FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period (16 weeks) ended September 11, 1999.
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from .......... to ..........
Commission file number 1-5418
SUPERVALU INC.
(Exact name of registrant as specified in its Charter)
DELAWARE 41-0617000
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
11840 VALLEY VIEW ROAD, EDEN PRAIRIE, MINNESOTA 55344
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (612) 828-4000
Former name, former address and former fiscal year, if changed since last
report:
N/A
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
The number of shares outstanding of each of the issuer's classes of Common Stock
as of October 9, 1999 is as follows:
Title of Each Class Shares Outstanding
------------------- ------------------
Common Shares 139,603,717
PART I - FINANCIAL INFORMATION
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Item 1: Financial Statements
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CONSOLIDATED STATEMENTS OF EARNINGS
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SUPERVALU INC. and Subsidiaries
- --------------------------------------------------------------------------------
(In thousands, except per share data)
Second Quarter (12 weeks) ended
Sept 11, 1999 % of sales Sept 12, 1998 % of sales
- --------------------------------------------------------------------------------------------------------------------
Net sales $ 4,145,775 100.00% $ 3,937,318 100.00%
Costs and expenses:
Cost of sales 3,697,589 89.19 3,534,551 89.77
Selling and administrative expenses 344,120 8.30 308,127 7.83
Amortization of goodwill 6,024 0.15 4,773 0.12
Interest
Interest expense 27,439 0.66 27,274 0.69
Interest income 4,574 0.11 4,113 0.10
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Interest expense, net 22,865 0.55 23,161 0.59
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Total costs and expenses 4,070,598 98.19 3,870,612 98.31
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Earnings before income taxes 75,177 1.81 66,706 1.69
Provision for income taxes
Current 30,942 24,211
Deferred (1,247) 2,595
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Income tax expense 29,695 0.71 26,806 0.68
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Net earnings $ 45,482 1.10% $ 39,900 1.01%
====================================================================
Net earnings per common share - diluted $ .37 $ .33
Net earnings per common share - basic $ .37 $ .33
Weighted average number of common
shares outstanding
Diluted 123,682 122,178
Basic 122,483 120,753
Dividends declared per common share $ .1350 $ .1325
All data subject to year-end audit.
See notes to consolidated financial statements.
2
PART I - FINANCIAL INFORMATION
- --------------------------------------------------------------------------------
Item 1: Financial Statements
- --------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF EARNINGS
- --------------------------------------------------------------------------------
SUPERVALU INC. and Subsidiaries
- --------------------------------------------------------------------------------
(In thousands, except per share data)
Year-to-date (28 weeks) ended
------------------------------------------------------------------
Sept 11, 1999 % of sales Sept 12, 1998 % of sales
- ------------------------------------------------------------------------------------------------------------------
Net sales $ 9,435,495 100.00% $9,139,894 100.00%
Costs and expenses:
Cost of sales 8,444,486 89.50 8,218,306 89.92
Selling and administrative expenses 757,718 8.03 702,178 7.68
Amortization of goodwill 12,850 0.14 11,095 0.12
Gain on sale 163,662 1.73 - -
Restructuring and other charges 103,596 1.09 - -
Interest
Interest expense 63,009 0.67 65,596 0.72
Interest income 9,899 0.11 10,290 0.11
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Interest expense, net 53,110 0.56 55,306 0.61
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Total costs and expenses 9,208,098 97.59 8,986,885 98.33
------------------------------------------------------------------
Earnings before income taxes 227,397 2.41 153,009 1.67
Provision for income taxes
Current 165,314 57,499
Deferred (50,120) 3,812
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Income tax expense 115,194 1.22 61,311 0.67
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Net earnings $ 112,203 1.19% $ 91,698 1.00%
==================================================================
Net earnings per common share - diluted $ .92 $ .75
Net earnings per common share - basic $ .93 $ .76
Weighted average number of common
shares outstanding
Diluted 122,017 122,159
Basic 120,853 120,645
Dividends declared per common share $ .2675 $ .2625
All data subject to year-end audit.
See notes to consolidated financial statements.
3
CONSOLIDATED STATEMENTS OF NET SALES AND EARNINGS
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SUPERVALU INC. and Subsidiaries
- --------------------------------------------------------------------------------
(In thousands)
Second Quarter (12 weeks) ended Year-to-Date (28 weeks) ended
------------------------------------------------------------------------------------------
Net sales Sept. 11, 1999 Sept. 12, 1998 Sept. 11, 1999 Sept. 12, 1998
- -----------------------------------------------------------------------------------------------------------------------------------
Retail food $ 1,371,942 $ 1,144,399 $ 2,958,615 $ 2,553,002
33.1 % 29.1 % 31.4 % 27.9 %
Food distribution 3,535,769 3,449,892 8,134,984 8,058,989
85.3 % 87.6 % 86.2 % 88.2 %
Sales eliminations (761,936) (656,973) (1,658,104) (1,472,097)
(18.4) % (16.7) % (17.6) % (16.1) %
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Total net sales $ 4,145,775 $ 3,937,318 $ 9,435,495 $ 9,139,894
100.0 % 100.0 % 100.0 % 100.0 %
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Earnings
- -----------------------------------------------------------------------------------------------------------------------------------
Retail food $ 31,516 $ 25,959 $ 73,631 $ 63,185
Food distribution 74,804 70,283 164,848 160,273
Gain on sale - - 163,662 -
Restructuring and other charges (1) - - (103,596) -
------------------------------------------------------------------------------------------
Total operating earnings 106,320 96,242 298,545 223,458
Interest income 4,574 4,113 9,899 10,290
Interest expense (27,439) (27,274) (63,009) (65,596)
General corporate expenses (8,278) (6,375) (18,038) (15,143)
------------------------------------------------------------------------------------------
Earnings before income taxes 75,177 66,706 227,397 153,009
Provision for income taxes (29,695) (26,806) (115,194) (61,311)
------------------------------------------------------------------------------------------
Net earnings $ 45,482 $ 39,900 $ 112,203 $ 91,698
===================================================================================================================================
All data subject to year-end audit.
See notes to consolidated financial statements.
(1) In the first quarter, the company incurred restructuring and other charges
for retail food and food distribution of $19.4 and $84.2 million,
respectively.
4
CONDENSED CONSOLIDATED BALANCE SHEETS
- ---------------------------------------------------------------------------------------
SUPERVALU INC. and Subsidiaries Second Quarter as of Fiscal Year End
- ---------------------------------------------------------------------------------------
(In thousands) September 11, February 27,
Assets 1999 1999
- ---------------------------------------------------------------------------------------
Current Assets
Cash and cash equivalents $ 11,257 $ 7,608
Receivables, less allowance for losses of
$30,035 at September 11, 1999 and $18,983 at
February 27, 1999 541,916 410,799
Inventories 1,292,503 1,067,837
Other current assets 129,788 96,283
---------------------------------------
Total current assets 1,975,464 1,582,527
Long-term notes receivable 183,299 161,273
Property, plant and equipment, net 1,941,980 1,699,024
Goodwill 1,587,043 567,890
Other assets 380,773 255,235
---------------------------------------
Total assets $6,068,559 $4,265,949
=======================================
Liabilities and Stockholders' Equity
- ---------------------------------------------------------------------------------------
Current Liabilities
Notes payable $ 455,255 $ 89,157
Accounts payable 1,366,493 981,961
Current debt and obligations under capital
leases 50,802 232,928
Other current liabilities 330,944 217,861
---------------------------------------
Total current liabilities 2,203,494 1,521,907
Long-term debt and obligations under capital
leases 1,850,819 1,246,269
Other liabilities and deferred income taxes 199,448 192,134
Total stockholders' equity 1,814,798 1,305,639
---------------------------------------
Total liabilities and stockholders' equity $6,068,559 $4,265,949
=======================================
All data subject to year-end audit.
See notes to consolidated financial statements.
5
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
- --------------------------------------------------------------------------------
SUPERVALU INC. and Subsidiaries
- --------------------------------------------------------------------------------
(In thousands, except per share data)
Capital in
Preferred Common Excess of Treasury Retained
Stock Stock Par Value Stock Earnings Total
- -----------------------------------------------------------------------------------------------------------------------------------
Balances at February 28, 1998 $ 5,908 $ 150,670 $ 2,927 $ (507,296) $ 1,549,696 $ 1,201,905
Net earnings - - - - 191,338 191,338
Sales of common stock
under option plans - - (5,902) 35,497 (3,667) 25,928
Cash dividends declared
on common stock -
$.5275 per share - - - - (63,985) (63,985)
Compensation under employee
incentive plans - - 1,057 10,914 - 11,971
Treasury shares exchanged for
acquisition - - 1,918 2,167 - 4,085
Purchase of shares for treasury - - - (65,603) - (65,603)
- -----------------------------------------------------------------------------------------------------------------------------------
Balances at February 27, 1999 5,908 150,670 - (524,321) 1,673,382 1,305,639
Net earnings - - - - 112,203 112,203
Sales of common stock
under option plans - - (4,161) 8,350 - 4,189
Cash dividends declared
on common stock -
$.2675 per share - - - - (31,973) (31,973)
Compensation under employee
incentive plans - - (486) 5,482 - 4,996
Treasury shares exchanged for - - 138,519 303,016 - 441,535
acquisition
Redemption of preferred stock (5,908) - - - - (5,908)
Purchase of shares for treasury - - - (15,883) - (15,883)
- -----------------------------------------------------------------------------------------------------------------------------------
Balances at September 11, 1999 $ - $150,670 $ 133,872 $(223,356) $1,753,612 $1,814,798
===================================================================================================================================
All data subject to year-end audit.
See notes to consolidated financial statements.
6
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
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SUPERVALU INC. and Subsidiaries
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(In thousands)
Year-to-date
(28 weeks ended)
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Sept 11, Sept 12,
1999 1998
- -----------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------
Net cash provided by operating activities $222,387 $290,629
- -----------------------------------------------------------------------------------------------------
Cash flows from investing activities
Additions to long-term notes receivable (24,635) (20,270)
Proceeds received on long-term notes receivable 22,942 20,425
Proceeds from sale of assets 359,206 24,339
Purchase of property, plant and equipment (179,401) (150,532)
Business acquisition, net of cash acquired (469,185) (24,998)
Decrease in other non-current assets 36,696 8,399
- -----------------------------------------------------------------------------------------------------
Net cash used in investing activities (254,377) (142,637)
- -----------------------------------------------------------------------------------------------------
Cash flows from financing activities
Net increase in checks outstanding, net of deposits 6,068 38,921
Net issuance (reduction) of short-term notes payable 351,412 (22,321)
Proceeds from issuance of long-term debt 346,300 83,500
Repayment of long-term debt (603,987) (186,445)
Dividends paid (31,861) (32,085)
Payment for purchase of treasury stock (15,883) (31,360)
Other cash provided by (used in) financing activities (16,410) 2,683
- -----------------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities 35,639 (147,107)
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Net increase in cash and cash equivalents 3,649 885
Cash and cash equivalents at beginning of year 7,608 6,100
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Cash and cash equivalents at end of second quarter $ 11,257 $ 6,985
=====================================================================================================
Supplemental Information:
Pretax LIFO income (expense) $ (1,337) $ 2,233
Pretax depreciation and amortization $130,378 $122,172
All data subject to year-end audit.
See notes to consolidated financial statements.
7
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Accounting Policies
- -------------------
The summary of significant accounting policies is included in the notes to
consolidated financial statements in the 1999 annual report of SUPERVALU INC.
("SUPERVALU" or the "company").
Richfood Acquisition
- --------------------
On August 31, 1999, the company acquired, in a merger, all of the outstanding
common stock of Richfood Holdings, Inc. ("Richfood"), a major food retailer and
distributor operating primarily in the Mid-Atlantic region of the United States.
The acquisition will be accounted for as a purchase. The company issued
approximately 19.7 million shares of SUPERVALU common stock with a market value
of approximately $443 million and paid $443 million in cash for the common stock
of Richfood. In addition, the company repaid approximately $394 million of
outstanding Richfood debt. Approximately $291 million of Richfood debt remained
outstanding immediately after the acquisition. The allocation of the
consideration paid for Richfood to the consolidated assets and liabilities is
based on preliminary estimates of their respective fair values. The excess of
the purchase price over the fair value of net assets acquired of approximately
$1.1 billion is being amortized on a straight line basis over 40 years. The
results of Richfood's operations from August 31, 1999 have been included in the
company's financial statements. One-time charges related to the merger of $10 to
$15 million after tax are expected within the first eighteen months following
the close.
Unaudited pro forma consolidated results of continuing operations, as though the
companies had been combined at the beginning of the periods presented, are as
follow:
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Year-to-date (28 weeks) ended
- --------------------------------------------------------------------------------------------
(In thousands, except per share data) September 11, 1999 September 12, 1998
- ------------------------------------------------------------------------ -------------------
Net sales $ 11,405,477 $ 11,042,378
Net earnings $ 130,668 (a) $ 91,670 (b)
Net earnings per common share - diluted $ .93 (a) $ .65 (b)
- --------------------------------------------------------------------------------------------
(a) Amounts include the net gain on the sale of Hazelwood Farms Bakeries and
restructuring and other charges of $10.9 million or $ .08 per share.
(b) Amounts include a restructuring charge at Richfood of $14.5 million or
$.10 per share.
8
Special Charges
- ---------------
In the first quarter of fiscal 2000, the company recorded one-time, pre-tax
restructuring and other charges of $103.6 million as a result of an extensive
review to reduce costs and enhance efficiency. Included in this total is $14.9
million for asset impairment costs. The restructuring charges include costs for
facility consolidation, non-core store disposal and rationalization of redundant
and certain decentralized administrative functions. Due to the above
restructuring items, the company expects approximately 2,500 employees to be
terminated. Details of the restructuring activity follow.
- --------------------------------------------------------------------------------------------
Initial Restructure Current Quarter Balance at
(In thousands) Activity Sept. 11, 1999
- --------------------------------------------------------------------------------------------
Facility consolidation $ 34,143 $ 656 $ 33,487
Non-core store disposal 39,978 2,304 37,674
Infrastructure realignment 14,591 417 14,174
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Total restructure $ 88,712 $ 3,377 $ 85,335
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Employees 2,517 173 2,344
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Statement of Registrant
- -----------------------
The data presented herein is unaudited but, in the opinion of management,
includes all adjustments necessary for a fair presentation of the condensed
consolidated financial position of the company and its subsidiaries at September
11, 1999 and September 12, 1998 and the results of the company's operations and
condensed cash flows for the periods then ended. These interim results are not
necessarily indicative of the results of the fiscal years as a whole.
9
Item 2: Management's Discussion and Analysis of Financial Condition and Results
of Operations
Results of Operations
- ---------------------
RESULTS FOR THE QUARTER:
The company recorded record sales of $4.1 billion, net earnings of $45.5 million
and diluted earnings per share of $.37. Last year sales were $3.9 billion, net
earnings were $39.9 million and diluted earnings per share were $.33.
Net sales
Net sales increased 5.3 percent compared to last year, positively impacted by a
19.9 percent increase in retail food sales and a 2.5 percent increase in food
distribution sales.
Retail food sales increased over last year primarily due to acquisitions and new
store openings over the past twelve months. Same-store sales were essentially
flat compared to last year, impacted by low inflation, competitive activities
and cannibalization in certain markets. Food distribution sales increased from
last year primarily due to the growth of the retail operations and the Richfood
acquisition fully offsetting the loss of sales from the sale of Hazelwood Farms
Bakeries in the first quarter.
Gross profit
Gross profit as a percentage of net sales was 10.8 percent compared to 10.2
percent last year. The growing proportion within the company's total sales mix
of the higher margin retail food business favorably impacted the gross profit
percentage. Retail food and food distribution gross profit margins were
comparable to last year.
Selling and administrative expenses
Selling and administrative expenses were 8.3 percent of net sales compared to
7.8 percent last year. The higher percentage was primarily due to the growing
proportion of the company's retail food business, which operates at a higher
selling and administrative expense percentage than the food distribution
business. Retail food and food distribution selling and administrative expenses
were comparable to last year, as a percent of sales.
Operating earnings
The company's operating earnings (earnings before interest and taxes) increased
to $98.0 million compared with $89.9 million last year. Operating earnings
before depreciation and amortization increased to $ 155.8 million compared with
$142.8 million last year, a 9.1 percent increase. Retail food operating earnings
increased 21.4 percent to $31.5 million from last year's $26.0 million.
10
Food distribution operating earnings increased 6.4 percent to $74.8 million from
$70.3 million last year. The increase in operating earnings was primarily due to
increased sales.
Interest expense and income
Interest expense increased to $27.4 million compared with $27.3 million last
year, primarily reflecting increased borrowings resulting from the Richfood
acquisition offset by lower average borrowings during most of the quarter
primarily from cash generated from the sale of Hazelwood Farms Bakeries in the
first quarter. Interest income increased to $4.6 million compared with $4.1
million last year.
Income taxes
The effective tax rate was 39.5 percent, consistent with last year's annual
effective tax rate.
Net earnings
Net earnings were $45.5 million or $.37 per share compared with last year's net
earnings of $39.9 million or $.33 per share. Weighted average shares increased
to 123.7 million compared with last year's 122.2 million due to the
approximately 19.7 million shares issued in connection with the Richfood
acquisition.
YEAR-TO-DATE RESULTS:
Net sales
Net sales increased 3.2 percent to $9.4 billion compared with $9.1 billion last
year. Retail food sales increased 15.9 percent over last year and food
distribution sales had a slight increase over last year of .9 percent.
Retail food sales increased over last year primarily due to acquisitions and new
store openings over the past twelve months. Same-store sales were essentially
flat compared to last year, impacted by low inflation, competitive activities
and cannibalization in certain markets. Food distribution sales increased from
last year primarily due to the growth of the retail operations and the Richfood
acquisition fully offsetting the loss of sales from the sale of Hazelwood Farms
Bakeries in the first quarter.
Gross profit
Gross profit as a percentage of net sales was 10.5 percent compared to 10.1
percent last year. The growing proportion within the company's total sales mix
of the higher margin retail food business favorably impacted the gross profit
percentage. Retail food and food distribution gross profit margins were
comparable to last year.
11
Selling and administrative expenses
Selling and administrative expenses were 8.0 percent of net sales compared to
7.7 percent last year. The higher percentage was primarily due to the growing
proportion of the company's retail food business, which operates at a higher
selling and administrative expense percentage than the food distribution
business. Retail food and food distribution selling and administrative expenses
were comparable to last year, as a percent of sales.
Sale of Business
In the first quarter, the company sold Hazelwood Farms Bakeries, which resulted
in a pre-tax gain of $163.7 million. The company had identified Hazelwood Farms
Bakeries as a non-strategic asset to be liquidated to allow the redeployment of
capital. The transaction resulted in $248.2 million of after-tax cash proceeds.
Special Charges
In the first quarter, the company recorded one-time, pre-tax restructuring and
other charges of $103.6 million as a result of an extensive review to reduce
costs and enhance efficiency over the next 18 months. Included in this total is
$14.9 million for asset impairment costs. The charge by segment was $19.4
million for retail and $84.2 million for food distribution. The restructuring
charges include costs for facility consolidation, non-core store disposals and
rationalization of redundant and certain decentralized administrative functions.
A total of $3.4 million has been offset against the restructuring reserve
year-to-date.
Facility consolidation costs of $47.2 million primarily include losses for the
sale or writedown of assets and leases. Holding costs are also included in this
total. Non-core store disposals include the sale or closure of retail locations
currently operated in the distribution business and other retail stores that are
located in non-strategic markets. These costs total $41.8 million and include
losses to be incurred upon the sale or closure of the stores and related assets,
costs for future lease obligations and lease buy-outs. Rationalization of
redundant and certain decentralized administrative functions consists primarily
of severance for staff reductions as a result of both standardizing and
consolidating business support functions across the company's home office,
retail and distribution operating regions. These costs amount to $14.6 million.
Due to the above restructuring items, the company expects approximately 2,500
employees to be terminated.
Operating earnings
The company's operating earnings (earnings before interest and taxes) increased
to $280.5 million compared with $208.3 million last year. Operating earnings
excluding the gain on the sale of Hazelwood Farms Bakeries and restructuring and
other charges were $220.4 million, a 5.8 percent increase over last year.
Operating earnings before depreciation and amortization increased to $410.9
million compared with $330.5 million last year. Operating earnings before
depreciation and amortization excluding one-time items were $350.8, a 6.2
percent increase over
12
last year. Retail food operating earnings, excluding restructuring and other
charges, increased 16.5 percent to $73.6 million from last year's $63.2 million.
Food distribution operating earnings, excluding the gain on the sale of
Hazelwood Farms Bakeries and restructuring and other charges, increased 2.9
percent to $164.8 million from $160.3 million last year. The increase in
operating earnings was primarily due to increased sales. Including one-time
items, operating earnings for retail food and food distribution decreased 14.1
percent and increased 52.4 percent, respectively.
Interest expense and income
Interest expense decreased to $63.0 million compared with $65.6 million last
year, primarily reflecting lower average borrowings primarily from cash
generated from the sale of Hazelwood Farms Bakeries in the first quarter offset
by increased borrowings resulting from the Richfood acquisition. Interest income
decreased to $9.9 million compared with $10.3 million last year, primarily due
to the reduction of notes receivable as the result of the sale of notes in the
ordinary course of business.
Income taxes
The effective tax rate was 50.7 percent compared with 40.1 percent last year.
The higher effective tax rate is primarily the result of the gain on the sale of
Hazelwood Farms Bakeries. Excluding the impact of the gain on the sale of
Hazelwood Farms Bakeries, the effective tax rate was approximately 39.5 percent,
consistent with the annual effective tax rate last year.
Net earnings
Net earnings were $112.2 million or $.92 per share compared with last year's net
earnings of $91.7 million or $.75 per share. Excluding the gain on the sale of
Hazelwood Farms Bakeries and restructuring and other charges, net earnings were
$101.3 million or $.83 per share. Weighted average shares declined to 122.0
million compared with last year's 122.2 million. In the second quarter of fiscal
2000, the company issued approximately 19.7 million shares of SUPERVALU common
stock resulting from the Richfood acquisition. The diluted outstanding shares at
the end of the second quarter were 140.8 million.
Liquidity and Capital Resources
- -------------------------------
Internally generated funds from operations continued to be the major source of
liquidity and capital growth. Cash provided from operations year-to-date was
$222.4 million compared with $290.6 million last year primarily reflecting
changes in working capital timing. Net cash used in investing activities was
$254.4 million compared with $142.6 million last year. The change from the prior
year reflects cash used for business acquisitions of $469.2 million and cash
proceeds received on the sale of assets of $359.2 million, which includes the
proceeds received from the sale of Hazelwood Farms Bakeries.
13
In addition to the $400 million revolving credit agreement, the company put in
place an additional 364 day $300 million revolving credit agreement during the
second quarter. The revolving credit agreements are available for general
corporate purposes and to support the company's commercial paper program. There
were no drawings on the revolving credit agreements during the quarter and $455
million of commercial paper was outstanding at the end of the quarter. A total
of $40.5 million of letters of credit were outstanding at the end of the
quarter.
On August 31, 1999, the company acquired, in a merger, all of the outstanding
common stock of Richfood. The company issued approximately 19.7 million shares
of SUPERVALU common stock with a market value of approximately $443 million and
paid $443 million in cash for the common stock of Richfood. In addition, the
company repaid approximately $394 million of outstanding Richfood debt. To
finance the acquisition and repay the Richfood debt the company used cash, a
portion of the proceeds from the issuance of $350 million of 7 7/8 percent notes
due 2009 and proceeds from the issuance of commercial paper. Subsequent to the
end of the quarter, the company issued $250 million of 7 5/8 percent notes due
2004 and used the proceeds to reduce commercial paper outstanding.
YEAR 2000
General
SUPERVALU's company wide Year 2000 Project ("Project") is proceeding on
schedule. The Project is addressing the issue of application systems,
information technology (IT) systems and technologies which include embedded
systems being able to distinguish between the year 1900 and the year 2000. In
1996, the company began establishing processes for evaluating and managing the
risks associated with the Project. The Project is divided into six components.
These components include program management, communications, application
conversions and technology upgrades, contingency planning, quality assurance and
external entities. The company is using both internal and external resources to
implement the Project. Year 2000 remediation and testing has been substantially
completed. The company has developed contingency plans for key business
functions that could be impacted by year 2000 issues and the focus of the
remaining year 2000 work will shift to readying contingency plans and preparing
for the year-end transition.
The company has relationships with a significant number of key business
partners. The company has had formal communications with its key business
partners and has developed formal contingency plans to mitigate the risk to the
company if the business partners are not prepared for the year 2000. The company
will continue to communicate with its key business partners on relevant issues
throughout 1999 and beyond. There can be no guarantee that the business partners
will successfully and timely reprogram or replace and test all of their own
computer hardware, software and process control systems. While the failure of a
single business partner to achieve year 2000 compliance should not have a
material adverse effect on
14
the company's results of operations, the failure of several key business
partners could have such an effect.
Costs
The total costs associated with required modifications to become year 2000
compliant is not expected to be material to the company's financial position.
The company has incurred costs to date of $26.3 million. Estimated costs for the
remainder of work is $2.4 million for a total projected Project cost of $28.7
million. The estimated remaining costs are primarily for monitoring and
supporting the transition and contingency plans.
Risks
While the effort to assess and correct the company's year 2000 issues have been
substantially completed prior to related forecasted failure horizons, the
company has been taking specific measures to assess risks and develop specific
contingency plans. Key business functions have been assessed and action plans
have been created which describe the communications, operations and IT
activities that will be conducted if the contingency plans must be executed.
The costs of the Project and the completion dates are based on management's best
estimates, which were derived from assumptions of future events including the
availability of resources, key business partner modification plans and other
factors. There can be no guarantee that these estimates will be achieved and
actual results could vary due to uncertainties.
The company's year 2000 efforts are ongoing and its overall Project will
continue to evolve as new information becomes available. The failure to correct
a material year 2000 problem could result in an interruption in certain normal
business activities and operations. Due to the general uncertainty inherent in
the year 2000 problem, resulting in part from the uncertainty of the year 2000
readiness of third parties on whom the company relies, the company is unable to
determine at this time whether the consequences of year 2000 failures will have
a material adverse impact on the company's results of operation but the company
believes that, with the implementation of new business systems and completion of
the Project as scheduled, the possibility of significant interruptions of normal
operations should be reduced.
Cautionary statements for purposes of the Safe Harbor Provisions of the Private
Securities Litigation Reform Act of 1995
The information in this 10Q includes forward-looking statements. Important risks
and uncertainties that could cause actual results to differ materially from
those discussed in such forward looking statements are detailed in Exhibit 99.1
to the company's Annual Report on Form 10-K for the fiscal year ended February
27, 1999 and under the caption "Year 2000" in this Form 10-Q; other risks or
uncertainties may be detailed from time to time in the company's future
Securities and Exchange Commission filings.
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PART II - OTHER INFORMATION
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Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits filed with this Form 10-Q:
4.1 Letter Amendment, dated as of August 20, 1999, to the Credit
Agreement dated as of October 8, 1997 among SUPERVALU, the
Lenders named therein and Bankers Trust Company, as Agent.
4.2 Fourth Supplemental Indenture dated as of August 4, 1999 between
SUPERVALU and Bankers Trust Company, as Trustee, to Indenture
dated as of July 1, 1987 between SUPERVALU and Bankers Trust
Company, as Trustee.
4.3 Fifth Supplemental Indenture dated as of September 17, 1999
between SUPERVALU and Bankers Trust Company, as Trustee, to
Indenture dated as of July 1, 1987 between SUPERVALU and Bankers
Trust Company, as Trustee.
4.4 Registration Rights Agreement dated as of August 4, 1999 among
SUPERVALU and Merrill Lynch, Pierce, Fenner & Smith Incorporated,
Goldman, Sachs & Co., Salomon Smith Barney Inc., U.S. Bancorp
Piper Jaffray Inc., Chase Securities Inc., First Union Capital
Markets Corp., and McDonald Investments Inc.
4.5 Registration Rights Agreement dated as of September 17, 1999
among SUPERVALU and Merrill Lynch, Pierce, Fenner & Smith
Incorporated, Goldman, Sachs & Co., Salomon Smith Barney Inc.,
U.S. Bancorp Piper Jaffray Inc., Banc One Capital Markets, Inc.,
Deutsche Bank Securities Inc. and Wachovia Securities, Inc.
(11) Computation of Earnings Per Common share.
(27) Financial Data Schedule.
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(b) Reports on Form 8-K:
The Registrant filed the following reports on Form 8-K during the
quarterly period ending on September 11, 1999:
(i) On July 21, 1999 reporting the execution of a merger
agreement with Richfood Holdings, Inc. and including certain
unaudited pro forma financial statements relating to that
merger; and
(ii) On August 31, 1999 reporting the consummation of the
Registrant's acquisition of Richfood Holdings, Inc.
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SIGNATURES
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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.
SUPERVALU INC. (Registrant)
Dated: October 15, 1999 By: /s/ Pamela K. Knous
--------------------------------
Pamela K. Knous
Executive Vice President, Chief
Financial Officer
(Authorized officer of Registrant)
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