UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For the fiscal year ended December 28, 1996 (fifty-two weeks)
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)
Securities registered pursuant to Section 12(b) of the Act:
Class B Common Stock, $.01 par value New York Stock Exchange
(Title of each class) (Name of each exchange on which registered)
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
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Annual Report on Form 10-K or any
amendment to this Annual Report on Form 10-K. [ ]
The aggregate market value of the voting stock held by non-affiliates of the
registrant, computed by reference to the last sale price of the Class B Common
Stock on February 27, 1997: $327,626,117
Number of shares outstanding of each class of common stock as of February 27,
1997:
Class A 4,272,308 Class B 11,529,922
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Company's definitive Proxy Statement in connection with the
Company's 1997 Annual Meeting of Stockholders to be held on April 23, 1997 are
incorporated by reference into Part III of this Form 10-K.
TABLE OF CONTENTS
PART I............................................................3
Item 1. Business.............................................3
Item 2. Properties...........................................9
Item 3. Legal Proceedings...................................10
Item 4. Submission of Matters to a Vote of Security
Holders.............................................11
PART II..........................................................11
Item 5. Market for the Registrant's Common Equity and
Related Stockholder Matters.........................11
Item 6. Selected Financial Data.............................12
Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations.......12
Item 8. Financial Statements and Supplementary Data.........12
Item 9. Changes in and Disagreements With Accountants
on Accounting and Financial Disclosure..............12
PART III.........................................................12
Item 10. Directors and Executive Officers of the
Registrant.........................................12
Item 11. Executive Compensation.............................12
Item 12. Security Ownership of Certain Beneficial
Owners and Management..............................13
Item 13. Certain Relationships and Related Transactions.....13
PART IV..........................................................13
Item 14. Exhibits, Financial Statement Schedules, and
Reports on Form 8-K................................13
PART I
Item 1. Business
Smith's Food & Drug Centers, Inc. (the "Company") is a leading
regional supermarket and drug store chain operating in the
Intermountain and Southwestern regions of the United States. As
of December 28, 1996 the Company operated 150 stores in Arizona,
Idaho, New Mexico, Nevada, Texas, Utah and Wyoming. The Company
was founded in 1948 and reincorporated under Delaware law in
1989. The Company's Class B Common Stock, par value $.01 per
share ("Class B Common Stock") is traded on the New York Stock
Exchange under the symbol "SFD".
The Company develops and operates combination food and drug
centers which offer one-stop shopping convenience through a full-
line supermarket with drug and pharmacy departments and some or
all of the following specialty departments: delicatessens, hot
prepared food sections, in-store bakeries, video rental shops,
floral shops, one-hour photo processing labs, full-service
banking and frozen yogurt shops. Through its 49 years of
operations, the Company has developed a valuable and
strategically located store base, strong name recognition,
customer loyalty, and a reputation for quality and service.
During 1996, the Company completed the following transactions
designed to enhance stockholder value:
CLOSURE OF SOUTHERN CALIFORNIA. Management determined that
because of the attractive growth prospects in the Company's other
principal markets and the competitive environment in Southern
California, it would redeploy Company resources from California
into such other markets. The Company has sold or leased 23
California stores and related equipment, six non-operating
California properties, and its primary distribution facility in
Riverside, California and has closed its remaining California
stores (the "California Divestiture").
ACQUISITION OF SMITTY'S SUPERMARKETS, INC. On May 23, 1996,
the Company acquired Smitty's Supermarkets, Inc. ("Smitty's")
which became a wholly-owned subsidiary of the Company in a stock-
for-stock exchange (the "Merger"). Smitty's was a regional
supermarket company operating 28 stores (two of which were
subsequently leased to other retailers) 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. Following the Merger, the Company
consolidated its Arizona operations with those of Smitty's in
order to enhance its market position in Arizona by expanding
our store base.
RECAPITALIZATION. The Company completed certain
recapitalization transactions on May 23, 1996 including, among
other things, (i) the purchase of approximately 50% of its
outstanding Class A Common Stock, par value $.01 per share
("Class A Common Stock" and, together with the Class B Common
Stock, the "Common Stock") and Class B Common Stock for $36 per
share, excluding shares issued to the stockholders of Smitty's in
connection with the Merger (the "Tender Offer"); (ii) the funding
of a senior credit facility (the "Credit Facility") which
provided $805 million aggregate principal amount of term loans
and a $190 million revolving credit facility; and (iii) the
issuance of $575 million principal amount of 11 1/4% Senior
Subordinated Notes due 2007 (the "Notes").
NEW SENIOR MANAGEMENT. On May 23, 1996, the Company entered
into a five-year management services agreement with The Yucaipa
Companies ("Yucaipa"), a private investment group specializing in
the acquisition and management of supermarket chains. Ronald W.
Burkle, the managing general partner of Yucaipa, was appointed as
Chief Executive Officer of the Company. In addition, Allen R.
Rowland joined the Company on January 29, 1996 as President and
Chief Operating Officer. Mr. Rowland was previously employed by
Albertson's, Inc. for 25 years.
Store Formats
The Company operates three types of retail stores: (i) 143 food
and drug combination stores; (ii) five warehouse stores; and
(iii) two conventional supermarkets. The food and drug
combination stores range in size from 33,000 to 112,000 square
feet (with an average size of 68,900 square feet) and offer an
extensive line of supermarket, non-food, and drug products. The
Company's typical food and drug combination store offers
approximately 50,000 SKUs, in comparison to approximately 20,000
SKUs offered at the average conventional supermarket nationwide.
All stores carry a full line of supermarket products, including
groceries, meat, poultry, produce, dairy products, bakery goods,
frozen foods and health and beauty aids. In addition,
combination stores carry a wide variety of general merchandise,
including pharmaceutical products, toys, hardware, giftware,
greeting cards, and small appliances. Within each category of
merchandise, the stores offer multiple selections of nationally
advertised brand name items. In addition, the stores carry an
extensive selection of private label merchandise, which provides
comparable quality products priced lower than national brands.
The Company also carries a variety of bulk merchandise and
generic brand products which enhance the Company's low price
image. These stores feature modern layouts with wide aisles and
well-lighted spaces to facilitate convenient shopping, a variety
of specialty departments, and centralized checkout facilities.
The Company's five price impact warehouse stores, operating under
the PriceRite Grocery Warehouse name, average 53,000 square feet
in size, and are targeted to price-conscious consumers rather
than conventional supermarket consumers. The PriceRite stores
offer lower overall prices, fewer SKUs , less front-end service
and fewer peripheral departments than the Company's food and drug
combination stores and conventional stores.
The Company's two conventional stores average 26,000 square feet
in size and have the appearance of traditional supermarkets.
Store Development and Expansion
Approximately 82% of the Company's stores have been newly built
or remodeled over the past seven years. During the last five
fiscal years, the Company invested approximately $92.4 million in
distribution, processing and other support facilities (not
including California operations). In an effort to further
enhance its store base and increase sales, the Company has
recently accelerated its store remodeling program. In fiscal
1996, the Company completed 11 store remodels and expects to
remodel 29 additional stores in fiscal 1997.
The Company's real estate department locates, acquires, and
develops sites for future stores. The Company's 49 years of
operations have allowed it to choose its store locations
selectively as new residential areas have been developed. The
Company believes that many of its stores are in developed areas
where land values and the difficulties in locating suitable
parcels would make it difficult to replicate the Company's
existing store base. Giving effect to the California
Divestiture, the Company owns 109 of its 150 stores, including
the underlying land with respect to 98 of such owned stores, as
of December 28, 1996. See "Item 2. Properties." In order to
maximize its future capital expenditure resources, the Company
intends to place a greater emphasis on leasing new stores.
Merchandising
The Company's merchandising strategy is to offer customers the
ability to fulfill a significant portion of their daily and
weekly shopping needs at one convenient location and to establish
and promote its reputation as a low price leader in the trade
area of each of its stores. The components of this merchandising
strategy include:
EVERYDAY LOW PRICING. The Company offers its products on an
everyday low pricing ("EDLP") basis in all markets other than
Phoenix and Tucson, where the Company offers a combination of
EDLP and promotional pricing. The Company offers an EDLP program
in most markets because the Company believes that it generally
allows for higher overall profitability than a promotional
pricing program. An EDLP program allows for more consistent
prices over time than a promotional program, which entails
variable pricing and higher levels of demand for sale products.
As a result, EDLP simplifies inventory management and lowers
operating costs.
QUALITY CUSTOMER SERVICE. The Company believes a key to its
success is its emphasis on quality customer service. The Company
provides courteous and efficient customer service by placing a
high degree of emphasis on employee training. Most stores have a
customer service counter located near the store entrance to
answer questions and to assist customers in locating merchandise.
The Company also provides rapid in-store checkout services, aided
by the use of computerized scanning devices and the bagging of
groceries at checkout. In most locations, stores are open 24
hours each day.
ADVERTISING AND PROMOTION. The Company reinforces its low price
image through extensive television advertising and through print
advertising in newspapers and circulars. The Company divides its
advertising budgets in a similar manner across its markets, with
approximately 70% committed to print advertising and
approximately 30% committed to radio and television advertising.
The Company also takes an active interest in the communities in
which its stores are located and maintains programs designed to
contribute funds, products, and manpower to local charities and
civic groups. In the Phoenix market, the Company uses a dual
banner "Smith's/Smitty's" advertising program.
SPECIALTY DEPARTMENTS. Each combination store provides certain
specialty departments designed to provide one-stop shopping
convenience to customers and to increase the frequency with which
customers return to the store. The specialty departments, which
vary depending upon store size and location, include
delicatessens with prepared food, full-service fresh fish and
meat departments, bakeries, dry cleaning drop-off facilities,
U.S. Post Office branches, pharmacies, video rental departments,
take-out food counters, camera and photo departments with on-site
film processing, floral departments, and in-store banking
provided by a regional or local bank.
PRIVATE LABEL PROGRAM. Through its private label program, the
Company offers in excess of two thousand items under the
"Smith's", "Smitty's", "Mountain Dairy", "Creek View", and other
brand names. Such private label products provide customers with
quality comparable to that of national brands but at lower
prices. Management believes that the Company's private label
program is one of the most successful programs in the industry.
The Company's owned manufacturing and processing facilities,
including its milk and beverage plants, cultured dairy products
plant, ice cream processing plant, and frozen dough plant, supply
the Company's stores with private label milk, milk products,
fruit punches, sour cream, yogurt, cottage cheese, chip dip
products, ice cream and novelty items, baked goods, and other
products. These facilities allow the Company to generate gross
margins on such private label items that are generally higher
than on national brands.
Operations
The Company is divided into two major operating regions, the
Intermountain Region and the Southwest Region, which are
segmented into eight geographic districts. The Intermountain
Region consists of stores in Utah, Nevada, Idaho, and Wyoming.
The Southwest Region consists of stores in Arizona, New Mexico,
and Texas. The regions and districts are staffed with
operational managers who are given as much autonomy as possible
while retaining the advantages of central control over
accounting, real estate, legal, data processing, and other
functions at the Company's headquarters. This operational
autonomy enables management to react quickly to changes in local
markets.
District and store managers are responsible for store operations,
local advertising formats, employee relations and development,
customer relations, community affairs, and other functions
relating to local operations. The regional staff includes
supervisors responsible for the grocery, meat, produce, bakery,
non-food, pharmacy, one-hour photo, deli, and prepared foods
departments.
Competition
The supermarket industry is highly competitive and characterized
by narrow profit margins. The Company's competitors include
regional and national supermarket chains, independent and
specialty grocers, drug and convenience stores, and the newer
"alternative format" food stores, including warehouse club
stores, deep discount drug stores and "supercenters". The
Company's competitors continue to open new stores in the
Company's existing markets. In addition, new competitors have
entered some of the Company's markets in the past and could do so
in the future. Supermarket chains generally compete on the basis
of price, location, quality of products, service, product variety
and store condition. The Company regularly monitors its
competitors' prices and adjusts its prices and marketing strategy
as management deems appropriate in light of existing conditions.
Some of the Company's competitors have greater financial
resources than the Company and could use those resources to take
steps which could adversely affect the Company's competitive
position.
The Company's principal supermarket competitors in the Salt Lake
City market are Albertson's, Harmons, Ream's Food Stores, Fred
Meyer , and Dan's Foods. In the Phoenix market, the Company's
principal competitors include Fry's, Bashas Markets, Mega Foods,
Safeway, Albertson's, and ABCO. In Albuquerque, the Company's
principal competitors are Furr's, Jewel Osco, and Albertson's,
and in Las Vegas, the Company's main competitors are Lucky,
Albertson's, and Vons. The Company also competes with various
drug chains and other non-food operators in each of its markets.
Purchasing, Distribution and Processing
The Company's procurement of food products is centralized on a
regional basis at the distribution facilities located in Layton,
Utah and Tolleson, Arizona. General merchandise is purchased
centrally for the entire Company at its Salt Lake City
distribution facility. Management of the Company's inventory
procurement function is centralized to ensure consistency of
purchasing activities and implementation of corporate-wide
programs. Category managers located at each central distribution
facility are responsible for volume purchasing, maintaining
proper inventory levels, and coordinating local programs.
Management believes that the Company will continue to achieve
increased promotional allowances and discounts through a
coordinated buying effort with Yucaipa-affiliated supermarket
chains.
The Company owns and operates one of the most modern and
efficient backstage operations in the industry. The Company's
warehousing, distribution, and processing facilities comprise
approximately 3.0 million square feet. The Layton, Utah
distribution facility supplies food and dairy products to all
stores in the Intermountain region except for Las Vegas. The
Salt Lake City, Utah distribution facility distributes the
majority of non-food merchandise, pharmaceutical products, and
certain bulk products to all stores in the Company. An
integrated distribution and processing center in Tolleson,
Arizona includes complete warehousing operations and a dairy
processing plant. The facility supplies products to all stores
in the Southwest Region and Las Vegas. The Company also operates
two produce warehouses, one in Ontario, California and the other
in Albuquerque, New Mexico. Approximately 80% of products sold
in 1996 were shipped through the Company's distribution network.
The Company transports food and merchandise from its distribution
centers primarily through a Company-owned fleet of tractors and
trailers to nearby stores and through common carriers for stores
located at greater distances. As of December 28, 1996, the
Company's owned fleet included 153 tractors and 352 trailers.
The Company seeks to lower costs on shipments by taking advantage
of backhauling opportunities where available.
The Company's processing facilities located in Tolleson, Arizona
and Layton, Utah produce a variety of products under the
Company's private labels for distribution to Company stores. The
Company's dairy plants process a variety of milk, milk products,
and fruit punches. The Company's automated frozen dough plant
produces frozen bakery goods for final baking at in-store
bakeries. The Company's cultured dairy products plant produces
sour cream, yogurt, cottage cheese and chip dip products. The
Company's ice cream processing plant supplies all stores with
Smith's private label ice cream and novelty items.
The Company believes that its central distribution facilities
provide several advantages. Management is able to control
inventory levels throughout its system in order to maximize the
Company's in-stock position, while at the same time optimizing
the use of store shelf space. Costs of products are reduced
through centralized volume purchases and effective management of
transportation costs. Stores are also served more efficiently
through central control of delivery schedules. By managing
overall inventory levels, the Company seeks to maximize inventory
turns and minimize investments in inventory.
Information Systems and Technology
The Company is currently supported by a full range of advanced
management systems. The Company has implemented store-level
management systems developed on UNIX in-store processors using
the Informix relational database. This application includes
direct store delivery store receiving, which allows goods to be
scanned electronically upon arrival at each store receiving dock.
This system also includes price verification and order entry
using hand-held personal computers. Store checkout is supported
by NCR point-of-sale scanning. The Company's stores are
supported by pharmacy, video rental, labor scheduling and time
and attendance systems which help the Company facilitate customer
service while managing labor costs.
The Company's buying operations are supported by the AS/400-based
E3 forecasting and purchasing system which uses statistical
models of seasonality, promotions and buying behavior to optimize
inventory levels. The Company's distribution centers operate
utilizing leading software of the Dallas Systems Company. The
key components are the Distribution Center Management Control
System, which is used for all inventory processing, and the
Distribution Center Assignment Monitoring System ("DCAMS"), which
is used for labor standards management. To increase operating
efficiency and decrease labor costs, the DCAMS system transmits
work assignments to lift drivers and order selectors through a
radio-frequency terminal. The Company is currently installing
the OMI purchasing and forecasting system which will be used for
distribution center replenishment.
The Company's computer operations and applications development
activities are outsourced to Electronic Data Systems, Inc.
Employees and Labor Relations
The Company's policy is to train and develop its employees and
promote from within. The Company generally prefers to promote
its own employees to store manager positions. Management-level
employees, including store department managers, participate in
incentive compensation programs tied to financial performance
(sales and EBITDA). Such compensation programs can represent
significant percentages of each managers' total compensation.
The Company believes that its employee retention rate is equal to
or exceeds the industry average.
At December 28, 1996, the Company employed approximately 20,200
persons, approximately 59% of whom were full-time and 41% of whom
were part-time. Approximately 47% of the Company's employees are
unionized. The Company's unionized employees work under eighteen
collective bargaining agreements with local labor unions,
primarily in Arizona, Nevada and New Mexico, which typically have
three-year terms. Management of the Company believes that it
will be able to renew existing agreements on terms acceptable to
the Company. If it is unable to do so, however, there could be a
material adverse effect on the Company's operations. The wages
and benefits provided in the Company's collective bargaining
agreements are substantially similar to those of its supermarket
competitors. The Company has not experienced a work stoppage in
the past ten years and considers its relations with its employees
and labor unions to be satisfactory.
Environmental Matters
The Company is subject to a variety of environmental laws, rules,
regulations and investigative or enforcement activities, as are
other companies in the same or similar business. The Company
believes it is in substantial compliance with such laws, rules
and regulations. These laws, rules, regulations and agency
activities change from time to time, and such changes may affect
the ongoing business and operations of the Company. The Company,
from time to time, has or may in the future receive requests from
environmental regulatory authorities to provide information or to
conduct investigation or remediation activities. None of the
requests received to date are expected by management to have a
material adverse effect on the Company's business.
Governmental Regulation
The Company is subject to regulation by a variety of governmental
authorities, including federal, state and local agencies which
regulate the distribution and sale of alcoholic beverages,
pharmaceuticals, milk and other agricultural products, as well as
various other food and drug items and also regulate trade
practices, building standards, labor, health, safety and
environmental matters. The Company, from time to time, receives
inquiries from state and federal regulatory authorities with
respect to its advertising practices, pricing policies and other
trade practices. None of these inquiries, individually or in the
aggregate, has resulted, or is expected by management to result,
in any order, judgment, fine or other action that has, or would
have, a material adverse effect on the business or financial
position of the Company.
Trade Names, Service Marks and Trademarks
The Company uses a variety of trade names, service marks and
trademarks in its business including "Smith's", "Smith's Food &
Drug Centers", "Smitty's", "Mountain Dairy", "Creek View",
"PriceRite", and numerous others. While the Company believes its
trademarks are important to its business, except for "Smith's",
"Smith's Food & Drug Centers", "Smitty's" and "PriceRite", the
Company does not believe any of such trademarks are critical to
its business.
RISK FACTORS
The following factors should be considered in addition to
the other information contained in this Report or incorporated
herein by reference in evaluating the Company and its business.
Leverage and Debt Service
At December 28, 1996, the Company's total debt and
stockholders' equity (deficit) was approximately $1,349.4 million
and $(122.2) million, respectively. As of December 28, 1996, the
Company had approximately $166.9 million available under the
Company's revolving credit facility (the "Revolver"). In
addition, scheduled payments for fiscal 1997 under net leases of
the Company and its subsidiaries will be approximately $36.3
million. The Company's ability to make scheduled payments of
principal and interest on, or to refinance its indebtedness and
to make scheduled payments under its operating leases depends on
its future performance, which is subject to economic, financial,
competitive and other factors which are, in part, beyond its
control. Based upon the current level of operations, the Company
believes that its cash flow from operations, together with
borrowings under the Revolver and other sources of liquidity,
will be adequate to meet the Company's anticipated requirements
for working capital, capital expenditures, lease payments,
interest payments and scheduled principal payments. There are no
assurances, however, that the Company's business will continue to
generate cash flow at or above current levels or that anticipated
growth can be achieved. If the Company is unable to generate
sufficient cash flow from operations in the future to service its
debt and make necessary capital or other expenditures, or if its
future cash flows are insufficient to amortize all required
principal payments out of internally generated funds, the Company
may be required to refinance all or a portion of its existing
debt, sell assets or obtain additional financing. There are no
assurances that any such refinancing or assets sales would be
possible or that any additional financing could be obtained
particularly in view of the Company's high level of debt. See
"Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations - Liquidity and Capital
Resources."
The Company's high level of debt and debt service
requirements have several important effects on its future
operations, including the following: (a) the Company has
significant cash requirements to service debt, reducing funds
available for operations and future business opportunities and
increasing the Company's vulnerability to adverse general
economic and industry conditions and competition; (b) the
Company's leveraged position increases its vulnerability to
competitive pressures; (c) the financial covenants and other
restrictions contained in the Credit Facility and other
agreements relating to the Company's indebtedness and in the
indenture governing the Notes require the Company to meet certain
financial tests and restrict its ability to borrow additional
funds, to dispose of assets or to pay cash dividends on, or
repurchase, preferred or common stock; and (d) funds available
for working capital, capital expenditures, acquisitions and
general corporate purposes are limited. The Company's continued
growth depends, in part, on its ability to continue its expansion
and store conversion efforts, and therefore its inability to
finance capital expenditures through borrowed funds or otherwise
could have a material adverse effect on the Company's future
operations.
Competition
The supermarket industry is highly competitive and
characterized by narrow profit margins. The Company's
competitors include national and regional supermarket chains,
independent and specialty grocers, drug and convenience stores
and the newer "alternative format" food stores, including
warehouse-style supermarkets, club stores, deep discount drug
stores and "supercenters." The Company's competitors continue to
open new stores in some of the Company's existing markets. In
addition, new competitors have entered the Company's markets in
the past and could do so in the future. Supermarket chains
generally compete on the basis of price, location, quality of
products, service, product variety and store condition. The
Company regularly monitors its competitors and adjusts prices and
marketing strategy as management deems appropriate in light of
existing competitive conditions. Some of the Company's
competitors have greater financial resources than the Company and
could use those resources to take steps which could adversely
affect the Company's competitive position. In addition, there
can be no assurances that new competitors will not enter the
Company's trade areas or that the Company can maintain its
current market share in such areas. See "Business-Competition."
Contingent Liabilities Relating to California Divestiture
In connection with closing stores and otherwise redeploying
assets, the Company has assigned leases and subleased stores and
other facilities, including the sublease to Ralphs Grocery
Company (an affiliate of Yucaipa) of the Company's Riverside,
California distribution center and dairy plant and the assignment
or sublease of eleven stores to various supermarket companies
(including nine to Ralphs Grocery Company) in connection with the
California Divestiture. Since the Company will generally remain
either primarily or secondarily liable for the underlying lease
obligations with respect to these stores and other facilities,
the Company has a contingent liability to the extent the
Company's sublessees or assignees default in the performance of
their obligations under their respective subleases or assigned
leases. See "Business."
Forward-Looking Statements
When used in this report, the words "estimate," "expect,"
"project," and similar expressions are intended to identify
forward-looking statements within the meaning of Section 27A of
the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. Such statements are
subject to certain risks and uncertainties, including, but not
limited to those discussed above, that could cause actual results
to differ materially from those projected. These forward-looking
statements speak only as of the date hereof. All of these
forward-looking statements are based on estimates and assumptions
made by management of the Company, which although believed to be
reasonable, are inherently uncertain and difficult to predict;
therefore, undue reliance should not be placed upon such
estimates. There can be no assurances that the growth, savings
or other benefits anticipated in these forward-looking statements
will be achieved. In addition, there can be no assurances that
unforeseen costs and expenses or other factors will not offset or
adversely affect the expected growth, cost savings or other
benefits in whole or in part.
Item 2. Properties
At December 28, 1996, the Company operated 150 stores located in
seven states. Of the 150 stores, the Company owned 109 with the
remainder leased from third parties. The following is an
analysis of the Company's operating store properties by state at
December 28, 1996:
State Owned Leased Total
-----------------------------------
Arizona 39 19 58
Utah 31 5 36
Nevada 13 10 23
New Mexico 15 4 19
Idaho 4 1 5
Wyoming 3 2 5
Texas 4 0 4
-----------------------------------
Total 109 41 150
===================================
Percentage 73% 27% 100%
===================================
The Company leases or subleases 41 of its operating stores under
leases expiring between 1997 and 2021. Eleven of the Company-
owned stores are located on property which is ground-leased, in
whole or in part, from third parties under leases expiring
between 2007 and 2040. In most cases, such building and ground
leases are subject to customary renewal options.
The Company owns a 1,180,000 square foot distribution and dairy
processing facility in Tolleson, Arizona, 573,000 square feet of
grocery warehousing facilities and 348,000 square feet of
processing plants in Layton, Utah; and a 226,000 square foot
nonfood warehouse in Salt Lake City, Utah. The Company also
leases a 40,000 square foot produce and forward purchasing
warehouse in Albuquerque, New Mexico; a 408,000 square foot
nonfood warehouse in Salt Lake City, Utah; and a 205,000 square
foot produce warehouse in Ontario, California, under leases
expiring in 1995, 2002, and 1999, respectively.
The Company's corporate offices, data processing and records
storage facilities are located in over 100,000 square feet of
office and storage space owned by the Company in Salt Lake City,
Utah.
Item 3. Legal Proceedings
On May 22, 1996, Larry F. Klang ("Plaintiff") filed a purported
class action complaint against the Company. Plaintiff filed an
amended complaint on May 30, 1996 (the "Klang Complaint") which
names as defendants the Company, its directors, Yucaipa, Ronald
Burkle, and Smitty's. The Klang Complaint alleges, among other
things, (i) that the recapitalization transactions consummated
by the Company on May 23, 1996, violated Delaware law by
impairing the capital of the Company in its repurchase of its
stock, (ii) that the directors and the Company violated fiduciary
duties of disclosure under Delaware law by making allegedly
inaccurate and incomplete disclosure in the Company's Offer to
Purchase and Proxy Statement, and (iii) that Mr. Burkle and
Yucaipa aided and abetted these allegedly illegal actions. The
Klang Complaint sought, among other things, injunctive relief,
rescission of the recapitalization transactions, certification
of the action as a class action, and costs and fees. On June 28,
1996, the Company and the other defendants filed their answer to
the Klang Complaint, denying all material allegations and
asserting various defenses to the action. On October 15, 1996,
the Plaintiff filed a motion to rescind the recapitalization
transactions. The defendants filed their opposition to that
motion on November 7, 1996. Plaintiff filed his reply on
November 15, 1996. Vice-Chancellor William Chandler held oral
argument on the motion on November 21, 1996. The motion is
presently under consideration by the court. Based upon the
proceedings to date, the Company continues to believe that the
Plaintiff's allegations are without merit. The Company intends
to continue to vigorously defend itself and the other defendants
against these allegations.
In addition, the Company, in the ordinary course of its business,
is a party to various legal actions which management believes are
routine in nature and incidental to the operations of the
Company. Management believes that the outcome of any such
proceedings to which the Company is currently a party will not,
individually or in the aggregate, have a material adverse effect
on the operations or financial condition of the Company.
Item 4. Submission of Matters to a Vote of Security Holders
There were no matters submitted to a vote of security holders
during the fourth quarter of fiscal 1996.
PART II
Item 5. Market for the Registrant's Common Equity and Related
Stockholder Matters
The Company's Class B Common Stock is listed on the New York
Stock Exchange under the symbol "SFD". The following table shows
the high and low sales prices per share for all quarters of
fiscal 1995 and 1996:
High Low
----------------------------------------
Fiscal 1995
First Quarter $27 5/8 $23
Second Quarter 24 19 1/4
Third Quarter 20 1/4 18 1/8
Fourth Quarter 27 3/4 19 3/8
Fiscal 1996
First Quarter 31 23 1/4
Second Quarter 28 3/4 21 1/2
Third Quarter 29 1/2 23 3/4
Fourth Quarter 30 7/8 25 5/8
---------------------------------------
As of February 27, 1997 there were 196 Class A Common
Stockholders and 879 Class B Common Stockholders of record.
There are numerous stockholders who hold their Class B Common
Stock in the "street name" of their various stock brokerage
houses.
In connection with the Merger on May 23, 1996, the stockholders
of Smitty's received 3,038,877 shares of Class B Common Stock in
exchange for their outstanding shares of Smitty's common stock
and Yucaipa received 200,000 shares of Class B Common Stock as
payment of its management fee. Such issuances were made in
reliance upon Section 4(2) of the Securities Act of 1933, as
amended. There were no other sales of unregistered securities of
the Company during fiscal 1996.
A cash dividend of $.15 per share of Class A Common Stock and
Class B Common Stock was paid in the first quarter of fiscal
1996. Cash dividends of $.15 per share of Class A Common Stock
and Class B Common Stock were paid in each of the four quarters
of fiscal 1995, totaling $.60 per common share for fiscal 1995.
As described under "Item 7. Management's Discussion and Analysis
of Financial Condition and Results of Operation - Liquidity and
Capital Resources", the Company has discontinued the payment of
cash dividends as of May 23, 1996 on the Common Stock and the
payment of future dividends is severely restricted by the terms
of the financing agreements entered into by the Company. The
Company's debt agreements, including its Credit Facility and
Indenture under which the Notes were issued, contain significant
restrictions or prohibitions on its ability to pay dividends or
repurchase shares.
Item 6. Selected Financial Data
The information required for this item is included in the
Annual Report to Stockholders for the fiscal year ended
December 28, 1996 on the schedule entitled "Five Year Summary
of Selected Financial and Operating Data" which information is
attached as part of Exhibit 13.1 hereto and incorporated
herein by reference.
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations
The information required for this item is included in the
Annual Report to Stockholders for the fiscal year ended
December 28, 1996 in the section entitled "Management's
Discussion and Analysis of Financial Condition and Results of
Operations", which information is attached as part of Exhibit
13.1 hereto and incorporated herein by reference.
Item 8. Financial Statements and Supplementary Data
The consolidated financial statements of the Company included in
the Annual Report to Stockholders for the fiscal year ended
December 28, 1996 are attached as part of Exhibit 13.1 hereto and
incorporated herein by reference.
Item 9. Changes in and Disagreements With Accountants on Accounting
and Financial Disclosure
None.
PART III
Item 10. Directors and Executive Officers of the Registrant
Information concerning directors and certain executive officers
of the Company is included in the Company's definitive Proxy Statement in
connection with the Company's 1997 Annual Meeting of Stockholders under the
caption "Proposal No. 1 - Election of Directors" and "Executive Officers"
which information is incorporated herein by reference.
Item 11. Executive Compensation
Information concerning Executive Compensation is included in the
Company's definitive Proxy Statement in connection with the Company's
1997 Annual Meeting of Stockholders under the caption
"Executive Compensation" and "Proposal No. 2 - Approval of
Smith's Food & Drug Centers, Inc. Directors' Deferred
Compensation Plan" which information is incorporated herein by
reference (other than information under the subcaptions
"Compensation Committee Report on Executive Compensation" and
"Stock Performance Graph", which shall not be deemed to be
incorporated by reference herein.).
Item 12. Security Ownership of Certain Beneficial Owners and
Management
Information concerning security ownership of certain beneficial
owners and management is included in the Company's definitive Proxy
Statement in connection with the Company's 1997 Annual Meeting of
Stockholders under the caption "Security Ownership of Certain
Beneficial Owners and Management" which information is incorporated
herein by reference.
Item 13. Certain Relationships and Related Transactions
Information concerning certain relationships and related
transactions is included in the Company's definitive Proxy Statement
in connection with the Company's 1997 Annual Meeting of Stockholders
under the caption "Certain Relationships and Related Transactions"
which information is incorporated herein by reference.
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form
8-K
(a) Documents filed as part of this report:
1.Financial Statements:
The following consolidated financial statements of
the Company and its subsidiaries and the Report of Ernst
& Young LLP, Independent Auditors, included in the
Company's Annual Report to Stockholders for the fiscal
year ended December 28, 1996 are incorporated herein by
reference:
Report of Ernst & Young LLP, Independent Auditors
Consolidated Statements of Income--fiscal years ended
December 28, 1996, December 30, 1995 and December 31,
1994
Consolidated Balance Sheets--December 28, 1996 and
December 30, 1995
Consolidated Statements of Common Stockholders'
Equity--fiscal years ended December 28, 1996, December
30, 1995 and December 31, 1994
Consolidated Statements of Cash Flows--fiscal years
ended December 28, 1996, December 30, 1995 and
December 31, 1994
Notes to Consolidated Financial Statements
2.Financial Statement Schedules:
None
3.Exhibits:
The exhibits listed in the accompanying index to exhibits
are filed or incorporated by reference as part of this
report on Form 10-K.
(b) Reports on Form 8-K:
There were no reports filed on Form 8-K during the fourth
quarter of fiscal 1996.
INDEX TO EXHIBITS
(Item 14(a))
Exhibit
Number Document
2.1 Recapitalization Agreement and Plan of Merger
dated as of January 29, 1996 by and among the
Company, Cactus Acquisition, Inc., Smitty's
Supermarkets, Inc. and The Yucaipa Companies
(incorporated by reference to Exhibit 2.1 of the
Company's Annual Report on Form 10-K for the fiscal
year ended December 30, 1995).
3.1 Amended and Restated Certificate of
Incorporation of the Company (incorporated by
reference to Exhibit 3.1 in the Company's
Registration Statement on Form S-3 (No. 333-14953)).
3.2 Amended and Restated By-laws of the Company
(incorporated by reference to Exhibit 3.2 in the
Company's Registration Statement on Form S-3
(No. 333-14953)).
4.1 Indenture dated as of May 23, 1996 by and between
the Company and Fleet National Bank of Connecticut,
as trustee, with respect to the 11 1/4% Senior
Subordinated Notes due 2007 (incorporated by
reference to Exhibit 4.1 in the Company's
Registration Statement on Form S-3 (No. 333-14953))
4.2 Certain instruments which define the rights of
holders of long-term debt of the Company and its
subsidiaries are not being filed because the total
amount of securities authorized under each such
instrument does not exceed 10% of the total
consolidated assets of the Company and its
subsidiaries. The Company hereby agrees to
furnish a copy of each such instrument to the
Commission upon request.
4.3 Form of Pass Through Trust Agreement between the
Company and the Pass Through Trustee Company
(incorporated by reference to Exhibit 4.1 in the
Company's Registration Statement on Form S-3
(No. 33-51097)).
4.4 Form of Pass Through Certificate (included in
Exhibit 4.3).
*10.1 Amended and Restated 1989 Stock Option Plan
(incorporated by reference to Exhibit 10.1 of the
Company's Annual Report on Form 10-K for the fiscal
year ended December 28, 1991).
*10.2 First Amendment to the Amended and Restated 1989
Stock Option Plan (Exhibit 10.1) dated as of February
7, 1995 (incorporated by reference to Exhibit 10.2
of the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 1994).
*10.3 1993 Employee Stock Purchase Plan (incorporated by
reference to Exhibit 10.2 of the Company's Annual
Report on Form 10-K for the fiscal year ended January
2, 1993).
*10.4 First Amendment to the 1993 Employee Stock Purchase
Plan (Exhibit 10.3) dated as of August 2, 1993
(incorporated by reference to Exhibit 10.3 of the
Company's Annual Report on Form 10-K for the fiscal
year ended January 1, 1994).
10.5 Employees' Profit Sharing Plan and Trust, as amended
and restated as of July 27, 1982 (incorporated by
reference to Exhibit 10.4 of the Company's
Registration Statement on Form S-1 (No. 33-28698).
10.6 Pension Plan of Employees, as amended and restated
as of July 27, 1982 (incorporated by reference to
Exhibit 10.5 of the Company's Registration Statement
on Form S-1 (No.33-28698)).
10.7 Credit Agreement dated as of May 23, 1996 by and
among the Company, Bankers Trust Company and The
Chase Manhattan Bank, as Arrangers, the lenders named
therein and Bankers Trust Company, as Administrative
Agent (incorporated by reference to Exhibit 10.4 of
the Company's Registration Statement on Form S-3 (No.
333-14953)).
10.8 Standstill Agreement dated as of January 29, 1996
by and among the Company, The Yucaipa Companies,
Yucaipa SSV partners, L.P., Yucaipa Smitty's Partners,
L.P., Yucaipa Smitty's Partners II, L.P., Yucaipa
Arizona Partners, L.P., Jeffrey P. Smith, Richard D.
Smith, Fred L. Smith, Ida Smith and the other
shareholders of the Company named therein, as amended
(incorporated by reference to Exhibit 10.2 of the
Company's Registration Statement on Form S-3
(No. 333-01601)).
*10.9 Forms of Supplemental Compensation Agreements dated
as of January 2, 1985, and amended as of March 14,
1985, between the Company and certain executive
officers (incorporated by reference to Exhibit 10.6
of the Company's Registration Statement on Form S-1
(No. 33-28698)).
10.10 Registration Rights Agreement by and among the
Company and the holders of the Company's Common
Stock named therein (incorporated by reference
to Exhibit 10.1 of the Company's Registration
Statement on Form S-3 (No. 333-14953)).
*10.11 Management Services
Agreement by and between the Company and The Yucaipa
Companies (incorporated by reference to Exhibit 10.2
of the Company's Registration Statement on Form S-3
(No. 333-14953)).
10.12 Warrant Agreement by and between the Company and The
Yucaipa Companies (incorporated by reference to
Exhibit 10.3 of the Company's Registration Statement
on Form S-3 (No. 333-14953)).
*10.15 Form of Additional Retirement Benefit Agreement
between the Company and certain of its executive
officers (incorporated by reference to Exhibit 10.13
of the Company's Annual Report on Form 10-K for the
fiscal year ended January 2, 1993).
10.16 Form of Indemnification Agreement between the Company
and its directors and officers (incorporated by
reference to Exhibit 10.14 of the Company's Annual
Report on Form 10-K for the fiscal year ended January
2, 1993).
12.1 Statement regarding computation of ratio of earnings
to fixed charges.
13.1 Company's Annual Report to Stockholders for the fiscal
year ended December 28, 1996 (selected pages only).
21.1 Subsidiaries of the Company.
23.1 Consent of Ernst & Young LLP, Independent Auditors.
27 Financial Data Schedule
* Indicates management contract or compensatory plan or
arrangement.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
\s\ Allen R. Rowland
--------------------
Allen R. Rowland
Date: March 28, 1997 President and Chief Operating Officer
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons
on behalf of the registrant and in the capacities and on the
dates indicated.
Signature Title Date
- --------------------------------------------------------------------------
\s\ Jeffrey P. Smith Chairman of the Board March 28, 1997
---------------------------
Jeffrey P. Smith
\s\ Ronald W. Burkle Chief Executive Officer March 28, 1997
---------------------------
Ronald W. Burkle
\s\ Allen R. Rowland President and Chief March 28, 1997
--------------------------- Operating Officer
Allen R. Rowland
\s\ Matthew G. Tezak Senior Vice March 28, 1997
--------------------------- President and
Matthew G. Tezak Chief Financial
Officer
(Principal
Financial and
Accounting
Officer)
\s\ Fred L. Smith Director March 28, 1997
--------------------------
Fred L. Smith
\s\ Linda McLoughlin Figel Director March 28, 1997
--------------------------
Linda McLoughlin Figel
\s\ Bruce Karatz Director March 28, 1997
--------------------------
Bruce Karatz
\s\ Bertram R. Zweig Director March 28, 1997
--------------------------
Bertram R. Zweig