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 September 28, 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 October 26,
1996:
Class A: 5,118,143
Class B: 10,684,087
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements:
Consolidated Statements of Income for the
thirteen weeks ended September 28, 1996 and
September 30, 1995 and the thirty-nine weeks ended
September 28, 1996 and September 30, 1995 3
Consolidated Balance Sheets as of
September 28, 1996 and December 30, 1995 4
Consolidated Statements of Cash Flows for
the thirty-nine weeks ended September 28, 1996 and
September 30, 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 6. Exhibits and Reports on Form 8-K 14
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
SMITH'S FOOD & DRUG CENTERS, INC.
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(Dollar amounts in thousands, except per share data)
Thirteen Thirteen Thirty-Nine Thirty-Nine
Weeks Ended Weeks Ended Weeks Ended Weeks Ended
Sep 28, 1996Sep 30, 1995 Sep 28, 1996 Sep 30, 1995
------------------------ ------------ ------------
Net sales $740,615 $768,335 $2,123,803 $2,285,413
Cost of goods sold 571,710 594,375 1,651,628 1,770,608
-------- -------- ---------- ----------
168,905 173,960 472,175 514,805
Expenses:
Operating, selling
and administrative 102,155 114,329 343,858 343,797
Depreciation and
amortization 24,180 26,743 68,251 77,152
Interest 33,955 14,819 71,047 44,960
Amortization of deferred
financing costs 2,222 108 3,102 324
Restructuring charges 201,622
-------- -------- ---------- ----------
162,512 155,999 687,880 466,233
INCOME (LOSS) BEFORE
INCOME TAXES AND
EXTRAORDINARY CHARGE 6,393 17,961 (215,705) 48,572
Income taxes (benefit) 2,500 6,900 (85,545) 19,000
-------- -------- ---------- ----------
INCOME (LOSS) BEFORE
EXTRAORDINARY CHARGE 3,893 11,061 (130,160) 29,572
Extraordinary charge on
extinguishment of debt,
net of tax benefit 41,782
-------- -------- ---------- ----------
NET INCOME (LOSS) $ 3,893 $ 11,061 $ (171,942) $ 29,572
======== ======== ========== ==========
Income (loss) per share of Common Stock:
Income (loss) before
extraordinary charge $ 0.24 $ 0.44 $ (6.28) $ 1.17
Extraordinary charge (2.02)
-------- -------- ---------- ----------
Net income (loss) $ 0.24 $ 0.44 $ (8.30) $ 1.17
======== ======== ========== ==========
Average number of common
shares outstanding
(In thousands) 16,174 25,076 20,724 25,257
======== ======== ========== ==========
See notes to consolidated financial statements
SMITH'S FOOD & DRUG CENTERS, INC.
CONSOLIDATED BALANCE SHEETS
(Dollar amounts in thousands)
Sep 28, 1996 Dec 30, 1995
------------ ------------
(Unaudited)
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 87,491 $ 16,079
Rebates and accounts receivable 22,772 23,802
Refundable income taxes 41,200
Inventories 349,073 394,982
Prepaid expenses and deposits 21,904 21,255
Deferred tax asset 88,143 23,900
Assets held for sale 94,293 125,000
---------- ----------
TOTAL CURRENT ASSETS 704,876 605,018
PROPERTY AND EQUIPMENT
Land 194,816 276,626
Buildings 579,905 610,049
Leasehold improvements 52,437 55,830
Property under capitalized leases 32,713
Fixtures and equipment 511,407 509,524
---------- ----------
1,371,278 1,452,029
Less allowances for depreciation
and amortization 417,892 390,933
---------- ----------
953,386 1,061,096
GOODWILL, less accumulated amortization
of $947 112,691
OTHER ASSETS 89,043 20,066
---------- ----------
$1,859,996 $1,686,180
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Trade accounts payable $ 239,164 $ 214,152
Accrued sales and other taxes 34,188 38,724
Accrued payroll and related benefits 69,749 65,785
Other accrued expenses 91,954 43,695
Current maturities of long-term debt 65,652 20,932
Current maturities of obligations
under Capital Leases 1,276
Current maturities of Redeemable
Preferred Stock 1,008
Accrued restructuring costs 60,152 58,000
---------- ----------
TOTAL CURRENT LIABILITIES 562,135 442,296
LONG-TERM DEBT, less current maturities 1,333,804 717,761
OBLIGATIONS UNDER CAPITAL LEASES,
less current portion 25,521
ACCRUED RESTRUCTURING COSTS, less
current portion 16,176 40,000
DEFERRED INCOME TAXES 24,728 58,600
OTHER LONG-TERM LIABILITIES 30,175 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, 5,132,143
shares in 1996 and 11,613,043 shares in 1995 51 116
Class B Common Stock, par value $.01 per share:
Authorized 100,000,000 shares; issued
10,670,087 shares in 1996 and 18,348,968
shares in 1995 107 183
Additional paid-in capital 193,726 285,236
Retained earnings (deficit) (329,746) 238,027
---------- ----------
(135,862) 523,562
Less Treasury Shares at cost
(4,890,302 shares in 1995) 106,842
---------- ----------
(135,862) 416,720
---------- ----------
$1,859,996 $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)
Thirty-Nine Thirty-Nine
Weeks Ended Weeks Ended
Sep 28, 1996 Sep 30, 1995
------------ ------------
OPERATING ACTIVITIES:
Net income (loss) $ (171,942) $ 29,572
Adjustments to reconcile net income (loss)
to net cash provided by operating
activities:
Depreciation and amortization 68,251 77,152
Deferred income taxes (benefit) (82,087) 6,400
Restructuring charges 201,622
Other 405 588
Changes in operating assets and
liabilities:
Rebates and accounts receivable 9,818 2,551
Refundable income taxes (30,480)
Inventories 91,733 6,944
Prepaid expenses and deposits 9,177 (16,727)
Trade accounts payable (12,070) (20,749)
Accrued sales and other taxes (10,900) 15,620
Accrued payroll and related benefits (5,810) 2,496
Accrued other expenses (7,231) (9,186)
Accrued restructuring costs (59,034)
---------- --------
CASH PROVIDED BY OPERATING ACTIVITIES 1,452 94,661
INVESTING ACTIVITIES:
Additions to property and equipment (71,870) (106,616)
Proceeds from sale of property and equipment 113,551 2,695
Other (63,513) (104)
---------- --------
CASH USED IN INVESTING ACTIVITIES (21,832) (104,025)
FINANCING ACTIVITIES:
Additions to long-term debt 1,380,000 37,000
Payments on long-term debt (832,025) (14,198)
Additions to obligations under capital leases 568
Payments on obligations under capital leases (431)
Payments of other long-term liabilities (339)
Redemptions of Preferred Stock (1,000) (483)
Purchases of Treasury Stock (452,687) (7,845)
Proceeds from sale of Treasury Stock 1,467 4,204
Payment of dividends (3,761) (11,179)
---------- --------
CASH PROVIDED BY FINANCING ACTIVITIES 91,792 7,499
---------- --------
NET INCREASE (DECREASE) IN
CASH AND CASH EQUIVALENTS 71,412 (1,865)
Cash and cash equivalents at beginning of year 16,079 14,188
---------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 87,491 $ 12,323
========== ========
SUPPLEMENTAL SCHEDULE OF BUSINESS ACQUISITION
Fair value of assets acquired $ 353,318
Value of stock issued (72,173)
----------
Liabilities assumed $ 281,145
==========
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 thirty-
nine week periods ended September 28, 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 included 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 third quarter was
$1.8 million in 1996 and $1.0 million in 1995 and for the first thirty-nine
weeks was $5.3 million in 1996 and $3.0 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 the thirty-nine weeks ended September 28,
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 excludes the Company's California stores and charges related
to the disposition of California assets or closure of the California region.
The amounts represent thirty-nine weeks of the combined operations of the
Company and Smitty's. (Dollar amounts in thousands, except per share data)
Period ending
-------------
Sep 28, 1996 Sep 30, 1995
------------ ------------
Net sales $2,266,984 $2,208,165
Loss before extraordinary charge (17,148) (11,644)
Net loss (81,649) (35,558)
Loss per share of Common Stock:
Loss before extraordinary charge (1.09) (0.74)
Net loss (5.17) (2.26)
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% 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 thirty-nine weeks of 1996, the Company sold, leased or agreed to sell or
lease 25 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 nine leased stores
were subleased. The remaining nine 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 thirty-nine weeks of 1996:
Accrued
Costs Adjustments Restructuring Costs
Balance at Incurred and at September 28, 1996
Dec 30, during Additional ---------------------
1995 1996 Charges Current Long-term
---------- -------- ----------- ------- ---------
Charges for lease obligations $65,600 $22,025 $ (19,922) $10,604 $13,049
Inventory 16,000 16,020 (20)
Termination costs 10,000 14,533 17,174 12,641
Asset disposition costs 24,083 24,083
Property maintenance costs
and other 6,400 6,456 16,027 12,844 3,127
------- ------- ------- ------- -------
$98,000 $59,034 $37,362 $60,152 $16,176
======= ======= ======= ======= =======
NOTE E -- LONG-TERM DEBT
Long-term debt consists of the following (dollar amounts in thousands):
Sep 28, Dec 30,
1996 1995
---------- --------
Term loans, principal due quarterly through
2005, with interest payable quarterly $ 803,800
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 accrued 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 11,872
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 6,041 6,308
---------- --------
1,399,456 738,693
Less current maturities 65,652 20,932
---------- --------
$1,333,804 $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 September 28, 1996, $803.8 million was outstanding
under the New Term Loans and other than $26.4 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 September 28, 1996, the weighted average
interest rate on the New Term Loans was 8.75%. 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 September 28, 1996, the interest rate on the New Revolving Facility
was 8.19%; however, no amounts were outstanding under the New Revolving
Facility other than $26.4 million of letters of credit.
Maturities of the Company's long-term debt for the five fiscal years succeeding
September 28, 1996 are approximately $50.0 million in 1996, $28.1 million in
1997, $57.8 million in 1998, $67.9 million in 1999, and $70.4 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 $69.6 million net of a $27.8
million income tax benefit 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.
On September 30, 1996, the Company made a voluntary prepayment of $50 million
on the New Term Loans. The voluntary prepayment and the Company's cash
interest expense coverage resulted in a .25% interest rate reduction on the New
Revolving Facility and $305 million of the New Term Loans. The prepayment also
reduced the scheduled payments of principal by $21 million in 1997.
NOTE F -- CAPITAL LEASES
At September 28, 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 $ 1,108
1997 4,344
1998 4,282
1999 4,293
2000 4,291
Thereafter 48,264
-------
66,582
Less amount representing interest 39,785
-------
Present value $26,797
=======
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 were issued to the
stockholders of Smitty's. Accordingly, the results for 1996 reflect only
eighteen 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
September 28, 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 September 28, 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 (0the "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% 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. As a result of the
closure of the California region and the Merger with Smitty's, comparisons of
quarter and year-to-date results to the prior year's comparable periods are not
meaningful.
Results of Operations
Net sales decreased $27.7 million, or 3.6%, from $768.3 million in the third
quarter of 1995 to $740.6 million in the third quarter of 1996. For the first
thirty-nine weeks of 1996, net sales decreased $161.6 million, or 7.1%, to
$2.12 billion from $2.29 billion for the first thirty-nine weeks of last year.
The sales decrease in 1996 was primarily attributable to changes in the number
of operating stores. Since the end of the third quarter of 1995, the Company
closed its 34 California stores, opened an additional eight stores in other
operating areas, and acquired 26 stores in the Smitty's merger. Excluding the
Company's California stores, net sales for the third quarter increased $143.9
million, or 24.1%, from $596.7 million last year to $740.6 million in 1996 and
net sales for the first thirty-nine weeks of the year increased $272.9 million,
or 15.3%. As adjusted to exclude the Company's California stores and Smitty's
stores, same store sales for the third quarter of 1996 decreased .7% and for
the first thirty-nine weeks of 1996 decreased 1.4%.
Gross profit decreased $5.1 million, or 2.9%, from $174.0 million in the third
quarter of 1995 to $168.9 million in the third quarter of 1996. For the first
thirty-nine weeks of the year, gross profit decreased $42.6 million, or 8.3%,
from $514.8 million in 1995 to $472.2 million in 1996. Gross margins during
the third quarter of 1996 were 22.8% compared to 22.6% a year ago. Gross
margins during the first thirty-nine weeks of 1996 were 22.2% compared to 22.5%
a year ago. Excluding the Company's California operations, gross profit
increased $35.4 million, or 26.6%, in the third quarter of 1996 and $68.9
million, or 17.4%, in the first thirty-nine weeks of 1996 compared to the
respective periods last year. Gross margins for both periods were relatively
constant.
Operating, selling and administrative expenses ("OS&A") decreased $12.1
million, or 10.6%, from $114.3 million in third quarter of 1995 to $102.2
million in the third quarter of 1996 and were relatively the same for the first
thirty-nine weeks of 1995 and 1996. As a percent of net sales, OS&A decreased
in the third quarter from 14.9% last year to 13.8% this year and increased in
the first thirty-nine weeks from 15.0% in 1995 to 16.2% in 1996. The decrease
in OS&A as a percent of net sales in the third quarter was primarily caused by
synergies resulting from the merger with Smitty's. The increase in OS&A as a
percent of net sales for the first thirty-nine weeks 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 $2.5 million, or 9.4%, from
$26.7 million in the third quarter last year to $24.2 million in the third
quarter this year and decreased $8.9 million, or 11.5%, from $77.2 million in
the first thirty-nine weeks last year to $68.3 million in the first thirty-nine
weeks this year. These decreases are due primarily to the closure of the
California Region which was offset slightly by the addition of Smitty's stores
and new food and drug combination stores elsewhere.
Interest expense increased $19.2 million, or 129.1%, from $14.8 million in the
third quarter last year to $34.0 million for the third quarter of 1996 and
increased $26.0 million, or 58.0%, from $45.0 million in the first thirty-nine
weeks of 1995 to $71.0 million in the first thirty-nine weeks 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 recorded in the second quarter of
1996 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.
Net income for the third quarter of 1996 totaled $3.9 million or $.24 per
common share compared to last year's net income of $11.1 million or $.44 per
common share. Primarily as a result of the restructuring and extraordinary
charges noted above, the Company recorded a net loss for the first thirty-nine
weeks of $171.9 million or $8.30 per common share compared to last year's net
income of $29.6 million or $1.17 per common share.
Liquidity and Capital Resources
During the first thirty-nine weeks of 1996, cash provided by operating
activities was $1.5 million compared to $94.7 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. Payments of accrued restructuring
costs in the first thirty-nine weeks of 1996 reduced cash provided by operating
activities by $59.0 million.
Cash used in investing activities was $21.8 million for the first thirty-nine
weeks 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. The Company is actively pursuing
opportunities to dispose of its remaining real estate assets in California
which consist of 11 closed stores and excess land.
Cash provided by financing activities totaled $91.8 million for the first
thirty-nine weeks 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
September 28, 1996, other than $26.4 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.
On September 30, 1996, the Company made a voluntary prepayment of $50 million
on the New Term Loans. The voluntary prepayment and the level of the Company's
cash interest expense coverage ratio resulted in a .25% interest rate reduction
on the New Revolving Facility and amounts outstanding in Tranche A. The
prepayment also reduced the scheduled payments of principal by $21 million in
1997.
The capital expenditures of the Company were $71.9 million for the first thirty-
nine weeks 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 October 1996, the Company
opened the only planned new store for the fourth quarter with total square
footage of 60,000 making four new stores opened for the year. 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 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) There were no reports on Form 8-K filed during the third quarter.
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: 11/12/96 /s/ Matthew G. Tezak
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Matthew G. Tezak, Senior Vice
President and Chief Financial
Officer (Principal Accounting
Officer)