently in progress: the installation of
ultra-high temperature manufacturing technologies at the Company's fluid dairy
plant and the 97,000 square foot expansion of freezer facilities at the
Company's Harrisburg, Pennsylvania distribution center. Proceeds from the sale
of property and equipment of $28.2 million consisted primarily of the proceeds
from a sale-leaseback transaction involving seven Farm Fresh store locations.
Customer notes issued were $12.3 million for the period, offset in part by
collections on customer notes of $2.8 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 $197.7 million for the
thirty-six week period ended January 9, 1999, 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 $30.9 million. The $30.9 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 $193.0 million outstanding under the Term Loan
is due in November 1999 and is reflected as a component of Current installments
of long term debt and capital lease obligations as of January 9, 1999 in the
accompanying Consolidated Balance Sheets. Management expects to refinance the
Term Loan during the fourth quarter of fiscal 1999 or the first quarter of
fiscal 2000. The Company is currently in the process of evaluating refinancing
alternatives, which may include new bank credit facilities and one, or more,
offerings under the Company's shelf registration.
<PAGE>
The Company's total debt was $719.4 million at January 9, 1999, 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.
Shareholders' equity increased to $367.4 million at January 9, 1999, from $324.2
million at May 2, 1998. The ratio of total debt to total capitalization (defined
as total debt plus shareholders' equity) was 0.66 to 1 at January 9, 1999, 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 available 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.
<PAGE>
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.
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 80% complete and is expected to be completed by mid 1999.
The testing and implementation phases are approximately 40% 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 65% complete. Once testing is complete,
compliant equipment will be ready for immediate use. Remediation, testing and
implementation 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. Product vendors are being asked to answer a standard questionnaire
regarding their Year 2000 Plan and status. Supply alternatives are being
reviewed for critical vendors. In addition, 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, testing and
implementation phases of this portion of the project are now complete. Although
management has not yet determined the risk associated with the failure of any
such part to become Year 2000 compliant, such failure could have a material
adverse effect on the Company's results of operations or financial position.
<PAGE>
Total costs associated with the Wholesale Grocery Division Plan are
expected to be approximately $6.6 million. Pursuant to the existing Strategic
Plan, approximately $3.1 million has, or is expected to be, capitalized in
accordance with GAAP, with approximately $1.2 million capitalized during the
thirty-six weeks ended January 9, 1999. This includes the acceleration of
approximately $3.0 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 $3.9 million of the total cost and expects to
spend the majority of the remaining costs over the next 9 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.
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
65% complete, with an expected completion date of mid 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 other than the Company's wholesale grocery
division which is discussed above. 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.
<PAGE>
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 $1.0 million capitalized during the thirty-six
weeks ended January 9, 1999. 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
$1.9 million of the total cost and expects to spend the majority of the
remaining costs over the next 9 months. All expenditures related to the Retail
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 Retail Grocery Division's material information
technology projects have been deferred due to the Y2K Plan.
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 to normal operations should be
reduced.
<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.
None.
<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: February 23, 1999 By /s/ John C. Belknap
---------------------
John C. Belknap
Executive Vice President
and Chief Financial Officer
<PAGE>
EXHIBIT INDEX
Exhibit 27.1 Financial Data Schedule
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY INFORMATION EXTRACTED FROM THE COMPANY'S
CONSOLIDATED FINANCIAL STATEMENTS FOR THE THIRTY-SIX WEEK PERIOD ENDED JANUARY
9, 1999 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> MAY-01-1999
<PERIOD-END> JAN-09-1999
<CASH> 12,670
<SECURITIES> 0
<RECEIVABLES> 131,220
<ALLOWANCES> 3,403
<INVENTORY> 257,673
<CURRENT-ASSETS> 452,793
<PP&E> 378,919
<DEPRECIATION> 138,161
<TOTAL-ASSETS> 1,441,082
<CURRENT-LIABILITIES> 538,453
<BONDS> 0
0
0
<COMMON> 90,919
<OTHER-SE> 276,516
<TOTAL-LIABILITY-AND-EQUITY> 1,441,082
<SALES> 2,757,158
<TOTAL-REVENUES> 2,757,158
<CGS> 2,262,960
<TOTAL-COSTS> 2,262,960
<OTHER-EXPENSES> 385,133
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 33,016
<INCOME-PRETAX> 78,400
<INCOME-TAX> 30,601
<INCOME-CONTINUING> 47,799
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 47,799
<EPS-PRIMARY> 1.00
<EPS-DILUTED> 1.00
</TABLE>
