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 March 30, 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 April 15,
1996:
Class A: 11,366,532
Class B: 13,705,191
<PAGE>
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited):
Consolidated Statements of Income for the
thirteen weeks ended March 30, 1996 and
April 1, 1995 3
Consolidated Balance Sheets as of
March 30, 1996 and December 30, 1995 4
Consolidated Statements of Cash Flows for
the thirteen weeks ended March 30, 1996 and
April 1, 1995 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of
Operations 8
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 11
<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
Weeks Ended Weeks Ended
Mar 30, 1996 Apr 1, 1995
------------ -----------
Net sales $693,165 $746,673
Cost of goods sold 546,606 578,351
-------- --------
146,559 168,322
Expenses:
Operating, selling
and administrative 111,353 112,770
Depreciation and
amortization 22,639 24,696
Interest 14,545 15,077
-------- --------
148,537 152,543
INCOME (LOSS) BEFORE
INCOME TAXES (1,978) 15,779
Income taxes (800) 6,300
-------- --------
NET INCOME (LOSS) $ (1,178) $ 9,479
======== ========
Net income (loss) per share
of Common Stock $ (.05) $ .37
======== ========
Dividends paid per share of
Common Stock $ .15 $ .15
======== ========
Average number of common
shares outstanding
(In thousands) 25,072 25,492
======== ========
See notes to consolidated financial statements
<PAGE>
SMITH'S FOOD & DRUG CENTERS, INC.
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(Dollar amounts in thousands)
March 30, December 30,
1996 1995
---------- ---------
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 11,022 $ 16,079
Rebates and accounts receivable 28,008 23,802
Inventories 297,974 394,982
Prepaid expenses and deposits 17,045 21,255
Deferred tax asset 14,500 23,900
Assets held for sale 42,800 125,000
---------- ----------
TOTAL CURRENT ASSETS 411,349 605,018
PROPERTY AND EQUIPMENT
Land 279,573 276,626
Buildings 614,700 610,049
Leasehold improvements 54,795 55,830
Fixtures and equipment 498,367 509,524
---------- ----------
1,447,435 1,452,029
Less allowances for depreciation
and amortization 392,282 390,933
---------- ----------
1,055,153 1,061,096
OTHER ASSETS 19,484 20,066
---------- ----------
$1,485,986 $1,686,180
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Trade accounts payable $ 163,998 $ 214,152
Accrued sales and other taxes 41,447 50,749
Accrued payroll and related benefits 77,924 97,455
Current maturities of long-term debt 24,093 20,932
Current maturities of Redeemable
Preferred Stock 1,008 1,008
Accrued restructuring costs 15,060 58,000
---------- ----------
TOTAL CURRENT LIABILITIES 323,530 442,296
LONG-TERM DEBT, less current maturities 648,681 725,253
ACCRUED RESTRUCTURING COSTS, less
current portion 40,000 40,000
DEFERRED INCOME TAXES 58,800 58,600
REDEEMABLE PREFERRED STOCK, less
current maturities 3,311 3,311
COMMON STOCKHOLDERS' EQUITY
Convertible Class A Common Stock, par value
$.01 per share: Authorized 20,000,000
shares; issued and outstanding, 11,366,532
shares in 1996 and 11,613,043 shares in 1995 114 116
Class B Common Stock, par value $.01 per
shares: Authorized 100,000,000 shares;
issued 18,595,479 shares in 1996 and
18,348,968 shares in 1995 185 183
Additional paid-in capital 285,119 285,236
Retained earnings 233,088 238,027
---------- ----------
518,506 523,562
Less Treasury Shares at cost (4,890,288 shares
in 1996 and 4,890,302 shares in 1995) 106,842 106,842
---------- ----------
411,664 416,720
---------- ----------
$1,485,986 $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)
Thirteen Thirteen
Weeks Ended Weeks Ended
March 30, April 1,
1996 1995
--------- ---------
OPERATING ACTIVITIES:
Net income (loss) $ (1,178) $ 9,479
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Depreciation and amortization 22,639 24,696
Deferred income taxes 9,600 2,150
Other 177 196
Changes in operating assets and
liabilities:
Rebates and accounts receivable (4,206) 1,307
Inventories 97,008 14,049
Prepaid expenses and deposits 4,210 (26,417)
Trade accounts payable (50,154) (39,319)
Accrued sales and other taxes (9,302) 4,369
Accrued payroll and related benefits (19,531) (6,442)
Accrued restructuring costs (42,940)
-------- --------
CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES 6,323 (15,932)
INVESTING ACTIVITIES:
Additions to property and equipment (18,271) (25,220)
Proceeds from sale of property and equipment 83,775 1,221
Other 582 92
-------- --------
CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES 66,086 (23,907)
FINANCING ACTIVITIES:
Additions to long-term debt 51,000
Payments on long-term debt (73,411) (4,880)
Redemptions of Redeemable Preferred Stock (350)
Purchases of Treasury Stock (1,114) (4,709)
Proceeds from sale of Treasury Stock 820 1,031
Payment of dividends (3,761) (3,747)
-------- --------
CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES (77,466) 38,345
NET DECREASE IN CASH AND CASH EQUIVALENTS (5,057) (1,494)
Cash and cash equivalents at beginning of year 16,079 14,188
-------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 11,022 $ 12,694
======== ========
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 week period ended March 30, 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
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.
NOTE C -- 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. In
January 1996, the Company entered into agreement to sell or lease 16 of its
California stores and related equipment and three non-operating properties
to various supermarket companies and others. Of the stores being sold or
leased, four stores owned by Smith's are being sold outright, two store
lease are being assigned, three stores owned by Smith's are being leased
and seven leased stores are being subleased. Since December 30, 1995, the
Company has received net cash proceeds of approximately $67.2 million from
the sale or lease of its California stores and distribution center and
expects to receive an additional approximately $10.6 million shortly after
the consummation of the merger and recapitalization (see Note D). The
remaining 18 California stores were closed by March 16, 1996 and it is
anticipated that these stores will be sold or leased to other retail
companies. The following table presents the components of the accrued
restructuring costs and actual activity for the first quarter of 1996:
Costs Accrued Restructuring
Balance at Incurred Costs
December 30, during the at March 30, 1996
1995 First Quarter Current Long-term
------- ------- ------- -------
Charges for lease obligations $65,600 $16,440 $ 9,160 $40,000
Inventory 16,000 16,010 (10)
Termination payments 10,000 10,490 (490)
Other 6,400 6,400
------- ------- ------- -------
$98,000 $42,940 $15,060 $40,000
======= ======= ======= =======
The accrued restructuring costs include management's best estimates of the
amounts expected to be realized on the disposal of the remaining stores and
closure of the region. At March 30, 1996, the Company's carrying value of
closed stores, leased stores and excess land in California was
approximately $260 million. The Company's current management has not
determined the ultimate disposition or use of these real estate assets and
believes that their disposal in the ordinary course of business would not
result in a significant impact on carrying values. However, should the
Company complete the subsequent event (see Note D), management may decide
to pursue the sale of these assets. The amounts the Company may realize on
disposal could differ significantly in the near term from the carrying
values.
NOTE D -- SUBSEQUENT EVENT
On January 29, 1996, the Company entered into a definitive merger agreement
with Smitty's Supermarkets, Inc. ("Smitty's") in which Smitty's will become
a wholly owned subsidiary of the Company. The merger will be completed by
issuing 3,038,888 shares of the Company's Class B Common Stock for all of
Smitty's outstanding common stock, subject to adjustment under certain
circumstances. The Company will assume or refinance approximately $148
million of Smitty's debt.
The Company also commenced on April 25, 1996 a self tender offer to
purchase 50% of its outstanding Class A and Class B Common Stock for $36
per share, excluding shares to be issued in connection with the Smitty's
merger. Debt of approximately $1.4 billion is expected to be issued at
various interest rates to finance the stock purchase, repay certain
existing indebtedness, and pay premiums related to early repayment.
Completion of the tender offer will be subject to the tender of at least
50% of the Company's outstanding Common Stock, the receipt of adequate
financing and various other conditions. Completion of the Smitty's merger
will be conditioned on the Company's purchase of shares pursuant to the
self tender offer, receipt of adequate financing, regulatory approvals,
approval by the Company's stockholders and various other conditions. The
tender offer is expected to be consummated on May 23,1996. The Smitty's
merger is expected to be consummated concurrently with the closing of the
tender offer.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Results of Operations
Net sales decreased $53.5 million, or 7.2%, from $746.7 million in the
first quarter of 1995 to $693.2 million in the first quarter of 1996. The
sales decrease in 1996 was primarily attributable to the closure of the
Company's 34 stores in California, offset in part by the net addition of 11
new stores outside of California since the end of the first quarter last
year. Excluding the Company's California stores, net sales increased $35.7
million, or 6.1%, from $584.4 million last year to $620.1 million in the
first quarter of 1996. As adjusted to exclude the Company's California
stores, same store sales for the first quarter of 1996 decreased 2.7%
caused primarily by the Company's discontinuance of its "ad match" program
in Phoenix and Tucson markets.
At March 30, 1996, the Company operated 120 stores totaling 7.4 million
square feet compared to 109 stores (excluding California) totaling 6.8
million square feet at the end of the prior year's first quarter, an
increase of 8.8%. During the remainder of fiscal 1996, the Company
currently expects to open four to six stores averaging approximately 58,000
square feet.
Gross profit decreased $21.8 million, or 12.9%, from $168.3 million in the
first quarter of 1995 to $146.6 million in the first quarter 1996. Gross
margins during the first quarter of 1996 were 21.1% compared to 22.5% a
year ago. Excluding the Company's California operations, gross profit
increased $28.0 million, or 6.2%, in the first quarter of 1996 compared to
the first quarter of 1995 and gross margins were relatively flat. The pre-
tax LIFO charge was $1.8 million compared to $1.0 million last year. Newly
opened stores apply pressure on gross margins until the stores become
established in their respective markets.
Operating, selling and administrative expenses decreased $1.4 million, or
1.2%, from $112.8 million in first quarter of 1995 to $111.4 million in the
first quarter of 1996. As a percent of net sales, OS&A increased from
15.1% last year to 16.1% this year. The increase in OS&A as a percent of
net sales was primarily attributable to the closure of the Company's 34
California stores offset somewhat by the opening of 11 net additional
stores of over the prior year. As adjusted to exclude the Company's
California stores, OS&A as a percent of net sales was flat.
Depreciation and amortization expenses decreased $2.1 million, or 8.3%,
from $24.7 million last year to $22.6 million this year, 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 decreased $.6 million from $15.1 million last year to
$14.5 million for the first quarter of 1996 as a result of net decreases in
the average debt amounts for each period.
The Company incurred a net loss for the quarter of $1.2 million or $.05 per
common share compared to last year's net income of $9.5 million or $.37 per
common share due to the costs related to the closure of the California
Region. Excluding the California loss of approximately $14.9 million, net
income for the quarter totaled $13.7 million.
Liquidity and Capital Resources
During the first quarter of 1996, cash provided by operating activities was
$6.3 million reflecting balance fluctuations in operating assets and
liabilities resulting from the closure of the California region and the
execution of cash management policies based upon cash availability.
Payment of accrued restructuring charges in the first quarter of 1996
reduced cash provided by operating activities by $42.9 million. The
California closure also caused the reduction of inventory, trade accounts
payable and accrued expense balances.
Cash provided by investing activities was $66.1 million for the first
quarter of 1996 as a result of proceeds from the sale of assets in the
California region offset by the expenditures of the Company's ongoing
expansion program.
Cash used in financing activities totaled $77.5 million for the first
quarter of 1996 as a result of payments on long-term debt.
At March 30, 1996, the Company has outstanding $648.7 million of long-term
debt, principally borrowed from insurance companies and other institutional
lenders. The Company has not experienced difficulty to date in obtaining
financing at satisfactory terms. Assuming that the Transactions (as
defined below) are not consummated, 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 expenditures and working capital
requirements for the forseeable future, including debt and lease servicing
requirements. Certain of the Company's existing debt agreements require
the Company to comply with various financial covenants, including
maintenance of certain levels of minimum net worth. The Company was in
compliance with all such covenants at March 30, 1996.
The Company has entered into a Recapitalization Agreement and Plan of
Merger, dated as of January 29, 1996, in which the Company has agreed to
(i) commence a tender offer (the "Offer") to purchase 50% of the Company's
outstanding Class A Common Stock and Class B Common Stock (together "Common
Stock") for $36.00 in cash per share and (ii) consummate the merger of
Smitty's Supermarkets, Inc. ("Smitty's") with Cactus Acquisition, Inc., a
wholly owned subsidiary of the Company (collectively, the "Transactions").
In order to consummate the Transactions, the Company will require
approximately $1.4 billion of financing to repay certain outstanding
indebtedness of the Company and Smitty's, purchase Common Stock in the
Offer, purchase shares of Series I Preferred Stock, purchase management
stock options and pay related fees and expenses. The Company will enter
into a new senior credit facility (the "New Credit Facility") that will
provide up to $805 million aggregate principal amount of term loans (the
"New Term Loans"), and a $190 million revolving credit facility (the "New
Revolving Facility") which will be available for working capital
requirements and general corporate purposes, of which approximately $7.9
million is anticipated to be borrowed in connection with the Transactions.
The Company will also issue $575 million principal amount of new senior
subordinated notes. The Company will also assume certain existing
indebtedness of Smitty's.
The New Revolving Facility will be 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, approximately $28 million of which are
anticipated to be outstanding upon consummation of the Transactions. The
New Revolving Facility will be non-amortizing and will have a six and
one-quarter year term. The Company will be required to reduce loans
outstanding under the New Revolving Facility $75 million for a period of
not less than 30 consecutive days during each consecutive 12-month period
thereafter. At December 30, 1995, on a pro forma basis, giving effect to
currently anticipated borrowings and letter of credit issuances, the
Company's remaining borrowing availability under the New Revolving Facility
would have been approximately $162.0 million. Pursuant to the New Credit
Facility, the New Term Loans will be issued in four tranches: (i) Tranche
A, in the amount of $325 million, will have a six and one-quarter year
term; (ii) Tranche B, in the amount of $160 million, will have a seven and
one-half year term; (iii) Tranche C, in the amount of $160 million, will
have an eight and one-half year term; and (iv) Tranche D, in the amount of
$160 million, will have a nine and one-quarter year term. The New Term
Loans will require quarterly amortization payments. The New Credit
Facility will be 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 will contain financial covenants
which are expected to require, among other things, the maintenance of
specified levels of cash flow and stockholders' equity.
The capital expenditures of the Company were $18.3 million for the first
quarter of 1996. The Company currently anticipates that its aggregate
capital expenditures for fiscal 1996 will be approximately $100.0 million,
excluding the approximately $17 million of capital expenditures which are
estimated to be required in connection with the integration of Arizona
operations. 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.
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.
The capital expenditures discussed above do not include potential
acquisitions which the Company could make to expand within its existing
markets or to enter other markets. Future acquisitions may require the
Company to seek additional debt or equity financing depending on the size
of the transaction. With the exception of the Transactions, the Company is
not currently engaged in discussions concerning any material acquisition
which it considers probable.
In March 1996, the Company paid its regular quarterly cash dividends of
$.15 per common share. Following the close of the Transactions, the
Company intends to discontinue the payment of cash dividends and payment of
future dividends will be severely restricted by the terms of financing
agreements entered into by the Company in connection with the
recapitalization and merger.
Following the consummation of the Transactions, the Company will be 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 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 February 20, 1996, the Company filed a report on Form 8-K with the
Securities and Exchange Commission announcing under Item 5, "Other Items"
that Smith's Food & Drug Centers, Inc. had entered into a definitive
Recapitalization Agreement and Plan of Merger. The terms and conditions of
the agreement and related transactions were set forth in the January 29,
1996 press release which was filed as an exhibit to the Form 8-K.
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.
INDEX TO EXHIBITS
Exhibit
Number Document
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: 05/14/96 /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 first quarter 1996
</LEGEND>
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-28-1996
<PERIOD-END> MAR-30-1996
<CASH> 11,022
<SECURITIES> 0
<RECEIVABLES> 28,008
<ALLOWANCES> 0
<INVENTORY> 297,974
<CURRENT-ASSETS> 411,349
<PP&E> 1,447,435
<DEPRECIATION> 392,282
<TOTAL-ASSETS> 1,485,986
<CURRENT-LIABILITIES> 323,530
<BONDS> 648,681
3,311
0
<COMMON> 299
<OTHER-SE> 411,365
<TOTAL-LIABILITY-AND-EQUITY> 1,485,986
<SALES> 693,165
<TOTAL-REVENUES> 693,165
<CGS> 546,606
<TOTAL-COSTS> 546,606
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 14,545
<INCOME-PRETAX> (1,978)
<INCOME-TAX> (800)
<INCOME-CONTINUING> (1,178)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,178)
<EPS-PRIMARY> (.05)
<EPS-DILUTED> (.05)
</TABLE>
