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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-----------------------------
FORM 10-Q
--------------------
(MARK ONE)---------
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JULY 31,OCTOBER 30, 1999
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ____________TO __________
COMMISSION FILE NUMBER 0-6544
--------------------------------
BRUNO'S, INC.
(DEBTOR-IN-POSSESSION AS OF FEBRUARY 2, 1998)
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
ALABAMA 63-0411801
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
800 LAKESHORE PARKWAY, BIRMINGHAM, ALABAMA 35211
(Address of principal executive office) (zip code)
205-940-9400
(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)15(D) OF THE SECURITIES EXCHANGE ACT OF
1934 DURING THE PRECEDING 12 MONTHS, AND (2) HAS BEEN SUBJECT TO SUCH FILING
REQUIREMENTS FOR THE PAST 90 DAYS.
YES [X] NO [ ]
THE NUMBER OF SHARES OF COMMON STOCK OUTSTANDING
AS OF SEPTEMBERDECEMBER 10, 1999 WAS 25,507,982.
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Commission File No. 0-6544
BRUNO'S, INC.
(DEBTOR-IN-POSSESSION)
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements: PAGE NO.
--------
Condensed Consolidated Balance Sheets at July 31,October 30, 1999 2
and January 30, 1999
Condensed Consolidated Statements of Operations for the 3
Twenty-Six (26)Thirty-nine (39) and Thirteen (13) Week Periods Ended
July 31,October 30, 1999 and August 1,October 31, 1998
Condensed Consolidated Statements of Cash Flows for the 4
Twenty-Six (26)Thirty-nine (39) Week Periods Ended July 31,October 30, 1999 and
August 1,October 31, 1998
Notes to Condensed Consolidated Financial Statements 5
Item 2. Management's Discussion and Analysis of Financial Condition 1211
and Results of Operations
Item 3. Quantitative and Qualitative Disclosures about Market Risks 2119
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 2119
Item 2. Changes in Securities 2120
Item 3. Defaults Upon Senior Securities 2120
Item 4. Submission of Matters to a Vote of Security Holders 2120
Item 5. Other Information 2120
Item 6. Exhibits and Reports on Form 8-K 2220
Signature Page 2321
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Commission File No. 0-6544
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
BRUNO'S, INC.
(DEBTOR-IN-POSSESSION)
CONDENSED CONSOLIDATED BALANCE SHEETS
AS OF JULY 31,OCTOBER 30, 1999 AND JANUARY 30, 1999
(In Thousands Except Share and Per Share Amounts)
- ------------------------------------------------------------------------------------------------------
JULY 31,OCTOBER 30, JANUARY 30,
1999 1999
(unaudited)
------------- ------------------------ -----------
ASSETS:
Current assets:
Cash and cash equivalents $ 110,23196,028 $ 65,953
Receivables 14,49813,499 25,463
Inventories, net of LIFO reserve of $3,989
at July 31,October 30, 1999, and January 30, 1999 160,147171,831 178,140
Vendor deposits 9,86811,252 15,168
Prepaid expenses and other 8,9468,633 10,242
------------- ----------------------- ----------
Total current assets 303,690301,243 294,966
------------- ----------------------- ----------
Property and equipment, net of accumulated
depreciation of $322,339$330,200 and $329,717,
respectively 255,000254,008 270,186
------------- ----------------------- ----------
Intangibles and other assets, net 12,71715,450 41,530
------------- ----------------------- ----------
Total $ 571,407570,701 $ 606,682
============= ======================= ==========
LIABILITIES AND SHAREHOLDERS' DEFICIENCY IN
NET ASSETS:
Liabilities not subject to compromise
Current liabilities:
Current maturities of capitalized lease obligations $ 3,8703,545 $ 4,130
Accounts payable 58,51472,347 65,472
Accrued payroll and related expenses 16,51417,298 15,042
Other accrued expenses 40,32239,338 31,247
------------- ----------------------- ----------
Total current liabilities 119,220132,528 115,891
------------- ----------------------- ----------
Noncurrent liabilities:
Capitalized lease obligations 4,5303,833 6,276
Other noncurrent liabilities 19,30417,707 25,494
------------- ----------------------- ----------
Total noncurrent liabilities 23,83421,540 31,770
------------- ----------------------- ----------
Liabilities subject to compromise 984,972981,192 996,363
------------- ----------------------- ----------
Shareholders' deficiency in net assets:
Common Stock, $.01 par value, 60,000,000
shares authorized; 25,507,982 issued and
outstanding at July 31,October 30, 1999, and January 30, 1999 255 255
Paid-in capital (deficiency) (586,944) (586,944)
Retained earnings 31,58323,569 50,972
Shareholders' notes receivable (1,513)(1,439) (1,625)
------------- ----------------------- ----------
Total deficiency in net assets (556,619)(564,559) (537,342)
------------- ----------------------- ----------
Total $ 571,407570,701 $ 606,682
============= ======================= ==========
See notes to condensed consolidated financial statements.
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CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
Commission File No. 0-6544
BRUNO'S, INC.
(DEBTOR-IN-POSSESSION)
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE TWENTY-SIXTHIRTY-NINE AND THIRTEEN WEEK PERIODS ENDED
JULY 31,OCTOBER 30, 1999 AND AUGUST 1,OCTOBER 31, 1998
(In Thousands Except Share and Per Share Amounts)
- ----------------------------------------------------------------------------------------------------------------------------------
JULYOCTOBER 30, OCTOBER 31, AUGUST 1, JULY 31, AUGUST 1,
1999 1998
1999 1998
(26(39 WEEKS) (26 WEEKS) (13 WEEKS) (13(39 WEEKS)
(unaudited) (unaudited) (unaudited) (unaudited)
------------ ------------
------------ ------------
NET SALES $ 814,8121,213,520 $ 994,022 $ 408,146 $ 492,293
------------ ------------1,434,571
------------ ------------
COST AND EXPENSES:
Cost of products sold 624,345 776,010 312,765 386,771932,978 1,122,750
Store operating, selling and administrative expenses 166,314 214,203 83,911 107,218251,848 306,441
Depreciation and amortization 22,827 26,843 11,496 13,36333,837 38,426
Interest expense, net (contractual interest for 1999 and 1998 esti-
mated at $41,719$62,944 and $42,374,$63,573, respectively for the 2639 week
period and $21,065$21,225 and $21,332,$21,199, respectively for the 13 week period) 1,484 1,544 726 9462,127 2,567
Gain on sale of Seessel's (1,959)
Reorganization items, net 29,299 21,551 29,311 18,771
------------ ------------30,201 5,558
------------ ------------
Total cost and expenses 844,269 1,040,151 438,209 527,0691,250,991 1,473,783
------------ ------------
------------ ------------
LossIncome/loss before income taxes (29,457) (46,129) (30,063) (34,776)(37,471) (39,212)
INCOME TAX BENEFIT - REFUND 10,068 --
10,068 --
------------ ------------ ------------ ------------
Net Income/loss $ (19,389)(27,403) $ (46,129) $ (19,995) $ (34,776)
============ ============(39,212)
============ ============
NET LOSS PER BASIC AND DILUTED
COMMON SHARE $ (0.76)(1.07) $ (1.81) $ (0.78) $ (1.36)
============ ============(1.54)
============ ============
WEIGHTED AVERAGE BASIC AND DILUTED
COMMON SHARES OUTSTANDING 25,507,982 25,507,982
============ ============
See notes to condensed consolidated financial statements
OCTOBER 30, OCTOBER 31,
1999 1998
(13 WEEKS) (13 WEEKS)
(unaudited) (unaudited)
------------ -----------
NET SALES $ 398,708 $ 440,549
------------ -----------
COST AND EXPENSES:
Cost of products sold 308,633 346,740
Store operating, selling and administrative expenses 85,534 92,238
Depreciation and amortization 11,010 11,583
Interest expense, net (contractual interest for 1999 and 1998
estimated at
$62,944 and $63,573, respectively for the 39 week
period and $21,225 and $21,199, respectively for the 13 week period) 643 1,023
Gain on sale of Seessel's (1,959)
Reorganization items, net 902 (15,993)
------------ ------------
Total cost and expenses 406,722 433,632
------------ ------------
Income/loss before income taxes (8,014) 6,917
INCOME TAX BENEFIT - REFUND -- --
------------ ------------
Net Income/loss $ (8,014) $ 6,917
============ ============
NET LOSS PER BASIC AND DILUTED
COMMON SHARE $ (0.31) $ 0.27
============ ============
WEIGHTED AVERAGE BASIC AND DILUTED
COMMON SHARES OUTSTANDING 25,507,982 25,507,982
============ ============
============ ============See notes to condensed consolidated financial statements
See notes to condensed consolidated financial statements.
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CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Commission File No. 0-6544
BRUNO'S, INC.
(DEBTOR-IN-POSSESSION)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE TWENTY-SIXTHIRTY-NINE WEEK PERIODS ENDED JULY 31,OCTOBER 30, 1999 AND
AUGUST 1,OCTOBER 31, 1998
(Amounts In Thousands)
- -------------------------------------------------------------------------------------------------------------------------
JULYOCTOBER 30, OCTOBER 31, AUGUST 1,
1999 1998
(26(39 WEEKS) (26(39 WEEKS)
(unaudited) (unaudited)
--------------------- -----------
OPERATING ACTIVITIES:
Net loss $ (19,389)(27,403) $ (46,129)
---------- ----------(39,212)
--------- ---------
Adjustments to reconcile net loss to net cash provided by (used in)
operating activities:
Depreciation and amortization (including amortization of debt issuance costs) 23,327 27,08934,587 38,919
Change in assets and liabilities 5,017 13,732485 (13,510)
Income tax refund 16,623 --
Write-off of debt issuance costs - reorganization 27,760 --
---------- ----------Noncash impairment and other special charges -- 5,903
--------- ---------
Total adjustments 72,727 40,821
---------- ----------79,455 31,312
--------- ---------
Payments for professional fees and other expenses related
to the Chapter 11 Cases, net of interest income (3,872) (5,644)
---------- ----------(5,591) (7,508)
--------- ---------
Net cash provided by (used in) operating activities 49,466 (10,952)
---------- ----------46,461 (15,408)
--------- ---------
INVESTING ACTIVITIES:
Proceeds from sale of property - reorganization 5,704 19,4367,258 81,807
Capital expenditures (8,886) (10,416)
---------- ----------(20,616) (15,679)
--------- ---------
Net cash provided by (used in) investing activities (3,182) 9,020
---------- ----------(13,358) 66,128
--------- ---------
FINANCING ACTIVITIES:
Net borrowings under debtor-in-possession financing -- 4,000--
Reduction of prepetition capitalized lease obligations, net (2,006) (2,205)
---------- ----------(3,028) (3,490)
--------- ---------
Net cash provided by (used in)used in financing activities (2,006) 1,795
---------- ----------(3,028) (3,490)
--------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 44,278 (137)30,075 47,230
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 65,953 2,888
---------- ------------------- ---------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 110,23196,028 $ 2,751
========== ==========50,118
========= =========
See notes to condensed consolidated financial statements.
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Commission File No. 0-6544
BRUNO'S, INC.
(DEBTOR-IN-POSSESSION)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE TWENTY-SIXTHIRTY-NINE AND THIRTEEN WEEK PERIODS ENDED
JULY 31,OCTOBER 30, 1999 AND AUGUST 1,OCTOBER 31, 1998
(IN THOUSANDS EXCEPT SHARE AND PER SHARE AMOUNTS)
1. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements include the
accounts of Bruno's, Inc. (the "Company") and its wholly owned subsidiaries.
Significant intercompany balances and transactions have been eliminated in
consolidation. Certain prior period amounts have been reclassified to conform
to the current period presentation. Operating results for the twenty-sixthirty-nine weeks
ended July 31,October 30, 1999, are not necessarily indicative of the results that may
be expected for the entire fiscal year. The unaudited 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 fiscal year ended January 30, 1999. In the opinion
of management, the accompanying unaudited condensed consolidated financial
statements contain all adjustments necessary for a fair statement of the
consolidated financial position and results of operations of the Company for
the interim periods.
On February 2, 1998, the Company and each of its 11 subsidiaries filed a
petition for reorganization under chapter 11 of title 11 of the United States
Bankruptcy Code (the "Bankruptcy Code"). The petitions were filed in the United
States Bankruptcy Court for the District of Delaware (the "Bankruptcy Court")
under case numbers 98-212(SLR) through 98-223(SLR) (the "Chapter 11 Cases").
The Chapter 11 Cases have been procedurally consolidated for administrative
purposes. The Company and its subsidiaries will continue to manage their
affairs and operate their business as debtors-in-possession while the Chapter
11 Cases are pending. As debtors-in-possession, the Company may not engage in
transactions outside the ordinary course of business without approval, after
notice and hearing, of the Bankruptcy Court.
On May 27, 1999, the Company filed its proposed plan of reorganization (the
"Proposed Plan of Reorganization") with the Bankruptcy Court. The Proposed Plan
of Reorganization is subject to approval by the Bankruptcy Court and the
Company's creditors, and if such approval is not obtained, any party in
interest could file its own plan of reorganization for the Company. For
purposes of the Company's Proposed Plan of Reorganization, the reorganization
value of the Company is calculated to be $275 million plus the amount of any
cash retained by the Company after the distributions of cash projected to be
made under the Proposed Plan of Reorganization. Among other things, the
Proposed Plan of Reorganization provides that (i) all prepetition debt, other
than capitalized lease obligations, would be eliminated, (ii) general unsecured
creditors would receive cash payments in an amount equal to 26% of the agreed
value of their claims, (iii) holders of the Company's prepetition bank debt
would receive substantially all of the shares of common stock of the
reorganized company, and (iv) no payments would be made to holders of
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the Company's Senior Subordinated Notes or to holders of shares of the
Company's existing common stock.
On June 23, 1999, the Bankruptcy Court granted a motion filed by the Trustee
for the holders of the Company's Senior Subordinated Notes seeking the
appointment of an independent examiner to investigate the 1995 leveraged
recapitalization under which affiliates of Kohlberg Kravis Roberts & Co.
acquired control of the Company. The independent examiner was appointed by
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the Bankruptcy Court is seeking to determine if there arewere any claims arising out of the
leveraged recapitalization that cancould be asserted on behalf of the Company for
the benefit of the Company's creditors. On October 5, 1999, the examiner filed
a report on his investigation with the Bankruptcy Court.
On October 15, 1999, the Company and its subsidiaries filed their Second
Amended Joint Plan of Reorganization (the "Proposed Plan of Reorganization")
with the Bankruptcy Court. Among other things, the Proposed Plan of
Reorganization provides that (i) all prepetition debt, other than capitalized
lease obligations, would be eliminated, (ii) general unsecured creditors would
receive cash payments in an amount equal to 30% of the agreed value of their
claims, (iii) holders of the Company's prepetition bank debt would receive
substantially all of the shares of common stock of the reorganized company, and
(iv) no payments would be made to holders of the Company's Senior Subordinated
Notes or to holders of shares of the Company's existing common stock.
On October 15, 1999, the Bankruptcy Court, after notice and a hearing,
authorized the Company to solicit acceptances of the Proposed Plan of
Reorganization from the Company's creditors. The Proposed Plan of
Reorganization has been approved by the requisite vote of the creditors of the
Company entitled to vote thereon. The Bankruptcy Court has establishedscheduled a deadlinehearing
commencing on December 20, 1999 to consider confirmation of October 5, 1999 for the examiner to complete his
investigation and issue a report on the investigation to the Bankruptcy Court.Proposed Plan
of Reorganization.
The Proposed Plan of Reorganization, if ultimately approved by the Company's
creditors and confirmed by the Bankruptcy
Court, will materially change the amounts reported in the consolidated
financial statements, which currently do not give effect to any adjustments to
the carrying value of assets or the amounts of liabilities that might be
necessary as a result of confirmation of the plan. After the effective date of
the Proposed Plan of Reorganization, the Company's consolidated financial
statements will not be comparable with those prepared before the effective
date, including the historical financial statements included in this quarterly
report.
2. INCOME TAXES
In connection with the preparation of the Company's federal income tax return
in June 1999, an Application for Tentative Carryback Adjustment was filed with
the Internal Revenue Service (IRS) resulting in the Company's receipt of a tax
refund, of which $10.1 million was recognized in the quarter ended July 31,
1999. The net operating loss, on which the carryback is based, is subject to
certain limitations, and thus the refund is subject to adjustment by the IRS.
In assessing the realization of the Company's deferred income tax assets,
management considers the likelihood that the deferred income tax assets will be
realized through future taxable income. Based upon management's projections,
the Company has fully reserved its net deferred income tax assets.
3. CONTINGENCIES
On June 6, 1997, a lawsuit was filed against the Company in the Circuit Court
for Jefferson County, Alabama (the "Alabama State Court") by SNA, Inc. ("SNA")
and A.B. Real Estate, Inc. ("A.B. Real Estate"). The lawsuit was styled A.B
Real Estate, Inc. et. al. v. Bruno's, Inc., et al., Civil Action No.
CV-97-3538. The complaint alleges that SNA and A.B. Real Estate are engaged in
the business of developing and managing commercial real estate, that the
Company had a contractual obligation to offer for sale and to sell grocery
store sites to SNA and A.B. Real Estate and to lease such sites back from such
entities, and that the Company's failure to perform its obligations constitutes
a breach of contract and fraud within the meaning of Alabama law. The complaint
seeks to recover compensatory and punitive damages from the Company in an
unspecified amount. Following the commencement of the Chapter 11 Cases, the
Company
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removed the lawsuit to the United States District Court for the Northern
District of Alabama (the "Alabama District Court"). Pursuant to a standing
order of the Alabama District Court, the lawsuit was referred to the United
States Bankruptcy Court for the Northern District of Alabama (the "Alabama
Bankruptcy Court"). SNA and A.B. Real Estate filed a motion to remand the
lawsuit to the Alabama State Court. After extensive negotiations, the parties
to the lawsuit agreed that the lawsuit will be tried by a jury before the
Alabama Bankruptcy Court. Accordingly, the lawsuit is now pending in the
Alabama Bankruptcy Court under the style A.B. Real Estate, Inc. et. al. v.
Bruno's, Inc., et. al., Adversary Proceeding No. 98 - 00064. Pursuant to the
agreement among the parties, a stipulation and agreement was filed in the
Bankruptcy Court in which the Chapter 11 Cases are pending to modify the
automatic stay resulting from the commencement of the Chapter 11 Cases to the
extent necessary to allow the prosecution of the lawsuit by a jury trial before
the Alabama Bankruptcy Court. The parties to the lawsuit are currently involved
in discovery proceedings. The Company believes that it has meritorious defenses
to the allegations contained in the complaint and intends to defend this
lawsuit vigorously. If the plaintiffs in this lawsuit ultimately are successful
in obtaining a judgment against the Company, they will have a general unsecured
claim against the Company that will be paid in accordance with the terms of the
plan of reorganization ultimately confirmed by the Bankruptcy Court in which
the Chapter 11 Cases are pending.
In addition, the Company is a party to various legal and taxing authority
proceedings incidental to its business. In the opinion of management, the
ultimate liability with respect to these proceedings will not have a material
adverse effect on the Company's financial position, results of operations or
cash flows. The Company's liability, if any, with respect to proceedings
occurring prior to the commencement of the Chapter 11 Cases will be paid in
accordance with the terms of the plan of reorganization ultimately confirmed by
the Bankruptcy Court.
4. DEBTOR-IN-POSSESSION FINANCING
Subsequent to the filing of the Chapter 11 Cases, the Company entered into a
Revolving Credit and Guaranty Agreement (the "Loan Agreement") with The Chase
Manhattan Bank ("Chase") to provide secured debtor-in-possession financing. The
Loan Agreement, as amended, provides for borrowings dependent upon the
Company's level of inventory, real estate and claims from certain vendors. The
Company has voluntarily reduced its maximum borrowings under the Loan Agreement
from $200 million to $50 million because the Company does not believe it will
need the additional borrowing capacity and because the reduction will result in
a decrease in the fees paid by the Company under the Loan Agreement. The
maximum borrowings under the Loan Agreement include a subfacility of $32
million for the issuance of letters of credit. The Loan Agreement grants a
security interest in substantially all of the Company's assets. Under the Loan
Agreement, certain vendors who have agreed to provide the Company, among other
things, with a line of credit and acceptable credit terms (the "Participating
Vendors") are secured on a pari passu basis with the security interest granted
to Chase and the other lenders. All obligations under the Loan Agreement will
be afforded "super-priority" administrative expense status in the Chapter 11
Cases. Advances under the Loan Agreement bear interest at Chase's Alternative
Base Rate (as defined in the Loan Agreement) plus 3/4 of 1%.
The Loan Agreement, as amended, contains certain restrictive covenants which,
among other things, require the Company to maintain a minimum cumulative EBITDA
as measured at the end
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of each of the Company's fiscal periods. The restrictive covenants also limit
the Company's capital expenditures and dividends and the ability of the Company
to grant liens and incur additional indebtedness. As of July 31,October 30, 1999, the
Company was in compliance withand the covenants contained inrequisite lending institutions under the Loan Agreement entered
into a letter agreement under which the lending institutions waived the minimum
EBITDA requirement with respect to the fiscal month ended on October 30, 1999.
The Company requested this waiver as amended.a result of the reduced sales and
increased costs incurred by the Company in the fiscal month ended October 30,
1999 due to a strike called by the United Food and Commercial Workers Union
against 104 of the Company's stores.
The Loan Agreement will terminate upon the earlier of consummation of a plan of
reorganization in the Chapter 11 Cases, February 1, 2000 or a Prepayment Date
(as such term is defined in the Loan Agreement). All borrowings under the Loan
Agreement will become due 30 days after termination.
As of July 31,October 30, 1999, the Company had no direct borrowings outstanding under
the Loan Agreement but had utilized $3.9 million of its availability under the
Loan Agreement to issue letters of credit. Trade payables owed to Participating
Vendors (as defined in the Loan Agreement) did not reduce the Company's
availability under the Loan Agreement because the Company's borrowing base, as
defined in the Loan Agreement, exceeded the $50 million limitation on
borrowings under the Loan Agreement.
5. LIABILITIES SUBJECT TO COMPROMISE
As described in Note 1, since February 2, 1998, the Company has been operating
as a debtor-in-possession under Chapter 11 of the Bankruptcy Code and has been
subject to the jurisdiction and supervision of the Bankruptcy Court.
Liabilities subject to compromise refer to liabilities outstanding prior to the
commencement of the Chapter 11 Cases. In the Chapter 11 Cases, substantially
all liabilities of the Company as of the date of the filing of the petitions
for reorganization will be subject to settlement under a plan of
reorganization. Certain creditors have filed claims substantially in excess of
the amounts reflected in the Company's records. Differences between amounts
shown by the Company and claims filed by the creditors are currently being
investigated and reconciled. After completion of these reconciliations, any
remaining differences may be resolved by negotiated agreement between the
Company and the claimant or by the Bankruptcy Court as part of the Chapter 11
Cases. Consequently, the amount of liabilities subject to compromise as shown
in the Company's Consolidated Balance Sheet at July 31,October 30, 1999, will likely be
subject to adjustment.
In the consolidated balance sheet of the Company, liabilities subject to
compromise consist of:
July 31,October 30, 1999 January 30, 1999
----------------------------- ----------------
Long-term debt $858,718 $858,722$ 858,626 $ 858,722
Trade accounts 86,50170,567 87,081
Prepetition accrued interest 24,727 24,727
Allowed claims for lease rejection 12,731 11,548
Other prepetition items 2,29514,541 14,285
-------- --------
$984,972 $996,363
======== ========--------- ---------
$ 981,192 $ 996,363
========= =========
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These amounts represent management's best estimate of known or potential claims
to be resolved in connection with the Chapter 11 Cases. Such claims remain
subject to future
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10 adjustments based on negotiations, actions of the Bankruptcy
Court, further developments with respect to disputed claims, or other events.
Payment terms for these amounts will be established as the Chapter 11 Cases
proceed.
The Company received approval from the Bankruptcy Court to pay or otherwise
honor certain of its prepetition obligations, including prepetition wages,
vacation pay, employee benefits and reimbursement of employee business
expenses. The Bankruptcy Court also has authorized the Company to pay up to
$23.0 million of prepetition obligations to critical vendors to aid the Company
in maintaining the normal flow of merchandise to its stores. As of July 31,October 30,
1999, the Company had made $19.3$22.8 million of such critical vendor payments.
6. REORGANIZATION ITEMS
Expenses and income directly incurred or realized as a result of the Chapter 11
Cases have been segregated from the normal operations and are disclosed
separately. The major components are as follows:
2639 Weeks 2639 Weeks 13 Weeks 13 Weeks
Ended Ended Ended Ended
JulyOctober 30, October 31, October 30, October 31,
----------- ----------- ----------- -----------
1999 August 1, 1998 July 31, 1999 August 1, 1998
------------- -------------- ------------- ------------------ ---- ---- ----
Restructuring chargesincome, net $ -- $ 17,621(704) $ -- $ 17,621(18,322)
Prepetition debt issuance costs 27,760 -- 27,760 --
Professional fees and
administrative items 6,000 6,0009,000 9,000 3,000 3,000
Sale of excess properties (2,333) (1,714) (276) (1,714)(3,006) (1,952) (673) (238)
Interest income (2,128) (356) (1,173) (136)
-------- -------- -------- --------(3,553) (786) (1,425) (433)
---------- ---------- ---------- ----------
$ 29,29930,201 $ 21,5515,558 $ 29,311902 $ 18,771
======== ======== ======== ========(15,993)
========== ========== ========== ==========
RESTRUCTURING CHARGES:INCOME, NET:
In the quarter ended October 31, 1998, the Company sold 15 stores and the real
estate on which three of the stores were located to Albertson's, Inc. The sale
of the stores and real property resulted in restructuring income of $18.3
million.
In the quarter ended August 1, 1998, the Company recorded restructuring charges
of $17.6 million associated with the scheduled sale or closure of 20 stores.
These charges primarily related to reserves recorded to cover the reduction of
fixed assets to net realizable value in the
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closed stores and the anticipated liability for ongoing store operations such
as rent and employee costs, among other things.
PREPETITION DEBT ISSUANCE COSTS:
In accordance with the guidance provided by Statement of Position 90-7,
"Financial Reporting by Entities in Reorganization Under the Bankruptcy Code,"
the Company during the quarter ended July 31, 1999 wrote off its unamortized
debt issuance costs relating to the Company's prepetition debt in order to
adjust the recorded balance of such prepetition debt to the amount of the
claims proposed to be allowed by the Company pursuant to the Proposed Plan of
Reorganization.
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PROFESSIONAL FEES AND ADMINISTRATIVE ITEMS:
Professional fees and administrative items relate to legal, accounting, other
professional and employee costs directly attributable to the Chapter 11 Cases.
SALE OF EXCESS PROPERTIES:
This amount represents the Company's net gain on the sale of excess real estate
during each of the periods shown above.
INTEREST INCOME:
This amount represents interest income associated with the accumulation of cash
and short-term investments subsequent to filing the Chapter 11 Cases.
7. ACCOUNTING STANDARD NOT YET ADOPTED
In June 1998, SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities," was issued. This Statement requires that all derivatives be
recognized in the statement of financial position as either assets or
liabilities and be measured at fair value. In addition, all hedging
relationships must be designated, reassessed and documented pursuant to the
provisions of SFAS No. 133. This Statement, as amended, will be effective for
the Company in its fiscal year ending February 3, 2002. The Company had an
interest rate collar arrangement on $150 million in outstanding debt which
expired on May 18, 1999. The Company's management has not yet determined the
effect, if any, of SFAS No. 133 on its financial statements.
8. SUBSEQUENT EVENTS
On September 10, 1999, the Company entered into an agreement with Gregerson's
Foods, Inc. ("Gregerson's") under which the Company will purchase from
Gregerson's (i) substantially all of the assets relating to three stores owned
and operated by Gregerson's in Alabama and (ii) the inventory in a fourth store
that Gregerson's plans to close in conjunction with its sale of the other three
stores to the Company. The transactions contemplated by the agreement with
Gregerson's are subject to a number of conditions, including the approval of
the Bankruptcy Court.
The Company is currently a party to a number of separate collective bargaining
agreements with affiliates of either the United Food and Commercial Workers
Union (the "UFCW") or the Retail, Wholesale and Department Store International
Union. These agreements are generally negotiated in three- or four-year cycles.
Two of these agreements expired on February 28, 1998 but were extended by a
letter agreement between the Company and the UFCW under which either party
could terminate the extension by giving the other party at least 48 hours'
written notice. On August 25, 1999, the Company provided written notice to the
UFCW that it was terminating the extension to these two agreements effective as
of 5:00 P.M. on August 27, 1999. The Company made this decision because of the
lack of progress in the Company's efforts to negotiate new agreements with the
UFCW. In response to the Company's decision to terminate
10
12
the extensions to these two agreements, the UFCW has threatened a strike or
other form of work stoppage by the employees who are covered by the two
agreements that have been terminated. In addition, another collective
bargaining agreement between the Company and the UFCW expires on September 25,
1999. The UFCW has notified the Company that it will not agree to extend this
agreement upon its expiration.
As of July 31, 1999, the Company employed approximately 12,400 persons, of whom
approximately 53% were full-time employees and approximately 47% were part-time
employees. Approximately 20% of the Company's employees were represented by the
UFCW under the two collective bargaining agreements that expired on February
28, 1998 and that were extended thereafter by mutual agreement between the
Company and the UFCW until the Company terminated the extension effective as of
August 27, 1999. Approximately 38% of the Company's employees are represented
by the UFCW under the collective bargaining agreement that expires on September
25, 1999.
The Company is currently negotiating with the UFCW in an effort to enter into
new collective bargaining agreements to replace the two agreements that have
expired and to replace the agreement that will expire on September 25, 1999.
There can be no assurance that these negotiations will be successful. A strike
or work stoppage, which has been threatened by the UFCW, could materially and
adversely affect the Company's sales and results of operations in future
periods.
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Commission File No. 0-6544
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following is management's discussion and analysis of significant factors
affecting the Company's operating results during the periods included in the
accompanying condensed consolidated statements of operations.
A table showing the percentage of net sales represented by certain items in the
Company's condensed consolidated statements of operations is as follows:
JULYOCTOBER 30, OCTOBER 31, AUGUST 1, JULYOCTOBER 30, OCTOBER 31, AUGUST 1,
1999 1998 1999 1998
(26(39 WEEKS) (26(39 WEEKS) (13 WEEKS) (13 WEEKS)
---------- ---------- ---------- --------------------- ----------- ----------- -----------
Net sales 100.00% 100.00% 100.00% 100.00%
Cost of products sold 76.63% 78.07% 76.63% 78.57%76.88% 78.26% 77.41% 78.71%
Store operating, selling, and administrative expenses 20.41% 21.55% 20.56% 21.78%20.75% 21.36% 21.45% 20.94%
-------- -------- -------- --------
EBITDA(1) 2.96%2.36% 0.38% 2.81% -0.34%1.14% 0.36%
Depreciation and amortization 2.80% 2.70% 2.82% 2.71%2.79% 2.68% 2.76% 2.63%
Interest expense, net 0.18% 0.18% 0.16% 0.18% 0.19%0.23%
Gain on sale of Seessel's N/A -0.14% N/A -0.44%
Reorganization items, net 3.60% 2.17% 7.18% 3.81%2.49% 0.39% 0.23% -3.63%
-------- -------- -------- --------
Income / Loss before income taxes -3.62% -4.64% -7.37% -7.06%-3.09% -2.73% -2.01% 1.57%
Income tax benefit - refund 1.24%0.83% 0.00% 2.47%0.00% 0.00%
-------- -------- -------- --------
Net income / loss -2.38% -4.64% -4.90% -7.06%-2.26% -2.73% -2.01% 1.57%
======== ======== ======== ========
A summary of the changes in certain items included in the condensed statements
of operations for the twenty-sixthirty-nine and thirteen week periods ended July 31,October 30,
1999 as compared to the twenty-sixthirty-nine and thirteen week periods ended August 1,1998October
31, 1998 is as follows (dollars in thousands):
Twenty-sixThirty-nine Weeks Thirteen Weeks
Ended July 31,October 30, 1999 Ended July 31,October 30, 1999
Amounts % Change Amounts % Change
------------- ------------- ------------- ----------------------- --------- ---------- ---------
Net sales $ (179,210) -18.03%(221,051) -15.41% $ (84,147) -17.09%(41,841) -9.50%
Cost of products sold (151,665) -19.54% (74,006) -19.13%(189,772) -16.90% (38,107) -10.99%
Store operating, selling, and administrative expenses (47,889) -22.36% (23,307) -21.74%
------------ ------------ ------------ ------------(54,593) -17.82% (6,704) -7.27%
---------- --------- ---------- ---------
EBITDA(1) 20,344 534.10% 13,166 776.30%23,314 433.35% 2,970 -189.05%
Depreciation and amortization (4,016) -14.96% (1,867) -13.97%(4,589) -11.94% (573) -4.95%
Interest expense, net (60) -3.89% (220) -23.26%(440) -17.14% (380) -37.15%
Gain on sale of Seessel's 1,959 -100.00% 1,959 -100.00%
Reorganization items, net 7,748 35.95% 10,540 56.15%
------------ ------------ ------------ ------------24,643 443.38% 16,895 -105.64%
---------- --------- ---------- ---------
Income / Loss before income taxes 16,672 36.14% 4,713 13.55%1,741 4.44% (14,931) 215.86%
Income tax benefit - refund 10,068 N/A 10,068-- N/A
------------ ------------ ------------ ---------------------- --------- ---------- ---------
Net income / loss $ 26,740 57.97%11,809 30.12% $ 14,781 42.50%
============ ============ ============ ============(14,931) 215.86%
========== ========= ========== =========
(1) EBITDA -- For purposes of this document, EBITDA is defined as net sales
reduced by cost of products sold and store operating, selling and
administrative expenses. EBITDA is presented because it is a widely
accepted financial indicator of a company's ability to service and/or
incur indebtedness. EBITDA, however, should not be construed as an
alternative to net income as a measure of a company's operating
results or to cash flow as a measure of liquidity. This methodology
may not be consistent with a similarly captioned item presented by
other companies.
1211
1413
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(DOLLARS IN THOUSANDS)
GENERAL
As of July 31,October 30, 1999, the Company operated a chain of 149152 supermarkets and
combination food and drug stores. The Company also operated eight retail liquor
stores located in the Florida panhandle. As of August 1,October 31, 1998, the Company
operated 197164 supermarkets and combination food and drug stores as well as nineeight
retail liquor stores.
On February 2, 1998, the Company and its 11 subsidiaries each filed a petition
for reorganization under chapter 11 of title 11 of the Bankruptcy Code. The
Chapter 11 Cases have been procedurally consolidated for administrative
purposes. The Company and its subsidiaries are currently operating their
businesses and managing their properties as debtors-in-possession pursuant to
the Bankruptcy Code. Since the commencement of the Chapter 11 Cases, the
Company has taken steps to restructure its operations and to improve
profitability. These steps include but are not limited to implementing price
reduction strategies, improving inventory levels in the Company's stores,
selling excess properties and continuing to analyze and review the Company's
market strategy, geographic positioning, and store level return on assets.
As a
result of this review, the Company sold or closed 48 stores during the third
and fourth quarters of the prior fiscal year.
The Company is currently a party to a number of separate collective bargaining agreements with
affiliates of either the United Food and Commercial Workers Union (the "UFCW") or the Retail, Wholesale and Department Store International
Union. These agreements are generally negotiated in three- or four-year cycles.. Two of
these agreements expired on February 28, 1998 but were extended by a letter
agreement between the Company and the UFCW under which either party could
terminate the extension by giving the other party at least 48 hours' written
notice. On August 25, 1999, the Company provided written notice to the UFCW
that it was terminating the extension to these two agreements effective as of
5:00 P.M. on August 27, 1999. The Company made this decision because of the
lack of progress in the Company's efforts to negotiate new agreements with the
UFCW. In response to the Company's decision to terminate the extensions to
these two agreements, the UFCW has threatened a strike or other form of work
stoppage by the employees who are covered by the two agreements that have been
terminated. In addition, anotherA third collective bargaining agreement between the Company and the UFCW
expiresexpired on September 25, 1999. On September 26, 1999, the UFCW called a strike
against 104 of the Company's stores. The strike lasted until October 3, 1999.
The UFCW has notifiedended the strike after the Company and the UFCW reached an agreement
on three separate new union contracts to replace the three agreements that it will not agreehad
expired. The new contracts were subsequently ratified by the members of the
UFCW entitled to extend this agreement upon its expiration.vote thereon.
As of July 31,October 30, 1999, the Company employed approximately 12,40012,700 persons, of
whom approximately 53%51% were full-time employees and approximately 47%49% were
part-time employees. Approximately 20% of the Company's employees were represented by the
UFCW under the two collective bargaining agreements that expired on February
28, 1998 and that were extended thereafter by mutual agreement between the
Company and the UFCW until the Company terminated the extension effective as of
August 27, 1999. Approximately 38% of the Company's employees are represented
by the UFCW under the collective bargaining agreement that expires on September
25, 1999.
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The Company is currently negotiating with the UFCW in an effort to enter into
new collective bargaining agreements to replace the two agreements that have
expired and to replace the agreement that will expire on September 25, 1999.
There can be no assurance that these negotiations will be successful. A strike
or work stoppage, which has been threatened by the UFCW, could materially and
adversely affect the Company's sales and results of operations in future
periods.
ACQUISITIONS AND DIVESTITURES
On September 10, 1999, the Company entered into an agreement with Gregerson's
Foods, Inc. ("Gregerson's") under which the Company will purchaseacquired from Gregerson's
(i) substantially all of the assets relating to three stores owned and operated
by Gregerson's in Alabama and (ii) the inventory in a fourth store that was
closed by Gregerson's plans to close in conjunction with its sale of the other three stores to
the Company. The transactions contemplated byCompany commenced operations in the agreement withstores acquired from
Gregerson's are subject to a number of conditions, including the approval of
the Bankruptcy Court.on October 10, 1999.
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14
During the first twothree quarters of the current fiscal year, the Company sold
one store that had been closed during the previous fiscal year as well as
miscellaneous excess real estate resulting in proceeds of $5.7$7.3 million.
On July 30, 1998, the Company entered into an agreement to sell 15 stores,
including one new store that had not commenced business, to Albertson's, Inc.
Eleven of the stores were located in the Nashville, Tennessee market area, and
four were located in the Chattanooga, Tennessee market. The sale of the 15
stores to Albertson's was consummated on August 24, 1998, and resulted in a net
gain of $16.2 million during the 39 week period ended October 31, 1998. This
gain includes restructuring income of $18.3 million, offset by $2.1 million of
inventory markdowns included as a special charge in cost of products sold.
Between August and December of 1998, the Company closed 20 stores consisting of
10 stores in Alabama, five in Florida, three in Mississippi and two in Georgia.
During the 39 week period ended October 31, 1998, the Company incurred a net
loss of $21.4 million in connection with these store closings. The loss
consisted primarily of $17.6 million in restructuring charges and $3.8 million
of inventory markdowns reflected as a special charge in cost of products sold.
In January 1999, the Company closed an additional 14 stores consisting of six
stores in Alabama, five in Georgia and three in Florida.
RESULTS OF OPERATIONS
NET SALES
Net sales decreased $84.1$41.8 and $179.2$221.1 million in the quarter and year-to-date
periods ended July 31,October 30, 1999, as compared to the comparable periods of the
prior year. The decrease in net sales for both periods was primarily
attributable to the reduction in the number of stores operated by the Company
as a result of the divestitures that occurred during the fiscal year ended
January 30, 1999 as described above under the heading "ACQUISITIONS AND
DIVESTITURES". Comparable store sales increased 1.1%decreased 1.5% and 0.1%0.5% in the quarter
and year-to-date periods ended July 31,October 30, 1999 from the prior year due
primarily to the successimpact of several
strategies adoptedthe seven - day strike called by the Company to improve its sales performance. These
strategies include lower prices, improved store conditions, and new advertising
and promotional programs. The Company's sales in the quarter and year-to-date
periods ended August 1, 1998 were adversely affected by the commencementUFCW against
104 of the Chapter 11 Cases andCompany's stores offset by increased sales resulting from special
promotional activity following the accident that occurred in the Company's distribution
center on April 21, 1998. As a resultend of the distribution center accident, thestrike.
The Company was not ablehas and will continue to supplyreview its stores with perishable merchandise from the
Company's distribution center from April 21, 1998 through May 24, 1998.
Although the Company made temporary arrangements for perishable
14
16
merchandise with third party suppliers and distributors, the Company was not
able to maintain adequate levels of perishable inventories at all times in its
stores. The reduction in store-level perishable inventories resulted in a loss
of customers and sales.
Although the Company believes that its current strategies to improve sales
performance have been successful in reducing the loss of customers and sales,
theremaintain its customer base. There can be no assurances,
however, that these strategies will increase sales or will not otherwise have
an adverse effect on the Company's business in the future.
GROSS PROFIT
Gross profit (net sales less cost of products sold) as a percentage of net
sales for the secondthird quarter was 23.4%22.6% compared to 21.4%21.3% in the secondthird quarter of
the prior year. Gross profit for the year-to-date period was 23.4%23.1% compared to
21.9%21.7% in the prior year. This improvement in both periods can be largely
attributed to better inventory control and improved purchasing practices, the
benefits of which were partially offset by more competitive pricing by the
Company. In addition, gross profit for the secondthird quarter and year-to-date
periods of the prior fiscal year were adversely affected by a $3.8$2.1 million and
$5.9 million, respectively, charge to cost of goodsproducts
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15
sold for anticipated losses on the liquidation ofrelated to inventory due to the closing of 20 stores during the third and fourth quarters
of the prior fiscal year asmarkdowns described above under the heading
"ACQUISITION AND DIVESTITURES".
STORE OPERATING, SELLING AND ADMINISTRATIVE EXPENSES
Store operating, selling, and administrative expenses as a percent of net sales
were 20.6%21.4% for the quarter and 20.4%20.8% for the year-to-date period ended July 31,October
30, 1999 compared to 21.8%20.9% and 21.6%21.4% for the comparable periods of the prior
year. The increased rate as a percent of net sales during the quarter ended
October 30, 1999 was the result of the decrease in comparable stores sales as a
result of the seven - day strike called by the UFCW against 104 of the Company's
stores and an increase in expenses related to the strike, including increased
expenses resulting from special promotional activity following the end of the
strike. The percentage decreases weredecrease for the year-to-date period was primarily due
to reductions in labor and associated costs utilityand less advertising expense and advertising.prior
to the strike.
EARNINGS BEFORE INTEREST, TAXES, DEPRECIATION AND AMORTIZATION (EBITDA)
EBITDA (as defined on page 12)11) increased by $13.2$2.9 million to $11.5$4.5 million in the
quarter ended July 31,October 30, 1999 from a negative $1.7$1.6 million in the comparable quarter of
the prior year. On aFor the year-to-date basis,period, EBITDA increased by $20.3$23.3 million
to $24.2$28.1 million in the first two quarters of the current fiscal year
from $3.8$5.4 million in the comparable period of the prior year
due to increases
in comparable store sales, improved gross profit margins, reductions in labor and lower store
operating expensesassociated costs
and less advertising expense prior to the strike as discussed above.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization for the quarter and year-to-date periods ended
July 31,October 30, 1999 was $11.5$11.0 and $22.8$33.8 million, respectively, compared to $13.4$11.6
and $26.8$38.4 million in the comparable periods of the prior year. This decrease in
depreciation and amortization is almost entirely the result of the sale or
closure of 48 stores during the last two quarters of the prior fiscal year.
15
17
INTEREST EXPENSE
As a result of the commencement of the Chapter 11 Cases, the Company ceased
accruing interest on its short-term borrowings and long-term debt outstanding
at January 31, 1998. Interest expense in the first two quarters of the current
and prior fiscal years relates primarily to equipment owned under capital
leases.
REORGANIZATION ITEMS, NET
Reorganization expenses incurred during the secondthird quarter and year-to-date
periods of the current fiscal year increased by $10.5$16.9 and $7.7$24.6 million,
respectively, from the prior fiscal year. The primary reason for thisthe third
quarter increase was the inclusion in the prior year of a gain on the sale of
15 stores to Albertson's, Inc. The primary reason for the year-to-date increase
was the write-off of deferred debt issuance costs associated with the Company's
prepetition debt as provided in Statement of Position 90-7. For an analysis of
the components and balances
14
16
included in this item, see NOTE 6 OF THE NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS.
INCOME TAXES
In connection with the preparation of the Company's federal income tax return
in June 1999, an Application for Tentative Carryback Adjustment was filed with
the Internal Revenue Service (IRS) resulting in the Company's receipt of a tax
refund, of which $10.1 million was recognized in the quarter ended July 31,
1999. The net operating loss, on which the carryback is based, is subject to
certain limitations, and thus the refund is subject to adjustment by the IRS.
In assessing the realization of the Company's deferred income tax assets,
management considers the likelihood that the deferred income tax assets will be
realized through future taxable income. Based upon management's projections,
the Company has fully reserved its net deferred income tax assets.
LIQUIDITY AND CAPITAL RESOURCES
The Company and its subsidiaries are parties to a Revolving Credit and Guaranty
Agreement dated as of February 2, 1998, as amended by the First Amendment
thereto dated as of March 5, 1998, the Second Amendment thereto dated as of
March 25, 1998, the Third Amendment thereto dated as of April 17, 1998, the
Fourth Amendment thereto dated as of July 31, 1998, and the Fifth Amendment
thereto dated as of October 31, 1998 (as so amended, the "Loan Agreement"). The
lenders who are parties to the Loan Agreement include The Chase Manhattan Bank
("Chase"), as agent for itself and any other lenders party thereto. The Loan
Agreement was entered into subsequent to the commencement of the Chapter 11
Cases and will terminate upon the earlier of consummation of a plan of
reorganization in the Chapter 11 Cases, February 1, 2000, or the Prepayment
Date (as such term is defined in the Loan Agreement). The Loan Agreement
provides the Company with a revolving line of credit for loans and with letters
of credit. The amount the Company is permitted to borrow under the Loan
Agreement is dependent upon the level of the Company's inventory, real estate
and claims from certain vendors. The Company has voluntarily reduced its
maximum allowable borrowings under the Loan Agreement from $200 million to $50
million because the Company does not anticipate that it will need the
16
18
additional borrowing capacity and because the reduction will decrease the fees
paid by the Company under the Loan Agreement. The maximum permitted borrowings
under the Loan Agreement include a subfacility of $32 million for the issuance
of letters of credit. The Company will use all amounts borrowed under the Loan
Agreement for its ongoing working capital needs and for other general corporate
purposes of the Company and its subsidiaries. The Company's subsidiaries are
also guarantors of the Company's obligations under the Loan Agreement.
The Loan Agreement contains certain restrictive covenants which, among other
things, require the Company to maintain a minimum cumulative EBITDA as measured
at the end of each of the Company's fiscal periods. The restrictive covenants
also limit the Company's capital expenditures and dividends and the ability of
the Company to grant liens and incur additional indebtedness. The Fifth
Amendment to the Loan Agreement, among other things, amended the
15
17
minimum cumulative EBITDA and capital expenditure covenants contained in the
Loan Agreement and established minimum cumulative EBITDA and capital
expenditure covenants for the fiscal year ended January 29, 2000. As of July 31,October
30, 1999, the Company was in compliance withand the covenants contained inrequisite lending institutions under the Loan
Agreement entered into a letter agreement under which the lending institutions
waived the minimum EBITDA requirement with respect to the fiscal month ended on
October 30, 1999. The Company requested this waiver as amended.a result of the reduced
sales and increased costs incurred by the Company in the fiscal month ended
October 30, 1999 due to the strike called by the UFCW against 104 of the
Company's stores.
As of July 31,October 30, 1999, the Company had no direct borrowings outstanding under
the Loan Agreement but had utilized $3.9 million of its availability under the
Loan Agreement to issue letters of credit. Total availability under the Loan
Agreement at July 31,October 30, 1999 was $46.1 million. Trade payables owed to
Participating Vendors (as defined in the Loan Agreement) did not reduce the
Company's availability under the Loan Agreement because the Company's borrowing
base, as defined in the Loan Agreement, exceeded the $50 million limitation on
borrowings under the Loan Agreement. The Company expects that its cash flow
from operations and borrowings under the Loan Agreement will provide it with
sufficient liquidity to conduct its operations while the Chapter 11 Cases are
pending. The Company's long-term liquidity and the adequacy of the Company's
capital resources cannot be determined until a plan of reorganization has been
accepted and confirmed in connection with the Chapter 11 Cases.
Operating activities provided $49.5$46.5 million of cash for the twenty-sixthirty-nine week
period ended July 31,October 30, 1999, and used cash of $11.0$15.4 million for the
comparable period of the prior year. The source of cash in the current fiscal
year is primarily attributable to the increase in EBITDA discussed above and to
a decrease in the Company's inventory levels, receivables and vendor deposits
partially offset by a corresponding decreaseand an increase in accounts payable. The use of cash in the prior fiscal year
is attributable to an increasea decrease in inventory
levelsEBITDA as well as to advances paid to vendors
in order to expedite the delivery of inventory to the Company.
Cash flows used in investing activities totaled $3.2$13.4 million in the
twenty-sixthirty-nine week period ended July 31,October 30, 1999. Capital expenditures of $8.9$20.6
million were only partially offset by proceeds from the sale of real estate of
$5.7$7.3 million. Proceeds from the sale of real estate of $19.4$81.8 million offset by
capital expenditures of $10.4$15.7 million provided $9.0$66.1 million of cash flow
during the comparable period of the prior fiscal year. The Company's capital
expenditures are primarily related to the remodeling of existing stores,
and investments in systems technology.technology and the acquisition of stores from
Gregerson's during the third quarter of 1999 as described above under the
heading "ACQUISITION AND DIVESTITURES".
Financing activities used cash of $2.0$3.0 million in the twenty-sixthirty-nine week period
ended July 31,October 30, 1999 and provided cash of $1.8$3.5 million in the comparable period of the prior
fiscal year. Current and prior year financing activities reflect payments on
capitalized lease obligations of $2.0$3.0 million 17
19
and $2.2$3.5 million, respectively, offset by borrowings under the Company's
debtor-in-possession financing of $4.0 million for the prior fiscal year only.respectively.
The Company's present plans call for additional capital expenditures of $26.0$14
million for the remainder of the current fiscal year ending January 29, 2000.
In addition, the Company has entered into an agreement with Gregerson's under
which the Company will purchase from Gregerson's (i) substantially all of the
assets relating to three stores owned and operated by Gregerson's in Alabama
and (ii) the inventory in a fourth store that Gregerson's plans to close in
conjunction with its sale of the other three stores to the Company. See
"ACQUISITIONS AND DIVESTITURES". The transactions contemplated by the agreement
with Gregerson's, if consummated, will result in additional capital
expenditures of approximately $8.0 million during the current fiscal year,
including the purchase price for the stores to be acquired and expenses to be
incurred in renovating such stores.
The Company's capital expenditure plans are subject to change from time to time
and the actual amounts spent may vary materially from the estimates set forth
above. The Company expects that its capital expenditures
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18
for the remainder of the current fiscal year will be financed through cash
flows from operations, existing cash balances and, if necessary, borrowings
under the Loan Agreement. The Company had approximately
$0.3 million of commitments in connection with these planned capital
expenditures at July 31, 1999.
As noted above, on February 2, 1998, the Company filed the Chapter 11 Cases.
The Company and its subsidiaries are currently operating their business and
managing their properties as debtors-in-possession pursuant to the Bankruptcy
Code. The Company filed itsCompany's Proposed Plan of Reorganization withhas been approved by the
requisite vote of the creditors of the Company entitled to vote thereon. The
Bankruptcy Court has scheduled a hearing commencing on May 27, 1999. TheDecember 20, 1999 to
consider confirmation of the Proposed Plan of Reorganization is subject to
approval by the Bankruptcy Court and the Company's creditors.Reorganization. The Company's
long-term liquidity and the adequacy of the Company's capital resources cannot
be determined until the Company's Proposed Plan of Reorganization, or an
alternative plan of reorganization, has been accepted and confirmed by the
Bankruptcy Court.
YEAR 2000
The Year 2000 issue refers to computer programs and microcontrollers which
could fail to execute properly at the turn of the century due to flaws in
design. Computer programs written using two digits (rather than four) to define
the applicable year are typical examples of such design flaws. Any programs
written in this manner recognize a date using "00" as the year 1900 rather than
the year 2000. Such design flaws could cause the computer systems and equipment
used by the Company to malfunction with the result that the Company could not
conduct its operations in a normal manner. Some of the computer programs and
microcontrollers owned or leased by the Company will need to be modified or
replaced in order to address the Year 2000 issue.
The Company has retained a third party contractor to identify and correct Year 2000
problems involving the Company's internal computer systems. Systems which
requirerequired modification or replacement have beenwere identified and a plan for addressing
issues has beenwas established. Following identification and planning, the major
project phases arewere correction, testing and implementation. Four general
categories of internal computer systems are beingwere addressed: Store Systems, Networks
and Servers, Mainframe Applications, and Mainframe Systems and Hardware.
Generally, all corporate and store systems had been modified or replaced as of
July 31, 1999.
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20
Changes in the Company's store systems needed to address the Year 2000 problem
are scheduled to be completed by the end of October 30, 1999.
In addition to addressing the Year 2000 problem with respect to the Company's
internal computer systems, the Company has identified other non-information
technology systems which could be affected by the Year 2000 issue. Examples of
such other systems are time clocks, refrigeration systems, and heating and air
conditioning systems. The Company is currently modifying or replacing the
software or microcontrollers containing the Year 2000 design flaws. The Company
currently estimates thathas substantially completed all necessary modifications or replacements of its
critical non-information technology systems will be completed by the end of October
1999.systems.
The Company also could be adversely affected if Year 2000 design flaws are
contained in the computer systems or microcontrollers used by the Company's
vendors and suppliers, including merchandise vendors, utilities, and service
providers. The Company has developed a list of critical vendors and suppliers
who might be unable to continue to supply necessary goods and services to the
Company if such vendors and suppliers do not take appropriate action to address
17
19
the Year 2000 issue. The Company is seekinghas sought assurance from each such critical
vendor and supplier that all necessary steps are being taken by them to address
the Year 2000 issue.
Based on current estimates, the Company anticipates that it will incur costs of
approximately $12 million relating to Year 2000 issues for its internal
computer systems. Approximately $8.3 millionSubstantially all of these costs had been incurred as of
July 31,October 30, 1999. The Company has deferred several systems development projects
to minimize the impact of Year 2000 compliance costs, but the Company does not
expect that such deferral will have a significant effect on the Company's
financial condition and results of operations. Management estimates that the
cost of correcting the Year 2000 problem in other non-information technology
systems, such as time clocks, refrigeration systems and heating and air
conditioning systems, will not be material. The Company believesanticipates that theany
remaining costs of addressing the Year 2000 issue will be financed through cash
flows from operations and existing cash balances and, if necessary, borrowings under the
Loan Agreement.balances.
If the Company fails adequately to address the Year 2000 issue, the Company,
under the most reasonably likely worst case scenario, would be unable to
process transactions such as sales, purchasing, transfers and payments in an
efficient, automated manner. In addition, other systems such as refrigeration
systems and heating and air conditioning systems could fail. The failure of
these systems could seriously disrupt the Company's business. Finally, the
Company could experience product shortages and an interruption of necessary
services if certain outside providers of goods and services fail to address the
Year 2000 issue.
The Company is currently developinghas developed a contingency plan dealing with the most reasonably
likely worst case scenario involving the Year 2000 issue. The Company plans to complete the development of its contingency plan
by October
1999. The contingency plan will considerprovides for alternate sourcing, systems and procedures.
CAUTIONARY STATEMENTS
The Private Securities Litigation Reform Act of 1995 provides a "safe harbor"
for forward-looking statements to encourage companies to provide prospective
information about their
19
21 companies without fear of litigation so long as those
statements are identified as forward-looking and are accompanied by meaningful
cautionary statements identifying important factors that could cause actual
results to differ materially from those projected in the statement. When used
in this Form 10-Q Report, the words "believe", "expect", "anticipate",
"estimate" and similar expressions are intended to identify forward-looking
statements. The Company desires to take advantage of the "safe harbor"
provisions of the Private Securities Litigation Reform Act of 1995 in
connection with the forward-looking statements contained in this Form 10-Q
Report. 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:
(a) Heightened competition, including specifically the
intensification of price competition; the entry of
new competitors; and the expansion, renovation and
opening of new stores by new and existing
competitors.
(b) Failure to obtain new customers or retain existing
customers.
(c) Inability to carry out marketing, sales and capital
plans.
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(d) Insufficiency of financial resources to renovate and
expand the Company's store base.
(e) Prolonged dispute with labor.
(f) Economic downturn in the Southeast region.
(g) Loss or retirement of key executives.
(h) Higher selling, general and administrative expenses
occasioned by the need for additional advertising,
marketing, administrative, or management information
systems expenditures.
(i) Adverse publicity and news coverage.
(j) Adverse effects resulting from the commencement and
prosecution of the Chapter 11 Cases.
(k) Adverse effects resulting from Year 2000 compliance
problems experienced by the Company or its
significant vendors.
The foregoing review of 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.
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22
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
The Company's primary "market risk" relates to changing interest rates. The
Company has a combination of fixed and variable rate debt. As a result of the
filing of the Chapter 11 Cases, interest is no longer accruing on the debt
incurred by the Company prior to the commencement of the Chapter 11 Cases. In
addition, the Company does not currently have any direct borrowings outstanding
under its debtor-in-possession financing facility. Accordingly, the Company
will have little, if any, interest rate risk while the Chapter 11 Cases are
pending. As a result, quantification of the Company's interest rate risk as of
July 31,October 30, 1999 is not presented because it would not be meaningful to do so.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is party to the Chapter 11 Cases, which commenced on February 2,
1998. In addition, the Company is a party to a lawsuit filed against the
Company by SNA and A.B. Real Estate as described in NOTE 3 OF THE NOTES TO THE
CONDENSED CONSOLIDATED FINANCIAL
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21
STATEMENTS. The Company also is a party to various other legal and taxing
authority proceedings incidental to its business. In the opinion of management,
the ultimate liability with respect to these proceedings will not have a
material adverse effect on the financial position or results of operations of
the Company.
ITEM 2. CHANGES IN SECURITIES
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
The Company commenced the Chapter 11 Cases on February 2, 1998. As a result of
filing the Chapter 11 Cases, no principal or interest payments will be made on
indebtedness incurred by the Company prior to February 2, 1998 until a plan of
reorganization defining the repayment terms has been approved by the Bankruptcy
Court. Accordingly, the Company did not make the semi-annual $21.0 million
interest payments due on February 2, 1998, August 1,3, 1998, February 1, 1999
and August 2, 1999 under the Company's 10 1/2% Senior Subordinated Notes. In
addition, the Company has not paid $3.7 million in accrued interest on the
Company's other debt outstanding at January 31, 1998.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
None
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) EXHIBITS
Exhibit
Number Description
------------- -----------
27 Financial Data Schedule (for SEC use only)
(B) REPORTS ON FORM 8-K
On June 4, 1999, the Company filed a Current Report on Form 8-K dated May 27,
1999 under Item 5 "OTHER EVENTS" to disclose the Company's filing with the
Bankruptcy Court of the Proposed Plan of Reorganization.None
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, the Registrant has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.
BRUNO'S, INC.
/s/ Arthur B. McCarter
----------------------
Arthur B. McCarter
Senior Vice PresidentJames A. Demme
---------------------------------
James A. Demme
Chairman of the Board and
Chief FinancialExecutive Officer
Dated: September 10,December 13, 1999
2321
2523
BRUNO'S, INC.
FORM 10-Q REPORT
(FOR QUARTER ENDED JULY 31,OCTOBER 30, 1999)
INDEX OF EXHIBITS
EXHIBIT NUMBER DESCRIPTION
-------------- -----------
27 Financial Data Schedule
1