SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED OCTOBER 17, 1998
[ ] 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 333-35457
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RANDALL'S FOOD MARKETS, INC.
(Exact name of registrant as specified in its charter)
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Texas 74-2134840
- ------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
3663 Briarpark, Houston, Texas 77042
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Address of principal executive offices (including zip code)
(713) 268-3500
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Registrant's telephone number, including area code
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes (X) No ( )
The number of shares outstanding of the registrant's common stock, par value
$0.25 per share, as of November 13, 1998 was 30,004,702 shares
RANDALL'S FOOD MARKETS, INC.
INDEX
PAGE NO.
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements:
Condensed Consolidated Balance Sheets at October 17, 1998 and
June 27, 1998 3
Condensed Consolidated Statements of Income for the Sixteen (16)
Week Periods Ended October 17, 1998 and October 18, 1997 4
Condensed Consolidated Statements of Cash Flows for the Sixteen
(16) Week Periods Ended October 17, 1998 and October 18, 1997 5
Notes to Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 9
Item 3. Quantitative and Qualitative Disclosure about Market Risk 14
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 14
Item 2. Changes in Securities 15
Item 3. Defaults Upon Senior Securities 16
Item 4. Submission of Matters to a Vote of Security Holders 16
Item 5. Other Information 16
Item 6. Exhibits and Reports on Form 8-K 16
SIGNATURES 17
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
RANDALL'S FOOD MARKETS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
OCTOBER 17, 1998 AND JUNE 27, 1998
(IN THOUSANDS)
UNAUDITED AUDITED
OCTOBER 17, 1998 JUNE 27, 1998
---------------- -------------
ASSETS
Current Assets:
Cash and cash equivalents $ 24,141 $ 36,243
Receivables, net 46,928 44,187
Merchandise inventories 181,117 166,332
Other current assets 15,899 17,778
-------- --------
Total current assets 268,085 264,540
Property and equipment, net 416,478 365,853
Goodwill, net 216,004 217,968
Other assets, net 36,886 35,386
-------- --------
Total $937,453 $883,747
-------- --------
-------- --------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Current maturities of long-term debt and obligations under capital leases $ 4,553 $ 4,544
Accounts payable 131,160 135,834
Accrued expenses and other 135,822 136,477
-------- --------
Total current liabilities 271,535 276,855
Long-term debt, net of current maturities 327,795 276,447
Obligations under capital leases, net of current maturities 60,247 61,515
Other long-term liabilities 33,299 32,485
-------- --------
Total liabilities 692,876 647,302
-------- --------
Commitments & Contingencies (See Note 3)
Redeemable common stock, $14.50 and $13.30 redemption value per share,
387,651 shares issued and outstanding at October 17, 1998 and June 27, 1998 5,621 5,155
-------- --------
Stockholders' Equity:
Common stock, $0.25 par value, 75,000,000 shares authorized; 29,647,061
shares issued and 29,628,679 shares outstanding at October 17, 1998 and
29,697,979 shares issued and 29,679,597 shares outstanding at June 27, 1998 7,411 7,425
Additional paid-in capital 173,854 174,337
Stockholders' notes receivable (5,905) (6,213)
Retained earnings 64,227 56,506
Restricted common stock (413) (547)
Treasury stock, 18,392 shares at cost (218) (218)
-------- --------
Total stockholders' equity 238,956 231,290
-------- --------
Total $937,453 $883,747
-------- --------
-------- --------
The accompanying notes are an integral part of
these condensed consolidated financial statements.
3
RANDALL'S FOOD MARKETS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
FOR THE SIXTEEN WEEK PERIODS ENDED
OCTOBER 17, 1998 and OCTOBER 18, 1997
(IN THOUSANDS)
(UNAUDITED)
OCTOBER 17, 1998 OCTOBER 18, 1997
---------------- ----------------
Net sales $766,741 $719,377
Cost of sales 552,880 522,940
-------- --------
Gross profit 213,861 196,437
-------- --------
Operating expenses:
Selling, general and administrative expenses 171,814 163,276
Depreciation and amortization 17,173 15,117
-------- --------
Total operating expenses 188,987 178,393
-------- --------
Operating income 24,874 18,044
Interest expense, net 10,052 10,522
-------- --------
Income before income taxes 14,822 7,522
Provision for income taxes 6,636 3,780
-------- --------
Net income $ 8,186 $ 3,742
-------- --------
-------- --------
The accompanying notes are an integral part of
these condensed consolidated financial statements.
4
RANDALL'S FOOD MARKETS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIXTEEN WEEK PERIODS ENDED
OCTOBER 17, 1998 and OCTOBER 18, 1997
(IN THOUSANDS)
(UNAUDITED)
OCTOBER 17, 1998 OCTOBER 18, 1997
---------------- ----------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 8,186 $ 3,742
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 17,173 15,117
Other 1,548 848
Change in assets and liabilities, net (19,872) 5,795
-------- --------
Net cash provided by operating activities 7,035 25,502
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (77,472) (14,572)
Proceeds from sale of assets 7,142 12,417
Other 210 531
-------- --------
Net cash used in investing activities (70,120) (1,624)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from borrowing under credit agreement 122,000 -
Repayments of debt (70,649) (3,132)
Reduction in obligations under capital leases (1,168) (1,291)
Other 800 (42)
-------- --------
Net cash provided by (used in) financing activities 50,983 (4,465)
-------- --------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (12,102) 19,413
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 36,243 23,115
-------- --------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 24,141 $ 42,528
-------- --------
-------- --------
The accompanying notes are an integral part of
these condensed consolidated financial statements.
5
RANDALL'S FOOD MARKETS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIXTEEN WEEK PERIODS ENDED
OCTOBER 17, 1998 AND OCTOBER 18, 1997 (UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying condensed consolidated balance sheet of Randall's Food
Markets, Inc. and subsidiaries (the "Company") at June 27, 1998 has been derived
from the Company's audited financial statements at that date. The condensed
consolidated balance sheet at October 17, 1998, the condensed consolidated
statements of income for the sixteen week periods ended October 17, 1998 and
October 18, 1997 and the condensed consolidated statements of cash flows for the
sixteen week periods ended October 17, 1998 and October 18, 1997 are unaudited.
In the opinion of management, such condensed consolidated financial statements
contain all adjustments, consisting only of normal recurring adjustments,
necessary for a fair statement of the consolidated financial position and
results of operations of the Company for the interim periods. Operating results
for the sixteen week period ended October 17, 1998 are not necessarily
indicative of the operating results that may be expected for a full fiscal year.
Certain information and footnote disclosures normally included in annual
financial statements presented in accordance with generally accepted accounting
principles have been omitted. The accompanying condensed consolidated financial
statements should be read in conjunction with the consolidated financial
statements and footnotes thereto included in the Company's Annual Report on Form
10-K for the year ended June 27, 1998.
Certain reclassifications have been made to the prior period's financial
statements to conform to the current period presentation.
2. STORE CLOSING COSTS
During the fiscal year ended June 28, 1997 ("Fiscal Year 1997"), the
Company recorded a charge of approximately $32.8 million in connection with the
planned closure, replacement or sale of certain of its stores during Fiscal Year
1997, the fiscal year ended June 27, 1998 ("Fiscal Year 1998") and the fiscal
year ending June 26, 1999 ("Fiscal Year 1999"). Such charge included estimated
inventory losses of approximately $3.0 million (included in cost of sales during
Fiscal Year 1997), estimated lease termination costs of approximately $11.7
million and asset write-offs of approximately $18.1 million (included in
operating expenses during Fiscal Year 1997). During the sixteen weeks ended
October 17, 1998, the Company closed and replaced three such stores and charged
approximately $6.8 million against the accrual recorded in connection with the
charge in Fiscal Year 1997.
3. CONTINGENCIES
MSP LITIGATION - Following the Company's acquisition of Cullum Companies,
Inc. in August 1992, the Company terminated the Cullum's Management Security
Plan for Cullum Companies, Inc. ("the MSP"). In respect of such termination, the
Company paid MSP participants the greater of (i) the amount of such
participant's deferral or (ii) the net present value of the participant's
accrued benefit, based upon the participant's current salary, age and years of
service. Thirty-five of the former MSP participants have instituted a claim
against the Company on behalf of all persons who were participants in the MSP on
its date of termination (which is alleged by plaintiffs to be approximately 250
persons). On May 7, 1997, the plaintiffs filed an amended complaint for the
Court to recognize their action as a class action, to recover additional amounts
under the MSP, for a declaration of rights under an employee pension benefit
plan and for breach of
6
fiduciary duty. The plaintiffs assert that the yearly plan agreement
executed by each participant in the MSP was a contract for a specified
retirement and death benefit set forth in such plan agreements and that such
benefits were vested and nonforfeitable. A pre-trial order in the MSP
litigation, which was submitted to the Court on October 22, 1997, states that
an expert for the plaintiffs, assuming class certification, may testify that
the damages allegedly sustained by the plaintiff class may range from
approximately $18.0 million to $37.2 million and, assuming that a court were
to award additional damages based on a rate of return achieved by an equity
index over the relevant period, such damages may range from approximately
$37.4 million to $70.6 million. On December 30, 1997, the Court issued an
order denying the plaintiffs' summary judgment motion on the plaintiffs'
claim that the MSP was not an exempt "top hat plan" (a plan which is unfunded
and maintained by an employer primarily for the purpose of providing deferred
compensation for a select group of management or highly compensated
employees). The order also granted the Company's summary judgment motions on
two of the plaintiffs' ancillary claims, but did not address the plaintiffs'
request for certification as a class action. On June 5, 1998, the Court
ruled that the plan was "unfunded", meaning that the trial of the limited
class action issue will deal only with the question of whether the MSP was
"maintained primarily for the purpose of providing deferred compensation for
a select group of management or highly compensated employees." On June 16,
1998, the Court certified the case as a class action for the limited issue of
determining if the MSP was an exempt "top hat plan". The Court defined the
class as all persons who, on the date of the termination of the MSP, were
participants in the MSP and were employed by Randall's Food Markets, Inc. On
September 8, 1998, a pre-trial conference was held to discuss burden of
proof, expert testimony and meaning of "select group" and the evidence to be
considered at the trial. The trial of the limited class action issue was
conducted before the Court, sitting without a jury, on October 26, 1998.
Upon order of the Court, both parties submitted post-trial briefs on November
6, 1998. The Court has yet to rule on the limited class action issue. Once
the initial class issue is resolved, the Court will make an evaluation as to
whether any other issues should be dealt with in a class action context.
Based upon current facts, the Company is unable to estimate any meaningful
range of possible loss that could result from an unfavorable outcome of the
MSP litigation. It is possible that the Company's results of operations or
cash flows in a particular quarterly or annual period or its financial
position could be materially affected by an ultimate unfavorable outcome of
the MSP litigation. However, the Company intends to vigorously contest the
MSP claim and, although there can be no assurance, management currently does
not anticipate an unfavorable outcome based on management's independent
analysis of the facts relating to such litigation.
FLEMING DISPUTE - On July 30, 1997, the Company initiated an arbitration
proceeding before the American Arbitration Association against Fleming
Companies, Inc. ("Fleming"), one of its long-time suppliers, alleging, among
other things, that Fleming violated the terms of a supply agreement signed in
1993. On July 7, 1998, the arbitration panel unanimously found that Fleming
materially breached the supply agreement and the contract was terminated as of
July 7, 1998 without payment of any termination fee. The Company and Fleming
entered into a transition agreement, effective September 25, 1998, which
provides for a continued supply of products from Fleming while the Company moves
to self distribution.
JOHN PAUL MITCHELL LAWSUIT - On August 26, 1998, a jury in the 126th
District Court, Travis County, Texas, returned a verdict against the Company and
a co-defendant, Jade Drug Company, Inc. ("Jade"), finding both parties
intentionally conspired with each other to interfere with contracts between John
Paul Mitchell Systems ("Mitchell") and one or more of its distributors and/or
salons. The jury found the Company guilty of having in its possession, selling
or offering for sale Mitchell products that it knew, or that a reasonable person
in the position of the Company would know, had serial numbers or other permanent
identification markings removed, altered or obliterated. The jury found that
the company unfairly competed with Mitchell by purchasing and distributing the
products and infringed on Mitchell's trademark. The jury also found that the
harm caused Mitchell resulted from malice.
7
The jury awarded Mitchell and its co-plaintiff, Ultimate Salon Services
Inc. (together, the "Plaintiffs"), $3.25 million in joint and several damages
from the Company and Jade, $4.5 million in exemplary damages from the Company
and $3.0 million in actual damages and $4.5 million in exemplary damages from
Jade.
The Company and Jade filed motions with the trial court judge to disregard
the jury's verdict. On November 19, 1998, the trial court judge threw out the
jury's verdict, entered judgement in favor of the Company and Jade, ordered that
the Plaintiffs recover nothing and ordered that the Plaintiffs pay the Company
and Jade all of their court costs. As of this date, the Plaintiffs have not
indicated whether or not they are going to appeal. Although the outcome of this
matter cannot be predicted with certainty, management believes an unfavorable
outcome will not have a material adverse effect on the Company, its operations,
its financial condition or its cash flows.
Other than the foregoing matters, the Company believes it is not a party to
any pending legal proceedings, including ordinary litigation incidental to the
conduct of its business and the ownership of its property, the adverse
determination of which would have a material adverse effect on the Company, its
operations, its financial condition or its cash flows.
8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The Company operates a chain of 116 supermarkets primarily under the
RANDALLS and TOM THUMB banners in the Houston, Dallas/Fort Worth and Austin
metropolitan areas. The Company operates on a 52 or 53 week fiscal year ending
on the last Saturday of each June. Same-store sales is defined as net sales for
stores in full operation in each of the current fiscal periods and the
comparable periods of the prior fiscal year. Replacement stores are included in
the same-store sales calculation. A replacement store is defined as a store
that is opened to replace a store that is closed nearby.
Presented below is a table showing the percentage of net sales represented by
certain items in the Company's consolidated condensed statements of income
(dollars in thousands):
16 WEEKS ENDED 16 WEEKS ENDED
OCTOBER 17, 1998 OCTOBER 18, 1997
------------------ -------------------
Net sales $ 766,741 100.0% $ 719,377 100.0%
Cost of sales 552,880 72.1% 522,940 72.7%
-------- ----- -------- -----
Gross profit 213,861 27.9% 196,437 27.3%
Selling, general and administrative expenses 171,814 22.4% 163,276 22.7%
Depreciation and amortization 17,173 2.2% 15,117 2.1%
-------- ----- -------- -----
Operating income 24,874 3.2% 18,044 2.5%
Interest expense, net 10,052 1.3% 10,522 1.5%
-------- ----- -------- -----
Earnings before taxes 14,822 1.9% 7,522 1.0%
Provision for income taxes 6,636 0.9% 3,780 0.5%
-------- ----- -------- -----
Net income $ 8,186 1.1% $ 3,742 0.5%
-------- ----- -------- -----
-------- ----- -------- -----
EBITDA $ 42,728 5.6% $ 33,841 4.7%
-------- ----- -------- -----
-------- ----- -------- -----
FIRST QUARTER 1999 COMPARED TO FIRST QUARTER 1998
NET SALES - Net sales for the sixteen weeks ended October 17, 1998 ("First
Quarter 1999") increased by $47.4 million (6.6%) compared to the sixteen weeks
ended October 18, 1997 ("First Quarter 1998"). Such increase is partially
attributable to additional sales of $11.5 million generated from the opening of
one new store (excluding 3 replacement stores) during First Quarter 1999 and the
operation during such period of two stores opened during the fiscal year ended
June 27, 1998 (excluding 2 replacement stores) which were not in operation
during the entire comparable period of the prior year. In addition, the Company
experienced an increase in same-store sales of approximately $67.5 million in
First Quarter 1999 as compared to First Quarter 1998. These increases were
offset by a decline of approximately $31.5 million from closed and temporarily
closed stores that are excluded from same-store sales.
The Company's same-store sales for First Quarter 1999 have improved
significantly over those of First Quarter 1998. Same-store sales during First
Quarter 1999 increased approximately 9.9% compared to an increase of
approximately 1.7% during First Quarter 1998. Such improvement was due
primarily to the store remodeling and expansion program, the contribution of
replacement stores, the success of other merchandising, marketing and customer
service initiatives and favorable economic conditions. The Company cannot
predict whether the improvement in the trend in same-store sales that has
occurred in First Quarter 1999 will continue in future periods, and as a
result, there can be no assurance that such trend will continue or will not be
reversed in future periods.
9
GROSS PROFIT - Gross profit for First Quarter 1999 increased by $17.4 million or
8.9% compared to First Quarter 1998. The dollar increase in gross profit is
primarily attributable to the increased sales volume during First Quarter 1999.
Gross profit as a percentage of net sales increased to 27.9% for First Quarter
1999 from 27.3% for First Quarter 1998. This increase, as a percentage of net
sales, was primarily due to more effective promotional efforts and higher gross
margins at new and replacement stores. Such higher gross margins at new and
replacement stores were due primarily to the more expansive specialty
departments and broader range of products and services offered by such stores.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES - Selling, general and
administrative expenses increased $8.5 million or 5.2% during First Quarter 1999
compared to First Quarter 1998. Selling, general and administrative expenses as
a percentage of net sales decreased to 22.4% for First Quarter 1999 from 22.7%
for First Quarter 1998. This decrease, as a percentage of net sales, was due
primarily to better expense management and the increase in net sales. The
Company intends to remain focused on expense control. Therefore, the Company
does not expect selling, general and administrative expenses as a percentage of
net sales to increase compared to corresponding periods of the prior year;
however, no assurance can be given in this regard.
EBITDA (EARNINGS BEFORE NET INTEREST EXPENSE, TAXES, DEPRECIATION, AMORTIZATION
AND LIFO PROVISION) AND OPERATING INCOME - EBITDA for First Quarter 1999
increased by $8.9 million or 26.3% compared to First Quarter 1998. EBITDA as a
percentage of net sales increased to 5.6% for First Quarter 1999 from 4.7% for
First Quarter 1998. Operating income for First Quarter 1999 increased by $6.8
million or 37.9% compared to First Quarter 1998. Such increases are primarily
attributable to the increases in gross profit offset to some extent by the
increases in selling, general and administrative expenses, as described above.
DEPRECIATION AND AMORTIZATION - Depreciation and amortization expense for First
Quarter 1999 increased by $2.1 million or 13.6% compared to First Quarter 1998.
This increase was primarily due to new store openings and the remodeling of
certain existing stores and other facilities in connection with the Company's
capital expenditure program that began in the year ended June 27, 1998. See
"Liquidity and Capital Resources".
INTEREST EXPENSE, NET - Net interest expense for First Quarter 1999 remained
relatively constant compared to First Quarter 1998. The Company expects
interest expense will increase in future periods as the Company utilizes the
revolving credit facility available under its bank credit agreement to finance
its working capital needs and expected capital expenditures. See "Liquidity and
Capital Resources".
PROVISION FOR INCOME TAXES - The provision for income taxes for First Quarter
1999 was $6.6 million compared $3.8 million for First Quarter 1998. This
increase was primarily due to the Company's increased pre-tax income.
NET INCOME - Net income for First Quarter 1999 increased $4.4 million or 118.8%
compared to First Quarter 1998 due primarily to the combined impact of the
factors discussed above.
LIQUIDITY AND CAPITAL RESOURCES - The Company is a holding company, and as a
result, its operating cash flow and its ability to service its indebtedness,
including the Company's $150.0 million aggregate principal amount outstanding of
9-3/8% Series B Senior Subordinated Notes due 2007, are dependent upon the
operating cash flow of its subsidiaries and the payment of funds by such
subsidiaries to the Company in the form of loans, dividends or otherwise.
10
The Company's principal sources of liquidity are expected to be cash
flow from operations, borrowings under the $225.0 million revolving credit
facility ("Revolver") available under the Company's current bank credit
agreement and proceeds from lease financing arrangements. As of October 17,
1998, the Company had approximately $173.0 million available (net of
approximately $18,000 of outstanding letters of credit) to be borrowed under
the Revolver. Management anticipates that the Company's principal uses of
liquidity will be to provide working capital, meet debt service requirements
and finance the Company's expansion and remodeling plans. Management
believes that cash flows generated from operations, borrowings under the
Revolver and proceeds from lease financing arrangements will adequately
provide for the Company's working capital and debt service needs and will be
sufficient to fund its expected capital expenditures.
During First Quarter 1999 and First Quarter 1998, operating activities
provided net cash of approximately $7.0 million and $25.5 million, respectively.
Net cash provided by operations during First Quarter 1999 resulted primarily
from net income during the period (adjusted for the non-cash impact of
depreciation and amortization) offset to some extent by increases in merchandise
inventories and decreases in accounts payable. Net cash provided by operations
during First Quarter 1998 resulted primarily from net income (adjusted for the
non-cash impact of depreciation and amortization), the collection of a $10.0
million federal income tax receivable, and increases in accounts payable and
accrued expenses, offset to some extent by increases in merchandise
inventories. Financing activities provided approximately $51.0 million during
First Quarter 1999, primarily from borrowings under the credit agreement offset
by a reduction of debt and capital lease obligations. During First Quarter
1998, financing activities utilized approximately $4.5 million, primarily due to
debt reduction.
Cash used in investing activities during First Quarter 1999 and First
Quarter 1998 consisted primarily of capital expenditures of approximately
$77.5 million and $14.6 million, respectively, offset to some extent by
proceeds from asset sales of approximately $7.1 million and $12.4 million
during First Quarter 1999 and First Quarter 1998, respectively. Capital
expenditures primarily include expenditures related to the construction of
new stores, the purchase of real estate, the remodeling of existing stores,
ongoing store expenditures for equipment and capitalized maintenance, as well
as expenditures relating to the Company's warehousing and distribution network
and computer equipment.
During Fiscal Year 1998, the Company embarked upon a program to accelerate
its store development and remodeling and to optimize its distribution network.
Such program has resulted in a level of capital expenditures in excess of
historical levels. During First Quarter 1999, the Company made capital
expenditures of approximately $77.5 million primarily for the construction of
new stores, purchase of land, remodel or renovation of existing stores,
expansion of its distribution system, and computer hardware and software
expenditures. The Company currently expects to make additional capital
expenditures of approximately $177.5 million for such programs for the
remainder of the fiscal year ending June 26, 1999. The Company anticipates
funding its future capital expenditures with cash flow from operations,
borrowings under the Revolver and proceeds from lease financing arrangements,
including a five-year, $50.0 million synthetic lease arrangement that the
Company entered into on September 10, 1998.
During Fiscal Year 1998, the Company commenced expansion of its
distribution system in a strategic shift toward self distribution. Such
expansion is expected to increase the efficiency of the Company's
distribution network and is expected to be completed during Fiscal Year 1999.
While the Company has distributed products to its stores for many years, the
anticipated expansion and move to self distribution present multiple risks
that could potentially have an adverse impact on the Company's financial
results for a particular quarter or annual reporting period. Such risks
include, but are not limited to, excess inventory levels and disruptions of
product delivery and sourcing. The Company has developed extensive transition
11
plans including the testing of the distribution network prior to the
transition to self distribution. Although there can be no assurance,
management believes that its prior experience in distribution and its
extensive planning process reduce the risks of a significant disruption of
supply during the transition to self distribution.
EFFECTS OF INFLATION - The Company's primary costs, inventory and labor, are
affected by a number of factors that are beyond its control, including
availability and price of merchandise, the competitive climate and general and
regional economic conditions. As is typical of the supermarket industry, the
Company has generally been able to maintain gross profit margins by adjusting
retail prices, but competitive conditions may from time to time render the
Company unable to do so while maintaining its market share.
YEAR 2000 COMPLIANCE - The year 2000 issue is the result of computer programs
being written using two digits rather than four to define the applicable year,
as well as hardware that is designed with similar constraints. Some of the
Company's computer programs and hardware that have date-sensitive functions may
recognize a date using "00" as the year 1900 rather than the year 2000. This
could result in a system failure or miscalculations causing disruptions in
operations including, among other things, a temporary inability to process
transactions, receive invoices, make payments or engage in similar normal
business activities.
A project to address the year 2000 issue began in February 1997. This
project is being managed by the Company's Chief Information Officer. The
Company is utilizing both internal and external resources to identify,
correct and test the Company's hardware and software for year 2000
compliance. In July 1997, the Company completed a comprehensive inventory and
impact assessment of its computer systems. Based on the findings of the
assessment, the Company has determined various software and hardware computer
systems will have be to upgraded. To complete this task the Company
developed the Y2K Migration Plan (the "Y2K Plan").
The Y2K Plan is currently underway and includes testing and implementing
the upgrades for all year 2000 non-compliant hardware and software computer
systems. The Y2K Plan is expected to be complete by the end of Fiscal Year
1999. Presently, approximately 50% of the Company's systems have been
upgraded and tested, and have been found to be Year 2000 compliant. The
Company currently expects the aggregate cost of its Y2K Plan to be
approximately $25.0 million for both Year 2000 upgrades and the replacement
of systems that are inefficient and in need of replacement regardless of
their year 2000 readiness. During First quarter 1999, the Company invested
approximately $7.0 million for hardware and software programs; these new
systems are Year 2000 compliant. The Company currently expects to make
additional such purchases of approximately $16.0 million during the remainder
of Fiscal Year 1999. In addition, the Company is in the process of resolving
year 2000 issues related to its non-data related systems and supplier
compliance. Any remaining costs are not anticipated to have a material impact
on the Company's financial position, results of operations or cash flows.
The Company intends its year 2000 date conversion project to be completed
on a timely basis so as to not significantly impact business operations. Year
2000 upgrades have been prioritized to complete all mission critical systems
such as procurement in the early phases of conversion. Currently, 90% of all
systems related to procurement have been upgraded and have been found to be Year
2000 compliant. If the necessary upgrades are not completed as planned, the year
2000 issue may have a material impact on the Company. The Company has suppliers
and other third parties that it relies on for business operations and currently
believes those suppliers and other third parties are taking the appropriate
action for year 2000 compliance. The Company cannot provide assurance that
failure of such suppliers and other third parties to address the year 2000 issue
will not have an adverse impact on the Company. While the Company has limited
ability to test and control its suppliers' and other third parties' year 2000
readiness, the Company is contacting major suppliers and critical other third
parties and obtaining and assessing whether they will be year 2000 compliant.
Based on the
12
responses, the Company will develop contingency plans to reduce the impact of
transactions with non-compliant major suppliers and other critical parties.
Although there can be no assurance that multiple business disruptions caused
by technology failures can be adequately anticipated, the Company is
identifying second and third sources of supply for major suppliers to
minimize the risk of business interruptions.
CAUTIONARY STATEMENT FOR PURPOSES OF THE "SAFE HARBOR" PROVISIONS OF THE PRIVATE
SECURITIES LITIGATION REFORM ACT OF 1995
The Private Securities Litigation Reform Act of 1995 provides a "safe
harbor" for certain forward-looking statements. The factors discussed below,
among others, could cause actual results to differ materially from those
contained in forward-looking statements made in this report, including,
without limitation, in "Management's Discussion and Analysis of Financial
Condition and Results of Operations," in the Company's related press release
and in oral statements made by authorized officers of the Company. When used
in this report, any press release or oral statements, the words "looking
forward", "estimate," "project," "anticipate," "expect," "intend," "believe"
and similar expressions are intended to identify forward-looking statements.
All of these forward-looking statements are based on estimates and
assumptions made by management of the Company, which, although believed to be
reasonable, are inherently uncertain. Therefore, undue reliance should not
be placed upon such estimates and statements. No assurance can be given that
any of such statements or estimates will be realized and actual results will
differ from those contemplated by such forward-looking statements. Accordingly,
the Company hereby identifies the following important factors which could
cause the Company's financial results to differ materially from any such
results which might be projected, forecast, estimated or budgeted by the
Company in forward-looking statements: heightened competition, including
specifically the intensification of price competition and the expansion,
renovation and opening of new stores by competitors; failure to obtain new
customers or retain existing customers; inability to carry out strategies to
accelerate new store development and remodeling programs, reduce operating
costs, differentiate products and services, leverage the frequent shopper
program and increase private label sales; insufficiency of financial
resources to renovate and expand the store base; increase in leverage and
interest expense due to the expansion and remodeling program; outcome of the
MSP Litigation and the John Paul Mitchell Litigation; issues arising in
connection with the Y2K Plan; prolonged dispute with labor; economic
downturn in the State of Texas; loss or retirement of key executives;
higher selling, general and administrative expenses occasioned by the need
for additional advertising, marketing, administrative or management
information systems expenditures; adverse publicity and news coverage.
The foregoing review of the factors pursuant to the Private Litigation
Securities Reform Act of 1995 should not be construed as exhaustive or as any
admission regarding the adequacy of disclosures made by the Company prior to
this filing.
13
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
During First Quarter 1999, the Company entered into two interest rate swap
agreements to hedge interest rate costs and risks associated with variable
interest rates. Such agreements effectively convert variable-rate debt, to the
extent of the notional amount, to fixed-rate debt with effective per annum
interest rates of 5.493% and 5.295%, with respect to the London Interbank
Offered Rate portion of such borrowings. The aggregate notional principal
amount of such agreements is $100.0 million, $50.0 million of which became
effective August 25, 1998 and matures August 25, 2001, and $50.0 million of
which became effective September 2, 1998 and matures September 2, 2001. The
counterparty to such agreements can terminate either agreement after two years,
at its sole discretion. The counterparty to such agreements is a major
financial institution, and therefore, credit losses from counterparty
nonperformance are not anticipated.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
MSP LITIGATION - Following the Company's acquisition of Cullum Companies,
Inc. in August 1992, the Company terminated the Cullum's Management Security
Plan for Cullum Companies, Inc. ("the MSP"). In respect of such termination, the
Company paid MSP participants the greater of (i) the amount of such
participant's deferral or (ii) the net present value of the participant's
accrued benefit, based upon the participant's current salary, age and years of
service. Thirty-five of the former MSP participants have instituted a claim
against the Company on behalf of all persons who were participants in the MSP on
its date of termination (which is alleged by plaintiffs to be approximately 250
persons). On May 7, 1997, the plaintiffs filed an amended complaint for the
Court to recognize their action as a class action, to recover additional amounts
under the MSP, for a declaration of rights under an employee pension benefit
plan and for breach of fiduciary duty. The plaintiffs assert that the yearly
plan agreement executed by each participant in the MSP was a contract for a
specified retirement and death benefit set forth in such plan agreements and
that such benefits were vested and nonforfeitable. A pre-trial order in the MSP
litigation, which was submitted to the Court on October 22, 1997, states that an
expert for the plaintiffs, assuming class certification, may testify that the
damages allegedly sustained by the plaintiff class may range from approximately
$18.0 million to $37.2 million and, assuming that a court were to award
additional damages based on a rate of return achieved by an equity index over
the relevant period, such damages may range from approximately $37.4 million to
$70.6 million. On December 30, 1997, the Court issued an order denying the
plaintiffs' summary judgment motion on the plaintiffs' claim that the MSP was
not an exempt "top hat plan" (a plan which is unfunded and maintained by an
employer primarily for the purpose of providing deferred compensation for a
select group of management or highly compensated employees). The order also
granted the Company's summary judgment motions on two of the plaintiffs'
ancillary claims, but did not address the plaintiffs' request for certification
as a class action. On June 5, 1998, the Court ruled that the plan was
"unfunded", meaning that the trial of the limited class action issue will deal
only with the question of whether the MSP was "maintained primarily for the
purpose of providing deferred compensation for a select group of management or
highly compensated employees." On June 16, 1998, the Court certified the case as
a class action for the limited issue of determining if the MSP was an exempt
"top hat plan". The Court defined the class as all persons who, on the date of
the termination of the MSP, were participants in the MSP and were employed by
Randall's Food Markets, Inc. On September 8, 1998, a pre-trial conference was
held to discuss burden of proof, expert testimony and meaning of "select group"
and the evidence to be considered at the trial. The trial of the limited class
action issue was conducted before the Court, sitting without a jury, on October
26, 1998. Upon order of the Court, both parties submitted post-trial briefs on
November 6, 1998. The Court has yet to rule on the limited class action issue.
Once the initial class issue is resolved, the Court will make an evaluation as
to whether any other issues should be dealt with in a class action context.
Based upon current facts, the Company is unable to estimate any meaningful range
of possible loss that could result from an unfavorable outcome of the MSP
litigation. It is possible that
14
the Company's results of operations or cash flows in a particular quarterly
or annual period or its financial position could be materially affected by an
ultimate unfavorable outcome of the MSP litigation. However, the Company
intends to vigorously contest the MSP claim and, although there can be no
assurance, management currently does not anticipate an unfavorable outcome
based on management's independent analysis of the facts relating to such
litigation.
FLEMING DISPUTE - On July 30, 1997, the Company initiated an arbitration
proceeding before the American Arbitration Association against Fleming
Companies, Inc. ("Fleming"), one of its long-time suppliers, alleging, among
other things, that Fleming violated the terms of a supply agreement signed in
1993. On July 7, 1998, the arbitration panel unanimously found that Fleming
materially breached the supply agreement and that the contract was terminated as
of July 7, 1998 without payment of any termination fee. The Company and Fleming
entered into a Transition Agreement, effective September 25, 1998, which
provides for a continued supply of products from Fleming while the Company moves
into self distribution.
JOHN PAUL MITCHELL LAWSUIT - On August 26, 1998, a jury in the 126th
District Court, Travis County, Texas, returned a verdict against the Company
and a co-defendant, Jade Drug Company, Inc. ("Jade"), finding both parties
intentionally conspired with each other to interfere with contracts between
John Paul Mitchell Systems ("Mitchell") and one or more of its distributors
and/or salons. The jury found the Company guilty of having in its
possession, selling or offering for sale Mitchell products that it knew, or
that a reasonable person in the position of the Company would know, had
serial numbers or other permanent identification markings removed, altered or
obliterated. The jury found that the company unfairly competed with Mitchell
by purchasing and distributing the products and infringed on Mitchell's
trademark. The jury also found that the harm caused Mitchell resulted from
malice.
The jury awarded Mitchell and its co-plaintiff, Ultimate Salon Services
Inc. (together, the "Plaintiffs"), $3.25 million in joint and several damages
from the Company and Jade, $4.5 million in exemplary damages from the Company
and $3.0 million in actual damages and $4.5 million in exemplary damages from
Jade.
The Company and Jade filed motions with the trial court judge to
disregard the jury's verdict. On November 19, 1998, the trial court judge
threw out the jury's verdict, entered judgement in favor of the Company and
Jade, ordered that the Plaintiffs recover nothing and ordered that the
Plaintiffs pay the Company and Jade all of their court costs. As of this
date, the Plaintiffs have not indicated whether or not they are going to
appeal. Although the outcome of this matter cannot be predicted with
certainty, management believes an unfavorable outcome will not have a
material adverse effect on the Company, its operations, its financial
condition, or its cash flows.
Other than the foregoing matters, the Company believes it is not a party to
any pending legal proceedings, including ordinary litigation incidental to the
conduct of its business and the ownership of its property, the adverse
determination of which would have a material adverse effect on the Company, its
operations, its financial condition, or its cash flows.
ITEM 2. CHANGES IN SECURITIES
None
15
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
A. Exhibits
Exhibit
Number Description of Document
10.21 Ground Lease Agreement, dated as of September 10, 1998 between
Brazos Markets Development, L.P. and Randall's Food & Drugs, Inc.
and Randall's Food Markets, Inc.
10.22 Facilities Lease Agreement, dated as of September 10, 1998 between
Brazos Markets Development, L.P. and Randall's Food & Drugs, Inc.
and Randall's Food Markets, Inc.
10.23 Guarantee as of September 10, 1998 Re: Agreement for Ground Lease,
Ground Lease Agreement, Agreement for Facilities Lease and Facilities
Lease Agreement, each between Brazos Markets Development, L.P., a
Delaware Corporation, and Randall's Food & Drugs, Inc., a Delaware
Corporation, and Randall's Food Markets Inc., a Texas Corporation,
and each effective as of September 10, 1998.
10.24 Residual Guarantee as of September 10, 1998 Re: Credit Agreement
dated effective as of September 10, 1998 by and among Brazos Markets
Development, L.P. as the Borrower, the several banks a party thereto
from time to time and the Agent.
27 Financial Data Schedule
B. Reports on Form 8-K
None
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Quarterly Report to be signed on its behalf by
the undersigned, thereunto duly authorized.
RANDALL'S FOOD MARKETS, INC.
(Registrant)
Date: November 25, 1998 /s/ R. RANDALL ONSTEAD, JR.
-------------------------------------
R. Randall Onstead, Jr.,
Chairman and Chief Executive Officer
Date: November 25, 1998 /s/ MICHAEL M. CALBERT
-------------------------------------
Michael M. Calbert,
Senior Vice President and
Chief Financial Officer
17