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 June 29, 1996 (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 July 27, 1996:
Class A: 5,179,261
Class B: 10,622,969
<PAGE>
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited):
Consolidated Statements of Income for the
thirteen weeks ended June 29, 1996 and
July 1, 1995 and the twenty-six weeks ended
June 29, 1996 and July 1, 1995..................................3
Consolidated Balance Sheets as of
June 29, 1996 and December 30, 1995.............................4
Consolidated Statements of Cash Flows for
the twenty-six weeks ended June 29, 1996 and
July 1, 1995....................................................6
Notes to Consolidated Financial Statements......................7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations..................11
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Securities Holders..........13
Item 6. Exhibits and Reports on Form 8-K...............................14
<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 Weeks Ended Twenty-Six Weeks Ended
----------------------- -----------------------
Jun 29, 1996 Jul 1, 1995 Jun 29, 1996 Jul 1, 1995
------------ ----------- ------------ -----------
Net sales $ 690,023 $770,405 $1,383,188 $1,517,078
Cost of goods sold 533,312 597,882 1,079,918 1,176,233
--------- -------- ---------- ----------
156,711 172,523 303,270 340,845
Expenses:
Operating, selling
and administrative 130,350 116,698 241,703 229,468
Depreciation and
amortization 21,432 25,713 44,071 50,409
Interest 22,655 15,172 37,092 30,141
Amortization of deferred
financing costs 772 108 880 216
Restructuring Charges 201,622 201,622
--------- -------- ---------- ----------
376,831 157,691 525,368 310,234
--------- -------- ---------- ----------
INCOME (LOSS) BEFORE
INCOME TAXES AND
EXTRAORDINARY CHARGE (220,120) 14,832 (222,098) 30,611
Income taxes (benefit) (87,245) 5,800 (88,045) 12,100
--------- -------- ---------- ----------
INCOME (LOSS) BEFORE
EXTRAORDINARY CHARGE (132,875) 9,032 (134,053) 18,511
Extraordinary charge on
extinguishment of debt, net of
tax benefit 41,782 41,782
--------- -------- ---------- ----------
NET INCOME (LOSS) $(174,657) $ 9,032 $ (175,835) $ 18,511
========= ======== ========== ==========
Income (loss) per share of Common Stock:
Income (loss) before
extraordinary charge $ (6.24) $ 0.36 $ (5.78) $ 0.73
Extraordinary charge (1.96) (1.80)
--------- -------- ---------- ----------
Net income (loss) $ (8.20) $ 0.36 $ (7.58) $ 0.73
========= ======== ========== ==========
Dividends paid per share
of Common Stock $ - $ 0.15 $ 0.15 $ 0.30
========= ======== ========== ==========
Average number of common
shares outstanding
(In thousands) 21,297 25,139 23,184 25,314
========= ======== ========== ==========
See notes to consolidated financial statements
<PAGE>
SMITH'S FOOD & DRUG CENTERS, INC.
CONSOLIDATED BALANCE SHEETS
(Dollar amounts in thousands)
Jun 29, 1996 Dec 30, 1995
------------ ------------
(Unaudited)
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 45,379 $ 16,079
Rebates and accounts receivable 27,419 23,802
Refundable income taxes 40,878
Inventories 328,674 394,982
Prepaid expenses and deposits 19,273 21,255
Deferred tax asset 110,621 23,900
Assets held for sale 111,402 125,000
---------- ----------
TOTAL CURRENT ASSETS 683,646 605,018
PROPERTY AND EQUIPMENT
Land 193,086 276,626
Buildings 578,063 610,049
Leasehold improvements 52,507 55,830
Property under capital leases 32,120
Fixtures and equipment 508,881 509,524
---------- ----------
1,364,657 1,452,029
Less allowances for depreciation and amortization 394,346 390,933
---------- ----------
970,311 1,061,096
GOODWILL, less accumulated amortization of $312 112,752
OTHER ASSETS 87,604 20,066
---------- ----------
$1,854,313 $1,686,180
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Trade accounts payable $ 220,601 $ 214,152
Accrued sales and other taxes 32,936 38,724
Accrued payroll and related benefits 67,328 65,785
Other accrued expenses 80,715 43,695
Current maturities of long-term debt 26,739 20,932
Current maturities of obligations
under Capital Leases 1,194
Current maturities of Redeemable Preferred Stock 1,008
Accrued restructuring costs 65,826 58,000
---------- ----------
TOTAL CURRENT LIABILITIES 495,339 442,296
LONG-TERM DEBT, less current maturities 1,374,206 717,761
OBLIGATIONS UNDER CAPITAL LEASES, less current portion 25,466
ACCRUED RESTRUCTURING COSTS, less current portion 20,900 40,000
DEFERRED INCOME TAXES 44,384 58,600
OTHER LONG-TERM LIABILITIES 30,513 7,492
REDEEMABLE PREFERRED STOCK, less current maturities 3,319 3,311
COMMON STOCKHOLDERS' EQUITY
Convertible Class A Common Stock, par value $.01 per
share: Authorized 20,000,000 shares; issued and
outstanding, 5,195,261 shares in 1996 and
11,613,043 shares in 1995 52 116
Class B Common Stock, par value $.01 per share:
Authorized 100,000,000 shares; issued 10,606,969
shares in 1996 and 18,348,968 shares in 1995 106 183
Additional paid-in capital 193,667 285,238
Retained earnings (deficit) (333,639) 238,025
---------- ----------
(139,814) 523,562
Less Treasury Shares at cost
(4,890,302 shares in 1995) 106,842
---------- ----------
(139,814) 416,720
---------- ----------
$1,854,313 $1,686,180
========== ==========
See notes to consolidated financial statements
<PAGE>
SMITH'S FOOD & DRUG CENTERS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(Dollar amounts in thousands)
Twenty-Six Weeks Ended
---------------------------
June 29, 1996 July 1, 1995
------------- ------------
OPERATING ACTIVITIES:
Net income (loss) $ (175,835) $18,511
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Depreciation and amortization 44,071 50,409
Deferred income taxes (74,189) 5,600
Restructuring charges 201,622
Other 303 393
Changes in operating assets and
liabilities:
Rebates and accounts receivable 5,171 2,477
Refundable income taxes (40,878)
Inventories 112,132 23,364
Prepaid expenses and deposits 11,808 (18,927)
Trade accounts payable (30,633) (28,109)
Accrued sales and other taxes (12,151) 3,076
Accrued payroll and related benefits (8,231) (1,949)
Accrued other expenses (18,470) 4,066
Accrued restructuring costs (48,636)
--------- -------
CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES (33,916) 58,911
INVESTING ACTIVITIES:
Additions to property and equipment (64,996) (65,697)
Proceeds from sale of property and equipment 96,846 2,648
Other (62,159) (28)
--------- -------
CASH USED IN INVESTING ACTIVITIES (30,309) (63,077)
FINANCING ACTIVITIES:
Additions to long-term debt 1,380,000 25,000
Payments on long-term debt (830,536) (8,855)
Redemptions of Preferred Stock (1,000) (383)
Purchases of Treasury Stock (452,405) (7,845)
Proceeds from sale of Treasury Stock 1,227 2,920
Payment of dividends (3,761) (7,412)
---------- -------
CASH PROVIDED BY FINANCING ACTIVITIES 93,525 3,425
---------- -------
NET INCREASE (DECREASE) IN
CASH AND CASH EQUIVALENTS 29,300 (741)
Cash and cash equivalents at beginning of year 16,079 14,188
---------- -------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 45,379 $13,447
========== =======
SUPPLEMENTAL SCHEDULE OF BUSINESS ACQUISITION
Fair value of assets acquired $ 352,745
Value of stock issued (72,173)
----------
Liabilities assumed $ 280,572
==========
See notes to consolidated financial statements
<PAGE>
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 in accordance 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 twenty-
six week period ended June 29, 1996 are not necessarily indicative of the
results that may be expected for the year ending December 28, 1996. 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 December 30, 1995.
NOTE B -- SIGNIFICANT ACCOUNTING POLICIES
Inventories
Inventories are valued at the lower of cost, determined on the last-in, first-
out (LIFO) method, or market. The pretax LIFO charge for the second quarter was
$1.8 million in 1996 and $1.0 million in 1995 and for the first half was $3.5
million in 1996 and $2.0 million in 1995.
Assets held for sale
Assets held for sale are valued at the lower of cost or estimated net realizable
value.
Property under capital leases
Property under capital leases is stated at the lower of the fair market value of
the asset or the present value of future minimum lease payments. These leases
are amortized on the straight-line method over the terms of the leases and such
amortization is included in depreciation and amortization expense.
Goodwill
Goodwill represents the excess of the purchase price over the fair value of
acquired assets less assumed liabilities and is amortized on a straight-line
method over 40 years.
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 for 1996 excludes Common Stock equivalents in
the form of stock options due to the net loss.
Reclassifications
Certain reclassifications have been made to the 1995 financial statements to
conform with the 1996 presentation.
NOTE C -- MERGER AND RECAPITALIZATION
On May 23, 1996, the Company completed a merger (the "Merger") in which Smitty's
Supermarkets, Inc. ("Smitty's") became a wholly owned subsidiary of the Company
in a transaction accounted for as a purchase. Smitty's is a regional
supermarket company operating 26 stores in the Phoenix and Tucson, Arizona
areas. The Company issued 3,038,877 shares of the Company's Class B Common
Stock for all of Smitty's outstanding common stock. The financial statements
reflect the preliminary allocation of the purchase price and assumption of
certain debt and include the results of operations for Smitty's from May 23,
1996.
The following unaudited pro forma information presents the results of the
Company's operations as though the Merger had been consummated at the beginning
of each period and excluding the Company's California stores and charges related
to the disposition of California assets or closure of the California region.
The amounts represent twenty-six weeks of operations of the Company combined
with twenty-four weeks of operations of Smitty's. (Dollar amounts in thousands,
except per share data)
Period Ended
--------------------------------
June 29, 1996 July 1, 1995
------------- ------------
Net sales $1,526,369 $1,449,218
Loss before extraordinary charge (21,041) (17,389)
Net loss (85,542) (41,303)
Loss per share of Common Stock:
Loss before extraordinary charge (1.33) (1.10)
Net loss (5.42) (2.62)
The Company also completed a self tender offer on May 23, 1996 pursuant to which
it purchased 50% of its outstanding Class A and Class B Common Stock for $36 per
share, excluding the shares issued in connection with the Smitty's merger
(together with the Merger, the "Recapitalization"). Debt consisting of $575
million principal amount of 11 1/4% senior subordinated notes due 2007 and $805
million principal amount of secured bank term loans at various interest rates
were used to finance the stock purchase, repay certain existing indebtedness,
and pay premiums related to early repayment of such indebtedness.
NOTE D -- RESTRUCTURING CHARGES
In December 1995, the Company recorded restructuring charges amounting to $140
million related to its decision to sell, lease or close all 34 stores and the
distribution center comprising its Southern California Region. During the first
half of 1996, the Company sold, leased or agreed to sell or lease 23 of its
California stores and related equipment and five non-operating properties to
various supermarket companies and others. Of the stores sold, leased or being
sold or leased, 10 owned stores were sold outright, three owned stores were
leased, three store leases were assigned and seven leased stores were subleased.
The remaining 11 California stores have been closed and it is anticipated that
these stores will be sold or leased.
Following the Merger and Recapitalization on May 23, 1996 (see Note C), the
Company adopted a strategy to accelerate the disposition of its remaining real
estate assets in California including its non-operating stores and excess land.
The Company intends to use the net cash proceeds from the sales of these assets
to either reinvest in the Company's business or reduce indebtedness.
Accordingly, the Company recorded in the second quarter additional restructuring
charges amounting to $201.6 million relating to (i) the difference between the
anticipated cash proceeds from the accelerated dispositions (based on appraisals
obtained following the completion of the Merger and Recapitalization) and the
Company's existing book values and (ii) other charges in connection with its
decision to close the California Region.
The following table presents the components of the accrued restructuring costs
and actual activity for the first half of 1996:
Costs Incurred Adjustments Accrued Restructuring
Balance at during the and Costs at June 29,1996
December 30, First Half Additional ---------------------
1995 of the Year Charges Current Long-term
------- ------------- -------- ------- ---------
Charges for lease
obligations $65,600 $19,465 $(19,922) $10,604 $15,609
Inventory 16,000 16,020 (20)
Termination costs 10,000 11,080 17,174 16,094
Asset disposition
costs 24,083 24,083
Property maintenance
costs and other 6,400 2,071 16,027 15,065 5,291
------- ------- -------- ------- -------
$98,000 $48,636 $ 37,362 $65,826 $20,900
======= ======= ======== ======= =======
NOTE E -- LONG-TERM DEBT
Long-term debt consists of the following (dollar amounts in thousands):
Jun 29, Dec 30,
1996 1995
---------- --------
Term loans, principal due quarterly through 2005,
with interest payable quarterly $ 805,000
11 1/4% Senior Subordinated Notes, principal due
2007 with interest payable semi-annually 575,000
Unsecured notes, due in 2002 through 2015 with
varying annual installments starting in 2000
which accrue interest at an average rate of 7.68%
in 1995 $410,000
Mortgage notes, collateralized by property and
equipment with a cost of $2.8 million in 1996
and $420.7 million in 1995, due in 1997 through
2005 with interest at an average rate of 5.11% in
1996 and 9.68% in 1995 2,743 254,385
Revolving credit loans 68,000
Sinking fund bonds, 10 1/2% interest, semi-annual
maturities to 2016 11,960
Industrial revenue bonds, collateralized by property
and equipment with a cost of $11.5 million in 1996
and $11.7 million in 1995 due in 2000 through 2010
plus interest at an average rate of 7.26% in 1996
and 7.44% in 1995 6,242 6,308
---------- --------
1,400,945 738,693
Less current maturities 26,739 20,932
---------- --------
$1,374,206 $717,761
========== ========
The Company entered into a new senior credit facility (the "New Credit
Facility") that provides term loans totaling $805 million (the "New Term Loans")
which were funded in connection with the Merger and Recapitalization and a $190
million revolving credit facility (the "New Revolving Facility") less amounts
outstanding under letters of credit. All indebtedness (as defined) under the
New Credit Facility is secured by substantially all of the assets of the
Company. At June 29, 1996, $805 million was outstanding under the New Term
Loans and other than $27.7 million of letters of credit, no amounts were
borrowed under the New Revolving Facility. A commitment fee of one-half of one
percent is charged on the average daily unused portion of the New Revolving
Facility, payable quarterly. Interest on borrowings under the New Term Loans is
at the bank's Base Rate (as defined) plus a margin ranging from 1.5% to 2.75% or
the adjusted Eurodollar Rate (as defined) plus a margin ranging from 2.75% to
4.00%. At June 29, 1996, the weighted average interest rate on the New Term
Loans was 8.79%. Interest on borrowings under the New Revolving Facility is at
the bank's Base Rate (as defined) plus a margin of 1.5% or the Adjusted
Eurodollar Rate (as Defined) plus a margin of 2.75%. At June 29, 1996, the
interest rate on the New Revolving Facility was 8.25%; however, no amounts were
outstanding under the New Revolving Facility other than $27.7 million of letters
of credit.
Maturities of the Company's long-term debt for the five fiscal years succeeding
June 29, 1996 are approximately $2.7 million in 1996, $46.9 million in 1997,
$55.4 million in 1998, $65.5 million in 1999, and $68.0 million in 2000.
The New Credit Facility requires the Company to maintain minimum levels of net
worth (as defined), to maintain minimum levels of earnings, to maintain a hedge
agreement to provide interest rate protection, and to comply with certain ratios
related to fixed charges and indebtedness. In addition, the New Credit Facility
limits additional borrowings, dividends on and redemption of capital stock and
the acquisition and the disposition of assets.
The Company recorded an extraordinary charge of $41.8 million which consisted of
fees incurred in the prepayment of certain mortgage notes and unsecured notes of
the Company and certain long-term debt of Smitty's assumed in the Merger and the
write-off of their related debt issuance costs.
NOTE F -- CAPITAL LEASES
At June 29, 1996, future minimum lease payments under capital leases having
initial or remaining non-cancelable terms of more than one year were as follows
(dollar amounts in thousands):
1996 $ 2,119
1997 4,163
1998 4,100
1999 4,130
2000 4,147
Thereafter 48,392
-------
67,051
Less amount representing interest 40,391
-------
Present value $26,660
=======
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Overview
On May 23, 1996, Smith's Food & Drug Centers, Inc. (the "Company") completed its
acquisition by merger (the "Merger") of Smitty's Supermarkets, Inc.
("Smitty's"), a 26-store Arizona supermarket chain. Pursuant to the Merger,
3,038,877 shares of the Company's Class B Common Stock was issued to the
stockholders of Smitty's. Accordingly, the results for 1996 reflect only five
weeks of operations from the Smitty's stores. The Merger has been accounted for
as a purchase of Smitty's by the Company. As a result, the assets and
liabilities of Smitty's have been recorded at their estimated fair value as of
the date the Merger was consummated. The purchase price in excess of the fair
value of Smitty's assets is recorded as goodwill and will be amortized over a 40
- -year period. The purchase price allocation reflected at June 29, 1996 is based
on management's preliminary estimates. The actual purchase accounting
adjustments will be determined within one year following the Merger and may vary
from the amounts reflected at June 29, 1996.
The Company also completed a self tender offer on May 23, 1996 pursuant to which
it purchased 50% of its outstanding Class A and Class B Common Stock for $36 per
share, excluding the shares issued in connection with the Smitty's merger. Of
the total shares of Class A and Class B Common Stock outstanding prior to the
tender offer, the Company purchased 12.5 million shares for $451.3 million.
Stock options representing 805,750 shares were also purchased for $13.7 million
in conjunction with this tender offer. Additionally, the Company redeemed 3.0
million shares of Series I Preferred Stock for $1.0 million.
The Company used proceeds from the issuance of long-term debt to finance these
transactions and to repay substantially all of its indebtedness. The Company
entered into a new senior credit facility (the "New Credit Facility") which
provides term loans totaling $805 million (the "New Term Loans") and a $190
million revolving credit facility (the "New Revolving Facility") less amounts
outstanding under letters of credit. The Company also issued $575 million
principal amount of 11 1/4% senior subordinated notes due 2007. As a result of
prepaying existing indebtedness, the Company incurred an extraordinary charge of
$41.8 million consisting of fees incurred in the prepayment and the write-off of
debt issuance costs.
The Company also closed its California region comprised of 34 stores and a large
distribution center during the first quarter of 1996. The closure of the
California region and the Merger with Smitty's causes the comparisons of quarter
and first half results to the prior year's comparable periods not to be
meaningful.
Results of Operations
Net sales decreased $80.4 million, or 10.4%, from $770.4 million in the second
quarter of 1995 to $690.0 million in the second quarter of 1996. For the first
twenty-six weeks of 1996, net sales decreased $133.9 million, or 8.8%, to $1.38
billion from $1.52 billion for the first half of last year. The sales decrease
in 1996 was primarily attributable to changes in the number of operating stores.
Since the end of the second quarter of 1995, the Company closed its 34
California stores, opened an additional 10 stores in other operating areas, and
acquired 26 stores in the Smitty's merger. Excluding the Company's California
stores, net sales for the second quarter increased $93.2 million, or 15.6%, from
$596.8 million last year to $690.0 million in 1996 and net sales for the first
half of the year increased $129.0 million, or 10.9%. As adjusted to exclude the
Company's California stores and Smitty's stores, same store sales for the second
quarter of 1996 decreased .9% and for the first half of 1996 decreased 1.8%.
Gross profit decreased $15.8 million, or 9.2%, from $172.5 million in the second
quarter of 1995 to $156.7 million in the second quarter of 1996. For the first
half of the year, gross profit decreased $37.5 million, or 11.0%, from $340.8
million in 1995 to $303.3 million in 1996. Gross margins during the second
quarter of 1996 were 22.7% compared to 22.4% a year ago. Gross margins during
the first half of 1996 were 21.9% compared to 22.5% a year ago. Excluding the
Company's California operations, gross profit increased $23.8 million, or 17.9%,
in the second quarter of 1996 and $33.4 million, or 12.7%, in the first half of
1996 compared to the respective periods last year. Gross margins for both
periods were relatively constant.
Operating, selling and administrative expenses ("OS&A") increased $13.7 million,
or 11.7%, from $116.7 million in second quarter of 1995 to $130.4 million in the
second quarter of 1996 and increased $12.2 million, or 5.3%, from $229.5 million
in the first half of 1995 to $241.7 million in the first half of 1996. As a
percent of net sales, OS&A increased in the second quarter from 15.2% last year
to 18.9% this year and increased in the first half from 15.1% in 1995 to 17.5%
in 1996. The increase in OS&A as a percent of net sales was primarily
attributable to compensation recognized on the purchase of stock options,
recording of deferred compensation, severance paid to the former Chief Executive
Officer and other expenses related to the Merger and Recapitalization.
Depreciation and amortization expenses decreased $4.3 million, or 16.7%, from
$25.7 million in the second quarter last year to $21.4 million in the second
quarter this year and decreased $6.3 million, or 12.5%, from $50.4 million in
the first half last year to $44.1 million in the first half this year. These
decreases are due primarily to the closure of the California Region which was
offset slightly by the addition of new food and drug combination stores
elsewhere.
Interest expense increased $7.5 million, or 49.3%, from $15.2 million in the
second quarter last year to $22.7 million for the second quarter of 1996 and
increased $7.0 million, or 23.2%, from $30.1 million in the first half of 1995
to $37.1 million in the first half of 1996. The increase in interest expense
was primarily due to the increased debt incurred in conjunction with the Merger
and Recapitalization.
The Company recorded $201.6 million of pre-tax restructuring charges in the
second quarter of 1996 reflecting additional charges in connection with its
decision to close the California region and additional differences between
anticipated cash proceeds and existing book values caused by adoption of an
accelerated disposition strategy. See Note D of the Notes to Consolidated
Financial Statement of the Company included elsewhere herein.
The extraordinary charge of $41.8 million consists of fees incurred in the
prepayment of certain mortgage notes and unsecured notes of the Company and
certain long-term debt assumed in the Merger and the write-off of their related
debt issuance costs.
Primarily as a result of the restructuring and extraordinary charges noted
above, the Company recorded a net loss for the second quarter of $174.7 million
or $8.20 per common share compared to last year's net income of $9.0 million or
$.36 per common share. The net loss for the first half of 1996 totaled $175.8
million or $7.58 per common share compared to last year's net income of $18.5
million or $.73 per common share.
Liquidity and Capital Resources
During the first half of 1996, cash used in operating activities was $33.9
million compared to cash provided by operating activities of $58.9 million last
year. This decrease was caused primarily by the net loss incurred in 1996 and
balance fluctuations in operating assets and liabilities resulting from the
closure of the California region and normal operations. Payment of accrued
restructuring charges in the first half of 1996 reduced cash provided by
operating activities by $48.6 million.
Cash used in investing activities was $30.3 million for the first half of 1996
as a result of the Company's ongoing expansion program and payment of financing
costs related to securing a new senior credit facility (the "New Credit
Facility") which were offset by proceeds from the sale of assets in the
California region. All California assets have been adjusted to their net
realizable values and are included in assets held for sale. Seven non-operating
stores are under contract to sell or lease which are expected to be finalized in
the third quarter of 1996. The Company is actively pursuing opportunities to
dispose its remaining real estate assets in California which consists of 11
closed stores and excess land.
Cash provided by financing activities totaled $93.5 million for the first half
of 1996 as a result of debt proceeds which were offset in part by the prepayment
of certain existing indebtedness and the purchase of 50% of the Company's
outstanding Class A Common Stock and Class B Common Stock for $36.00 in cash per
share.
The Company entered into the New Credit Facility that provides $805 million
aggregate principal amount of term loans (the "New Term Loans") which was funded
at the time of the Recapitalization and Merger and a $190 million revolving
credit facility (the "New Revolving Facility") which is available for working
capital requirements and general corporate purposes. The Company also issued
$575 million principal amount of new senior subordinated notes. At June 29,
1996, other than $27.7 million of letters of credit, no amounts were borrowed
under the New Revolving Facility.
The New Revolving Facility is available, subject to the satisfaction of
customary borrowing conditions, for working capital requirements and general
corporate purposes. A portion of the New Revolving Facility may be used to
support letters of credit. The New Revolving Facility is non-amortizing and has
a six and one-quarter year term. The Company is required to reduce loans
outstanding under the New Revolving Facility to less than $75 million for a
period of not less than 30 consecutive days during each consecutive 12-month
period thereafter.
The New Term Loans were issued in four tranches: (i) Tranche A, in the amount of
$325 million, has a six and one-quarter year term; (ii) Tranche B, in the amount
of $160 million, has a seven and one-half year term; (iii) Tranche C, in the
amount of $160 million, has an eight and one-half year term; and (iv) Tranche D,
in the amount of $160 million, has a nine and one-quarter year term. The New
Term Loans require quarterly amortization payments. The New Credit Facility is
guaranteed by each of the Company's subsidiaries and secured by liens on
substantially all of the unencumbered assets of the Company and its subsidiaries
and by a pledge of the Company's stock in such subsidiaries. The New Credit
Facility contains financial covenants which require, among other things, the
maintenance of specified levels of cash flow and stockholders' equity.
The capital expenditures of the Company were $65.0 million for the first half of
1996. The Company currently anticipates that its aggregate capital expenditures
for fiscal 1996 will be approximately $90.0 million. The Company intends to
finance these capital expenditures primarily with cash provided by operations
and other sources of liquidity including borrowings and leases. No assurance
can be given that sources of financing for capital expenditures will be
available or sufficient. During the remainder of fiscal 1996, the Company
currently expects to open three stores averaging approximately 60,000 square
feet. However, the capital expenditure program has substantial flexibility and
is subject to revision based on various factors. Management believes that if
the Company were to substantially reduce or postpone these programs, there would
be no substantial impact on short-term operating profitability. In the long
term, however, if these programs were substantially reduced, management believes
its operating businesses, and ultimately its cash flow, would be adversely
affected.
In March 1996, the Company paid its regular quarterly cash dividends of $.15 per
common share. The Company has discontinued the payment of cash dividends and
payment of future dividends is severely restricted by the terms of financing
agreements entered into by the Company in connection with the Recapitalization
and Merger.
The Company is highly leveraged. Based upon current levels of operations and
anticipated cost savings and future growth, the Company believes that its cash
flow from operations, together with available borrowings under the New Revolving
Facility and its other sources of liquidity (including leases), will be adequate
to meet its anticipated requirements for working capital, capital expenditures,
lease payments, interest payments and scheduled principal payments. There can
be no assurance, however, that the Company's business will continue to generate
cash flow at or above current levels or that estimated cost savings or growth
can be achieved.
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Securities Holders
At the Company's Annual Meeting of Stockholders held on May 23, 1996, the
stockholders voted on the following proposals:
Proposal No. 1--Approval of the Recapitalization Agreement
The stockholders approved the Recapitalization Agreement and the transactions
contemplated thereby (with 222,993,884 affirmative votes, 2,605,634 negative
votes, 8,595,747 abstentions and zero broker non-votes).
Proposal No. 2--Amendment and Restatement of Certificate of Incorporation
The stockholders approved the adoption of the following separate amendments to
the Company's Certificate of Incorporation:
a) Proposal No. 2A reduced the number of directors to seven and classified the
Board of Directors into three classes of directors serving staggered three-
year terms (with 224,830,181 affirmative votes, 4,265,025 negative votes,
5,097,059 abstentions and zero broker non-votes).
b) Proposal No. 2B provided for the authorization of 20,000,000 shares of
Class C Common Stock, par value $.01 per share, of the Company (with
224,758,454 affirmative votes, 4,012,811 negative votes, 5,421,000
abstentions and zero broker non-votes).
c) Proposal No. 2C amended certain redemption and voting provisions with
respect to the Series I Preferred Stock (with 211,941,982 affirmative
votes, 6,807,857 negative votes, 15,442,426 abstentions and zero broker
non-votes and in a separate class vote for the holders of shares of Series
I Preferred Stock with 103,550,000 affirmative votes, 6,057,330 negative
votes, and 15,000,060 abstentions).
Proposal No. 3--Election of Board of Directors
The stockholders elected as directors the following:
VOTES VOTES BROKER
NAME FOR WITHHELD NON-VOTES
- ---- ----- -------- ---------
One-Year Term
Jeffrey P. Smith 237,750,108 193,215 -0-
Ronald W. Burkle 237,747,597 195,726 -0-
Allen R. Rowland 237,747,708 195,615 -0-
Two-Year Term
Fred L. Smith 237,747,597 195,726 -0-
Linda McLoughlin Figel 237,747,597 195,726 -0-
Three-Year Term
Bruce Karatz 237,747,708 195,615 -0-
Bertram R. Zweig 237,747,708 195,615 -0-
Proposal No. 4--Ratification of Selection of Independent Auditors
The stockholders ratified the appointment of Ernst & Young LLP as the
Corporation's independent auditors for 1996 (with 232,799,352 affirmative votes,
16,880 negative votes, 5,026,891 abstentions and zero broker non-votes).
Item 6. Exhibits and Reports on Form 8-K
(a) The exhibits listed in the accompanying index to exhibits are filed as part
of the Form 10-Q.
(b) On May 7, 1996, the Company filed a report on Form 8-K with the Securities
and Exchange Commission describing under Item 5, "Other Items" an
amendment to the Company's contemplated capital structure for financing a
portion of transactions agreed to in the Recapitalization Agreement and
Plan of Merger, dated as of January 29, 1996, and included in a filed
amendment to its registration statement on Form S-3 (File No. 333-01601).
As a result of the amendment to its contemplated capital structure, the
Company amended the Unaudited Pro Forma Financial Data contained in the
Registration Statement which was also included in this Form 8-K.
<PAGE>
INDEX TO EXHIBITS
Exhibit
Number Document
27 Financial Data Schedule
<PAGE>
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: 08/13/96 /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 2nd Quarter 1996
</LEGEND>
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-28-1996
<PERIOD-END> JUN-29-1996
<CASH> 45379
<SECURITIES> 0
<RECEIVABLES> 27419
<ALLOWANCES> 0
<INVENTORY> 328674
<CURRENT-ASSETS> 683646
<PP&E> 1364657
<DEPRECIATION> 394346
<TOTAL-ASSETS> 1854313
<CURRENT-LIABILITIES> 495339
<BONDS> 1374206
3319
0
<COMMON> 158
<OTHER-SE> (139972)
<TOTAL-LIABILITY-AND-EQUITY> 1854313
<SALES> 1383188
<TOTAL-REVENUES> 1383188
<CGS> 1079918
<TOTAL-COSTS> 1079918
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 37092
<INCOME-PRETAX> (222098)
<INCOME-TAX> (88045)
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 41782
<CHANGES> 0
<NET-INCOME> (175835)
<EPS-PRIMARY> (7.58)
<EPS-DILUTED> (7.58)
</TABLE>
