UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended: January 3, 1999
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
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 (I.R.S. Employer Identification No.)
incorporation or organization)
6411 A Street
Anchorage, Alaska 99518
(Address of principal executive offices)
Registrant's telephone number, including area code: (907) 561-1944
Securities registered pursuant to Section 12(b) of the Act:
Title of each class: Common stock - par value $.01
Name of each exchange on which registered: New York Stock Exchange
Securities registered pursuant to section 12(g) of the Act: None.
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 [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K (ss.229.405 of this chapter) is not contained herein, and will
not be contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this form 10-K. [X]
Aggregate market value of the voting stock held by non-affiliates of the
registrant as of March 29, 1999: $63,924,493
Number of Shares of Common Stock outstanding as of March 29, 1999: 8,248,052.
DOCUMENTS INCORPORATED BY REFERENCE
(To the Extent Indicated Herein)
<PAGE>
CARR-GOTTSTEIN FOODS CO.
INDEX TO ANNUAL REPORT ON FORM 10-K
For the Fiscal Year Ended January 3, 1999
PART I
Page
Item 1. Business........................................................1
Item 2. Properties......................................................8
Item 3. Legal Proceedings...............................................8
Item 4. Submission of Matters to a Vote of Security Holders.............9
PART II
Item 5. Market for Registrant's Common Equity
and Related Stockholder Matters.........................10
Item 6. Selected Financial Information and Other Data..................11
Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations...........12
Item 7A. Quantitative and Qualitative Disclosures about Market Risk.....15
Item 8. Financial Statements and Supplementary Data....................15
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure............15
PART III
Item 10. Directors and Officers of the Registrant.......................16
Item 11. Executive Compensation.........................................17
Item 12. Security Ownership of Certain Beneficial
Owners and Management.............................17
Item 13. Certain Relationships and Related Transactions.................17
PART IV
Item 14. Exhibits, Financial Statement Schedules, Reports on Form 8-K...18
<PAGE>
Item 1. Business
As used in this Annual Report on Form 10-K ("Form 10-K"), unless the
context indicates otherwise, the terms "Company" and "CGF" refer to
Carr-Gottstein Foods Co., a Delaware corporation. Unless otherwise indicated, as
used in this Form 10-K (i) all references to square feet are to gross square
feet, rather than net selling space; and (ii) all references to a year shall
mean the fiscal year of the Company which commences in such year (for example,
the fiscal year commencing December 29, 1997 and ending January 3, 1999 is
referred herein as "1998").
The Company
The Company is the leading food and drug retailer in Alaska, with 49
stores primarily located in Anchorage, as well as in Fairbanks, Juneau, Kenai
and other Alaska communities. The Company operates a chain of 16
super-combination food, drug and general merchandise stores under the name Carrs
Quality Centers (the "Carrs Stores"). The Company also operates nine smaller
stores, four under the name Eagle Quality Centers and two under other trade
names (collectively, the "Eagle Stores"), as well as three neighborhood food
stores in smaller Alaska communities. The Company is also Alaska's
highest-volume alcoholic beverage retailer through its chain of 17 wine and
liquor stores operated under the name Oaken Keg Spirit Shops (the "Oaken Keg
Stores"). The Company also operates seven small tobacco stores which operate
under the name The Great Alaska Tobacco Company (the "Tobacco Stores"). In
addition, the Company's vertically integrated organization, which includes
freight transportation operations and Alaska's only full-line food warehouse and
distribution center, provides the Company's retail and wholesale operations
important merchandising benefits, cost advantages and operating efficiencies
generally not available to its competitors.
History
The Company's predecessor (the "Predecessor") was formed in 1986 as the
result of a merger of J.B. Gottstein & Co., a retail grocery and wholesale
grocery distributor founded in 1915, and Carrs Quality Centers, an Alaska
grocery store company that commenced operations in 1950. The Company was formed
in 1990 by Leonard Green & Partners, L.P. ("LGA"), for the purpose of acquiring,
through Green Equity Investors, L.P. ("GEI") and with certain members of the
Company's senior management, assets of the Predecessor used in its retail,
wholesale and freight operations. On October 12, 1990, the Company acquired
certain assets of the Predecessor, including real property, and certain
subsidiaries used or held for use in the business and operation of retail food
and liquor stores, food wholesaling and freight operations, and assumed certain
liabilities, pursuant to an acquisition agreement among the Company, the
Predecessor, Laurence J. Carr and Barnard J. Gottstein.
Proposed Merger
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 ("Acquisition"), Inc., a wholly-owned subsidiary of Safeway,
pursuant to which Safeway would acquire by merger (the "Merger") 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 Board of Directors
of the Company approved the Merger Agreement. The consummation of the
transactions contemplated by the Merger Agreement, is subject to certain
conditions, including approval of the Company's stockholders, clearance from
certain regulatory authorities and receipt of certain consents and court
approval. Financing is not a condition to complete the transaction.
In connection with the Merger Agreement, GEI, the Company's largest
stockholder, executed an agreement with Safeway (the "Stockholder Support
Agreement") in which it has agreed to vote its 2,869,592, shares of Common
Stock, which represents 35.1% of the Company's outstanding stock, 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 transactions contemplated by the
Merger Agreement.
Consent Decree. On February 9, 1999, Safeway, the Company and
Acquisition entered into a Consent Decree with the State of Alaska (the "Consent
Decree"), in connection with settling a lawsuit filed by the State of Alaska in
the Superior Court for the State of Alaska, Third Judicial District at Anchorage
(the "Court"), with respect to the Merger (a copy of the Consent Decree may be
<PAGE>
obtained from the Court). The Consent Decree, which is subject to court
approval, requires Safeway and the Company to sell seven stores (the "Stores")
- -- four Safeway stores located in Anchorage, one Safeway store located in each
of Eagle River and Wasilla and the Company store in Fairbanks. Each of these
Stores is required to be sold to operating supermarket companies that will be
approved by the Attorney General.
The Consent Decree provides for a 60-day public comment period
following which the Court will conduct a hearing on the comments, if any, and
will determine whether to approve the Consent Decree. The parties have scheduled
a hearing before the Court for April 13, 1999. The Merger may not be consummated
prior to the entry of an order by the Court approving the Consent Decree, and
upon the approval and entry of the Consent Decree by the Court.
Following the Court's approval of the Consent Decree, Safeway and the
Company will have six months to obtain approval from the Attorney General of the
State of Alaska (the "Attorney General") of signed purchase agreements and
proposed transactions to sell the Stores and an additional two months to
complete the sales, subject to extensions approved by the Attorney General. The
Consent Decree contains provisions for payments by Safeway of up to $1 million
for each Store for which it is unable to meet those deadlines. In addition, if
the deadlines are not met, the State of Alaska may seek the appointment of a
trustee to effect the divestiture of the remaining Stores.
Pursuant to the Consent Decree, until Safeway and the Company have sold
the Stores, they have agreed to operate and conduct the business of the Stores
in the ordinary course, maintain existing business relationships with each
Store's suppliers, customers and employees, maintain inventory levels and
selections at each Store and limit increases in the gross profit margins for
supermarkets that they operate in the geographic areas in which the Stores are
located.
Hart-Scott-Rodino ("HSR") Act. The Merger is subject to review by the
Federal Trade Commission (the "FTC") and the Antitrust Division of the
Department of Justice (the "DOJ") under the HSR Act. The parties have apprised
the FTC of the Consent Decree. The staff of the FTC's Seattle Regional Office
has indicated to Safeway and the Company that it is prepared to recommend that
the Bureau of Competition grant early termination of the waiting period under
the HSR Act, provided that the Court enters the Consent Decree in substantially
the same form as agreed to by the parties, and that the Bureau of Competition is
in agreement with this position.
AKPIRG Litigation. In late October 1998, an Alaska consumer group,
Alaska Public Interest Research Group ("AKPIRG"), and five individuals filed a
purported class-action lawsuit in Alaska state court seeking an injunction to
prevent the Merger. In February 1999, Safeway and the Company settled with
AKPIRG and the individual plaintiffs. The settlement provided that AKPIRG and
the individual plaintiffs no longer oppose the Merger or the Consent Decree and
dismiss the lawsuit.
Business Strategy
The Company's business strategy is to enhance its leading market
position in Alaska and to increase revenue and profitability by providing
competitively priced, high-quality grocery and perishable merchandise at
superior levels of customer convenience and satisfaction. The Company believes
it is at the forefront of supermarket industry innovations in customer offerings
and expects to capitalize on its competitive advantages within Alaska. The
Company has devoted significant resources to expand and remodel its
well-established stores to take full advantage of their prime locations. The
Company expects to vigorously pursue opportunities to improve its profitability
through increased efficiencies at both the store and distribution levels,
enhanced systems and cost controls and recently implemented state-of-the-art
electronic marketing programs. Management believes that these efforts to improve
revenue and reduce costs, combined with opportunistic acquisition or
construction of new stores, primarily Eagle Stores in smaller Alaska communities
and, selectively, Carrs Stores, will address the Company's goal of maximizing
profitable growth.
The Company's strategy capitalizes on the following competitive
advantages:
Superior Merchandising Capabilities. The primary objectives of
the Company's merchandising strategy are customer convenience and
satisfaction. Hallmarks of the Company's stores are their variety,
quality and presentation of fresh produce and other perishables offered
together with a wide range of specialty departments and services not
found in conventional supermarkets. The Company believes that freshness
and quality of produce is generally the single most important
determinant for a customer in choosing a supermarket, and that the
freshness, quality, variety and presentation of its perishables are
among the finest in the United States supermarket industry.
<PAGE>
Quality Store Base. Over the past 30 years the Company has
strategically located its stores in prime residential shopping areas
intended to provide maximum accessibility and convenience to customers.
Since 1991 the Company has invested in excess of $100 million to
remodel and expand its existing store base and acquire or construct new
stores. Due to the excellent condition of the current store base, the
Company does not expect that significant capital improvements will be
necessary in the foreseeable future.
Vertically Integrated Freight Distribution and Warehouse
Facilities. The Company's freight distribution and warehouse facilities
provide it with distinct competitive advantages in its procurement
costs, quality of perishables and inventory management. The Company is
able to supply merchandise to its Anchorage area stores generally
within 12 hours, six days per week, allowing it to offer fresher
perishables, minimize stock-outs and devote a greater percentage of
store square footage to selling rather than on-site storage space.
Because the Company's competitors rely on distribution facilities
located more than 2,200 miles away, the Company believes that its
competitors experience a five-day or more delay in receiving
merchandise, must use more store square footage for inventory storage
and are not able to match the Company's shipping volume efficiencies.
Furthermore, the economies of scale provided by the Company's
third-party wholesale and freight distribution businesses reduce the
Company's own delivered cost of goods.
State-of-the-Art Electronic Direct Marketing Program. Through
its "Carrs Plus" electronic marketing program, the Company tracks
consumer buying patterns, enabling the Company to optimize its
marketing expenditures. By using a "Carrs Plus" card with their
purchases, customers automatically obtain discounts on various store
items while the Company collects detailed information about consumer
preferences. The Company uses the information generated through its
"Carrs Plus" program to develop targeted direct mail marketing
campaigns, which are typically more cost-effective and successful than
mass mailings or newspaper advertisements.
Merchandising Strategy
The Company's retail merchandising strategy emphasizes shopping
convenience, superlative customer service and high-quality produce, meat and
other perishables. The integration of the Company's retail and distribution
operations is important to the success of its merchandising strategy, as it
allows the Company to offer fresher perishables and experience fewer stock-outs
than its competitors. Key elements of the Company's merchandising strategy
include:
Quality Produce, Meat and Other Perishables. Carrs Stores and Eagle
Stores emphasize superior quality produce, meat, seafood and other perishables
in addition to a wide selection of food, drugstore items and general
merchandise. The Company believes that the freshness, quality, variety and
presentation of its perishables are among the finest in the United States
supermarket industry.
Innovative Specialty Departments. A hallmark of the Company's stores is
the variety of innovative specialty departments. A number of Carrs Stores offer
a combination of specialty service meat departments, 59-minute photo developing,
"Orient Express" Chinese and other specialty food take-out counters, service
seafood departments, sushi counters, candy departments, fresh fruit and juice
bars, bagel bars, fresh pasta departments, espresso and ice cream stands, and
full-service bank branches. All Carrs Stores also include full-service
pharmacies, floral departments and service delicatessens. All Carrs Stores and
most Eagle Stores include natural food departments, soup and salad bars,
in-store bakeries and video rental departments. In the Anchorage area, the
Company also offers catering services for large and small events. In addition,
the Company is the exclusive ticketing agent for most major Alaska cultural and
sporting events, selling tickets through its Carrs TixTM outlets in all but two
Carrs Stores and at certain event locations.
Competitive Prices. The Company maintains a reputation as the provider
of the best overall supermarket values in Alaska by supplementing its
competitive pricing with targeted temporary price reductions on selected food
and non-food merchandise. The Company's sophisticated information systems and
distribution network give management the flexibility to respond to market
conditions by rapidly adjusting its prices.
Customer Service. The Company distinguishes itself from its competitors
by offering excellent customer service. The Company has adopted operating
policies designed to maximize customer convenience and satisfaction. Checkout
services include price scanning in all stores, acceptance of credit cards and
debit cards, use of the Company's proprietary "Carrs Plus" card, "candy-free"
<PAGE>
checkout aisles for customers with young children, and carryout for all
customers with more than one bag. Many Carrs Stores and Eagle Stores feature
special services to assist customers, including baby changing rooms with
complimentary diapers and a service center from which customers can send and
receive faxes, send overnight packages and purchase hunting and fishing licenses
and money orders.
Store Base
Over the past 30 years the Company has strategically located its stores
in prime residential shopping areas to provide maximum accessibility and
convenience to customers. The Carrs Stores and Eagle Stores are destination
stores that offer customers one-stop shopping convenience in modern,
easy-to-shop formats. Due to the Company's Anchorage distribution center, the
Company's stores are not required to maintain a significant amount of space for
inventory storage and are therefore able to maximize selling area.
Carrs Stores. Carrs Stores are super-combination food, drug and general
merchandise stores. Specialty departments and merchandise mix in each Carrs
Stores are based upon management's review of the location of a store,
demographics of the area surrounding each store and a store's proximity to other
Carrs Stores. The 16 Carrs Stores range from approximately 28,500 total square
feet to approximately 73,000 total square feet, and average approximately 52,000
total square feet.
Eagle Stores and Other Stores. Eagle Stores are designed to serve the
smaller and more rural communities in which they operate by offering a full
range of food items, a variety of non-food and drugstore items and general
merchandise products with a selection of the Company's higher margin specialty
departments. The Eagle Stores range from approximately 16,300 total square feet
to approximately 43,900 total square feet and average approximately 25,600 total
square feet. The Company operates Eagle Stores in Homer, Seward, Valdez,
Unalaska/Dutch Harbor, Nome and Kotzebue. In addition, the Company operates
three smaller neighborhood stores in Big Lake, Seldovia and Girdwood which
average approximately 10,000 square feet.
Oaken Keg Stores. The Company is the state's highest-volume alcoholic
beverage retailer. Alaska law does not permit alcoholic beverages to be sold in
grocery stores. Accordingly, a wholly-owned subsidiary of the Company operates a
chain of 17 Oaken Keg Stores. The Company has positioned 15 of the 17 Oaken Keg
Stores adjacent to Carrs Stores to provide convenient access to customers and
generate walk-in traffic. Oaken Keg Stores range in size from 900 total square
feet to 5,300 total square feet.
Tobacco Stores. Tobacco Stores were designed to offer the consumer a
customer friendly environment, in a tightly controlled area, in which to
purchase a full range of tobacco items including a broad selection of cigars and
miscellaneous accessories. The seven Tobacco Stores range in size from 525 total
square feet to approximately 1,000 total square feet.
Store Expansions, Remodels and Additions. From 1990 through 1998, the
Company pursued a program of store expansions and remodels, as well as store
additions through either construction or acquisition. Remodels involve the
addition of specialty departments and cosmetic renovations. Expansions involve
the same type of work as remodels, but include the addition of square footage.
Management believes that the addition or expansion of specialty departments and
services into the Company's stores, combined with the upgrading and enlargement
of core product departments, has led to increased customer traffic and sales
volume and improved store operating performance. In addition, management
believes that providing a broad range of products and services strengthens the
competitive position of its Carrs Stores and Eagle Stores as destination stores
in each of their markets.
The Company completed two major remodels of Carrs stores in early 1998.
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.
Warehouse Facilities and Freight Distribution
Warehouse Operations. The Company's full-line food warehouse and
distribution center in Anchorage is the only facility of its kind in Alaska. The
warehouse and distribution center consists of a 233,000 square foot facility in
Anchorage which supplies approximately 80% of the merchandise sold in the
Company's stores. This facility also contains refrigeration and freezer space
and six state-of-the-industry banana ripening rooms. The Company's computerized
<PAGE>
store ordering system allows each individual store to place its own merchandise
orders directly with the warehouse. Special computerized storage and picking
systems track merchandise from point of receiving through point of sale to
ensure precise inventory control and minimize handling costs. The warehouse and
distribution center operates above a 95% fill rate. This efficiency, plus the
proximity of the facility to a significant number of the Company's stores,
enables the Company to respond quickly to store orders and to minimize
stock-outs at its stores.
Freight Operations. The Company operates a 105,000 square foot
warehouse and cross-dock facility in Tacoma, Washington, which serves as a
collection point for substantially all of the inventory purchased by the Company
in the lower 48 states. At the Tacoma facility, inventory is received, sorted
and logged into the Company's computerized inventory management system. The
Company operates 18 tractors and 537 trailers. This fleet, in addition to
trailers leased as needed on a short-term basis, handles all transportation from
the Company's Tacoma facility to ocean ports, from the Anchorage port to the
Company's warehouse, and most of the transportation from the Company's warehouse
to the Company's retail stores and third-party customers.
Third-Party Wholesale and Freight Services. In addition to supplying
its own stores, the Company utilizes its warehouse and distribution capabilities
to sell grocery and household products on a wholesale basis to customers
throughout Alaska, including other retailers and military commissaries. The
Company believes that this expanded customer base allows it to take advantage of
purchasing and other operating synergies which might otherwise be unavailable to
it. In addition to its warehouse sales, the Company utilizes its existing
shipping and freight handling systems to offer freight services to third
parties. The economies of scale resulting from these third-party sales and
services reduce the Company's own delivered cost of goods.
Competitive Advantages. The Company's freight and warehouse operations
give the Company several logistical and cost advantages relative to its
competition. The Company has developed logistical expertise in long-range
distribution which enables it to service efficiently stores and customers
throughout Alaska, up to approximately 900 miles from its Anchorage warehouse.
The Company manages the inventory for its retail operations and its wholesale
distribution operations on a combined basis. It is able to consolidate van loads
at its Tacoma facility for maximum space efficiency, reducing the number of vans
that must be shipped and the landed cost of the Company's inventory in
Anchorage.
In contrast, the Company's competitors do not have centralized
warehousing and distribution facilities in Alaska and must supply individual
retail sites in Alaska from warehouses in the lower 48 states, more than 2,200
miles from Anchorage. This requires a longer lead time for store orders and
makes it difficult for competitors to match the consistent freshness of the
Company's perishables or its responsiveness to market conditions. Without a
consolidation and distribution center in Alaska, the Company's competitors must
ship vans from the lower 48 states directly to their Alaskan stores, and the
Company believes that the competitors generally have a five-day or more period
from placement of order to receipt of merchandise. Since the Company ships to an
Alaska warehouse where loads can be redistributed for shipment to individual
stores, management believes the Company is able to load vans more efficiently,
reducing the cost of shipment. In order to reduce stock-outs, the Company's
competitors must maintain larger in-store inventories, thereby reducing selling
square footage that could otherwise be devoted to a broader selection of
merchandise.
Marketing and Promotion
The Company's retail advertising strategy is directed primarily at
emphasizing its variety of high-quality perishables, customer service and a
broad selection of nationally advertised brand name products, available at
competitively low prices. The Company markets its retail operations through
newspaper, radio and television advertising and also uses direct mail
advertising, including periodic advertisements, and special season catalogues.
The Company's proprietary "Carrs Plus" card is used by customers for quick check
cashing and video rental, special discounts and bonuses without using coupons.
Through its "Carrs Plus" electronic marketing program the Company tracks
consumer buying patterns, enabling the Company to optimize its marketing
expenditures. The Company uses the information generated through its "Carrs
Plus" program to develop targeted direct mail marketing campaigns which are
typically more cost-effective and successful than mass mailings or newspaper
advertisements. The Company markets its wholesale operations primarily through a
wholesale sales force. The Company also participates actively in local community
affairs through the donation of funds and products to local sporting events and
charities, and it encourages employees to participate in civic groups.
<PAGE>
Management Information Systems
The Company employs sophisticated information technology systems in all
of its stores and distribution operations to improve operating efficiency and
achieve lower costs, particularly in the areas of buying, distribution, scanning
and in-store computing, merchandising and expense management. Management
believes that its commitment to management information systems provides labor
cost savings, better control of prices and increased checkout speed and accuracy
due to improved product procurement, store delivery schedules, inventory
management and pricing accuracy. The Company's information system also handles
real time electronic mail and authorizations for check, debit and credit
payments, and processing for third-party pharmacy authorization. In addition,
the Company uses scanner-generated information by store of individual product
sales for better merchandising of stores, tighter inventory control and better
space allocation.
All Company stores and a majority of the Company's independent
wholesale customers place orders via hand-held TelxonTM terminals. Such orders
can be processed by the warehouse within the hour. The Company developed and
maintains a warehouse inventory tracking and productivity improvement system to
manage all of the Company's warehouse inventory levels. This system includes
inventory control and labor management components that help reduce product cost
and maximize the Company's ability to service customers. This system also tracks
inventory that is "on the water" during ocean transport from Washington to
Alaska. Sophisticated logistics systems anticipate inventory needs and recommend
product moves between the Tacoma and Anchorage sites. Central purchasing and a
proprietary forward-buying system provide the Company with purchasing power that
helps minimize product acquisition costs.
During the first quarter of 1996, the Company completed the process of
replacing its 4381 IBM mainframe computer with the installation of its new
purchasing and financial system ("Project Fusion") that was designed to improve
operating efficiencies and help streamline the Company's administrative
operations. Project Fusion has allowed the Company to support modern database
tools and client/server technology. The Company believes that this new flexible
systems environment has enabled it to respond more rapidly to business
opportunities and competitive situations as a result of better utilization of
management information data.
Trademarks and Licenses
The Company employs various trademarks, trade names and service marks.
Certain governmental licenses and permits, including alcoholic beverage
licenses, health permits and various business licenses, are necessary to
operations. Management believes that the Company holds and is in material
compliance with all necessary licenses and permits.
Competition
The food, drug and general merchandise retail businesses are highly
competitive. The principal competitive factors in the Alaska market include
quality of products, customer service, product assortment, price, store location
and convenience. The Company believes that its competitive strengths include its
high-quality perishables, customer service, specialty departments, low prices,
variety of product offering, convenient store locations and long history of
community involvement. The Company believes that its freight network and
Anchorage warehouse and distribution center also provide significant competitive
advantages.
Given the wide assortment of products its stores offer, the Company
competes with various types of retailers, including independent and national
supermarket operators, national general merchandisers and discount retailers and
membership wholesale clubs. The Company's principal competitors in the
supermarket business include Safeway, Fred Meyer, Alaska Commercial, a number of
independent supermarket operators, and four military commissaries. The Company's
primary competitors for general merchandise are Fred Meyer, Kmart and Wal-Mart,
and Costco and Sam's Club membership warehouse stores.
Year 2000 Issue
The year 2000 issue 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-field 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.
<PAGE>
In order to improve operating efficiencies and to help streamline CGF's
administrative operations, CGF 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, CGF 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 CGF. CGF 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. CGF 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. CGF expended approximately $250,000 in 1998 and
expects to expend approximately $500,000 in 1999 addressing Year 2000 issues.
CGF currently expects that the total incremental cost of ensuring that its
remaining computer systems are Year 2000 complaint will not exceed $1,000,000.
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 CGF has initiated formal communications with a number
of its significant suppliers to determine the extent to which CGF's interface
systems are vulnerable to those third parties' failure to remediate their own
Year 2000 issues, and has initiated similar communication with the balance of
its major suppliers, there is no guarantee that the systems of other companies
on which CGF's systems rely will be timely converted and would not have an
adverse effect on CGF's systems.
Alaska Economy
Historically, Alaska had been one of the more rapidly growing states in
the United States in terms of both population and employment, although
employment growth has slowed recently. The Alaska Department of Labor had
projected growth in Alaska's population from approximately 553,000 in 1990 to
approximately 671,000 in 2000, a compound annual growth rate of approximately
2.0% compared to the estimated national population growth rate of approximately
1.0% for that period. Employment in Alaska, which grew 2.0% in 1998, is
projected to remain fairly flat over the next few years. Alaska's residents are
not subject to any state sales or income taxes and receive annual distributions
from the state of Alaska Permanent Fund, a fund of approximately $25 billion
that is supported by royalties from oil production. The distribution totaled
$864 million ($1,541 per eligible resident) in Alaska's fiscal year ended June
30, 1998.
The traditional strengths of the Alaska economy have been petroleum,
fishing, forest products and mining industries. Military and government
spending, as well as tourism, have also been major contributors to the state's
economy. Military and government spending provide a stimulus to the state's
economy through payroll and benefit payments and capital spending on
transportation and other infrastructure. In recent years, tourism has become an
increasingly important contributor to the Alaska economy.
Employees
As of March 1, 1999, the Company employed a total of approximately
3,200 people, approximately 2,400 of whom are covered by collective bargaining
agreements. Certain employees engaged in the Company's warehouse operations are
represented by the Teamsters Union, grocery store and administrative employees
are represented by the United Food and Commercial Workers Union ("UFCW"), and
pharmacists are represented by the Alaska State District Council of Laborers.
The Company has not experienced a labor strike since 1971 and believes its
relations with its employees to be satisfactory.
On July 24, 1996, the Company entered into a three-year labor agreement
covering approximately 2,000 grocery store employees represented by the UFCW. On
December 1, 1996, the Company entered into a three-year contract with the UFCW
covering its administrative employees and on February 28, 1997, the Company
entered into a three-year agreement with the Teamsters Union covering its
Anchorage warehouse and distribution employees. The two latter contracts provide
for pay increases over their terms.
Item 2. Properties
The Company owns eight neighborhood shopping centers. Five centers are
located within the Anchorage area, and each is anchored by a Carrs Store. The
<PAGE>
other centers are located in Homer, Valdez and Unalaska/Dutch Harbor and are
anchored by Eagle Stores. These eight centers include an aggregate of
approximately 491,000 square feet of retail space, approximately 347,000 square
feet of which is occupied by the Company's grocery and liquor stores and
approximately 144,000 square feet of which is leased to retail tenants.
In addition to its shopping centers, the Company owns six stand-alone
supermarkets, one each in Anchorage, Fairbanks, Juneau, Seward, Nome and
Girdwood. The Anchorage, Fairbanks and Juneau facilities include adjacent Oaken
Keg Stores. The Company owns a supermarket in Ketchikan, Alaska, which is part
of a shopping center owned by an unaffiliated party. The Company owns its
warehouse and distribution center in Anchorage (approximately 233,000 square
feet), an office building in Anchorage (approximately 9,300 square feet), and
one stand-alone Oaken Keg Store in Fairbanks. The Company owns a small village
store located in Seldovia, Alaska.
The Company leases five Carrs Stores, five Oaken Keg Stores and its two
headquarters buildings from general partnerships controlled by the former owners
of the Predecessor. The Company leases two Carrs Stores, two Oaken Keg Stores
and two neighborhood stores from unaffiliated landlords. The Company subleases
to its wholly-owned subsidiary, Oaken Keg Spirit Shops, Inc., space for three
Oaken Keg stores.
In 1998, Company sold approximately 18 acres of property in Tacoma,
Washington, the location of its current cross-dock and warehouse facility. As
part of the agreement a replacement cross-dock and warehouse facility was
constructed and leased back to the Company. The lease term is for 15 years and
includes three successive renewal options at the end of the initial term. The
Company leases its cross-dock and warehouse facility in Tacoma, Washington from
Safeway.
The remaining terms for all leased Carrs Stores locations, except one,
exceed 20 years, including renewal options. The lease term of one Carrs location
in Anchorage expires on December 31, 1999. The lease term of three Oaken Keg
locations expires in 1999, 2001 and 2015. Two Oaken Keg leases expire in 2000.
Two Oaken Keg Stores are currently on month-to-month lease terms. The lease for
the Kotzebue Eagle Store expires in 2003. The Company's lease for its
neighborhood store in Big Lake is on a month-to-month term while negotiations to
extend it are under way. The lease for the Company's cross dock and warehouse
facility in Tacoma, Washington expires in 2014, with three successive renewal
options at the end of the initial term.
Most of the properties owned in fee by the Company are collateral for
approximately $41.1 million principal amount of first mortgage financing that
matures in June 2001. Certain of the Company's leased properties are collateral
for the Company's $116.8 million bank facility.
The Company is subject to federal, state and local laws and regulations
that impose liability for cleaning up past or present releases of pollutants to
the environment. In this regard, the Company has performed remedial
investigations and cleanup activities with respect to contamination from
underground storage tanks at certain of its properties. One such situation
remains pending at the present time. Management believes that any liability
relating to that situation will not have a material adverse impact on the
financial condition, results of operations or business of the Company.
Item 3. Legal Proceedings
The Company is a party to a number of legal proceedings in the ordinary
course of business. Management believes that these proceedings will not, in the
aggregate, have a material adverse impact on the financial condition, results of
operations or business of the Company.
In connection with the proposed Merger, the Company, Safeway and
Acquisition have entered into the Consent Decree. See "Proposed Merger - Consent
Decree."
A subsidiary of the Company, AOL Express ("AOL"), operates a warehouse
and cross-dock facility near the Port of Tacoma, Washington. In 1981, the United
States Environmental Protection Agency ("EPA") designated the bottom of
Commencement (Tacoma) Bay (the "Bay") as a site to be cleaned up under the
Comprehensive Environmental Response, Compensation and Liability Act ("CERCLA").
<PAGE>
In 1989, the EPA named as potentially responsible parties ("PRPs") over 130
parties, including AOL, that own property located along the Bay or on storm
sewer systems that discharge into the Bay. The agency divided the Bay into
several areas and intends to negotiate cleanup responsibilities separately with
those PRPs in each area. The cleanup costs for the area to which AOL has been
assigned have been estimated preliminarily to range from $18.0 million to $30.0
million. The EPA announced that it has named too many PRPs to discuss dismissal
or settlement with any single party. The Company therefore joined with
approximately 40 other PRPs who claim to have contributed little or nothing
toward the contamination of the Bay (the "Minor PRPs Group"). The Minor PRP
Group is currently working with a group of large, industrial PRPs to create a
privately mediated allocation of liability. No assurance can be given that a
private allocation of liability will be agreed upon or, if agreed upon, that it
will be acceptable to the Company. The Company has commissioned environmental
investigations of its Tacoma facility site and operations, and, based on these
investigations, management believes that the Company is not responsible for the
contamination that is the subject of these proceedings. Accordingly, the Company
has made no accrual for liability in connection with this action. It will
continue to seek its dismissal from the action, directly, through the Minor PRP
Group, and through the allocation mediation. While there can be no assurance
that the Company will be dismissed from these proceedings and an estimate of the
portion (if any) of the cost allocable to the Company is uncertain, based on the
Company's findings to date, the Company believes that any costs or liability
resulting from this action will not have a material adverse impact on the
financial condition, results of operations or business of the Company.
Item 4. Submissions of Matters to a Vote of Security Holders
No matters were submitted to a vote of security holders during the
fourth quarter of the fiscal year ended January 3, 1999.
<PAGE>
PART II
Item 5. Market for the Registrant's Common Equity and Related Stockholders
Matters.
The Company's Common Stock is traded on the New York Stock Exchange
under the symbol CGF. The quarterly high and low closing sale prices for the
Common Stock as reported on the New York Stock Exchange during 1996, 1997,1998
and 1999 are as follows:
<TABLE>
<CAPTION>
1996 High Low
<S> <C> <C>
First quarter.................... $ 5.63 $ 4.50
Second quarter................... $ 5.13 $ 4.13
Third quarter.................... $ 4.38 $ 3.63
Fourth quarter................... $ 4.13 $ 3.38
1997
First quarter.................... $ 5.88 $ 3.63
Second quarter................... $ 5.38 $ 4.75
Third quarter.................... $ 5.44 $ 4.75
Fourth quarter................... $ 5.31 $ 4.75
1998
First quarter.................... $ 5.75 $ 4.81
Second quarter................... $ 7.50 $ 5.31
Third quarter.................... $ 11.25 $ 7.13
Fourth quarter................... $ 11.63 $ 10.75
1999
First quarter (through March 19, 1999) $ 12.31 $ 10.88
</TABLE>
As of March 19, 1999, the number of stockholders of record of the
Company's Common Stock was 221.
The Company has not declared or paid cash dividends to its
stockholders. The Company anticipates that all of its earnings in the near
future will be used for debt repayments or be retained for the development and
expansion of its business and, therefore, does not anticipate paying dividends
on its Common Stock in the foreseeable future. Declaration of dividends on the
Common Stock will depend, among other things, upon the level of indebtedness,
future earnings, the operating and financial conditions of the Company, its
capital requirements and general business conditions. The agreements governing
the Company's indebtedness contain provisions which prohibit the Company from
paying dividends on its Common Stock. See "Item 7. Management's Discussion and
Analysis of Financial Condition and Results of Operations-Liquidity and Capital
Resources."
<PAGE>
<TABLE>
<CAPTION>
Item 6. Selected Financial Information and Other Data.
(Amounts in Thousands, except for per share, Fiscal year Fiscal year Fiscal year Fiscal year Fiscal year
employees and store information) 1998 1997 1996 1995 1994
- ------------------------------------------------ -------------- -------------- ---------------- -------------- ---------------
<S> <C> <C> <C> <C> <C>
Operating Results:
Sales $ 601,869 $ 589,274 $ 612,576 $ 601,322 $ 577,063
Cost of merchandise sold, including
warehousing and transportation expenses (1) 426,452 418,639 442,996 431,230 417,183
Gross profit 175,417 170,635 169,580 170,092 159,880
Operating and administrative expenses (1,3,5) 143,984 151,105 144,525 141,884 130,255
Operating income (3,5) 31,433 19,530 25,055 28,208 29,625
Interest expense, net 25,811 26,711 27,923 16,079 12,210
Income (loss) before extraordinary item (2) 2,124 (5,605) (2,810) 4,650 9,211
Net income (loss) 2,124 (5,605) (2,810) 3,744 9,211
============== =============== =============== ============== ===============
Other Data:
Depreciation and amortization $ 17,066 $ 16,536 $ 17,702 $ 17,626 $ 15,690
Compensation expense stock options (3) - - - 1,518 -
Nonrecurring charge (5) - 8,949 - - -
Cash interest 24,498 25,366 26,484 15,558 12,143
Basic Income (Loss) Per Share:
Before extraordinary items $ 0.26 $ (0.71) $ (0.36) $ 0.32 $ 0.55
Net income (loss) 0.26 (0.71) (0.36) 0.26 0.55
Weighted average shares outstanding 8,212 7,921 7,814 (4) 14,457 16,763
Diluted Income (Loss) Per Share: (6)
Before extraordinary items $ .25 $ (0.71) $ (0.36) $ 0.31 $ 0.53
Net income (loss) .25 (0.71) (0.36) 0.25 0.53
Weighted average shares outstanding 8,664 7,921 7,814 15,112 17,233
Financial Position:
Total assets $ 312,721 $ 315,465 $ 330,844 $ 336,620 $ 326,369
Long-term debt, excluding current maturities 208,027 215,420 227,640 234,740 136,339
Stockholders' equity 27,461 24,314 29,598 32,302 112,636
Capital expenditures 10,097 7,010 4,390 16,660 26,473
Other Year-End Statistics:
Number of stores 49 45 42 39 36
Number of employees 3,264 3,040 3,243 3,568 3,597
</TABLE>
(1) Reclassifications have been made to fiscal years 1994 and 1995. During
these years, warehousing, transportation and the related occupancy
costs were originally reported as operating and administrative
expenses. For the current presentation, these expenses have been
classified as cost of sales.
(2) In fiscal year 1995, extraordinary item consisted of a $906 ($0.06 per
share) charge resulting from early retirement of debt.
(3) In 1995, the Company recognized a one-time pre-tax charge of $1.5
million for non-cash expenses associated with the restructuring of a
management stock option incentive plan.
(4) On November 15, 1995, the Company repurchased and retired 7,500 shares
of common stock. This repurchase reduced the weighted average shares
for fiscal year 1995 by approximately 800 shares.
(5) In 1997, the Company recognized a nonrecurring charge of $8.9 million
for expenses principally associated with its decision to close its YES
Foods institutional food service business and discontinue its
wholesaling services to a Russian export business.
(6) Diluted earnings per share data for fiscal years 1994 through 1996 have
been restated to conform with Statement of Financial Accounting
Standard No. 128, Earnings Per Share.
<PAGE>
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
In recent years, Alaska, primarily the greater Anchorage area, has
attracted an increased presence of existing and new competitors, including
supermarkets, general merchandisers, discount retailers and warehouse membership
club stores. The Company has addressed the competition by remerchandising
certain general merchandise categories and by continuing its aggressive capital
expenditure program to remodel existing stores and establish additional stores
in new regions of Alaska. From 1992 through 1998, 13 of the 16 Carrs Stores have
been remodeled or expanded, and three new Carrs Stores and four new Eagle Stores
have been added.
The table below sets forth certain income statement components as a percentage
of sales.
<TABLE>
<CAPTION>
Fiscal Year
------------------------------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Sales....................................................... 100.0% 100.0% 100.0%
Cost of merchandise sold, including warehousing
and transportation expenses .......................... 70.9 71.0 72.3
Gross profit............................................... 29.1 29.0 27.7
Operating and administrative expenses....................... 23.9 25.7 23.6
---- ---- ----
Operating income............................................ 5.2 3.3 4.1
=== === ===
</TABLE>
Results of Operations
Fiscal 1998 Compared to Fiscal 1997
Sales. Sales for fiscal 1998 were $601.9 million compared to $589.3
million for fiscal 1997. The 2.1% increase was due primarily to the fact that
the year included one additional week as compared to the prior year. Excluding
the impact of the 53rd week in fiscal 1998 and the effect of the Company's
decision to close its YES Foods institutional food service business and
discontinue its wholesaling service to a Russian export business in fiscal 1997,
sales for the year increased $17.4 million, or 3.0%. The increase in sales for
1998, excluding the impact of the 53rd week, reflects a 1.8% increase in total
retail comparable store sales.
Gross Profit. Gross profit for fiscal 1998 was $175.4 million compared
to $170.6 million for fiscal 1997. The increase in gross margin dollars is
primarily attributable to the one additional week in 1998 as compared to the
prior year. As a percentage of sales, gross profit was 29.1% for fiscal 1998 as
compared to 29.0% for fiscal 1997.
Operating and Administrative Expenses. Operating expenses for fiscal
1998 were $144.0 million as compared to $142.2 million for fiscal 1997. The 1997
results are before a one-time pre-tax non-recurring charge of $8.9 million for
expenses principally associated with the Company's decision to close its YES
Foods institutional food service business and discontinue its wholesaling
services to a Russian export business. Excluding the 1997 nonrecurring charge,
operating expenses as a percentage of sales were 23.9% for fiscal 1998 and 24.1%
for fiscal 1997.
Operating Income. Operating income for fiscal 1998 increased $3.0
million from $28.5 million, excluding the nonrecurring pre-tax charge of $8.9
million, or 4.9% of sales, in 1997 to $31.4 million, or 5.2% of sales, in 1998.
The increase was due primarily to the improved gross profit dollars during 1998
combined with lower operating expenses.
Other Income and Expense. Net interest expense was $25.8 million for
fiscal 1998 compared to $26.7 million for fiscal 1997. The decrease in interest
expense reflects the lower average debt balances during 1998. See "Liquidity and
Capital Resources".
Income Taxes. The Company recognized an income tax expense for fiscal
1998 of $3.5 million compared to an income tax benefit of $1.9 for fiscal 1997.
Net Income. Net income was $2.1 million, or $0.26 per share, for fiscal
1998 compared to a net loss of $5.6 million, or $0.71 per share, for fiscal
<PAGE>
1997. The net loss for fiscal 1997 reflects the $8.9 million pre-tax
nonrecurring charge ($5.3 million, or $0.67 per share on an after-tax basis) for
expenses principally associated with the Company's decision to close its YES
Foods institutional food service business and discontinue its wholesaling
services to a Russian export business.
Fiscal 1997 Compared to Fiscal 1996
Sales. Sales for fiscal 1997 were $589.3 million compared to $612.6
million for fiscal 1996. The 3.8% decrease was due primarily to the Company's
decision to close its YES Foods institutional food service business and
discontinue its wholesaling services to a Russian export business, as well as
generally softer comparable store sales at the retail division during the first
half of 1997. The decrease in sales for 1997 reflects a 1.4% decrease in total
retail comparable store sales. Sales at the retail division were impacted by
increased competitive activity and less promotional spending by the Company.
Gross Profit. Gross profit for fiscal 1997 was $170.6 million compared
to $169.6 million for fiscal 1996. The increase in gross margin dollars is
primarily attributable to improved buying practices, reductions in promotional
spending, as well as improved gross margins achieved at the wholesale and
freight divisions. As a percentage of sales, gross profit was 29.0% for fiscal
1997 as compared to 27.7% for fiscal 1996. Gross profit as a percentage of sales
for fiscal 1997 increased as a result of improved buying practices, reductions
in promotional spending during 1997 and the closure of YES Foods, which operated
at lower gross margin rates.
Operating and Administrative Expenses. Operating expenses for fiscal
1997, before a one-time pre-tax non-recurring charge of $8.9 million for
expenses principally associated with the Company's decision to close its YES
Foods institutional food service business and discontinue its wholesaling
services to a Russian export business, were $142.2 million compared to $144.5
million for fiscal 1996. Excluding the nonrecurring charge, operating expenses
as a percentage of sales were 24.1% for fiscal 1997 and 23.6% for fiscal 1996.
Including the nonrecurring charge, operating expenses were $151.1 million, or
25.7% of sales.
Operating Income. Operating income for fiscal 1997, before the
nonrecurring pre-tax charge of $8.9 million recognized in June 1997, increased
$3.4 million from $25.1 million, or 4.1% of sales, in 1996 to $28.5 million, or
4.8% of sales, in 1997. The increase was due primarily to the improved gross
margin rate and dollars during 1997.
Other Income and Expense. Net interest expense was $26.7 million for
fiscal 1997 compared to $27.9 million for fiscal 1996. The decrease in interest
expense reflects the lower average debt balances during 1997. See "Liquidity and
Capital Resources".
Income Taxes. The Company recognized an income tax benefit for
fiscal 1997 of $1.9 million compared to an expense of $30 thousand for fiscal
1996.
Net Loss. Net loss was $5.6 million, or $0.71 per share, for fiscal
1997 compared to a net loss of $2.8 million, or $0.36 per share, for fiscal
1996. The net loss for fiscal 1997 reflects the $8.9 million pre-tax
nonrecurring charge ($5.3 million, or $0.67 per share on an after-tax basis) for
expenses principally associated with the Company's decision to close its YES
Foods institutional food service business and discontinue its wholesaling
services to a Russian export business.
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 $19.2 million for fiscal
1998 compared to $22.2 million for fiscal 1997 and $22.2 million for fiscal
1996. The fiscal 1998 decrease compared to fiscal 1997 was due primarily to
increases in inventories and other assets, offset by an increase in net income.
The Company spent an aggregate of $10.1 million, $7.0 million and $4.4
million on capital expenditures during fiscal 1998, 1997 and 1996, respectively.
During fiscal 1998, the Company completed two major remodels and added two Great
<PAGE>
Alaska Tobacco Company stores. Also during the year, 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.
The table below summarizes year-end historical remodels, expansions and
new store information, as well as added selling square footage resulting from
expansions and new stores, for the period from 1991 through December 1998. Due
to the Company's substantial investment in the store base since 1990, the
Company does not expect that significant capital improvements will be necessary
in the foreseeable future.
<TABLE>
<CAPTION>
Number of stores Total selling
Remodels Expansions New stores Square feet added Total selling square feet
------------ --------------- ---------- ------------------ -------------------------
Year Carrs Eagle Carrs Eagle Carrs Eagle Carrs Eagle Carrs Eagle
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1991 7 -- -- 1 -- -- -- 5,240 431,689 62,572
1992 -- -- 2 -- -- -- 31,408 -- 463,097 62,572
1993 5 2 2 -- 1 -- 8,323 -- 471,420 62,572
1994 3 -- 2 -- -- 3 30,377 67,184 501,797 129,756
1995 -- -- 1 -- 1 -- 43,886 -- 545,683 129,756
1996 -- -- -- -- -- -- (2,558) -- 543,125 129,756
1997 3 -- -- -- -- 1 210 2,255 543,335 132,011
1998 2 -- -- -- 1 -- 35,382 -- 578,717 132,011
</TABLE>
Net cash used by financing activities was $7.4 million, $14.0 million
and $12.3 million for fiscal 1998, 1997 and 1996, respectively. The cash used
was principally for scheduled debt amortization payments and payments against
the Company's working capital revolver. 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.
The Company is a party to a credit facility (the "Credit Facility")
which provides for (i) two term loan facilities, a $35.0 million facility
maturing on June 30, 2001 ("Term A Facility") and a $60.0 million facility
maturing on December 31, 2002 ("Term B Facility"), and (ii) a revolving credit
facility of $35.0 million expiring on June 30, 2001. The revolving credit
facility and the $35.0 million term loan bears interest at an annual rate equal
to the lender's base rate plus 1.0% or the reserve-adjusted Eurodollar rate plus
2.0%, at the Company's option, and the $60.0 million term loan bears interest at
an annual rate equal to the lender's base rate plus 1.25% or the
reserve-adjusted Eurodollar rate plus 2.25%, at the Company's option. Interest
rates on the revolving credit facility and the Term A Facility are subject to
reduction by up to 0.75% in the event the Company meets certain financial tests.
On April 17, 1998, the Company amended the Credit Facility. The amendment
reduced borrowing rates by 50 basis points on its $35.0 working capital revolver
and Term A Facility, and by 75 basis points on its Term B Facility. The
amendment also modified certain financial covenants and restrictions.
The principal amounts of the Term A Facility and the Term B Facility
are required to be amortized commencing on June 30, 1996. Scheduled amortization
payments under the Term A Facility are $5.0 million in 1996, $7.0 million in
each of 1997, 1998 and 1999, $5.0 million in 2000 and $4.0 million in 2001.
Scheduled amortization payments under the Term B Facility are $600,000 in 1996,
1997, 1998, 1999 and 2000, $15.0 million in 2001 and $42.0 million in 2002.
Availability under the revolver will be reduced by $5.0 million on each of
December 31, 1999 and 2000.
At January 3, 1999, there were no borrowings on the Company's revolving
credit facility. The Company had available unused credit of $35.0 million. Funds
borrowed under the revolving credit portion of the Credit Facility are
restricted to working capital and general corporate purposes.
Inflation. As is typical of the supermarket industry, the Company has
adjusted its retail prices in response to inflationary trends. Competitive
conditions may from time to time limit the Company's ability to increase its
prices as a result of inflation.
New Accounting Pronouncements. In June 1997, the FASB issued SFAS No.
130, "Reporting Comprehensive Income". SFAS 130 establishes standards for the
reporting and display of comprehensive income and its components. Comprehensive
income includes all changes in equity during a period except those due to owner
<PAGE>
investments and distributions. It includes items such as foreign currency
translation adjustments, and unrealized gains and losses on available-for-sale
securities. This standard does not change the display or components of
present-day net income. SFAS 130 does not apply to the Company because it has no
items of other comprehensive income.
Also in June 1997, the FASB issued SFAS No. 131, "Disclosure about
Segments of an Enterprise and Related Information". This new standard requires
companies to disclose segment data based on how management makes decisions about
allocating resources to segments and how it measures segment performance. SFAS
131 requires companies to disclose a measure of segment profit or loss
(operating income, for example), segment assets, and reconciliations to
consolidated totals. It also requires entity-wide disclosures about a company's
products and services, its major customers and the material countries in which
it holds assets and reports revenues. The Company adopted SFAS 131 in its 1998
year-end financial statements.
In February 1998, the FASB issued SFAS No 132, "Employers' Disclosures
about Pensions and Other Postretirement Benefits". SFAS 132 standardizes the
disclosure requirements for pensions and postretirement benefits where
practical. It also eliminates certain disclosures and requires additional
information on changes in benefit obligations and fair values of plan assets.
The Company adopted SFAS 132 in its 1998 year-end financial statements.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
The company's Facility described in note 10 to the financial statements
as well as in the Management Discussion and Analysis carries interest rate risk.
Amounts borrowed under this Agreement bears interest at either LIBOR plus 2.0%
to 2.3%, or at the Company's choice , the lender's prime rate plus 1.0% to 1.3%.
Should the lenders' base rate change, the Company's interest expense will
increase or decrease accordingly. As of January 3, 1999, the company had
borrowed $74.2 million subject to interest rate risk. On this amount, a 1%
increase in the interest rate would cost the Company $742,000 in additional
gross interest cost on an annual basis.
Item 8. Financial Statements and Supplementary Data.
See the Index to Consolidated Financial Statements at page F-1.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
None.
<PAGE>
PART III
Certain information required by Part III is omitted from this Report as
CGF will file a definitive proxy statement pursuant to Regulation 14A (the
"Proxy Statement") not later than 120 days after the end of the fiscal year
covered by this Report, and certain information included therein is incorporated
herein by reference. Only those sections of the Proxy Statement which
specifically address the items set forth herein are incorporated by reference.
Such incorporation does not include the Compensation Committee Report or the
Performance Graph included in the Proxy Statement.
Item 10. Directors and Executive Officers of the Registrant
John J. Cairns, 71, is the current Chairman of the Board of CGF. He
joined Carr-Gottstein Inc., CGF's predecessor, in 1981 and served as General
Manager, Executive Vice President, Chief Operating Officer, Secretary, and a
director until the sale of its operating assets to CGF in 1990. From 1990 until
1993, Mr. Cairns served as President of CGF and served as Chairman of the Board
of Directors of CGF. In 1993, he was made Chief Executive Officer upon the
creation of that position. In September 1994, Mr. Cairns retired from his
position as Chief Executive Officer. Mr. Cairns continues to serve as Chairman
and is employed by the Company on a part-time basis to assist the Chief
Executive Officer on special projects and matters of strategic planning. Prior
to joining CGF's predecessor, Mr. Cairns held various operating, administrative,
and executive positions with the Great Atlantic and Pacific Tea Company from
1943 to 1978 and served as Vice President-Corporate Development and a director
of Smith Management Corporation, a regional retail food operator in Salt Lake
City, from 1978 to 1981.
Lawrence H. Hayward, 44, is President and Chief Executive Officer of
CGF. He joined the Company in March 1995 as its Senior Vice President and Chief
Operating Officer and was promoted to President and Chief Executive Officer in
August 1996. From 1981 until 1990, Mr. Hayward served in various corporate
positions at American Stores Company headquartered in Salt Lake City, Utah. From
1990 to 1995, Mr. Hayward was employed by Buttrey Food and Drug Co. as Vice
President for Distribution/Transportation, Vice President for Support Services
and then Vice President of Store Operations. Mr. Hayward currently serves on the
Board of Directors of Western Association of Food Chains, Inc.
Donald J. Anderson, 38, is Senior Vice President, Chief Financial
Officer and Secretary of CGF. He joined the Company in his present position in
April 1995. Mr. Anderson has 22 years of experience in the grocery industry.
From 1977 to 1994, he served in various positions with Buttrey Food and Drug
Co., including Director of Financial Reporting, Corporate Controller, and Vice
President. In 1994, Mr. Anderson returned to American Stores Corporate where he
was Program Manager for the financial portion of a multi-million dollar
re-engineering program.
Jeff L. Philipps, 43, is Senior Vice President Retail Division of
CGF. He joined the Company in his present position in February 1997. Mr.
Philipps has more than 20 years of experience in the retail food business. Prior
to joining CGF Mr. Philipps served as the Director of Business Development for
the National Procurement Organization at American Stores Company headquartered
in Salt Lake City, Utah.
Leonard I. Green, 65, has served as a director of the Company since
1990. Since 1989, he has been, individually or through a corporation, a partner
of LGA, a merchant banking firm that is the general partner of GEI. Since 1994,
Mr. Green has also been an executive officer and equity owner of Leonard Green &
Partners, L.P. ("LGP"), a second merchant banking firm that manages another
investment fund. Before forming LGA in 1989, Mr. Green had been a partner of the
<PAGE>
merchant banking firm of Gibbons, Green, van Amerongen for more than five years.
Mr. Green is also a director of Rite-Aid Corporation, Communications & Power
Industries, Inc., and Hechinger Company.
Jonathan D. Sokoloff, 41, has been a director of the Company since
1990. He joined LGA as a partner in 1990. Mr. Sokoloff has also been an
executive officer and equity owner of LGP since its formation in 1994. Mr.
Sokoloff was previously a managing director in corporate finance at Drexel
Burnham Lambert Incorporated. Mr. Sokoloff is also a director of TwinLab
Corporation, Gart Sports Company and Hechinger Company.
Gregory J. Annick, 35, has been a director of the Company since 1990.
He joined LGA as an associate in 1989, became a principal in 1993, and through a
corporation became a partner in 1994. Since 1994, Mr. Annick has also been an
executive officer and equity owner of LGP. From 1988 to 1989, he was an
associate with the merchant banking firm of Gibbons, Green, van Amerongen.
Before that time, Mr. Annick was a financial analyst in mergers and acquisitions
with Goldman, Sachs & Co. Mr. Annick is also a director of Communications &
Power Industries, Inc., Leslie's Poolmart, Inc., Hechinger Company and Liberty
Group Publishing, Inc.
E. Dean Werries, 69, became a director of CGF in 1994. From 1989 to
1994, Mr. Werries served as Chairman of the Board of Fleming Companies, Inc. He
joined Fleming in 1955 and held various positions within that company through
1988, when he was appointed President and Chief Executive Officer. In 1994, Mr.
Werries retired as Chairman. He currently serves as Chairman of the Board of
Sonic Corp.
Donald E. Gallegos, 64, became a director of CGF in 1994. He is the
retired President of King Soopers, a retail grocery chain owned by Kroger, Inc.
On April 1, 1997, after serving seven years as President, Mr. Gallegos retired
from that position and became Chairman of the Executive Committee. Mr. Gallegos
held various positions with King Soopers prior to being appointed Senior Vice
President of Dillon Companies, King Soopers' Parent Company, in 1982 and then
President in 1990.
To the best of CGF's knowledge, based solely upon review of the copies
of such reports furnished to CGF and written representations that no other
reports were required, all Section 16(a) filing requirements applicable to its
officers, directors, and greater than ten-percent shareholders were complied
with during the fiscal year ended December 28, 1997.
Item 11. Executive Compensation
The information required by this Item is included under the captions
"Executive Compensation" in the Proxy Statement.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The information required by this Item is included under the caption
"Ownership of Voting Securities By Certain Beneficial Owners and Management" in
the Proxy Statement.
Item 13. Certain Relationships and Related Transactions
The information required by this Item is included under the caption
"Certain Transactions" in the Proxy Statement.
<PAGE>
Item 14 Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a)1 Financial Statements - See Index to Consolidated Financial Statements
at page F-.1
(a)2 Financial Statement Schedule - none
(a)3 Exhibits - See Index to Exhibits immediately following page F-29.
(b) On February 23, 1999, the Company filed a Form 8-K,
announcing that it and Safeway Inc. had filed a consent
decree with the Attorney General of the State of Alaska
regarding the acquisition by Safeway of all of the
outstanding shares of common stock of CGF.
<PAGE>
Pursuant to the requirements of Section 13 or 15(d) 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, on the 2nd day of
April, 1999.
CARR-GOTTSTEIN FOODS CO.
By: /S/ Lawrence H. Hayward
--------------------------
Lawrence H. Hayward, President and Chief
Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities indicated on the 2nd day of April, 1999.
PRINCIPAL EXECUTIVE OFFICERS DIRECTORS
/S/ Lawrence H. Hayward. /S/ Leonard I. Green
_____________________________ __________________________
Lawrence H. Hayward, President and Chief Leonard I. Green
Executive Officer; Director
/S/ Jonathan Sokoloff
__________________________
Jonathan Sokoloff
PRINCIPAL FINANCIAL OFFICER
and ACCOUNTING OFFICER
/S/ Gregory Annick
__________________________
/S/ Donald J. Anderson Gregory Annick
______________________________
Donald J. Anderson, Chief Financial Officer
and Accounting Officer
/S/ John J. Cairns
__________________________
John J. Cairns
/S/ Lawrence H. Hayward
__________________________
Lawrence H. Hayward
/S/ E. Dean Werries
___________________________
E. Dean Werries
/S/ Donald Gallegos
___________________________
Donald Gallegos
<PAGE>
[Intentionally Left Blank]
<PAGE>
CARR-GOTTSTEIN FOODS CO. AND SUBSIDIARIES
Index to Consolidated Financial Statements
- -------------------------------------------------------------------------------
....Page
Independent Auditors' Report...............................................F-2
Consolidated Statements of Operations for the years ended
January 3, 1999, December 28, 1997 and December 29, 1996...............F-3
Consolidated Balance Sheets as of January 3, 1999 and December 28, 1997... F-4
Consolidated Statements of Stockholders' Equity for the years
ended ended January 3, 1999, December 28, 1997 and December 29, 1996...F-5
Consolidated Statements of Cash Flows for the years ended January 3, 1999,
December 28, 1997, and December 29, 1996...................................F-6
Notes to Consolidated Financial Statements.................................F-7
<PAGE>
CARR GOTTSTEON FOODS CO. AND SUBSIDIARIES
Independent Auditors' Report
- -------------------------------------------------------------------------------
The Board of Directors and Stockholders
Carr-Gottstein Foods Co.
We have audited the consolidated financial statements of Carr-Gottstein
Foods Co. and subsidiaries as listed in the accompanying index. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of
Carr-Gottstein Foods Co. and subsidiaries as of January 3, 1999 and December 28,
1997 and the results of their operations and their cash flows for each of the
years in the three-year period ended January 3, 1999 in conformity with
generally accepted accounting principles.
KPMG LLP
Anchorage, Alaska
March 24, 1999
<PAGE>
CARR-GOTTSTEIN FOODS CO. AND SUBSIDIARIES
Consolidated Statements of Operations
<TABLE>
<CAPTION>
Years ended
- -------------------------------------------------------------------------------------------------------------------------
January 3, December 28, 1997 December 29,
Amounts In Thousands (except per share data) 1999 1996
- ----------------------------------------------------------------- ----------------- ------------------ -------------------
<S> <C> <C> <C>
Sales $ 601,869 $ 589,274 $ 612,576
Cost of merchandise sold, including warehousing
and transportation expenses 426,452 418,639 442,996
- ----------------------------------------------------------------- ----------------- ------------------ -------------------
Gross profit 175,417 170,635 169,580
Operating and administrative expenses 143,984 142,156 144,525
Nonrecurring charge - 8,949 -
- ----------------------------------------------------------------- ----------------- ------------------ -------------------
Operating income 31,433 19,530 25,055
Other income (expense):
Interest expense, net (25,811) (26,711) (27,923)
Other income (expense) (7) (373) 88
- ----------------------------------------------------------------- ----------------- ------------------ -------------------
Income (loss) before income tax expense 5,615 (7,554) (2,780)
Income tax benefit (expense) (3,491) 1,949 (30)
- ----------------------------------------------------------------- ----------------- ------------------ -------------------
Net income (loss) $ 2,124 $ (5,605) $ (2,810)
================================================================= ================= ================== ===================
Basic income (loss) per common share:
Income (loss) $ 0.26 $ (0.71) $ (0.36)
- ----------------------------------------------------------------- ----------------- ------------------ -------------------
Net income (loss) per share $ 0.26 $ (0.71) $ (0.36)
================================================================= ================= ================== ===================
Diluted income (loss) per common share:
Income (loss) $ 0.25 $ (0.71) $ (0.36)
- ----------------------------------------------------------------- ----------------- ------------------ -------------------
Net income (loss) per share $ 0.25 $ (0.71) $ (0.36)
================================================================= ================= ================== ===================
Weighted average common shares outstanding - basic 8,212 7,921 7,814
Weighted average common shares outstanding - diluted 8,664 7,921 7,814
================================================================= ================= ================== ===================
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
CARR-GOTTSTEIN FOODS CO. AND SUBSIDIARIES
Consolidated Balance Sheets
<TABLE>
<CAPTION>
January 3, December 28,
Amounts in Thousands 1999 1997
- -----------------------------------------------------------------------------------------------------------------------
Assets
Current assets:
<S> <C> <C>
Cash and cash equivalents $ 11,273 $ 11,081
Accounts receivable, net 10,816 11,513
Income taxes receivable 111 949
Inventories 54,002 51,471
Deferred taxes 2,944 2,690
Prepaid expenses and other current assets 2,810 2,380
- ----------------------------------------------------------------------------------- ----------------- ------------------
Total current assets 81,956 80,084
Property, plant and equipment, at cost, net of accumulated depreciation 125,614 134,090
Intangible assets, net of accumulated amortization 88,797 88,973
Deferred taxes - 783
Other assets 16,354 11,535
- ----------------------------------------------------------------------------------- ----------------- ------------------
$ 312,721 $ 315,465
=================================================================================== ================= ==================
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $ 41,097 $ 37,187
Accrued expenses 21,159 22,797
Current maturities of long-term debt 11,208 12,220
- ----------------------------------------------------------------------------------- ----------------- ------------------
Total current liabilities 73,464 72,204
Long-term debt, excluding current maturities 208,027 215,420
Deferred tax liability 387 -
Other liabilities 3,382 3,527
- ----------------------------------------------------------------------------------- ----------------- ------------------
Total liabilities $ 285,260 $ 291,151
- ----------------------------------------------------------------------------------- ----------------- ------------------
Stockholders' equity:
Common stock, $.01 par value, authorized 25,000 shares,
issued 9,680 shares at 1998 and 1997, respectively 97 97
Additional paid-in capital 50,992 52,088
Deficit (14,025) (16,149)
- ----------------------------------------------------------------------------------- ----------------- ------------------
37,064 36,036
Less treasury stock, 1,432 shares and 1,741 shares, respectively, at cost 9,603 11,722
- ----------------------------------------------------------------------------------- ----------------- ------------------
Total stockholders' equity 27,461 24,314
- ----------------------------------------------------------------------------------- ----------------- ------------------
Commitments and contingencies
- ----------------------------------------------------------------------------------- ----------------- -----------------
$ 312,721 $ 315,465
=================================================================================== ================= ==================
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
CARR-GOTTSTEIN FOODS CO. AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity
Years ended January 3, 1999,
December 28, 1997, and
December 29, 1996
<TABLE>
<CAPTION>
Additional Stock Total
Common Paid-In Subscriptions Treasury Stockholders'
Amounts in Thousands Stock capital Deficit Receivable Stock Equity
- --------------------------------------- ------------ ------------- ---------- ----------------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1995 $ 97 $ 52,595 $ (7,734) $ (44) $ (12,612) $ 32,302
Issuance of treasury stock - (82) - - 144 62
Net loss - - (2,810) - - (2,810)
Payments under stock purchase plan - - - 44 - 44
- ---------------------------------------- ---------- ------------ ------------- ------------ -------------- -------------
Balance at December 29, 1996 97 52,513 (10,544) - (12,468) 29,598
Issuance of treasury stock - (425) - - 746 321
Net loss - - (5,605) - - (5,605)
- ---------------------------------------- ---------- ------------ ------------- ------------ -------------- -------------
Balance at December 28, 1997 97 52,088 (16,149) - (11,722)` 24,314
Issuance of treasury stock - (1,096) - - 2,119 1,023
Net income - - 2,124 - - 2,124
- ---------------------------------------- ---------- ------------ ------------- ------------ -------------- -------------
Balance at January 3, 1999 $ 97 $ 50,992 $ (14,025) $ - $ (9,603) $ 27,461
======================================== ========== ============ ============= ============ ============== =============
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
CARR-GOTTSTEIN FOODS CO.
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Years ended
- -----------------------------------------------------------------------------------------------------------------------
January 3, December 28, December 29,
Amounts in Thousands 1999 1997 1996
- -----------------------------------------------------------------------------------------------------------------------
Operating activities:
<S> <C> <C> <C>
Net income (loss) $ 2,124 $ (5,605) $ (2,810)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation 13,773 13,678 14,844
Amortization of intangibles 3,293 2,858 2,858
Amortization of loan fees 1,313 1,345 1,439
Loss (gain) on disposal of property and equipment 7 115 (84)
Changes in assets and liabilities:
Decrease in receivables 697 5,137 1,203
Decrease (increase) in inventories (3,406) 2,761 (3,727)
Decrease (increase) in prepaid expenses and
other current assets (430) 429 72
Increase in other assets (2,061) (544) (556)
Increase (decrease) in income taxes payable - (298) 298
Decrease (increase) in deferred taxes 916 (1,221) (984)
Increase (decrease) in accounts payable 3,910 (1,280) 2,481
Increase (decrease) in accrued expenses (1,638) 5,694 6,957
Decrease (increase) in income tax receivable 838 (949) 164
Increase (decrease) in other liabilities (145) 70 50
- ---------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 19,191 22,190 22,205
- -----------------------------------------------------------------------------------------------------------------------
Investing activities:
Additions to property and equipment (7,855) (6,910) (4,390)
Additions to intangible assets (2,242) (100) -
Additions to other assets (4,071) - -
Proceeds from sale of property and equipment 2,551 1,206 287
- -----------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (11,617) (5,804) (4,103)
- -----------------------------------------------------------------------------------------------------------------------
Financing activities:
Proceeds from issuance of long-term debt 4,000 - -
Payments under revolving line of credit, net - (7,000) (9,000)
Payments on long-term debt (12,405) (7,281) (3,370)
Change in stock subscriptions receivable - - 44
Issuance of treasury stock, net 1,023 321 62
- -----------------------------------------------------------------------------------------------------------------------
Net cash used in financing activities (7,382) (13,960) (12,264)
- -----------------------------------------------------------------------------------------------------------------------
Net increase in cash and cash equivalents 192 2,426 5,838
Cash and cash equivalents at beginning of year 11,081 8,655 2,817
- -----------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 11,273 $ 11,081 $ 8,655
=======================================================================================================================
Supplemental information:
Interest paid $ 25,019 $ 25,064 $ 25,198
Income taxes paid $ 1,558 $ 956 $ 552
=======================================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
CARR-GOTTSTEIN FOODS CO. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Amounts in Thousands (except for per share data)
- -------------------------------------------------------------------------------
(1) BUSINESS
Carr Gottstein Foods Co. and subsidiaries (Company) is the leading food and drug
retailer in Alaska with 49 stores primarily located in Anchorage, as well as in
Fairbanks, Juneau, Kenai and other Alaska communities. The Company operates a
chain of 16 super-combination food, drug and general merchandise stores under
the name Carrs Quality Centers. The Company also operates nine smaller stores
under the name Eagle Quality Centers or other names in smaller Alaska
communities. The Company is also Alaska's highest-volume alcoholic beverage
retailer through its chain of 17 wine and liquor stores operated under the name
Oaken Keg Spirit Shops. The Company operates seven small tobacco stores which
operate under the name The Great Alaska Tobacco Company. In addition, the
Company operates a freight transportation business under the names AOL Express
and APR Forwarders, and a full-line food warehouse and distribution center under
the name J.B. Gottstein. The Company, through CGF Properties, Inc., owns many of
the buildings and shopping centers from which its Carrs, Eagle Quality Centers
and Oaken Keg Spirit Shops operate.
(2) ACQUISITION AND BASIS OF PRESENTATION
As of October 12, 1990, CG Acquisition Co. acquired certain assets and
liabilities of Carr Gottstein Inc. and other related entities (Predecessor) and
changed the corporate name to Carr Gottstein Foods Co. The transactions
described above are referred to herein as the Acquisition. The cost of the
Acquisition approximated $280,000 and was financed through bank borrowings,
issuance of senior notes, subordinated notes and common stock. The Acquisition
was accounted for using purchase accounting in which the purchase price was
allocated to the acquired assets and liabilities based on their relative
estimated fair values. The excess of the purchase price over the fair value of
assets and liabilities acquired resulted in identified intangibles of $25,100
and goodwill of $105,700.
(3) CAPITALIZATION
On May 6, 1993, the Company reclassified its common stock into a single class
and authorized 25,000 shares of $.01 par value common stock, 10,000 shares of
$.01 par value preferred stock and a two for one split for the reclassified
common stock. As a result of the split, 5,678 shares were issued and additional
paid-in capital was reduced by $57.
During 1993, the Company undertook an initial public offering of its common
stock. The shares were issued at an initial price of $14.50 per share. The
Company issued 5,824 new shares of common stock and received net proceeds of
$77,632. Common stock and additional paid-in capital were increased by $58 and
$77,574, respectively.
(4) MERGER AGREEMENT
On August 6, 1998, the Company signed a definitive agreement (the "Merger
Agreement"), with Safeway Inc. ("Safeway") and ACG Merger Sub, Inc.
("Acquisition"), a wholly-owned subsidiary of Safeway, pursuant to which Safeway
will acquire through the merger (the "Merger") of Acquisition into the Company
all outstanding shares of the Company's common stock at a purchase price of
$12.50 per share. In addition, Safeway would assume approximately $220 million
of debt and will account for the transaction as a purchase. The Board of
Directors of the Company approved the Merger Agreement. The consummation of the
transactions contemplated by the Merger Agreement, which is subject to certain
conditions, including approval of the Company's stockholders, clearance from
certain regulatory authorities and receipt of certain consents and court
approval, is expected to occur in the second 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 2,870 shares of Common Stock, which
represented 35.1% of the Company's outstanding stock at the time of the
execution of the Merger Agreement, in favor of approval of the Merger Agreement.
<PAGE>
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 transactions contemplated by the
Merger Agreement.
Consent Decree. On February 9, 1999, Safeway, the Company and Acquisition
entered into a Consent Decree with the State of Alaska (the "Consent Decree"),
in connection with settling a lawsuit filed by the State of Alaska in the
Superior Court for the State of Alaska, Third Judicial District at Anchorage
(the "Court"), with respect to the Merger (a copy of the Consent Decree may be
obtained from the Court). The Consent Decree, which is subject to court
approval, requires Safeway and the Company to sell seven stores (the "Stores")
- -- four Safeway stores located in Anchorage, one Safeway store located in each
of Eagle River and Wasilla and the Company store in Fairbanks. Each of these
Stores is required to be sold to operating supermarket companies that will be
approved by the Attorney General.
The Consent Decree provides for a 60-day public comment period following which
the Court will conduct a hearing on the comments, if any, and will determine
whether to approve the Consent Decree. The parties have scheduled a hearing
before the Court for April 13, 1999. The Merger may not be consummated prior to
the entry of an order by the Court approving the Consent Decree, and upon the
approval and entry of the Consent Decree by the Court, Safeway and the Company
anticipate consummating the Merger shortly thereafter.
Following the Court's approval of the Consent Decree, Safeway and the Company
will have six months to obtain approval from the Attorney General of the State
of Alaska (the "Attorney General") of signed purchase agreements and proposed
transactions to sell the Stores and an additional two months to complete the
sales, subject to extensions approved by the Attorney General. The Consent
Decree contains provisions for payments by Safeway of up to $1 million for each
Store for which it is unable to meet those deadlines. In addition, if the
deadlines are not met, the State of Alaska may seek the appointment of a trustee
to effect the divestiture of the remaining Stores.
Pursuant to the Consent Decree, until Safeway and the Company have sold the
Stores, they have agreed to operate and conduct the business of the Stores in
the ordinary course, maintain existing business relationships with each Store's
suppliers, customers and employees, maintain inventory levels and selections at
each Store and limit increases in the gross profit margins for supermarkets that
they operate in the geographic areas in which the Stores are located.
Hart-Scott-Rodino ("HSR") Act. The Merger is subject to review by the Federal
Trade Commission (the "FTC") and the Antitrust Division of the Department of
Justice (the "DOJ") under the HSR Act. The parties have apprised the FTC of the
Consent Decree. The staff of the FTC's Seattle Regional Office has indicated to
Safeway and the Company that it is prepared to recommend that the Bureau of
Competition grant early termination of the waiting period under the HSR Act,
provided that the Court enters the Consent Decree in substantially the same form
as agreed to by the parties, and that the Bureau of Competition is in agreement
with this position.
AKPIRG Litigation. In late October 1998, an Alaska consumer group, Alaska Public
Interest Research Group ("AKPIRG"), and five individuals filed a purported
class-action lawsuit in Alaska state court seeking an injunction to prevent the
Merger. In February 1999, Safeway and the Company settled with AKPIRG and the
individual plaintiffs. The settlement provides that AKPIRG and the individual
plaintiffs will no longer oppose the Merger or the Consent Decree and will
dismiss the lawsuit.
<PAGE>
(5) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Accounting Estimates and Assumptions
In preparing the consolidated financial statements in accordance with generally
accepted accounting principles, management is required to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities as of the date of the financial
statements and revenue and expenses for the reporting period. Actual results
could differ from those estimates and assumptions. The more significant
estimates and assumptions applied in the preparation of the consolidated
financial statements are discussed below.
Fiscal Year
The Company's fiscal year is a 52 or 53 week year, ending on the Sunday closest
to the calendar year-end. Fiscal year 1998 as presented in the consolidated
financial statements consists of 53 weeks and fiscal years 1997 and 1996 consist
of 52 weeks. References to fiscal year 1998 represent the 53 week year ending
January 3, 1999 and references to fiscal years 1997 and 1996 represent the 52
week years ending December 28, 1997 and December 29, 1996, respectively.
Consolidation
The consolidated financial statements of the Company include the accounts of
Carr Gottstein Foods Co. and its divisions; J.B. Gottstein, Carrs Quality
Centers and Eagle Quality Centers and its wholly-owned subsidiaries, AOL
Express, Inc., APR Forwarders, Inc., Oaken Keg Spirit Shops, Inc., Alaska
Advertisers, Inc. and CGF Properties, Inc.. Significant intercompany
transactions and accounts have been eliminated from the consolidated financial
statements.
Cash Equivalents
For purposes of the statement of cash flows, short-term investments with a
maturity of three months or less are considered to be cash equivalents. Cash and
cash equivalents include cash on hand, checking accounts and savings accounts.
Inventories
Inventories are stated at the lower of cost or market. Retail food company and
liquor company store inventory cost is determined by reducing inventories taken
at retail prices by estimated gross margin percentages. Wholesale inventories
are valued at weighted average cost. Inventories include direct transportation,
warehouse and allocated administrative costs.
Property, Plant and Equipment
Property, plant and equipment are recorded at cost. Maintenance, repairs and
minor replacements are charged to expense as incurred. When assets are sold,
retired or fully depreciated, their cost and related accumulated depreciation
are removed from the property, plant and equipment accounts, and any gain or
loss is recorded.
Depreciation
The costs of buildings, equipment and fixtures are depreciated over their
estimated useful lives on a straight-line basis. The components of buildings are
depreciated over lives ranging from 10 to 31.5 years or over the respective
lease terms, if such periods are shorter. Fixtures and equipment are depreciated
over estimated lives of three to 15 years.
Intangible Assets and Amortization
Intangible assets represent the excess of purchase price over fair value of net
assets acquired. Goodwill is generally amortized on a straight-line basis over
40 years. Costs allocated to specifically identified assets are amortized on a
straight-line basis over three to five years. On an annual basis the Company
assesses the recoverability of goodwill and other intangible assets by
determining whether the amortization of the balances over the remaining lives
can be recovered through the undiscounted future operating cash flows of the
acquired operations.
Loan Fees
Loan fees are amortized over the term of the related debt.
<PAGE>
Buying and Promotional Allowances
Allowances and credits received from vendors in connection with the Company's
buying and merchandising activities are recognized as earned.
Investment in Affiliate
The equity method of accounting is used to account for the Company's ownership
of 33-1/3% of the stock of Denali Commercial Management, Inc. (DCM). The
financial position and results of operations of DCM are not material.
Income Taxes
The Company files consolidated federal and state income tax returns. Income
taxes are accounted for under the asset and liability method. Deferred tax
assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases and operating
loss and tax credit carryforwards. Deferred tax assets and liabilities are
measured using enacted tax rates expected to apply to taxable income in the
years in which those temporary differences are expected to be recovered or
settled. The effect on deferred tax assets and liabilities of a change in tax
rates is recognized in income in the period that includes the enactment date.
Commitments and Contingencies
Liabilities for loss contingencies arising from claims, assessments, litigation,
fines and penalties, and other sources are recorded when it is probable that a
liability has been incurred and the amount of the assessment or cost can be
reasonably estimated.
Earnings Per Common Share
Statement of Financial Accounting Standard No. 128, Earnings Per Share, which
simplifies the earnings per share calculation and makes the U.S. standard more
consistent with international accounting standards, was adopted in 1997 by the
Company. Earnings per share data for 1996 was restated to conform with the
provisions of SFAS No. 128. Basic earnings per common share are determined by
dividing net income (loss) by the weighted average number of common shares
outstanding. Diluted earnings per common share are determined by dividing net
income (loss) by the weighted average number of common shares outstanding,
including common stock options which are dilutive. At January 3, 1999, options
to purchase 902 shares of common stock were included in the computation of
diluted earnings per share because they were dilutive. At December 28, 1997 and
December 29, 1996, options to purchase 1,112 and 1,197 shares of common stock,
respectively, were not included in the computation of diluted earnings per share
because they were not dilutive.
Impairment of Long-Lived Assets
Statement of Financial Accounting Standard No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of,
sets forth new standards for determining when long-lived assets are impaired and
requires impaired assets to be carried at the lower of cost or fair value. The
Company adopted the new standard as of January 1, 1996, which has had no effect
on the Company's financial statements.
Stock Option Plan
Statement of Financial Accounting Standard No. 123, Accounting for Stock-Based
Compensation, was adopted by the Company as of January 1, 1996. This statement
establishes accounting and reporting standards for stock-based employee
compensation plans. As permitted by this statement, the Company has elected to
continue to account for stock options using APB Opinion No. 25, Accounting for
Stock Issued to Employees, to determine the amount of any compensation expense
related to stock options. Consequently, the Company discloses the amount of
compensation expense and the impact on net earnings and earnings per share had
the fair value method set forth in SFAS No. 123 been used to calculate
compensation.
<PAGE>
(6) ACCOUNTS RECEIVABLE
Accounts receivable consist of the following:
<TABLE>
<CAPTION>
January 3, December 28,
1999 1997
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Wholesale and retail trade $ 10,052 $ 10,593
Tenant 106 127
Other 1,243 1,492
- -----------------------------------------------------------------------------------------------------------------------
11,401 12,212
Less allowance for doubtful accounts 585 699
- -----------------------------------------------------------------------------------------------------------------------
Accounts receivable, net $ 10,816 $ 11,513
=======================================================================================================================
(7) PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of the following:
January 3, December 28,
1999 1997
- -----------------------------------------------------------------------------------------------------------------------
Land $ 24,176 $ 24,932
Buildings 95,868 95,624
Fixtures and equipment 101,972 98,087
- -----------------------------------------------------------------------------------------------------------------------
222,016 218,643
Less accumulated depreciation 96,402 84,553
- -----------------------------------------------------------------------------------------------------------------------
Property, plant and equipment, net $ 125,614 $ 134,090
=======================================================================================================================
(8) INTANGIBLE ASSETS
Intangible assets consist of the following:
January 3, December 28,
1999 1997
- -----------------------------------------------------------------------------------------------------------------------
Goodwill $ 111,275 $ 107,605
Other intangibles 17,932 18,485
- -----------------------------------------------------------------------------------------------------------------------
129,207 126,090
Less accumulated amortization 40,410 37,117
- -----------------------------------------------------------------------------------------------------------------------
Intangible assets, net $ 88,797 $ 88,973
=======================================================================================================================
</TABLE>
(9) REVOLVING LINE OF CREDIT
The Company has a $35,000 revolving line of credit (revolver) available for
working capital purposes. The revolver, along with the bank term debt, are
secured by substantially all of the Company's assets, except for certain real
estate assets. The revolver and term debt agreements contain restrictive
covenants. Interest is payable quarterly on the revolver at the lower of prime
plus 1.0% or LIBOR plus 2.0%. Availability under the revolver will be reduced by
$5,000 on each of December 31, 1999 and 2000. The Company is required to pay an
annual commitment fee of 0.5% per annum on the average unused portion of the
revolver. There was no outstanding balance on the revolver at January 3, 1999 or
December 28, 1997.
<PAGE>
(10) LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
January 3, December 28,
1999 1997
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Firstmortgage notes payable in monthly payments of $426; including
interest at 10.55%; unpaid balance due at maturity of June 1, 2001;
prepayment penalties apply; secured by real estate $ 41,073 $ 41,871
Senior subordinated notes with interest payable semiannually at
12.0%; entire balance due at maturity of November 15, 2005;
prepayment penalties apply; unsecured 100,000 100,000
Bank term note payable with varying semiannual principal
payments; interest payable quarterly at the lower of
prime plus 1.0% or LIBOR plus 2.0%, approximately
8.1% at January 3, 1999; maturity of June 30, 2001 16,000 26,500
Bank term note payable with varying semiannual principal
payments; interest payable quarterly at the lower of
prime plus 1.3% or LIBOR plus 2.3%, approximately
8.3% at January 3, 1999; maturity December 31, 2002 58,200 59,100
Other notes payable 3,962 169
- -----------------------------------------------------------------------------------------------------------------------
219,235 227,640
Less current maturities of long-term debt 11,208 12,220
- -----------------------------------------------------------------------------------------------------------------------
Total long-term debt $ 208,027 $ 215,420
=======================================================================================================================
</TABLE>
The Company's debt agreements contain various restrictive covenants pertaining
to net worth levels and dividends; limitations on additional indebtedness and
capital expenditures; financial ratios and monthly, quarterly and annual
reporting requirements. In addition, the agreements require certain mandatory
pre-payment of amounts resulting from real estate or fixed asset sales,
increases in outstanding cash balances, issuance of stock, or the issuance of
additional debt. Substantially all of the assets of the Company are pledged as
security for long-term debt. During 1997, the Company amended its bank agreement
whereby its restrictive covenants excluded the impact of the nonrecurring charge
taken for expenses principally associated with its decision to close YES Foods
and discontinue its wholesaling services to a Russian export business. On April
17, 1998 the Company amended its bank agreement. The amendment reduced the
Company's borrowing rates by 50 basis points on its $35.0 million 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. The Company was in compliance with all debt
agreements at January 3, 1999.
Certain of the Company's debt agreements also contain a restrictive covenant
which does not permit the Company to enter into a transaction of merger. The
creditor has indicated that the Company was in compliance with this covenant at
January 3, 1999, and will continue to be in compliance until the merger with
Safeway is consummated. However, at the merger effective date, the covenant will
be violated, and long-term debt in the amount of $74,200 will be considered to
be in default and callable by the creditor. However, the Company has been
advised by Safeway that it is the intention of Safeway to immediately refinance
this obligation with other pre-existing credit arrangements after the Merger.
The accompanying financial statements do not reflect these obligations as
current liabilities; the obligation is classified as a long-term liability in
accordance with the original stated maturities.
<PAGE>
Notes to Consolidated Financial Statements
Amounts in Thousands (except for per share data)
- -------------------------------------------------------------------------------
The aggregate maturities of long-term debt for periods subsequent to January 3,
1999, are as follows:
<TABLE>
<CAPTION>
Fiscal year Amount
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
1999 $ 11,208
2000 4,126
2001 46,447
2002 36,306
2003 21,148
Thereafter 100,000
- -----------------------------------------------------------------------------------------------------------------------
$ 219,235
=======================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
Interest expense consists of the following:
Fiscal year
- -----------------------------------------------------------------------------------------------------------------------
1998 1997 1996
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Interest on debt $ 24,498 $ 25,366 $ 26,484
Amortization of loan fees 1,313 1,345 1,439
- -----------------------------------------------------------------------------------------------------------------------
Interest expense, net $ 25,811 $ 26,711 $ 27,923
=======================================================================================================================
</TABLE>
Loan fees are classified as other assets and total $5,638 and $6,513, net of
amortization, at January 3, 1999 and December 28, 1997, respectively.
(11) OTHER LIABILITIES
Other long-term obligations consist primarily of self insurance reserves, see
"Commitments and Contingencies - Self Insurance" and installment obligations
payable to former or current employees arising from deferred compensation
agreements of the Predecessor which were assumed in the Acquisition. These
obligations are payable over a 10-year period, without interest, commencing on
the employee's termination from the Company. Each employee's principal balance,
which accrues interest at 8.0% to the date of termination, is discounted from
the date the employee attains the age of 65 for current employees or the
remaining payoff period for terminated employees.
(12) INCOME TAXES
Income tax expense (benefit) for continuing operations before extraordinary item
consists of the following:
<TABLE>
<CAPTION>
Fiscal year
- -----------------------------------------------------------------------------------------------------------------------
1998 1997 1996
- -----------------------------------------------------------------------------------------------------------------------
Current:
<S> <C> <C> <C>
Federal $ 1,985 $ (562) $ 782
State 589 (166) 232
- -----------------------------------------------------------------------------------------------------------------------
2,574 (728) 1,014
- -----------------------------------------------------------------------------------------------------------------------
Deferred:
Federal 708 (942) (759)
State 210 (279) (225)
- -----------------------------------------------------------------------------------------------------------------------
917 (1,221) (984)
- -----------------------------------------------------------------------------------------------------------------------
Income tax expense (benefit) $ 3,491 $ (1,949) $ 30
=======================================================================================================================
</TABLE>
<PAGE>
Notes To Consolidated Financial Statements
Amounts in Thousands (except for per share data)
- -------------------------------------------------------------------------------
A reconciliation of income tax expense (benefit) at the statutory rate of 35%
applied to earnings before income taxes and extraordinary item to the Company's
effective rate is as follows:
<TABLE>
<CAPTION>
Fiscal year
- -----------------------------------------------------------------------------------------------------------------------
1998 1997 1996
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Computed "expected" tax expense (benefit) $ 1,965 $ (2,644) $ (973)
State income taxes, net of federal benefit 519 (290) 4
Nondeductible goodwill amortization 925 925 925
Other 82 60 74
- -----------------------------------------------------------------------------------------------------------------------
$ 3,491 $ (1,949) $ 30
=======================================================================================================================
</TABLE>
In July 1997, an examination by the Internal Revenue Service ("IRS") of the
Company's federal tax returns for fiscal years 1994 and 1995 was finalized,
resulting in no material effect on the results of operations or financial
condition of the Company. The examination had no effect on previously recorded
expense or net income.
The components of the net deferred tax asset are as follows:
<TABLE>
<CAPTION>
January 3, December 28,
1999 1997
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Deferred tax assets:
Alternative minimum tax credit carryforward $ 900 $ 4,535
Intangible assets, due to differences in
amortization 197 69
Financial statement accrual of self-
insurance costs 1,446 1,427
Financial statement accrual for compensated
absences 675 671
Revenues received in advance, amortized
for financial reporting 315 638
Financial statement expense for stock options 249 496
Inventory capitalized for taxes 758 638
Allowance for doubtful accounts 240 287
Financial statement accruals not deductible
until paid 1,020 510
- -----------------------------------------------------------------------------------------------------------------------
Total gross deferred tax assets 5,800 9,271
- -----------------------------------------------------------------------------------------------------------------------
Deferred tax liabilities:
Property, plant, and equipment, due to
differences in depreciation (3,243) (5,798)
- -----------------------------------------------------------------------------------------------------------------------
Total gross deferred tax liabilities (3,243) (5,798)
- -----------------------------------------------------------------------------------------------------------------------
Net deferred tax asset $ 2,557 $ 3,473
=======================================================================================================================
</TABLE>
At January 3, 1999 the Company had alternative minimum tax credit carryforwards
of approximately $763 and $137 for federal and state income taxes, respectively,
which carry forward indefinitely.
<PAGE>
A valuation allowance is provided when it is more likely than not that some
portion of the deferred tax asset will not be realized. Based on the Company's
historical taxable income, adjusted for significant items such as the loss from
early retirement of debt and utilization of net operating losses, and expected
future taxable income, management believes it is more likely than not that the
Company will realize the benefit of deferred tax assets existing at January 3,
1999. Further, management believes the existing net deductible temporary
differences will reverse during periods in which the Company generates net
taxable income. Therefore, the Company has not provided a valuation allowance.
However, the amount of the deferred tax asset considered realizable could be
reduced in the near term if estimates of future taxable income are reduced.
(13) LEASE COMMITMENTS
The Company leases (as lessee) land, buildings, fixtures and equipment primarily
for retail stores and its headquarters under operating leases expiring at
various dates through 2019. Generally, these leases include options to renew at
the end of the initial lease period. Commitments for future minimum payments
under noncancelable operating leases for periods subsequent to January 3, 1999,
are as follows:
Fiscal Year Amount
- -------------------------------------------------------------------------------
1999 $ 7,911
2000 7,895
2001 7,906
2002 7,845
2003 7,794
Thereafter 66,438
- -------------------------------------------------------------------------------
$ 105,789
===============================================================================
Rental expense under operating lease agreements include contingency rentals
which are based on a certain percentage of sales that are achieved over a set
amount of sales determined on an individual store basis. Rental expense is as
follows:
Fiscal year Minimum payments Percentage rents Total
- ------------------------------------------------------------------------------
1996 9,338 355 9,693
1997 9,549 71 9,620
1998 8,941 71 9,012
==============================================================================
The Company leases five Carrs Stores, six Oaken Keg Stores and its two
headquarters buildings from general partnerships controlled by the former owners
of the Predecessor. The Company leases two Carrs Store, three Oaken Keg Stores
and two neighborhood stores from unaffiliated landlords.
In 1998, Company sold approximately 18 acres of property in Tacoma, Washington,
the location of its current cross-dock and warehouse facility. As part of the
agreement a replacement cross-dock and warehouse facility was constructed and
leased back to the Company. The lease term for this operating lease is 15 years
and includes three successive renewal options at the end of the initial term.
The Company leases its cross-dock and warehouse facility in Tacoma, Washington
from Safeway Inc.
During the first quarter 1998, the Company purchased certain real estate and
personal property in Fairbanks and North Pole. As part of the agreement, the
Company entered into an operating lease on a 58,000 square foot store in North
Pole for an initial lease term of 15 years followed by four successive renewal
options.
<PAGE>
Notes to Consolidated Financial Statements
Amounts in Thousands (except for per share data)
- -------------------------------------------------------------------------------
(14) LESSOR
The Company is the lessor of commercial and office facilities. Generally, these
operating leases include options to renew at the end of the initial lease
period. Substantially all of the leases for commercial facilities provide for
minimum rentals and contingent rentals while leases for office facilities are
generally for fixed rentals. Minimum annual rentals under noncancelable
operating leases for periods subsequent to January 3, 1999 are as follows:
Fiscal year Amount
- -------------------------------------------------------------------------------
1999 $ 1,116
2000 838
2001 504
2002 433
2003 344
Thereafter 322
- -------------------------------------------------------------------------------
$ 3,557
===============================================================================
<TABLE>
<CAPTION>
Net rental income related to these operating leases is as follows:
Fiscal year Minimum rents Percentage rents Related expenses Net rental incom
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1996 1,582 19 661 940
1997 1,454 72 996 530
1998 1,598 75 895 778
=======================================================================================================================
</TABLE>
(15) RETIREMENT AND UNION PENSION PLANS
The Company contributes to a 401(k) retirement savings plan covering
substantially all employees qualified by age and length of service, except
employees covered by union contracts. The Company employs approximately 3.2
people of which 2.4 or 75% are covered by union contracts. The retirement
savings plan allows participant contributions in an amount equal to 15% of the
participant's compensation, not to exceed federal statutory maximum
contributions. The amount of discretionary Company contributions is determined
by the Board of Directors, subject to Internal Revenue Code limitations.
Participants are 100% vested in Company contributions. In addition, the Company
contributes to union sponsored multiemployer pension plans on behalf of union
employees. Contributions to retirement savings and pension plans are as follows:
Fiscal year 401(k) plan Pension plans
- -------------------------------------------------------------------------------
1996 611 3,445
1997 589 3,505
1998 543 3,533
===============================================================================
(16) INCENTIVE BONUS PLAN
The Company has an incentive bonus plan for key employees. The amount of bonuses
distributed to eligible employees and individual bonus awards are based on the
Company's financial performance and other criteria set by a committee appointed
by the Board of Directors. The cost of this plan approximated $2,260, $1,455,
and $0 for fiscal years 1998, 1997and 1996 respectively.
<PAGE>
(17) STOCK OPTIONS
Outside Director Plan
The Company has an outside director stock option plan for directors who are not
for three years prior to appointment to the Board of Directors an employee of
the Company or a partner or employee of Leonard Green & Associates, L.P. Green
Equity Investors, L.P. or any partnership controlled by such partnerships. Each
outside director is automatically granted the option to purchase 20 shares of
common stock at the then fair market value on the date of such appointment or
election to the Board of Directors. The options are fully vested upon grant. The
plan permits awards with respect to a maximum of 100 shares. As of January 3,
1999 two directors each had outstanding options to purchase 20 shares of common
stock at $5.25 per share.
Employee Performance Plan
The Company has a nonqualified performance stock option plan, under which a
committee of the Board of Directors may award key employees options to purchase
common stock in the Company. The plan permits awards with respect to a maximum
of 1,312 shares. In 1998, this plan was amended to permit awards with respect to
a maximum of 1,562 shares. As of January 3, 1999, options for 862 shares were
outstanding, of which options with respect to 797 shares were fully vested. The
committee determines the exercise price of the options and the period over which
the options will vest. Options are generally awarded at fair market value of the
Company's stock as of the date of the award.
At January 3, 1999, there were 227 additional shares available for grant under
the plan. The per share weighted-average fair value of stock options granted
during 1998, 1997 and 1996 was $ 2.09, $1.84 and $1.34 respectively, on the date
of grant using a qualified option-pricing model with the following
weighted-average assumptions: 1998 - expected dividend yield 0.0%, risk-free
interest rate of 5.8%, volatility of 37.7% and an expected life of seven years;
1997 - expected dividend yield 0.0%, risk-free interest rate of 6.0%, volatility
of 39.2% and an expected life of seven years; 1996 - expected dividend yield
0.0%, risk-free interest rate of 7.1% volatility of 38.6% and an expected life
of nine years.
The Company applies APB Opinion No. 25 in accounting for its Plan and,
accordingly, compensation expense is only recognized for stock options which the
exercise price is less than fair value on the date of grant. Had the Company
determined compensation cost based on the fair value at the grant date for its
options under SFAS No. 123, the Company's net income (loss) would have been
reduced to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
1998 1997 1996
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net income (loss) As reported $ 2,124 $ ( 5,605) $ (2,810)
Pro forma 2,041 (5,727) (3,066)
Basic net income (loss) per share As reported $ 0.26 $ (0.71) $ (0.36)
Pro forma 0.25 (0.72) (0.39)
Diluted net income (loss) per share As reported $ 0.25 $ (0.71) $ (0.36)
Pro forma 0.24 (0.72) (0.39)
=======================================================================================================================
</TABLE>
Certain of the Company's Board members and executive officers own Common Stock
or stock options. Immediately prior to the consummation of the Merger, all
unvested stock options issued under the 1991 Stock Option Plan will become
vested, and upon consummation of the Merger all outstanding options under the
1991 Stock Option Plan will be exercisable for a per share cash amount equal to
the Merger Consideration minus the per share exercise price. Such options will
be canceled following the Merger and each optionholder will receive a per share
cash payment equal to the difference between the Merger Consideration and the
per share exercise price. Stock options held by non-employee directors will be
canceled in exchange for a per share cash payment equal to the difference
between the Merger Consideration and the per share exercise price.
<PAGE>
Notes to Consolidated Financial Statements
Amounts in Thousands (except for per share data)
- -------------------------------------------------------------------------------
Stock option activity during the periods indicated is as follows:
<TABLE>
<CAPTION>
Number of Weighted-Average
Shares Exercise Price
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Balance at December 31, 1995 990 $ 3.72
Granted 235 3.62
Exercised (21) 2.88
Forfeited (7) 5.12
Canceled (35) 5.88
Expired (5) 4.30
- -----------------------------------------------------------------------------------------------------------------------
Balance at December 29, 1996 1,157 $ 3.66
Granted 110 4.20
Exercised (111) 2.89
Forfeited (19) 5.25
Canceled (35) 5.25
Expired (30) 5.09
- -----------------------------------------------------------------------------------------------------------------------
Balance at December 28, 1997 1,072 $ 3.67
Granted 110 5.55
Exercised (309) 3.31
Forfeited (11) 5.28
- -----------------------------------------------------------------------------------------------------------------------
Balance at January 3, 1999 862 $ 4.02
=======================================================================================================================
</TABLE>
At January 3, 1999, the range of exercise prices and weighted-average remaining
contractual life of outstanding options was $2.88 - $7.50 and seven years,
respectively.
The number of shares subject to exercisable options was 797, 1,049 and 1,078 at
fiscal year-end 1998, 1997 and 1996, respectively, and the weighted-average
exercise price of those options was $3.90, $3.54 and $3.38, respectively.
(18) RELATED PARTY TRANSACTIONS
GEI owns approximately 35% of the Company's common stock. LGA is the general
partner of GEI. The Company paid LGA fees of $450 for each of fiscal years 1998,
1997 and 1996, for management consulting and advisory services.
(19) COMMITMENTS AND CONTINGENCIES
Shared Appreciation Agreement
The Company is party to a shared appreciation agreement with the Predecessor
which requires the Company to pay the Predecessor 50% of certain proceeds in
excess of $65,500 from the financing, refinancing, condemnation, sale or other
disposition or realization of value of certain real properties. The cumulative
maximum amount payable under the agreement was $7,300 through fiscal year 1994.
Beginning in fiscal year 1995, the maximum amount payable is increased by 10%
per annum of any remaining unpaid portion of the maximum. As of January 3, 1999,
the maximum amount payable is $9,937, of which no amount is currently due as the
conditions of the agreement have not been met. Neither the Company nor its
Affiliates has paid or has been obligated to pay any amounts pursuant to this
agreement.
<PAGE>
Notes to Consolidated Financial Statements
Amounts in Thousands (except for per share data)
- -------------------------------------------------------------------------------
Self-Insurance
The Company is self-insured for basic automobile, workers' compensation, general
liability and employee health benefits, and purchases insurance coverage for
amounts in excess of the basic self-insurance program. Reserves are established
to cover estimated reported losses, estimated unreported losses based on past
experience modified for current trends, and estimated expenses for investigating
and settling claims. Actual losses will vary from the established reserves.
While management uses what it believes is pertinent information and factors in
determining the amount of reserves, future additions to the reserves may be
necessary due to changes in the information and factors used.
Environmental Remediation
The Company, along with other parties, has been identified by the Environmental
Protection Agency (EPA) as a potentially responsible party (PRP) for the cleanup
of a site in Tacoma, Washington. The EPA has estimated primarily the cost of the
required remediation to range from $18,000 to $30,800. Based on a
Company-commissioned environmental investigation, management believes that the
Company is not responsible for the subject contamination. Accordingly, the
Company has made no accrual for liability in connection with this site and is
seeking dismissal from the proceedings both directly and indirectly through a
group of PRPs who are responsible for a minimal amount, if any, of the
contamination. While there can be no assurance that the Company will be
dismissed from these proceedings and an estimate of the portion, if any, of the
cost allocable to the Company is uncertain, based on the Company's findings to
date, management believes that any liability the Company may incur in connection
with these proceedings will not have a material adverse impact on the financial
condition, results of operations or business of the Company.
Legal Proceedings
The Company is subject to legal proceedings and claims which have arisen in the
ordinary course of its business that are not fully adjudicated. Management
believes, after consultation with legal counsel, these actions when finally
concluded and determined will not have a material adverse effect on the
Company's financial position.
(20) GEOGRAPHIC CONCENTRATION
All of the Company's retail outlets are in Alaska, with nine of its 16 Carrs
Quality Centers and nine of its 17 Oaken Keg Stores located in Anchorage,
Alaska. In addition, the Company's wholesale distribution business is conducted
in Alaska. As a result of this geographic concentration, the Company's growth
and operations depend upon economic conditions in Alaska. Because the economy of
Alaska is dependent on the natural resources industry, particularly oil, as well
as on tourism, commercial fishing, government and U.S. military spending, any
deterioration or improvements in these markets could affect the Company.
(21) FAIR VALUE OF FINANCIAL INSTRUMENTS
Cash and Accounts Receivable
The carrying amount approximates fair value due to the short maturity of these
instruments.
Short and Long-Term Debt
The carrying amount of the Company's borrowings under the revolver approximate
fair value. The fair value of long-term debt is based on the current rates
offered to the Company for debt with similar terms and average maturities. The
carrying amount of long-term debt of $219,235 and $227,640 has approximate fair
values of $221,754 and $230,591, at January 3, 1999 and December 28, 1997,
respectively.
<PAGE>
Notes to Consolidated Financial Statements
Amounts in Thousands (except for per share data)
- -------------------------------------------------------------------------------
(22) SEGMENTS AND RELATED INFORMATION
The company adopted SFAS No. 131, Disclosures about Segments of an Enterprise
and Related Information, in 1998. As discussed in Note 1, the Company is engaged
principally in one line of business - food and drug retailing - which represents
more than 90% of consolidated sales. All other operations, food wholesaler,
freight transportation and certain corporate administration expenses, are
reported in the Other segment.
The Company evaluates performance based on several factors, of which the primary
financial measurement is Net Income before Taxes. The accounting policies of the
business segments are the same as those described in the summary of significant
accounting policies (Note 5).
Information relating to the Company's operations is set forth in the following
table:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------
Fiscal year 1998 Retail Other Total
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net sales from external customers 545,152 56,717 601,869
Income before income taxes 8,141 (2,526) 5,615
Total assets 259,338 53,383 312,721
=======================================================================================================================
Fiscal year 1997
- -----------------------------------------------------------------------------------------------------------------------
Net sales from external customers 514,560 74,714 589,274
Income before income taxes 4,860 (12,414) (7,554)
Total assets 258,532 56,933 315,465
=======================================================================================================================
Fiscal year 1996
- -----------------------------------------------------------------------------------------------------------------------
Net sales from external customers 521,291 91,285 612,576
Income before income taxes 461 (3,241) (2,780)
Total assets 275,186 55,658 330,844
=======================================================================================================================
</TABLE>
<PAGE>
Notes to Consolidated Financial Statements
Amounts in Thousands (except for per share data)
- -------------------------------------------------------------------------------
(23) QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
<TABLE>
<CAPTION>
Following is a presentation of selected financial data for each of the four
quarters of fiscal year 1998 and 1997. The fourth quarter 1998 consist of 14
weeks, all other quarters consist of 13 weeks:
First Second Third Fourth
quarter quarter quarter quarter
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1998:
Sales $ 135,113 $ 150,229 $ 155,427 $ 161,100
Gross profit 39,466 44,143 45,132 46,676
Operating income 5,909 8,143 9,024 8,357
Net income (loss) (634) 682 1,345 731
Basic net income (loss) per share (0.08) .08 .16 .09
Diluted net income (loss) per share (0.07) .08 .16 .09
Average shares outstanding 8,147 8,213 8,242 8,245
Average shares outstanding-diluted 8,774 8,728 8,577 8,573
1997:
Sales $ 141,467 $ 152,029 $ 152,007 $ 143,771
Gross profit 40,992 43,700 43,431 42,512
Operating income 5,478 (1,422) 7,964 7,510
Net income (loss) (1,019) (5,075) 339 150
Basic net income (loss) per share (0.13) (0.64) .04 .02
Diluted net income (loss) per share (0.13) (0.64) .04 .02
Average shares outstanding 7,883 7,932 7,934 7,937
Average shares outstanding-diluted 7,883 7,932 8,653 8,482
=======================================================================================================================
</TABLE>
<PAGE>
Notes to Consolidated Financial Statements
Amounts in Thousands (except for per share data)
- -------------------------------------------------------------------------------
(24) CONDENSED CONSOLIDATING FINANCIAL INFORMATION
The Company issued $100,000 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>
Balance Sheet Non-Guarantor Guarantor Parent
Subsidiary Subsidiaries Company
January 3, 1999 CGF Properties (Combined) Only Elimination
Consolidated
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Assets
Inventories $ - $ 4,020 $ 49,982$ - $ 54,002
Other current assets 7,931 79,453 (1,430) (58,000) 27,954
- -----------------------------------------------------------------------------------------------------------------------
Total current assets 7,931 83,473 48,552 (58,000) 81,956
Property, plant and equipment, net 61,845 2,323 61,446 - 125,614
Intangible, net - - 88,797 - 88,797
Investments in subsidiaries - - 109,513 (109,513) -
Other assets - 673 15,681 - 16,354
- -----------------------------------------------------------------------------------------------------------------------
$ 69,776 $ 86,469 $ 323,989 $ (167,513) $ 312,721
=======================================================================================================================
Liabilities and Stockholders' Equity
Current liabilities $ 1,160 $ 5,322 $ 124,982 $ (58,000) $ 73,464
Long-term debt, excluding current
maturities 40,250 - 167,777 - 208,027
Other liabilities - - 3,769 - 3,769
- -----------------------------------------------------------------------------------------------------------------------
Total liabilities 41,410 5,322 296,528 (58,000) 285,260
- -----------------------------------------------------------------------------------------------------------------------
Common stock 10 44 97 (54) 97
Additional paid-in capital 28,966 39,381 50,992 (68,347) 50,992
Retained earnings (deficit) (610) 41,722 (14,025) (41,112) (14,025)
- -----------------------------------------------------------------------------------------------------------------------
28,366 81,147 37,064 (109,513) 37,064
Less treasury stock - - 9,603 - 9,603
- -----------------------------------------------------------------------------------------------------------------------
Total stockholders' equity 28,366 81,147 27,461 (109,513) 27,461
- -----------------------------------------------------------------------------------------------------------------------
$ 69,776 $ 86,469 $ 323,989 $ (167,513) $ 312,721
=======================================================================================================================
</TABLE>
<PAGE>
Notes to Consolidated Financial Statements
Amounts in Thousands (except for per share data)
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Balance Sheet Non-Guarantor Guarantor Parent
Subsidiary Subsidiaries Company
December 28, 1997 CGF Properties (Combined) Only Elimination
Consolidated
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Assets
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>
Notes to Consolidated Financial Statements
Amounts in Thousands (except for per share data)
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
The following are condensed consolidating statements of operations:
Statement of Operations Non-Guarantor Guarantor Parent
Subsidiary Subsidiaries Company
Fiscal year 1998 CGF Properties (Combined) Only Elimination
Consolidated
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Sales $ - $ 81,832 $ 561,133 $ (41,096) $ 601,869
Cost of merchandise sold, including
warehousing and transportation - 59,404 408,144 (41,096) 426,452
- ----------------------------------------------------------------------------------------------------------------------
Gross profit - 22,428 152,989 - 175,417
Operating and administrative
(income) expenses (5,514) 10,328 139,170 - 143,984
- -----------------------------------------------------------------------------------------------------------------------
Operating income 5,514 12,100 13,819 - 31,433
Interest expense, net (4,744) - (21,067) - (25,811)
Other expense - - (7) - (7)
Equity in subsidiary earnings - - 7,593 (7,593) -
- -----------------------------------------------------------------------------------------------------------------------
Income before income tax 770 12,100 338 (7,593) (5,615)
Income tax (expense) benefit (316) (4,961) 1,786 - (3,491)
- -----------------------------------------------------------------------------------------------------------------------
Net income $ 454 $ 7,139 $ 2,124 $ (7,593) $ 2,124
=======================================================================================================================
</TABLE>
<PAGE>
Notes to Consolidated Financial Statements
Amounts in Thousands (except for per share data)
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Statement of Operations Non-Guarantor Guarantor Parent
Subsidiary Subsidiaries Company
Fiscal year 1997 CGF Properties (Combined) Only Elimination Consolidated
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Sales $ - $ 78,176 $ 551,205 $ (40,107) $ 589,274
Cost of merchandise sold, including
warehousing and transportation - 57,142 401,604 (40,107) 418,639
- ----------------------------------------------------------------------------------------------------------------------
Gross profit - 21,034 149,601 - 170,635
Operating and administrative
(income) expenses (5,218) 11,141 145,182 - 151,105
- -----------------------------------------------------------------------------------------------------------------------
Operating income 5,218 9,893 4,419 - 19,530
Interest expense, net (4,456) - (22,255) - (26,711)
Other expense - - (373) - (373)
Equity in subsidiary earnings - - 6,287 (6,287) -
- -----------------------------------------------------------------------------------------------------------------------
Income before income tax 762 9,893 (11,922) (6,287) (7,554)
Income tax (expense) benefit (312) (4,056) 6,317 - 1,949
- -----------------------------------------------------------------------------------------------------------------------
Net income (loss) $ 450 $ 5,837 $ (5,605) $ (6,287) $ (5,605)
======================================================================================================================
</TABLE>
<PAGE>
Notes to Consolidated Financial Statements
Amounts in Thousands (except for per share data)
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Statement of Operations Non-Guarantor Guarantor Parent
Subsidiary Subsidiaries Company
Fiscal year 1996 CGF Properties (Combined) Only Elimination Consolidated
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Sales $ - $ 75,159 $ 574,182 $ (36,765) $ 612,576
Cost of merchandise sold, including
warehousing and transportation - 54,261 425,500 (36,765) 442,996
- -----------------------------------------------------------------------------------------------------------------------
Gross profit - 28,898 148,682 - 169,580
Operating and administrative
(income) expenses (5,155) 11,884 137,796 - 144,525
- -----------------------------------------------------------------------------------------------------------------------
Operating income 5,155 9,014 10,886 - 25,055
Interest expense, net (4,522) - (23,401) - (27,923)
Other income - - 88 - 88
Equity in subsidiary earnings - - 5,691 (5,691) -
- -----------------------------------------------------------------------------------------------------------------------
Income before income tax 633 9,014 (6,736) (5,691) (2,780)
Income tax (expense) benefit (260) (3,696) 3,926 - (30)
- -----------------------------------------------------------------------------------------------------------------------
Net income (loss) $ 373 $ 5,318 $ (2,810) $ (5,691) $ (2,810)
=======================================================================================================================
</TABLE>
<PAGE>
Notes to Consolidated Financial Statements
Amounts in Thousands (except for per share data)
- -------------------------------------------------------------------------------
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>
Statement of Cash Flows Non-Guarantor Guarantor Parent
Subsidiary Subsidiaries Company
Fiscal year 1998 CGF Properties (Combined) Only Consolidated
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net cash provided by (used in) operating activities $ 2,616 $ (1,731) $ 18,306 $ 19,191
- -----------------------------------------------------------------------------------------------------------------------
Investing activities
Addition to property and equipment (1,816) (687) (5,352) (7,855)
Proceeds from sale of property and equipment - 2,418 133 2,551
Additions to intangible assets - - (2,242) (2,242)
Additions to other assets - - (4,071) (4,071)
- -----------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) investing activities (1,816) 1,731 (11,532) (11,617)
- -----------------------------------------------------------------------------------------------------------------------
Financing activities
Payments on long-term debt (799) - (11,421) (12,220)
Issuance of note payable - - 4,000 4,000
Payments on note payable - - (185) (185)
Issuance of treasury stock - - 1,023 1,023
- -------------------------------------------------------------------------------------------------------------------------
Net cash used in financing activities (799) - (6,583) (7,382)
- -----------------------------------------------------------------------------------------------------------------------
Net increase in cash and cash equivalents 1 - 191 192
- -----------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at beginning of year 53 106 10,922 11,081
- -----------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 54 $ 106 $ 11,113 $ 11,273
=======================================================================================================================
</TABLE>
<PAGE>
Notes to Consolidated Financial Statements
Amounts in Thousands (except for per share data)
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Statement of Cash Flows Non-Guarantor Guarantor Parent
Subsidiary Subsidiaries Company
Fiscal year 1997 CGF Properties (Combined) Only Consolidated
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net cash provided by operating activities $ 661 $ 43 $ 21,486 $ 22,190
- -----------------------------------------------------------------------------------------------------------------------
Investing activities
Addition to property and equipment - (43) (6,967) (7,010)
Proceeds from sale of property and equipment - - 1,206 1,206
- -----------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities - (43) (5,761) (5,804)
- -----------------------------------------------------------------------------------------------------------------------
Financing activities
Net payments under line of credit - - (7,000) (7,000)
Payments on long-term debt (661) - (6,620) (7,281)
Purchase of treasury stock - - 321 321
- -----------------------------------------------------------------------------------------------------------------------
Net cash used in financing activities (661) - (13,299) (13,960)
- -----------------------------------------------------------------------------------------------------------------------
Net increase in cash and cash equivalents - - 2,426 2,426
Cash and cash equivalents at beginning of year 53 106 8,496 8,655
- -----------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 53 $ 106 $ 10,922 $ 11,081
=======================================================================================================================
</TABLE>
<PAGE>
Notes to Consolidated Financial Statements
Amounts in Thousands (except for per share data)
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Statement of Cash Flows Non-Guarantor Guarantor Parent
Subsidiary Subsidiaries Company
Fiscal year 1996 CGF Properties (Combined) Only Consolidated
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net cash provided by operating activities $ 548 $ 417 $ 21,240 $ 22,205
- -----------------------------------------------------------------------------------------------------------------------
Investing activities
Addition to property and equipment - (368) (4,022) (4,390)
Proceeds from sale of property and equipment - - 287 287
- -----------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities - (368) (3,735) (4,103)
- -----------------------------------------------------------------------------------------------------------------------
Financing activities
Net payments under line of credit - - (9,000) (9,000)
Payments on long-term debt (548) - (2,822) (3,370)
Purchase of treasury stock - - 62 62
Change in stock subscriptions receivable - - 44 44
- -----------------------------------------------------------------------------------------------------------------------
Net cash used in financing activities (548) - (11,716) (12,264)
- -----------------------------------------------------------------------------------------------------------------------
Net increase in cash and cash equivalents - 49 5,789 5,838
Cash and cash equivalents at beginning of year 53 57 2,707 2,817
- -----------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 53 $ 106 $ 8,496 $ 8,655
======================================================================================================================
</TABLE>
<PAGE>
CARR-GOTTSTEIN FOODS CO. AND SUBSIDIARIES
Index to Exhibits
Sequentially
Exhibit No. Description Numbered
2.1(1) Agreement and Plan of Merger Among Carr Gottstein Foods Co.,
Safeway Inc. and ACG Merger Sub, Inc.
3.1(2) Restated Certificate of Incorporation
3.3(3) Restated Bylaws
4.1(4) Indenture dated as of November 15, 1995 among Registrant, the
certain subsidiaries of Registrant and U.S. Trust company of
California, N.A., as Trustee
4.2(4) Registration Rights Agreement dated as of November 15, 1995
among Registrant, certain subsidiaries of Registrant, and
Donaldson, Lufkin, & Jenrette Securities Corporation, BT
Securities Corporation and Goldman, Sachs & Co.
4.3 Form of Note Certificate (included in Exhibit 4.1)
4.4(6) First Supplemental Indenture among Carr-Gottstein Foods Co.,
the guarantors named therein and U.S. Trust Company of
California, N.A., as Trustee
10.1(5) Deed of Trust, Assignment of Rents, Security Agreement and
Fixture filing dated October 11, 1991 by and between CGF
Properties, Inc., Stewart Title Company of Alaska, Inc., and
Teachers Insurance and Annuity Association of America
10.2(5) Assignment of Lessor's Interest in lease dated October 11, 1991
by Registrant in favor of Teachers Insurance and Annuity
Association of America
10.3(5) Environmental Indemnity dated October 11, 1991 by Registrant
payable to Teachers Insurance and Annuity Association of America
10.8(5) Carr-Gottstein Foods Co. 1991 Stock Option Plan
10.14(5) Shared Appreciation Agreement dated October 12, 1990 between
Carr-Gottstein Foods Co. and Registrant
10.22(5) Amended and Restated Retail Lease (Huffman Shopping Center)
dated October 12, 1990 between Labar Co. and Registrant
10.65(7) Carr-Gottstein Foods Co. Retirement Savings & Investment Plan
and Trust as Amended and Restated July 1, 1991
10.66(7) Oaken Keg Spirit Shops Retirement Savings & Investment Plan and
Trust as Amended and Restated July 1, 1991
10.67(7) Amendment to the Carr-Gottstein 1991 Stock Option Plan
10.71(8) Form of Assignment and Assumption Agreement
10.72(8) Form of Assignment of Leases and Rents
10.73(8) Form of Environmental Indemnity Agreement
10.74(8) Form of Fee Mortgage
10.75(8) Form of Leasehold Mortgage
10.79(8) Swing Line Loan Promissory Note ($5,000,000) between Registrant
and Bankers Trust Company
10.80(8) Guaranty Agreement
10.81(8) Security Agreement
10.82(8) Pledge Agreement
10.83(8) Collateral Account Agreement
10.97(9) 1991 Outside Directors Stock Option Plan
10.99(10) Employment Agreement - Lawrence Hayward
10.101(11) Employment Agreement - Donald Anderson
10.102(12) Amended and Restated Credit Agreement, dated as of November 15,
1995 among Registrant, certain lenders and Bankers Trust
Company, as agent
10.103(13) Management Service Agreement between Registrant and Leonard
Green & Associates, L.P.
10.104(1) Amendment to the Carr-Gottstein 1991 Stock Option Plan
10.105(1) Amendment to the Carr-Gottstein 1994 Stock Option Plan
10.106(1) 1998 Severance Plan
10.107(1) Amendment to Employment Agreement - Lawrence H. Hayward
<PAGE>
10.108(1) Amendment to Employment Agreement - Donald J. Anderson
10.109(1) Amendment to Employment Agreement - Jeff L. Philipps
10.110(1) 1998 Special Bonus Plan
21(13) Subsidiaries of Registrant
(1) Incorporated by reference to the exhibit filed with the Registrant's
Quarterly Report on Form 10-Q for the quarterly period ended
September 27, 1998.
(2) Incorporated by reference to the exhibit filed with the Registrant's
Quarterly Report on Form 10-Q for the quarter ended July 4, 1993.
(3) Incorporated by reference to the exhibit filed with the Registrant's
Quarterly Report on Form 10-Q for the quarter ended October 3, 1993
(4) Incorporated by reference to the exhibit filed with the Registrant's
Amendment Number 2 to Schedule 13E-4 first published on October 13,
1995
(5) Incorporated by reference to the exhibit filed with the Registrant's
Form S-1 Registration Statement filed on May 21, 1993.
(6) Incorporated by reference to the exhibit filed with the Registrant's
Form 8-K filed on March 14, 1996.
(7) Incorporated by reference to the exhibit filed with the Registrant's
Quarterly Report on Form 10-Q for the quarter ended July 4, 1993.
(8) Incorporated by reference to the exhibit filed with the Registrant's
Quarterly Report on Form 10-Q for the quarter ended October 3, 1993.
(9) Incorporated by reference to the exhibit filed with the Registrant's
Quarterly Report on Form 10-Q for the quarter ended July 3, 1994.
(10) Incorporated by reference to the exhibit filed with the Registrant's
Quarterly Report on Form 10-Q for the quarter ended October 2, 1994.
(11) Incorporated by reference to the exhibit filed with the Registrant's
Annual Report on Form 10-K for the fiscal year ended January 1,
1995.
(12) Incorporated by reference to the exhibit filed with the Registrant's
Quarterly Report on Form 10-Q for the quarter ended July 2, 1995.
(13) Incorporated by reference to the exhibit filed with the Registrant's
Registration Statement on Form S-4 on December 19, 1995.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
consolidated balance sheet as of January 3, 1999, and the related statements of
income and cash flows for the 12-month period then ended and is qualified in its
entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JAN-03-1999
<PERIOD-START> DEC-29-1997
<PERIOD-END> JAN-03-1999
<CASH> 11273
<SECURITIES> 0
<RECEIVABLES> 11401
<ALLOWANCES> 585
<INVENTORY> 54002
<CURRENT-ASSETS> 81956
<PP&E> 222016
<DEPRECIATION> 96402
<TOTAL-ASSETS> 312721
<CURRENT-LIABILITIES> 73464
<BONDS> 0
0
0
<COMMON> 97
<OTHER-SE> 27364
<TOTAL-LIABILITY-AND-EQUITY> 312721
<SALES> 601869
<TOTAL-REVENUES> 601869
<CGS> 426452
<TOTAL-COSTS> 426452
<OTHER-EXPENSES> 143991
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 25811
<INCOME-PRETAX> 5615
<INCOME-TAX> 3491
<INCOME-CONTINUING> 2124
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2124
<EPS-PRIMARY> .26
<EPS-DILUTED> .25
</TABLE>
