<PAGE>
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
____________________________
FORM 10-Q
(Mark One)
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the Quarterly Period Ended November 2, 1996
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from to
Commission File Number 0-19802
BUTTREY FOOD AND DRUG STORES COMPANY
(Exact name of registrant as specified in its charter)
Delaware 81-0466189
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
601 6th Street, S.W.
Great Falls, Montana 59404
(Address of principal executive offices)
Registrant's telephone number, including area code: (406) 761-3401
Indicate by check mark whether the registrant (1) has filed all documents
and reports required to be filed by Sections 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for shorter period that
the registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes [x] No [ ]
The number of shares of the registrant's Common Stock outstanding at
December 16, 1996 was 8,639,056 shares
THERE ARE NO EXHIBITS FILED WITH THIS FORM
===================================================
Page 1 of 13
<PAGE>
BUTTREY FOOD AND DRUG STORES COMPANY
AND SUBSIDIARY
FORM 10-Q
For the Quarterly Period Ended November 2, 1996
INDEX
<TABLE>
<CAPTION>
Page
<S> <C>
Part I. Financial Information
Item 1. Financial Statements
a) Consolidated Balance Sheets
as of November 2, 1996 (unaudited) and February 3, 1996 3
b) Consolidated Statements of Operations for the 13 weeks
and the 39 weeks ended November 2, 1996 (unaudited) and
October 28, 1995 (unaudited) 4
c) Consolidated Statement of Stockholders' Equity as of February 3, 1996
and for the 39 weeks ended November 2, 1996 (unaudited) 4
d) Consolidated Statements of Cash Flows for the 13 weeks and the 39
weeks ended November 2, 1996 (unaudited)
and October 28, 1995 (unaudited) 5
e) Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 6
Part II. Other Information
Item 1. Legal Proceedings 12
Item 6. Exhibits and Reports on Form 8-K 13
Signatures 13
</TABLE>
2
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
BUTTREY FOOD AND DRUG STORES COMPANY AND SUBSIDIARY
<TABLE>
<CAPTION>
CONSOLIDATED BALANCE SHEETS
- ----------------------------------------------------------------------------------------------
(Dollar Amounts in Thousands)
- ----------------------------------------------------------------------------------------------
ASSETS
November 2, February 3,
1,996 1,996
- ----------------------------------------------------------------------------------------------
(unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 6,223 $ 6,140
Accounts receivable 4,319 4,488
Inventories 47,213 43,304
Prepaid expenses 1,368 1,230
Deferred tax asset 1,271 1,271
- ----------------------------------------------------------------------------------------------
TOTAL CURRENT ASSETS 60,394 56,433
Property and equipment, at cost 145,854 130,174
Less accumulated depreciation 52,102 45,765
- ----------------------------------------------------------------------------------------------
NET PROPERTY AND EQUIPMENT 93,751 84,409
Intangible assets, net 4,253 3,259
Other assets 587 530
- ----------------------------------------------------------------------------------------------
TOTAL ASSETS $158,985 $144,631
==============================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current installments of long-term debt $ 5,604 $ 2,205
Current obligations under capital leases 415 379
Accounts payable 21,825 16,345
Accrued payroll and benefits 6,896 7,530
Accrued expenses and reserves 4,147 5,106
Accrued interest payable 67 111
Notes payable - 20
Income taxes (18) -
- ----------------------------------------------------------------------------------------------
TOTAL CURRENT LIABILITIES 38,936 31,696
Long-term debt 18,438 13,510
Obligations under capital leases 9,069 9,385
Deferred taxes payable 1,735 1,735
- ----------------------------------------------------------------------------------------------
TOTAL LIABILITIES 68,178 56,326
Stockholders' equity:
Preferred stock $.01 par value, authorized 1,000,000 shares - -
Common stock $.01 par value, authorized 15,000,000 shares;
issued and outstanding 8,639,056 shares as of November 2
and as of February 3, 1996 86 86
Paid-in capital 79,133 79,133
Retained earnings 11,988 9,486
- ----------------------------------------------------------------------------------------------
91,207 88,705
Less stock subscriptions receivable 400 400
- ----------------------------------------------------------------------------------------------
NET STOCKHOLDERS' EQUITY 90,807 88,305
- ----------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $158,985 $144,631
==============================================================================================
</TABLE>
See accompanying notes to consolidated financial statements
3
<PAGE>
BUTTREY FOOD AND DRUG STORES COMPANY AND SUBSIDIARY
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF OPERATIONS
- ------------------------------------------------------------------------------------------------------------------------
(Dollar Amounts in Thousands, Except Per Share Data)
- ------------------------------------------------------------------------------------------------------------------------
13 Weeks Ended 39 Weeks Ended
----------------------------- -----------------------------
November 2, October 28, November 2, October 28,
1996 1995 1996 1995
- ------------------------------------------------------------------------------------------------------------------------
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
SALES $92,843 $90,483 $275,059 $269,808
Cost of sales and related occupancy expenses 70,966 68,788 210,095 205,762
- ------------------------------------------------------------------------------------------------------------------------
GROSS PROFIT 21,876 21,695 64,964 64,046
Marketing, general, and administrative expenses 19,913 20,633 58,838 60,757
- ------------------------------------------------------------------------------------------------------------------------
OPERATING INCOME 1,963 1,062 6,125 3,289
Other income / (expense):
Gain on disposal of property and equipment - 35 11 254
Interest income 58 58 114 279
Interest expense (783) (650) (2,091) (2,299)
- -------------------------------------------------------------------------------------------------------------------------
(725) (557) (1,966) (1,766)
- -------------------------------------------------------------------------------------------------------------------------
EARNINGS BEFORE INCOME TAXES AND EXTRAORDINARY CHARGE 1,239 505 4,159 1,523
Income tax provision 489 202 1,657 609
- -------------------------------------------------------------------------------------------------------------------------
EARNINGS BEFORE EXTRAORDINARY CHARGE 749 303 2,502 914
Extraordinary charge (net of tax) - - - (51)
- -------------------------------------------------------------------------------------------------------------------------
NET EARNINGS $ 749 $ 303 $ 2,502 $ 863
=========================================================================================================================
Earnings per share before extraordinary charge $ 0.09 $ 0.04 $ 0.29 $ 0.11
Extraordinary charge per share - - - (0.01)
- -------------------------------------------------------------------------------------------------------------------------
Net earnings per share $ 0.09 $ 0.04 $ 0.29 $ 0.10
=========================================================================================================================
WEIGHTED AVERAGE COMMON AND COMMON
EQUIVALENT SHARES OUTSTANDING 8,623,598 8,607,775 8,625,393 8,606,418
=========================================================================================================================
</TABLE>
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------------
(Dollar Amounts in Thousands)
- ---------------------------------------------------------------------------------------------------------------------------------
Retained Net
Common Paid-in earnings Stock stockholders'
stock capital (deficit) subscriptions equity
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance at February 3, 1996 $86 $79,133 $ 9,486 $ (400) $88,305
Net additions on stock subscriptions - - - - -
Net earnings - - 2,502 - 2,502
- ---------------------------------------------------------------------------------------------------------------------------------
BALANCE AT NOVEMBER 2, 1996 (UNAUDITED) $86 $79,133 $11,988 $ (400) $90,807
=================================================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements
4
<PAGE>
BUTTREY FOOD AND DRUG STORES COMPANY AND SUBSIDIARY
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CASH FLOWS
- ----------------------------------------------------------------------------------------------------------------
(Dollar Amounts in Thousands)
- ----------------------------------------------------------------------------------------------------------------
13 Weeks Ended 39 Weeks Ended
----------------------- ---------------------
November 2, October 28, November 2, October 28,
1996 1995 1996 1995
- ----------------------------------------------------------------------------------------------------------------
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
OPERATING ACTIVITIES:
Net income $ 749 $ 303 $ 2,502 $ 863
Adjustments to reconcile income to net cash
provided by operating activities:
Depreciation 2,272 2,879 6,436 8,579
Amortization 118 78 200 314
Gain on disposal of property and equipment - (35) (11) (254)
Changes in operating assets and liabilities:
Decrease (increase) in accounts receivable (47) 15 170 (113)
Increase in inventories (4,642) (5,026) (3,910) (5,485)
Decrease (increase) in prepaid expenses (117) 668 (138) 377
Increase (decrease) in accounts payable (473) 578 5,551 2,740
Increase (decrease) in accrued payroll and benefits (306) 1,095 (693) 3
Increase (decrease) in accrued expenses and reserves 279 645 (772) (84)
Decrease in accrued interest payable (59) (257) (44) (304)
Decrease in income taxes payable (216) (253) (233) (216)
- ----------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED (USED) BY OPERATING ACTIVITIES (2,442) 690 9,058 6,420
- ----------------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES:
Purchase of property and equipment (4,871) (2,433) (15,759) (5,124)
Proceeds from sale of property and equipment - - - 9,458
Decrease (increase) in other assets (795) 128 (1,243) 19
- ----------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED (USED) BY INVESTING ACTIVITIES (5,666) (2,305) (17,002) 4,353
- ----------------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES:
Payments on long-term debt (1,032) (11,852) (2,133) (31,322)
Proceeds from equipment financing 6,500 14,024 10,460 14,024
Collection on stock subscriptions receivable - 19 - 38
Payments on capital lease obligations (96) (85) (280) (248)
Decrease in notes payable, net - (19) (20) (43)
- ----------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED (USED) BY FINANCING ACTIVITIES 5,372 2,087 8,027 (17,551)
- ----------------------------------------------------------------------------------------------------------------
Increase (decrease) in cash and cash equivalents (2,735) 472 83 (6,778)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 8,959 9,515 6,140 16,765
- ----------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 6,223 $ 9,987 $ 6,223 $ 9,987
================================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements
5
<PAGE>
BUTTREY FOOD AND DRUG STORES COMPANY AND SUBSIDIARY
________________________________________________________________________________
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
The unaudited interim consolidated financial statements and related notes
have been prepared pursuant to the rules and regulations of the Securities and
Exchange Commission. Accordingly, certain information and footnote disclosures
normally included in financial statements prepared in accordance with generally
accepted accounting principles have not been presented. The accompanying
unaudited interim consolidated financial statements and related notes should be
read in conjunction with the financial statements and related notes included in
the Buttrey Food and Drug Stores Company ("Buttrey" or the "Company") Annual
Report on Form 10-K for the year ended February 3, 1996.
The information furnished reflects, in the opinion of the management of the
Company, all material adjustments consisting only of normal recurring accruals
necessary to present fairly the Company's financial condition and its results of
operations.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
The following discussion should be read in conjunction with the financial
statements and related notes included elsewhere in this Form 10-Q.
GENERAL
Buttrey is a food and drug retailer in Montana and in the market areas it
serves in Wyoming and western North Dakota. Founded in Montana in 1896, the
Company currently operates 42 stores and a mail order pharmacy business, which
began operations during the second quarter of 1994. The Company is the successor
to the Buttrey Food and Drug division (the "Predecessor Division") of Skaggs
Alpha Beta, Inc. ("Skaggs"), an indirect, wholly-owned subsidiary of American
Stores Company ("ASC"). The Company acquired certain assets and liabilities of
the Predecessor Division in October 1990 in a transaction (the "Acquisition")
organized by Freeman Spogli & Co. Incorporated ("FS&Co."), a private investment
firm.
RISK FACTORS
The following risk factors should be carefully considered, in addition to
other information contained in this Form 10-Q.
Certain Restrictions Imposed by Lenders
The Company's credit agreement contains significant financial and operating
covenants including, among other things, requirements that the Company maintain
certain financial ratios and satisfy certain financial tests, limitations on the
amount of capital expenditures and restrictions on the ability of the Company to
incur indebtedness, to pay dividends or to take certain corporate actions. See
"--Liquidity and Capital Resources."
Competition
The food and drug retailing business is highly competitive. The Company's
competitors include, among others, multi-regional supermarket chains, smaller,
independent supermarket chains, drug stores, convenience stores, discount
hardware stores and large chain discount retailers. Some of these competitors
have substantially greater resources than the Company. The Company expects
competition from large chain discount retailers to further increase as stores
are opened in market areas served by the Company.
6
<PAGE>
Expansion Plans
During 1996, the Company has completed the conversion of the Great Falls
and Lewistown, Montana, stores to the Big Fresh format, the acquisition of one
store in Cheyenne, Wyoming, which has also been converted to the Big Fresh
format, the acquisition of one store and a pharmacy business in Laramie,
Wyoming, and the expansion and remodel of its Malta, Montana store. The Company
is also currently constructing a new store in Bozeman, Montana, which will
replace its existing store with a larger store under the Big Fresh format. In
addition, the Company intends to construct one or two new stores per year over
the next two years. These plans are subject to site availability and financing,
competition, zoning and other governmental regulations and general economic
conditions, and no assurances can be given that such plans will not be revised
as a result of such factors. Historically, the Company has experienced temporary
disruptions and lost sales during store remodelings, and believes that this will
continue in connection with future remodelings. Additionally, the Company may
make selective acquisitions of existing food or drug stores that will complement
the Company's operations. See "--Liquidity and Capital Resources."
Control of the Company
A majority of the members of the Board of Directors of the Company are
affiliated with FS&Co., which controls FS Equity Partners II, L.P., the
Company's principal stockholder. FSEP currently holds 50.8% of the outstanding
Common Stock of the Company. As a result, FS&Co. controls and will continue to
control the Company's management policy and financing decisions.
RESULTS OF OPERATIONS
13 Weeks Ended November 2, 1996 Compared to 13 Weeks Ended October 28, 1995
Sales for the 13 weeks ended November 2, 1996 increased $2.3 million, or
2.6%, from $90.5 million in the third quarter of 1995 to $92.8 million in the
third quarter of 1996. Comparable store sales were equal to the 1995 level which
reflects a reduction in Montana tourism and a more aggressive competitive
environment.
Gross profit for the 13 weeks ended November 2, 1996 increased $0.2 million
from $21.7 million in the third quarter of 1995 to $21.9 million in the third
quarter of 1996, primarily reflecting the increase in sales, offset by a
decrease in gross profit as a percentage of sales due to increased promotional
activity in response to a more aggressive competitive environment. Gross profit
as a percentage of sales decreased 0.4% from 24.0% in the third quarter of 1995
to 23.6% in the third quarter of 1996.
Marketing, general and administrative ("MG&A") expenses for the 13 weeks
ended November 2, 1996 decreased $0.7 million from $20.6 million in the third
quarter of 1995 to $19.9 million in the third quarter of 1996. The decrease in
MG&A is attributable to reductions in depreciation and amortization expenses,
employee benefits, store labor and other operating expenses. MG&A expenses as a
percentage of sales decreased 1.3% from 22.8% in the third quarter of 1995 to
21.5% in the third quarter of 1996.
Operating income for the 13 weeks ended November 2, 1996 increased $0.9
million from $1.1 million, or 1.2% of sales, in the third quarter of 1995 to
$2.0 million, or 2.1% of sales, in the third quarter of 1996.
Interest expense, net of interest income, for the 13 weeks ended November
2, 1996 increased $0.1 million from $0.6 million in the third quarter of 1995 to
$0.7 million in the third quarter of 1996. The increase in interest expense is
attributable to an increase in long-term debt associated with the borrowings
under the Company's various equipment financing facilities. See "--Liquidity
and Capital Resources."
7
<PAGE>
Net income for the 13 weeks ended November 2, 1996 increased $0.4 million
from $0.3 million, or $0.04 per share, in the third quarter of 1995 to $0.7
million, or $0.09 per share, in the third quarter of 1996.
39 Weeks Ended November 2, 1996 Compared to 13 Weeks Ended October 28, 1995
Sales for the 39 weeks ended November 2, 1996 increased $5.3 million, or
1.9%, from $269.8 million in 1995 to $275.1 million in 1996. Comparable store
sales increased 0.5% despite the loss of sales during the remodeling of the
Company's highest volume store in the first quarter, the opening of one new
competitor, a more aggressive competitive environment and a reduction in Montana
tourism.
Gross profit for the 39 weeks ended November 2, 1996 increased $1.0 million
from $64.0 million in 1995 to $65.0 million in 1996, primarily reflecting the
increase in sales. Gross profit as a percentage of sales decreased 0.1% from
23.7% in 1995 to 23.6% in 1996.
MG&A expenses for the 39 weeks ended November 2, 1996 decreased $2.0
million from $60.8 million in 1995 to $58.8 million in 1996. The decrease in
MG&A is attributable to reductions in depreciation and amortization expenses,
employee benefits, store labor and other operating expenses. MG&A expenses as a
percentage of sales decreased 1.1% from 22.5% in 1995 to 21.4% in 1996.
Operating income for the 39 weeks ended November 2, 1996 increased $2.8
million from $3.3 million, or 1.2% of sales, in 1995 to $6.1 million, or 2.2% of
sales, in 1996.
In the first quarter of 1995, the Company recorded a gain on disposal of
assets of $0.3 million primarily from the sale of excess land and the Payson
distribution center.
Interest expense, net of interest income, for the 39 weeks ended November
2, 1996 was essentially equal to the $2.0 million in 1995. See "--Liquidity and
Capital Resources."
Net income before extraordinary charge for the 39 weeks ended November 2,
1996 increased $1.6 million from $0.9 million, or $0.11 per share, in 1995 to
$2.5 million, or $0.29 per share, in 1996.
In the first quarter of 1995, the Company recorded an extraordinary charge
of $85,000 ($51,000 on an after-tax basis, or $0.01 per share) as a result of
the early retirement of debt. See "--Liquidity and Capital Resources."
Net income for the 39 weeks ended November 2, 1996 increased $1.6 million
from $0.9 million, or $0.10 per share, in 1995 to $2.5 million, or $0.29 per
share, in 1996.
LIQUIDITY AND CAPITAL RESOURCES
The Company's liquidity needs arise primarily from capital expenditures,
debt service on its indebtedness and the funding of the Company's working
capital requirements. The Company has financed its liquidity needs primarily
using cash flow from operations, lease and debt financing of capital
expenditures, cash provided by certain asset sales, temporary borrowings under
the Company's working capital facility and the public sale of equity securities
in an initial public offering of Common Stock in February 1992.
On September 7, 1995, the Company entered into a new credit facility with
The CIT Group/Business Credit, Inc. ("CITBC") and The CIT Group/Equipment
Financing, Inc. ("CEF") providing available credit of up to $42.8 million (the
"Financing Agreement"). The new facility includes a $30.0 million working
capital facility and includes variable rate term loans totaling $12.8 million,
which refinanced existing equipment financing loans resulting in lower interest
rates and extended maturities. The borrowing base under which the working
capital revolver can be utilized is equal to 65% of Eligible Inventory
8
<PAGE>
(essentially non-perishable inventory). The estimated borrowing base as of
November 2, 1996 was $26.6 million. During the third quarter, the Financing
Agreement was amended to provide for a third term loan, for greater flexibility
in regards to the capital expenditure covenants, and for other technical
changes. On August 6, 1996, the Company received $5.0 million in proceeds for
Term Loan III, which amortizes the principal balance on a straight-line basis
over 60 months. Under the Financing Agreement, interest is determined, at the
Company's option, at a defined prime rate or at the London Interbank Offered
Rate ("LIBOR") for each applicable loan as follows:
<TABLE>
<S> <C>
$30.0 Working Capital Facility prime rate plus 0.50% or LIBOR
plus 2.00%
$8.1 Term Loan I prime rate plus 1.00% or LIBOR
plus 2.25%
$4.7 Term Loan II prime rate plus 1.50% or LIBOR
plus 2.65%
$5.0 Term Loan III prime rate plus 1.50% or LIBOR
plus 2.25%
</TABLE>
The Financing Agreement matures five years from inception, however, the
principal portion of term loans I and II are amortized on a straight-line basis
over 84 months. In the event that the Financing Agreement is not extended at
the end of five years, all term loans become due and payable. Additionally, the
Financing Agreement also provides that the maturity date of all balances shall
become accelerated upon a specified change in control or ownership.
Borrowings under the Financing Agreement are secured by the Great Falls
Distribution Center, a retail store location in Butte, Montana and all of the
personal property of the Company. The Financing Agreement contains financial
and operating covenants including limitations on the amount of capital
expenditures, dividends and the Company's ability to incur additional debt. The
Financing Agreement also requires the maintenance of certain financial ratios
and the satisfaction of certain tests which require escalating levels of
performance over time. The Company is currently in compliance with all such
financial ratios and tests.
The principal financial covenants defined in the Financing Agreement
compared to the Company's actual results for the 13 weeks ended November 2, 1996
are as follows:
<TABLE>
<CAPTION>
Actual Test
<S> <C> <C>
Minimum Net Worth $90.8 Million $72.5 Million
Maximum Capital Expenditures $15.8 Million $26.9 Million
Maximum Net Capital Expenditures $6.8 Million $20.9 Million
Minimum Interest Charge Coverage Ratio 7.32 4.50
</TABLE>
As of November 2, 1996, there was $1.5 million in borrowings outstanding
under the working capital revolver and $2.7 million outstanding under the letter
of credit subfacility. In addition, the outstanding balance under Term Loan I
was $6.7 million (of which $1.2 million is classified as current), under Term
Loan II was $3.9 million (of which $0.7 million is classified as current) and
under Term Loan III was $4.7 million (of which $1.0 million is classified as
current). The Company's borrowing requirements for working capital are somewhat
seasonal, reflecting increases in inventory in the fourth calendar quarter due
to holiday purchases and, historically, the Company's funding of employee
benefit program contributions in the first calendar quarter of each year.
9
<PAGE>
The Company has utilized equipment financing from time to time in order to
finance the purchases of store equipment and vehicles. In addition to the
outstanding term loans, on September 1, 1995, the Company completed a $1.2
million financing of new store equipment for the Company's new store in Butte,
Montana. The loan bears interest at LIBOR plus 2.65% and is payable in equal
monthly installments over four years. On July 26, 1996, the Company completed a
$4.0 million loan transaction with NationsBanc Leasing Corporation
("NationsBanc") to finance the purchase of new equipment for the recently
completed Great Falls remodels and for the upgrading of the Company's
transportation fleet. Approximately $3.5 million of this loan bears interest at
an 8.03% fixed rate while the remaining $0.5 million bears interest at LIBOR
plus 2.35%. The loan is payable in monthly installments over 48 months. As of
November 2, 1996, the outstanding obligation under these equipment loans was
$4.6 million (of which $1.2 million is classified as current). Additionally,
subsequent to the conclusion of the third quarter, the Company completed an
additional loan transaction with NationsBanc in an amount which approximates
$1.6 million for the financing of the Lewistown remodel and for upgrading of the
Company's transportation fleet. The new loan is payable in monthly installments
over 48 months and bears interest at LIBOR plus 2.35%. The Company has also
entered into commitments with institutional financing sources to finance an
aggregate of $14.0 million of its 1996 capital expenditures, $10.6 million of
which has been funded.
The Company has entered into a number of capital lease obligations for
store facilities. The Company's total outstanding capital lease obligation as of
November 2, 1996 was $9.5 million (of which $0.4 million is classified as
current).
On April 17, 1995, the Company completed the sale of the Payson
Distribution Center to Associated Food Stores, Inc. of Salt Lake City, Utah
("Associated"), and received proceeds totaling $8.8 million ($3.5 million for
property and equipment and $5.3 million for inventory). The Company used
approximately $7.3 million of these proceeds to retire obligations under long-
term debt. In connection with the early retirement of debt, the Company recorded
an extraordinary charge of $0.1 million ($0.1 million on an after-tax basis)
reflecting the non-cash write-off of unamortized deferred debt issuance costs.
Additionally, in conjunction with the sale of the Payson Distribution Center,
the Company also entered into a supply agreement with Associated whereby the
Company agreed to purchase from Associated certain products previously
distributed from the Payson Distribution Center. In March 1996, the Company
negotiated a new supply agreement with McKesson Drug Company for the purchase of
pharmaceutical products. Associated continues to supply over-the-counter
products, health and beauty care items and general merchandise.
During the 39 weeks ended November 2, 1996, net cash provided by operating
activities was $9.1 million, and reflected noncash charges of $6.6 million in
depreciation and amortization expenses during this period. Net cash provided by
operating activities was favorably impacted by a $5.6 million increase in
accounts payable offset by a $4.3 million increase in inventories, and a net
decrease in the remaining working capital accounts of $1.7 million.
The Company spent an aggregate of $10.0 million, $8.8 million and $12.8
million on capital expenditures, primarily for store remodelings and new store
expansion, during 1995, 1994 and 1993, respectively. Of these amounts, the
Company has funded approximately $1.2 million, $9.2 million and $5.2 million
through equipment and real estate financings in 1995, 1994 and 1993,
respectively. The Company plans to continue its store remodeling and development
program. During 1996, the Company completed the conversion of the Great Falls
and Lewistown, Montana, stores to the Big Fresh format, the acquisition of one
store in Cheyenne, Wyoming, which has also been converted to the Big Fresh
format, the acquisition of one store and a pharmacy business in Laramie,
Wyoming, and the expansion and remodel of its Malta, Montana store. The Company
is also currently constructing a new store in Bozeman, Montana, which will
replace its existing store with a larger store under the Big Fresh format. In
addition, the Company intends to construct one or two new stores per year over
the next two years.
10
<PAGE>
On June 11, 1996, the Company completed the acquisition of one store in
Cheyenne, Wyoming (the Company has two existing stores in this market). The
purchase price for the new Cheyenne store was $5.2 million for real property,
fixtures and equipment, and a non-compete agreement plus $0.3 million for
inventory.
On September 4, the Company completed its previously announced acquisition
of a store and pharmacy business in Laramie, Wyoming. The combined purchase
price was $0.8 million for fixtures and equipment and non-compete agreements
plus $0.6 million for inventory. The Company also entered into a lease for the
real property with the seller of the business.
For 1996, capital expenditures by the Company, including the foregoing, are
estimated to be approximately $23.8 million. Additionally, the Company also may
expand the number of stores it operates through additional selective
acquisitions of existing food or drug stores that will complement the Company's
operations. Except for the Cheyenne and the Laramie acquisitions, the projected
capital expenditure amount for 1996 does not include any additional amounts for
potential acquisitions.
Based upon the foregoing, and considering current and projected operating
results as well as the current budgeted capital expenditures described above,
the Company believes that it will have sufficient cash available, including
amounts available under the Financing Agreement and cash generated from
operations, and amounts available from lease and mortgage financings, to meet
its liquidity needs for debt service, its capital expenditure program, working
capital and general corporate purposes for the foreseeable future.
11
<PAGE>
BUTTREY FOOD AND DRUG STORES COMPANY
AND SUBSIDIARY
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Internal Revenue Service ("IRS") has completed its examination of the
Company's income tax returns for the periods ended February 1, 1992 and February
2, 1991, the period of the Company's initial acquisition of assets. On December
1, 1995, the Company received notice from the IRS of proposed adjustments for
the Company's fiscal periods 1991 to 1994. These adjustments generally relate to
the Company's allocation of purchase price among the assets initially acquired
by the Company and the treatment of certain of these assets for tax depreciation
and amortization purposes. The notice proposes adjustments which would reduce
the Company's net operating loss and alternative minimum tax credit carryover
and would result in additional federal taxes of up to $5.6 million plus interest
from the date when such additional taxes are asserted to have been due to the
date of payment.
The Company, after consultation with tax counsel, continues to believe in
the propriety of its positions set forth in its tax returns and it will
vigorously contest the adjustments being proposed by the IRS. If the IRS were to
ultimately prevail, in whole or in part, with respect to its proposed
adjustments, the Company would account for such change in its tax liability by
adjusting deferred tax assets and liabilities to reflect the revised tax basis
of its assets, by adjusting the current tax liability to reflect the prior year
taxes due, and by applying the effect of those adjustments to increase goodwill.
Any interest related to prior year taxes due would be expenses when accruable.
12
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibit Number
--------------
27 Financial Data Schedule
(b) Reports on Form 8-K
-------------------
During the quarter ended November 2, 1996, the Company did not file any
reports on Form 8-K
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Dated: December 16, 1996 BUTTREY FOOD AND DRUG
STORES COMPANY
(Registrant)
/s/ Wayne S. Peterson
------------------------
Wayne S. Peterson
Senior Vice President, Chief Financial
Officer and Secretary
(Duly Authorized Officer and Principal
Financial and Accounting Officer)
13
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