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 July 5, 1997 (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 August 1,
1997:
Class A: 3,668,430
Class B: 12,189,222
<PAGE>
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements:
Consolidated Statements of Income for the
thirteen weeks ended July 5, 1997 and
June 29, 1996 and the twenty-seven weeks
ended July 5, 1997 and the twenty-six weeks
ended June 29, 1996 3
Consolidated Balance Sheets as of
July 5, 1997 and December 28, 1996 4
Consolidated Statements of Cash Flows for
the twenty-seven weeks ended July 5, 1997 and
and the twenty-six weeks ended June 29, 1996 6
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 10
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 13
Item 4. Submission of Matters to a Vote of
Securities Holders 13
Item 5. Other Information 14
Item 6. Exhibits and Reports on Form 8-K 14
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
SMITH'S FOOD & DRUG CENTERS, INC.
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(Dollar amounts in thousands, except per share data)
Thirteen Thirteen Twenty-Seven Twenty-Six
Weeks Weeks Weeks Weeks
Ended Ended Ended Ended
Jul 5, Jun 29, Jul 5, Jun 29,
1997 1996 1997 1996
-------- -------- ---------- ----------
Net sales $780,231 $690,023 $1,612,052 $1,383,188
Cost of goods sold 601,646 533,312 1,247,641 1,079,918
-------- -------- ---------- ---------
178,585 156,711 364,411 303,270
Expenses:
Operating, selling
and administrative 109,392 130,350 225,420 241,703
Depreciation and
amortization 23,978 21,432 46,887 44,071
Interest 28,948 22,655 61,671 37,092
Amortization of deferred
financing costs 809 772 3,109 880
Restructuring charges 201,622 201,622
-------- -------- ---------- ---------
163,127 376,831 337,087 525,368
-------- -------- ---------- ---------
INCOME (LOSS) BEFORE
INCOME TAXES AND
EXTRAORDINARY CHARGE 15,458 (220,120) 27,324 (222,098)
Income taxes (benefit) 6,500 (87,245) 11,500 (88,045)
-------- -------- ---------- ---------
INCOME (LOSS) BEFORE
EXTRAORDINARY CHARGE 8,958 (132,875) 15,824 (134,053)
Extraordinary charge on
extinguishment of debt,
net of tax benefit 41,782 25,030 41,782
-------- --------- ---------- ---------
NET INCOME (LOSS) $ 8,958 $(174,657) $ (9,206) $(175,835)
======== ========= ========== =========
Income (loss) per share of Common Stock:
Income (loss) before
extraordinary charge $ 0.55 $ (6.24) $ 0.97 $ (5.78)
Extraordinary charge (1.96) (1.54) (1.80)
-------- -------- ---------- ---------
Net income (loss) $ 0.55 $ (8.20) $ (0.57) $ (7.58)
======== ======== ========== =========
Average number of common
shares outstanding
(In thousands) 16,328 21,297 16,275 23,184
======== ======== ========== =========
See notes to consolidated financial statements
<PAGE>
SMITH'S FOOD & DRUG CENTERS, INC.
CONSOLIDATED BALANCE SHEETS
(Dollar amounts in thousands)
Jul 5, Dec 28,
1997 1996
---------- ----------
(Unaudited)
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 3,333 $ 48,466
Rebates and accounts receivable 24,036 23,624
Refundable income taxes 49,832
Inventories 357,993 371,912
Prepaid expenses and deposits 22,820 25,520
Deferred tax assets 60,810 60,679
Assets held for sale 31,747 40,348
---------- ----------
TOTAL CURRENT ASSETS 500,739 620,381
PROPERTY AND EQUIPMENT
Land 193,344 195,408
Buildings 591,831 591,075
Leasehold improvements 55,217 46,266
Property under capitalized leases 49,025 33,212
Fixtures and equipment 496,772 530,894
---------- ----------
1,386,189 1,396,855
Less allowances for depreciation
and amortization 432,134 440,811
---------- ----------
954,055 956,044
OTHER ASSETS
Goodwill, less accumulated amortization
of $3,211 in 1997 and $1,684 in 1996 122,662 121,484
Deferred financing costs, net 32,514 72,364
Other 19,199 15,732
---------- ----------
174,375 209,580
---------- ----------
$1,629,169 $1,786,005
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Trade accounts payable $ 274,058 $ 269,717
Accrued sales and other taxes 27,175 29,480
Accrued payroll and related benefits 77,394 78,950
Other accrued expenses 51,683 69,303
Current maturities of long-term debt 54,757 35,496
Current maturities of obligations
under capital leases 2,049 1,387
Accrued restructuring costs 16,716 25,678
---------- ----------
TOTAL CURRENT LIABILITIES 503,832 510,011
LONG-TERM DEBT, less current maturities 1,169,862 1,313,926
OBLIGATIONS UNDER CAPITAL LEASES,
less current portion 39,866 25,585
ACCRUED RESTRUCTURING COSTS,
less current portion 6,116 10,421
DEFERRED INCOME TAXES 9,550 13,330
OTHER LONG-TERM LIABILITIES 27,611 31,616
REDEEMABLE PREFERRED STOCK 3,319 3,319
COMMON STOCKHOLDERS' EQUITY
Convertible Class A Common Stock,
par value $.01 per share:
Authorized 20,000,000 shares; issued
and outstanding, 3,678,961 shares in
1997 and 5,117,144 shares in 1996 37 51
Class B Common Stock, par value $.01
per share: Authorized 100,000,000
shares; issued and outstanding,
12,178,691 shares in 1997 and
10,685,086 shares in 1996 122 107
Additional paid-in capital 200,030 199,609
Accumulated deficit (331,176) (321,970)
---------- ----------
(130,987) (122,203)
---------- ----------
$1,629,169 $1,786,005
========== ==========
See notes to consolidated financial statements
<PAGE>
SMITH'S FOOD & DRUG CENTERS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(Dollar amounts in thousands)
Twenty-Seven Twenty-Six
Weeks Ended Weeks Ended
Jul 5, 1997 Jun 29, 1996
-------- ----------
OPERATING ACTIVITIES:
Net loss $ (9,206) $ (175,835)
Adjustments to reconcile net loss to net
cash provided by operating activities:
Depreciation and amortization 46,877 44,071
Amortization of deferred financing costs 3,109 880
Deferred income benefit (3,901) (74,189)
Restructuring charges 201,622
Extraordinary charge 40,430 69,637
Other 844 303
Changes in operating assets and liabilities:
Rebates and accounts receivable (412) 5,171
Refundable income taxes 49,832 (40,878)
Inventories 13,919 112,132
Prepaid expenses and deposits 2,700 11,808
Trade accounts payable 4,341 (30,633)
Accrued sales and other taxes (2,305) (12,151)
Accrued payroll and related benefits (1,556) (8,231)
Accrued other expenses (17,620) (18,470)
Accrued restructuring costs (13,267) (48,636)
-------- ----------
CASH PROVIDED BY OPERATING ACTIVITIES 113,785 36,601
INVESTING ACTIVITIES:
Additions to property and equipment (72,106) (64,996)
Proceeds from sale of property and equipment 50,444 96,846
Other (3,467) (454)
-------- ----------
CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES (25,129) 31,396
FINANCING ACTIVITIES:
Additions to long-term debt 636,164 1,380,000
Payments on long-term debt (760,967) (830,536)
Purchases of Treasury Stock (3,142) (452,405)
Proceeds from sale of Treasury Stock 2,720 1,227
Payments of deferred financing costs (3,689) (74,935)
Fees paid on early extinguishment of debt (57,287)
Payment of dividends (3,761)
Other (4,875) (1,000)
-------- ----------
CASH USED IN FINANCING ACTIVITITES (133,789) (38,697)
-------- ----------
NET INCREASE (DECREASE) IN
CASH AND CASH EQUIVALENTS (45,133) 29,300
Cash and cash equivalents at beginning of year 48,466 16,079
-------- ----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 3,333 $ 45,379
======== ==========
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES
Obligations under capital leases incurred $ 15,813 $ --
======== ==========
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 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
week period ended July 5, 1997 are not necessarily indicative of the results
that may be expected for the year ending January 3, 1998. For further
information, refer to the consolidated financial statements and notes thereto
included in the Company's annual report on Form 10-K for the year ended
December 28, 1996.
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 $0.8 million in 1997 and $1.8 million in 1996 and for the first twenty-
seven weeks in 1997 was $2.4 million and for the first twenty-six weeks in 1996
was $3.5 million.
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 1996 financial statements to
conform with the 1997 presentation.
NOTE C -- MERGERS AND RECAPITALIZATION
SMITTY'S MERGER
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 28 stores (two stores were subsequently
leased to other retailers) 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. An additional 200,000 shares of the
Company's Class B Common Stock were issued in prepayment of certain management
fees. The financial statements reflect the allocation of the purchase price
and assumption of certain debt and include the results of operations for
Smitty's from May 23, 1996.
RECAPITALIZATION
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 Merger
(together with the Merger, the "Recapitalization"). The purchase of shares in
the tender offer was accounted for as a purchase of treasury stock which was
subsequently retired. The tender offer price of $36 per share was set in
January 1996 by the Company's Board of Directors to allow stockholders to sell
at least 50% of their shares at an appropriate premium of approximately $8.00
per share above trading prices of the Class B Common Stock on the New York
Stock Exchange prior to the announcement of the tender offer. 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.
PENDING MERGER
On May 11, 1997, the Company entered into a definitive merger agreement with
Fred Meyer, Inc. ("Fred Meyer") in which Smith's and Fred Meyer will form a
holding company ("Holdings") with two subsidiaries. Subject to certain
conditions, one subsidiary will merge with and into Smith's and the other
subsidiary will merge with and into Fred Meyer (collectively, the "1997
Mergers"). The 1997 Mergers will be completed by converting each outstanding
share of Smith's Class A Common Stock and Class B Common Stock into the right
to receive 1.05 shares of Holdings Common Stock, each outstanding share of
Smith's Series I Preferred Stock into the right to receive $0.33 1/3, and each
outstanding share of Fred Meyer Common Stock into the right to receive one
share of Holdings Common Stock. Completion of the 1997 Mergers is conditioned
on approval by the Company's and Fred Meyer's shareholders and various other
conditions and is expected to be consummated during September of 1997.
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 California Region. During 1996, the Company
sold or leased 23 of its California stores and related equipment and six non-
operating properties to various supermarket companies and others. During the
first twenty-seven weeks of 1997, the Company sold or leased three of its
California stores and related equipment and five non-operating properties. Of
the stores 26 sold or leased, 16 owned stores were sold outright, two owned
stores were leased, three store leases were assigned and five leased stores
were subleased. The remaining eight 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 of 1996 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 twenty-seven weeks of 1997 (dollar amounts in
thousands):
Expenditures Accrued
Balance at Incurred Restructuring Costs
Dec 28, during at Jul 5, 1997
1996 1997 Current Long-term
------- ------- ------- ------
Charges for lease obligations $21,865 $ 4,116 $11,633 $6,116
Termination costs 2,541 1,584 957
Property maintenance costs
and other 11,693 7,567 4,126
------- ------- ------- ------
$36,099 $13,267 $16,716 $6,116
======= ======= ======= ======
NOTE E -- LONG-TERM DEBT
Long-term debt consists of the following (dollar amounts in thousands):
Jul 5, Dec 28,
1997 1996
---------- ----------
Term loans, principal due quarterly through
2005, with interest at an average rate of
7.10% in 1997 and 8.57% in 1996 $ 600,000 $ 753,800
11 1/4% Senior Subordinated Notes, principal due
2007 with interest payable semi-annually 575,000 575,000
Unsecured Notes, principal due in annual
installments beginning in 2000 and interest
payable semi-annually at an average rate
of 8.89% 24,164
Revolving Credit Facility with interest at an
average rate of 6.94% 5,000
Sinking fund bonds, 10 1/2% interest,
semi-annual maturities to 2016 11,780 11,872
Mortgage notes, collateralized by property and
equipment with a cost of $2.8 million in 1997
and 1996, due in 2000 through 2005 with interest
at an average rate of 4.86% in 1997 and 5.11%
in 1996 2,741 2,742
Industrial revenue bonds, collateralized by
property and equipment with a cost of $9.3
million in 1997 and $9.0 million in 1996 due
in 2000 through 2010 plus interest at an
average rate of 7.22% in 1997 and 1996 5,934 6,008
---------- ----------
1,224,619 1,349,422
Less current maturities 54,757 35,496
---------- ----------
$1,169,862 $1,313,926
========== ==========
On March 27, 1997, the Company entered into an amended and restated senior
credit facility (the "New Credit Facility") that provides term loans totaling
$600 million (the "New Term Loans") and a $150 million revolving credit
facility (the "New Revolving Facility") less amounts outstanding under letters
of credit. The proceeds from the New Credit Facility were used to repay the
old term bank loans and outstanding indebtedness under the Company's revolvers
and letters of credit. All indebtedness under the New Credit Facility is
secured by substantially all of the assets of the Company. A commitment fee
ranging from .25% to .50% is charged on the average daily unused portion of the
New Revolving Facility, payable quarterly. Interest on borrowings under the
New Credit Facility is at the bank's Base Rate plus a margin based on the
Company's leverage ratio ranging from 0% to 1.25% or the Adjusted Eurodollar
Rate plus a margin based on the Company's leverage ratio ranging from .75% to
2.25%. At July 5, 1997, $7.8 million of letters of credit were issued under
the New Revolving Facility.
Maturities of the Company's long-term debt for the five fiscal years succeeding
July 5, 1997 are approximately $30.5 million in 1997, $59.9 million in 1998,
$66.5 million in 1999, $75.3 million in 2000, and $77.1 million in 2001.
The New Credit Facility requires the Company to maintain minimum levels of net
worth and earnings, and to comply with certain ratios related to fixed charges,
capital expenditures 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 $40.4 million net of a $15.4
million income tax benefit in the first quarter of 1997 which consisted of the
write-off of debt issuance costs related to the old credit facility which was
refinanced.
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 28-store Arizona supermarket chain (two stores were
subsequently leased to other retailers). Pursuant to the Merger, 3,038,877
shares of the Company's Class B Common Stock, $0.01 par value ("Class B Common
Stock") were issued to the stockholders of Smitty's. 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 was recorded as goodwill and is being
amortized over a 40-year period.
The Company also completed a self tender offer on May 23, 1996 pursuant to
which it purchased 50% of its outstanding Class A Common Stock, $0.01 par value
("Class A Common Stock") 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 Common Stock 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 senior credit facility (the "Credit Facility") which provided
term loans totaling $805 million (the "Term Loans") and a $190 million
revolving credit 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 (the "Notes"). As a result of prepaying existing
indebtedness, the Company incurred in 1996 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. As a result of the
closure of the California region and the Merger with Smitty's, comparisons of
quarter results to the prior year's comparable period are not meaningful.
Results of Operations
Net sales increased $90.2 million, or 13.1%, from $690.0 million in the second
quarter of 1996 to $780.2 million in the second quarter of 1997. For the first
half of 1997, net sales increased $228.9 million, or 16.5%, to $1.61 billion
from $1.38 billion for the first twenty-six weeks last year. If net sales were
adjusted to remove the additional week in the first half of 1997 (a twenty-
seven week period compared to a twenty-six week period in the prior year), the
sales increase would have been approximately 12.2%. This sales increase was
primarily attributable to changes in the number of operating stores. The
Company closed its 34 California stores during the first quarter of 1996 and
acquired 26 stores (net) in the Merger. Additionally, the Company has opened
an additional six stores (net) since June 29, 1996. Excluding the Company's
California operations during the first quarter of 1996, net sales for the first
twenty-seven weeks of the year increased $301.9 million or 23.0%. Same store
sales for the second quarter of 1997 increased 2.2%. As adjusted to exclude
the Company's California operations during the first quarter of 1996, same
store sales for the first twenty-seven weeks of 1997 increased 1.6%. These
increases reflect the favorable consumer response to the Company's initiatives
for improving sales and customer service.
Gross profit increased $21.9 million, or 14.0%, from $156.7 million in the
second quarter of 1996 to $178.6 million in the second quarter of 1997. For
the first twenty-seven weeks of the year, gross profit increased $61.1 million,
or 20.2%, from $303.3 million in 1996 to $364.4 million in 1997. Gross margins
during the second quarter of 1997 were 22.9% compared to 22.7% a year ago.
Gross margins during the first twenty-seven weeks of 1997 were 22.6% compared
to 21.9% a year ago. Excluding the Company's California operations during the
first quarter of 1996, gross profit increased $63.4 million, or 22.7%, in the
first twenty-seven weeks of 1997 compared to last year.
Operating, selling and administrative expense ("OS&A") decreased $21.0 million,
or 16.1%, from $130.4 million in the second quarter of 1996 to $109.4 million
in the second quarter of 1997 and decreased $16.3 million, or 6.7%, from $241.7
million for the first twenty-six weeks of 1996 to $225.4 million for the first
twenty-seven weeks of 1997. As a percent of net sales, OS&A decreased in the
second quarter from 18.9% last year to 14.0% this year and decreased in the
first twenty-seven weeks from 17.5% in 1996 to 14.0% in 1997. The decrease in
OS&A as a percent of net sales was primarily caused by synergies resulting from
the Merger, the absence in 1997 of expenses related to the Merger and
Recapitalization (the 1996 period included expenses for compensation on the
purchase of stock options, deferred compensation, severance paid to the former
Chief Executive Officer and other expenses) and the closure of the Company's
California stores in the first quarter of 1996.
Depreciation and amortization expense increased $2.6 million, or 12.1%, from
$21.4 million in the second quarter last year to $24.0 million in the second
quarter this year and increased $2.8 million, or 6.3%, from $44.1 million in
the first twenty-six weeks last year to $46.9 million in the first twenty-seven
weeks this year. These increases in depreciation and amortization expense
resulted from new food and drug combination stores opened since the end of the
second quarter of 1996.
Interest expense increased $6.2 million, or 27.3%, from $22.7 million in the
second quarter last year to $28.9 million for the second quarter of 1997 and
increased $24.6 million, or 66.3%, from $37.1 million in the first twenty-six
weeks last year to $61.7 million in the first twenty-seven weeks this year.
These increases in interest expense were primarily due to the increased debt
incurred in conjunction with the Merger and Recapitalization. On March 27,
1997, the Company completed the refinancing of its Credit Facility which
effectively reduced the Company's interest rate on the Term Loans by
approximately 170 basis points.
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 Statements of the Company included elsewhere herein.
The extraordinary charge of $41.8 million recorded in the second quarter of
1996 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 the related debt issuance costs. The extraordinary charge
of $25.0 million recorded in the first quarter of 1997 consists of the write-
off of debt issuance costs related to the Credit Facility which was refinanced
on March 27, 1997.
Net income for the second quarter of 1997 totaled $9.0 million or $0.55 per
common share compared to last year's net loss of $174.7 million or $8.20 per
common share. The net loss for the first twenty-seven weeks of 1997 totaled
$9.2 million or $0.57 per common share compared to a net loss of $175.8 million
or $7.58 per common share for the first twenty-six weeks of 1996. The
comparability of these results is affected by the restructuring charges and
extraordinary charges noted above.
Liquidity and Capital Resources
During the first twenty-seven weeks of 1997, cash provided by operating
activities was $113.8 million compared to $36.6 million for the first twenty-
six weeks of 1996. This increase was caused primarily by balance fluctuations
in operating assets and liabilities resulting from the closure of the
California region, receipt of $49.8 million from an income tax refund, and
normal operations.
Cash used in investing activities was $25.1 million for the first twenty-seven
weeks of 1997 as a result of the Company's ongoing expansion program which was
offset by proceeds from the sale of assets in the California region. The
Company is actively pursuing opportunities to dispose of its remaining real
estate assets in California which consist of eight closed stores and excess
land.
Cash used in financing activities totaled $133.8 million for the first twenty-
seven weeks of 1997 as a result of prepayments of the Credit Facility.
On March 27, 1997, the Company entered into an amended and restated senior
credit facility (the "New Credit Facility") that provided $600 million
aggregate principal amount of term loans (the "New Term Loans") and a $150
million revolving credit facility (the "New Revolving Facility") which is
available for working capital requirements and general corporate purposes. At
July 5, 1997, other than $7.8 million of letters of credit, $5.0 million was
outstanding under the New Revolving Facility. 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 three-quarter year term. The New Term
Loans were issued in two tranches: Tranche A, in the amount of $400 million,
has a six and three-quarter year term and Tranche B, in the amount of $200
million, has an eight 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 $72.1 million for the first twenty-
seven weeks of 1997. The Company currently anticipates that its aggregate
capital expenditures for fiscal 1997 will be approximately $100 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. 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 its capital expenditure projects, there would be no substantial
impact on short-term operating profitability. In the long term, however, if
these projects were substantially reduced, management believes its operations,
and ultimately its cash flow, would be adversely affected.
The Company has discontinued the payment of cash dividends and payment of
future dividends is severely restricted by the terms of the New Credit Facility
and the Indenture governing the Notes.
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 additional
cost savings or growth can be achieved.
In February 1997, the Financial Accounting Standards Board issued Statement No.
128, "Earnings per Share," which is required to be adopted for periods ending
after December 15, 1997. At that time, the Company will be required to change
the method currently used to compute earnings per share and to restate all
prior periods to conform to the new requirements. Under the new requirements,
basic earnings per share excludes the effect of stock options and diluted
earnings per share includes the effect of stock options. For the quarter ended
July 5, 1997, basic income per share would have been $0.02 higher than
reported. For the twenty-seven weeks ended July 5, 1997, basic income per
share before extraordinary charge would have been $0.03 higher than reported
and basic loss per share would have been $0.01 higher than reported. Diluted
earnings per share would have been the same as reported which included the
effect of stock options. For the quarter and twenty-six weeks ended June 29,
1996, the basic loss per share and diluted loss per share would have been the
same as reported because the effect of stock options was excluded due to the
net loss.
Cautionary Statement for Purposes of "Safe Harbor Provisions" of the Private
Securities Litigation Reform Act of 1995
When used in this report, the words "estimate," "believe," "expect," "project"
and similar expressions, together with other discussion of future trends or
results, are intended to identify forward-looking statements within the meaning
of Section 27A of the Securities Act of 1933, as amended (the "Securities Act")
and Section 21E of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"). Such statements are subject to certain risks and
uncertainties, including those discussed below, that could cause actual results
to differ materially from those projected. These forward-looking statements
speak only as of the date hereof. All of these forward-looking statements are
based on estimates and assumptions made by management of the Company, which,
although believed to be reasonable, are inherently uncertain and difficult to
predict, and therefore undue reliance should not be placed upon such estimates.
There can be no assurance that the savings or other benefits anticipated in
these forward-looking statements will be achieved. The following important
factors, among others, could cause the Company not to achieve the cost savings
or other benefits contemplated herein or otherwise cause the Company's results
of operations to be adversely affected in future periods: (i) continued or
increased competitive pressures from existing competitors and new entrants,
including price-cutting strategies; (ii) unanticipated costs related to the
Company's growth and operating strategies; (iii) loss or retirement of key
members of management; (iv) inability to negotiate more favorable terms with
suppliers or to improve working capital management; (v) increase in interest
rates of the Company's cost of borrowing or a default under any material debt
agreements; (vi) inability to develop new stores in advantageous locations or
to successfully convert existing stores; (vii) prolonged labor disruption;
(viii) deterioration in general of regional economic conditions; (ix) adverse
state or federal legislation or regulation that increases the cost of
compliance, or adverse findings by a regulator with respect to existing
operations; (x) loss of customers as result of the conversion of store formats;
(xi) adverse determinations in connection with pending or future litigation or
other material claims and judgments against the Company; (xii) inability to
achieve future sales; and (xiii) the unavailability of funds for capital
expenditures. Many of such factors are beyond the control of the Company.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
On May 22, 1996, Larry F. Klang ("Plaintiff") filed a purported class action
complaint against the Company in the Court of Chancery of the State of
Delaware, New Castle County. Plaintiff filed an amended complaint on May 30,
1996 (the "Klang Complaint") which named as defendants the Company, Smitty's
Super Valu, Inc. ("Smitty's"), the directors of the Company prior to the
consummation of the Merger, The Yucaipa Companies, a California general
partnership ("Yucaipa"), and Ronald Burkle. The Klang Complaint alleged, among
other things, (i) that the recapitalization transactions consummated by the
Company on May 23, 1996, violated Delaware law by impairing the capital of the
Company in its repurchase of its stock, (ii) that the directors and the Company
violated fiduciary duties of disclosure under Delaware law by making allegedly
inaccurate and incomplete disclosure in the Company's Offer to Purchase and
Proxy Statement, and (iii) that Mr. Burkle and Yucaipa aided and abetted these
allegedly illegal actions. The Klang Complaint sought, among other things,
injunctive relief, rescission of the recapitalization transactions,
certification of the action as a class action, and costs and fees. On June 28,
1996, the Company and the other defendants filed their answer to the Klang
Complaint, denying all material allegations and asserting various defenses to
the action. On October 15, 1996, the Plaintiff filed a motion to rescind the
recapitalization transactions. Vice-Chancellor William Chandler held oral
argument on the motion on November 21, 1996 and on May 13, 1997, the Court
denied the Plaintiff's motion to rescind the recapitalization transactions and
dismissed each of the Plaintiff's claims. On May 13, 1997, Plaintiff filed a
notice of appeal and on May 16, 1997, Plaintiff filed a motion to expedite the
appeal. The foregoing was reported by the Company in its Quarterly Report on
Form 10-Q for the quarterly period ended April 5, 1997. The Delaware Supreme
Court heard oral argument with respect to the appeal on August 12, 1997 and
reserved decision on the appeal. On August 13, 1997, the Court ordered that
the appeal be scheduled for oral argument before the Court en Banc, without
further briefing on a priority basis. The Court has not yet established a date
for the oral argument.
Item 4. Submission of Matters to a Vote of Securities Holders
At the Company's Annual Meeting of Stockholders held on April 23, 1997, the
stockholders voted on the following proposals:
Proposal No. 1--Election of Board of Directors
The stockholders re-elected as directors the following individuals to three-
year terms:
VOTES VOTES BROKER
NAME FOR WITHHELD NON-VOTES
Jeffrey P. Smith 129,361,691 58,964 -0-
Ronald W. Burkle 129,361,642 59,013 -0-
Allen R. Rowland 129,361,691 58,964 -0-
Proposal No. 2--Approval of Directors' Deferred Compensation Plan
The stockholders approved the Directors' Deferred Compensation Plan (with
119,439,597 affirmative votes, 1,033 negative votes, 9,980,025 abstentions and
zero broker non-votes).
Proposal No. 3--Ratification of Selection of Independent Auditors
The stockholders ratified the appointment of Ernst & Young LLP as the
Corporation's independent auditors for 1997 (with 124,417,371 affirmative
votes, 97 negative votes, 5,003,187 abstentions and zero broker non-votes).
Item 5. Other Information
On May 11, 1997, the Company and Fred Meyer, Inc., a Delaware corporation
("Fred Meyer"), entered into an Agreement and Plan of Reorganization and Merger
(the "Merger Agreement"). Pursuant to the terms of the Merger Agreement, the
Company and Fred Meyer will form a Delaware holding company ("Holdings"),
Holdings will form two subsidiaries ("Smith's Sub" and "Fred Sub") and, subject
to certain conditions being satisfied or waived, Smith's Sub would merge with
and into the Company and Fred Sub would merge with and into Fred Meyer (the
"Smith's Merger" and the "Fred Merger," and collectively, the "1997 Mergers"),
with the Company and Fred Meyer surviving the 1997 Mergers and becoming wholly-
owned subsidiaries of Holdings. Pursuant to the 1997 Mergers, (i) each
outstanding share of the Company's Class A Common Stock and each outstanding
share of the Company's Class B Common Stock would be converted into the right
to receive 1.05 shares of Holdings Common Stock, $0.01 par value ("Holdings
Common Stock"), (ii) each outstanding share of the Company's Series I Preferred
Stock, $0.01 par value, would be converted into the right to receive $0.33 1/3
in cash, and (iii) each outstanding share of Fred Meyer Common Stock would be
converted into the right to receive one share of Holdings Common Stock. Upon
consummation of the 1997 Mergers, Holdings Common Stock will trade on the New
York Stock Exchange. Conditions to the consummation of the 1997 Mergers
include the approval by the stockholders of Fred Meyer and the Company of the
Merger Agreement. The Company has set September 8, 1997 as the date of the
special meeting of stockholders for stockholders to consider and vote on the
Merger Agreement.
In connection with the 1997 Mergers, Holdings intends to refinance and
consolidate a majority of the existing indebtedness of the combined company.
The refinancing is expected to be completed on or about the effective time of
the 1997 Mergers, but is not, however, a condition to the obligations of the
Company and Fred Meyer to effect the 1997 Mergers. Fred Meyer has entered into
a commitment letter (the "Financing Commitment") with The Chase Manhattan Bank,
Bankers Trust Company and certain of their affiliates (collectively, the
"Banks"), which are presently anticipated to provide the sources of funds
required by Holdings to complete the refinancing. Pursuant to the Financing
Commitment, the Banks have agreed to provide senior credit facilities to
Holdings in an aggregate amount of up to $2.03 billion (the "Holdings Credit
Facility") and a lease financing program for Fred Meyer of up to $270 million.
It is presently anticipated that the Holdings Credit Facility will be
guaranteed by Holdings' material subsidiaries, including the Company and Fred
Meyer.
On August 8, 1997, the Company commenced an offer to purchase for cash any and
all of its outstanding Notes from the holders thereof (the "Offer"). In
connection with the Offer, the Company is soliciting consents from holders of
the Notes to certain amendments to the indenture governing the Notes to delete
or modify restrictive covenants and certain other provisions in the indenture
in order to provide the Company sufficient operating flexibility to operate as
a subsidiary of Holdings following the 1997 Mergers. Consummation of the Offer
is subject to the tender of, and receipt of consents from, the holders of at
least a majority of the outstanding aggregate principal amount of Notes, the
consummation of the 1997 Mergers and the receipt of financing and certain other
conditions. As of August 8, 1997, $575 million aggregate principal amount of
Notes were outstanding.
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 14, 1997, the Company filed a report on Form 8-K dated May 11, 1997
with the Securities and Exchange Commission describing under Item 5, "Other
Events" the Agreement and Plan of Reorganization and Merger between the
Company and Fred Meyer, Inc.
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: August 15, 1997 /s/ Matthew G. Tezak
------------------------ ------------------------------------------
Matthew G. Tezak, Senior Vice
President and Chief Financial
Officer (Principal Accounting
Officer)
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