<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
------------------------------
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Date of Report (Date of earliest event reported): August 31, 1999
SUPERVALU INC.
----------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 1-5418 41-0617000
- --------------------------------------------------------------------------------
(State or other jurisdiction (Commission (I.R.S. Employer
of incorporation) File Number) Identification No.)
11840 Valley View Road
Eden Prairie, Minnesota 55344
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (612) 828-4000
--------------
- --------------------------------------------------------------------------------
(Former name or former address, if changed since last report)
<PAGE>
Item 2. Acquisition or Disposition of Assets.
Effective August 31, 1999, SUPERVALU INC. ("SUPERVALU") acquired all of the
outstanding common stock of Richfood Holdings, Inc. ("Richfood"). The
acquisition was consummated pursuant to an Agreement and Plan of Merger, dated
as of June 9, 1999, among Richfood, SUPERVALU and a wholly-owned subsidiary of
SUPERVALU, providing for the merger of Richfood with and into the subsidiary of
SUPERVALU (the "Merger"). The Merger has been accounted for as a purchase.
As consideration for the Merger, SUPERVALU paid $443 million in cash and
issued approximately 19.7 million shares of SUPERVALU common stock with a market
value of approximately $443 million. For shareholders receiving stock
consideration in the Merger, the conversion ratio was .8239 shares of SUPERVALU
common stock for each Richfood share. SUPERVALU also assumed $685 million of
Richfood debt, of which approximately $394 million was repaid by SUPERVALU after
the closing. To finance the acquisition and repay the Richfood debt, SUPERVALU
used cash, a portion of the proceeds from the issuance of $350 million of 7 7/8%
10-year notes in August 1999 and proceeds from the issuance of commercial paper
(supported by a new $300 million 364-day credit facility). The new credit
facility is in addition to SUPERVALU's existing $400 million credit facility.
Item 7. Financial Statements and Exhibits.
(a) Financial statements of business acquired.
The audited consolidated financial statements of Richfood as of
May 1, 1999 and for the fiscal year ended May 1, 1999 are filed as
Exhibit 99.1 to this report.
(b) Pro forma financial information.
The unaudited pro forma condensed combined financial information
of SUPERVALU reflecting the Richfood acquisition was previously filed
in SUPERVALU's Current Report on Form 8-K on July 21, 1999.
(c) Exhibits.
23 Consent of Ernst & Young LLP
99.1 Audited Consolidated Financial Statements of Richfood as of
May 1, 1999 and for the fiscal year ended May 1, 1999.
-2-
<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.
Dated: September 10, 1999
SUPERVALU INC.
By: /s/ Pamela K. Knous
--------------------------------
Pamela K. Knous
Executive Vice President and
Chief Financial Officer
-3-
<PAGE>
EXHIBIT INDEX
23 Consent of Ernst & Young LLP
99.1 Audited Consolidated Financial Statements of Richfood as of May 1,
1999 and for the fiscal year ended May 1, 1999.
<PAGE>
Exhibit 23
CONSENT OF INDEPENDENT AUDITORS
We consent to incorporation by reference in the registration statements No.
33-28310, No. 33-16934, No. 2-56896, No. 333-10151, No. 333-24813, No.333-72851,
and No. 333-61365 on Form S-8 and No. 33-56415 on Form S-3 of SUPERVALU INC. of
our report dated June 15, 1999, relating to the consolidated financial
statements of Richfood Holdings, Inc. as of May 1, 1999 and May 2, 1998 and for
each of the three fiscal years in the period ended May 1, 1999, included in this
Current Report on Form 8-K of SUPERVALU INC.
/s/ ERNST & YOUNG LLP
---------------------------------------
Richmond, Virginia
September 10, 1999
<PAGE>
EXHIBIT 99.1
Report of Independent Auditors
The Board of Directors and Shareholders
Richfood Holdings, Inc.:
We have audited the accompanying consolidated balance sheets of Richfood
Holdings, Inc. and subsidiaries as of May 1, 1999 and May 2, 1998, and the
related consolidated statements of earnings, shareholders' equity and cash flows
for each of the three fiscal years in the period ended May 1, 1999. Our audits
also included the financial statement schedule listed in the Index at Item
14(a). These financial statements and schedule are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements and schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Richfood Holdings, Inc. and subsidiaries at May 1, 1999, and May 2, 1998, and
the consolidated results of their operations and their cash flows for each of
the three fiscal years in the period ended May 1, 1999, in conformity with
generally accepted accounting principles. Also, in our opinion, the related
financial statement schedule, when considered in relation to the basic financial
statements taken as a whole, presents fairly in all material respects the
information set forth therein.
/s/ Ernst & Young LLP
Richmond, Virginia
June 15, 1999
1
<PAGE>
Richfood Holdings, Inc. and Subsidiaries
Consolidated Statements of Earnings
<TABLE>
<CAPTION>
Fiscal Year Ended
-------------------------------------------------------------------------------
May 1, Percent of May 2, Percent of May 3, Percent of
1999 Sales 1998 Sales 1997 Sales
----------- ---------- ----------- ---------- ----------- ----------
(Dollar amounts in thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C>
Sales $ 3,968,239 100.00% $ 3,203,731 100.00% $ 3,411,625 100.00%
Cost of goods sold 3,247,017 81.83 2,832,505 88.41 3,053,299 89.50
----------- ------- ----------- ------- ----------- -------
Gross margin 721,222 18.17 371,226 11.59 358,326 10.50
Operating and administrative
expenses 558,560 14.07 256,660 8.01 252,885 7.41
Restructuring costs -- -- 24,179 0.76 -- --
----------- ------- ----------- ------- ----------- -------
Operating profit 162,662 4.10 90,387 2.82 105,441 3.09
Interest expense 46,707 1.18 6,013 0.19 7,166 0.21
Interest income (3,620) (0.09) (3,811) (0.12) (3,672) (0.11)
----------- ------- ----------- ------- ----------- -------
Earnings before income taxes
and extraordinary loss 119,575 3.01 88,185 2.75 101,947 2.99
Income taxes 46,532 1.17 33,479 1.04 40,596 1.19
----------- ------- ----------- ------- ----------- -------
Earnings before extraordinary loss 73,043 1.84 54,706 1.71 61,351 1.80
Extraordinary loss, net of tax -- -- -- -- (1,882) (0.06)
----------- ------- ----------- ------- ----------- -------
Net earnings $ 73,043 1.84% $ 54,706 1.71% $ 59,469 1.74%
=========== ======= =========== ======= =========== =======
Earnings per common share:
Earnings before extraordinary loss $ 1.53 $ 1.15 $ 1.30
Extraordinary loss, net of tax -- -- (0.04)
----------- ------- ----------- ------- ----------- -------
Net earnings $ 1.53 $ 1.15 $ 1.26
=========== ======= =========== ======= =========== =======
Earnings per common share -
assuming dilution:
Earnings before extraordinary
loss $ 1.53 $ 1.15 $ 1.29
Extraordinary loss, net of tax -- -- (0.04)
----------- ------- ----------- ------- ----------- -------
Net earnings $ 1.53 $ 1.15 $ 1.25
=========== ======= =========== ======= =========== =======
Cash dividends declared per common
share $ 0.20 $ 0.16 $ 0.12
=========== ======= =========== ======= =========== =======
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
2
<PAGE>
Richfood Holdings, Inc. and Subsidiaries
Consolidated Balance Sheets
<TABLE>
<CAPTION>
May 1, 1999 May 2, 1998
----------- -----------
(Dollar amounts in thousands)
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 4,911 $ 39,968
Receivables, less allowance for doubtful accounts of
$3,219 (fiscal 1998- $3,393) 117,757 101,454
Inventories 227,539 194,875
Assets held for sale 35,400 -
Other current assets 25,446 20,675
---------- --------
Total current assets 411,053 356,972
---------- --------
Notes receivable, less allowance for doubtful accounts of
$1,580 (fiscal 1998 - $1,654) 34,291 22,767
Assets held for sale 35,429 26,342
Property and equipment, net 248,716 187,288
Goodwill, net 587,479 263,369
Other assets 104,137 52,113
---------- --------
Total assets $1,421,105 $908,851
========== ========
Liabilities and Shareholders' Equity
Current liabilities:
Current installments of long-term debt and capital lease
obligations $217,907 $16,684
Accounts payable 206,173 209,009
Accrued expenses and other current liabilities 125,884 76,942
---------- --------
Total current liabilities 549,964 302,635
---------- --------
Long-term debt and capital lease obligations 455,981 253,087
Deferred credits and other 26,484 28,915
Shareholders' equity:
Preferred stock, no par value
Authorized shares - 5,000,000;
None issued or outstanding - -
Common stock, no par value:
Authorized shares - 90,000,000;
Issued and outstanding shares 47,727,490
(fiscal 1998 - 47,658,964) 91,691 90,729
Retained earnings 296,985 233,485
---------- --------
Total shareholders' equity 388,676 324,214
Commitments and contingent liabilities (Notes 5, 6 and 13)
---------- --------
Total liabilities and shareholders' equity $1,421,105 $908,851
========== ========
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
3
<PAGE>
Richfood Holdings, Inc. and Subsidiaries
Consolidated Statements of Shareholders' Equity
<TABLE>
<CAPTION>
Common Stock
----------------------- Retained
Shares Dollars Earnings Total
----------- -------- --------- ---------
(Dollar amounts in thousands)
<S> <C> <C> <C> <C>
Balance at April 27, 1996 46,987,602 $ 66,964 $ 132,598 $ 199,562
Net earnings -- -- 59,469 59,469
Issuance of common stock under
employee stock incentive plans 534,361 7,230 -- 7,230
Shares canceled/surrendered (120,193) (1,936) -- (1,936)
Cash dividends declared on common
stock -- -- (5,675) (5,675)
----------- -------- --------- ---------
Balance at May 3, 1997 47,401,770 72,258 186,392 258,650
Net earnings -- -- 54,706 54,706
Warrants issued -- 14,415 -- 14,415
Issuance of common stock under
employee stock incentive plans 257,194 4,056 -- 4,056
Cash dividends declared on common
stock -- -- (7,613) (7,613)
----------- -------- --------- ---------
Balance at May 2, 1998 47,658,964 90,729 233,485 324,214
Net earnings -- -- 73,043 73,043
Issuance of common stock under
employee stock incentive plans 68,526 962 -- 962
Cash dividends declared on
common stock -- -- (9,543) (9,543)
----------- -------- --------- ---------
Balance at May 1, 1999 47,727,490 $ 91,691 $ 296,985 $ 388,676
=========== ======== ========= =========
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
4
<PAGE>
Richfood Holdings, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Fiscal Year Ended
-----------------------------------
May 1, May 2, May 3,
1999 1998 1997
--------- --------- ---------
(Dollar amounts in thousands)
<S> <C> <C> <C>
Operating activities:
Net earnings $ 73,043 $ 54,706 $ 59,469
Adjustments to reconcile net earnings to net cash provided
by operating activities:
Restructuring charge, non-cash component -- 23,314 --
Depreciation and amortization 56,762 32,072 29,234
Provision for doubtful accounts 3,093 4,148 4,241
Deferred income taxes 2,268 (2,741) 7,702
Extraordinary loss--loss on debt extinguishment,
non-cash component -- -- 663
Accretion of fair value adjustment to Shoppers notes (3,300) -- --
Other, net (360) 28 289
Changes in operating assets and liabilities, net of effects of
acquisitions:
Receivables (18,300) 6,300 (622)
Inventories (558) 12,552 (353)
Other current assets (1,220) 3,041 (987)
Accounts payable, accrued expenses and other liabilities (52,711) (21,035) 16,424
--------- --------- ---------
Net cash provided by operating activities 58,717 112,385 116,060
Investing activities:
Acquisitions, net of cash acquired (182,701) (222,067) (26,098)
Proceeds from sale of assets held for sale 8,179 -- --
Purchases of property and equipment (70,808) (22,194) (15,415)
Proceeds from sale of property and equipment 36,259 -- --
Issuance of notes receivable (16,923) (11,227) (22,266)
Collections on notes receivable 4,806 7,246 10,511
Other, net (1,728) (9,801) (8,091)
--------- --------- ---------
Net cash used for investing activities (222,916) (258,043) (61,359)
Financing activities:
Net (repayments of) proceeds from revolving credit facilities (11,500) 192,000 --
Proceeds from issuance of long term debt 200,000 -- --
Principal payments on long-term debt and capital lease
obligations (32,904) (12,136) (58,633)
Payment of note payable due Trak (18,169) -- --
Proceeds from issuance of common stock under
employee stock incentive plans and other 777 2,474 2,130
Cash dividends paid on common stock (9,062) (7,128) (5,197)
--------- --------- ---------
Net cash provided by (used for) financing activities 129,142 175,210 (61,700)
--------- --------- ---------
Net (decrease) increase in cash and cash equivalents (35,057) 29,552 (6,999)
Cash and cash equivalents at beginning of fiscal year 39,968 10,416 17,415
--------- --------- ---------
Cash and cash equivalents at end of fiscal year $ 4,911 $ 39,968 $ 10,416
========= ========= =========
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
5
<PAGE>
Notes to Consolidated Financial Statements
(Dollar amounts in thousands, except per share data)
1. Summary of Significant Accounting Policies
Principles of Consolidation and Presentation
The Consolidated Financial Statements of Richfood Holdings, Inc. and
subsidiaries (the "Company") as of and for the fiscal years ended May 1, 1999
("fiscal 1999") and May 2, 1998 ("fiscal 1998") and for the fiscal year ended
May 3, 1997 ("fiscal 1997") include the accounts of Richfood Holdings, Inc. and
all subsidiaries after the elimination of significant intercompany transactions
and balances.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenue and expenses during the reporting periods.
Actual results could differ from these estimates.
Fiscal Year
The Company reports on a 52-53 week fiscal year ending the Saturday nearest
April 30. Fiscal 1999 and fiscal 1998 each consist of 52 weeks. Fiscal 1997
consists of 53 weeks.
Cash and Cash Equivalents
Cash equivalents of $4,832 and $38,552 at May 1, 1999 and May 2, 1998,
respectively, consist of money market funds and commercial paper. For purposes
of the Consolidated Statements of Cash Flows, the Company considers all highly
liquid investments with initial maturities of three months or less to be cash
equivalents.
Inventories
The Company values inventories at the lower of cost or market with the cost of
the majority of inventories determined using the last-in, first-out ("LIFO")
method. Cost for the remaining inventories is determined using the first-in,
first-out ("FIFO") method.
Assets Held for Sale
Assets held for sale are carried at the lower of carrying amount or estimated
fair value less costs to sell. Assets held for sale at May 1, 1999 primarily
consist of the Company's investment in Trak Auto Corporation ("Trak") (Note 2),
the Company's West Point, Pennsylvania frozen food distribution facility (the
"West Point Facility") (Note 7) and certain other real estate acquired in
connection with the acquisition of Dart Group Corporation ("Dart") (Note 2).
Assets held for sale at May 2, 1998 primarily consisted of the West Point
Facility. On May 27, 1999, subsequent to fiscal 1999, the Company sold its
interest in Trak to an unaffiliated third party for approximately $35.4 million.
The Company is currently marketing the remaining facilities.
6
<PAGE>
1. Summary of Significant Accounting Policies (continued)
Impairment of Long-Lived Assets
The Company evaluates the recoverability of long-lived assets to be held and
used and goodwill for impairment when events or changes in circumstances
indicate that the carrying amount of an asset may not be fully recoverable. An
evaluation is made periodically and is based on such factors as the occurrence
of a significant event, a significant change in the environment in which the
business operates or if the expected future undiscounted net cash flows would
become less than the carrying amount of the asset. The Company reports
long-lived assets and certain identifiable intangibles to be disposed of at the
lower of carrying amount or estimated fair value less costs to sell.
In the fourth quarter of fiscal 1998, the Company implemented a restructuring
plan that included the closure of the West Point Facility. In conjunction with
this restructuring plan, the Company recorded an impairment loss. (Note 7).
Property and Equipment
Property and equipment are stated at cost less accumulated depreciation.
Depreciation is computed using the straight-line method over the estimated
useful lives of the respective assets. In general, the estimated useful lives
for computing depreciation are 20 to 45 years for buildings, 10 to 15 years for
leasehold improvements and 3 to 15 years for vehicles, fixtures and equipment.
Leased property meeting certain criteria is capitalized and the present value of
the related lease payment is recorded as a liability. Amortization of
capitalized leased assets is computed using the straight-line method over the
term of the lease.
Goodwill and Other Assets
The excess of cost over the fair value of net assets of businesses acquired
(goodwill) is amortized on a straight-line basis over 40 years. Goodwill is
shown net of accumulated amortization of $36,811 and $20,572 at May 1, 1999 and
May 2, 1998, respectively. The increase in goodwill from May 2, 1998 to May 1,
1999 is primarily due to the Dart acquisition. (Note 2).
Other assets primarily consist of lease rights, supply agreements, the prepaid
pension asset (Note 11), and deferred taxes (Note 8). Lease rights represent the
present value of the difference between the fair market rental and the
contractual lease payments of an acquired enterprise at the date of acquisition,
and are amortized on a straight line basis over the remaining terms of the lease
agreements. Supply agreements generally provide that the Company will be the
principal supplier for the customers and generally include minimum purchase
requirements by product category. Supply agreements are recorded at their
acquisition cost and are amortized on a straight-line basis over the terms of
the respective supply agreements. Supply agreements included in other assets
were $17,003 (net of $13,900 accumulated amortization) and $19,758 (net of
$10,326 accumulated amortization) at May 1, 1999 and May 2, 1998, respectively.
An evaluation of the recorded value for supply agreements is made periodically
and is based on such factors as the relationship with the applicable customer
and expectations as to future revenues under the applicable contract.
7
<PAGE>
1. Summary of Significant Accounting Policies (continued)
Store Pre-opening Costs
Costs associated with the Company opening new retail stores are charged to
expense as incurred.
Income Taxes
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to the differences between the financial statement and
tax bases of existing assets and liabilities. Deferred tax assets and
liabilities are measured using income tax rates expected to apply to taxable
income in the years in which the temporary differences are expected to be
recovered or settled.
Stock-Based Compensation
As permitted by the provisions of Statement of Financial Accounting Standards
No. 123 "Accounting for Stock-Based Compensation," the Company follows the
disclosure only requirements and continues to account for stock-based
compensation using the intrinsic value method prescribed by Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," and
related Interpretations.
Fair Value of Financial Instruments
Financial instruments include cash and cash equivalents, accounts and notes
receivable, accounts payable and long-term debt and capital lease obligations
reported in the Consolidated Balance Sheets. The carrying amounts for cash and
cash equivalents, accounts receivable, accounts payable and certain notes
receivable approximate fair value at May 1, 1999, and May 2, 1998, because of
the short-term nature of these financial instruments. The carrying amount of
certain notes receivable, which are subject to variable interest rates,
approximates fair value at May 1, 1999, and May 2, 1998, due to the variable
interest rates related to these financial instruments. The fair value of the
9.75% Senior Notes (Notes 2 and 6) is based on quoted market prices. The fair
value of the outstanding 9.75% Senior Notes on May 1, 1999 was approximately
$208,458. The fair values of long-term debt with fixed interest rates and
capital lease obligations approximate their carrying values at May 1, 1999, and
May 2, 1998. The fair value of long-term debt outstanding under the Company's
$450,000 senior unsecured credit facilities (Note 6) approximates the carrying
value due to variable interest rates associated with these facilities. The
Company is party to an interest rate lock, which expires August 17, 1999,
whereby the Company hedged the interest rate on $150,000 of ten year debt
securities to be issued at a hedged base treasury yield of approximately 6.3%.
As of May 1, 1999, the settlement amount approximated $11,000 and as of June 9,
1999, the approximate settlement amount was $4,800.
8
<PAGE>
1. Summary of Significant Accounting Policies (continued)
Earnings per Common Share
Basic earnings per common share amounts are computed based on earnings divided
by the weighted average number of common shares outstanding during the
respective periods presented. Diluted earnings per common share amounts are
computed based on earnings divided by the weighted average number of common
shares and stock options and warrants that represent potential common shares
outstanding during the respective periods presented.
A reconciliation of the numerators and denominators used in the basic and
diluted per-share computations is presented in Note 9.
Retirement Plans
In fiscal 1999, the Company adopted Statement of Financial Accounting Standards
No. 132, "Employers' Disclosure about Pensions and Other Postretirement
Benefits" ("SFAS No. 132"). SFAS No. 132 revises the disclosure requirements
for pensions and other postretirement benefit plans.
Derivatives and Hedging Activities
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities," which sets standards for the recognition and
measurement of derivatives and hedging activities. This Statement, as amended,
is effective for the Company's fiscal year ending April 2002. Management has not
completed its assessment of the impact of this Statement on earnings or
financial position.
2. Merger and Acquisitions
On May 18, 1998, a wholly-owned subsidiary of the Company acquired all of the
outstanding shares of Dart for $160 per share, net to the seller in cash, or
approximately $201,000 (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. The excess of
purchase price over the fair value of net assets acquired of approximately
$320,000 is being amortized on a straight-line basis over 40 years. Dart,
headquartered in Landover, Maryland, was comprised, at the time of acquisition,
of: Shoppers Food Warehouse Corp. ("Shoppers"), a 100% owned chain of 37 price
impact supermarkets operating in the greater Washington, DC metropolitan area;
9
<PAGE>
2. Merger and Acquisitions (continued)
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). 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.
At the time of the Dart Acquisition, the Company announced its intention to
divest its ownership in Dart's non-core assets, including Trak, Crown and Total
Beverage. Total Beverage was sold by Dart to an unaffiliated third party on May
22, 1998, for approximately $8,200. Crown filed a voluntary petition for
protection under Chapter 11 of the United States Bankruptcy Code on July 14,
1998. On May 27, 1999, Dart tendered all of its outstanding shares of Trak
common stock pursuant to a tender offer by an unaffiliated third party at $9 per
share, or approximately $35,400, which approximates its carrying value at May 1,
1999. The Company's proportionate share of the combined results of operations of
Trak, Crown and Total Beverage represented a net after-tax loss of approximately
$28,300 for the period May 18, 1998, through May 1, 1999 (including allocated
interest expense of approximately $2,500 and the Company's proportionate share
of reorganization expense pursuant to Crown's bankruptcy in the amount of
$19,377) and are excluded from the Consolidated Statements of Earnings, in
accordance with Emerging Issues Task Force Issue No. 87-11: "Allocation of
Purchase Price to Assets to be Sold."
The Dart Acquisition was financed with proceeds from $450,000 senior unsecured
credit facilities (the "Facilities"), consisting of a $250,000, five-year
revolving credit facility (the "Revolver") and a $200,000, 18-month term loan
(the "Term Loan"). Proceeds from the Facilities also were used to repay the
outstanding balance of $192,000 under an existing revolving facility. At the
time of the Dart Acquisition, Shoppers had outstanding $200,000 in principal
amount of 9 3/4% Senior Notes due 2004. (Note 6)
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 purchase price consisted of
approximately $226,000 cash, plus capital leases assumed with a fair value of
approximately $47,000, plus 1.5 million warrants for the purchase of the
Company's common stock at an exercise price equal to $25 per share with a term
of five years following issuance. 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. The purchase
price has been allocated to the assets acquired and the liabilities assumed
based upon their respective fair values at the date of acquisition. The excess
of purchase price over the fair value of net assets acquired of approximately
$196,000 is being amortized on a straight-line basis over 40 years. During
fiscal 1999, the Company finalized its plan to exit certain retail store
10
<PAGE>
2. Merger and Acquisitions (continued)
locations and adjusted its purchase price allocations accordingly. These
adjustments primarily relate to obligations under lease agreements and the write
down to fair value of retail store equipment.
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 which
would actually have occurred had the transactions been consummated on that date
or which may be obtained in the future.
<TABLE>
<CAPTION>
Fiscal Year Ended
-------------------------------
May 1, 1999 May 2, 1998
- ---------------------------------------------------------------------------- --------------
(unaudited)
<S> <C> <C>
Sales $3,988,641 $4,041,082
Earnings before extraordinary loss and cumulative effect of
accounting change 72,831 40,327
Extraordinary loss, net of tax -- (3,126)
Cumulative effect of accounting change, net of tax -- 1,729
---------- ----------
Net earnings $ 72,831 $ 38,930
========== ==========
Per common share data:
Earnings before extraordinary loss and cumulative effect of
accounting change $ 1.53 $ 0.85
Extraordinary loss, net of tax -- (0.07)
Cumulative effect of accounting change, net of tax -- 0.04
---------- ----------
Net earnings $ 1.53 $ 0.82
========== ==========
Earnings before extraordinary loss and cumulative effect of
accounting change-assuming dilution $ 1.52 $ 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 $ 1.52 $ 0.82
========== ==========
</TABLE>
11
<PAGE>
2. Merger and Acquisitions (continued)
On September 30, 1996, a wholly-owned subsidiary of the Company acquired
substantially all of the assets and assumed certain liabilities of Norristown
Wholesale, Inc. ("Norristown"), a wholesale distributor of produce and other
perishable food items headquartered in Norristown, Pennsylvania. Assets acquired
primarily consisted of inventory, accounts receivable, warehouse and
transportation equipment and a customer list. The Company also assumed the lease
for Norristown's transportation fleet. 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 Statements of Earnings since the date of acquisition. The purchase
price of the acquisition was approximately $26,000.
3. Inventories
At May 1, 1999, and May 2, 1998, approximately 75% and 76%, respectively, of
total inventories were valued using the LIFO method. Costs for the remaining
inventories were determined using the FIFO method. If all inventories were
valued at the lower of FIFO cost or market, inventories would have been higher
by approximately $6,956 at May 1, 1999 and $7,653 at May 2, 1998, and net
earnings would have been lower by approximately $426 for fiscal 1999, $253 for
fiscal 1998, and $12 for fiscal 1997. FIFO value of inventories approximates
their replacement cost.
4. Notes Receivable
The Company's notes receivable are due principally from customers and relate
primarily to financing for store acquisitions and improvements. The majority of
such notes bear interest at the prime rate (7.75% at May 1, 1999) plus 1% to 2%
and have remaining terms ranging from 1 to 10 years. Collateral securing such
notes varies, but may include inventory, equipment, fixtures, accounts
receivable, contract rights, personal assets and pledges of Richfood common
stock. Receivables shown in current assets include $11,953 and $7,754 at May 1,
1999, and May 2, 1998, respectively, related to current maturities of these
notes receivable.
12
<PAGE>
5. Property and Equipment and Leases
Property and equipment are summarized as follows:
May 1, 1999 May 2, 1998
----------- -----------
Land $ 2,519 $ 12,276
Buildings 47,871 62,272
Fixtures and equipment 218,499 126,644
Leasehold improvements 59,266 41,892
Trucks and autos 11,263 12,711
Assets under capital leases:
Truck fleet 231 1,375
Buildings 48,541 41,140
Other 3,991 4,060
-------- --------
392,181 302,370
Less accumulated depreciation
and amortization 143,465 115,082
-------- --------
Property and equipment, net $248,716 $187,288
======== ========
Depreciation and amortization expense relating to property and equipment and
assets under capital leases was approximately $32,398, $18,820, and $16,700 for
fiscal 1999, fiscal 1998 and fiscal 1997, respectively. Capital lease
obligations have imputed interest rates that range primarily from 6.50% to 6.66%
and are due in varying amounts through fiscal 2022.
Future minimum lease payments under capital leases at May 1, 1999 are as
follows:
Fiscal Year
2000 $ 8,852
2001 7,138
2002 6,281
2003 6,247
2004 6,184
Thereafter 50,506
-------
Total future minimum lease payments 85,208
Less amount representing interest 29,049
-------
Present value of minimum capital
lease payments 56,159
Less current installments of obligations
under capital leases 5,145
-------
Long-term obligations under capital leases $51,014
=======
13
<PAGE>
5. Property and Equipment and Leases (continued)
The Company leases certain warehouse, office and storage facilities, equipment
and retail stores under noncancelable operating leases that expire within 32
years from May 1, 1999 and have renewal options from 5 to 58 years. The majority
of the leases provide for the payment of taxes, insurance and maintenance (and
contingent rentals based on a percentage of sales volume, in the case of retail
store leases) by the Company. The Company subleases certain retail stores to
third parties.
As of May 1, 1999, minimum rentals to be paid and minimum sublease rentals to be
received on noncancelable operating leases with remaining terms greater than one
year are as follows:
<TABLE>
<CAPTION>
Minimum Sublease
Minimum Lease Rentals Rentals to be Net Minimum
Fiscal Year to be Paid Received Lease Rentals
- ----------- --------------------- ---------------- -------------
<S> <C> <C> <C>
2000 $ 51,857 $ 5,162 $ 46,695
2001 49,383 3,858 45,525
2002 47,016 3,672 43,344
2003 103,212 3,372 99,840
2004 37,871 2,868 35,003
Thereafter 329,028 11,635 317,393
-------- ------- --------
Total $618,367 $30,567 $587,800
======== ======= ========
</TABLE>
Total annual rental expense is as follows:
Fiscal Year Ended
------------------------------------------
May 1, 1999 May 2, 1998 May 3, 1997
----------- ----------- -----------
Minimum rentals $52,542 $30,854 $27,886
Less sublease income (6,082) (5,226) (6,962)
------- ------- -------
Rental expense $46,460 $25,628 $20,924
======= ======= =======
In December 1998, the Company sold certain of its Farm Fresh properties for
$35,039 and immediately leased back the properties from the purchaser over a
period of 15 years. The related lease is being accounted for as an operating
lease.
In connection with various guarantees of certain customer store leases, the
Company is contingently liable, in the event of customer nonperformance, for
future lease payments with a present value of approximately $77,650 at May 1,
1999. The related leases expire at varying dates over the next 23 years.
14
<PAGE>
6. Long-term Debt and Capital Lease Obligations
Long-term debt, including capital lease obligations, consists of the following:
<TABLE>
<CAPTION>
May 1, 1999 May 2, 1998
----------- -----------
<S> <C> <C>
$250,000, five-year, senior unsecured revolving credit facility, average
effective interest rate of 6.18%, due May 2003 $172,000 $ -
Term loan, average interest rate of 6.40%, due November 1999 193,000 -
Revolving credit facility repaid May 18, 1998 - 192,000
$200,000 face amount Senior Notes, unsecured, interest rate of 9.75%, due
June 2004 210,966 -
Senior Notes, unsecured, interest rate of 6.15%,
due July 1999 to July 2000 18,000 27,000
Obligations under capital leases (Note 5) 56,159 48,106
Other long-term debt 23,763 2,665
-------- --------
Total long-term debt and capital lease obligations 673,888 269,771
Less current installments 217,907 16,684
-------- --------
Long-term debt and capital lease obligations, net of current
installments $455,981 $253,087
======== ========
</TABLE>
On May 12, 1998, the Company entered into an agreement with a syndicate of
commercial banks that provides $450,000 senior unsecured credit facilities (the
"Facilities"), consisting of a $250,000, five-year revolving credit facility
(the "Revolver") and a $200,000, 18-month term loan (the "Term Loan"). Proceeds
from the Facilities were used primarily to fund the Dart Acquisition, to repay
the outstanding balance of $192,000 under the Company's terminated revolving
facility and to provide funds for other general corporate purposes. Also in
connection with the Dart Acquisition, the Company assumed $200,000 in face
amount of Shoppers' 9 3/4% Senior Notes due June 2004 ("Shoppers Notes") with a
fair value of $221,500 on the date of the acquisition. In June 1998, the Company
repurchased $6,500 in face amount of the Shoppers Notes in an open market
transaction for a total cash payment of approximately $7,200, including accrued
interest.
The $193,000 outstanding under the Term Loan is due November 1999, and is
reflected as a component of current installments of long-term debt and capital
lease obligations as of May 1, 1999. See Note 16 regarding subsequent events.
Principal advances under the Revolver and outstanding principal balances of the
Term Loan bear interest, at the option of the Company, at either (i) the Base
Rate plus the Applicable Margin or (ii) Adjusted one, two, three or six-month
LIBOR plus the Applicable Margin. The Base Rate is the higher of (i) First
Union's Prime Rate, or (ii) the Federal Funds Rate plus 0.50%. The Applicable
Margin for loans bearing interest based upon the Base Rate will be 0%. The
Applicable Margin for loans bearing interest based upon Adjusted LIBOR will vary
based on the Company's Total Funded Debt to EBITDA Ratio (as defined in the
agreement). The Facilities have a mandatory prepayment clause, which requires
the Company to prepay the outstanding balance of the Term Loan Facility with the
net proceeds of new equity offerings and new issuances of senior debt and with
the proceeds of any sale of Trak, Crown, Total Beverage or any real estate
assets of Dart. In May 1998, the Company prepaid the Term Loan by $7,000 with
net proceeds from the sale of Total Beverage. Subsequent to fiscal 1999, on June
4, 1999, the Company used the net proceeds from the sale of Trak of
approximately $35,000 to make a partial prepayment of the remaining outstanding
balance under the Term Loan. Under the terms of the Facilities, the Company has
15
<PAGE>
6. Long-term Debt and Capital Lease Obligations (continued)
agreed to maintain certain Fixed Charge Coverage and Total Funded Debt to EBITDA
ratios. The Facilities also contain covenants that limit the incurrence of
additional indebtedness and prohibit certain liens on assets. The Company is in
compliance with all such covenants at May 1, 1999.
In July 1993, the Company issued $45,000 aggregate principal amount of 6.15%
Senior Notes (the "Senior Notes"), due over a term of seven years. The Senior
Notes require semiannual interest payments and annual sinking fund payments
consisting of principal of $9,000 plus accrued interest from July 1996 through
July 2000. The Senior Notes also include an optional redemption provision
whereby the Company may elect to redeem all, or any portion, of the debt prior
to maturity subject to certain make-whole provisions. The Senior Notes contain
covenants for certain subsidiaries that, among other things, limit the
incurrence of additional indebtedness; prohibit certain liens on assets; require
maintenance of minimum net worth; limit the ability to transfer funds to
Richfood Holdings, Inc. in the form of loans, advances or cash dividends; and
require certain financial ratios to be met as of each quarter end. The Company
is in compliance with all such covenants at May 1, 1999.
In April 1992, a predecessor of the Company issued $75,000 aggregate principal
amount of 10 5/8% Senior Subordinated Notes, due 2002. In April 1997, the first
permitted optional redemption date, the Company redeemed the remaining $47,525
in principal amount of the Senior Subordinated Notes at a redemption price of
105.31% of par. The Company primarily used cash on hand, supplemented by
borrowings under revolving credit facilities, to fund the early redemption of
the Senior Subordinated Notes. The fiscal 1997 redemption resulted in an
extraordinary loss of $1,882, net of a tax benefit of $1,308. The extraordinary
loss is comprised of amounts paid in excess of par value and the write-off of
related deferred financing costs.
Future principal repayments on long-term debt for the five fiscal years
subsequent to fiscal 1999, excluding obligations under capital leases, are as
follows: fiscal 2000--$212,762; fiscal 2001--$10,291; fiscal 2002--$1,307;
fiscal 2003--$179,498; and fiscal 2004--$229.
At May 1, 1999 other long-term debt consists primarily of three mortgages
secured by Dart real estate with an aggregate net book value of approximately
$15,263. The mortgages have maturity dates of December 1999, November 2002 and
December 2007 and an effective interest rate of 6.66%.
As of May 1, 1999, the Company issued $16,017 in standby letters of credit,
primarily for self-insurance purposes. These letters of credit are subject to
annual renewal and will be replaced with similar letters of credit in the normal
course of business.
Interest payments made under long-term debt and capital leases were $52,536,
$5,363 and $7,973 for fiscal 1999, fiscal 1998 and fiscal 1997, respectively.
On September 30, 1998, the Company filed a Shelf Registration Statement, which
became effective in October 1998. Under the terms of the Shelf Registration
Statement, the Company may issue from time to time in one or more series up to
$500,000 aggregate offering price of its (i) unsecured debt securities, which
16
<PAGE>
6. Long-term Debt and Capital Lease Obligations (continued)
may be either senior debt securities or subordinated debt securities, (ii)
shares of preferred stock, without par value ("Preferred Stock"), which may be
issued in the form of depositary shares evidenced by depositary receipts, (iii)
shares of common stock, without par value ("Common Stock"), and (iv) warrants to
purchase shares of Common Stock or Preferred Stock on terms to be determined at
the time of sale.
7. Restructuring
In the fourth quarter of fiscal 1998, the Company announced a plan to
restructure its Pennsylvania frozen foods operations, which reduced fiscal 1998
earnings before taxes by $24,179. The implementation of the plan included
closing the West Point Facility and transferring related operations to the
Company's Harrisburg, Pennsylvania, distribution facility.
The aggregate charges included $17,820 for asset impairment and $6,359 for
activities under the restructuring plan. The asset impairment charge included
$14,616 to write-down the West Point Facility and related equipment to fair
value less estimated costs to sell and $3,204 to write-off the unamortized
goodwill associated with the Company's West Point operations. The estimated fair
value less estimated costs to sell the West Point Facility of approximately
$20,700 is classified as noncurrent assets held for sale at May 1, 1999 and May
2, 1998. At May 2, 1998, approximately $4,682 remained in the accrual. During
fiscal 1999, the Company paid approximately $3,810 cash toward certain
non-cancelable leases, employee separation costs and other obligations under the
restructuring plan. At May 1, 1999, approximately $872 remains in the accrual to
be utilized for employee separation costs and other obligations that will extend
beyond fiscal 1999.
17
<PAGE>
8. Income Taxes
The components of income tax expense (benefit) related to earnings before income
taxes and extraordinary loss are as follows:
Fiscal Year Ended
----------------------------------------
May 1, 1999 May 2, 1998 May 3, 1997
----------- ----------- -----------
Current:
Federal $41,462 $31,460 $27,800
State 2,802 4,760 5,094
------- ------- -------
44,264 36,220 32,894
Deferred:
Federal 2,297 (801) 6,941
State (29) (1,940) 761
------- ------- -------
2,268 (2,741) 7,702
------- ------- -------
Income taxes $46,532 $33,479 $40,596
======= ======= =======
Income tax payments,
net of refunds received $39,219 $29,812 $40,074
======= ======= =======
Income tax expense differs from the amounts resulting from applying the
statutory federal income tax rate to earnings before income taxes and
extraordinary loss as follows:
<TABLE>
<CAPTION>
Fiscal Year Ended
------------------------------------------
May 1, 1999 May 2, 1998 May 3, 1997
----------- ----------- -----------
<S> <C> <C> <C>
Taxes computed using federal statutory rate 35.00% 35.00% 35.00%
State income taxes, net of federal income tax benefit 1.51 2.07 3.73
Nondeductibility of goodwill amortization expense 2.92 0.97 0.74
Other, net (0.52) (0.08) 0.35
----- ----- -----
Effective tax rate 38.91% 37.96% 39.82%
===== ===== =====
</TABLE>
18
<PAGE>
8. Income Taxes (continued)
Deferred income taxes for fiscal 1999 and fiscal 1998 reflect the income tax
effects of temporary differences between the carrying amounts of assets and
liabilities for financial reporting purposes and the amounts used for income tax
purposes. Significant components of deferred tax assets and liabilities at May
1, 1999 and May 2, 1998 are as follows:
May 1, 1999 May 2, 1998
----------- -----------
Deferred tax assets:
Allowance for doubtful accounts $ 2,329 $ 2,256
Property and equipment 1,288 -
Deferred revenue 8,116 2,697
Deferred financing costs 2,240 -
Accrued expenses 24,769 15,648
Net operating loss carryforward 41,909 2,165
Other 446 2,494
-------- --------
Total deferred tax assets 81,097 25,260
Deferred tax liabilities:
Property and equipment - (11,188)
Goodwill (32,957) (8,128)
Inventories (2,205) (1,302)
Lease acquisition costs and lease rights (8,318) (2,165)
Retirement plans (2,233) (444)
Other (109) (1,284)
-------- --------
Total deferred tax liabilities (45,822) (24,511)
-------- --------
Net deferred tax assets $ 35,275 $ 749
======== ========
Net current deferred tax assets $ 15,588 $ 15,197
Net noncurrent deferred tax assets 19,687 -
Net noncurrent deferred tax liabilities - (14,448)
-------- --------
Net deferred tax assets $ 35,275 $ 749
======== ========
As a result of the Dart Acquisition, the Company acquired a net operating loss
carryforward, with a remaining balance of approximately $112,000 as of May 1,
1999. The net operating losses will expire in the years 2007 to 2018. Due to
Internal Revenue Service regulations, utilization of the net operating loss
carryforwards in a particular year may be limited. The Company also has an
alternative minimum tax credit carryforward of $1,100.
19
<PAGE>
9. Earnings per Share
The following table sets forth the computation of basic and diluted earnings per
share:
<TABLE>
<CAPTION>
Fiscal Year Ended
----------------------------------------------
May 1, May 2, May 3,
1999 1998 1997
---------- ---------- ----------
<S> <C> <C> <C>
Numerator:
Earnings before extraordinary loss $73,043 $54,706 $61,351
Extraordinary loss, net of tax - - (1,882)
========== ========== ==========
Net earnings $73,043 $54,706 $59,469
========== ========== ==========
Denominator:
Denominator for basic earnings per share-
weighted average common shares 47,689,003 47,528,161 47,290,092
Effect of dilutive securities:
Stock options 135,722 209,831 268,388
Warrants - 4,562 -
---------- ---------- ----------
Dilutive securities 135,722 214,393 268,388
---------- ---------- ----------
Denominator for diluted earnings per share-
adjusted weighted average shares 47,824,725 47,742,554 47,558,480
========== ========== ==========
Earnings per common share:
Earnings before extraordinary loss $1.53 $1.15 $1.30
Extraordinary loss, net of tax - - (0.04)
---------- ---------- ----------
Net earnings $1.53 $1.15 $1.26
========== ========== ==========
Earnings per common share - assuming dilution:
Earnings before extraordinary loss $1.53 $1.15 $1.29
Extraordinary loss, net of tax - - (0.04)
---------- ---------- ----------
Net earnings $1.53 $1.15 $1.25
========== ========== ==========
</TABLE>
Options and warrants to purchase 2,152,450, 53,000 and 224,800 shares of common
stock at weighted-average exercise prices of $24.66, $26.97 and $23.77 per share
were outstanding in fiscal 1999, fiscal 1998, and fiscal 1997, respectively, but
were not included in the computation of diluted earnings per share because the
options' and warrants' exercise prices were greater than the average market
prices of the common shares and, therefore, would be antidilutive.
Under the Company's Amended and Restated Omnibus Stock Incentive Plan, dated
July 1997 (the "Omnibus Plan"), with respect to Incentive Awards granted for the
three fiscal year performance cycle that commenced on May 4, 1997, certain
employees would be entitled to receive approximately 51,400 shares of common
stock at May 1, 1999. These contingently issuable shares are not included in the
computation of diluted earnings per share because certain performance goals and
other necessary vesting conditions had not been satisfied as of May 1, 1999.
20
<PAGE>
10. Stock Options, Warrants and Other
The Omnibus Plan authorizes the granting of a maximum of 2,250,000 shares of
Richfood common stock (subject to adjustment to reflect certain dilutive
events), in the form of shares of restricted common stock, incentive stock
options and nonqualified stock options with or without stock appreciation
rights, stock awards and performance shares, to certain employees. Options to
purchase Richfood common stock are granted at a price no less than the fair
market value of the stock on the date of grant (if the option is an incentive
stock option) or 50% of the fair market value of the stock on the date of grant
(if the option is a nonqualified stock option). Options may be exercised at such
times and subject to such conditions as may be prescribed by the Company at the
time of grant. The maximum period in which an option may be exercised is
determined by the Company at the time of grant and cannot exceed ten years.
Options outstanding under the Omnibus Plan vest in equal installments over a
four year period and have a term of ten years from date of grant. Options to
purchase approximately 990,000 shares of common stock remain outstanding under
the Omnibus Plan at May 1, 1999. Approximately 1,248,000 and 1,689,000 shares of
common stock remained available for grant at May 1, 1999 and May 2, 1998,
respectively.
The Company's Non-Employee Directors' Stock Option Plan (the "Directors' Stock
Plan") authorizes the granting of a maximum of 112,500 shares of Richfood common
stock (subject to adjustment to reflect certain dilutive events) in the form of
nonqualified stock options. The Directors' Stock Plan provides for each eligible
director to receive, on September 1 of each year, an option to purchase 1,500
shares of common stock. Options to purchase Richfood common stock are granted at
the fair market value of the stock on the date of grant, vest in equal
installments over a four year period and have a term of ten years. Options to
purchase approximately 67,000 shares of common stock remain outstanding under
the Directors' Stock Plan at May 1, 1999. Approximately 43,000 and 56,000 shares
of common stock remained available for grant at May 1, 1999 and May 2, 1998,
respectively.
At May 1, 1999, there were options to purchase approximately 554,000 shares of
Richfood common stock outstanding that were granted under other employee
incentive stock plans. The Company does not anticipate any future grants under
these plans.
21
<PAGE>
10. Stock Options, Warrants and Other (continued)
Pro forma information regarding net earnings and earnings per share is required
by Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-based Compensation" ("SFAS No. 123"), and has been determined based on the
fair value at the grant date for options awarded in fiscal years 1999, 1998, and
1997 consistent with the provisions of SFAS No. 123. The fair value of each
option grant is estimated using the Black-Scholes option-pricing model with the
following weighted-average assumptions used for grants during fiscal years 1999,
1998, and 1997:
Risk Free
Dividend Yield Volatility Expected Life Interest Rate
-------------- ---------- ------------- -------------
Fiscal 1999 0.90% 0.29 5 years 4.60%
Fiscal 1998 0.60% 0.18 5 years 5.80%
Fiscal 1997 0.50% 0.18 5 years 6.29%
The Black-Scholes option valuation model requires the input of highly subjective
assumptions including expectations of future dividends and stock price
volatility. The assumptions are only used for making the required fair value
estimate and should not be considered as indicators of future dividend policy or
stock price appreciation. For purposes of the pro forma disclosures, the
estimated fair value of the options is amortized to pro forma expense over the
options' vesting period. The pro forma effect on net earnings for fiscal years
1998 and 1997 does not take into consideration pro forma compensation expense
related to grants made prior to fiscal 1996 and, accordingly, may not be
indicative of the pro forma effect on net earnings in future years. If the
Company had elected to recognize compensation expense related to stock options
granted in fiscal years 1999, 1998 and 1997 in accordance with the provisions of
SFAS No. 123, the decrease in net earnings and net earnings per common share
would have been less than 2%.
A summary of the number of shares (in thousands) subject to outstanding stock
options and related information is as follows:
<TABLE>
<CAPTION>
Fiscal Year Ended
--------------------------------------------------------------------------------------------------------
May 1, 1999 May 2, 1998 May 3, 1997
---------------------------------- ---------------------------------- ----------------------------------
Weighted Average Weighted Average Weighted Average
Exercise Price Exercise Price Exercise Price
Shares Shares Shares
----------------- ---------------- ----------------- ---------------- --------------- ------------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding-beginning
of year 1,236 $18.67 1,184 $ 14.68 1,404 $ 9.82
Granted 521 19.31 342 24.47 356 23.19
Exercised (72) 10.86 (265) 8.21 (492) 6.39
Canceled (74) 23.56 (25) 20.01 (84) 18.17
----------------- ---------------- ----------------- ---------------- --------------- ------------------
Outstanding-end of year 1,611 $19.00 1,236 $ 18.67 1,184 $ 14.68
----------------- ---------------- ----------------- ---------------- --------------- ------------------
Price range-end of year $2.55-$28.38 $2.55-$28.38 $2.55-$25.33
================= ================ ================= ================ =============== ==================
</TABLE>
22
<PAGE>
10. Stock Options, Warrants and Other (continued)
The weighted average fair value of each option granted during fiscal years 1999
and 1998 was $5.78 and $7.15, respectively. The number and weighted average fair
value of shares of nonvested restricted stock granted during fiscal year 1997
was $37,500 and $21.92 per share, respectively.
Information regarding the shares (in thousands) subject to outstanding stock
options at May 1, 1999 is as follows:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
- ------------------------------------------------------------------------- ------------------------------
Weighted Average Weighted Weighted
Range of exercise Remaining Average Average
prices Shares Contractual Life Exercise Price Shares Exercise Price
- ----------------------- ---------- --------------------- ----------------- ----------- -----------------
<S> <C> <C> <C> <C> <C>
$2.55-$ 6.04 88 3 years $ 5.31 88 $ 5.31
$10.33-$15.38 158 5 years $10.69 149 $10.41
$16.17-$18.56 692 8 years $18.03 200 $17.18
$20.00-$28.38 673 8 years $23.76 216 $23.84
============= ====== ======== ====== === ======
$ 2.55-$28.38 1,611 8 years $19.00 653 $16.24
============= ====== ======== ====== === ======
</TABLE>
On March 4, 1998, in conjunction with the acquisition of substantially all of
the assets and assumption of certain liabilities of Farm Fresh, Inc. (Note 2),
the Company issued warrants to purchase 1,500,000 shares of the Company's common
stock at $25 per share as part of the purchase consideration. The warrants are
immediately exercisable and will expire five years from the date of issuance.
The estimated fair market value of the warrants at the date of issuance,
approximately $14,415, was valued as part of the total purchase consideration.
As of May 1, 1999, all of these warrants remained outstanding.
11. Retirement Plans
The Company adopted SFAS No. 132 in fiscal 1999. All of the Company's wholesale
and corporate employees are covered by a defined benefit plan. At May 2, 1998,
there were two such plans, which were subsequently merged into one plan
effective April 30, 1999. All prior year information has been adjusted to
reflect the plan merger and adoption of SFAS No. 132.
23
<PAGE>
11. Retirement Plans (continued)
The Company's retirement plan covers employees who meet certain age and service
requirements. Retirement benefits vest under the various plans after five years
of service and are based on years of service and either average final
compensation, or a fixed dollar payment per month. The Company's funding policy
has been to contribute annually an amount actuarially determined to provide the
plans with sufficient assets to meet future benefit payment requirements. Plan
assets at May 1, 1999, consist of equity securities, preferred stock, U.S.
government and agency obligations, mortgage-backed securities, corporate
obligations and mutual funds.
The following tables provide a reconciliation of benefit obligations, plan
assets, and funded status of the plan.
<TABLE>
<CAPTION>
May 1, 1999 May 2, 1998
----------- -----------
<S> <C> <C>
Change in benefit obligation:
Benefit obligation at beginning of year $59,661 $46,820
Service cost 3,089 2,528
Interest cost 4,100 3,548
Actuarial loss 107 8,692
Benefits paid (2,014) (1,927)
------- -------
Benefit obligation at end of year $64,943 $59,661
======= =======
May 1, 1999 May 2, 1998
----------- -----------
Change in plan assets:
Fair value of plan assets at beginning of year $74,929 $61,492
Actual return on plan assets 3,178 14,969
Employer contribution 775 395
Benefits paid (2,014) (1,927)
======= =======
Fair value of plan assets at end of year $76,868 $74,929
======= =======
Funded status of the plan:
Plan assets in excess of benefit obligation $11,925 $15,268
Unrecognized net loss (gain) 1,077 (5,177)
Unrecognized net transition asset (2,246) (2,380)
------- -------
Prepaid benefit cost $10,756 $7,711
======= =======
</TABLE>
24
<PAGE>
11. Retirement Plans (continued)
The following are the components of net retirement (benefit) expense related to
the defined benefit plan:
Fiscal Year Ended
--------------------------------
May 1, May 2, May 3,
1999 1998 1997
------- ------- -------
Service cost-present value of
benefits earned during the year $ 3,089 $ 2,528 $ 2,710
Interest cost on projected benefit
obligation 4,100 3,548 3,315
Expected return on plan assets (6,669) (5,452) (4,787)
Amortization and deferrals (784) (857) (1,193)
------- ------- -------
Net retirement (benefit) expense $ (264) $ (233) $ 45
======= ======= =======
The weighted average discount rate assumed by the Company ranged from 7.00% to
7.75% and the projected increase in compensation ranged from 5% to 6% for all
years presented. The Company assumed an expected long-term rate of return of 9%
for all years presented.
The Company maintains a nonqualified, unfunded supplemental retirement plan for
selected management personnel. Supplemental retirement plan benefits vest after
specified years of service requirements are met and are based on years of
service and average final compensation. The Company established a trust that
maintains life insurance policies to serve as a funding source for the plan. The
cash surrender value of the life insurance policies was $1,607 at May 1, 1999
and $1,440 at May 2, 1998. The projected benefit obligation for the plan was
$5,644 at May 1, 1999 and $2,617 at May 2, 1998.
The Company maintains defined contribution plans under section 401(k) of the
Internal Revenue Code. These plans are offered to substantially all employees
who meet certain age and service requirements and allow for participant pre-tax
contributions and employer matching contributions. The Company recognized
expense of $2,171, $633 and $664 related to contributions to the plans for
fiscal 1999, fiscal 1998 and fiscal 1997, respectively. Fiscal 1999 expense
increased approximately $1,499 due to the acquisitions of Farm Fresh and
Shoppers (Note 2).
Certain retail employees are covered under union-sponsored, collectively
bargained, multi-employer pension plans. The Company recognized expense of
$1,193, $353 and $371 related to contributions to these plans for fiscal 1999,
fiscal 1998 and fiscal 1997, respectively. Fiscal 1999 expense increased
approximately $840 over fiscal 1998 expense due to the acquisition of Shoppers
(Note 2).
25
<PAGE>
12. Significant Customer
The Company's supply agreement with its largest customer for fiscal years 1999,
1998, and 1997, Giant Food Stores, Inc. of Carlisle, Pennsylvania ("Giant"),
expires in December 1999. On April 22, 1999, Giant informed the Company that its
existing supply contract would not be renewed. The Company's sales to Giant for
fiscal 1999 were $629,000 and accounted for 15%, 19% and 17% of the Company's
sales in fiscal 1999, 1998 and 1997, respectively.
13. Litigation And Related Matters
The Company is party to various legal actions that are incidental to its
business. While the outcome of 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, results of operations or cash flows.
14. Business Segments
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 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
Mechanicsville, Virginia, and Harrisburg, Pennsylvania. This segment also
includes the Company's fluid dairy operations located in Richmond, Virginia.
At May 1, 1999, the Company's retail grocery division consisted primarily of
three grocery store chains: 41 Farm Fresh supermarkets located primarily in
Virginia's Hampton Roads region; 37 Shoppers Food Warehouse price impact
warehouse-style supermarkets located in the Washington, D.C. metropolitan area;
and 18 Metro/Basics grocery stores located in the Baltimore, Maryland,
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.
26
<PAGE>
14. Business Segments (continued)
The following summarizes key segment information and reconciles segment results
to consolidated financial results:
Fiscal Year
-----------------------------------------
May 1, May 2, May 3,
1999 1998 1997
----------- ----------- -----------
Sales:
Wholesale grocery $ 3,229,410 $ 3,021,124 $ 3,280,229
Intersegment sales (1,022,796) (242,905) (207,075)
----------- ----------- -----------
Wholesale grocery sales to
external customers 2,206,614 2,778,219 3,073,154
Retail grocery 1,761,625 425,512 338,471
----------- ----------- -----------
Total sales $ 3,968,239 $ 3,203,731 $ 3,411,625
=========== =========== ===========
Operating profit:
Wholesale grocery $ 130,013 $ 115,832 $ 108,413
Retail grocery 46,074 7,099 5,027
General corporate expenses (13,425) (8,365) (7,999)
----------- ----------- -----------
Total operating profit 162,662 114,566 105,441
Restructuring costs -- 24,179 --
Interest expense 46,707 6,013 7,166
Interest income (3,620) (3,811) (3,672)
----------- ----------- -----------
Earnings before income taxes
and extraordinary loss $ 119,575 $ 88,185 $ 101,947
=========== =========== ===========
Identifiable assets:
Wholesale grocery $ 502,825 $ 491,928 $ 512,227
Retail grocery 918,280 416,923 69,253
----------- ----------- -----------
Total identifiable assets $ 1,421,105 $ 908,851 $ 581,480
=========== =========== ===========
Depreciation and amortization:
Wholesale grocery $ 19,755 $ 25,628 $ 23,355
Retail grocery 37,007 6,444 5,879
----------- ----------- -----------
Total depreciation and amortization $ 56,762 $ 32,072 $ 29,234
=========== =========== ===========
Capital expenditures:
Wholesale grocery $ 20,585 $ 11,650 $ 9,368
Retail grocery 50,223 10,544 6,047
----------- ----------- -----------
Total capital expenditures $ 70,808 $ 22,194 $ 15,415
=========== =========== ===========
27
<PAGE>
15. Selected Quarterly Data (Unaudited)
Summarized quarterly financial information for the quarters indicated and market
price and dividend information for the Company's common stock is as follows:
<TABLE>
<CAPTION>
Fiscal Year Ended May 1, 1999
------------------------------------------------------------
First Second Third Fourth
(12 Weeks) (12 Weeks) (12 Weeks) (16 Weeks)
--------------- -------------- ------------- ---------------
<S> <C> <C> <C> <C>
Sales $901,303 $909,206 $946,649 $1,211,081
Gross margin 155,639 166,547 172,012 227,024
Net earnings 13,286 15,079 19,434 25,244
Net earnings per common share $ 0.28 $ 0.32 $ 0.41 $ 0.53
Net earnings per common share-assuming
dilution $ 0.28 $ 0.32 $ 0.41 $ 0.53
Cash dividends declared per common share $ 0.05 $ 0.05 $ 0.05 $ 0.05
Market price range:
Low $ 19 1/4 $ 13 13/16 $ 16 $ 11 7/8
High $ 27 $ 23 $ 22 $ 24 13/16
</TABLE>
<TABLE>
<CAPTION>
Fiscal Year Ended May 2, 1998
---------------------------------------------------------
First Second Third Fourth
(12 Weeks) (12 Weeks) (12 Weeks) (16 Weeks)
------------- ------------- --------------- --------------
<S> <C> <C> <C> <C>
Sales $ 739,125 $ 719,474 $743,951 $1,001,181
Gross margin 79,392 78,497 82,123 131,214
Net earnings 14,506 15,010 17,580 7,610
Net earnings per common share $ 0.31 $ 0.32 $ 0.37 $ 0.16
Net earnings per common share-assuming $ 0.30 $ 0.31 $ 0.37 $ 0.16
dilution
Cash dividends declared per common share $ 0.04 $ 0.04 $ 0.04 $ 0.04
Market price range:
Low $ 19 7/8 $21 11/16 $ 22 1/2 $ 26 3/16
High $ 26 3/16 $26 1/2 $28 15/16 $ 32
</TABLE>
Market price information reflects the sales prices of the common stock on the
New York Stock Exchange (NYSE) composite tape.
28
<PAGE>
16. Subsequent Events
On June 9, 1999, Richfood entered into an Agreement and Plan of Merger (the
"Merger Agreement"), dated as of June 9, 1999, among SUPERVALU INC., a Delaware
corporation ("SUPERVALU"), Winter Acquisition, Inc., a Delaware corporation and
wholly owned subsidiary of SUPERVALU ("Acquisition"), and Richfood. Pursuant to
the Merger, each share of common stock of Richfood will be converted into, and
become exchangeable for, at the election of the holder, either (i) $18.50 in
cash or (ii) the number of shares of common stock, par value $1.00 per share, of
SUPERVALU equal to the ratio determined by dividing $18.50 by the average of the
per share sales price of SUPERVALU Common Stock, subject to certain allocation
and proration procedures.
The transaction has been approved by the Boards of Directors of Richfood and
SUPERVALU, but remains subject to regulatory approvals (including expiration or
early termination of the waiting period under the Hart-Scott-Rodino Antitrust
Improvements Act of 1976), approval by Richfood's shareholders and other
customary closing conditions. In addition, the Merger Agreement provides that if
the Average SUPERVALU Price (as defined in the Merger Agreement) is less than
$18.50, each of SUPERVALU and Richfood will have the right to terminate the
Agreement; provided, however, that if the Average SUPERVALU Price is between
$15.00 and $18.50, Richfood will not have such termination right if SUPERVALU
increases the portion of the Merger Consideration (as defined in the Merger
Agreement) payable in cash, and thereafter with additional SUPERVALU Common
Stock. The transaction is expected to be completed before the end of calendar
1999.
Either party may terminate the Merger Agreement under certain circumstances,
including if the Merger has not been consummated on or before January 15, 2000.
In addition, Richfood may terminate the Merger Agreement if it receives a bona
fide, written, unsolicited offer with respect to any merger, consolidation or
business combination involving Richfood or any of its subsidiaries, or the
acquisition of all or any significant part of the assets of Richfood or any of
its subsidiaries, that the Board of Directors of Richfood determines is more
favorable, from a financial point of view, to Richfood's shareholders than the
Merger (a "Superior Proposal"), and SUPERVALU does not match that Superior
Proposal. In the event that Richfood terminates the Merger Agreement to enter
into an agreement with respect to a Superior Proposal, or if Richfood or
SUPERVALU terminate the Merger Agreement in certain other limited circumstances,
Richfood would be required to pay SUPERVALU a termination fee of $27,000, plus
SUPERVALU's reasonable out-of-pocket expenses (not to exceed $3,000 in the
aggregate).
The Company is party to an interest rate lock agreement, which expires August
17, 1999, whereby the Company hedged the interest rate on $150,000 of ten year
debt securities ("debt securities") to be issued at a hedged base treasury yield
of approximately 6.3%. The purpose of the interest rate lock agreement was to
serve as an anticipatory hedge on the debt securities, which the Company
expected to issue under its existing Shelf Registration Statement (Note 6). As a
result of the announcement of the Merger Agreement, it is no longer probable
that the debt securities will be issued. Accordingly, the Company expects to
recognize a one-time charge associated with the settlement of the interest rate
lock agreement. As of May 1, 1999, the settlement amount approximated $11,000
and as of June 9, 1999, the approximate settlement amount was $4,800.
29
<PAGE>
SCHEDULE II
Richfood Holdings, Inc.
Valuation and Qualifying Accounts
(Dollar amounts in thousands)
<TABLE>
<CAPTION>
Balance at Charged to Balance at
Beginning of Costs and Deductions End of
Description Fiscal year Expenses and other Fiscal Year
----------- ------------ ---------- ---------- -----------
<S> <C> <C> <C> <C>
For Fiscal Year Ended
May 1, 1999
Deducted from asset accounts:
Allowance for doubtful accounts $5,047 $3,093 $3,341 $4,799
For Fiscal Year Ended
May 2, 1998
Deducted from asset accounts:
Allowance for doubtful accounts 5,331 4,148 4,432 5,047
For Fiscal Year Ended
May 3, 1997
Deducted from asset accounts:
Allowance for doubtful accounts 5,573 4,241 4,483 5,331
</TABLE>
