FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the Quarter Ended OCTOBER 2, 1999
Commission File Number 0-4485
WESTERN BEEF, INC.
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(Exact name of registrant as specified in its charter)
Delaware 13-3266114
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(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification no.)
47-05 Metropolitan Avenue, Ridgewood, New York 11385
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(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: (718) 417-3770
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months and (2) has been subject to such filing requirements for
the past 90 days.
Yes |X| No |_|
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the close of the period covered by this report.
5,475,153 shares of Common Stock, par value $.05, as of November 12, 1999.
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WESTERN BEEF, INC. AND SUBSIDIARIES
INDEX
Page
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CAUTIONARY STATEMENT RELEVANT TO FORWARD-LOOKING
INFORMATION 2
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited):
Condensed consolidated balance sheets as of
October 2, 1999 and January 1, 1999. 3
Condensed consolidated statements of income
for the thirty-nine weeks and the thirteen weeks
ended October 2, 1999 and 1998. 4
Condensed consolidated statements of cash flows
for the thirty-nine weeks ended October 2, 1999
and 1998. 5
Notes to condensed consolidated financial statements. 6
Item 2. Management Discussion and Analysis of Financial Condition
and Results of Operations. 8
PART II - OTHER INFORMATION 11
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Item 1. Legal Proceedings
Item 2. Changes in Securities
Item 3. Default upon Senior Securities
Item 4. Submission of Matters to a Vote of Security Holders
Item 5. Other Information
Item 6. Exhibits and Reports on Form 8-K
Signature 12
CAUTIONARY STATEMENT RELEVANT TO FORWARD-LOOKING INFORMATION FOR THE PURPOSE OF
"SAFE HARBOR" PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF
1995.
The Private Securities Litigation Reform Act of 1995 provides a "Safe Harbor"
for forward-looking statements. Certain information included in this
quarterly report on Form 10-Q contains or may contain forward-looking
statements such as those statements pertaining to the renovation of the
Company's existing stores, the construction or acquisition of new stores, the
recoverability of deferred tax assets, the continued availability of credit
lines for capital expansion, the suitability of facilities, access to
suppliers, implementation of technological improvement programs and year 2000
issues. Such forward-looking information involves important risks and
uncertainties that could significantly affect expected results in the future
from those expressed in any forward-looking statements made by, or on behalf
of, the Company. These risks and uncertainties include, but are not limited
to, uncertainties relating to economic conditions; delays and other hazards
inherent in building and construction; competition in both the retail and
wholesale markets and government and regulatory policies and certifications
(in particular those relating to the United States Department of Agriculture
Food Stamp Program); the pricing and availability of the products the Company
sells and distributes, including Western Beef label brand products; potential
delays in the implementation of the Company's technological improvement
programs; and the effectiveness of such programs upon the implementation of,
and the Company's ability to resolve, any and all year 2000 computer
applications.
2
ITEM 1: FINANCIAL STATEMENTS
WESTERN BEEF, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PAR VALUE)
(UNAUDITED)
OCTOBER 2, 1999 JANUARY 1, 1999
--------------- ---------------
ASSETS
Current assets:
Cash and cash equivalents $ 11,163 $ 12,086
Accounts receivable, net of allowance for doubtful
accounts ($876 and $522) 7,281 5,632
Inventories 16,568 15,290
Deferred income taxes 1,678 1,550
Prepaid expenses and other current assets 1,971 2,133
-------- --------
Total current assets 38,661 36,691
Property, plant and equipment, net of accumulated
depreciation and amortization ($27,424 and $24,267) 48,304 47,373
Other assets 2,193 2,293
-------- --------
Total assets $ 89,158 $ 86,357
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 1,161 $ 1,681
Current portion of obligations under capital leases 734 690
Accounts payable 12,397 10,564
Accounts payable-related party 2,961 3,765
Accrued expenses and other current liabilities 5,931 5,610
-------- --------
Total current liabilities 23,184 22,310
Long-term debt, net of current portion 7,994 8,819
Obligations under capital leases, net of current portion 1,882 2,438
Deferred income taxes 2,831 2,497
Other non-current liabilities 2,659 1,760
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Total liabilities 38,550 37,824
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Stockholders' equity:
Preferred stock, $.05 par value; 2000 shares
authorized; none issued -- --
Common stock, $.05 par value; 15,000 shares
authorized; 5,475 shares issued and outstanding 274 274
Capital in excess of par value 11,407 11,407
Retained earnings 38,964 36,915
Deferred compensation (37) (63)
-------- --------
Total stockholders' equity 50,608 48,533
-------- --------
Total liabilities and stockholders' equity $ 89,158 $ 86,357
======== ========
See accompanying notes to condensed consolidated financial statements.
3
WESTERN BEEF, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT SHARE DATA)
(UNAUDITED)
Thirty-Nine Weeks Ended Thirteen Weeks Ended
OCTOBER 2, 1999 OCTOBER 2, 1998 OCTOBER 2, 1999 OCTOBER 2, 1998
--------------- --------------- --------------- ---------------
Net sales $245,664 $221,285 $ 82,888 $ 75,031
Cost of sales 182,102 161,637 61,959 54,711
-------- -------- -------- --------
Gross profit 63,562 59,648 20,929 20,320
Selling, general and administrative
expenses 60,249 55,444 19,870 19,012
-------- -------- -------- --------
Income before income taxes 3,313 4,204 1,059 1,308
Provision for income taxes 1,264 1,577 397 487
-------- -------- -------- --------
Net income $ 2,049 $ 2,627 $ 662 $ 821
======== ======== ======== ========
Net income per share of common
stock-basic and diluted $ .37 $ .48 $ .12 $ .15
======== ======== ======== ========
Weighted average shares
outstanding-basic 5,475 5,473 5,475 5,475
======== ======== ======== ========
Weighted average shares
outstanding-diluted 5,498 5,499 5,501 5,501
======== ======== ======== ========
See accompanying notes to condensed consolidated financial statements.
4
WESTERN BEEF, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
Thirty-Nine Weeks Ended
OCTOBER 2, 1999 OCTOBER 2, 1998
--------------- ---------------
Cash flows from operating activities:
Net income $ 2,049 $ 2,627
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 3,230 3,094
Deferred income tax expense 206 111
Provision for losses on accounts receivable 354 310
Gain on disposal of property, plant and equipment -- (139)
(Increase) decrease in assets:
Accounts receivable (2,003) 652
Inventories (1,278) (2,091)
Prepaid expenses and other current assets 162 (207)
Other assets 64 (94)
(Decrease) increase in liabilities:
Accounts payable and accounts payable-related party 1,029 3,949
Accrued expenses and other current liabilities 321 1,350
Other non-current liabilities 899 (591)
-------- --------
Net cash provided by operating activities 5,033 8,971
-------- --------
Cash flows from investing activities:
Capital expenditures (4,099) (7,569)
Proceeds from sale of property, plant and equipment -- 1,055
-------- --------
Net cash used in investing activities (4,099) (6,514)
-------- --------
Cash flows from financing activities:
Proceeds from issuance of long-term debt and capital leases 160 2,055
Payments on long-term debt and capital leases (2,017) (2,119)
Proceeds from Issuance of common stock -- 18
-------- --------
Net cash used in financing activities (1,857) (46)
-------- --------
Net (decrease) increase in cash and cash equivalents (923) 2,411
Cash and cash equivalents, beginning of period 12,086 7,527
-------- --------
Cash and cash equivalents, end of period $ 11,163 $ 9,938
======== ========
Cash paid during the thirty-nine weeks for:
Interest $ 805 $ 774
Income taxes $ 515 $ 979
See accompanying notes to condensed consolidated financial statements.
5
WESTERN BEEF, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(1) BASIS OF PRESENTATION:
The accompanying unaudited condensed consolidated financial statements
have been prepared in accordance with generally accepted accounting
principles for interim financial information and with the instructions
to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not
include all of the information and footnotes required by generally
accepted accounting principles for complete financial statements. In
the opinion of management, all adjustments (consisting solely of normal
recurring items) considered necessary for a fair presentation have
been included. Operating results for the thirty-nine weeks ended
October 2, 1999 are not necessarily indicative of the results that may
be expected for the year ending January 1, 2000. For further
information, refer to the consolidated financial statements and
footnotes thereto included in the Company's Annual Report on Form 10-K
for the year ended January 1, 1999 as filed on March 29, 1999.
(2) LITIGATION:
Except as discussed below, there has been no significant change in
litigation as discussed in Note 7 of Notes to Consolidated Financial
Statements in the Company's Annual Report on Form 10-K for the year
ended January 1, 1999 as filed on March 29, 1999.
On December 3, 1998, a class action, Plumpe v. Castellana et al., No.
16807 NC, was filed in the Delaware Chancery Court against Western
Beef, Inc., Peter Castellana, Jr., Joseph Castellana, Stephen R. Bokser
and Arnold B. Becker. The action seeks to enjoin a transaction pursuant
to which the Company would be acquired by and merged into, an entity
owned by certain officers of the Company and their family members, on
the grounds that the transaction would create a breach of fiduciary
duties to shareholders. The action also seeks rescission of the
transaction if it is consummated, damages and accountants' and
attorneys' fees.
On July 29, 1999, the acquisition price was increased to $8.75 per
share from an initial offer price of $7.50 per share and the Company
entered into a Memorandum of Understanding with counsel to the
plaintiff in the above referenced shareholder lawsuit arising from
the merger. The Memorandum of Understanding provides for the
settlement of such lawsuit based on the payment of a per share merger
consideration of $8.75 and is subject to, among other things,
completion by plaintiff of additional discovery, completion of
definitive documentation relating to the settlement, court approval
and the dismissal of the lawsuit with prejudice and without any
costs to any party (except as agreed upon). Additionally, pursuant
to the memorandum of understanding, the defendants will not oppose the
plaintiff's application for an award for attorney's fees in the amount
of $150,000 and reimbursement of expenses not to exceed $10,000. The
defendants have also agreed to be responsible for the costs and
expenses related to providing notice of the proposed settlement,
regardless of whether the proposed settlement is approved by the
court. On October 26, 1999, the defendants commenced mailing notice of
the hearing concerning the proposed settlement. The hearing will be
held before the Delaware Chancery Court on December 9, 1999, at
10:00 a.m.
(3) CHANGE IN FISCAL YEAR-END:
The Company has changed its retail 52-53 week year-end to end on the
Saturday closest to the end of the calendar year from the Friday
closest to the end of the calendar year. This change did not have a
significant impact on the results of operations and cash flows for the
thirteen and thirty-nine week periods ended October 2, 1999.
6
WESTERN BEEF, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(4) SEGMENTS OF BUSINESS
The Company operates in two industry segments. The wholesale segment
primarily sells poultry, beef, pork and provisions to retailers,
restaurants and institutions. The retail segment sells various meat and
grocery items to the general public. All intersegment sales prices are
market based. Corporate overhead costs are allocated to each of its
operating segments based on overall sales. The Company evaluates the
performance of its segments based on operating earnings before taxes of
the respective business units. Financial data (in thousands of dollars)
for the three and nine month periods ended October 2, 1999 and 1998 is
as follows:
1999
THREE MONTHS ENDED OCTOBER 2, 1999
Retail Wholesale Total
------ --------- -----
Net sales $ 64,432 $ 18,456 $ 82,888
Intersegment sales -- 13,453 13,453
Net interest expense 231 33 264
Net income before provision
for income taxes 1,028 31 1,059
Other significant non-cash items:
Bad debt expense -- 161 161
Capital expenditures 1,032 22 1,054
NINE MONTHS ENDED OCTOBER, 2 1999
Retail Wholesale Total
------ --------- -----
Net sales $192,210 $ 53,454 $245,664
Intersegment sales -- 41,343 41,343
Net interest expense 704 101 805
Net income before provision
for income taxes 2,995 318 3,313
Other significant non-cash items:
Bad debt expense -- 354 354
Capital expenditures 4,035 64 4,099
Identifiable assets 75,474 13,684 89,158
7
WESTERN BEEF, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(4) SEGMENTS OF BUSINESS (CONTINUED)
1998
THREE MONTHS ENDED OCTOBER 2, 1998
Retail Wholesale Total
------ --------- -----
Net sales $ 61,723 $ 13,308 $ 75,031
Intersegment sales -- 13,861 13,861
Net interest expense 233 37 270
Net income loss before provision
for income taxes 1,372 (64) 1,308
Other significant non-cash items:
Bad debt expense -- 147 147
Capital expenditures 1,930 60 1,990
NINE MONTHS ENDED OCTOBER 2, 1998
Retail Wholesale Total
------ --------- -----
Net sales $179,068 $ 42,217 $221,285
Intersegment sales -- 40,431 40,431
Net interest expense 661 113 774
Net income before provision
for income taxes 3,980 224 4,204
Other significant non-cash items:
Bad debt expense -- 310 310
Capital expenditures 7,310 259 7,569
Identifiable assets 71,736 11,918 83,654
ITEM 2: MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS.
For the quarter ended October 2, 1999, Western Beef, Inc. (the
"Company") achieved net income of $662,000 or $.12 per share on
net sales of $82,888,000 as compared to net income of $821,000
or $.15 per share on net sales of $75,031,000 for the comparable
period in 1998. On a year-to-date basis the Company achieved net
income of $2,049,000 or $.37 per share on net sales of
$245,664,000 for the thirty nine week period ended October 2,
1999 as compared to net income of $2,627,000 or $.48 per share
on net sales of $221,285,000 for the thirty-nine week period
ended October 2, 1998.
Net sales increased $7,857,000 and $24,379,000 for the quarter
and year-to-date periods ended October 2, 1999 as compared with
sales for the comparable periods in the prior year. The
Company's retail division accounted for $2,709,000 and
$13,142,000 of the sales increases for the quarter and
year-to-date periods respectively, ended October 2, 1999,
primarily as a result of the
8
1998 openings of two Western Beef supermarkets in New Jersey and
two Junior's Food Outlet stores in New York. Year-to-date
comparable store retail sales were basically unchanged from the
retail sales for the similar period in 1998. Wholesale division
sales increased $5,148,000 and $11,237,000 for the quarter and
year-to-date periods ended October 2, 1999 as compared with
sales for the comparable periods in the prior year, resulting
from the continued expansion of the Company's wholesale sales
force and the acquisition of new-credit worthy customers.
Gross profit as a percentage of sales decreased to 25.3% in the
third quarter of 1999 from 27.1% in the same quarter of the
prior year. On a year-to-date basis gross profit decreased to
25.9% for the thirty-nine weeks ended October 2, 1999 from 27.1%
for the comparable period in the prior year. The decrease in the
gross profit margins for 1999 resulted from increased sales in
the Company's wholesale division and Junior's Food Outlet stores
which operate at lower gross profit margins.
Selling, general and administrative expenses increased $858,000
and $4,805,000 for the quarter and year-to-date periods ended
October 2, 1999 as compared with such expenses for the
comparable periods in the prior year. As a percentage of sales,
selling, general and administrative expenses decreased to 24.0%
and 24.5% for the quarter and year-to-date periods ended October
2,1999 from 25.3% and 25.1% for the similar periods in 1998. The
increase in expense for the quarter resulted primarily from
costs incurred in connection with expansion of the Company's
wholesale division whereas the increase in expense for the
year-to-date period resulted primarily from costs associated
with the opening of the two new supermarkets in New Jersey and
the two new Junior's Food Outlet stores in New York and
increases in insurance reserves under the Company's
self-insurance program. The decreases in selling, general and
administrative expenses, as a percentage of sales, are
attributable to the increased ratio of wholesale sales which
incur lower operating costs than those incurred by the retail
division.
LIQUIDITY AND CAPITAL RESOURCES
Cash flow from operations was $5,033,000 for the thirty-nine
weeks ended October 2, 1999 as compared to $8,971,000 for the
comparable period in 1998. Such decrease primarily resulted from
higher wholesale division sales, thereby increasing accounts
receivable and an increase in inventories as a result of the new
supermarkets and Junior's Food Outlet stores that opened in
1998.
Capital expenditures of $4,099,000 related principally to the
acquisition of a parcel of land in Queens, NY on which the
Company intends to construct a Junior's Food Outlet store,
construction costs at a new Western Beef supermarket to be
opened on Prospect Avenue in the Bronx, N.Y. and various
expenditures for equipment and leasehold improvements for its
existing stores. The Company funded these expenditures with cash
flow from operations. The Company believes that cash on hand and
its $3,000,000 bank line of credit which expires on July 1, 2000
will be sufficient to meet its operational needs. At October 2,
1999 the entire balance was available for use by the Company.
In 1999, the Company intends to commence construction on one
Western Beef supermarket and two Junior's Food Outlet stores.
The Company expects the aggregate 1999 and 2000 capital
commitments for these projects and additional developments
scheduled in 2000, to be approximately $11,600,000. Several
financial institutions have expressed an interest in financing
the new store equipment that would be required at these new
locations.
9
ITEM 2: MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS. (CONTINUED)
YEAR 2000 ISSUES
The Company is executing a plan to ensure that the Company's
computer systems and software applications will properly
function beyond 1999. This plan involves identifying year 2000
issues, assigning priorities to items identified and correcting
or replacing material items that are not year 2000 compliant.
This plan also considers year 2000 vulnerability with respect to
the Company's major suppliers and third party service providers.
The Company is utilizing both internal and external resources to
address year 2000 issues. Costs associated with year 2000
computer system modifications are currently estimated to be
approximately $300,000 of which $225,000 has been incurred to
date. Included in these costs are $150,000 for certain front-end
cash register systems whose upgrade was previously identified
for non-year 2000 operational enhancements.
The Company has already installed year 2000 program codes on all
of its financial, merchandise and distribution computer software
systems. Effective with the first payroll week of 1999, the
Company was operating on year 2000 compliant software provided
by its third party payroll service company. Finally, the Company
has received and completed the testing of the front-end register
system enhancements previously discussed and has completed
Company-wide implementation of this software.
The Company has contingency plans in place for its financial,
merchandise and distribution automation systems utilizing
internal and major supplier communication systems. In the
event of power interruptions, most of its retail outlets are
equipped with generators for its front-end register systems
and up to 50% of each store's lighting requirements. Plans
are currently being formulated to provide back-up power for
the Company's wholesale and retail divisions' refrigeration
equipment. As of September 30, 1999 the Company has ordered
one generator which will be delivered in February, 2000. This
generator will be mobile in order to meet the demands of any
given store. However, if more than one store experiences
power interruptions perishable products must be stored in the
Company's refrigerated trailers packed with dry ice. Because
the above-mentioned generator will not arrive prior to
January 1, 2000, the Company is currently investigating
additional remedies to any potential problems due to power
interruptions.
As part of the Company's goal to achieve year 2000 compliance,
it is seeking representations from suppliers, vendors and
business partners about their year 2000 compliance. No
assurances can be given that the Company will be able to
identify and address all year 2000 issues due to their
complexity and the Company's dependence on representations and
preparedness of third parties with whom the Company does
business. Although the Company believes that its efforts and
plans will address year 2000 issues that are within the
Company's reasonable control, there can be no assurance that
year 2000 issues will not have a material adverse effect on the
Company's business or results of operations.
10
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
The Company has various outstanding litigation matters, which
it considers to be in the ordinary course of business. In the
opinion of Management, the outcome of these litigation matters
will not materially adversely affect the Company's financial
position and results of operations and cash flows.
Reference is made to the information regarding legal
proceedings appearing in Part I of this Report on Form
10-Q under the heading "Notes to Condensed Consolidated
Financial Statements -- Note 2. Litigation" which is hereby
incorporated by reference.
Item 2. Changes in Securities
None
Item 3. Default upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
27 Financial Data Schedule
(b) Reports on Form 8-K
The registrant has not filed a report on Form 8-K
during the quarter ended October 2, 1999
11
SIGNATURE
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.
WESTERN BEEF, INC.
By: /s/ THOMAS F. MORANZONI
---------------------------
Chief Financial Officer
(Principal Financial and
Accounting Officer)
Date: November 12, 1999
12