EXHIBIT 13.1
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Net Sales
Net sales increased 5.9% in 1993, 19.5% in 1992 and 9.2% in 1991
compared with the respective prior years. Since 1992 included 53 weeks
compared to 52 weeks in 1993 and 1991, the increase in net sales would have
been 8% in 1993 and 18% in 1992 after adjusting for the extra week. New
stores increased net sales by 6.6% in 1993, 18.8% in 1992 and 8.1% in 1991.
The fluctuation in sales increases from new stores resulted primarily from
the timing of store openings within the respective years. Same store sales
decreased 0.7% in 1993 and increased 0.7% in 1992 and 1.1% in 1991 compared
with the respective prior years. The decrease in same store sales in 1993
was caused primarily by the effect on sales in Southern California due to
the continuing recession in this market, heavy price competition in Utah
resulting from the Company's aggressive pricing program and new stores
opened by competitors. To the extent these conditions persist, the
weakness in same store sales may continue. The increases in same store
sales in 1992 and 1991 were generated as new stores opened in previous
years continued to mature in their markets and as volume increased as a
result of the Company's everyday low price policy.
The Company opened 11 stores during 1993, 12 stores during 1992 and 17
stores during 1991. Retail square footage increased to 8,501,000 square
feet at the end of 1993 (129 stores) from 7,668,000 square feet at the end
of 1992 (119 stores) and 6,773,000 square feet at the end of 1991 (109
stores). Due to market conditions and current recessionary pressures in
its expansion area, the Company is moderating its expansion plans. In 1994
and 1995, the Company anticipates opening 10 to 12 stores each year with
continuing emphasis in Southern California. New stores opened by the
Company in recent years have averaged approximately 75,000 square feet.
Stores expected to be opened during 1994 range from 45,000 to 82,000 square
feet. Future stores primarily will range from 54,000 to 66,000 square
feet, although a few larger stores will be opened where appropriate.
Gross Margin
Gross margins during 1993, 1992 and 1991 were 22.5%, 22.9% and 22.3%,
respectively. The decrease in 1993 was caused primarily by the Company's
aggressive Utah pricing program, which commenced in July 1993. To
reinforce the Company's everyday low price program, prices in Utah stores
were lowered on more than 10,000 grocery, meat and produce items.
Management anticipates that this new pricing program will enhance long term
earnings potential. However, in the near term, both gross margins and net
income are expected to be under pressure as the Company continues to build
sales volume. The improvements in gross margins in 1992 and 1991 were due
to the further maturing of new and existing store marketing areas, a shift
in product mix to private label and other higher margin products in the
Company's specialty departments and continuing improvements in backstage
efficiencies.
Gross margins also have been and are expected to be affected by the
Company's expansion program. The stores in Southern California tend to
operate at higher gross margins to offset higher real estate, operating and
labor costs. Additionally, the new 1,000,000 square foot distribution
center in Riverside, California , including a dairy processing plant, was
completed and began operations in late 1993. This new center is expected
to increase gross margins in the Southern California region through
backstage efficiencies and reduced shipping expenses. However, the Company
anticipates that new stores recently opened and the planned new stores in
Southern California will apply pressure on the Company's gross margins
until the stores become established in their respective markets.
In 1992 the Company adopted the last-in, first-out (LIFO) cost method
for valuing inventories. The adoption of LIFO did not have a material
effect on the 1992 financial statements. The pretax LIFO charge was $1.6
million in 1993. There were no LIFO charges or credits in 1992.
Operating, Selling and Administrative Expenses
Operating, selling and administrative expenses as a percent of net sales
were 15.3% in 1993, 15.8% in 1992 and 15.5% in 1991. The decrease in 1993,
resulting primarily from the Company's aggressive program to reduce
operating costs, was somewhat offset by the higher operating costs
associated with continued expansion into Southern California. The increase
in 1992 was caused mainly by the higher operating costs incurred by the
stores in the Southern California market. The Company anticipates that the
new and planned stores in Southern California will increase operating,
selling and administrative expenses as a percent of net sales until
anticipated economies of scale are realized.
Depreciation and Amortization Expenses
Depreciation and amortization expenses increased 22.0% in 1993, 38.9% in
1992 and 19.1% in 1991 over the respective prior years due to the addition
of new combination centers and distribution and processing facilities.
Interest Expense
Interest expense increased 23.5% in 1993, 19.2% in 1992 and 18.5% in
1991 compared with the respective prior years as a result of net increases
in the average long-term debt amounts for each period. However, the
increase in 1991 was partially offset by a reduction of debt from the
proceeds of the Company's public offering of Class B Common Stock in July
1991.
Income Taxes
Income taxes as a percent of income before income taxes were 42.8% in
1993, 39.1% in 1992 and 38.5% in 1991. The Omnibus Budget Reconciliation
Act of 1993 increased the Company's Federal Tax rate from 34% to 35%. As a
result of the increased tax rate, net income for 1993 was reduced by $2.75
million or $.09 per common share. This reduction consisted of $.80 million
or $.03 per common share for the rate increase on income earned in 1993 and
$1.95 million or $.06 per common share for the increase in recorded
deferred taxes. The effective tax rate, including state income taxes, for
1994 is expected to approximate 40.5%. The increase in 1992 was due
primarily to the Company's increased presence in markets that have higher
state tax rates.
Net Income
As the Company opens new stores and enters new markets, pressure on net
income is created by normal start-up costs associated with new store
openings and by the Company aggressively pursuing its everyday low price
policy in order to establish market share within each store's trading area
and build sufficient volume to effect anticipated economies of scale.
Management believes that net income in 1994 will come under pressure as the
Company continues its expansion into selected markets in Southern
California. The Company operated 26 combination stores in Southern
California at the end of 1993 and plans to open additional stores in that
market. Net income may also be affected by the relatively higher real
estate costs and operating and selling expenses (including preopening,
startup and advertising expenses) typically associated with stores in the
Southern California market. However these higher costs may be offset to
some degree, depending upon competitive conditions, by the generally higher
gross margins expected in that market. In addition, net income may continue
to be affected by price competition in its Utah market as a result of the
Company's aggressive pricing program.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents increased $46.4 million during 1993 and $1.1
million during 1992. The increase during 1993 primarily resulted from the
receipt of $152.7 million from a sale/leaseback transaction completed at
the end of 1993. The proceeds from the sale/leaseback transaction will be
used to finance 1994 store expansion, cash management efforts, and normal
cash activities. Working capital increased to $160.4 million at January 1,
1994 from $91.2 million at January 2, 1993, an increase of $69.2 million.
The Company's current ratio at the end of 1993 was 1.5:1 compared to 1.3:1
in 1992 and 1.1:1 in 1991. The working capital is supplemented by unused
revolving credit lines which aggregated $60 million at January 1, 1994.
Cash provided by operating activities amounted to $118.6 million and
$84.6 million for 1993 and 1992, respectively. Cash normally provided by
operating activities in each of such years was partially offset by
increases in inventory balances. The Company maintains levels of inventory
necessary to support its highvolume, everyday low price merchandising
strategy. Inventories increased $36.5 million and $51.0 million to $377.9
million and $341.4 million at the end of 1993 and 1992, respectively.
These increases in inventories were caused mainly by warehouse and store
expansion and forward buying.
Cash used in investing activities totaled $164.4 million for 1993 and
$286.6 million for 1992. Additions to property and equipment totaled
$322.3 million in 1993 and $288.0 million in 1992 reflecting the Company's
ongoing expansion program. In 1993 the Company completed the sale and
leaseback of several recently constructed stores and its new Riverside
distribution center totaling $152.7 million. There were no sale/leaseback
transactions in 1992. The Company anticipates investing approximately $150
million during 1994 for the development and construction of new food and
drug centers, remodeling of existing stores and replacing equipment.
However, the actual timing and amount of capital expenditures will depend
upon a number of factors.
Cash provided by financing activities totaled $92.3 million for 1993 and
$203.1 million for 1992. The Company obtained $262.0 million during 1993
and $252.7 million during 1992 in additional unsecured long-term borrowings
to finance additions to property and equipment. In connection with the
above referenced sale/leaseback transaction, the Company caused to be filed
on November 18, 1993 a shelf registration statement with the Securities and
Exchange Commission relating to the public offering of up to $300 million
aggregate principal amount of Pass Through Certificates. The shelf
registration was declared effective in January 1994. Quarterly cash
dividends have been paid on the Company's Class A and Class B Common Stock
since 1989.
At January 1, 1994 and January 2, 1993, the Company had outstanding
$704.0 million and $592.3 million, respectively, of long-term debt,
principally borrowed from insurance companies and other institutional
lenders. Of these amounts, $289.1 million and $325.1 million were secured
by real estate assets at the end of each respective year. The Company has
not experienced difficulty in obtaining financing at satisfactory interest
rates. Management believes that the financial resources available to it,
including proceeds from sale/leaseback transactions, amounts available
under existing and future bank lines of credit, additional long-term
financings and internally generated funds, will be sufficient to meet
planned capital expansion and working capital requirements for the
foreseeable future, including debt and lease servicing requirements. The
Company may, however, use additional sources of funds for such purposes,
including the issuance of debt or equity securities and leasing rather than
owning real estate and equipment.
INFLATION
In recent years, the impact of inflation on the Company's operating
results has been moderate, reflecting generally lower rates of inflation
in the economy. Management does not believe that the Company will be
adversely affected by any significant future inflation because of the large
number of Company-owned stores which do not have contingent or volume-
related rental obligations. While inflation has not had, and the Company
does not expect it to have, a material impact upon operating results, there
is no assurance that the Company's business will not be affected by
inflation in the future.
CONSOLIDATED STATEMENTS OF INCOME
Dollar amounts in thousands,
except per share data 1993 1992 1991
Net sales $2,807,165 $2,649,860 $2,217,437
Cost of goods sold 2,175,061 2,042,800 1,723,848
---------- ---------- ----------
632,104 607,060 493,589
Expenses:
Operating, selling and
administrative 430,258 419,664 344,363
Depreciation and
amortization 77,099 63,216 45,510
Interest 44,627 36,130 30,319
---------- ---------- ----------
551,984 519,010 420,192
---------- ---------- ----------
Income before income taxes 80,120 88,050 73,397
Income taxes 34,300 34,400 28,300
---------- ---------- ----------
Net income $ 45,820 $ 53,650 $ 45,097
========== ========== ==========
Net income per share of
Common Stock $1.52 $1.79 $1.65
See notes to consolidated financial statements
CONSOLIDATED BALANCE SHEETS
Dollar amounts in thousands 1993 1992
ASSETS
Current Assets
Cash and cash equivalents $ 61,921 $ 15,526
Rebates and accounts receivable 20,838 16,800
Inventories 377,939 341,416
Prepaid expenses and deposits 19,634 20,616
---------- ----------
Total Current Assets 480,332 394,358
Property and Equipment
Land 282,469 277,167
Buildings 582,775 549,935
Leasehold improvements 38,866 30,668
Fixtures and equipment 538,882 436,969
---------- ----------
1,442,992 1,294,739
Less allowances for depreciation and amortization 284,363 217,101
---------- ----------
1,158,629 1,077,638
Other Assets 15,347 14,089
---------- ----------
$1,654,308 $1,486,085
========== ==========
LIABILITIES AND COMMON STOCKHOLDERS' EQUITY
Current Liabilities
Trade accounts payable $ 185,225 $ 184,106
Accrued sales and other taxes 38,763 32,138
Accrued payroll and related benefits 73,467 65,460
Current maturities of long-term debt 21,473 20,373
Current maturities of Redeemable Preferred Stock 1,046 1,046
---------- ----------
Total Current Liabilities 319,974 303,123
Long-Term Debt, less current maturities 704,014 592,311
Deferred Income Taxes 82,700 68,800
Redeemable Preferred Stock, less current maturities 5,423 6,462
Common Stockholders' Equity
Convertible Class A Common Stock (shares issued
and outstanding, 12,617,445 in 1993 and
13,403,132 in 1992) 126 134
Class B Common Stock (shares issued, 17,344,566
in 1993 and 16,558,879 in 1992) 173 165
Additional paid-in capital 285,482 285,980
Retained earnings 259,400 229,110
---------- ----------
545,181 515,389
Less cost of Common Stock in the
treasury (95,718 shares) 2,984
---------- ----------
542,197 515,389
---------- ----------
$1,654,308 $1,486,085
========== ==========
See notes to consolidated financial statements
CONSOLIDATED STATEMENTS OF COMMON STOCKHOLDERS' EQUITY
Class A Class B
Common Stock Common Stock Additional
Dollar amounts in thousands, Number of Par Number of Par Paid-in Retained Treasury
except per share data Shares Value Shares Value Capital Earnings Stock Total
Balance at December 30, 1990 15,843,764 $158 9,428,247 $ 94 $114,418 $153,488 $268,158
Net income for 1991 45,097 45,097
Issuance of Class B
Common Stock 4,690,000 47 170,810 170,857
Conversion of shares from
Class A to Class B (1,683,334) (17) 1,683,334 17
Cash dividends -- $.36 per share (9,942) (9,942)
Other 216 216
---------- ---- ---------- ---- -------- -------- -------- --------
Balance at December 28, 1991 14,160,430 141 15,801,581 158 285,444 188,643 474,386
Net income for 1992 53,650 53,650
Conversion of shares from
Class A to Class B (757,298) (7) 757,298 7
Cash dividends -- $.44 per share (13,183) (13,183)
Other 536 536
---------- ---- ---------- ---- -------- -------- -------- --------
Balance at January 2, 1993 13,403,132 134 16,558,879 165 285,980 229,110 515,389
Net income for 1993 45,820 45,820
Conversion of shares from
Class A to Class B (785,687) (8) 785,687 8
Purchase of Class B Common
Stock for the treasury $(11,074) (11,074)
Shares sold to the Employee
Stock Profit Sharing Plan (212) 3,237 3,025
Shares sold under the Employee
Stock Purchase Plan (771) 4,853 4,082
Cash dividends -- $.52 per share (15,530) (15,530)
Other 485 485
---------- ---- ---------- ---- -------- -------- -------- --------
Balance at January 1, 1994 12,617,445 $126 17,344,566 $173 $285,482 $259,400 $ (2,984) $542,197
========== ==== ========== ==== ======== ======== ======== ========
See notes to consolidated financial statements
CONSOLIDATED STATEMENTS OF CASH FLOWS
Dollar amounts in thousands 1993 1992 1991
Operating Activities
Net income $ 45,820 $ 53,650 $ 45,097
Adjustments to reconcile net
income to cash provided by
operating activities:
Depreciation and amortization
(including amounts charged to
cost of goods sold) 82,173 67,781 50,495
Deferred income taxes 15,400 16,000 8,500
Other 485 536 216
Changes in operating assets
and liabilities:
Rebates and accounts receivable (4,038) (1,726) 227
Inventories (36,523) (50,989) (80,796)
Prepaid expenses and deposits (518) (10,161) (244)
Trade accounts payable 1,119 3,723 18,051
Accrued sales and other taxes 6,625 1,296 2,535
Accrued payroll and related benefits 8,007 4,478 17,823
-------- -------- --------
Cash provided by operating activities 118,550 84,588 61,904
Investing Activities
Additions to property and equipment (322,301) (287,989) (281,560)
Sale/leaseback arrangements and
other property and equipment sales 159,137 3,920 7,027
Other (1,258) (2,500) (2,885)
-------- -------- --------
Cash used in investing activities (164,422) (286,569) (277,418)
Financing Activities
Additions to long-term debt 262,000 252,748 77,007
Payments on long-term debt (149,197) (35,513) (24,124)
Redemptions of Redeemable
Preferred Stock (1,039) (939) (1,047)
Proceeds from sale of Class B
Common Stock 170,857
Purchases of Treasury Stock (11,074)
Proceeds from sales of Treasury Stock 7,107
Payment of dividends (15,530) (13,183) (9,942)
-------- -------- --------
Cash provided by financing activities 92,267 203,113 212,751
-------- -------- --------
Net increase (decrease) in cash
and cash equivalents 46,395 1,132 (2,763)
Cash and cash equivalents at
beginning of year 15,526 14,394 17,157
-------- -------- --------
Cash and cash equivalents at
end of year $ 61,921 $ 15,526 $ 14,394
======== ======== ========
See notes to consolidated financial statements
Notes to Consolidated Financial Statements
NOTE A - Significant Accounting Policies
Principles of Consolidation
The consolidated financial statements include the accounts of Smith's Food
& Drug Centers, Inc. and its wholly-owned subsidiaries (The Company), after
the elimination of significant intercompany transactions and accounts. The
Company operates a regional supermarket and drug store chain in the
Intermountain, Southwestern, and Southern California regions of the United
States.
Definition of Accounting Period
The Company's fiscal year ends on the Saturday nearest to December 31.
Fiscal year operating results include 52 weeks for each year except 1992
which includes 53 weeks.
Cash and Cash Equivalents
Cash and cash equivalents consist of cash and short-term investments with
maturities less than three months. The amount reported in the balance
sheet for cash and cash equivalents approximates its fair value.
Inventories
Inventories are valued at the lower of cost or market. In 1992 the last-
in, first-out (LIFO) cost method was adopted for valuing inventories. The
adoption of LIFO did not have a material effect on the financial
statements. Approximately 95% of inventories in 1993 and 1992 were valued
using LIFO. Other inventories were valued using the first-in, first-out
method.
Property and Equipment
Property and equipment are stated at cost. Depreciation and amortization
are provided by the straight-line method based upon estimated useful lives.
Improvements to leased property are amortized over their estimated useful
lives or the remaining terms of the leases, whichever is shorter.
Pre-Operating and Closing Costs
Costs incurred in connection with the opening of new stores and
distribution facilities are expensed as incurred. The remaining net
investment in stores closed, less salvage value, is charged against
earnings in the period of closing and, for leased stores, a provision is
made for the remaining lease liability, net of expected sublease rental.
Interest Costs
Interest costs are expensed as incurred, except for interest costs which
have been capitalized as part of the cost of properties under development.
The Company's cash payments for interest (net of capitalized interest of
approximately $14.5 million in 1993, $8.8 million in 1992, and $8.0 million
in 1991) amounted to $39.8 million in 1993, $33.6 million in 1992, and
$27.9 million in 1991.
Income Taxes
The Company determines its deferred tax assets and liabilities based on
differences between the financial reporting and tax basis of its assets and
liabilities using the tax rates that will be in effect when the differences
are expected to reverse. Deferred income taxes result primarily from
temporary differences arising from accrued insurance claims and using
different depreciation and amortization methods for book and tax purposes.
Net Income Per Share of Common Stock
Net income per share of Common Stock is computed by dividing the net income
by the weighted average number of shares of Common Stock outstanding of
30,238,811 in 1993, 29,962,011 in 1992, and 27,397,973 in 1991. In 1993,
the weighted average number of common shares includes common stock
equivalents in the form of stock options. In 1992 and 1991, stock options
were excluded from the calculation. Stock options did not have a material
dilutive effect on the net income per share calculation in any period
reported.
Litigation
The Company is a party to certain legal actions arising out of the ordinary
course of its business. Management believes that none of these actions,
individually or in the aggregate, will have a material adverse effect on
the Company's results of operations or financial position.
Reclassifications
Certain reclassifications have been made to the 1992 financial statements
to conform with the 1993 presentation.
NOTE B - Property and Equipment
The Company depreciates its buildings over 25 to 30 years and its fixtures
and equipment over a period of 2 to 9 years and amortizes its leasehold
improvements over their estimated useful lives or the life of the lease,
whichever is shorter. Property and equipment consists of the following:
Allowances for Net Current Year
Depreciation and BookDepreciation and
Dollar amounts in thousands Cost Amortization Value Amortization
1993
Land $282,469 $282,469
Buildings 582,775 $75,663 507,112 $17,902
Leasehold improvements 38,866 8,333 30,533 1,884
Fixtures and equipment 538,882 200,367 338,515 62,387
---------- -------- ---------- -------
$1,442,992 $284,363 $1,158,629 $82,173
========== ======== ========== =======
1992
Land $ 277,167 $ 277,167
Buildings 549,935 $60,199 489,736 $15,675
Leasehold improvements 30,668 6,742 23,926 1,744
Fixtures and equipment 436,969 150,160 286,809 50,362
---------- -------- ---------- -------
$1,294,739 $217,101 $1,077,638 $67,781
========== ======== ========== =======
NOTE C - Long-Term Debt
Long-term debt consists of the following:
Dollar amounts in thousands 1993 1992
Mortgage notes, collateralized by property and
equipment with a cost of $451.4 million in 1993
and $479.2 million in 1992, due through 2011 with
interest at an average rate of 9.77% in 1993 and
9.92% in 1992 $ 301,740 $335,457
Unsecured notes, due in 2002 through 2015 with
varying annual installments starting in 2000
which accrue interest at an average rate of 7.68%
in 1993 and 8.49% in 1992 410,000 148,127
Revolving credit bank loans 70,000
Short-term bank loans refinanced in 1993 as
unsecured notes 45,000
Industrial revenue bonds, collateralized by
property and equipment with a cost of $21.0
million in 1993 and $18.8 million in 1992 due
in 1994 through 2010 plus interest at an average
rate of 6.68% in 1993 and 6.85% in 1992 8,847 9,847
Other 4,900 4,253
-------- --------
725,487 612,684
Less current maturities 21,473 20,373
-------- --------
$704,014 $592,311
======== ========
Interest rates on the revolving credit bank loans are generally lower than
the prime rate. The agreements are reviewed annually with the banks, at
which time the date each installment is due is generally extended one year.
At January 1, 1994, the Company had unused lines of credit related to
unsecured revolving credit bank loans of $60.0 million.
The Company's loan agreements contain provisions which require the Company
to maintain a specified level of consolidated net worth, fixed charge
coverage and ratio of debt to net worth.
Maturities of the Company's long-term debt for the five fiscal years
succeeding January 1, 1994 are approximately $21.5 million in 1994, $24.3
million in 1995, $25.9 million in 1996, $23.6 million in 1997 and $24.3
million in 1998.
The amounts classified as short-term bank loans and revolving credit bank
loans approximate their fair value. The fair value of the Company's long-
term debt was estimated using discounted cash flow analysis, based on the
Company's current incremental borrowing rates for similar types of debt
arrangements.
NOTE D - Redeemable Preferred Stock
The Company has 85,000,000 shares of $.01 per share par value Preferred
Stock authorized. The Company has designated 34,524,579 of these shares as
Series I Preferred Stock, of which 19,406,694 shares and 22,523,691 shares
were issued and outstanding in 1993 and 1992, respectively. The Preferred
Stock has no dividend requirement.
All shares of the Company's Series I Preferred Stock are subject to
redemption at any time at the option of the Board of Directors, in such
numbers as the Board may determine, and at a redemption price of $.33 1/3
per share. The scheduled redemptions of the Company's Redeemable Preferred
Stock are approximately $1.0 million each year until all outstanding shares
are redeemed. Upon liquidation of the Company, each share of Series I
Preferred Stock is entitled to a liquidation preference of $.33 1/3, on a
pro rata basis with any other series of Preferred Stock, before any
distribution to the holders of Class A Common Stock or Class B Common
Stock. Each Share of Series I Preferred Stock is entitled to ten votes per
share. Redeemable Series I Preferred Stock is stated at redemption value
in the balance sheets.
The amount included in the balance sheet for Redeemable Preferred Stock
approximates its fair value.
NOTE E - Common Stockholders' Equity
The voting powers, preferences and relative rights of Class A Common Stock
and Class B Common Stock are identical in all respects, except that the
holders of Class A Common Stock have ten votes per share and the holders of
Class B Common Stock have one vote per share. Each share of Class A Common
Stock is convertible at any time at the option of the holder into one share
of Class B Common Stock. The Company's Certificate of Incorporation also
provides that each share of Class A Common Stock will be converted
automatically into one share of Class B Common Stock if at any time the
number of shares of Class A Common Stock issued and outstanding shall be
less than 2,910,885. Future sales or transfers of the Company's Class A
Common Stock are restricted to the Company or immediate family members of
the original Class A Common Stockholders unless first presented to the
Company for conversion into an equal number of Class B Common Stock shares.
The Class B Common Stock has no conversion rights. At January 1, 1994
there were 20,000,000 shares of $.01 per share par value Class A Common
Stock and 100,000,000 shares of $.01 per share par value Class B Common
Stock authorized.
NOTE F - Income Taxes
Income tax expense consists of the following:
Dollar amounts in thousands 1993 1992 1991
Current:
Federal $15,715 $15,493 $17,050
State 3,185 2,907 2,750
------- ------- -------
18,900 18,400 19,800
Deferred:
Federal 13,012 13,819 7,057
State 2,388 2,181 1,443
------- ------- -------
15,400 16,000 8,500
------- ------- -------
$34,300 $34,400 $28,300
======= ======= =======
Income tax expense included a charge of $1.95 million in 1993 resulting
from applying the increased federal tax rate to deferred tax items. Cash
disbursements for income taxes were $17.3 million in 1993, $17.6 million in
1992, and $23.4 million in 1991.
The difference between income tax expense and the tax computed by applying
the statutory income tax rate to income before income taxes is as follows:
1993 1992 1991
Statutory federal income tax rate 35.0% 34.0%
34.0%
State income tax rate, net of federal
income tax effect 5.2 5.0 4.4
Job tax credits (.3) (.4)
(.5)
Effect of income tax rate increase on
deferred taxes 2.4
Other .5 .5 .6
---- ---- ----
42.8% 39.1%
38.5%
==== ==== ====
Deferred income taxes arise because of differences in the treatment of
income and expense items for financial reporting and income tax purposes.
The effect of temporary differences that give rise to deferred tax balances
are as follows:
Dollar amounts in thousands 1993 1992
Deferred tax liabilities:
Depreciation and amortization $85,078 $70,595
Other 7,203 4,218
------- -------
92,281 74,813
Deferred tax assets:
Reserves (11,243) (10,045)
Other (3,495) (2,568)
------- -------
(14,738) (12,613)
------- -------
Net current deferred tax assets (5,157) (6,600)
------- -------
Net non-current deferred tax liabilities $82,700 $68,800
======= =======
NOTE G - Fair Value of Financial Instruments
The carrying amounts and related fair values of the Company's financial
instruments are as follows:
1993 1992
Dollar amounts in thousands Carrying Fair Carrying Fair
Amount Value Amount Value
Cash and cash equivalents $61,921 $61,921 $15,526 $15,526
Long-term debt 725,487 784,627 612,684 649,192
Redeemable Preferred Stock 6,469 6,469 7,508 7,508
NOTE H - Leases and Commitments
The Company leases property and equipment under terms which include, in
some cases, renewal options, escalation clauses or contingent rentals which
are based on sales. Total rental expense for such leases amounted to the
following:
Dollar amounts in thousands 1993 1992 1991
Minimum rentals $19,539 $18,956 $15,650
Contingent rentals 281 161 1,041
------- ------- -------
19,820 19,117 16,691
Less sublease rental income 5,506 4,906 4,705
------- ------- -------
$14,314 $14,211 $11,986
======= ======= =======
At January 1, 1994, future minimum rental commitments and sublease rental
income for all noncancellable leases with initial or remaining terms of one
year or more consisted of the following:
Less
Minimum Sublease
Rental Rental
Dollar amounts in thousands Commitments Income Total
1994 $ 20,535 $ 6,167 $ 14,368
1995 20,780 5,964 14,816
1996 35,876 5,456 30,420
1997 32,275 5,116 27,159
1998 33,630 4,921 28,709
Thereafter 586,638 25,042 561,596
-------- ------- --------
$729,734 $52,666 $677,068
======== ======= ========
At January 1, 1994 the Company had contract commitments of approximately
$15.4 million for future construction.
During 1993, the Company entered into a sale and leaseback agreement for
several recently constructed stores and the new Riverside distribution
center, the net proceeds from which totaled $152.7 million. The lease is
for a period of 25 years with annual rentals.
NOTE I - Employee Stock Plans
In 1993 the Company established a stock profit sharing plan under which
year end employees who are compensated for more than 1,000 hours during the
year are participants. Eligible employees are allocated shares of stock
based on hours of service up to 2,080 hours. Contributions are made at the
sole discretion of the Company based on its profitability. The
contribution expense in 1993 was $3.0 million.
In 1993 the Company established a stock purchase plan which permits
employees to purchase shares of the Company's Class B Common Stock through
payroll deductions at 85% of fair market value at the time of purchase.
Employees purchased 180,950 shares from the Treasury during 1993.
The Company has a Stock Option Plan which authorizes the Compensation
Committee of the Board of Directors to grant options to key employees for
the purchase of Class B Common Stock. In April 1992, the aggregate number
of shares available for grant under the plan was increased to equal 10% of
the number of shares of Class B Common Stock authorized. However, the
number of outstanding and unexercised options shall not exceed 10% of the
number of shares of Class A and Class B Common Stock outstanding. The
number of unoptioned shares of Class B Common Stock available for grant was
1,489,129 shares and 1,888,701 shares at the end of 1993 and 1992,
respectively. The options may be either incentive stock options or non-
qualified stock options. Stock options granted to key employees and
options outstanding are as follows:
Option Price Number of
per Share Shares
Balance at December 30, 1990 $19.00 813,000
Granted 19.00 191,000
Forfeited 19.00 (66,000)
----- ---------
Balance at December 28, 1991 19.00 938,000
Granted 19.00 198,500
Forfeited 19.00 (29,000)
----- ---------
Balance at January 2, 1993 19.00 1,107,500
Granted 19.00 622,000
Forfeited 19.00 (232,000)
----- ---------
Balance at January 1, 1994 $19.00 1,497,500
===== =========
The options are exercisable as follows:
Number of
Shares
January 4, 1997 25,000
June 21, 1999 516,000
March 1, 2000 30,000
January 1, 2001 162,000
September 18, 2001 20,000
December 1, 2001 30,000
January 2, 2002 79,500
January 4, 2003 59,000
June 1, 2003 1,000
December 20, 2003 515,000
---------
1,437,500
Options currently exercisable 60,000
---------
1,497,500
=========
Compensation expense for the difference between the market value of the
options on the grant date and the grant price is recognized on a straight-
line basis over the life of the options. The amount charged to operations
in 1993, 1992, and 1991 was immaterial.
NOTE J - Pension Plans
Employees whose terms of employment are determined by negotiations with
recognized collective bargaining units are covered by their respective
multi-employer defined benefit pension plans to which the Company
contributes. The costs charged to operations for these plans amounted to
approximately $3.3 million in 1993, $2.3 million in 1992, and $1.6 million
in 1991. Other information for these multi-employer plans is not available
to the Company.
The Company maintains a defined benefit pension plan for all other
permanent employees which provides for normal retirement at age 65.
Employees are eligible to join when they complete at least one year of
service and have reached age 21. The benefits are based on years of service
and stated amounts associated with those years of service. The Company's
funding policy is to contribute annually the maximum amount deductible for
federal income tax purposes. Net pension cost includes the following
components:
Dollar amounts in thousands 1993 1992 1991
Service cost - present value of
benefits earned during the period $1,869 $1,619 $1,364
Interest cost on projected benefit
obligation 1,350 1,079 776
Actual return on plan assets (1,053) (339) (1,170)
Net amortization and deferral (304) (628) 310
------ ------ ------
$1,862 $1,731 $1,280
====== ====== ======
The following table presents the plan's funded status and amounts
recognized in the Company's consolidated balance sheets:
Dollar amounts in thousands 1993 1992
Actuarial present value of accumulated benefits
based on service rendered to date:
Vested $14,623 $10,234
Non-vested 3,750 3,371
------- -------
18,373 13,605
Plan assets at fair value (primarily in equity
and fixed income funds and real estate) 17,188 13,317
------- -------
Projected benefit obligation in excess of fair
value of plan assets (1,185) (288)
Unrecognized net loss from past experience
different from that assumed and effects of
changes in assumptions 5,616 3,431
Prior service cost not yet recognized in net
periodic pension cost 188 391
Unrecognized net asset (1,304) (1,467)
------- -------
Net prepaid pension expense $3,315 $2,067
====== ======
The weighted average discount rate used to determine the actuarial present
value of the projected benefit obligation was 7.75% in 1993 and 8.5% 1992.
The expected long-term rate of return on plan assets was 9.5% in 1993,
1992, and 1991.
The Company provides a 401(k) plan for virtually all employees. The plan
is entirely funded by employee contributions which are based on employee
compensation not to exceed certain limits.
REPORT OF ERNST & YOUNG, INDEPENDENT AUDITORS
Board of Directors and Stockholders
of Smith's Food & Drug Centers, Inc.
We have audited the accompanying consolidated balance sheets of Smith's
Food & Drug Centers, Inc. and subsidiaries as of January 1, 1994 and
January 2, 1993, and the related consolidated statements of income,
common stockholders' equity, and cash flows for each of the three fiscal
years in the period ended January 1, 1994. These financial
statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements
based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining,
on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Smith's Food & Drug Centers, Inc. and subsidiaries at January 1, 1994 and
January 2, 1993, and the consolidated results of their operations and
their cash flows for each of the three fiscal years in the period ended
January 1, 1994, in conformity with generally accepted accounting
principles.
ERNST & YOUNG
Salt Lake City, Utah
January 27, 1994
FIVE YEAR SUMMARY OF SELECTED FINANCIAL AND OPERATING DATA
Dollar amounts in thousands, 1993 1992 1991 1990 1989
except per share data 52 Weeks 53 Weeks 52 Weeks 52 Weeks 52 Weeks
Income Statement Data
Net sales $2,807,165 $2,649,860 $2,217,437 $2,031,373 $1,731,559
Gross profit 632,104 607,060 493,589 442,318 376,816
Operating, selling
and administrative
expense 430,258 419,664 344,363 323,792 277,986
Depreciation and
amortization expense 77,099 63,216 45,510 38,217 31,009
Interest expense 44,627 36,130 30,319 25,595 26,290
Income before
income taxes 80,120 88,050 73,397 54,714 41,531
Net income 45,820 53,650 45,097 34,314 26,131
Common Stock Data
Average number of
common shares
outstanding 30,238,811 29,962,011 27,397,973 25,272,011 22,479,281
Net income per
common share $ 1.52 $ 1.79 $ 1.65 $ 1.36 $ 1.16
Dividends per
common share .52 .44 .36 .28 .10
Book value per
common share 18.15 17.20 15.83 10.61 9.53
Balance Sheet Data
Net property and
equipment $1,158,629 $1,077,638 $ 861,350 $ 637,312 $ 511,345
Total assets 1,654,308 1,486,085 1,196,689 891,716 728,482
Long-term debt,less
current maturities 704,014 592,311 375,632 326,190 257,208
Redeemable Preferred
Stock,less current
maturities 5,423 6,462 7,401 8,448 9,542
Common stockholders'
equity 542,197 515,389 474,386 268,158 240,920
Select Operating Data
Number of stores 129 119 109 95 98
Total store square
footage 8,501,000 7,668,000 6,773,000 5,580,000 5,235,000
Number of employees 18,759 19,310 18,303 15,208 15,289
QUARTERLY FINANCIAL DATA
(unaudited)
Dollar amounts in thousands,
except per share data First Second Third Fourth Year
Fiscal 1993
Net sales $688,239 $705,520 $686,747 $726,659 $2,807,165
Gross profit 160,350 162,538 151,226 157,990 632,104
Net income 14,007 13,999 7,911 9,903 45,820
Net income per
common share .46 .46 .26 .34 1.52
NYSE price range
High 37 1/4 33 1/4 26 1/2 22 1/2
Low 31 23 5/8 20 19
Fiscal 1992
Net sales $669,511 $640,096 $653,385 $686,868 $2,649,860
Gross profit 151,229 147,297 150,989 157,545 607,060
Net income 13,148 13,544 13,844 13,114 53,650
Net income per
common share .44 .45 .46 .44 1.79
NYSE price range
High 43 1/4 38 34 3/4 37 3/4
Low 33 3/8 27 7/8 25 3/4 32 3/4
Fiscal 1991
Net sales $532,922 $547,007 $544,026 $593,482 $2,217,437
Gross profit 116,855 120,285 121,925 134,524 493,589
Net income 10,406 10,844 12,228 11,619 45,097
Net income per
common share .41 .43 .42 .39 1.65
NYSE price range
High 41 1/2 43 3/4 42 3/8 39
Low 28 3/4 36 1/2 35 1/2 30 1/4