UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_________________
FORM 10-Q
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended October 1, 1994 (thirteen weeks)
or
[ ] 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: 001-10252
SMITH'S FOOD & DRUG CENTERS, INC.
(Exact name of registrant as specified in its charter)
Delaware 87-0258768
(State of Incorporation) (I.R.S. Employer Identification No.)
1550 South Redwood Road, Salt Lake City, UT 84104
(Address of principal executive offices) (Zip Code)
(801) 974-1400
(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
Number of shares outstanding of each class of common stock as of October 1,
1994:
Class A 12,330,964
Class B 14,361,297
<PAGE>
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited):
Consolidated Statements of Income for the
thirteen weeks ended October 1, 1994 and
October 2, 1993 and the thirty-nine weeks ended
October 1, 1994 and October 2, 1993 3
Consolidated Balance Sheets as of
October 1, 1994 and January 1, 1994 4
Consolidated Statements of Cash Flows for
the thirty-nine weeks ended October 1, 1994 and
October 2, 1993 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 7
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8K 8
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
SMITH'S FOOD & DRUG CENTERS, INC.
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(Dollar amounts in thousands, except per share data)
Thirteen Thirteen Thirty-Nine Thirty-Nine
Weeks Ended Weeks Ended Weeks Ended Weeks Ended
October 1, October 2, October 1, October 2,
1994 1993 1994 1993
Net sales $725,360 $686,747 $2,227,468 $2,080,506
Cost of goods sold 561,815 535,521 1,736,506 1,606,392
--------- --------- ----------- -----------
163,545 151,226 490,962 474,114
Expenses:
Operating, selling and
administrative 105,174 103,474 329,063 321,687
Depreciation and
amortization 22,750 19,850 65,207 56,837
Interest 13,480 10,591 39,410 32,173
--------- --------- ----------- -----------
141,404 133,915 433,680 410,697
INCOME BEFORE
INCOME TAXES 22,141 17,311 57,282 63,417
Income taxes 8,800 9,400 22,700 27,500
--------- --------- ----------- -----------
NET INCOME $ 13,341 $ 7,911 $ 34,582 $ 35,917
========= ========= =========== ===========
Net income per share of
Common Stock $ .48 $ .26 $ 1.20 $ 1.19
Dividends paid per share
of Common Stock $ .13 $ .13 $ .39 $ .39
Average number of common
shares outstanding
(In thousands) 27,583 30,086 28,761 30,297
See notes to consolidated financial statements
<PAGE>
SMITH'S FOOD & DRUG CENTERS, INC.
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(Dollar amounts in thousands)
October 1, January 1,
1994 1994
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 17,340 $ 61,921
Rebates and accounts receivable 19,509 20,838
Inventories 366,165 377,939
Prepaid expenses and deposits 21,085 19,634
---------- ----------
TOTAL CURRENT ASSETS 424,099 480,332
PROPERTY AND EQUIPMENT
Land 296,887 282,469
Buildings 604,317 582,775
Leasehold improvements 42,673 38,866
Fixtures and equipment 570,215 538,882
---------- ----------
1,514,092 1,442,992
Less allowances for depreciation
and amortization 339,776 284,363
---------- ----------
1,174,316 1,158,629
---------- ----------
OTHER ASSETS 22,360 15,347
---------- ----------
$1,620,775 $1,654,308
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Trade accounts payable $ 204,873 $ 185,225
Accrued sales and other taxes 47,319 38,763
Accrued payroll and related benefits 76,494 73,467
Current maturities of long-term debt 18,331 21,473
Current maturities of Redeemable
Preferred Stock 629 1,046
---------- ----------
TOTAL CURRENT LIABILITIES 347,646 319,974
LONG-TERM DEBT, less current maturities 676,847 704,014
DEFERRED INCOME TAXES 88,625 82,700
REDEEMABLE PREFERRED STOCK, less
current maturities 5,423 5,423
COMMON STOCKHOLDERS' EQUITY
Convertible Class A Common Stock, par
value $.01 per share: Authorized
20,000,000 shares; issued and outstanding,
12,330,964 shares in 1994 and 12,617,445
shares in 1993 123 126
Class B Common Stock, par value $.01 per
share: Authorized 100,000,000 shares;
issued 17,631,047 shares in 1994 and
17,344,566 shares in 1993 176 173
Additional paid-in capital 285,268 285,482
Retained earnings 282,741 259,399
---------- ----------
568,308 545,180
Less Treasury Shares at cost (3,269,750
shares in 1994 and 95,718 shares in 1993) 66,074 2,983
---------- ----------
502,234 542,197
---------- ----------
$1,620,775 $1,654,308
========== ==========
See notes to consolidated financial statements
<PAGE>
SMITH'S FOOD & DRUG CENTERS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(Dollar amounts in thousands)
Thirty-Nine Thirty-Nine
Weeks Ended Weeks Ended
October 1, October 2,
1994 1993
OPERATING ACTIVITIES:
Net income $ 34,582 $ 35,917
Adjustments to reconcile net income
to net cash provided by operating
activities:
Depreciation and amortization
(including amounts charged to
cost of goods sold) 69,566 60,490
Deferred income taxes 9,100 9,600
Other 460 364
Changes in operating assets and
liabilities:
Rebates and accounts receivable 1,329 (260)
Inventories 11,774 (3,112)
Prepaid expenses and deposits (4,626) (13,462)
Trade accounts payable 19,648 (1,082)
Accrued sales and other taxes 8,556 12,239
Accrued payroll and related
benefits 3,027 1,612
-------- --------
CASH PROVIDED BY OPERATING ACTIVITIES 153,416 102,306
INVESTING ACTIVITIES:
Additions to property and equipment (106,156) (230,993)
Sale/leaseback arrangements and other
property sales 20,903 2,103
Other (7,013) 589
-------- --------
CASH USED IN INVESTING ACTIVITIES (92,266) (228,301)
FINANCING ACTIVITIES:
Additions to long-term debt 155,000
Payments on long-term debt (30,309) (15,472)
Redemptions of Preferred Stock (417) (414)
Purchases of Treasury Stock (68,584) (9,556)
Proceeds from sale of Treasury Stock 4,820 5,824
Payment of dividends (11,241) (11,647)
-------- --------
CASH PROVIDED BY (USED IN)
FINANCING ACTIVITIES (105,731) 123,735
-------- --------
NET DECREASE IN
CASH AND CASH EQUIVALENTS (44,581) (2,260)
Cash and cash equivalents at beginning
of year 61,921 15,526
-------- --------
CASH AND CASH EQUIVALENTS
AT END OF PERIOD $ 17,340 $ 13,266
======== ========
See notes to consolidated financial statements
<PAGE>
SMITH'S FOOD & DRUG CENTERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
NOTE A -- BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
notes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included. Operating results for the thirteen and thirty-nine week periods
ended October 1, 1994 are not necessarily indicative of the results that may be
expected for the year ending December 31, 1994. For further information, refer
to the consolidated financial statements and notes thereto incorporated by
reference in the Company's annual report on Form 10-K for the year ended January
1, 1994.
NOTE B -- SIGNIFICANT ACCOUNTING POLICIES
Net Income per Share of Common Stock: Net income per share of Common Stock is
computed by dividing net income by the weighted average number of shares of
Common Stock outstanding. The weighted average number of common shares includes
Common Stock equivalents in the form of stock options.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Results of Operations
Net sales increased 5.6% in the third quarter of 1994 to $725 million compared
to $687 million for the same period last year. For the first nine months of
1994 net sales increased to $2.23 billion from $2.08 billion for the same period
last year, an increase of 7.1%. Same store sales decreased 3.0% compared with
the prior year's third quarter and decreased 2.2% compared to the first nine
months of the prior year. The decrease in same store sales was mainly caused
by weakened sales in Southern California due to the continuing recession and
intense price competition in this market and new store openings by competitors
in many of the Company's major markets. To the extent these conditions persist,
the weakness in same store sales may continue.
During the first thirty-nine weeks of fiscal 1994, the Company opened five large
combination food and drug centers, all in Southern California. At October 1,
1994, the Company operated 134 stores totaling 8.9 million square feet compared
to 121 stores totaling 7.8 million square feet at the end of the prior year's
third quarter. During the quarter the Company determined to slow the rate of
expansion into California to give operating management an opportunity to focus
on the performance of the 31 stores currently operating there. In the fourth
quarter of fiscal 1994, the Company currently expects to complete construction
of seven additional stores including three stores in New Mexico, two stores in
Nevada and two stores in Southern California, totaling approximately 433,000
square feet. To avoid problems associated with opening stores during the
Christmas season, some of the grand openings for these completed stores may be
held in January, 1995. During 1995, emphasis will be placed on opening new
stores in markets including Arizona, New Mexico, Nevada and Utah. The Company
also anticipates that future stores will range in size from 54,000 to 66,000
square feet compared to approximately 75,000 square feet for new stores opened
in recent years. These new combination food & drug centers will have many of
the same attributes and product selections as the larger stores.
Gross margins as a percentage of net sales increased to 22.5% during the third
quarter of 1994 from 22.0% during the same period last year. This increase is
due primarily to a lessening of the pricing competition initiated by the
aggressive Utah pricing program and reduced charges for inventory shrinkage..
For the first thirty-nine weeks of 1994, gross margins as a percentage of net
sales decreased to 22.0% compared to 22.8% for the same period last year. This
decrease is due primarily to the Company's aggressive Utah pricing program,
which commenced in July 1993. The Company anticipates that new stores recently
opened and planned to open, as in the past, will apply pressure on its gross
margins until the stores become established in their respective markets. The
pretax LIFO charge was $750,000 for the third quarter of 1994, the same as the
third quarter last year, and $3.75 million for the first nine months of 1994
compared to $2.25 million for the same period last year.
Operating, selling and administrative expenses as a percentage of net sales
decreased to 14.5% during the third quarter of 1994 from 15.1% during the third
quarter of 1993. For the first nine months of the year compared to last year,
operating, selling and administrative expenses as a percentage of net sales
decreased to 14.8% from 15.5%. These decreases resulted primarily from the
Company's program to reduce operating costs.
Depreciation and amortization expenses increased 14.6% for the third quarter and
14.7% for the first nine months of 1994 compared to the same respective periods
last year due to the increase in the number of new and larger combination stores
and the new distribution center which was completed at the end of 1993.
Interest expense increased 27.3% in the third quarter and 22.5% for the first
nine months of 1994 compared to the same respective periods last year. These
increases were due to a reduction in capitalized interest as a result of the
slowed expansion in California and an increase in the average interest rate
caused by the refinancing in 1993 of revolving credit indebtedness with long-
term unsecured debt.
Income tax expense in 1993 was affected by an increased tax rate in the third
quarter of that year. As a result, net income for the third quarter of 1993 was
reduced by $2,600,000 or $.09 per common share. The effective tax rate,
including state income taxes, is expected to approximate 40% in 1994.
Liquidity and Capital Resources
Cash and cash equivalents decreased $44.6 million during the first thirty-nine
weeks of 1994. Working capital was $76.5 million at October 1, 1994, a decrease
of $83.9 million compared to January 1, 1994.
During the first thirty-nine weeks of 1994, cash provided by operating
activities was affected by a decrease in inventories and an increase in accounts
payable, resulting in net cash provided by operations of $153.4 million.
Cash used by investing activities was $92.3 million for the first thirty-nine
weeks of 1994 reflecting the Company's ongoing expansion program. The Company
anticipates investing approximately $40 million during the remainder of 1994
for the development and construction of new food and drug centers, remodeling of
existing stores and replacing equipment. However, the actual timing and amount
of capital expenditures will depend upon a number of factors.
Cash used in financing activities totaled $105.7 million for the first thirty-
nine weeks of 1994 as a result of open market repurchases of the Company's
Common Stock and payments on long-term debt. At the end of 1993, the Company
completed a sale/leaseback transaction which increased cash and cash equivalents
at the end of the year. The proceeds from the sale/leaseback have been used to
finance 1994 store expansion and general working capital purposes.
Management believes that the financial resources available to it, including
proceeds from sale/leaseback transactions, amounts available under existing and
future bank lines of credit, additional long-term financings, and internally
generated funds, will be sufficient to meet planned capital expansion and
working capital requirements for the foreseeable future, including debt and
lease servicing requirements. The Company may, however, use additional sources
of funds for such purposes, including the issuance of debt or equity securities
and leasing rather than owning buildings and equipment.
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) The exhibit listed in the accompanying index to exhibits is filed as part
of the Form 10-Q.
(b) There were no reports on Form 8-K filed during the third quarter.
INDEX TO EXHIBITS
Exhibit
Number Document
10.18 Amendment 1, dated as of September 2, 1994, to Revolving
Credit Agreement, dated as of October 15, 1993, between the
Company and Credit Suisse (which was filed as exhibit 10.9 to
the Company's report on Form 10-K for the year ended January
1, 1994).
10.19 Amendment 1, dated as of September 26, 1994, to Revolving
Credit Agreement, dated as of June 28, 1993, between the
Company and Bank of America (which was filed as exhibit 10.16
to the Company's report on Form 10-K for the year ended
January 1, 1994).
27 Financial Data Schedule
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SMITH'S FOOD & DRUG CENTERS, INC.
(Registrant)
Date: 11/07/94 /s/Matthew G. Tezak
Matthew G. Tezak, Senior Vice
President and Chief Financial
Officer (Principal Accounting
Officer)
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
ARTICLE 5 FDS FOR 3RD QUARTER 10-Q
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> QTR-3
<FISCAL-YEAR-END> DEC-31-1994
<PERIOD-END> OCT-01-1994
<CASH> 17,340
<SECURITIES> 0
<RECEIVABLES> 19,509
<ALLOWANCES> 0
<INVENTORY> 366,165
<CURRENT-ASSETS> 424,099
<PP&E> 1,514,092
<DEPRECIATION> 339,776
<TOTAL-ASSETS> 1,620,775
<CURRENT-LIABILITIES> 347,646
<BONDS> 0
<COMMON> 299
5,423
0
<OTHER-SE> 501,935
<TOTAL-LIABILITY-AND-EQUITY> 1,620,775
<SALES> 725,360
<TOTAL-REVENUES> 725,360
<CGS> 561,815
<TOTAL-COSTS> 561,815
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 13,480
<INCOME-PRETAX> 22,141
<INCOME-TAX> 8,800
<INCOME-CONTINUING> 13,341
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 13,341
<EPS-PRIMARY> .48
<EPS-DILUTED> .48
</TABLE>
[LOGO] CREDIT SUISSE FOUNDED 1856
SCHWEIZERISCHE KREDITANSTALT
CREDITO SVIZZERO
LOS ANGELES
September 2, 1994
Telephone (213)955-8200
Cable Address Credswiss
Telex 67227
Letters 633 West Fifth Street, 64th Floor
Los Angeles, CA 90071
Smith's Food & Drug Centers, Inc.
1550 South Redwood Road
Salt Lake City, Utah 84104
Attention: Casey Jones
Director of Capital Development and Banking
Gentlemen:
This letter is to amend our Agreement dated as of October
15, 1993. Section 4.1(b) and 4.1(c) are hereby amended to
read in their entirety:
(b) Maintain a Tangible Net Worth of not less
than the sum of $350 Million, plus 30% of net
income after taxes on a quarterly basis, plus 100%
of any increase in shareholder's equity other than
the quarterly income increases, measured at the
end of each fiscal quarter, commencing with the
quarter ending September 30, 1994.
(c) Maintain a Leverage Ratio not to exceed 2.5
to 1, measured at the end of each fiscal quarter,
commencing with the quarter ending September 30,
1994. As used herein, "Leverage Ratio" means the
ratio of total debt to tangible net worth. Total
debt includes all borrowed money and lease
obligations (including capital leases and
operating leases, the latter to be calculated as
six times the annual amount owed).
All other terms and conditions of our Agreement remain
unchanged.
If the foregoing meets with your approval, please sign and
return to us the enclosed copy of this amendment to signify
your agreement.
Very truly yours,
/s/Marilou Palenzuela /s/Maria N. Gaspara
Marilou Palenzuela Maria N. Gaspara
Member of Senior Management Associate
Read, Agreed & Accepted:
Smith's Food & Drug Centers, Inc.
By: /s/Matthew G. Tezak
Name: Matthew G. Tezak
Title: SR VP & CFO
[LOGO]
BANK OF AMERICA
Richard E. Bryson
Vice President
United States Division
SF Credit Products Group #3838
September 26, 1994
Casey Jones
Director of Capital Development and Banking
Smith's Food & Drug Centers, Inc.
1550 South Redwood Road
Salt Lake City, Utah 84104
Dear Casey:
As we discussed, the existing three year
facility will be immediately amended to change
the covenants and pricing as follows:
* Section 6.7(a) - Net worth
revised downward from $450MM to
$350MM, plus 50% of incremental
net worth measured quarterly.
* Section 6.8 - Revise upward from
2.0/1 to 2.1/1, measured
quarterly.
* Pricing - New pricing GRID added;
GRID ONE:
- If Smith's Pass
Through Certificates
are rated BBB- by S&P
and at least Baa3 by
Moodys.
- 18.75 bp commitment
fee and L + 60 bp
spread. (L+60 drawn
cost).
GRID TWO:
- If Smith's Pass
Through Certificates
are rated below BBB-
by S&P or below Baa3
by Moodys or are
unrated.
- 25 bp commitment
fee and L + 75 bp
point spread. (L+75
drawn cost).
The pricing grid two therefore becomes
effective by either a one step S&P downgrade or
a two step Moodys downgrade.
Closing the amendment is subject to
documentation acceptable to Bank of America and
reimbursement of Bank of America legal expenses.
If you agree to these terms and conditions,
please sign both copies and return one to my
attention.
Sincerely,
BANK OF AMERICA NATIONAL
TRUST AND SAVINGS ASSOCIATION
/s/Richard E. Bryson
Richard E. Bryson
Vice President
AGREED AND ACCEPTED
SMITH'S FOOD & DRUG CENTERS, INC.
/s/Casey Jones
Casey Jones
Director of Capital Development & Banking
