SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarter ended January 25, 1997
Commission file number 33-92700
DOMINICK'S FINER FOODS, INC.
(Exact name of registrant as specified in charter)
Delaware 36-3168270
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification Number)
505 Railroad Avenue
Northlake, Illinois 60164
(Address of principal executive offices) (ZipCode)
Registrant's telephone number, including area code: (708) 562-1000
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 at least the past 90
days. YES [X] NO [ ].
At March 3, 1997, there were 1,000 shares of Common Stock
outstanding. As of such date, all of the outstanding shares of Common
Stock were held by Dominick's Supermarkets, Inc. and there was no public
market for the Common Stock.
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TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets as of
January 25, 1997 (unaudited) and November 2, 1996 1
Consolidated Statements of Operations for the 12 weeks ended
January 25, 1997 and January 20, 1996 (unaudited) 2
Consolidated Statements of Cash Flows for the 12 weeks ended
January 25, 1997 and January 20, 1996 (unaudited) 3
Notes to Consolidated Financial Statements 4
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 5
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 8
Item 2. Changes in Securities 8
Item 3. Defaults Upon Senior Securities 8
Item 4. Submission of Matters to a Vote of Security Holders 8
Item 5. Other Information 9
Item 6. Exhibits and Reports on Form 8-K 9
Signatures 10
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<TABLE>
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
DOMINICK'S FINER FOODS,INC.
CONSOLIDATED BALANCE SHEETS
(in thousands)
ASSETS
January 25, 1997 November 2, 1996
(unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 21,191 $ 32,735
Receivables, net 20,694 16,723
Inventories 203,947 203,411
Prepaid expenses and other 24,059 21,860
Total current assets 269,891 274,729
Property and equipment, net 383,649 368,224
Other assets:
Deferred financing costs, net 11,271 11,524
Goodwill, net 417,656 420,182
Other 27,215 27,546
Total other assets 456,142 459,252
Total assets $ 1,109,682 $ 1,102,205
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Accounts payable $ 158,309 $ 187,787
Accrued payroll and related liabilities 28,441 30,896
Taxes payable 25,899 18,234
Other accrued liabilities 67,127 61,465
Current portion of long-term debt 377 376
Current portion of capital lease obligations 11,337 9,676
Total current liabilities 291,490 308,434
Long-term debt:
Term loans 215,578 200,644
Senior subordinated debt 200,000 200,000
Capital lease obligations 135,832 130,052
Deferred income taxes and other liabilities 82,786 84,004
Stockholder's equity:
Common stock - -
Additional paid-in capital 193,977 193,951
Accumulated deficit (9,981) (14,880)
Total stockholder's equity 183,996 179,071
Total liabilities and stockholder's equity $ 1,109,682 $ 1,102,205
See accompanying notes.
</TABLE>
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<TABLE>
DOMINICK'S FINER FOODS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands)
(unaudited)
12 Weeks 12 Weeks
Ended Ended
January 25, 1997 January 20, 1996
<S> <C> <C>
Sales $ 602,923 $ 584,362
Cost of sales 460,616 452,410
Gross profit 142,307 131,952
Selling, general and administrative expenses 119,012 112,622
Operating income 23,295 19,330
Interest expense 13,377 16,514
Income before income taxes 9,918 2,816
Income tax expense 5,017 2,146
Net income $ 4,901 $ 670
See accompanying notes.
</TABLE>
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<TABLE>
DOMINICK'S FINER FOODS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
12 Weeks 12 Weeks
Ended Ended
January 25, 1997 January 20, 1996
<S> <C> <C>
Cash flows from operating activities:
Net income $ 4,901 $ 670
Adjustments to reconcile net income to net cash
used in operating activities:
Depreciation and amortization 12,021 10,164
Amortization of deferred financing costs 252 812
Gain on disposal of assets (44) -
Changes in operating assets and liabilities:
Receivables (3,972) 3,643
Inventories (536) 1,856
Prepaid expenses (3,064) (985)
Accounts payable (29,478) (33,521)
Accrued liabilities and taxes payable 9,401 (7,273)
Total adjustments (15,420) (25,304)
Net cash used in operating activities (10,519) (24,634)
Cash flows from investing activities:
Capital expenditures (21,108) (3,563)
Proceeds from sale of assets 56 117
Net cash used in investing activities (21,052) (3,446)
Cash flows from financing activities:
Principal payments for long-term debt and
capital lease obligations (4,013) (9,951)
Proceeds from sale-leaseback of assets 8,848 16,911
Increase in revolving debt 15,000 -
Deferred financing costs and other 192 (322)
Net cash provided by financing activities 20,027 6,638
Net decrease in cash and cash equivalents (11,544) (21,442)
Cash and cash equivalents at beginning of period 32,735 55,551
Cash and cash equivalents at end of period $ 21,191 $ 34,109
See accompanying notes.
</TABLE>
<PAGE>
DOMINICK'S FINER FOODS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1. Summary of Significant Accounting Policies
Basis of Presentation
The consolidated balance sheet of Dominick's Finer Foods,
Inc. (together with its subsidiaries, the "Company") as of
January 25, 1997, and the consolidated statements of operations
and cash flows for the 12 week period ended January 25, 1997, and
January 20, 1996, are unaudited, but include all adjustments
which the Company considers necessary for a fair presentation of
its consolidated financial position, results of operations and
cash flows for these periods. These interim financial statements
do not include all disclosures required by generally accepted
accounting principles and, therefore, should be read in
conjunction with the financial statements and notes thereto
included in the Company's Annual Report on Form 10-K for the
fiscal year ended November 2, 1996. Results of operations for
interim periods are not necessarily indicative of the results for
a full fiscal year. The Company is a wholly owned subsidiary of
Dominick's Supermarkets, Inc. ("Supermarkets").
On November 1, 1996, $35.9 million of the proceeds of
Supermarkets' initial public offering, together with $45.0
million of available cash and $193.6 million of proceeds under
the New Credit Facility was used to repay all of the outstanding
borrowings under the Company's then existing credit facility.
The remaining proceeds were used to terminate a consulting
agreement.
The Company uses a 52-53 week fiscal year ending on the
Saturday closest to October 31. The Company operates supermarkets
in Chicago, Illinois, and its suburbs. The consolidated
financial statements include the accounts of the Company and its
wholly-owned subsidiaries.
Inventories
Inventories are stated at the lower of cost, primarily using
the last-in, first-out (LIFO) method, or market. If inventories
had been valued using replacement cost, inventories would have
been higher by $3,960,000 and $3,355,000 at January 25, 1997 and
November 2, 1996, respectively, and gross profit and operating
income would have been greater by $605,000 and $450,000 for the
12 weeks ended January 25, 1997 and January 20, 1996,
respectively.
<PAGE>
<TABLE>
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Results of Operations
The following table sets forth the historical results of the
Company for the 12 weeks ended January 25, 1997, and for the 12
weeks ended January 20, 1996, expresses in millions of dollars
and as a percentage of sales.
12 Weeks Ended
January 25, 1997 January 20,1996
(unaudited)
<S> <C> <C> <C> <C>
Sales $602.9 100.0 % $584.4 100.0 %
Gross profit 142.3 23.6 % 132.0 22.6 %
Selling, general and
administrative expenses 119.0 19.7 % 112.6 19.3 %
Operating income 23.3 3.9 % 19.3 3.3 %
Interest expense 13.4 2.2 % 16.5 2.8 %
Income tax expense 5.0 0.8 % 2.1 0.4 %
Net income 4.9 0.9 % 0.7 0.1 %
</TABLE>
Comparison of Results of Operations for the 12 Weeks Ended
January 25, 1997 with the 12 Weeks Ended January 20, 1996
Sales: Sales increased $18.5 million, or 3.2%, from $584.4
million in the 12 weeks ended January 20, 1996 to $602.9 million
in the 12 weeks ended January 25, 1997. The increase in sales in
the fiscal 1997 period was primarily attributable to the opening
of four new Dominick's Fresh Stores in the fourth quarter of
fiscal 1996, partially offset by a decrease in comparable store
sales of 0.7%. The decrease in comparable store sales is due to
greater remodel construction activity compared to the prior year
period, which caused some disruption in 12 stores. Additionally,
the shortened holiday season in the fiscal 1997 period also
impacted sales.
Gross Profit: Gross profit increased $10.3 million, or
7.8%, from $132.0 million in the 12 weeks ended January 20, 1996
to $142.3 million in the 12 weeks ended January 25, 1997. Gross
profit as a percentage of sales increased from 22.6% in the 12
weeks ended January 20, 1996 to 23.6% in the 12 weeks ended
January 25, 1997, due primarily to the Company's ongoing efforts
to reduce its cost of goods through purchasing improvements and
to increase sales and margins in its grocery and drug
departments.
Selling, General and Administrative Expenses: Selling,
general and administrative expenses ("SG&A") increased $6.4
million, or 5.7%, from $112.6 million in the 12 weeks ended
January 20, 1996 to $119.0 million in the 12 weeks ended January
25, 1997. SG&A increased from 19.3% of sales in the 12 weeks
ended January 20, 1996 to 19.7% of sales in the 12 weeks ended
January 25, 1997. The increase in SG&A as a percentage of sales
reflects planned increases in rent and occupancy costs associated
with new and replacement stores opening in the second half of
fiscal 1996.
Operating Income: Operating income for the 12 weeks ended
January 25, 1997 increased $4.0 million, or 20.7%, from $19.3
million in the 12 weeks ended January 20, 1996 to $23.3 million
as a result of the factors discussed above.
Interest Expense: Interest expense decreased from $16.5
million in the 12 weeks ended January 20, 1996 to $13.4 million
in the 12 weeks ended January 25, 1997. The decrease in interest
expense was due to lower borrowings and interest rates following
Supermarkets' initial public offering.
Net Income: Net income increased from $0.7 million in the
12 weeks ended January 20, 1996 to $4.9 million in the 12 weeks
ended January 25, 1997, as a result of the factors discussed
above.
Liquidity and Capital Resources
The Company's principal sources of liquidity are cash flow
from operations, borrowings under the New Revolving Facility (as
defined below) and capital and operating leases. The Company's
principal uses of liquidity are to provide working capital,
finance capital expenditures and meet debt service requirements.
On November 1, 1996, $35.9 million of the proceeds of
Supermarkets' initial public offering, together with $45.0
million of available cash and $193.6 million of proceeds under
the New Credit Facility (defined below) was used to repay all of
the outstanding borrowings under the Company's then existing
credit facility. The remaining proceeds were used to terminate a
consulting agreement As a result of these changes, the Company's
debt was reduced and it anticipates that its future results of
operations will reflect reduced levels of interest expense.
On November 1, 1996, the Company entered into a credit
facility with a syndicate of financial institutions (the "New
Credit Facility"). The New Credit Facility provides for a $100
million amortizing term loan (the" New Term Loan"), a $105
million revolving term facility (the "New Revolving Term
Facility") and a $120 million revolving facility (the "New Revolving
Facility," and together with the New Revolving Term Facility, the
"New Revolving Facilities"), each of which has a six and one-half
year term. The New Revolving Facility is available for working
capital and general corporate purposes, including up to $50 million
to support letters of credit. Up to $20 million of the New Revolving
Facility is available as a swingline facility (i.e.,a facility which
permits same-day borrowings directly from the agent under the New
Credit Facility). The Company is not required to reduce borrowings
under the New Revolving Facilities by a specified amount each
year. The New Term Loan requires quarterly amortization payments
commencing in the second quarter of fiscal 1998 in amounts
ranging from $2.5 million to $7.5 million per quarter. The
Company will also be required to make prepayments under the New
Credit Facility, subject to certain exceptions, with a percentage
of its consolidated excess cash flow and with the proceeds from
certain asset sales, issuance's of debt securities and any
pension plan reversions.
The Company used approximately $10.5 million of cash for
operating activities during the 12 weeks ended January 25, 1997
compared to $24.6 million in the same period last year. The
reduction in cash used for operating activities during the 12
weeks ended January 25, 1997 is attributable to lower interest
expense and the timing of cash payments for interest. The
Company anticipates that one of the principal uses of cash in its
operating activities will be inventory purchases. However,
supermarket operators typically require small amounts of working
capital since inventory is generally sold prior to the time that
payments to suppliers are due. This reduces the need for short-
term borrowings and allows cash from operations to be used for
non-current purposes such as financing capital expenditures and
other investing activities. Consistent with this pattern, the
Company had a working capital deficit of $21.6 million at January
25, 1997.
The Company's cash used in investing activities for the 12
weeks ended January 25, 1997 was $21.0 million, which consisted
principally of capital expenditures related primarily to store
remodels and, to a lesser extent, expenditures for warehousing,
distribution and manufacturing facilities and equipment,
including data processing and computer systems.
The Company plans to make gross capital expenditures of
approximately $84 million (or $55 million net of expected capital
leases) in fiscal 1997. Such expenditures consist of
approximately $60 million related to remodels and new stores, as
well as ongoing store expenditures for equipment and maintenance
and approximately $24 million related to warehousing,
distribution and manufacturing facilities and equipment,
including data processing and computer systems. Management
expects that these capital expenditures will be financed
primarily through cash flow from operations and lease financing.
During the 12 weeks ended January 25, 1997, the Company sold and
leased-back under capital leases approximately $9 million of
certain existing owned equipment.
The capital expenditure plans discussed above do not include
potential acquisitions which the Company could make to expand
within its existing market or to enter contiguous markets. The
Company considers acquisition opportunities from time to time.
In March 1997, the Company completed the purchase of Byerly's two
Chicago area stores, which have been closed for remodeling to the
"Fresh Store" format. The Company is also evaluating other
acquisition opportunities in its market area, although no
agreements have been reached. Any such future acquisition,
depending on its size and the form of consideration, may require
the Company to seek additional debt or equity financing.
The Company is a wholly owned subsidiary of Supermarkets.
The Company's principal debt instruments generally restrict the
Company from paying dividends or otherwise distributing cash to
Supermarkets, except under certain limited circumstances,
including for the payment of taxes and, subject to limitations,
for general administration purposes.
The Company, in the ordinary course of its business, is
party to various legal actions. One case currently pending
alleges gender discrimination by the Company and seeks
compensatory and punitive damages in an unspecified amount. The
plaintiffs' motion for class certification is currently pending
before the court. A federal magistrate has recommended that the
female subclass be certified, see "Legal Proceedings." Due to
the numerous legal and factual issues which must be resolved
during the course of this litigation, the Company is unable to
predict the ultimate outcome of this lawsuit. If the Company
were held liable for the alleged discrimination (or otherwise
concludes that it is in the Company's best interest to settle the
matter), it could be required to pay monetary damages (or
settlement payments) which, depending on the outcome of the class
certification motion (and the size of any class certified), the
theory of recovery or the resolution of the plaintiffs' claims
for compensatory and punitive damages, could be substantial and
could have a material adverse effect on the Company. Based upon
the current state of the proceedings, the Company's assessment to
date of the underlying facts and circumstances and the other
information currently available, and although no assurances can
be given, the Company does not believe that the resolution of
this litigation will have a material adverse effect on the
Company's overall liquidity. As additional information is
gathered and the litigation proceeds, the Company will continue
to assess its potential impact.
The Company is highly leveraged. Based upon current levels
of operations and anticipated cost savings and future growth, the
Company believes that its cash flows from operations, together
with available borrowings under the New Revolving Facility and
its other sources of liquidity (including capital and operating
leases), will be adequate to meet its anticipated requirements
for working capital, debt service and capital expenditures over
the next few years. However, there can be no assurance that the
Company will generate sufficient cash flow from operations or
that it will be able to make future borrowings under the New
Credit Facility.
Effects of Inflation
The Company's primary costs, inventory and labor, are
affected by a number of factors that are beyond its control,
including the availability and price of merchandise, the
competitive climate and general and regional economic conditions.
As is typical of the supermarket industry, the Company has
generally been able to maintain gross profit margins by adjusting
its retail prices, but competitive conditions may from time to
time render it unable to do so while maintaining its market
share.
Cautionary Statement for Purposes of ``Safe Harbor Provisions ''
of the Private Securities Litigation Reform Act of 1995
When used in this report, the words "estimate," "expect,"
"project" and similar expressions, together with other discussion
of future trends or results, are intended to identify
forward-looking statements within the meaning of Section 27A of the
Securities Act of 1933, as amended (the ``Securities Act'') and
Section 21E of the Securities Exchange Act of 1934, as amended
(the ``Exchange Act''). Such statements are subject to certain risks
and uncertainties, including those discussed below, that could cause
actual results to differ materially from those projected. These
forward-looking statements speak only as of the date hereof. All
of these forward-looking statements are based on estimates and
assumptions made by management of the Company, which although
believed to be reasonable, are inherently uncertain and
difficult to predict; therefore, undue reliance should not be
placed upon such estimates. There can be no assurance that the
savings or other benefits anticipated in these forward looking
statements will be achieved. The following important factors,
among others, could cause the Company not to achieve the cost savings
or other benefits contemplated herein or otherwise cause the Company's
results of operations to be adversely affected in future periods:
(i) continued or increased competitive pressures from existing
competitors and new entrants, including price-cutting strategies;
(ii) unanticipated costs related to the Company's growth and
operating strategies; (iii) loss or retirement of key members of
management; (iv) inability to negotiate more favorable terms with
suppliers or to improve working capital management; (v) increase in
interest rates of the Company's cost of borrowing or a default under
any material debt agreements; (vi) inability to develop new stores
in advantageous locations or to successfully convert existing stores;
(vii) prolonged labor disruption; (viii) deterioration in general of
regional economic conditions; (ix) adverse state or federal
legislation or regulation that increases the cost of compliance,
or adverse findings by a regulator with respect to existing
operations; (x) loss of customers as result of the conversion of
store formats; (xi) adverse determinations in connection with
pending or future litigation or other material claims and
judgments against the Company; (xii) inability to achieve future
sales ; and (xiii) the unavailability of funds for capital
expenditures. Many of such factors are beyond the control of the
Company. In addition, there can be no assurance that unforeseen
costs and expenses or other factors will not offset or adversely
affect the projected cost savings or other benefits in whole or
in part.
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
On March 16, 1995, a lawsuit was filed in the United States
District Court for the Northern District of Illinois against the
Company by two employees of the Company. The plaintiffs'
original complaint asserted allegations of gender discrimination
and sought compensatory and punitive damages in an unspecified
amount. The plaintiffs filed an amended complaint on May 1,
1995. The amended complaint added four additional plaintiffs and
asserted allegations of gender and national origin
discrimination. The plaintiffs filed a second amended complaint
on August 16, 1996 adding three additional plaintiffs. The
plaintiffs' motion for class certification is currently pending
before the court. On February 21, 1997, the magistrate judge
issued a report and recommendation in which he recommended that
the subclass of female employees be certified and that the
subclass of Hispanic employees not be certified. That report and
recommendation is now before the district court judge. The
Company will object to the report and recommendation of the
magistrate judge concerning the female subclass, and the
plaintiffs are expected to object to the recommendation concerning the
Hispanic subclass. The parties are currently in the process of
briefing those objections. The district court is obligated to
conduct a de novo review of the certification issue. The Company
plans to vigorously defend this lawsuit. Due to the numerous
legal and factual issues which must be resolved during the course
of this litigation, the Company is unable to predict the ultimate
outcome of this lawsuit. If the Company was held liable for the
alleged discrimination (or otherwise concludes that it is in the
Company's best interest to settle the matter), it could be
required to pay monetary damages (or settlement payments) which,
depending on the outcome of the class certification motion (and
the size of any class certified), the theory of recovery or the
resolution of the plaintiffs' claims for compensatory and
punitive damages, could be substantial and could have a material
adverse effect on the Company. Based upon the current state of
the proceedings, the Company's assessment to date of the
underlying facts and circumstances and the other information
currently available, and although no assurances can be given, the
Company does not believe that the resolution of this litigation
will have a material adverse effect on the Company's overall
liquidity. As additional information is gathered and the
litigation proceeds, the Company will continue to assess its
potential impact.
Item 2. Changes in Securities
None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K
Exhibit 27 - Financial Data Schedule
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1934,
the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
Dated: March 10, 1997 DOMINICK'S FINER FOODS, INC.
/s/Robert A. Mariano
Robert A. Mariano
President and Chief Executive Officer
/s/ Darren W. Karst
Darren W. Karst
Executive Vice President,
Chief Financial Officer
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12<PAGE>
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<S> <C>
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<FISCAL-YEAR-END> NOV-01-1997
<PERIOD-END> JAN-25-1997
<CASH> 21,191
<SECURITIES> 0
<RECEIVABLES> 20,694
<ALLOWANCES> 0
<INVENTORY> 203,947
<CURRENT-ASSETS> 269,891
<PP&E> 440,819
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<TOTAL-ASSETS> 1,109,682
<CURRENT-LIABILITIES> 291,490
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0
0
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<TOTAL-REVENUES> 602,923
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<TOTAL-COSTS> 460,616
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