UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 _________________ FORM 10-Q [X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 29, 1996 (thirteen weeks) or [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to Commission File Number: 001-10252 SMITH'S FOOD & DRUG CENTERS, INC. (Exact name of registrant as specified in its charter) Delaware 87-0258768 (State of Incorporation) (I.R.S. Employer Identification No.) 1550 South Redwood Road, Salt Lake City, UT 84104 (Address of principal executive offices) (Zip Code) (801) 974-1400 (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No Number of shares outstanding of each class of common stock as of July 27, 1996: Class A: 5,179,261 Class B: 10,622,969 TABLE OF CONTENTS PART I. FINANCIAL INFORMATION Item 1. Financial Statements (Unaudited): Consolidated Statements of Income for the thirteen weeks ended June 29, 1996 and July 1, 1995 and the twenty-six weeks ended June 29, 1996 and July 1, 1995..................................3 Consolidated Balance Sheets as of June 29, 1996 and December 30, 1995.............................4 Consolidated Statements of Cash Flows for the twenty-six weeks ended June 29, 1996 and July 1, 1995....................................................6 Notes to Consolidated Financial Statements......................7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations..................11 PART II. OTHER INFORMATION Item 4. Submission of Matters to a Vote of Securities Holders..........13 Item 6. Exhibits and Reports on Form 8-K...............................14 PART I. FINANCIAL INFORMATION Item 1. Financial Statements (Unaudited) SMITH'S FOOD & DRUG CENTERS, INC. CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) (Dollar amounts in thousands, except per share data) Thirteen Weeks Ended Twenty-Six Weeks Ended ----------------------- ----------------------- Jun 29, 1996 Jul 1, 1995 Jun 29, 1996 Jul 1, 1995 ------------ ----------- ------------ ----------- Net sales $ 690,023 $770,405 $1,383,188 $1,517,078 Cost of goods sold 533,312 597,882 1,079,918 1,176,233 --------- -------- ---------- ---------- 156,711 172,523 303,270 340,845 Expenses: Operating, selling and administrative 130,350 116,698 241,703 229,468 Depreciation and amortization 21,432 25,713 44,071 50,409 Interest 22,655 15,172 37,092 30,141 Amortization of deferred financing costs 772 108 880 216 Restructuring Charges 201,622 201,622 --------- -------- ---------- ---------- 376,831 157,691 525,368 310,234 --------- -------- ---------- ---------- INCOME (LOSS) BEFORE INCOME TAXES AND EXTRAORDINARY CHARGE (220,120) 14,832 (222,098) 30,611 Income taxes (benefit) (87,245) 5,800 (88,045) 12,100 --------- -------- ---------- ---------- INCOME (LOSS) BEFORE EXTRAORDINARY CHARGE (132,875) 9,032 (134,053) 18,511 Extraordinary charge on extinguishment of debt, net of tax benefit 41,782 41,782 --------- -------- ---------- ---------- NET INCOME (LOSS) $(174,657) $ 9,032 $ (175,835) $ 18,511 ========= ======== ========== ========== Income (loss) per share of Common Stock: Income (loss) before extraordinary charge $ (6.24) $ 0.36 $ (5.78) $ 0.73 Extraordinary charge (1.96) (1.80) --------- -------- ---------- ---------- Net income (loss) $ (8.20) $ 0.36 $ (7.58) $ 0.73 ========= ======== ========== ========== Dividends paid per share of Common Stock $ - $ 0.15 $ 0.15 $ 0.30 ========= ======== ========== ========== Average number of common shares outstanding (In thousands) 21,297 25,139 23,184 25,314 ========= ======== ========== ========== See notes to consolidated financial statements SMITH'S FOOD & DRUG CENTERS, INC. CONSOLIDATED BALANCE SHEETS (Dollar amounts in thousands) Jun 29, 1996 Dec 30, 1995 ------------ ------------ (Unaudited) ASSETS CURRENT ASSETS Cash and cash equivalents $ 45,379 $ 16,079 Rebates and accounts receivable 27,419 23,802 Refundable income taxes 40,878 Inventories 328,674 394,982 Prepaid expenses and deposits 19,273 21,255 Deferred tax asset 110,621 23,900 Assets held for sale 111,402 125,000 ---------- ---------- TOTAL CURRENT ASSETS 683,646 605,018 PROPERTY AND EQUIPMENT Land 193,086 276,626 Buildings 578,063 610,049 Leasehold improvements 52,507 55,830 Property under capital leases 32,120 Fixtures and equipment 508,881 509,524 ---------- ---------- 1,364,657 1,452,029 Less allowances for depreciation and amortization 394,346 390,933 ---------- ---------- 970,311 1,061,096 GOODWILL, less accumulated amortization of $312 112,752 OTHER ASSETS 87,604 20,066 ---------- ---------- $1,854,313 $1,686,180 ========== ========== LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES Trade accounts payable $ 220,601 $ 214,152 Accrued sales and other taxes 32,936 38,724 Accrued payroll and related benefits 67,328 65,785 Other accrued expenses 80,715 43,695 Current maturities of long-term debt 26,739 20,932 Current maturities of obligations under Capital Leases 1,194 Current maturities of Redeemable Preferred Stock 1,008 Accrued restructuring costs 65,826 58,000 ---------- ---------- TOTAL CURRENT LIABILITIES 495,339 442,296 LONG-TERM DEBT, less current maturities 1,374,206 717,761 OBLIGATIONS UNDER CAPITAL LEASES, less current portion 25,466 ACCRUED RESTRUCTURING COSTS, less current portion 20,900 40,000 DEFERRED INCOME TAXES 44,384 58,600 OTHER LONG-TERM LIABILITIES 30,513 7,492 REDEEMABLE PREFERRED STOCK, less current maturities 3,319 3,311 COMMON STOCKHOLDERS' EQUITY Convertible Class A Common Stock, par value $.01 per share: Authorized 20,000,000 shares; issued and outstanding, 5,195,261 shares in 1996 and 11,613,043 shares in 1995 52 116 Class B Common Stock, par value $.01 per share: Authorized 100,000,000 shares; issued 10,606,969 shares in 1996 and 18,348,968 shares in 1995 106 183 Additional paid-in capital 193,667 285,238 Retained earnings (deficit) (333,639) 238,025 ---------- ---------- (139,814) 523,562 Less Treasury Shares at cost (4,890,302 shares in 1995) 106,842 ---------- ---------- (139,814) 416,720 ---------- ---------- $1,854,313 $1,686,180 ========== ========== See notes to consolidated financial statements SMITH'S FOOD & DRUG CENTERS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (Dollar amounts in thousands) Twenty-Six Weeks Ended --------------------------- June 29, 1996 July 1, 1995 ------------- ------------ OPERATING ACTIVITIES: Net income (loss) $ (175,835) $18,511 Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Depreciation and amortization 44,071 50,409 Deferred income taxes (74,189) 5,600 Restructuring charges 201,622 Other 303 393 Changes in operating assets and liabilities: Rebates and accounts receivable 5,171 2,477 Refundable income taxes (40,878) Inventories 112,132 23,364 Prepaid expenses and deposits 11,808 (18,927) Trade accounts payable (30,633) (28,109) Accrued sales and other taxes (12,151) 3,076 Accrued payroll and related benefits (8,231) (1,949) Accrued other expenses (18,470) 4,066 Accrued restructuring costs (48,636) --------- ------- CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES (33,916) 58,911 INVESTING ACTIVITIES: Additions to property and equipment (64,996) (65,697) Proceeds from sale of property and equipment 96,846 2,648 Other (62,159) (28) --------- ------- CASH USED IN INVESTING ACTIVITIES (30,309) (63,077) FINANCING ACTIVITIES: Additions to long-term debt 1,380,000 25,000 Payments on long-term debt (830,536) (8,855) Redemptions of Preferred Stock (1,000) (383) Purchases of Treasury Stock (452,405) (7,845) Proceeds from sale of Treasury Stock 1,227 2,920 Payment of dividends (3,761) (7,412) ---------- ------- CASH PROVIDED BY FINANCING ACTIVITIES 93,525 3,425 ---------- ------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 29,300 (741) Cash and cash equivalents at beginning of year 16,079 14,188 ---------- ------- CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 45,379 $13,447 ========== ======= SUPPLEMENTAL SCHEDULE OF BUSINESS ACQUISITION Fair value of assets acquired $ 352,745 Value of stock issued (72,173) ---------- Liabilities assumed $ 280,572 ========== See notes to consolidated financial statements NOTE A -- BASIS OF PRESENTATION The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and in accordance with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and notes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the thirteen and twenty- six week period ended June 29, 1996 are not necessarily indicative of the results that may be expected for the year ending December 28, 1996. For further information, refer to the consolidated financial statements and notes thereto incorporated by reference in the Company's annual report on Form 10-K for the year ended December 30, 1995. NOTE B -- SIGNIFICANT ACCOUNTING POLICIES Inventories Inventories are valued at the lower of cost, determined on the last-in, first- out (LIFO) method, or market. The pretax LIFO charge for the second quarter was $1.8 million in 1996 and $1.0 million in 1995 and for the first half was $3.5 million in 1996 and $2.0 million in 1995. Assets held for sale Assets held for sale are valued at the lower of cost or estimated net realizable value. Property under capital leases Property under capital leases is stated at the lower of the fair market value of the asset or the present value of future minimum lease payments. These leases are amortized on the straight-line method over the terms of the leases and such amortization is included in depreciation and amortization expense. Goodwill Goodwill represents the excess of the purchase price over the fair value of acquired assets less assumed liabilities and is amortized on a straight-line method over 40 years. Net Income per Share of Common Stock Net income per share of Common Stock is computed by dividing net income by the weighted average number of shares of Common Stock outstanding. The weighted average number of common shares for 1996 excludes Common Stock equivalents in the form of stock options due to the net loss. Reclassifications Certain reclassifications have been made to the 1995 financial statements to conform with the 1996 presentation. NOTE C -- MERGER AND RECAPITALIZATION On May 23, 1996, the Company completed a merger (the "Merger") in which Smitty's Supermarkets, Inc. ("Smitty's") became a wholly owned subsidiary of the Company in a transaction accounted for as a purchase. Smitty's is a regional supermarket company operating 26 stores in the Phoenix and Tucson, Arizona areas. The Company issued 3,038,877 shares of the Company's Class B Common Stock for all of Smitty's outstanding common stock. The financial statements reflect the preliminary allocation of the purchase price and assumption of certain debt and include the results of operations for Smitty's from May 23, 1996. The following unaudited pro forma information presents the results of the Company's operations as though the Merger had been consummated at the beginning of each period and excluding the Company's California stores and charges related to the disposition of California assets or closure of the California region. The amounts represent twenty-six weeks of operations of the Company combined with twenty-four weeks of operations of Smitty's. (Dollar amounts in thousands, except per share data) Period Ended -------------------------------- June 29, 1996 July 1, 1995 ------------- ------------ Net sales $1,526,369 $1,449,218 Loss before extraordinary charge (21,041) (17,389) Net loss (85,542) (41,303) Loss per share of Common Stock: Loss before extraordinary charge (1.33) (1.10) Net loss (5.42) (2.62) The Company also completed a self tender offer on May 23, 1996 pursuant to which it purchased 50% of its outstanding Class A and Class B Common Stock for $36 per share, excluding the shares issued in connection with the Smitty's merger (together with the Merger, the "Recapitalization"). Debt consisting of $575 million principal amount of 11 1/4% senior subordinated notes due 2007 and $805 million principal amount of secured bank term loans at various interest rates were used to finance the stock purchase, repay certain existing indebtedness, and pay premiums related to early repayment of such indebtedness. NOTE D -- RESTRUCTURING CHARGES In December 1995, the Company recorded restructuring charges amounting to $140 million related to its decision to sell, lease or close all 34 stores and the distribution center comprising its Southern California Region. During the first half of 1996, the Company sold, leased or agreed to sell or lease 23 of its California stores and related equipment and five non-operating properties to various supermarket companies and others. Of the stores sold, leased or being sold or leased, 10 owned stores were sold outright, three owned stores were leased, three store leases were assigned and seven leased stores were subleased. The remaining 11 California stores have been closed and it is anticipated that these stores will be sold or leased. Following the Merger and Recapitalization on May 23, 1996 (see Note C), the Company adopted a strategy to accelerate the disposition of its remaining real estate assets in California including its non-operating stores and excess land. The Company intends to use the net cash proceeds from the sales of these assets to either reinvest in the Company's business or reduce indebtedness. Accordingly, the Company recorded in the second quarter additional restructuring charges amounting to $201.6 million relating to (i) the difference between the anticipated cash proceeds from the accelerated dispositions (based on appraisals obtained following the completion of the Merger and Recapitalization) and the Company's existing book values and (ii) other charges in connection with its decision to close the California Region. The following table presents the components of the accrued restructuring costs and actual activity for the first half of 1996: Costs Incurred Adjustments Accrued Restructuring Balance at during the and Costs at June 29,1996 December 30, First Half Additional --------------------- 1995 of the Year Charges Current Long-term ------- ------------- -------- ------- --------- Charges for lease obligations $65,600 $19,465 $(19,922) $10,604 $15,609 Inventory 16,000 16,020 (20) Termination costs 10,000 11,080 17,174 16,094 Asset disposition costs 24,083 24,083 Property maintenance costs and other 6,400 2,071 16,027 15,065 5,291 ------- ------- -------- ------- ------- $98,000 $48,636 $ 37,362 $65,826 $20,900 ======= ======= ======== ======= ======= NOTE E -- LONG-TERM DEBT Long-term debt consists of the following (dollar amounts in thousands): Jun 29, Dec 30, 1996 1995 ---------- -------- Term loans, principal due quarterly through 2005, with interest payable quarterly $ 805,000 11 1/4% Senior Subordinated Notes, principal due 2007 with interest payable semi-annually 575,000 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 1995 $410,000 Mortgage notes, collateralized by property and equipment with a cost of $2.8 million in 1996 and $420.7 million in 1995, due in 1997 through 2005 with interest at an average rate of 5.11% in 1996 and 9.68% in 1995 2,743 254,385 Revolving credit loans 68,000 Sinking fund bonds, 10 1/2% interest, semi-annual maturities to 2016 11,960 Industrial revenue bonds, collateralized by property and equipment with a cost of $11.5 million in 1996 and $11.7 million in 1995 due in 2000 through 2010 plus interest at an average rate of 7.26% in 1996 and 7.44% in 1995 6,242 6,308 ---------- -------- 1,400,945 738,693 Less current maturities 26,739 20,932 ---------- -------- $1,374,206 $717,761 ========== ======== The Company entered into a new senior credit facility (the "New Credit Facility") that provides term loans totaling $805 million (the "New Term Loans") which were funded in connection with the Merger and Recapitalization and a $190 million revolving credit facility (the "New Revolving Facility") less amounts outstanding under letters of credit. All indebtedness (as defined) under the New Credit Facility is secured by substantially all of the assets of the Company. At June 29, 1996, $805 million was outstanding under the New Term Loans and other than $27.7 million of letters of credit, no amounts were borrowed under the New Revolving Facility. A commitment fee of one-half of one percent is charged on the average daily unused portion of the New Revolving Facility, payable quarterly. Interest on borrowings under the New Term Loans is at the bank's Base Rate (as defined) plus a margin ranging from 1.5% to 2.75% or the adjusted Eurodollar Rate (as defined) plus a margin ranging from 2.75% to 4.00%. At June 29, 1996, the weighted average interest rate on the New Term Loans was 8.79%. Interest on borrowings under the New Revolving Facility is at the bank's Base Rate (as defined) plus a margin of 1.5% or the Adjusted Eurodollar Rate (as Defined) plus a margin of 2.75%. At June 29, 1996, the interest rate on the New Revolving Facility was 8.25%; however, no amounts were outstanding under the New Revolving Facility other than $27.7 million of letters of credit. Maturities of the Company's long-term debt for the five fiscal years succeeding June 29, 1996 are approximately $2.7 million in 1996, $46.9 million in 1997, $55.4 million in 1998, $65.5 million in 1999, and $68.0 million in 2000. The New Credit Facility requires the Company to maintain minimum levels of net worth (as defined), to maintain minimum levels of earnings, to maintain a hedge agreement to provide interest rate protection, and to comply with certain ratios related to fixed charges and indebtedness. In addition, the New Credit Facility limits additional borrowings, dividends on and redemption of capital stock and the acquisition and the disposition of assets. The Company recorded an extraordinary charge of $41.8 million which consisted of fees incurred in the prepayment of certain mortgage notes and unsecured notes of the Company and certain long-term debt of Smitty's assumed in the Merger and the write-off of their related debt issuance costs. NOTE F -- CAPITAL LEASES At June 29, 1996, future minimum lease payments under capital leases having initial or remaining non-cancelable terms of more than one year were as follows (dollar amounts in thousands): 1996 $ 2,119 1997 4,163 1998 4,100 1999 4,130 2000 4,147 Thereafter 48,392 ------- 67,051 Less amount representing interest 40,391 ------- Present value $26,660 ======= Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Overview On May 23, 1996, Smith's Food & Drug Centers, Inc. (the "Company") completed its acquisition by merger (the "Merger") of Smitty's Supermarkets, Inc. ("Smitty's"), a 26-store Arizona supermarket chain. Pursuant to the Merger, 3,038,877 shares of the Company's Class B Common Stock was issued to the stockholders of Smitty's. Accordingly, the results for 1996 reflect only five weeks of operations from the Smitty's stores. The Merger has been accounted for as a purchase of Smitty's by the Company. As a result, the assets and liabilities of Smitty's have been recorded at their estimated fair value as of the date the Merger was consummated. The purchase price in excess of the fair value of Smitty's assets is recorded as goodwill and will be amortized over a 40 - -year period. The purchase price allocation reflected at June 29, 1996 is based on management's preliminary estimates. The actual purchase accounting adjustments will be determined within one year following the Merger and may vary from the amounts reflected at June 29, 1996. The Company also completed a self tender offer on May 23, 1996 pursuant to which it purchased 50% of its outstanding Class A and Class B Common Stock for $36 per share, excluding the shares issued in connection with the Smitty's merger. Of the total shares of Class A and Class B Common Stock outstanding prior to the tender offer, the Company purchased 12.5 million shares for $451.3 million. Stock options representing 805,750 shares were also purchased for $13.7 million in conjunction with this tender offer. Additionally, the Company redeemed 3.0 million shares of Series I Preferred Stock for $1.0 million. The Company used proceeds from the issuance of long-term debt to finance these transactions and to repay substantially all of its indebtedness. The Company entered into a new senior credit facility (the "New Credit Facility") which provides term loans totaling $805 million (the "New Term Loans") and a $190 million revolving credit facility (the "New Revolving Facility") less amounts outstanding under letters of credit. The Company also issued $575 million principal amount of 11 1/4% senior subordinated notes due 2007. As a result of prepaying existing indebtedness, the Company incurred an extraordinary charge of $41.8 million consisting of fees incurred in the prepayment and the write-off of debt issuance costs. The Company also closed its California region comprised of 34 stores and a large distribution center during the first quarter of 1996. The closure of the California region and the Merger with Smitty's causes the comparisons of quarter and first half results to the prior year's comparable periods not to be meaningful. Results of Operations Net sales decreased $80.4 million, or 10.4%, from $770.4 million in the second quarter of 1995 to $690.0 million in the second quarter of 1996. For the first twenty-six weeks of 1996, net sales decreased $133.9 million, or 8.8%, to $1.38 billion from $1.52 billion for the first half of last year. The sales decrease in 1996 was primarily attributable to changes in the number of operating stores. Since the end of the second quarter of 1995, the Company closed its 34 California stores, opened an additional 10 stores in other operating areas, and acquired 26 stores in the Smitty's merger. Excluding the Company's California stores, net sales for the second quarter increased $93.2 million, or 15.6%, from $596.8 million last year to $690.0 million in 1996 and net sales for the first half of the year increased $129.0 million, or 10.9%. As adjusted to exclude the Company's California stores and Smitty's stores, same store sales for the second quarter of 1996 decreased .9% and for the first half of 1996 decreased 1.8%. Gross profit decreased $15.8 million, or 9.2%, from $172.5 million in the second quarter of 1995 to $156.7 million in the second quarter of 1996. For the first half of the year, gross profit decreased $37.5 million, or 11.0%, from $340.8 million in 1995 to $303.3 million in 1996. Gross margins during the second quarter of 1996 were 22.7% compared to 22.4% a year ago. Gross margins during the first half of 1996 were 21.9% compared to 22.5% a year ago. Excluding the Company's California operations, gross profit increased $23.8 million, or 17.9%, in the second quarter of 1996 and $33.4 million, or 12.7%, in the first half of 1996 compared to the respective periods last year. Gross margins for both periods were relatively constant. Operating, selling and administrative expenses ("OS&A") increased $13.7 million, or 11.7%, from $116.7 million in second quarter of 1995 to $130.4 million in the second quarter of 1996 and increased $12.2 million, or 5.3%, from $229.5 million in the first half of 1995 to $241.7 million in the first half of 1996. As a percent of net sales, OS&A increased in the second quarter from 15.2% last year to 18.9% this year and increased in the first half from 15.1% in 1995 to 17.5% in 1996. The increase in OS&A as a percent of net sales was primarily attributable to compensation recognized on the purchase of stock options, recording of deferred compensation, severance paid to the former Chief Executive Officer and other expenses related to the Merger and Recapitalization. Depreciation and amortization expenses decreased $4.3 million, or 16.7%, from $25.7 million in the second quarter last year to $21.4 million in the second quarter this year and decreased $6.3 million, or 12.5%, from $50.4 million in the first half last year to $44.1 million in the first half this year. These decreases are due primarily to the closure of the California Region which was offset slightly by the addition of new food and drug combination stores elsewhere. Interest expense increased $7.5 million, or 49.3%, from $15.2 million in the second quarter last year to $22.7 million for the second quarter of 1996 and increased $7.0 million, or 23.2%, from $30.1 million in the first half of 1995 to $37.1 million in the first half of 1996. The increase in interest expense was primarily due to the increased debt incurred in conjunction with the Merger and Recapitalization. The Company recorded $201.6 million of pre-tax restructuring charges in the second quarter of 1996 reflecting additional charges in connection with its decision to close the California region and additional differences between anticipated cash proceeds and existing book values caused by adoption of an accelerated disposition strategy. See Note D of the Notes to Consolidated Financial Statement of the Company included elsewhere herein. The extraordinary charge of $41.8 million consists of fees incurred in the prepayment of certain mortgage notes and unsecured notes of the Company and certain long-term debt assumed in the Merger and the write-off of their related debt issuance costs. Primarily as a result of the restructuring and extraordinary charges noted above, the Company recorded a net loss for the second quarter of $174.7 million or $8.20 per common share compared to last year's net income of $9.0 million or $.36 per common share. The net loss for the first half of 1996 totaled $175.8 million or $7.58 per common share compared to last year's net income of $18.5 million or $.73 per common share. Liquidity and Capital Resources During the first half of 1996, cash used in operating activities was $33.9 million compared to cash provided by operating activities of $58.9 million last year. This decrease was caused primarily by the net loss incurred in 1996 and balance fluctuations in operating assets and liabilities resulting from the closure of the California region and normal operations. Payment of accrued restructuring charges in the first half of 1996 reduced cash provided by operating activities by $48.6 million. Cash used in investing activities was $30.3 million for the first half of 1996 as a result of the Company's ongoing expansion program and payment of financing costs related to securing a new senior credit facility (the "New Credit Facility") which were offset by proceeds from the sale of assets in the California region. All California assets have been adjusted to their net realizable values and are included in assets held for sale. Seven non-operating stores are under contract to sell or lease which are expected to be finalized in the third quarter of 1996. The Company is actively pursuing opportunities to dispose its remaining real estate assets in California which consists of 11 closed stores and excess land. Cash provided by financing activities totaled $93.5 million for the first half of 1996 as a result of debt proceeds which were offset in part by the prepayment of certain existing indebtedness and the purchase of 50% of the Company's outstanding Class A Common Stock and Class B Common Stock for $36.00 in cash per share. The Company entered into the New Credit Facility that provides $805 million aggregate principal amount of term loans (the "New Term Loans") which was funded at the time of the Recapitalization and Merger and a $190 million revolving credit facility (the "New Revolving Facility") which is available for working capital requirements and general corporate purposes. The Company also issued $575 million principal amount of new senior subordinated notes. At June 29, 1996, other than $27.7 million of letters of credit, no amounts were borrowed under the New Revolving Facility. The New Revolving Facility is available, subject to the satisfaction of customary borrowing conditions, for working capital requirements and general corporate purposes. A portion of the New Revolving Facility may be used to support letters of credit. The New Revolving Facility is non-amortizing and has a six and one-quarter year term. The Company is required to reduce loans outstanding under the New Revolving Facility to less than $75 million for a period of not less than 30 consecutive days during each consecutive 12-month period thereafter. The New Term Loans were issued in four tranches: (i) Tranche A, in the amount of $325 million, has a six and one-quarter year term; (ii) Tranche B, in the amount of $160 million, has a seven and one-half year term; (iii) Tranche C, in the amount of $160 million, has an eight and one-half year term; and (iv) Tranche D, in the amount of $160 million, has a nine and one-quarter year term. The New Term Loans require quarterly amortization payments. The New Credit Facility is guaranteed by each of the Company's subsidiaries and secured by liens on substantially all of the unencumbered assets of the Company and its subsidiaries and by a pledge of the Company's stock in such subsidiaries. The New Credit Facility contains financial covenants which require, among other things, the maintenance of specified levels of cash flow and stockholders' equity. The capital expenditures of the Company were $65.0 million for the first half of 1996. The Company currently anticipates that its aggregate capital expenditures for fiscal 1996 will be approximately $90.0 million. The Company intends to finance these capital expenditures primarily with cash provided by operations and other sources of liquidity including borrowings and leases. No assurance can be given that sources of financing for capital expenditures will be available or sufficient. During the remainder of fiscal 1996, the Company currently expects to open three stores averaging approximately 60,000 square feet. However, the capital expenditure program has substantial flexibility and is subject to revision based on various factors. Management believes that if the Company were to substantially reduce or postpone these programs, there would be no substantial impact on short-term operating profitability. In the long term, however, if these programs were substantially reduced, management believes its operating businesses, and ultimately its cash flow, would be adversely affected. In March 1996, the Company paid its regular quarterly cash dividends of $.15 per common share. The Company has discontinued the payment of cash dividends and payment of future dividends is severely restricted by the terms of financing agreements entered into by the Company in connection with the Recapitalization and Merger. The Company is highly leveraged. Based upon current levels of operations and anticipated cost savings and future growth, the Company believes that its cash flow from operations, together with available borrowings under the New Revolving Facility and its other sources of liquidity (including leases), will be adequate to meet its anticipated requirements for working capital, capital expenditures, lease payments, interest payments and scheduled principal payments. There can be no assurance, however, that the Company's business will continue to generate cash flow at or above current levels or that estimated cost savings or growth can be achieved. PART II. OTHER INFORMATION Item 4. Submission of Matters to a Vote of Securities Holders At the Company's Annual Meeting of Stockholders held on May 23, 1996, the stockholders voted on the following proposals: Proposal No. 1--Approval of the Recapitalization Agreement The stockholders approved the Recapitalization Agreement and the transactions contemplated thereby (with 222,993,884 affirmative votes, 2,605,634 negative votes, 8,595,747 abstentions and zero broker non-votes). Proposal No. 2--Amendment and Restatement of Certificate of Incorporation The stockholders approved the adoption of the following separate amendments to the Company's Certificate of Incorporation: a) Proposal No. 2A reduced the number of directors to seven and classified the Board of Directors into three classes of directors serving staggered three- year terms (with 224,830,181 affirmative votes, 4,265,025 negative votes, 5,097,059 abstentions and zero broker non-votes). b) Proposal No. 2B provided for the authorization of 20,000,000 shares of Class C Common Stock, par value $.01 per share, of the Company (with 224,758,454 affirmative votes, 4,012,811 negative votes, 5,421,000 abstentions and zero broker non-votes). c) Proposal No. 2C amended certain redemption and voting provisions with respect to the Series I Preferred Stock (with 211,941,982 affirmative votes, 6,807,857 negative votes, 15,442,426 abstentions and zero broker non-votes and in a separate class vote for the holders of shares of Series I Preferred Stock with 103,550,000 affirmative votes, 6,057,330 negative votes, and 15,000,060 abstentions). Proposal No. 3--Election of Board of Directors The stockholders elected as directors the following: VOTES VOTES BROKER NAME FOR WITHHELD NON-VOTES - ---- ----- -------- --------- One-Year Term Jeffrey P. Smith 237,750,108 193,215 -0- Ronald W. Burkle 237,747,597 195,726 -0- Allen R. Rowland 237,747,708 195,615 -0- Two-Year Term Fred L. Smith 237,747,597 195,726 -0- Linda McLoughlin Figel 237,747,597 195,726 -0- Three-Year Term Bruce Karatz 237,747,708 195,615 -0- Bertram R. Zweig 237,747,708 195,615 -0- Proposal No. 4--Ratification of Selection of Independent Auditors The stockholders ratified the appointment of Ernst & Young LLP as the Corporation's independent auditors for 1996 (with 232,799,352 affirmative votes, 16,880 negative votes, 5,026,891 abstentions and zero broker non-votes). Item 6. Exhibits and Reports on Form 8-K (a) The exhibits listed in the accompanying index to exhibits are filed as part of the Form 10-Q. (b) On May 7, 1996, the Company filed a report on Form 8-K with the Securities and Exchange Commission describing under Item 5, "Other Items" an amendment to the Company's contemplated capital structure for financing a portion of transactions agreed to in the Recapitalization Agreement and Plan of Merger, dated as of January 29, 1996, and included in a filed amendment to its registration statement on Form S-3 (File No. 333-01601). As a result of the amendment to its contemplated capital structure, the Company amended the Unaudited Pro Forma Financial Data contained in the Registration Statement which was also included in this Form 8-K. INDEX TO EXHIBITS Exhibit Number Document 27 Financial Data Schedule 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. SMITH'S FOOD & DRUG CENTERS, INC. --------------------------------- (Registrant) Date: 08/13/96 /s/ Matthew G. Tezak ---------- --------------------------------- Matthew G. Tezak, Senior Vice President and Chief Financial Officer (Principal Accounting Officer)