RICHFOOD HOLDINGS, INC. AND SUBSIDIARIES
FINANCIAL REVIEW
The following discussion of the Company's consolidated results of operations and
financial position should be read in conjunction with the Consolidated Financial
Statements and notes thereto included in this annual report. References in the
following discussion are to the fiscal years ended May 3, 1997 ("fiscal 1997"),
April 27, 1996 ("fiscal 1996") and April 29, 1995 ("fiscal 1995").
On August 29, 1996, the Company's Board of Directors declared a
three-for-two common stock split payable September 30, 1996, to shareholders of
record on September 16, 1996. All references to per common share data in the
Financial Review for all previously reported periods have been adjusted to
reflect the common stock split.
Results of Operations
Comparison of Fiscal 1997 with Fiscal 1996
Sales of $3,411.6 million for fiscal 1997 consisted of $3,280.2 million of
wholesale grocery sales and $338.5 million of retail grocery sales. Wholesale
grocery sales included $207.1 million of sales to the Company's retail grocery
division. Wholesale grocery sales increased $183.2 million, or 5.9%, over sales
of $3,097.0 million for fiscal 1996. The Company's results of operations for
fiscal 1997 included fifty-three weeks of operations, compared to fifty-two
weeks in fiscal 1996. Excluding the effect of the additional week in fiscal
1997, wholesale grocery sales would have increased $121.8 million, or 3.9%. This
increase was primarily attributable to sales of $65.2 million recorded by
Norristown Wholesale, Inc. ("Norristown") after its acquisition by the Company
on September 30, 1996, and incremental sales to new and current customers.
Retail grocery sales of $338.5 million for fiscal 1997 increased $15.7
million, or 4.9%, over sales of $322.8 million for fiscal 1996. Excluding the
effect of the additional week in fiscal 1997, retail grocery sales would have
increased $9.9 million, or 3.1%. This increase was primarily attributable to the
opening of one new METRO store in September 1996, the inclusion of a full year
of sales from two additional stores opened in the fourth quarter of fiscal 1996
and incremental sales resulting from the Company's conversion of former BASICS
stores to the METRO format. Sales for the retail grocery division decreased 1.0%
on a comparable store basis in fiscal 1997, compared to fiscal 1996, primarily
due to the impact of competitive store openings.
Gross margin increased to 10.50% of sales for fiscal 1997 from 10.04% of
sales for fiscal 1996. Operating and administrative expenses were 7.41% of sales
in fiscal 1997, compared to 7.28% of sales in fiscal 1996. The increases in
gross margin and operating and administrative expenses as a percent of sales
were primarily attributable to the inclusion of the higher gross margin and
operating expense ratio of the Norristown produce business in fiscal 1997
results.
The Company's operating results for fiscal 1996 included a one-time charge
for merger and integration costs of $12.0 million in connection with the
Company's acquisition of Super Rite Corporation ("Super Rite"), a full service
wholesale and retail food distributor headquartered in Harrisburg, Pennsylvania,
effective October 15, 1995 (the "Super Rite Acquisition"). This charge primarily
related to transaction costs associated with the Super Rite Acquisition,
severance costs and costs related to the conversion of certain BASICS locations
to the METRO store format, including write-offs of property and equipment. See
note 2 to the Consolidated Financial Statements for further discussion.
Interest expense decreased to $7.2 million in fiscal 1997 from $12.4
million in fiscal 1996. The decrease was primarily due to lower average debt
levels in fiscal 1997, compared to fiscal 1996. On April 1, 1997, the Company
redeemed the remaining $47.5 million outstanding principal amount of its 10 5/8%
Senior Subordinated Notes due April 2002 ("Senior Subordinated Notes").
The Company's effective income tax rate was 39.8% in fiscal 1997, compared
to 42.8% in fiscal 1996. The higher effective income tax rate for fiscal 1996
was primarily attributable to certain nondeductible merger and integration costs
associated with the Super Rite Acquisition.
The extraordinary loss, net of tax, of $1.9 million for fiscal 1997
related to the early redemption of the remaining $47.5 million principal amount
of Senior Subordinated Notes. The extraordinary loss, net of tax, of $2.2
million for fiscal 1996 primarily related to the repurchase, at market prices
above par, of $27.5 million principal amount of Senior Subordinated Notes. The
extraordinary losses for fiscal 1997 and fiscal 1996 were primarily comprised of
the amount paid in excess of par value and the write-off of related deferred
financing costs for the Senior Subordinated Notes.
Excluding the effects of the extraordinary losses in fiscal 1997 and
fiscal 1996, and the effects of the one-time charge for merger and integration
costs in fiscal 1996, net earnings for fiscal 1997 were $61.4 million, or $1.30
per share, a 30.5% increase over net earnings of $47.0 million, or $1.00 per
share, for fiscal 1996. Net earnings, including the effects of the extraordinary
losses and the one-time charge for merger and integration costs, were $59.5
million, or $1.26 per share, for fiscal 1997, compared to $37.1 million, or
$0.79 per share, for fiscal 1996.
Comparison of Fiscal 1996 with Fiscal 1995
Sales of $3,250.9 million for fiscal 1996 consisted of $3,097.0 million of
wholesale grocery sales and $322.8 million of retail grocery sales. Wholesale
grocery sales included $168.9 million of sales to the Company's retail grocery
division. Wholesale grocery sales increased $239.6 million, or 8.4%, over sales
of $2,857.4 million for fiscal 1995. The Company's results of operations for
fiscal 1996 included fifty-two weeks of operations for Super Rite, compared to
fifty-three weeks in fiscal 1995. Excluding the effect of the additional week in
fiscal 1995 for Super Rite, wholesale grocery sales would have increased $264.9
million, or 9.4%. This increase was primarily attributable to: a full year of
sales to former customers of the wholesale division of Camellia Food Stores,
Inc., which was acquired by the Company on April 3, 1995; a full year of sales
for Rotelle, Inc. ("Rotelle"), which was acquired by the Company on August 23,
1994; and sales to customers who expanded their retail operations.
Retail grocery sales of $322.8 million for fiscal 1996 increased $18.1
million, or 5.9%, over sales of $304.7 million for fiscal 1995. Excluding the
effect of the additional week in fiscal 1995 for Super Rite, retail grocery
sales would have increased $23.8 million, or 7.9%. This increase was primarily
attributable to the Company's conversion of three former BASICS stores to the
METRO format and the opening of two new METRO stores between May 1994 and April
1996. Sales for the retail grocery division increased 6.7% on a comparable store
basis in fiscal 1996, compared to fiscal 1995.
Gross margin increased to 10.04% of sales for fiscal 1996 from 9.95% of
sales for fiscal 1995. This increase was primarily attributable to the Company's
retail grocery division emphasizing sales of categories with higher margins such
as meat, perishables and private label items.
RICHFOOD HOLDINGS, INC. AND SUBSIDIARIES
FINANCIAL REVIEW (CONTINUED)
Operating and administrative expenses were 7.28% of sales in fiscal 1996,
compared to 7.22% of sales in fiscal 1995. The increase was primarily
attributable to the Company increasing its provision for doubtful accounts in
fiscal 1996 and the effect of incremental depreciation and amortization expense
resulting primarily from the inclusion of a full year of Rotelle's operating
results in fiscal 1996.
Interest expense decreased to $12.4 million in fiscal 1996 from $18.3
million in fiscal 1995. This decrease was primarily due to lower average debt
levels in fiscal 1996, compared to fiscal 1995. Lower average debt levels
primarily resulted from the early extinguishment of $27.5 million of Senior
Subordinated Notes and the repayment in full of borrowings under a $25.0 million
term loan facility and a $25.0 million revolving credit facility in fiscal 1996.
The Company's effective income tax rate was 42.8% in fiscal 1996, compared
to 41.2% in fiscal 1995. The higher effective income tax rate for fiscal 1996
was primarily attributable to certain nondeductible merger and integration costs
associated with the Super Rite Acquisition.
Excluding the effects of the one-time charge for merger and integration
costs related to the Super Rite Acquisition and the extraordinary loss related
to early extinguishment of certain debt, net earnings for fiscal 1996 were $47.0
million, or $1.00 per share, a 19.9% increase over net earnings of $39.2
million, or $0.84 per share, for fiscal 1995. Net earnings for fiscal 1996,
including the effects of the one-time charge and the extraordinary loss, were
$37.1 million, or $0.79 per share.
Liquidity and Capital Resources
Cash and cash equivalents were $10.4 million at May 3, 1997, compared to $17.4
million at April 27, 1996. Working capital was $21.9 million at May 3, 1997, and
$40.8 million at April 27, 1996. The decrease in working capital was primarily
attributable to a reduction in cash and cash equivalents, which were utilized to
reduce long-term debt, and an increase in accounts payable resulting from the
Company's continued focus on effective accounts payable management. The
Company's working capital needs are financed primarily through cash provided by
operations. The Company also utilizes, on a short-term basis, unsecured
committed revolving lines of credit. Amounts drawn under these lines of credit
are typically repaid within a few business days. There were no borrowings
outstanding under these facilities at May 3, 1997.
Net Cash Provided by Operating Activities
The Company's operations continue to generate significant cash to support the
Company's growth. Net cash provided by operating activities for fiscal 1997 was
$116.1 million. This amount included net earnings of $59.5 million and
depreciation and amortization of $29.2 million. Net cash provided by operating
activities was $89.6 million and $100.4 million for fiscal 1996 and 1995,
respectively. These amounts primarily consisted of net earnings of $37.1 million
in fiscal 1996 and $39.2 million in fiscal 1995, and depreciation and
amortization of $27.1 million in fiscal 1996 and $23.9 million in fiscal 1995.
Net Cash Used for Investing Activities
Net cash used for investing activities was $61.4 million for fiscal 1997, $20.3
million for fiscal 1996 and $77.7 million for fiscal 1995. Net cash used for
investing activities included acquisitions made by the Company, and consisted of
$26.1 million for the Company's purchase of Norristown in fiscal 1997 and $50.7
million for the Company's purchase of Rotelle in fiscal 1995.
Capital expenditures were $15.4 million for fiscal 1997, $14.8 million for
fiscal 1996 and $20.0 million for fiscal 1995. Capital expenditures for all
years included capital employed for new METRO stores and the conversion of
existing BASICS stores to the METRO format. In addition, capital expenditures
for all years included the purchase of material handling equipment, improvements
to the distribution centers and dairy plant and, in fiscal 1996 and fiscal 1995,
warehouse racking at the Company's distribution centers. The Company anticipates
that fiscal 1998 capital expenditures will be approximately $25.0 million. The
increase in budgeted capital expenditures for fiscal 1998 is primarily
attributable to anticipated expenditures for the retail grocery division, which
include the addition of new METRO stores in the Baltimore, Maryland market and
the conversion of certain BASICS stores to the METRO format. Budgeted capital
expenditures for the wholesale grocery division include material handling
equipment, improvements at the distribution centers and further investments in
technology.
The Company remains committed to providing secured financing to support
the growth of its retail customers. Loans issued to retailers were $22.3 million
in fiscal 1997, $16.8 million in fiscal 1996 and $15.9 million in fiscal 1995.
Collections on loans were $10.5 million in fiscal 1997, $14.0 million in fiscal
1996 and $12.4 million in fiscal 1995. As a result of fiscal 1997 customer
financing activities, the Company's notes receivable increased from $34.6
million at April 27, 1996, to $43.4 million at May 3, 1997.
Net Cash Used for Financing Activities
Net cash used for financing activities was $61.7 million for fiscal 1997, $81.2
million for fiscal 1996 and $14.4 million for fiscal 1995. During fiscal 1997,
the Company made $58.6 million of principal payments on long-term debt,
including the early redemption of the remaining $47.5 million principal amount
of Senior Subordinated Notes on April 1, 1997, and the first $9.0 million
principal payment on the Company's 6.15% Senior Notes due July 1, 2000. During
fiscal 1996, the Company reduced its total debt by $80.8 million. This reduction
primarily related to the repayment of outstanding borrowings under a $25.0
million revolving credit facility and a $25.0 million term loan facility, as
well as the early extinguishment of $27.5 million of Senior Subordinated Notes.
The Company's total debt was $42.7 million at May 3, 1997, compared to
$97.7 million at April 27, 1996. Shareholders' equity increased to $258.7
million at May 3, 1997, from $199.6 million at April 27, 1996. The ratio of
total debt to equity was 0.17 to 1 at May 3, 1997, and 0.49 to 1 at April 27,
1996. The ratio of total debt to total capitalization (defined as total debt
plus shareholders' equity) decreased to 0.14 to 1 at May 3, 1997, from 0.33 to 1
at April 27, 1996.
The Company increased the cash dividend on its common stock to $0.12 per
share in fiscal 1997 from $0.08 per share in fiscal 1996 and $0.07 per share in
fiscal 1995. Cash dividends paid were $5.2 million in fiscal 1997, $2.9 million
in fiscal 1996 and $2.0 million in fiscal 1995.
The Company believes that it has the ability to continue to generate
adequate funds from its operations and through borrowings under its long-term
debt facilities to maintain its competitive position and expand its business.
RICHFOOD HOLDINGS, INC. AND SUBSIDIARIES
SELECTED CONSOLIDATED FINANCIAL DATA
===========================================================================================================================
Fiscal Year Ended
-------------------------------------------------------------------------
(Dollar amounts in thousands, May 3, April 27, April 29, April 30, May 1,
except per share data) 1997(a) 1996 1995(b) 1994 1993(c)
- ---------------------------------------------------------------------------------------------------------------------------
Operations:
Sales $3,411,625 $3,250,868 $2,992,735 $2,545,676 $2,357,706
Gross margin 358,326 326,307 297,715 250,441 236,944
Operating and administrative expenses 252,885 236,661 216,099 186,912 191,058
Merger and integration costs -- 11,993(d) -- -- --
Loss on disposal of assets -- -- -- 13,148(f) 9,188(f)
Interest expense 7,166 12,354 18,312 17,534 17,619
Earnings before income taxes and
extraordinary loss 101,947 68,529 66,643 36,025 22,765
Earnings before extraordinary loss 61,351 39,215 39,218 21,371 14,311
Extraordinary loss, net of tax (1,882)(e) (2,164)(e) -- -- (5,042)(g)
Net earnings 59,469 37,051 39,218 21,371 9,269
Preferred stock dividends -- -- -- -- 8,838
Net earnings applicable to common stock 59,469 37,051 39,218 21,371 431
Net earnings as a percent of sales 1.74% 1.14% 1.31% 0.84% 0.39%
- ---------------------------------------------------------------------------------------------------------------------------
Per Common Share Data:
Earnings before extraordinary loss $ 1.30 $ 0.84 $ 0.84 $ 0.47 $ 0.12
Net earnings 1.26 0.79 0.84 0.47 0.01
Cash dividends declared 0.12 0.08 0.07 0.05 0.05
Book value 5.46 4.25 3.43 2.61 2.09
Market price range-- High 28 1/8 22 13 1/3 12 1/6 9 2/3
-- Low 18 5/8 13 9 8 1/2 5 1/4
Weighted average common
shares outstanding 47,290,092 46,825,107 46,711,389 45,771,755 45,288,332
- ---------------------------------------------------------------------------------------------------------------------------
Financial Position:
Working capital $ 21,868 $ 40,828 $ 72,780 $ 84,926 $ 68,401
Total assets 581,480 564,261 580,770 487,904 487,266
Total debt 42,725 97,743 178,531 181,576 208,875
Shareholders' equity 258,650 199,562 160,330 121,868 95,395
- ---------------------------------------------------------------------------------------------------------------------------
Financial Ratios and Other Data:
Current ratio 1.08 to 1 1.16 to 1 1.31 to 1 1.47 to 1 1.36 to 1
Inventory turnover 18.73 18.90 18.80 16.18 15.40
Return on average assets 10.38% 6.47% 7.34% 4.38% 2.05%
Debt to equity ratio 0.17 to 1 0.49 to 1 1.11 to 1 1.49 to 1 2.19 to 1
Return on average shareholders' equity 25.96% 20.59% 27.79% 19.67% 0.46%
Number of employees at fiscal year-end 5,151 4,925 4,600 4,639 4,397
===========================================================================================================================
All historical financial data presented has been restated to reflect Richfood
Holdings, Inc.'s October 15, 1995, acquisition of Super Rite Corporation which
was accounted for as a pooling of interests (see note 2 to the Consolidated
Financial Statements).
All references to common share and per common share data for previously reported
periods have been adjusted to reflect the 3-for-2 common stock split in fiscal
1997 and the 2-for-1 common stock split in fiscal 1994.
(a) Fiscal 1997 was a 53 week year. Results for fiscal 1997 reflect the
acquisition of Norristown Wholesale, Inc., on September 30, 1996 (see note
2 to the Consolidated Financial Statements).
(b) Results for fiscal 1995 reflect the acquisitions of Rotelle, Inc. on August
23, 1994, and the Wholesale Division of Camellia Food Stores, Inc. on April
3, 1995 (see note 2 to the Consolidated Financial Statements).
(c) Results for fiscal 1993 reflect the acquisition of the Civilian Wholesale
Division of B. Green & Company, Inc. on January 22, 1993.
(d) See note 2 to the Consolidated Financial Statements and Financial Review for
further discussion.
(e) See note 7 to the Consolidated Financial Statements and Financial Review for
further discussion.
(f) The fiscal 1994 and fiscal 1993 loss on disposal of assets related to the
write-down of assets of closed retail grocery stores.
(g) The $5.0 million extraordinary loss, net of tax, in fiscal 1993 primarily
related to the early redemption of then-outstanding Super Rite Foods, Inc.
Senior Subordinated 13 1/4% Notes.
RICHFOOD HOLDINGS, INC. AND SUBSIDIARIES
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders
Richfood Holdings, Inc.:
We have audited the accompanying consolidated balance sheet of Richfood
Holdings, Inc. and subsidiaries as of May 3, 1997, and the related consolidated
statements of earnings, shareholders' equity and cash flows for the fiscal year
then ended. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audit. The consolidated balance sheet of Richfood
Holdings, Inc. and subsidiaries as of April 27, 1996, and the related
consolidated statements of earnings, shareholders' equity and cash flows for
each of the fiscal years in the two-year period ended April 27, 1996 were
audited by other auditors whose report, dated June 10, 1996, expressed an
unqualified opinion on those statements based on their audits and the report of
other auditors related to the fiscal 1995 consolidated financial statements of
Super Rite Corporation (note 2).
We conducted our audit 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 audit provides 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 as of May 3, 1997, and the consolidated
results of their operations and their cash flows for the fiscal year then ended,
in conformity with generally accepted accounting principles.
/s/ Ernst & Young LLP
Richmond, Virginia
June 14, 1997
MANAGEMENT'S RESPONSIBILITY FOR FINANCIAL REPORTING
The Board of Directors and Shareholders
Richfood Holdings, Inc.:
The integrity and objectivity of the consolidated financial statements and
related financial information in this report are the responsibility of
management of the Company. The consolidated financial statements have been
prepared in conformity with generally accepted accounting principles and
include, when necessary, the best estimates and judgments of management.
Management is responsible for maintaining an internal control structure,
at appropriate cost, designed to provide reasonable assurance that assets are
safeguarded, transactions are executed in accordance with management's
authorization and financial records provide a reliable basis for the preparation
of the consolidated financial statements. The Company's year-end consolidated
financial statements are audited by our independent auditors. The annual audit
includes consideration of the Company's internal control structure to the extent
required by generally accepted auditing standards to enable our independent
auditors to determine the nature, timing and extent of their audit procedures.
Management also maintains a staff of internal auditors who evaluate the adequacy
of, and investigate the adherence to, internal controls and related policies and
procedures.
The Audit Committee of the Board of Directors, consisting of outside
directors, meets periodically with the independent auditors, internal auditors
and management to review matters relating to the Company's financial reporting,
the adequacy of the internal control structure and the scope and results of
audit work. Our independent auditors and the internal auditors have unrestricted
access to the Audit Committee.
/s/ John E. Stokely /s/ David W. Hoover
John E. Stokely David W. Hoover
President and Vice President-Finance
Chief Executive Officer
RICHFOOD HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
=======================================================================================================================
Fiscal Year Ended
------------------------------------------------------------------------------
(Dollar amounts in thousands, May 3, Percent April 27, Percent April 29, Percent
except per share data) 1997 of Sales 1996 of Sales 1995 of Sales
- -----------------------------------------------------------------------------------------------------------------------
Sales $3,411,625 100.00% $3,250,868 100.00% $2,992,735 100.00%
Costs and expenses:
Cost of goods sold 3,053,299 89.50 2,924,561 89.96 2,695,020 90.05
Operating and administrative
expenses 252,885 7.41 236,661 7.28 216,099 7.22
Merger and integration costs -- -- 11,993 0.37 -- --
Interest expense 7,166 0.21 12,354 0.38 18,312 0.61
Interest income (3,672) (0.11) (3,230) (0.10) (3,339) (0.11)
- -----------------------------------------------------------------------------------------------------------------------
Earnings before income taxes
and extraordinary loss 101,947 2.99 68,529 2.11 66,643 2.23
Income taxes 40,596 1.19 29,314 0.90 27,425 0.92
- -----------------------------------------------------------------------------------------------------------------------
Earnings before extraordinary
loss 61,351 1.80 39,215 1.21 39,218 1.31
Extraordinary loss, net of tax (1,882) (0.06) (2,164) (0.07) -- --
- -----------------------------------------------------------------------------------------------------------------------
Net earnings $ 59,469 1.74% $ 37,051 1.14% $ 39,218 1.31%
=======================================================================================================================
Earnings per common share:
Earnings before
extraordinary loss $ 1.30 $ 0.84 $ 0.84
Extraordinary loss, net of tax (0.04) (0.05) --
- -----------------------------------------------------------------------------------------------------------------------
Net earnings $ 1.26 $ 0.79 $ 0.84
=======================================================================================================================
Cash dividends declared
per common share $ 0.12 $ 0.08 $ 0.07
=======================================================================================================================
Weighted average common
shares outstanding 47,290,092 46,825,107 46,711,389
=======================================================================================================================
See accompanying Notes to Consolidated Financial Statements.
RICHFOOD HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
=======================================================================================
May 3, April 27,
(Dollar amounts in thousands) 1997 1996
- ---------------------------------------------------------------------------------------
Assets
Current assets:
Cash and cash equivalents $ 10,416 $ 17,415
Receivables, less allowance for doubtful
accounts of $3,445 (fiscal 1996 - $3,994) 104,739 100,385
Inventories 163,510 162,461
Other current assets 14,426 19,987
- ---------------------------------------------------------------------------------------
Total current assets 293,091 300,248
- ---------------------------------------------------------------------------------------
Notes receivable, less allowance for doubtful
accounts of $1,886 (fiscal 1996 - $1,579) 34,639 27,179
Property and equipment, net 121,594 122,659
Goodwill, net 87,520 74,455
Other assets 44,636 39,720
- ---------------------------------------------------------------------------------------
Total assets $581,480 $564,261
=======================================================================================
Liabilities and Shareholders' Equity
Current liabilities:
Current installments of long-term debt $ 10,656 $ 10,712
Accounts payable 209,207 187,010
Accrued expenses and other current liabilities 51,360 61,698
- ---------------------------------------------------------------------------------------
Total current liabilities 271,223 259,420
- ---------------------------------------------------------------------------------------
Long-term debt 32,069 87,031
Deferred credits and other 19,538 18,248
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 47,401,770
(fiscal 1996 - 46,987,602) 72,258 66,964
Retained earnings 186,392 132,598
- ----------------------------------------------------------------------------------------
Total shareholders' equity 258,650 199,562
Commitments and contingent liabilities (notes 5, 6 and 12)
- ----------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $581,480 $564,261
========================================================================================
See accompanying Notes to Consolidated Financial Statements.
RICHFOOD HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
===========================================================================================================================
Common Stock
-------------------------- Retained
(Dollar amounts in thousands) Shares Dollars Earnings Total
- ---------------------------------------------------------------------------------------------------------------------------
Balance at April 30, 1994 46,600,551 $62,593 $59,275 $121,868
Net earnings -- -- 39,218 39,218
Issuance of common stock under employee
stock incentive plans 226,002 1,683 -- 1,683
Shares canceled/surrendered (27,058) (298) -- (298)
Cash dividends declared on common stock -- -- (2,141) (2,141)
- ---------------------------------------------------------------------------------------------------------------------------
Balance at April 29, 1995 46,799,495 63,978 96,352 160,330
Net earnings -- -- 37,051 37,051
Effect of change in fiscal year end of pooled company -- -- 2,548 2,548
Issuance of common stock under employee
stock incentive plans 233,086 1,675 -- 1,675
Proceeds from short-swing profits -- 1,628 -- 1,628
Shares canceled/surrendered (44,979) (317) -- (317)
Cash dividends declared on common stock -- -- (3,353) (3,353)
- ---------------------------------------------------------------------------------------------------------------------------
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
===========================================================================================================================
See accompanying Notes to Consolidated Financial Statements.
RICHFOOD HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
===========================================================================================================================
Fiscal Year Ended
-------------------------------------------
May 3, April 27, April 29,
(Dollar amounts in thousands) 1997 1996 1995
- ---------------------------------------------------------------------------------------------------------------------------
Operating activities:
Net earnings $ 59,469 $ 37,051 $ 39,218
Adjustments to conform fiscal year of pooled company:
Net earnings -- 2,548 --
Non-cash components -- 1,959 --
Adjustments to reconcile net earnings to net cash provided
by operating activities:
Depreciation and amortization 29,234 27,089 23,903
Provision for doubtful accounts 4,241 6,197 4,490
Deferred income taxes 7,702 (2,051) 1,821
Extraordinary loss -- loss on debt extinguishment,
non-cash component 663 1,116 --
Other, net 289 (63) 382
Changes in operating assets and liabilities, net of effects
of acquisitions:
Receivables (622) 564 (4,838)
Inventories (353) (19,405) 13,337
Other current assets (987) 643 1,516
Accounts payable, accrued expenses and other liabilities 16,424 33,903 20,578
- ---------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 116,060 89,551 100,407
- ---------------------------------------------------------------------------------------------------------------------------
Investing activities:
Acquisitions, net of cash acquired (26,098) -- (56,977)
Purchases of property and equipment (15,415) (14,781) (19,976)
Proceeds from sale of property and equipment 706 208 4,230
Issuance of notes receivable (22,266) (16,805) (15,902)
Collections on notes receivable 10,511 13,988 12,425
Other, net (8,797) (2,935) (1,493)
- ---------------------------------------------------------------------------------------------------------------------------
Net cash used for investing activities (61,359) (20,325) (77,693)
- ---------------------------------------------------------------------------------------------------------------------------
Financing activities:
Net repayment of revolving credit facilities -- (25,000) --
Principal payments on long-term debt (58,633) (55,788) (12,481)
Proceeds from issuance of common stock under employee
stock incentive plans and other 2,130 2,545 93
Cash dividends paid on common stock (5,197) (2,949) (2,033)
- ---------------------------------------------------------------------------------------------------------------------------
Net cash used for financing activities (61,700) (81,192) (14,421)
- ---------------------------------------------------------------------------------------------------------------------------
Net (decrease) increase in cash and cash equivalents (6,999) (11,966) 8,293
Cash and cash equivalents at beginning of fiscal year 17,415 29,381 21,088
- ---------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of fiscal year $ 10,416 $ 17,415 $ 29,381
===========================================================================================================================
See accompanying Notes to Consolidated Financial Statements.
RICHFOOD HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in thousands, except per share data)
(1) Summary of Significant Accounting Policies
(a) 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 3, 1997
("fiscal 1997"), April 27, 1996 ("fiscal 1996") and April 29, 1995 ("fiscal
1995") include the accounts of Richfood Holdings, Inc. and all subsidiaries
after the elimination of significant intercompany transactions and balances. See
note 2 for information on the fiscal 1996 business combination that was
accounted for as a pooling of interests.
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.
(b) Fiscal Year
The Company reports on a 52-53 week fiscal year ending the Saturday nearest
April 30. Fiscal 1997 consists of 53 weeks.
(c) Cash and Cash Equivalents
Cash equivalents of $10,321 and $16,613 at May 3, 1997 and April 27, 1996,
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.
(d) 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.
(e) 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.
(f) Goodwill and Other Assets
The excess of cost over the fair value of net assets of businesses acquired
(goodwill) is being amortized on a straight-line basis over 15 to 40 years. The
Company's policy is to record an impairment loss against the unamortized
goodwill in the period when it is determined that the carrying amount of the
asset may not be 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. Goodwill is shown net of accumulated amortization of $17,164 and $14,064
at May 3, 1997 and April 27, 1996, respectively. The increase in goodwill from
April 27, 1996 to May 3, 1997 is primarily due to the Company's acquisition of
Norristown Wholesale, Inc. (note 2).
Other assets primarily consist of supply agreements, the prepaid pension
asset (note 10) and lease acquisition costs. The 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 being amortized on a
straight-line basis over the terms of the respective supply agreements. Supply
agreements included in other assets were $18,638 (net of $20,391 accumulated
amortization) and $17,281 (net of $13,845 accumulated amortization) at May 3,
1997 and April 27, 1996, 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. Lease acquisition costs incurred, principally for
the purchase of existing store locations, are being amortized on a straight-line
basis over the terms of the respective leases.
(g) Store Pre-opening Costs
Costs associated with the Company opening new retail stores are charged to
expense as incurred.
(h) 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.
(i) Stock-Based Compensation
In fiscal 1997, the Company adopted the disclosure-only requirements of
Statement of Financial Accounting Standards (SFAS) No. 123, "Accounting for
Stock-Based Compensation." As permitted by the provisions of SFAS No. 123, the
Company 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.
(j) Fair Value of Financial Instruments
Financial instruments include cash and cash equivalents, accounts and notes
receivable, accounts payable and long-term debt 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 3, 1997 and April 27, 1996 because of the short-term nature of these
financial instruments. The carrying amount of certain notes receivable, which
are subject to variable interest rates, approximate fair value at May 3, 1997
and April 27, 1996 due to the variable interest rates related to these financial
instruments. The fair value of long-term debt with fixed interest rates
approximates the carrying value at May 3, 1997 and April 27, 1996.
(k) Earnings per Common Share
Earnings per common share amounts are computed based on earnings divided by the
weighted average number of common shares outstanding during the respective
fiscal years presented. Stock options are not considered as common stock
equivalents in the earnings per share calculations because they have no material
dilutive effect.
In February 1997, the Financial Accounting Standards Board issued SFAS No.
128, "Earnings Per Share," which the Company will be required to adopt for the
fiscal quarter ending January 10, 1998. At that time, the Company will be
required to change the method currently used to compute earnings per share and
to restate all prior periods. Under the new requirements for calculating basic
earnings per share, the dilutive effect of common stock equivalents will be
excluded. The adoption of this accounting standard is not expected to have a
material impact on the Company's consolidated financial statements.
(l) Common Stock Split
On August 29, 1996, the Company's Board of Directors declared a three-for-two
common stock split payable September 30, 1996, to shareholders of record on
September 16, 1996 ("common stock split"). All references to common share and
per common share data in the Consolidated Financial Statements and in the Notes
to the Consolidated Financial Statements for all previously reported periods
have been adjusted to reflect the common stock split.
(2) Merger and Acquisitions
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.
On October 15, 1995, Super Rite Corporation ("Super Rite"), a full service
wholesale and retail grocery distributor headquartered in Harrisburg,
Pennsylvania, became a wholly-owned subsidiary of Richfood Holdings, Inc.
("Richfood") and each outstanding share of common stock of Super Rite was
converted into the right to acquire 1.0205 shares of common stock of Richfood
(1.53 shares adjusted for the common stock split). Under the terms of the
merger, Richfood issued 9,770,188 shares of common stock (14,655,282 shares
adjusted for the common stock split) to the shareholders of Super Rite and
outstanding options to acquire shares of Super Rite common stock were converted
into options to acquire approximately 230,000 shares of Richfood common stock
(345,000 shares adjusted for the common stock split).
The merger was accounted for using the pooling of interests method and,
accordingly, the Consolidated Financial Statements for periods prior to October
15, 1995 have been restated to include the accounts of Super Rite. Super Rite
previously used the fiscal year ending on the Saturday closest to February 29th
or March 1st for its financial reporting purposes. Super Rite's consolidated
financial statements for its 53 week fiscal year ended March 4, 1995 have been
combined with those of Richfood for its 52 week fiscal year ended April 29,
1995.
RICHFOOD HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Dollar amounts in thousands, except per share data)
In order to conform to Richfood's fiscal year, Super Rite's net earnings
of $2,548, on sales of $228,113, for the eight-week period from March 5, 1995 to
April 29, 1995, have been reflected as a direct adjustment to retained earnings.
Richfood also conformed certain of Super Rite's accounting practices and methods
to the Company's in accordance with the pooling of interests method.
In addition, as a result of the merger, the Company recorded a one-time
charge for merger and integration costs of $11,993 in the third quarter of
fiscal 1996. This charge included $4,881 of costs, including write-offs of
property and equipment, associated with the conversion of certain of the
Company's retail grocery stores operating under the BASICS format to the METRO
store format, $3,709 of direct transaction costs and professional fees, $1,403
of severance and related costs associated with the elimination of duplicate
employee functions, $1,100 of costs associated with terminating certain
transportation equipment leases and duplicate product lines and $900 of other
acquisition related costs. During fiscal 1996, $5,473 of the merger and
integration accrual was utilized. The remaining accrual of $6,520 at April 27,
1996 was substantially utilized during fiscal 1997.
Sales and net earnings information of the separate companies, and
respective subsidiaries, for the twenty-four week period preceding the October
15, 1995 merger and for fiscal 1995 are as follows:
Twenty-four Fiscal year
weeks ended ended
October 14, April 29,
1995 1995
- -----------------------------------------------------------
Sales:
Richfood Holdings, Inc. $ 782,932 $1,520,450
Super Rite Corporation 703,244 1,473,822
Adjustments to conform
certain of Super Rite
Corporation's accounting
practices and methods (1,666) (1,537)
- -----------------------------------------------------------
Combined $1,484,510 $2,992,735
===========================================================
Net earnings:
Richfood Holdings, Inc. $ 12,903 $ 25,401
Super Rite Corporation 6,054 12,951
Adjustments to conform
certain of Super Rite
Corporation's accounting
practices and methods 1,058 866
- -----------------------------------------------------------
Combined $ 20,015 $ 39,218
===========================================================
On April 3, 1995, the Company acquired certain assets and assumed certain
contracts of Camellia Food Stores, Inc. ("Camellia"), a wholesale and retail
grocery distributor headquartered in Norfolk, Virginia. In connection with the
transaction, the Company acquired Camellia's wholesale inventory, customer notes
and fluid dairy operation and assumed the lease for Camellia's truck fleet.
Additionally, in connection with this acquisition, the Company entered into
five-year supply agreements with Camellia and certain other independent retail
customers. The purchase price of the acquisition was approximately $7,000.
On August 23, 1994, the Company acquired all of the outstanding common
stock of Rotelle, Inc. ("Rotelle"), a wholesale frozen food distributor
headquartered in West Point, Pennsylvania. The Company accounted for the Rotelle
acquisition under the purchase method 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 $51,000.
(3) Inventories
At May 3, 1997 and April 27, 1996, approximately 84% and 87%, 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 $8,062 at May 3, 1997 and $8,081 at April 27, 1996, and net
earnings would have been higher (lower) by approximately $(12) for fiscal 1997,
$821 for fiscal 1996 and $935 for fiscal 1995. 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 plus 2% (10 1/2 % at May 3, 1997) 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 $6,883 and $5,878 at May 3, 1997 and
April 27, 1996, respectively, related to current maturities of these notes
receivable.
(5) Property and Equipment and Leases
Property and equipment are summarized as follows:
May 3, April 27,
1997 1996
- -----------------------------------------------------------
Land $ 5,452 $ 5,471
Buildings 64,116 64,477
Fixtures and equipment 114,734 108,576
Leasehold improvements 28,920 27,195
Trucks and autos 17,691 17,030
- -----------------------------------------------------------
Total property and equipment 230,913 222,749
Less accumulated depreciation 109,319 100,090
- -----------------------------------------------------------
Property and equipment, net $121,594 $122,659
===========================================================
Depreciation expense relating to property and equipment was approximately
$16,700, $15,200 and $15,000 for fiscal 1997, fiscal 1996 and fiscal 1995,
respectively.
The Company leases certain warehouse, office and storage facilities,
equipment and retail stores under noncancelable operating leases that expire
within 28 years from May 3, 1997 and have renewal options from 5 to 35 years.
The majority of the leases provide for the payment of taxes, insurance and
maintenance (and contingent rentals based on sales volume, in the case of retail
store leases) by the Company. The Company subleases certain warehouse space and
certain retail stores to third parties.
The Company's Harrisburg, Pennsylvania distribution center, refrigerated
warehouse space and certain retail locations are leased at fair market rates
from various partnerships, the partners of which were related parties in fiscal
1996 and fiscal 1995. The annual rent expense was $5,996 and $5,475 in fiscal
1996 and fiscal 1995, respectively.
As of May 3, 1997, 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:
Minimum Minimum
Lease Sublease
Rentals To Rentals To Net
Fiscal Year Be Paid Be Received Rentals
- --------------------------------------------------------------------
1998 $ 26,479 $ 6,982 $ 19,497
1999 25,144 6,823 18,321
2000 22,491 6,078 16,413
2001 20,229 5,176 15,053
2002 19,327 4,575 14,752
Thereafter 198,327 29,129 169,198
- --------------------------------------------------------------------
Total $311,997 $58,763 $253,234
====================================================================
Total annual rental expense is as follows:
Fiscal Year Ended
- ------------------------------------------------------------
May 3, April 27, April 29,
1997 1996 1995
- ------------------------------------------------------------
Minimum rentals $27,886 $27,977 $26,993
Less sublease income (6,962) (8,174) (8,280)
- ------------------------------------------------------------
Rental expense $20,924 $19,803 $18,713
============================================================
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 $35,000 at May 3,
1997. The related leases expire at varying dates over the next 24 years.
(6) Long-term Debt
Long-term debt consists of the following:
May 3, April 27,
1997 1996
- -----------------------------------------------------------
Senior Subordinated Notes,
unsecured, interest rate of 10 5/8%,
repaid April 1997 $ -- $47,525
Senior Notes, unsecured, interest rate
of 6.15%, due July 1997 to July 2000 36,000 45,000
Other long-term debt 6,725 5,218
- -----------------------------------------------------------
Total long-term debt 42,725 97,743
Less current installments 10,656 10,712
- -----------------------------------------------------------
Long-term debt,
net of current installments $32,069 $87,031
===========================================================
In April 1992, the Company issued $75,000 aggregate principal amount of 10
5/8% Senior Subordinated Notes, due 2002. The Senior Subordinated Notes required
semiannual interest payments. During fiscal 1996, the Company repurchased, at
market prices above par, $27,475 of the Senior Subordinated Notes, and on April
1, 1997, the first permitted optional redemption date, the Company redeemed the
remaining $47,525 at a redemption price of 105.31% of par (note 7).
In July 1993, the Company issued $45,000 aggregate principal amount of
6.15% 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 1, 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.
RICHFOOD HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Dollar amounts in thousands, except per share data)
The Company maintains a $40,000 revolving credit facility with a
commercial bank to provide for the general working capital needs of the Company.
The unsecured revolving credit facility expires in July 1998. Borrowings under
the facility bear interest at a rate, selected by the Company, equal to (i) a
floating rate equal to the commercial bank's overnight cost of funds plus 0.225%
or (ii) a fixed rate equal to LIBOR plus 0.225%, and include a 0.10% fee on the
average daily unused portion of the facility. There were no borrowings
outstanding under this revolving credit facility at May 3, 1997.
The Company maintains a $20,000 revolving credit facility with a
commercial bank to provide for the general working capital needs of the Company.
The unsecured revolving credit facility expires in December 1997. Borrowings
under the facility bear interest at a fixed rate equal to (i) the commercial
bank's Overnight Commercial Loan Rate or (ii) a Eurodollar Rate fixed for an
interest period determined by the Company plus 0.225%. The facility includes a
0.12% fee on the average daily unused portion of the facility. There were no
borrowings outstanding under this revolving credit facility at May 3, 1997.
Future principal repayments on long-term debt for the five fiscal years
subsequent to fiscal 1997 are approximately as follows: fiscal 1998--$10,700;
fiscal 1999--$13,100; fiscal 2000--$9,800; fiscal 2001--$9,100; and fiscal
2002--$0.
The Company's long-term debt facilities 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 in the form of loans,
advances or cash dividends; and require certain financial ratios to be met as of
each quarter end.
As of May 3, 1997, the Company issued $9,064 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 were $7,973 for fiscal 1997,
$11,671 for fiscal 1996 and $17,706 for fiscal 1995.
(7) Extraordinary Loss
The extraordinary loss of $1,882, net of tax benefit of $1,308, for fiscal 1997,
relates to the redemption, at 105.31% of par, of the remaining $47,525 principal
amount of Senior Subordinated Notes on April 1, 1997, the first permitted
optional redemption date, and is comprised of (i) the amount paid in excess of
their par value, and (ii) the write-off of related deferred financing costs. The
Company primarily used cash on hand, supplemented by borrowings under existing
revolving credit facilities, to pay the redemption price for the Senior
Subordinated Notes.
The extraordinary loss of $2,164, net of tax benefit of $1,733, for fiscal
1996 primarily related to the repurchase, at market prices above par, of $27,475
principal amount of Senior Subordinated Notes, and is comprised of (i) the
amount paid in excess of their par value, and (ii) the write-off of related
deferred financing costs.
(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 3, April 27, April 29,
1997 1996 1995
- ------------------------------------------------------------
Current:
Federal $27,800 $26,767 $21,502
State 5,094 4,598 4,102
- ------------------------------------------------------------
32,894 31,365 25,604
- ------------------------------------------------------------
Deferred:
Federal 6,941 (1,370) 876
State 761 (681) 945
- ------------------------------------------------------------
7,702 (2,051) 1,821
- ------------------------------------------------------------
Income taxes $40,596 $29,314 $27,425
- ------------------------------------------------------------
Income tax payments $40,074 $26,517 $21,160
============================================================
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:
Fiscal Year Ended
- ----------------------------------------------------------------
May 3, April 27, April 29,
1997 1996 1995
- ----------------------------------------------------------------
Taxes computed using
federal statutory rate 35.00% 35.00% 35.00%
State income taxes, net of
federal income tax benefit 3.73 4.98 4.28
Nondeductibility of goodwill
amortization expense 0.74 2.58 1.11
Change in valuation
allowance -- (1.35) 1.08
Other, net 0.35 1.57 (0.32)
- ---------------------------------------------------------------
Effective tax rate 39.82% 42.78% 41.15%
===============================================================
Deferred income taxes for fiscal 1997 and fiscal 1996 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
3, 1997 and April 27, 1996 are as follows:
May 3, April 27,
1997 1996
- ----------------------------------------------------------------
Deferred tax assets:
Allowance for doubtful accounts $ 1,907 $ 2,010
Inventories 446 2,277
Deferred revenue 2,301 1,987
Accrued expenses 11,678 14,831
Other 4,329 2,060
- ----------------------------------------------------------------
Total deferred tax assets 20,661 23,165
- ----------------------------------------------------------------
Deferred tax liabilities:
Property and equipment-depreciation (16,303) (12,170)
Retirement plans (2,522) (2,804)
Other (3,466) (2,691)
- ----------------------------------------------------------------
Total deferred tax liabilities (22,291) (17,665)
- ----------------------------------------------------------------
Net deferred tax assets (liabilities) $ (1,630) $ 5,500
================================================================
Net current deferred tax assets $ 10,671 $ 17,295
Net noncurrent deferred tax liabilities (12,301) (11,795)
- ----------------------------------------------------------------
Net deferred tax assets (liabilities) $ (1,630) $ 5,500
================================================================
(9) Stock Option Plans and Other
The Company's Amended and Restated Omnibus Stock Incentive Plan, dated June 1996
(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 247,000 shares of common stock remain outstanding under
the Omnibus Plan at May 3, 1997. At May 3, 1997, approximately 2,000,000 shares
of common stock remained available for grant. At April 27, 1996, approximately
123,000 shares of common stock remained available for grant (the amendment and
restatement of the Omnibus Plan resulted in an additional 2,250,000 shares
available for grant).
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 42,000 shares of common stock remain outstanding under
the Directors' Stock Plan at May 3, 1997. Approximately 68,000 and 83,000 shares
of common stock remained available for grant at May 3, 1997 and April 27, 1996,
respectively.
RICHFOOD HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Dollar amounts in thousands, except per share data)
At May 3, 1997, there were options to purchase approximately 895,000
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.
Pro forma information regarding net earnings and earnings per share is
required by SFAS No. 123, and has been determined based on the fair value at the
grant date for options awarded in fiscal 1997 and fiscal 1996, 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 both fiscal 1997 and 1996: dividend
yield of 0.05%, expected volatility of 0.18 and expected lives of 5 years; and a
risk-free interest rate of 6.29% and 5.90% for fiscal 1997 and fiscal 1996,
respectively. 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 1997 and fiscal 1996 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 its stock options granted in fiscal 1997 and fiscal 1996 in
accordance with the provisions of SFAS No. 123, the decrease in net earnings and
net earnings per common share would have been immaterial.
A summary of the number of shares (in thousands) subject to outstanding
stock options and related information is as follows:
Fiscal Year Ended
- -------------------------------------------------------------
May 3, April 27, April 29,
1997 1996 1995
- -------------------------------------------------------------
Weighted
Average
Exercised
Shares Price Shares Shares
- -------------------------------------------------------------
Outstanding beginning
of year 1,404 $ 9.82 1,350 1,248
Granted 356 23.19 401 303
Exercised (492) 6.39 (233) (171)
Canceled (84) 18.17 (114) (30)
- -------------------------------------------------------------
Outstanding at end
of year 1,184 $14.68 1,404 1,350
- -------------------------------------------------------------
Price range at end
of year $ 2.55- $ 2.55- $ 2.55-
$25.33 $18.33 $10.59
=============================================================
The weighted average fair value of each option granted during fiscal 1997
was $8.28. The number and weighted average fair value of shares of nonvested
stock granted during fiscal 1997 was 37,500 and $21.92 per share, respectively.
Information regarding the shares (in thousands) subject to outstanding
stock options at May 3, 1997 is as follows:
Options Outstanding Options Exercisable
- ---------------------------------------------------------------------------------------
Weighted Average Weighted Weighted
Range of Remaining Avergage Average
exercise prices Shares Contractual Life Exercise Price Shares Exercise Price
- ---------------------------------------------------------------------------------------
$ 2.55 - $ 6.04 270 5 years $ 5.17 270 $ 5.17
$10.33 - $10.59 255 7 years $10.35 133 $10.34
$14.33 - $18.33 322 8 years $17.18 104 $17.20
$21.38 - $25.33 337 9 years $23.17 -- --
- ---------------------------------------------------------------------------------------
$ 2.55 - $25.33 1,184 8 years $14.68 507 $ 9.00
=======================================================================================
During fiscal 1996 certain officers of Super Rite who participated in the
Company's April 1996 secondary public offering, which was completed within six
months after the date of the Super Rite acquisition, remitted proceeds from
short swing profits of $1,628 to the Company.
(10) Retirement Plans
Substantially all of the Company's employees are covered by defined benefit
plans. The funded status of the plans is as follows:
May 3, 1997 April 27, 1996
- --------------------------------------------------------------------------------------------------------------------------------
Assets Exceed Accumulated Benefits Assets Exceed Accumulated Benefits
Accumulated Benefits Exceed Assets Accumulated Benefits Exceed Assets
- --------------------------------------------------------------------------------------------------------------------------------
Actuarial present value of vested
benefit obligation $27,513 $ 4,695 $25,280 $3,972
================================================================================================================================
Accumulated benefit obligation $29,220 $ 4,927 $26,705 $4,070
================================================================================================================================
Fair value of plan assets $57,721 $ 3,771 $54,247 $3,304
Projected benefit obligation 41,893 4,927 39,531 4,109
- --------------------------------------------------------------------------------------------------------------------------------
Plan assets in excess of (less than)
projected benefit obligation 15,828 (1,156) 14,716 (805)
Unrecognized net transition asset (4,192) 596 (5,099) --
Unrecognized prior service cost 152 -- 177 --
Unrecognized net (gain) loss (2,283) -- (761) 120
Minimum liability -- (546) -- (80)
- --------------------------------------------------------------------------------------------------------------------------------
Net pension asset (liability) $ 9,505 $(1,106) $ 9,033 $ (765)
================================================================================================================================
The Company's retirement plans cover employees who meet certain age and
service requirements. Retirement benefits vest under the various plans after 5
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 under the various plans at May 3, 1997 consist of equity securities, U.S.
government and agency obligations, mortgage-backed securities, corporate
obligations, mutual funds and guaranteed insurance contracts.
The following are the components of net retirement expense (benefit)
related to the defined benefit plans:
Fiscal Year Ended
- ------------------------------------------------------------
May 3, April 27, April 29,
1997 1996 1995
- ------------------------------------------------------------
Service cost -- present value
of benefits earned during
the year $ 2,710 $ 2,440 $ 2,109
Interest cost on projected
benefit obligation 3,315 3,087 2,781
Expected return on plan assets,
net of amount deferred (4,787) (6,325) (4,034)
Net amortization and deferral (1,193) 811 (1,128)
- ------------------------------------------------------------
Net retirement expense
(benefit) $ 45 $ 13 $ (272)
============================================================
The weighted average discount rate assumed by the Company ranged from
7.75% to 8% for all years presented. The Company assumed an expected long-term
rate of return of 9% and a projected increase in compensation of 6% 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 act as a financing source for the
plan. The cash surrender value of the life insurance policies was $1,198 at May
3, 1997 and $1,066 at April 27, 1996. The projected benefit obligation for the
plan was $2,350 at May 3, 1997 and $1,327 at April 27, 1996.
The Company maintains defined contribution employee savings and stock
ownership 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 pretax contributions and employer
matching contributions. The Company contributed $664, $655 and $783 to the plans
for fiscal 1997, fiscal 1996 and fiscal 1995, respectively.
Certain employees are covered under a union-sponsored, collectively
bargained, multi-employer pension plan. The Company's contribution to this plan
was $371, $346 and $348 in fiscal 1997, fiscal 1996 and fiscal 1995,
respectively.
RICHFOOD HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Dollar amounts in thousands, except per share data)
(11) Significant Customers
Sales to three wholesale customers accounted for 17%, 9% and 9% of the Company's
sales in fiscal 1997, 16%, 9% and 11% of sales in fiscal 1996 and 15%, 10% and
13% of sales in fiscal 1995. The Company maintains supply agreements with these
customers which expire in December 1999, December 1997 and December 2001,
respectively. The Company's third largest customer has announced that it is
currently exploring strategic alternatives.
(12) 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 or business.
(13) Industry Segments
At May 3, 1997, the Company operated a wholesale grocery division and a retail
grocery division consisting of seventeen retail grocery stores in the
Mid-Atlantic region. The Company's wholesale grocery division provides a full
range of grocery, dairy, frozen food, produce and meat products to chains and
independent retailers throughout the region. Sales by industry segment include
sales to unaffiliated customers, as reported in the Consolidated Statements of
Earnings, and sales between industry segments, which are accounted for on terms
comparable to unaffiliated customers.
Operating profit represents sales, less cost of goods sold and operating
and administrative expenses. Identifiable assets by segment, except for
goodwill, are those assets used directly in the operations of that unit.
The following is industry segment information:
Fiscal Year
- -----------------------------------------------------------
May 3, April 27, April 29,
1997 1996 1995
- -----------------------------------------------------------
Sales:
Wholesale grocery $3,280,229 $3,096,997 $2,857,374
Retail grocery 338,471 322,787 304,718
Intersegment sales (207,075) (168,916) (169,357)
- -----------------------------------------------------------
Total sales $3,411,625 $3,250,868 $2,992,735
===========================================================
Operating profit:
Wholesale grocery $ 108,413 $ 90,882 $ 83,318
Retail grocery 5,027 5,551 2,911
General corporate
expenses (7,999) (6,787) (4,613)
- -----------------------------------------------------------
Total operating profit 105,441 89,646 81,616
- -----------------------------------------------------------
Merger and integration
costs -- 11,993 --
Interest expense 7,166 12,354 18,312
Interest income (3,672) (3,230) (3,339)
- -----------------------------------------------------------
Earnings before income
taxes and extra-
ordinary loss $ 101,947 $ 68,529 $ 66,643
===========================================================
Identifiable assets:
Wholesale grocery $ 512,227 $ 494,266 $ 505,810
Retail grocery 69,253 69,995 74,960
- -----------------------------------------------------------
Total identifiable
assets $ 581,480 $ 564,261 $ 580,770
===========================================================
Depreciation and
amortization:
Wholesale grocery $ 23,355 $ 21,092 $ 19,119
Retail grocery 5,879 5,997 4,784
- -----------------------------------------------------------
Total depreciation
and amortization $ 29,234 $ 27,089 $ 23,903
===========================================================
Capital expenditures:
Wholesale grocery $ 9,368 $ 9,518 $ 6,276
Retail grocery 6,047 5,263 13,700
- -----------------------------------------------------------
Total capital
expenditures $ 15,415 $ 14,781 $ 19,976
===========================================================
(14) Selected Quarterly Data (Unaudited)
Summarized quarterly financial information for the quarters indicated and market
price and dividend information for Richfood's common stock are as follows:
Fiscal Year Ended May 3, 1997
- --------------------------------------------------------------------------------------------------------------------
First Second Third Fourth
(12 Weeks) (12 Weeks) (12 Weeks) (17 Weeks)
- --------------------------------------------------------------------------------------------------------------------
Sales $753,383 $739,640 $807,272 $1,111,330
Gross margin 77,899 77,620 85,493 117,314
Earnings before extraordinary loss 12,445 12,572 15,000 21,334
Extraordinary loss, net of tax -- -- -- (1,882)
- --------------------------------------------------------------------------------------------------------------------
Net earnings $ 12,445 $ 12,572 $ 15,000 $ 19,452
====================================================================================================================
Earnings per common share:
Earnings before extraordinary loss $ 0.26 $ 0.27 $ 0.32 $ 0.45
Extraordinary loss -- -- -- (0.04)
- --------------------------------------------------------------------------------------------------------------------
Net earnings $ 0.26 $ 0.27 $ 0.32 $ 0.41
====================================================================================================================
Cash dividends declared per common share $ 0.03 $ 0.03 $ 0.03 $ 0.03
====================================================================================================================
Market price range:
Low $ 21 1/3 $ 21 11/12 $ 21 5/8 $ 18 5/8
High $ 24 1/4 $ 25 5/12 $ 28 1/8 $ 25 1/4
Fiscal Year Ended April 27, 1996(a)
- ------------------------------------------------------------------------------------------------------------------
First Second Third Fourth
(12 Weeks) (12 Weeks) (12 Weeks) (16 Weeks)
- ------------------------------------------------------------------------------------------------------------------
Sales $766,967 $717,543 $766,802 $999,556
Gross margin 76,999 68,708 75,731 104,869
Merger and integration costs -- -- 11,993 --
Earnings before extraordinary loss 10,165 9,850 3,774 15,426
Extraordinary loss, net of tax -- -- (1,002) (1,162)
- ------------------------------------------------------------------------------------------------------------------
Net earnings $ 10,165 $ 9,850 $ 2,772 $ 14,264
==================================================================================================================
Earnings per common share:
Earnings before extraordinary loss $ 0.22 $ 0.21 $ 0.08 $ 0.33
Extraordinary loss -- -- (0.02) (0.02)
- ------------------------------------------------------------------------------------------------------------------
Net earnings $ 0.22 $ 0.21 $ 0.06 $ 0.31
==================================================================================================================
Cash dividends declared per common share $ 0.02 $ 0.02 $ 0.02 $ 0.02
==================================================================================================================
Market price range:
Low $ 13 $ 15 1/6 $ 16 1/2 $ 15 3/4
High 16 1/6 17 5/6 19 1/3 22
(a) Fiscal 1996 first, second, third and fourth quarters include thirteen,
eleven, twelve and sixteen weeks, respectively, of Super Rite operating
results.
Richfood's common stock was listed on the New York Stock Exchange (NYSE)
on December 6, 1996. Market price information for the periods after listing on
the NYSE reflect the sales prices of the common stock on the NYSE composite
tape. Prior to listing on the NYSE, Richfood's common stock was traded in the
over-the-counter market and was quoted through The Nasdaq National Market.
Market price information for periods prior to listing on the NYSE reflects
inter-dealer prices, without retail mark-up, mark-down or commission, and may
not necessarily represent actual transactions.