UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[x] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 For the Quarterly Period Ended June 28, 1998
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 1-12116
CARR-GOTTSTEIN FOODS CO.
(Exact name of registrant as specified in its charter)
Delaware 920135158
(State or other jurisdiction of
incorporation or organization) (I.R.S. Employer Identification No.)
6411 A Street
Anchorage, Alaska 99518
(Address of principal executive offices)
Registrant's telephone number, including area code: (907) 561-1944
Indicate by check mark whether the registrant (1) has filed all
documents and reports required to be filed by Sections 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or for 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 [ ]
The number of shares of the registrant's Common Stock outstanding at
August 11, 1998 was 8,241,152 shares.
EXHIBIT INDEX
APPEARS AT PAGE 19
Page 1 of 21
<PAGE>
CARR-GOTTSTEIN FOODS CO.
AND SUBSIDIARIES
FORM 10-Q
For the Quarterly Period Ended June 28, 1998
INDEX
Part I. Financial Information Page
Item 1. Financial Statements
a) Consolidated Balance Sheets
as of June 28, 1998 (unaudited) and December 28, 1997 1
b) Consolidated Statements of Operations for the 13 weeks
and 26 weeks ended June 28, 1998 (unaudited)
and June 29, 1997 (unaudited) 2
c) Consolidated Statements of Cash Flows for the 26 weeks ended
June 28, 1998 (unaudited) and June 29, 1997 (unaudited) 3
d) Notes to Consolidated Financial Statements (unaudited) 4
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations (unaudited) 13
Part II. Other Information 17
Signatures 18
<PAGE>
<TABLE>
<CAPTION>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Carr-Gottstein Foods Co. and Subsidiaries
Consolidated Balance Sheets
- --------------------------------------------------------------------------------------------------------------------------
Amounts In Thousands
- --------------------------------------------------------------------------------------------------------------------------
June 28, December 28,
1998 1997
- ----------------------------------------------------------------------------------- -------------------- ------------------
<S> <C> <C>
Assets (unaudited) (unaudited)
Current assets:
Cash and cash equivalents $ 13,621 $ 11,081
Accounts receivable, net 11,857 11,513
Income taxes receivable 778 949
Inventories 53,347 51,471
Deferred taxes 2,690 2,690
Prepaid expenses and other current assets 1,940 2,380
- ----------------------------------------------------------------------------------- -------------------- ------------------
Total current assets 84,233 80,084
Property, plant and equipment, at cost, net of accumulated depreciation 128,982 134,090
Intangible assets, net of accumulated amortization 89,792 88,973
Deferred taxes 783 783
Other assets 16,203 11,535
- ----------------------------------------------------------------------------------- -------------------- ------------------
$ 319,993 $ 315,465
=================================================================================== ==================== ==================
Liabilities and Stockholders' Equity Current liabilities:
Accounts payable $ 42,801 $ 37,187
Accrued expenses 21,128 22,797
Income taxes payable 755 -
Current maturities of long-term debt 8,647 12,220
- ----------------------------------------------------------------------------------- -------------------- ------------------
Total current liabilities 73,331 72,204
Long-term debt, excluding current maturities 215,077 215,420
Other liabilities 6,232 3,527
- ----------------------------------------------------------------------------------- -------------------- ------------------
Total liabilities 294,640 291,151
- ----------------------------------------------------------------------------------- -------------------- ------------------
Stockholders' equity:
Common stock, $.01 par value, authorized 25,000 shares,
Issued 9,680 shares 97 97
Additional paid in capital 51,048 52,088
Deficit (16,101) (16,149)
- ----------------------------------------------------------------------------------- -------------------- ------------------
35,044 36,036
Less treasury stock, 1,439 and 1,741 shares, at cost 9,691 11,722
- ----------------------------------------------------------------------------------- -------------------- ------------------
Total stockholders' equity 25,353 24,314
- ----------------------------------------------------------------------------------- -------------------- ------------------
Commitments and contingencies
=================================================================================== ==================== ==================
$ 319,993 $ 315,465
=================================================================================== ==================== ==================
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Carr-Gottstein Foods Co. and Subsidiaries
- -------------------------------------------------------------------------------------------------------------------------------
Consolidated Statements of Operations
Amounts In Thousands (except per share data)
- -------------------------------------------------------------------------------------------------------------------------------
13 Weeks Ended 26 Weeks Ended
June 28, June 29, June 28, June 29,
1998 1997 1998 1997
- -------------------------------------------------------------- -------------- ----------------- --------------- ----------------
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
Sales $ 150,229 $ 152,029 $ 285,342 $ 293,495
Cost of merchandise sold, including warehousing
and transportation expenses 106,086 108,329 201,733 208,803
- -------------------------------------------------------------- -------------- ----------------- --------------- ----------------
Gross profit 44,143 43,700 83,609 84,692
Operating and administrative expenses 36,000 36,173 69,557 71,687
Non-recurring charge - 8,949 - 8,949
- -------------------------------------------------------------- -------------- ----------------- --------------- ----------------
Operating income (loss) 8,143 (1,422) 14,052 4,056
Other expenses:
Interest expense, net (6,493) (6,704) (13,007) (13,415)
Other income 15 - 26 -
- -------------------------------------------------------------- -------------- ----------------- --------------- ----------------
Total other expense (6,478) (6,704) (12,981) (13,415)
- -------------------------------------------------------------- -------------- ----------------- --------------- ----------------
Net income (loss) before taxes 1,665 (8,126) 1,071 (9,359)
Income tax (expense) benefit (983) 3,051 (1,023) 3,265
- -------------------------------------------------------------- -------------- ----------------- --------------- ----------------
Net income (loss) $ 682 $ (5,075) $ 48 $ 6,094
============================================================== ============== ================= =============== ================
Basic income (loss) per common share 0.08 (0.64) 0.01 (0.77)
Diluted income (loss) per common share 0.08 (0.64) 0.01 $ (0.77)
============================================================== ============== ================= =============== ================
Weighted avg. common shares outstanding-basic 8,213 7,932 8,180 7,908
Weighted avg. common shares outstanding-diluted 8,699 7,932 8,666 7,908
============================================================== ============== ================= =============== ================
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Carr-Gottstein Foods Co. and Subsidiaries
Consolidated Statements of Cash Flows
- --------------------------------------------------------------------------------------------------------------------------
Amounts in Thousands
- --------------------------------------------------------------------------------------------------------------------------
26 weeks Ended
June 28, June 29,
1998 1997
- ---------------------------------------------------------------------------------------------------------------------------
(unaudited) (unaudited)
<S> <C> <C>
Operating activities:
Net income (loss) $ 48 $ (6,094)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation 6,715 6,836
Amortization of intangibles 1,420 1,427
Amortization of loan fees and discounts 659 687
Gain on disposal of property and equipment (26) -
(Increase) decrease in assets:
Income tax receivable 171 (911)
Receivables (344) (1,608)
Inventories (1,876) (2,277)
Prepaid expenses 440 (112)
Deferred taxes - (3,109)
Other assets (5,327) 417
(Decrease) increase in liabilities:
Accounts payable 5,614 2,495
Accrued expenses (1,216) 8,635
Income taxes payable 755 (298)
Other liabilities 2,252 (131)
- ---------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 9,285 5,957
- ---------------------------------------------------------------------------------------------------------------------------
Investing activities:
Additions to property and equipment (4,032) (1,945)
Additions to intangibles (2,239) -
Proceeds from sale of property 2,451 -
- ---------------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (3,820) (1,945)
- ---------------------------------------------------------------------------------------------------------------------------
Financing activities:
Payments on long-term debt (3,916) (3,132)
Short term borrowings, net - 900
Issuance of treasury stock 991 309
- ---------------------------------------------------------------------------------------------------------------------------
Net cash used in financing activities (2,925) (1,923)
Net increase in cash and cash equivalents 2,540 2,089
Cash and cash equivalents at beginning of period 11,081 8,655
- ---------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 13,621 $ 10,744
===========================================================================================================================
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 12,895 $ 12,584
Income taxes 268 971
===========================================================================================================================
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE>
Carr-Gottstein Foods Co. and Subsidiaries
Notes to Consolidated Financial Statements (unaudited)
(1) During interim periods, Carr-Gottstein Foods Co. and subsidiaries (the
"Company") follows the accounting policies set forth in its audited
financial statements included in its Annual Report for the fiscal year
ended December 28, 1997 filed with the Securities Exchange Commission.
These consolidated interim financial statements should be read in
conjunction with such audited consolidated financial statements and notes
thereto. Management believes that the accompanying interim financial
statements reflect all adjustments, which are necessary for a fair
statement of the results of the interim period, presented. All adjustments
made in the accompanying interim financial statements are of a normal
recurring nature.
(2) Statement Financial Accounting Standard No. 128 (SFAS 128), Earnings Per
Share, which supersedes APB Opinion No. 15, Earnings Per Share, specifies
the computation, presentation, and disclosure requirements for earnings per
share (EPS) for entities with publicly held common stock or potential
common stock. The statement replaces Primary EPS and Fully Diluted EPS with
Basic EPS and Diluted EPS, respectively. Basic EPS, unlike Primary EPS,
excludes all dilution while Diluted EPS, like Fully Diluted EPS, reflects
the potential dilution that could occur if securities or other contracts to
issue common stock were exercised or converted into common stock or
resulted in the issuance of common stock that then shared in the earnings
of the entity. The Company has adopted the provisions of SFAS No. 128 and
has restated all prior period EPS amounts accordingly.
(3) On August 6, 1998, the Company announced that it had signed a definitive
agreement (the "Merger Agreement"), with Safeway Inc. ("Safeway") and ACG
Merger Sub, Inc., a wholly-owned subsidiary of Safeway, pursuant to which
Safeway would acquire all outstanding shares of the Company's Common Stock
("Common Stock") at a purchase price of $12.50 per share. In addition,
Safeway will assume approximately $220 million of debt and will account for
the transaction as a purchase. The Merger Agreement was unanimously
approved by the Board of Directors of the Company. The consummation of the
transaction contemplated by the Merger Agreement, which is subject to
certain conditions, including approval of the Company's shareholders,
clearance from certain regulatory authorities and receipt of certain
consents, is expected to occur in the first quarter of 1999. Financing is
not a condition to complete the transaction.
In connection with the Merger Agreement, Green Equity Investors, L.P. (an
affiliate of Leonard Green & Associates, L.P.), the Company's largest
stockholder, executed an agreement with Safeway (the "Stockholder Support
Agreement") in which it agreed to vote its 2,869,592 shares of Common
Stock, which represented 34.8% of the Company's outstanding stock at the
time of the execution of the agreement in favor of approval of the Merger
Agreement.
The Merger Agreement provides for payment to Safeway of a termination fee
and reimbursement of expenses, under certain circumstances, including if
the Board, in the exercise of its fiduciary responsibilities, withdraws or
modifies its recommendation to the stockholders of the transaction
contemplated by the Merger Agreement.
<PAGE>
Carr-Gottstein Foods Co. and Subsidiaries
Notes to Consolidated Financial Statements (unaudited) - continued
(2) CONDENSED CONSOLIDATING FINANCIAL INFORMATION
The Company issued $100,000,000 of senior subordinated unsecured notes on
November 15, 1995. CGF Properties, Inc. has not guaranteed the unsecured notes
and financial information for this wholly-owned subsidiary is presented
separately. All of the Company's other direct and indirect subsidiaries, AOL
Express, Inc., APR Forwarders, Inc., Oaken Keg Spirit Shops, Inc. and Alaska
Advertisers, Inc. are wholly-owned and have fully and unconditionally guaranteed
the unsecured notes on a joint and several basis and, accordingly, are presented
on a combined basis. Parent company only information is presented for
Carr-Gottstein Foods Co., which reflects only its business activity and its
wholly-owned subsidiaries accounted for using the equity method. Separate
financial statements and other disclosures for the guarantor subsidiaries are
not presented because in the opinion of management such information is not
material.
The following are condensed consolidating balance sheets:
<TABLE>
<CAPTION>
Amounts in Thousands
- -----------------------------------------------------------------------------------------------------------------------
Balance Sheet Non-Guarantor Guarantor Parent
Subsidiary Subsidiaries Company
June 28, 1998 CGF Properties (Combined) Only Elimination Consolidated
- -----------------------------------------------------------------------------------------------------------------------
Assets
<S> <C> <C> <C> <C> <C>
Inventories $ - $ 3,737 $ 49,610 $ - $ 53,347
Other current assets 7,364 80,336 1,209 (58,023) 30,886
- -----------------------------------------------------------------------------------------------------------------------
Total current assets 7,364 84,073 50,819 (58,023) 84,233
Property, plant and equipment, net 63,197 2,712 63,073 - 128,982
Intangible, net - - 89,792 - 89,792
Investments in subsidiaries - - 111,802 (111,802) -
Other assets - 673 16,313 - 16,986
- -----------------------------------------------------------------------------------------------------------------------
$ 70,561 $ 87,458 $ 331,799 $ (169,825) $ 319,993
=======================================================================================================================
Liabilities and Stockholders' Equity
Current liabilities $ 1,121 $4,356 $ 125,877 $ (58,023) $ 73,331
Long-term debt, excluding current
maturities 40,740 - 174,337 - 215,077
Other liabilities - - 6,232 - 6,232
- -----------------------------------------------------------------------------------------------------------------------
Total liabilities 41,861 4,356 306,446 (58,023) 294,640
Common stock 10 44 97 (54) 97
Additional paid-in capital 28,966 39,381 51,048 (68,347) 51,048
Retained earnings (deficit) (276) 43,677 (16,101) (43,401) (16,101)
- -----------------------------------------------------------------------------------------------------------------------
28,700 83,102 35,044 (111,802) 35,044
Less treasury stock - - (9,691) - (9,691)
- -----------------------------------------------------------------------------------------------------------------------
Total stockholders' equity 28,700 83,102 25,353 (111,802) 25,253
- -----------------------------------------------------------------------------------------------------------------------
$ 70,561 $ 87,458 $ 331,799 $ (169,825) $ 319,993
=======================================================================================================================
</TABLE>
<PAGE>
Carr-Gottstein Foods Co. and Subsidiaries
Notes to Consolidated Financial Statements (unaudited) - continued
<TABLE>
<CAPTION>
Amounts in Thousands
- -----------------------------------------------------------------------------------------------------------------------
Balance Sheet Non-Guarantor Guarantor Parent
Subsidiary Subsidiaries Company
December 28, 1997 CGF Properties (Combined) Only Elimination Consolidated
- -----------------------------------------------------------------------------------------------------------------------
Assets
<S> <C> <C> <C> <C> <C>
Inventories $ - $ 3,837 $ 47,634$ - $ 51,471
Other current assets 8,323 74,760 5,230 (59,700) 28,613
- -----------------------------------------------------------------------------------------------------------------------
Total current assets 8,323 78,597 52,864 (59,700) 80,084
Property, plant and equipment, net 62,671 4,951 66,468 - 134,090
Intangible, net - - 88,973 - 88,973
Investments in subsidiaries - - 108,207 (108,207) -
Other assets 32 573 11,713 - 12,318
- -----------------------------------------------------------------------------------------------------------------------
$ 71,026 $ 84,121 $ 328,225 $ (167,907) $ 315,465
=======================================================================================================================
Liabilities and Stockholders' Equity
Current liabilities $ 1,591 $ 4,276 $ 126,037 $ (59,700) $ 72,204
Long-term debt, excluding current
maturities 41,073 - 174,347 - 215,420
Other liabilities - - 3,527 - 3,527
- -----------------------------------------------------------------------------------------------------------------------
Total liabilities 42,664 4,276 303,911 (59,700) 291,151
- -----------------------------------------------------------------------------------------------------------------------
Common stock 10 44 97 (54) 97
Additional paid-in capital 28,966 39,381 52,088 (68,347) 52,088
Retained earnings (deficit) (614) 40,420 (16,149) (39,806) (16,149)
- -----------------------------------------------------------------------------------------------------------------------
28,362 79,845 36,036 (108,207) 36,036
Less treasury stock - - 11,722 - 11,722
- -----------------------------------------------------------------------------------------------------------------------
Total stockholders' equity 28,362 79,845 24,314 (108,207) 24,314
- -----------------------------------------------------------------------------------------------------------------------
$ 71,026 $ 84,121 $ 328,225 $ (167,907) $ 315,465
=======================================================================================================================
</TABLE>
<PAGE>
Carr-Gottstein Foods Co. and Subsidiaries
Notes to Consolidated Financial Statements (unaudited) - continued
The following are condensed consolidating statements of operations:
<TABLE>
<CAPTION>
Amounts in Thousands
- -----------------------------------------------------------------------------------------------------------------------
Statement of Operations Non-Guarantor Guarantor Parent
Subsidiary Subsidiaries Company
13 Weeks Ended June 28, 1998 CGF Properties (Combined) Only Elimination Consolidated
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Sales $ - $ 20,671 $ 140,051 $ (10,493) $ 150,229
Cost of merchandise sold, including
warehousing and transportation
expenses - 14,888 101,691 (10,493) 106,086
- -----------------------------------------------------------------------------------------------------------------------
Gross profit - 5,783 38,360 - 44,143
Operating and administrative
(income) expenses (1,442) 2,567 34,875 - 36,000
Non-recurring charge - - - - -
- -----------------------------------------------------------------------------------------------------------------------
Operating income 1,442 3,216 3,485 - 8,143
Interest expense, net (1,098) - (5,395) - (6,493)
Other income - - 15 - 15
Equity in subsidiary earnings - - 2,100 (2,100) -
- -----------------------------------------------------------------------------------------------------------------------
Income before income tax 344 3,216 205 (2,100) 1,665
Income tax (expense) benefit (141) (1,319) 477 - (983)
- -----------------------------------------------------------------------------------------------------------------------
Net income $ 203 $ 1,897 $ 682 $ (2,100) $ 682
=======================================================================================================================
</TABLE>
<PAGE>
Carr-Gottstein Foods Co. and Subsidiaries
Notes to Consolidated Financial Statements (unaudited) - continued
The following are condensed consolidating statements of operations:
<TABLE>
<CAPTION>
Amounts in Thousands
- -----------------------------------------------------------------------------------------------------------------------
Statement of Operations Non-Guarantor Guarantor Parent
Subsidiary Subsidiaries Company
26 Weeks Ended June 28, 1998 CGF Properties (Combined) Only Elimination Consolidated
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Sales $ - $ 39,120 $ 266,186 $ (19,964) $ 285,342
Cost of merchandise sold, including
warehousing and transportation
expenses - 28,501 193,196 (19,964) 201,733
- -----------------------------------------------------------------------------------------------------------------------
Gross profit - 10,619 72,990 - 83,609
Operating and administrative
(income) expenses (2,774) 5,098 67,233 - 69,557
Non-recurring charge - - - - -
- -----------------------------------------------------------------------------------------------------------------------
Operating income 2,774 5,521 5,757 - 14,052
Interest expense, net (2,201) - (10,806) - (13,007)
Other income - - 26 - 26
Equity in subsidiary earnings - - 3,595 (3,595) -
- -----------------------------------------------------------------------------------------------------------------------
Income before income tax 573 5,521 (1,428) (3,595) 1,071
Income tax (expense) benefit (235) (2,264) 1,476 - (1,023)
- -----------------------------------------------------------------------------------------------------------------------
Net income $ 338 $ 3,257 $ 48 $ (3,595) $ 48
=======================================================================================================================
</TABLE>
<PAGE>
Carr-Gottstein Foods Co. and Subsidiaries
Notes to Consolidated Financial Statements (unaudited) - continued
The following are condensed consolidating statements of operations:
<TABLE>
<CAPTION>
Amounts in Thousands
- -----------------------------------------------------------------------------------------------------------------------
Statement of Operations Non-Guarantor Guarantor Parent
Subsidiary Subsidiaries Company
13 Weeks Ended June 29,1997 CGF Properties (Combined) Only Elimination Consolidated
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Sales $ - $ 20,736 $ 142,395 $ (11,102) $ 152,029
Cost of merchandise sold, including
warehousing and transportation
expenses - 15,101 104,330 (11,102) 108,329
- -----------------------------------------------------------------------------------------------------------------------
Gross profit - 5,635 38,065 - 43,700
Operating and administrative
expenses (1,420) 2,712 34,881 - 36,173
Non-recurring charge - - 8,949 - 8,949
- -----------------------------------------------------------------------------------------------------------------------
Operating income (loss) 1,420 2,923 (5,765) - (1,422)
Interest expense, net (1,116) - (5,588) - (6,704)
Equity in subsidiary earnings - - 1,904 (1,904) -
- -----------------------------------------------------------------------------------------------------------------------
Income (loss) before income tax 304 2,923 (9,449) (1,904) (8,126)
Income tax (expense) benefit (125) (1,198) 4,374 - 3,051
- -----------------------------------------------------------------------------------------------------------------------
Net income (loss) $ 179 $ 1,725 $ (5,075) $ (1,904) $ (5,075)
=======================================================================================================================
</TABLE>
<PAGE>
Carr-Gottstein Foods Co. and Subsidiaries
Notes to Consolidated Financial Statements (unaudited) - continued
The following are condensed consolidating statements of operations:
<TABLE>
<CAPTION>
Amounts in Thousands
- -----------------------------------------------------------------------------------------------------------------------
Statement of Operations Non-Guarantor Guarantor Parent
Subsidiary Subsidiaries Company
26 Weeks Ended June 29, 1997 CGF Properties (Combined) Only Elimination Consolidated
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Sales $ - $ 37,780 $ 275,453 $ (19,737) $ 293,495
Cost of merchandise sold, including
warehousing and transportation
expenses - 27,292 201,249 (19,737) 208,803
- -----------------------------------------------------------------------------------------------------------------------
Gross profit - 10,488 74,204 - 84,692
Operating and administrative
(income) expenses (2,669) 5,530 68,826 - 71,687
Non-recurring charge - - 8,949 - 8,949
- -----------------------------------------------------------------------------------------------------------------------
Operating income 2,669 4,958 (3,571) - 4,056
Interest expense, net (2,312) - (11,103) - (13,415)
Equity in subsidiary earnings - - 3,136 (3,136) -
- -----------------------------------------------------------------------------------------------------------------------
Earnings before income tax 357 4,958 (11,538) (3,136) (9,359)
Income tax (expense) benefit (147) (2,032) 5,444 - 3,265
- -----------------------------------------------------------------------------------------------------------------------
Net earnings (loss) $ 210 $ 2,926 $ (6,094) $ (3,136) $ (6,094)
=======================================================================================================================
</TABLE>
<PAGE>
Carr-Gottstein Foods Co. and Subsidiaries
Notes to Consolidated Financial Statements (unaudited) - continued
The following is condensed consolidating cash flow information. The consolidated
Company's cash and cash equivalents is positive at each balance sheet date so
negative balances for individual subsidiaries are not classified as liabilities.
The net cash provided by operating activities fluctuates due to changes in
intercompany receivables and payables from the transfer of cash to and from the
parent company.
<TABLE>
<CAPTION>
Amounts in Thousands
- -----------------------------------------------------------------------------------------------------------------------
Statement of Cash Flows Non-Guarantor Guarantor Parent
Subsidiary Subsidiaries Company
26 Weeks Ended June 28, 1998 CGF Properties (Combined) Only Consolidated
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net cash provided by (used in) operating activities $ 1,992 $ (1,593) $ 8,886 $ 9,285
- -----------------------------------------------------------------------------------------------------------------------
Investing activities
Addition to property and equipment (1,815) (808) (1,409) (4,032)
Proceeds from sale of property and equipment - 2,401 50 2,451
Additions to intangible assets - - (2,239) (2,239)
Net cash provided by (used in) investing activities (1,815) 1,593 (3,598) (3,820)
- -----------------------------------------------------------------------------------------------------------------------
Financing activities
Payments on long-term debt (176) - (3,740) (3,916)
Short term borrowings, net - - - -
Issuance of treasury stock - - 991 991
- -------------------------------------------------------------------------------------------------------------------------
Net cash used in financing activities (176) - (2,749) (2,925)
- -----------------------------------------------------------------------------------------------------------------------
Net increase in cash and cash equivalents 1 - 2,539 2,540
Cash and cash equivalents at beginning of period 53 106 10,922 11,081
- -----------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 54 $ 106 $ 13,461 $ 13,621
=======================================================================================================================
</TABLE>
<PAGE>
Carr-Gottstein Foods Co. and Subsidiaries
Notes to Consolidated Financial Statements (unaudited) - continued
The following is condensed consolidating cash flow information. The consolidated
Company's cash and cash equivalents is positive at each balance sheet date so
negative balances for individual subsidiaries are not classified as liabilities.
The net cash provided by operating activities fluctuates due to changes in
intercompany receivables and payables from the transfer of cash to and from the
parent company.
<TABLE>
<CAPTION>
Amounts in Thousands
- -----------------------------------------------------------------------------------------------------------------------
Statement of Cash Flows Non-Guarantor Guarantor Parent
Subsidiary Subsidiaries Company
26 Weeks Ended June 29, 1997 CGF Properties (Combined) Only Consolidated
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net cash provided by operating activities $ 324 $ 10 $ 5,623 $ 5,957
- -----------------------------------------------------------------------------------------------------------------------
Investing activities
Addition to property and equipment - (10) (1,935) (1,945)
- -----------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities - (10) (1,935) (1,945)
- -----------------------------------------------------------------------------------------------------------------------
Financing activities
Payments on long-term debt (322) - (2,810) (3,132)
Short term borrowings, net - - 900 900
Issuance of treasury stock - - 309 309
- -----------------------------------------------------------------------------------------------------------------------
Net cash used in financing activities (322) - (1,601) (1,923)
- -----------------------------------------------------------------------------------------------------------------------
Net increase in cash and cash equivalents 2 - 2,087 2,089
Cash and cash equivalents at beginning of period 53 106 8,496 8,655
- -----------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 55 $ 106 $ 10,583 $ 10,744
=======================================================================================================================
</TABLE>
<PAGE>
Carr-Gottstein Foods Co. and Subsidiaries
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
The following discussion should be read in conjunction with the unaudited
financial statements and related notes included elsewhere in this Form 10-Q.
General
Carr-Gottstein Foods Co. is the leading retail and wholesale food
company in Alaska operating full-service supermarkets and wine and liquor stores
as well as the only full-line food warehouse and distribution center (under
the J.B. Gottstein name) in the state.
Results of Operations
13 Weeks Ended June 28, 1998 Compared to 13 Weeks Ended June 29, 1997
Sales. Sales for the 13 weeks ended June 28, 1998 were $150.2 million
compared to $152.0 million for the 13 weeks ended June 29, 1997. The 1.2%
decrease was due primarily to the closure of YES Foods, which closed in the
third quarter of 1997. Excluding the impact of YES Foods, sales improved by $3.9
million, or 2.6%. Retail comparable store sales for the 13 weeks of 1998,
improved 1.0% from the 13 week period in 1998.
Gross Profit. Gross profit for the 13 weeks ended June 28, 1998 was
$44.1 million compared to $43.7 million for the 13 weeks ended June 29, 1997.
The improvement in gross margin dollars is primarily attributable to the
increase in sales at the retail locations as compared to the prior year. As a
percentage of sales, gross profit was 29.4% for the 13 weeks 1998 compared to
28.7% for the 13 weeks 1997. Gross profit as a percentage of sales for the 13
weeks 1998 increased primarily due to the closure of YES Foods, which was
operating at lower average gross margins during the 1997 period.
Operating and Administrative Expenses. Operating and administrative
expenses for the 13 weeks ended June 28, 1998 were $36.0 million compared to
$36.2 million for the 13 weeks ended June 29, 1997. Operating and administrative
expenses as a percentage of sales were 24.0% for the 13 weeks 1998 compared to
23.8% for the 13 weeks 1997.
Operating Income. Operating income for the 13 weeks ended June 28, 1998
increased $9.6 million from an operating loss of $1.4 million in the second
quarter of 1997 to $8.1 million in the second quarter of 1998. This increase in
operating income was due to improvements in gross profit margin, effective
expense control and a non-recurring pre-tax charge of $8.9 million taken in the
1997 quarter for expenses primarily associated with the closure of YES Foods and
the discontinuance of service to a Russian export business.
Other Income and Expense. Net interest expense was $6.5 million for the
13 weeks ended June 28, 1998 compared to $6.7 million for the 13 weeks ended
June 29, 1997. The decrease in interest expense was due primarily to lower
average debt balances in the quarter.
Income Taxes. Income tax expense for the 13 weeks ended June 28, 1998
was $1.0 million compared to a $3.1 million benefit for the 13 weeks ended June
29, 1997.
Net Income. Net income for the 13 weeks ended June 28, 1998 was $0.7
million, or $0.08 per share, versus a net loss of $5.1 million, or $0.64 per
share for the 13 weeks ended June 29, 1997.
<PAGE>
26 Weeks Ended June 28, 1998 Compared to 26 Weeks Ended June 29, 1997
Sales. Sales for the 26 weeks ended June 28, 1998 were $285.3 million
compared to $293.5 million for the 26 weeks ended June 29, 1997. The decrease in
sales for the 26 weeks of 1998 reflects an increase of 0.2% in total retail
comparable store sales.
Gross Profit. Gross profit for the 26 weeks ended June 28, 1998 was
$83.6 million compared to $84.7 million for the 26 weeks ended June 29, 1997.
The decrease in gross margin dollars is primarily attributable to the closure of
YES Foods. As a percentage of sales, gross profit was 29.3% for the 26 weeks
1998 compared to 28.9 % for the 26 weeks 1997.
Operating and Administrative Expenses. Operating and administrative
expenses for the 26 weeks ended June 28, 1998 were $69.6 million compared to
$71.7 million for the 26 weeks ended June 29, 1997. Operating and administrative
expenses as a percentage of sales were 24.4% for the 26 weeks 1998 compared to
24.4% for the 26 weeks 1997. The decrease in operating expense dollars is due
primarily to the reduction in expenses from the closure of YES Foods.
Operating Income. Operating income for the 26 weeks ended June 28, 1998
increased $10.0 million from $4.1 million, or 1.4% of sales, in 1997 to $14.1
million, or 4.9% of sales in 1998. This increase in operating income was due to
improvements in gross profit margin, effective expense control and the
non-recurring pre-tax charge taken in the second quarter of 1997 for expenses
primarily associated with the closure of YES Foods and the discontinuance of
service to a Russian export business.
Other Income and Expense. Net interest expense was $13.0 million for
the 26 weeks ended June 28, 1998 compared to $13.4 million for the 26 weeks
ended June 29, 1997. The decrease in interest expense is due to lower average
debt balances during the first half of 1998.
Income Taxes. The Company recognized an income tax expense for the 26
weeks ended June 28, 1998 of $1.0 million compared to a $3.3 million benefit for
the 26 weeks ended June 29, 1997.
Net Income. Net loss for the 26 weeks ended June 28, 1998 was $48,000
or $0.01 per share, versus a net loss of $6.1 million, or $0.77 per share for
the 26 weeks ended June 29, 1997.
Liquidity and Capital Resources
The Company's primary sources of liquidity are cash flows from
operations and its working capital revolving credit facility, which are
considered to be adequate for anticipated cash needs. Primary uses are capital
expenditures, debt service, and lease payments.
Net cash provided by operating activities was $9.3 million for the 26
weeks ended June 28, 1998 compared to net cash provided by operating activities
of $6.0 million for the same period in 1997. The change in the 26 weeks 1998
compared to 1997 was due primarily to the increased net earnings recorded during
this period.
Capital expenditures for the 26 weeks ending June 28, 1998 were $6.3
million. Capital expenditures are expected to range between $8.0 and $12.0
million for fiscal 1998. It is anticipated that the balance of 1998 capital
expenditures will be funded out of cash provided by operations and borrowings
under the working capital revolver.
Net cash used by financing activities for the 26 weeks ending June 28,
1998 was $2.9 million. During this time period, the Company had no increased
borrowings under its revolving line of credit and made payments against its
long-term debt in the amount of $3.9 million. The level of borrowings under the
<PAGE>
Company's revolving debt is dependent primarily upon cash flows from operations,
the timing of disbursements, long-term borrowing activity and capital
expenditures.
At June 28, 1998 there were no borrowings outstanding on the revolving
debt. The Company had available unused credit of $35.0 million. Funds borrowed
under the revolving credit portion of the Company's credit facility are
restricted to working capital and general corporate purposes. The level of
borrowings under the Company's revolving debt is dependent primarily upon cash
flows from operations, the timing of disbursements, long-term borrowing activity
and capital expenditure requirements.
On April 9, 1998 the Company completed a transaction whereby it
purchased the fixtures, equipment and inventory of the three retail locations of
Market Basket, Inc. located in Fairbanks and North Pole, Alaska. The transaction
also included the purchase of certain real estate in Fairbanks. As part of the
agreement, the Company entered into a long-term lease for the store in North
Pole, Alaska.
On April 17, 1998 the Company amended its Senior Credit Agreement. The
amendment reduced the Company's borrowing rates by 50 basis points on its $35.0
working capital revolver and $23.0 million Term A facilities, and by 75 basis
points on its $58.8 million Term B facility. The amendment also modified certain
financial covenants and restrictions.
Year 2000 Issue
The year 2000 issues stems from the fact that many computer programs
were written using two, rather than four, digits to identify the applicable
year. As a result, computer programs with time-sensitive software may recognize
a two-digit code for any year in the next century as related to this century.
For example, "00" entered in a date-filed for the year 2000, may be interpreted
as the year 1900, resulting in system failures or miscalculations and
disruptions of operations, including, among other things, a temporary inability
to process transactions or engage in other normal business activities.
In order to improve operating efficiencies and to help streamline the
Company's administrative operations, the Company installed its new purchasing
and financial system, Project Fusion, in 1996. An ancillary benefit of Project
Fusion is that the majority of the resulting systems are Year 2000 compliant.
Based upon a recent assessment, the Company has determined that the incremental
cost of ensuring that its remaining computer systems are Year 2000 compliant is
not expected to have a material adverse effect on the Company. The Company has
completed a preliminary assessment of each of its operations and their Year 2000
readiness, believes that appropriate actions are being taken, and expects to
complete its overall Year 2000 remediation prior to any anticipated impact on
its operations. The Company believes that, with modifications to existing
software and conversions to new systems, the Year 2000 issue will not pose
significant operational problems for its computer systems and that costs
associated with Year 2000 remediation will not be material. However, if such
modifications and conversions are not made, or are not completed timely, the
Year 2000 issue could have a material impact on the operations of this Company.
The potential impact of the Year 2000 issue on significant customers, vendors
and suppliers has not yet been assessed and cannot be reasonably estimated at
this time. Further, while the Company has initiated formal communications with a
number of its significant suppliers to determine the extent to which the
Company's interface systems are vulnerable to those third parties' failure to
remediate their own Year 2000 issues, and will initiate similar communication
with the balance of its major suppliers in 1998, there is no guarantee that the
systems of other companies on which the Company's systems rely will be timely
converted and would not have an adverse effect on the Company's systems.
Recent Events
On August 6, 1998, the Company announced that it had signed a
definitive agreement (the "Merger Agreement"), with Safeway Inc. ("Safeway") and
ACG Merger Sub, Inc., a wholly-owned subsidiary of Safeway, pursuant to which
Safeway would acquire all outstanding shares of the Company's Common Stock
<PAGE>
("Common Stock") at a purchase price of $12.50 per share. In addition, Safeway
will assume approximately $220 million of debt and will account for the
transaction as a purchase. The Merger Agreement was unanimously approved by the
Board of Directors of the Company. The consummation of the transaction
contemplated by the Merger Agreement, which is subject to certain conditions,
including approval of the Company's shareholders, clearance from certain
regulatory authorities and receipt of certain consents, is expected to occur in
the first quarter of 1999. Financing is not a condition to complete the
transaction.
In connection with the Merger Agreement, Green Equity Investors, L.P.
(an affiliate of Leonard Green & Associates, L.P.), the Company's largest
stockholder, executed an agreement with Safeway (the "Stockholder Support
Agreement") in which it agreed to vote its 2,869,592 shares of Common Stock,
which represented 34.8% of the Company's outstanding stock at the time of the
execution of the agreement in favor of approval of the Merger Agreement.
The Merger Agreement provides for payment to Safeway of a termination
fee and reimbursement of expenses, under certain circumstances, including if the
Board, in the exercise of its fiduciary responsibilities, withdraws or modifies
its recommendation to the stockholders of the transaction contemplated by the
Merger Agreement.
Item 2. Quantitative and Qualitative Disclosure about Market Risk
Not applicable
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings - None.
Item 2. Changes in Securities - None
Item 3. Defaults Upon Senior Securities - None.
Item 4. Submission of Matters to a Vote of Security Holders - None
Item 5. Other Information - None
Item 6. Exhibits and Reports on Form 8-K
(a) The exhibits set forth in the Exhibit Index on page 19
hereof are filed with this quarterly report on Form
10-Q.
(b) No reports were filed on Form 8-K during the quarter ended
June 28, 1998.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CARR-GOTTSTEIN FOODS CO.
By: s/s Lawrence H. Hayward
Lawrence H. Hayward
President and
Chief Executive Officer
Date: August 11, 1998
By: s/s Donald J. Anderson
Donald J. Anderson
Senior Vice-President and
Chief Financial Officer
Date: August 11, 1998
<PAGE>
CARR-GOTTSTEIN FOODS CO.
Exhibit Index
The following exhibits are attached as indicated:
Exhibit
Number Description of Exhibit
27 Financial Data Schedule
27.1 Restated Financial Schedule
27.2 Restated Financial Schedule
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This schedule contains summary financial information extracted from the
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<FN>
<F1> Restated to be consistent with 1998 presentation.
<F2> Restated to reflect adoption in fourth quarter 1997 of FAS 128 which is a
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<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
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</LEGEND>
<RESTATED>
<MULTIPLIER> 1000
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<DEPRECIATION> 64925<F1>
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<F1> Restated to be consistent with 1998 presentation.
<F2> Restated to reflect adoption in fourth quarter 1997 of FAS 128 which is a
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</FN>
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