FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For quarter ended January 29, 1995 Commission File No. 33-25621
KASH N' KARRY FOOD STORES, INC.
(Exact name of registrant as specified in charter)
Delaware 95-4161591
(State of incorporation) (IRS employer identification number)
6422 Harney Road, Tampa, Florida 33610
(Address of registrant's principal executive offices)
(813) 621-0200
(Registrant's telephone number, including area code)
The registrant 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
and has been subject to such filing requirements for the past 90 days. The
registrant has filed all documents and reports required to be filed by
Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to
the distribution of securities under a plan confirmed by a court.
As of March 10, 1995, there were 3,100,000 shares outstanding of the
registrant's common stock, $0.01 par value.
KASH N' KARRY FOOD STORES, INC.
BALANCE SHEETS
(Dollar Amounts in Thousands, Except Per Share Amounts)
ASSETS
Reorganized Predecessor
Company Company
------------ -----------
January 29, July 31,
1995 1994
------------ -----------
(Unaudited)
(Note 1)
Current assets:
Cash and cash equivalents $ 10,517 $ 6,852
Accounts receivable 6,701 8,084
Inventories 78,756 76,094
Prepaid expenses and other current assets 3,246 12,805
--------- ---------
Total current assets 99,220 103,835
Property and equipment, at cost, less
accumulated depreciation 143,813 160,491
Favorable lease interests, less accumulated
amortization of $192 and $13,543 29,762 12,312
Deferred financing costs, less accumulated
amortization of $182 and $22,572 4,043 12,630
Reorganization value in excess of amount allocable
to identifiable assets, less accumulated
amortization of $460 at January 29, 1995 102,059 --
Excess of cost over net assets acquired, less
accumulated amortization of $16,288 at
July 31, 1994 -- 96,758
Other assets 2,854 3,867
--------- ---------
Total assets $381,751 $389,893
========= =========
See accompanying notes to condensed financial statements.
KASH N' KARRY FOOD STORES, INC.
BALANCE SHEETS
(Dollar Amounts in Thousands, Except Per Share Amounts)
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Reorganized Predecessor
Company Company
------------ -----------
January 29, July 31,
1995 1994
------------ -----------
(Unaudited)
(Note 1)
Current liabilities:
Current portion of long-term debt $ 12,764 $ 42,740
Accounts payable 39,883 34,908
Accrued payroll and benefits 9,023 5,579
Accrued interest 4,618 15,849
Taxes, other than income 4,052 6,056
Other accrued expenses 21,673 11,450
--------- ---------
Total current liabilities 92,013 116,582
Long-term debt, less current obligations 227,522 317,381
Other long-term liabilities 14,914 12,334
Old Series B Cumulative Preferred Stock of $.01 par
value and a stated value of $100 a share.
Authorized 50,000 shares; 38,750 shares
outstanding at July 31, 1994. -- 3,875
Old Series C Convertible Preferred Stock of
$.01 par value. Authorized 100,000 shares;
77,500 shares outstanding at July 31, 1994. -- 775
Stockholders' equity (deficit):
New Common Stock of $.01 par value.
Authorized 5,500,000 shares; 3,100,000
shares outstanding at January 29, 1995. 31 --
Old Common Stock of $.01 par value.
Authorized 4,000,000 shares; 2,819,589
shares outstanding at July 31, 1994. -- 28
Capital in excess of par value 46,464 77,695
Retained earnings (deficit) 807 (138,740)
Less cost of treasury stock - 2,437 shares
at July 31, 1994 -- (37)
--------- ---------
Total stockholders' equity (deficit) 47,302 (61,054)
--------- ---------
Total liabilities & stockholders' equity $381,751 $389,893
========= =========
See accompanying notes to condensed financial statements.
KASH N' KARRY FOOD STORES, INC.
CONDENSED STATEMENTS OF OPERATIONS
(In Thousands)
(Unaudited)
Reorganized Predecessor
Company Company
----------- --------------------------
Four Nine Thirteen
Weeks Ended Weeks Ended Weeks Ended
January 29, January 1, January 30,
1995 1995 1994
----------- ----------- -----------
Sales $ 86,354 $186,535 $278,166
Cost of sales 68,940 149,070 221,706
--------- ----------- ----------
Gross profit 17,414 37,465 56,460
Selling, general and
administrative expenses 12,226 28,319 45,300
Depreciation and amortization 1,979 4,161 6,220
--------- --------- ----------
Operating income 3,209 4,985 4,940
Interest expense 2,402 3,159 11,372
--------- --------- ----------
Income (loss) before reorganization
items, income taxes, extra-
ordinary item and change in
accounting principle 807 1,826 (6,432)
Reorganization items -- (219) --
--------- --------- ----------
Income (loss) before income taxes,
extraordinary item and change
in accounting principle 807 1,607 (6,432)
Provision for income taxes -- -- --
--------- --------- ----------
Income (loss) before extra-
ordinary item and change in
accounting principle 807 1,607 (6,432)
Extraordinary item - gain on
debt discharge -- 70,166 --
Cumulative effect of change in
accounting principle -
postretirement medical benefits -- (2,000) --
--------- --------- ----------
Net income (loss) $ 807 $69,773 $ (6,432)
========= ========= ==========
Net income per common share (A)(B) $ 0.03
=========
(A) Based on a weighted average number of shares of common stock of 3,100,000
outstanding.
(B) Net income per common share is not meaningful prior to January 1, 1995
due to the significant change in the capital structure in connection with
the Restructuring.
See accompanying notes to condensed financial statements.
KASH N' KARRY FOOD STORES, INC.
CONDENSED STATEMENTS OF OPERATIONS
(In Thousands)
(Unaudited)
Reorganized Predecessor
Company Company
----------- --------------------------
Four Twenty-Two Twenty-Six
Weeks Ended Weeks Ended Weeks Ended
January 29, January 1, January 30,
1995 1995 1994
----------- ----------- -----------
Sales $ 86,354 $426,681 $534,801
Cost of sales 68,940 340,802 425,915
--------- ----------- ----------
Gross profit 17,414 85,879 108,886
Selling, general and
administrative expenses 12,226 68,819 90,128
Depreciation and amortization 1,979 10,234 12,111
Store closing and other costs -- -- 11,016
--------- --------- ----------
Operating income (loss) 3,209 6,826 (4,369)
Interest expense 2,402 13,719 22,513
--------- --------- ----------
Income (loss) before reorganization
items, income taxes, extra-
ordinary item and change in
accounting principle 807 (6,893) (26,882)
Reorganization items -- (219) --
--------- --------- ----------
Income (loss) before income taxes,
extraordinary item and change
in accounting principle 807 (7,112) (26,882)
Provision for income taxes -- -- --
--------- --------- ----------
Income (loss) before extra-
ordinary item and change
in accounting principle 807 (7,112) (26,882)
Extraordinary item - gain on
debt discharge -- 70,166 --
Cumulative effect of change in
accounting principle -
postretirement medical benefits -- (2,000) --
--------- --------- ----------
Net income (loss) $ 807 $ 61,054 $ (26,882)
========= ========= ==========
Net income per common share (A)(B) $ 0.03
=========
(A) Based on a weighted average number of shares of common stock of 3,100,000
outstanding.
(B) Net income per common share is not meaningful prior to January 1, 1995
due to the significant change in the capital structure in connection with
the Restructuring.
See accompanying notes to condensed financial statements.
KASH N' KARRY FOOD STORES, INC.
STATEMENTS OF CASH FLOWS
(In Thousands)
(Unaudited)
Reorganized Predecessor
Company Company
------------ -----------------------
Four Weeks Twenty-Two Twenty-Six
Ended Weeks Ended Weeks Ended
January 29, January 1, January 30,
1995 1995 1994
----------- ----------- -----------
Net cash flow from operating activities:
Net income (loss) $ 807 $61,054 $(26,882)
Adjustments to reconcile net income
(loss) to net cash provided (used)
by operating activities:
Depreciation and amortization,
excluding deferred financing costs 1,979 11,234 12,111
Store closing and other costs -- -- 11,016
Amortization of deferred financing costs 182 1,152 1,549
Reorganization expense -- 4,329 --
Adjustment of accounts to fair value -- (4,110) --
Change in accounting principle -- 2,000 --
Write-off of transaction costs -- 12,989 --
Gain on discharge of debt -- (70,166) --
(Increase) decrease in assets:
Accounts receivable (939) 2,322 660
Inventories 8,358 (5,917) 9,433
Prepaid expenses and other assets (149) (270) (454)
Increase (decrease) in liabilities:
Accounts payable 3,175 1,800 1,652
Accrued expenses and other
liabilities (1,072) (4,012) 2,697
--------- -------- ---------
Net cash provided (used) by
operating activities 12,341 12,405 11,782
---------- -------- ---------
Cash used by investing activities:
Additions to property and equipment (162) (665) (6,194)
Leased/financed asset additions -- -- (4,412)
Proceeds from sale of property and
equipment -- -- 359
---------- -------- ---------
Net cash used by investing
activities (162) (665) (10,247)
---------- -------- ---------
See accompanying notes to condensed financial statements.
KASH N' KARRY FOOD STORES, INC.
STATEMENTS OF CASH FLOWS
(Continued)
(In Thousands)
(Unaudited)
Reorganized Predecessor
Company Company
------------ -----------------------
Four Weeks Twenty-Two Twenty-Six
Ended Weeks Ended Weeks Ended
January 29, January 1, January 30,
1995 1995 1994
----------- ----------- -----------
Cash provided (used) by financing activities:
Borrowings under revolving loan facility $ 4,200 $ 800 $ 15,700
Additions to obligations under
capital leases and notes payable -- -- 799
Repayments on revolving loan facility (6,700) (18,000) (9,100)
Repayments on term loan facility -- (3,098) (2,925)
Repayments of other long-term liabilities (151) (2,235) (2,642)
Sale of Common Stock -- 10,000 --
Other financing activities -- (5,070) (512)
--------- --------- ----------
Net cash provided (used) by
financing activities (2,651) (17,603) 1,320
--------- --------- ----------
Net increase (decrease) in cash
and cash equivalents 9,528 (5,863) 2,855
Cash and cash equivalents at beginning
of period 989 6,852 2,145
--------- --------- ----------
Cash and cash equivalents at end of period $ 10,517 $ 989 $ 5,000
========= ========= ==========
See accompanying notes to condensed financial statements.
KASH N' KARRY FOOD STORES, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(In Thousands)
(Unaudited)
1. On September 3, 1994, the Company began to solicit acceptances of all
impaired parties of a restructuring of the Company which would be implemented
through the consummation of a "prepackaged" plan of reorganization under
Chapter 11 of the United States Bankruptcy Code (the "Restructuring"). As a
result of this solicitation, the voting requirements prescribed by Section
1126 of the Bankruptcy Code were satisfied, and on November 9, 1994 (the
"Petition Date") the Company filed with the Bankruptcy Court a voluntary
petition for reorganization under Chapter 11 of the Bankruptcy Code. On
December 12, 1994, the Bankruptcy Court confirmed the plan of reorganization,
and the Company emerged from bankruptcy on December 29, 1994 (the "Effective
Date"). During the pendency of the bankruptcy case, the Company, with the
Bankruptcy Court's approval, operated its business in the ordinary course,
and paid all pre-petition and post-petition claims of the Company's general
unsecured creditors, trade creditors and employees in full. In connection
with the Restructuring:
(i) Each $1,000 principal amount of the Company's Old Senior Floating
Rate Notes was exchanged for (a) new Senior Floating Rate Notes due February
1, 2003 (the "New Senior Floating Rate Notes") in an original principal
amount equal to $1,000 plus 100% of the accrued interest under the Old Senior
Floating Rate Notes from and including February 3, 1994, through but not
including the Petition Date, or, at such holder's election, (b) new 11.5%
Senior Fixed Rate Notes due February 1, 2003 (the "New Senior Fixed Rate
Notes") in the same original principal amount, or, at such holder's election,
(c) an amount of New Senior Floating Rate Notes and an amount of New Senior
Fixed Rate Notes equal, in the aggregate, to 100% of such claim;
(ii) Each $1,000 principal amount of the Company's Old Senior Fixed
Rate Notes was exchanged for (a) New Senior Floating Rate Notes in an
original principal amount equal to $1,000 plus 100% of the accrued interest
under the Old Senior Fixed Rate Notes from and including February 2, 1994,
through but not including the Petition Date, or, at such holder's election,
(b) New Senior Fixed Rate Notes in the same original principal amount, or, at
such holder's election, (c) an amount of New Senior Floating Rate Notes and
an amount of New Senior Fixed Rate Notes equal, in the aggregate, to 100% of
such claim;
(iii) the Old Subordinated Debentures were exchanged for newly-issued
common stock of the Company representing 85 percent of the common stock
outstanding on the Effective Date;
(iv) Green Equity Investors, L.P. invested $10,000 cash in exchange for
newly-issued common stock of the Company representing 15 percent of the
common stock outstanding on the Effective Date;
(v) the Company entered into a new credit agreement with The CIT
Group/Business Credit, Inc. as Administrative Agent, and the lenders under
its old bank credit agreement; and
KASH N' KARRY FOOD STORES, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(In Thousands)
(Unaudited)
(vi) all of the existing preferred stock, common stock, and options and
warrants to purchase common stock of the Company was extinguished.
2. The condensed financial statements presented herein have been prepared
in accordance with the instructions to Form 10-Q and do not include all of
the information and note disclosures required by generally accepted
accounting principles. These statements should be read in conjunction with
the fiscal 1994 Form 10-K filed by the Company. The accompanying condensed
financial statements have not been audited by independent accountants in
accordance with generally accepted auditing standards, but in the opinion of
management the condensed financial statements for the period ended January
30, 1994 includes all adjustments, consisting only of normal recurring
adjustments, necessary to summarize fairly the Company's financial position
and results of operations.
The condensed financial statements as of and for the period ended
January 29, 1995 reflect the Company's emergence from Chapter 11 and were
prepared according to the principles of fresh start reporting contained in
American Institute of Certified Public Accountants' Statement of Position
90-7 "Financial Reporting by Entities in Reorganization Under the Bankruptcy
Code" ("SOP 90-7"). Operations during the period from the Effective Date
through January 1, 1995 had no significant impact on the emergence
transactions and as a result have not been separately identified. As a
result of the implementation of fresh start accounting, the Company's
condensed financial statements are not comparable to the Company's condensed
financial statements of prior periods. Results for the periods ended January
29, 1995 or January 1, 1995 are not necessarily indicative of the results for
the full year.
The total reorganization value assigned to the Company's assets was
estimated by calculating projected cash flows before debt service
requirements discounted back to present value using a discount rate of 13.3%
(representing the estimated weighted cost of capital), as well as by
analyzing market cash flow multiples applied to the Company's adjusted
12-month trailing cash flows. After extensive negotiations between
independent investment banking firms representing the Company and an ad hoc
committee of bondholders, the reorganization value was agreed to by the
parties and confirmed by the Bankruptcy Court. The excess of the
reorganization value over the value of the identifiable assets is reported as
"Reorganization Value in Excess of Amounts Allocable to Identifiable Assets"
and is being amortized over twenty years. Under the principles of fresh
start accounting, the Company's total assets were recorded at this assumed
reorganization value, with the reorganization value allocated to identifiable
tangible and intangible assets on the basis of their estimated fair value.
In addition, the Company's accumulated deficit was eliminated.
The effect of the Restructuring and the implementation of fresh start
accounting on the Company's condensed balance sheet as of January 1, 1995 was
as follows:
KASH N' KARRY FOOD STORES, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(In Thousands)
(Unaudited)
Fresh
Start
Pre-Fresh Balance
Start Balance Adjustments Sheet
Sheet January of Fair Value January
1, 1995 Restructuring Adjustment 1, 1995
(A) (B)
------------- ------------- ---------- --------
Cash and cash equivalents $ 9,166 $ (8,177) $ -- $ 989
Accounts receivable 5,762 -- -- 5,762
Inventories 82,011 -- 5,104 87,115
Prepaid expenses and other
current assets 3,088 -- -- 3,088
--------- --------- --------- --------
Total current assets 100,027 (8,177) 5,104 96,954
Property and equipment, net 162,754 -- (17,775) 144,979
Favorable lease interests, net 11,673 -- 18,280 29,953
Deferred financing costs 17,769 (7,456) (6,088) 4,225
Reorganization value in
excess of amount alloc-
able to identifiable
assets -- -- 102,519 102,519
Excess of cost over net
assets acquired 95,560 -- (95,560) --
Other assets 3,790 -- (928) 2,862
--------- --------- --------- --------
Total assets $391,573 $(15,633) $ 5,552 $381,492
========= ========== ========= ========
Current liabilities, excluding
current portion of long-
term debt $ 82,983 $(12,617) $ 6,779 $ 77,145
Long-term debt, including
current obligations 366,231 (119,486) (3,959) 242,786
Other long-term liabilities 6,226 -- 8,840 15,066
Redeemable Preferred Stock 4,650 (4,650) -- --
Stockholders' equity (deficit) (68,517) 121,120 (6,108) 46,495
--------- --------- --------- --------
Total liabilities
and stockholders'
equity $391,573 $(15,633) $ 5,552 $381,492
========= ========== ========= ========
(A) To record the transactions applicable to the Restructuring as outlined
in footnote 1 and eliminate the deficit in accumulated deficit.
(B) To record the adjustments to state assets and liabilities at fair value,
and to record the cumulative effect of adopting SFAS No. 106 as of the
Effective Date.
3. Inventories consist of merchandise held for resale and are stated at the
lower of cost or market; cost is determined using average cost, which
approximates the first-in, first-out (FIFO) method.
KASH N' KARRY FOOD STORES, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(In Thousands)
(Unaudited)
4. The Company had a policy of classifying capital expenditures to be
refinanced within one year as prepaid expenses and other current assets.
These amounts have been classified as property and equipment at January 29,
1995. At July 31, 1994, prepaid expenses and other current assets included
$9,987 of expenditures for construction in progress expected to be financed
within one year.
5. Long-term debt consists of the following:
January 29, July 31,
1995 1994
----------- --------
New term loan and revolving
credit facilities (A) $ 47,000 $ --
Old bank term and revolving
credit facilities (A) -- 59,629
New Senior Floating
Rate Notes (B) 22,953 --
New Senior Fixed Rate
Notes (C) 121,162 --
Old Senior Floating
Rate Notes (B) -- 85,000
Old Senior Fixed
Rate Notes (C) -- 50,000
Subordinated Debentures -- 105,000
Mortgages payable 33,555 34,368
Capital lease obligations 8,410 13,877
Other 7,206 12,247
--------- ---------
Long-term debt including
current portion 240,286 360,121
Less current portion (12,764) (42,740)
--------- ---------
Long-term debt $227,522 $317,381
========= =========
(A) In connection with the Restructuring, the Company entered into a new
term loan and revolving credit agreement (the "New Credit Agreement") on
December 29, 1994. At January 29, 1995, the Company's New Credit Agreement
provides for borrowings of up to $35,000 under a term loan facility (with
quarterly principal repayments of $1,750 and a $14,000 repayment due when the
facility terminates on December 29, 1997) and a $50,000 revolving credit
facility with a $25,000 sublimit for letters of credit. At January 29, 1995,
the Company had $12,000 in borrowings under the working capital line, and had
$17,300 of letters of credit issued against the revolving credit facility.
Amounts outstanding under the term facility bear interest (11.0% at January
29, 1995) equal to the prime rate (as defined) plus 250 basis points.
Amounts outstanding under the revolving credit facility bear interest (9.50%
at January 29, 1995) equal to the prime rate plus 100 basis points.
KASH N' KARRY FOOD STORES, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(In Thousands)
(Unaudited)
(B) The New Senior Floating Rate Notes mature on February 1, 2003, and bear
interest (7.31% at January 29, 1995) payable semiannually, at a rate equal to
six-month LIBOR (as defined in the New Senior Floating Rate Note Indenture)
plus 200 basis points. The New Senior Floating Rate Notes are redeemable in
whole or in part, at the option of the Company, on not less than 30 nor more
than 60 days' prior notice in amounts of $1,000 or an integral multiple
thereof, at 100% of the principal amount and unpaid interest, if any, to the
redemption date. Through August 1, 1995, all interest on the New Senior
Floating Rate Notes may, at the option of the Company, be paid by issuing in
lieu of cash additional New Senior Floating Rate Notes in an aggregate
principal amount equal to the amount of interest due. The Old Senior
Floating Rate Notes bore interest (5.88% at July 31, 1994) payable
semiannually, at a rate equal to six-month LIBOR plus 250 basis points.
(C) The New Senior Fixed Rate Notes mature on February 1, 2003, and bear
interest at 11.5% per annum, payable semiannually. The New Senior Fixed Rate
Notes are redeemable in whole or in part, at the option of the Company, on
not less than 30 nor more than 60 days' prior notice in amounts of $1,000 or
an integral multiple thereof, at 100% of the principal amount and unpaid
interest, if any, to the redemption date. Through February 1, 1996, all
interest on the New Senior Fixed Rate Notes may, at the option of the
Company, be paid by issuing in lieu of cash additional New Senior Fixed Rate
Notes in an aggregate principal amount equal to the amount of interest due.
The Old Senior Fixed Rate Notes bore interest, payable semiannually, at an
annual rate of 12.375%.
6. Reorganization items included in the condensed statements of operations
consist of restructuring costs, adjustments to fair value, professional fees
and other expenses.
7. The Company has a retiree medical plan under which medical coverage is
available to current retirees and those active employees who, on August 1,
1993, had attained age 65 with at least 15 years of service. In accordance
with SOP 90-7, which the Company adopted on the Effective Date of the
Restructuring, the provisions of Financial Accounting Standards Board
Statement 106 "Employers' Accounting for Postretirement Benefits Other Than
Pensions" were also adopted as of that date. The following table sets
forth the projected actuarial present value of unfunded postretirement
benefit obligations for the plan at January 29, 1995:
Accumulated postretirement
benefit obligation:
Retirees $1,915
Fully eligible active
plan participants 85
-------
Accrued postretirement
benefit obligation $2,000
=======
KASH N' KARRY FOOD STORES, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(In Thousands)
(Unaudited)
The weighted average discount rate used in determining the accumulated
postretirement benefit obligation was 8.0%.
8. During the first quarter of fiscal 1994, the Company recorded a
non-recurring charge of $11,016 which reflects expenses associated with a
program of closing twelve underperforming stores and expensing costs
associated with unsuccessful financing activities.
KASH N' KARRY FOOD STORES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
This analysis should be read in conjunction with the condensed financial
statements and related notes thereto included elsewhere in this document.
The Company follows a 52/53 week fiscal year ending on the Sunday nearest to
July 31. Historical results of operations are given for the four weeks ended
January 29, 1995 and the nine weeks ended January 1, 1995 (combined, the
"1995 Three-Month Period"); the thirteen weeks ended January 30, 1994 (the
"1994 Three-Month Period"); the four weeks ended January 29, 1995 and the
twenty-two weeks ended January 1, 1995, (combined, the "1995 Six-Month
Period"); and the twenty-six weeks ended January 30, 1994 (the "1994
Six-Month Period"). On November 9, 1994 (the "Petition Date"), the Company
filed with the United States Bankruptcy Court a voluntary petition for
reorganization under Chapter 11 of the Bankruptcy Code; on December 12, 1994,
the Bankruptcy Court confirmed the Company's plan of reorganization (the
"Restructuring"); and the Restructuring became effective on December 29, 1994
(the "Effective Date") when the Company emerged from bankruptcy. The
financial statements as of January 29, 1995 and for the period then ended
reflect the Company's emergence from Chapter 11 and were prepared according
to the principles of fresh start reporting contained in American Institute of
Certified Public Accountant's Statement of Position 90-7 "Financial Reporting
by Entities in Reorganization Under the Bankruptcy Code" ("SOP 90-7").
Results of Operations
The discussion below compares the results of operations for the 1995
Three-Month Period with the 1994 Three-Month Period; and the 1995 Six-Month
Period with the 1994 Six-Month Period. Except as specifically acknowledged
below, management believes that the impact of the Restructuring and the
implementation of fresh start reporting did not significantly affect the
results of operations for the 1995 Three-Month Period or the 1995 Six-Month
Period, and that the operating results of the individual four week period and
nine week period ended January 29, 1995 and January 1, 1995, respectively, is
indicative of the results of operations for the thirteen week period ended
January 29, 1995; and that the operating results of the individual four week
period and twenty-two week period ended January 29, 1995 and January 1, 1995,
respectively, is indicative of the results of operations of the twenty-six
week period ended January 29, 1995.
Operating cash flow (earnings before interest, taxes, depreciation and
amortization, store closing and other costs, reorganization items,
extraordinary items and cumulative effect of change in accounting principle)
for the 1995 Three-Month Period was $14.3 million compared to $11.2 million
for the 1994 Three-Month Period; and for the 1995 Six-Month Period was $22.2
million compared to $18.8 million for the 1994 Six-Month Period. The
increases in operating cash flow were attributable to the factors indicated
as follows:
Sales.
1995 1994 1995 1994
Three-Month Three-Month Six-Month Six-Month
Period Period Period Period
----------- ------------ ---------- ------------
Sales (in millions) $272.9 $278.2 $513.0 $534.8
Change in same store sales (0.71%) (0.22%)
Average sales per
store week (in thousands) $212 $209 $199 $190
The Company closed seventeen stores and opened two new stores over the
last year as part of an overall strategic consolidation of its store network.
The Company was able to mitigate the sales impact of these store closings by
transferring a portion of the sales of the closed stores to operating stores;
therefore, there was not a substantial adverse impact on the Company's
operating cash flow. In addition, sales have been positively impacted as a
result of a recently initiated store remodeling program and aggressive sales
promotional activities.
Gross Profit. The Company had gross profit of $54.9 million, or 20.1%
as a percentage of sales, for the 1995 Three-Month Period; and gross profit
of $56.5 million, or 20.3% as a percentage of sales, for the 1994 Three-Month
Period. The Company had gross profit of $103.3 million, or 20.1% as a
percentage of sales, for the 1995 Six-Month Period; and gross profit of
$108.9 million, or 20.4% of sales, for the 1994 Six-Month Period. The
decreases in gross margin as a percentage of sales were due to the effect of
lower investment in forward buy inventory and receipt of less promotional
funds, offset by improved perishable margins and increased efficiency in
warehouse and distribution operations.
Selling, General and Administrative Expenses. The Company had selling,
general and administrative expenses of $40.5 million, or 14.9% as a
percentage of sales, for the 1995 Three-Month Period, and $45.3 million, or
16.3% as a percentage of sales, for the 1994 Three-Month Period. The Company
had selling, general and administrative expenses of $81.0 million, or 15.8%
as a percentage of sales, for the 1995 Six-Month Period and $90.1 million, or
16.9% as a percentage of sales, for the 1994 Six-Month Period. The
reductions of selling, general and administrative expenses were due to lower
store labor costs, reduced corporate overhead expenses and lower advertising
expenditures associated with a comprehensive operational restructuring of the
Company initiated during the year; and reduced operating costs associated
with stores that were closed during the last twelve months. These
improvements were partially offset by an increase in workers' compensation
insurance reserves.
Depreciation and Amortization. The Company's depreciation and
amortization expenses were $6.1 million for the 1995 Three-Month Period, $6.2
million for the 1994 Three-Month Period, $12.2 million for the 1995 Six-Month
Period, and $12.1 million for the 1994 Six-Month Period.
KASH N' KARRY FOOD STORES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Store Closing and Other Costs. During the first quarter of fiscal 1994,
the Company recorded a non-recurring charge of $11.0 million. This charge
included $1.9 million of costs associated with unsuccessful financing
activities, $4.2 million of favorable lease interests written off in
connection with the closing of twelve underperforming stores, $4.0 million
representing an adjustment to the expected lease liability on closed stores,
net of sublease income, and $.9 million of other store closing and related
expenses.
Interest Expense. Interest expense for the 1994 Three-Month Period and
the 1994 Six-Month Period was primarily comprised of interest under the Old
Bank Credit Agreement, the Old Senior Floating Rate Notes, the Old Senior
Fixed Rate Notes, the Old Subordinated Debentures, and various mortgages and
capital leases. For the 1995 Three-Month Period and the 1995 Six-Month
Period, interest expense was reported on the Old Senior Floating Rate Notes,
the Old Senior Fixed Rate Notes, and the Old Subordinated Debentures through,
but not including the Petition Date; and interest expense was reported on the
New Senior Floating Rate Notes and the New Senior Fixed Rate Notes from the
Effective Date through January 29, 1995. In accordance with the provisions
of the Restructuring, no interest was due to the holders of the Old Senior
Floating Rate Notes, Old Senior Fixed Rate Notes, or Old Subordinated
Debentures for the period between the Petition Date and the Effective Date,
and therefore no interest expense was recorded for this period. As provided
in the Restructuring, interest accrued from February 2, 1994, in the case of
the Old Senior Fixed Rate Notes, and from February 3, 1994, in the case of
the Old Senior Floating Rate Notes, through the Petition Date, was paid by
issuing additional New Senior Floating Rate Notes and New Senior Fixed Rate
Notes. Interest accrued on the Old Subordinated Debentures from February 1,
1994 through the Petition Date was converted into shareholders' equity.
Reorganization Costs. In accordance with SOP 90-7, income and costs
directly related to the reorganization have been segregated and are
separately disclosed. The major components are restructuring costs,
adjustments to fair value, professional fees and other expenses.
Gain on Debt Discharge. The gain on debt discharge reflects the
conversion of $105.0 million of Old Subordinated Debentures, plus accrued
interest from February 1, 1994 through the Petition Date, into $39.5 million
of shareholders' equity, resulting in a $70.2 million gain. The gain is
presented net of write-offs and costs associated with the repayment of
borrowings on the Effective Date.
Financial Condition
During the pendency of its bankruptcy case discussed above, the Company
operated its business in the ordinary course, and paid all pre-petition and
post-petition claims of the Company's general unsecured creditors, trade
creditors, and employees in full. The provisions of the Restructuring, which
are discussed in footnote 1 to the accompanying condensed financial
statements, will have an immediate beneficial impact on the Company's
financial condition, primarily as a result of significantly deleveraging the
Company's balance sheet.
Prior to the Petition Date, the Company's Old Bank Credit Agreement
provided for a revolving credit facility with individual sublimits of $30.0
million for working capital loans and $25.0 million for letters of credit,
with a maximum of $50.0 million outstanding under the total facility at any
one time. During the weeks immediately preceding the bankruptcy filing, the
Company, with the approval of its bank lenders, increased its cash position
by fully drawing the remaining availability under its working capital line.
On the Petition Date, the Bankruptcy Court approved the use of cash
collateral and a letter of credit facility of $17.7 million under the Old
Bank Credit Agreement, and additional debtor-in-possession financing provided
by BankAmerica Business Credit, Inc. of $11.2 million, subject to certain
terms and conditions. The Company entered into a new term loan and revolving
credit agreement with The CIT Group/Business Credit Inc. and other lenders to
provide a 3-year $35 million term loan facility and a 3-year $50 million
revolving credit facility which took effect on the Effective Date.
Beginning August 1, 1994, the Company implemented a short-term business
strategy to improve the Company's financial performance. The focus of this
strategy is to conserve capital, reduce administrative and operating
expenses, and direct management attention toward the operation of existing
stores. During the first six months of fiscal 1995 the Company has
significantly improved its liquidity as a result of the payment moratorium on
interest due on the Old Senior Fixed Rate Notes, Old Senior Floating Rate
Notes, and Old Subordinated Debentures; managing working capital; and
reducing operating expenses and capital expenditures. These actions have
allowed the Company to begin investing in forward buy inventory again.
Consistent with its short-term business strategy, the Company does not
anticipate opening or acquiring any new stores during the current fiscal
year, but expects that capital expenditures of approximately $6.0 million
will be used to upgrade its existing store facilities.
The Company has entered into an interest rate swap through August 1995
to reduce its exposure to increases in short-term interest rates on the
majority of its floating rate debt. The Company does not believe that there
would be any material impact on the accompanying financial statements as of
January 29, 1995 by liquidating this contract.
Based upon the Company's ability to generate working capital through its
operations and its new $50.0 million revolving credit facility, the Company
believes that it has the financial resources necessary to pay its capital
obligations and implement its business plan.
Effects of Inflation
The Company's primary costs, inventory and labor, are affected by a
number of factors that are beyond its control, including 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 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.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
In its Quarterly Report on Form 10-Q for the quarter ended on October
30, 1994, the Company reported on its voluntary petition for reorganization
pursuant to Chapter 11 of the United States Bankruptcy Code, styled In re:
Kash n' Karry Food Stores, Inc., Chapter 11 Case No. 94-1082 (HSB), which was
then pending with the United States District Court for the District of
Delaware (the "Bankruptcy Court"). The Company's First Amended Plan of
Reorganization, as amended by notices of technical modifications thereto
filed with the Bankruptcy Court on November 9, 1994, (the "Petition Date")
and December 12, 1994 (the "Plan"), was consummated and became effective on
December 29, 1994 (the "Effective Date"), and is no longer pending.
Under the terms of the Plan, on the Effective Date, each of the
following transactions occurred:
(1) each $1,000 principal amount of the Company's $85 million Senior
Floating Rate Notes due August 2, 1996 (the "Old Senior Floating Rate Notes")
was exchanged for (a) new Senior Floating Rate Notes due February 1, 2003
(the "New Senior Floating Rate Notes") in an original principal amount equal
to $1,000 plus 100% of the accrued interest under the Old Senior Floating
Rate Notes from and including February 3, 1994, through but not including the
Petition Date, or, at such holder's election, (b) new 11.5% Senior Fixed Rate
Notes due February 1, 2003 (the "New Senior Fixed Rate Notes") in the same
original principal amount, or, at such holder's election, (c) an amount of
New Senior Floating Rate Notes and an amount of New Senior Fixed Rate Notes
equal, in the aggregate, to 100% of such claim;
(2) each $1,000 principal amount of the Company's $50 million 12-3/8%
Senior Fixed Rate Notes due February 1, 1999 (the "Old Senior Fixed Rate
Notes") was exchanged for (a) New Senior Floating Rate Notes in an original
principal amount equal to $1,000 plus 100% of the accrued interest under the
Old Senior Fixed Rate Notes from and including February 2, 1994, through but
not including the Petition Date, or, at such holder's election, (b) New
Senior Fixed Rate Notes in the same original principal amount, or, at such
holder's election, (c) an amount of New Senior Floating Rate Notes and an
amount of New Senior Fixed Rate Notes equal, in the aggregate, to 100% of
such claim;
(3) the Company's $105 million 14% Subordinated Debentures due February
1, 2001 were exchanged for approximately 2,635,000 shares of newly-issued
common stock of the Company, representing in the aggregate 85 percent of the
common stock to be outstanding on the Effective Date;
(4) Green Equity Investors, L.P., invested $10 million cash in exchange
for 465,000 shares of newly-issued common stock of the Company representing
15 percent of the common stock outstanding on the Effective Date;
(5) all of the existing preferred stock, common stock, and options and
warrants to purchase common stock of the Company were extinguished;
(6) the Company entered into a new credit agreement with The CIT
Group/Business Credit, Inc., and the lenders under its old bank credit
agreement, pursuant to which the Company has credit availability from and
after the Effective Date on the terms set forth therein; and
(7) the rights of trade creditors and other creditors of the Company
were unimpaired.
The Company's former chief executive officer filed a proof of claim in
the bankruptcy proceeding stating a claim for payments allegedly owed to him
in connection with his severance from the Company. The total principal
amount of such former officer's claim is less than $1.5 million. The Company
has until March 31, 1995 in which to respond to the proof of claim.
Except for the pending proof of claim, there are no material legal
proceedings to which the Company is a party or to which any of its property
is subject. The Company is a party to ordinary and routine litigation
incidental to its business.
Item 3. Defaults Upon Senior Securities.
The Company did not make interest payments due on August 1, 1994, and
August 2, 1994, respectively, under the Old Senior Fixed Rate Notes, the Old
Subordinated Debentures, and the Old Senior Floating Rate Notes. Prior to
and during the pendency of the Company's bankruptcy proceeding, the holders
of such obligations did not enforce any remedies with respect to the
occurrences of an event of default thereunder. Pursuant to the Plan, on the
Effective Date, the principal and accrued interest under the Old Senior Fixed
Rate Notes and the Old Senior Floating Rate Notes were exchanged for either
New Senior Fixed Rate Notes or New Senior Floating Rate Notes, and the
principal and accrued interest under the Old Subordinated Debentures were
exchanged for common stock of the Company. No default by the Company has
occurred under the New Senior Fixed Rate Notes or New Senior Floating Rate
Notes.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits:
Exhibit No. Description
2 First Amended Plan of Reorganization filed by the Company with
the United States Bankruptcy Court of the District of Delaware
on November 9, 1994, as amended by notices of technical
modifications thereto filed on November 9, 1994, and December
12, 1994 (previously filed as Exhibit 2 to the Company's
Quarterly Report on Form 10-Q for the period ended October 30,
1994).
3(i) Restated Certificate of Incorporation filed with the Delaware
Secretary of State on December 29, 1994.
3(ii)(a) Bylaws adopted October 12, 1988.
3(ii)(b) First Amendment to Bylaws adopted July 30, 1991.
3(ii)(c) Second Amendment to Bylaws adopted December 29, 1994.
Exhibit No. Description
4.1 Indenture dated as of December 29, 1994, between the Company
and Shawmut Bank Connecticut, N.A., as Trustee, relating to
11.5% Senior Fixed Rate Notes due 2003.
4.2 Indenture dated as of December 29, 1994, between the Company
and IBJ Schroder Bank & Trust Company, as Trustee, relating to
Senior Floating Rate Notes due 2003.
10.1 Credit Agreement dated as of December 29, 1994, among the
Company, certain lenders, The CIT Group/Business Credit, Inc.,
as administrative agent, and Bank of America National Trust
and Savings Association, as co-agent.
10.2 Master Third Amendment to Deferred Compensation Agreements,
dated as of September 2, 1994, between the Company and the key
employees party thereto.
10.3 Management Services Agreement dated as of December 29, 1994,
by and between the Company and Leonard Green & Partners.
27 Financial Data Schedule
(b) Reports on Form 8-K:
On a Form 8-K dated February 17, 1995, the Company reported on its
dismissal of KPMG Peat Marwick LLP, and its engagement of Coopers & Lybrand
L.L.P., as its principal accountants.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
KASH N' KARRY FOOD STORES, INC.
Date: March 15, 1995 /s/ Raymond P. Springer
-------------------------------
Raymond P. Springer
Senior Vice President,
Administration
Date: March 15, 1995 /s/ Richard D. Coleman
-------------------------------
Richard D. Coleman
Vice President, Controller