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 April 5, 1997 (fourteen 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 May 2, 1997:
Class A: 3,852,600
Class B: 11,949,630
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements:
Consolidated Statements of Income for the
fourteen weeks ended April 5, 1997 and
the thirteen weeks ended March 30, 1996................3
Consolidated Balance Sheets as of
April 5, 1997 and December 28, 1996....................4
Consolidated Statements of Cash Flows for
the fourteen weeks ended April 5, 1997 and
the thirteen weeks ended March 30, 1996................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 1. Legal Proceedings.....................................14
Item 5. Other Information.....................................14
Item 6. Exhibits and Reports on Form 8-K......................15
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)
Fourteen Thirteen
Weeks Ended Weeks Ended
Apr 5, 1997 Mar 30, 1996
----------- ------------
Net sales $831,821 $693,165
Cost of goods sold 645,995 546,606
-------- --------
185,826 146,559
Expenses:
Operating, selling
and administrative 116,028 111,353
Depreciation and
amortization 22,909 22,639
Interest 32,723 14,437
Amortization of deferred
financing costs 2,300 108
-------- --------
173,960 148,537
INCOME (LOSS) BEFORE
INCOME TAXES AND
EXTRAORDINARY CHARGE 11,866 (1,978)
Income taxes (benefit) 5,000 (800)
-------- --------
INCOME (LOSS) BEFORE
EXTRAORDINARY CHARGE 6,866 (1,178)
Extraordinary charge on
extinguishment of debt, net of
tax benefit 25,030
-------- --------
NET LOSS $(18,164) $ (1,178)
======== ========
Income (loss) per share of Common Stock:
Income (loss) before
extraordinary charge $ 0.42 $ (0.05)
Extraordinary charge (1.54)
-------- --------
Net loss $ (1.12) $ (0.05)
======== ========
Average number of common
shares outstanding
(In thousands) 16,195 25,072
======== ========
See notes to consolidated financial statements
SMITH'S FOOD & DRUG CENTERS, INC.
CONSOLIDATED BALANCE SHEETS
(Dollar amounts in thousands)
Apr 5, Dec 28,
1997 1996
-------- ---------
(Unaudited)
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 3,611 $ 48,466
Rebates and accounts receivable 21,374 23,624
Refundable income taxes 49,832
Inventories 374,585 371,912
Prepaid expenses and deposits 23,810 25,520
Deferred tax assets 59,700 60,679
Assets held for sale 28,277 40,348
---------- ----------
TOTAL CURRENT ASSETS 511,357 620,381
PROPERTY AND EQUIPMENT
Land 193,210 195,408
Buildings 589,394 591,075
Leasehold improvements 50,542 46,266
Property under capitalized leases 46,969 33,212
Fixtures and equipment 488,632 530,894
---------- ----------
1,368,747 1,396,855
Less allowances for depreciation
and amortization 408,926 440,811
---------- ----------
959,821 956,044
OTHER ASSETS
Goodwill, less accumulated amortization of
of $2,441 in 1997 and $1,684 in 1996 120,727 121,484
Deferred financing costs, net 32,972 72,364
Other 18,263 15,732
---------- ----------
171,962 209,580
---------- ----------
$1,643,140 $1,786,005
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Trade accounts payable $ 292,467 $ 269,717
Accrued sales and other taxes 28,114 29,480
Accrued payroll and related benefits 76,814 78,950
Other accrued expenses 75,890 69,303
Current maturities of long-term debt 31,269 35,496
Current maturities of obligations under
Capital Leases 1,574 1,387
Accrued restructuring costs 17,402 25,678
---------- ----------
TOTAL CURRENT LIABILITIES 523,530 510,011
LONG-TERM DEBT, less current maturities 1,176,224 1,313,926
OBLIGATIONS UNDER CAPITAL LEASES, less
current portion 38,753 25,585
ACCRUED RESTRUCTURING COSTS, less
current portion 9,167 10,421
DEFERRED INCOME TAXES 1,950 13,330
OTHER LONG-TERM LIABILITIES 31,372 31,616
REDEEMABLE PREFERRED STOCK 3,319 3,319
COMMON STOCKHOLDERS' EQUITY
Convertible Class A Common Stock,
par value $.01 per share:
Authorized 20,000,000 shares; issued
and outstanding, 4,272,308 shares in
1997 and 5,117,144 shares in 1996 43 51
Class B Common Stock, par value $.01
per share: Authorized 100,000,000
shares; issued and outstanding 11,529,922
shares in 1997 and 10,685,086 shares in 1996 115 107
Additional paid-in capital 198,801 199,609
Retained deficit (340,134) (321,970)
---------- ----------
(141,175) (122,203)
---------- ----------
$1,643,140 $1,786,005
========== ==========
See notes to consolidated financial statements
SMITH'S FOOD & DRUG CENTERS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(Dollar amounts in thousands)
Fourteen Thirteen
Weeks Ended Weeks Ended
April 5, March 30,
1997 1996
OPERATING ACTIVITIES: ----------- -----------
Net loss $ (18,164) $ (1,178)
Adjustments to reconcile net loss to net
cash provided by operating activities:
Depreciation and amortization 22,909 22,639
Amortization of deferred financing costs 2,300 108
Deferred income taxes (benefit) (10,401) 9,600
Extraordinary charge 40,430
Other 305 177
Changes in operating assets and liabilities:
Rebates and accounts receivable 2,250 (4,206)
Refundable income taxes 49,832
Inventories (2,673) 97,008
Prepaid expenses and deposits 1,710 4,210
Trade accounts payable 22,750 (50,154)
Accrued sales and other taxes (1,366) 2,726
Accrued payroll and related benefits (2,136) (8,449)
Accrued other expenses 6,587 (23,110)
Accrued restructuring costs (9,530) (42,940)
--------- --------
CASH PROVIDED BY OPERATING ACTIVITIES 104,803 6,431
INVESTING ACTIVITIES:
Additions to property and equipment (21,017) (18,271)
Proceeds from sale of property and equipment 20,917 83,775
Other (2,531) 474
--------- --------
CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES (2,631) 65,978
FINANCING ACTIVITIES:
Additions to long-term debt 618,000
Payments on long-term debt (759,929) (73,411)
Purchases of Treasury Stock (2,845) (1,114)
Proceeds from sale of Treasury Stock 1,732 820
Payments of deferred financing costs (3,338)
Payment of dividends (3,761)
Other (647)
--------- --------
CASH USED IN FINANCING ACTIVITITES (147,027) (77,466)
--------- --------
NET DECREASE IN CASH AND CASH EQUIVALENTS (44,855) (5,057)
Cash and cash equivalents at beginning of year 48,466 16,079
--------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 3,611 $ 11,022
========= ========
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
Obligations under capital leases incurred $ 13,758
=========
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 fourteen week
period ended April 5, 1997 are not necessarily indicative of the results that
may be expected for the year ending January 3, 1998. 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 28, 1996.
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 first quarter was
$1.6 million in 1997 and $1.8 million in 1996.
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 1996 financial statements to
conform with the 1997 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 28 stores (two stores 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. An additional 200,000 shares of the
Company's Class B Common Stock were issued in prepayment of certain management
fees. 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 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 California Region. During 1996, the Company
sold or leased 23 of its California stores and related equipment and six non-
operating properties to various supermarket companies and others. During the
first fourteen weeks of 1997, the Company sold or leased three of its
California stores and related equipment and four non-operating properties. Of
the stores sold or leased, 16 owned stores were sold outright, two owned stores
were leased, three store leases were assigned and five leased stores were
subleased. The remaining 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 of 1996 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 fourteen weeks of 1997 (dollar amounts in
thousands):
Costs Accrued
Balance at Incurred Restructuring Costs
December 28, during at April 5, 1997
1996 1997 Current Long-term
------- ------ ------- ------
Charges for lease obligations $21,865 $2,310 $11,733 $7,822
Termination costs 2,541 1,358 1,183
Property maintenance costs
and other 11,693 5,862 4,486 1,345
------- ------ ------- ------
$36,099 $9,530 $17,402 $9,167
======= ====== ======= ======
NOTE E -- LONG-TERM DEBT
Long-term debt consists of the following (dollar amounts in thousands):
April 5, December 28,
1997 1996
---------- ----------
Term loans, principal due quarterly through
2005, with interest at an average rate of
7.10% in 1997 and 8.57% in 1996 $ 600,000 $ 753,800
11 1/4% Senior Subordinated Notes, principal due
2007 with interest payable semi-annually 575,000 575,000
Revolving Credit Facility with interest at an
average rate of 7.24% in 1997 12,000
Sinking fund bonds, 10 1/2% interest,
semi-annual maturities to 2016 11,780 11,872
Mortgage notes, collateralized by property and
equipment with a cost of $2.8 million in 1997
and 1996, due in 2000 through 2005 with interest
at an average rate of 4.86% in 1997 and 5.11%
in 1996 2,741 2,742
Industrial revenue bonds, collateralized by
property and equipment with a cost of $9.1
million in 1997 and $9.0 million in 1996 due in
2000 through 2010 plus interest at an average
rate of 7.22% in 1997 and 1996 5,972 6,008
---------- ----------
1,207,493 1,349,422
Less current maturities 31,269 35,496
---------- ----------
$1,176,224 $1,313,926
========== ==========
On March 27, 1997, the Company entered into an amended and restated senior
credit facility (the "New Credit Facility") that provides term loans totaling
$600 million (the "New Term Loans") and a $150 million revolving credit
facility (the "New Revolving Facility") less amounts outstanding under letters
of credit. The proceeds from the New Credit Facility were used to repay the
old term bank loans and outstanding indebtedness under the Company's revolvers
and letters of credit. All indebtedness under the New Credit Facility is
secured by substantially all of the assets of the Company. A commitment fee
ranging from .25% to .50% is charged on the average daily unused portion of the
New Revolving Facility, payable quarterly. Interest on borrowings under the
New Credit Facility is at the bank's Base Rate plus a margin based on the
Company's leverage ratio ranging from 0% to 1.25% or the Adjusted Eurodollar
Rate plus a margin based on the Company's leverage ratio ranging from .50% to
2.25%. At April 5, 1997, $13.7 million of letters of credit were issued under
the New Revolving Facility.
Maturities of the Company's long-term debt for the five fiscal years succeeding
April 5, 1997 are approximately $15.8 million in 1997, $61.5 million in 1998,
$66.6 million in 1999, $74.3 million in 2000, and $76.5 in 2001.
The Credit Facility requires the Company to maintain minimum levels of net
worth and earnings, and to comply with certain ratios related to fixed charges,
capital expenditures and indebtedness. In addition, the 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 $40.4 million net of a $15.4
million income tax benefit which consisted of the write-off of debt issuance
costs related to the old credit facility which was refinanced.
NOTE F - SUBSEQUENT EVENT
On May 11, 1997, the Company entered into a definitive merger agreement with
Fred Meyer, Inc. ("Fred Meyer") in which Smith's and Fred Meyer will form a
holding company ("Holdings") with two subsidiaries. Subject to certain
conditions, one subsidiary will merge with and into Smith's and the other
subsidiary will merge with and into Fred Meyer (collectively, the "1997
Mergers"). The 1997 Mergers will be completed by converting each outstanding
share of Class A Common Stock and Class B Common Stock into the right to
receive 1.05 shares of Holdings Common Stock, each outstanding share of Series
I Preferred Stock into the right to receive $.33 1/3, and each outstanding
share of Fred Meyer Common Stock into the right to receive one share of
Holdings Common Stock. Completion of the 1997 Mergers is conditioned on
regulatory approvals and approval by the Company's shareholders and various
other conditions and is expected to be consummated during the third quarter of
1997.
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 28-store Arizona supermarket chain (two stores were
subsequently leased to other retailers). Pursuant to the Merger, 3,038,877
shares of the Company's Class B Common Stock, $.01 par value ("Class B Common
Stock") were issued to the stockholders of Smitty's. 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
April 5, 1997 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 April 5, 1997.
The Company also completed a self tender offer on May 23, 1996 pursuant to
which it purchased 50% of its outstanding Class A Common Stock, $.01 par value
("Class A Common Stock") 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 Common Stock 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 senior credit facility (the "Credit Facility") which provided
term loans totaling $805 million (the "Term Loans") and a $190 million
revolving credit facility (the "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 (the "Notes"). As a result of
prepaying existing indebtedness, the Company incurred in 1996 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 results to the prior year's comparable period are not meaningful.
Results of Operations
Net sales increased $138.6 million, or 20.0%, from $693.2 million in the first
quarter of 1996 to $831.8 million in the first quarter of 1997. If net sales
were adjusted to remove the additional week in the first quarter of 1997 (a
fourteen week period compared to a thirteen week period in the prior year), the
sales increase would have been approximately 11%. This sales increase was
primarily attributable to changes in the number of operating stores. During
the first quarter of 1996, the Company closed its 34 California stores and
since March 30, 1996, the Company has opened an additional five stores (net)
and acquired 26 stores (net) in the Merger. Excluding the Company's California
stores, net sales for the first quarter increased $211.7 million, or 34.1%,
from $620.1 million last year to $831.8 million in 1997. As adjusted to
exclude the Company's California stores and Smitty's stores, same store sales
for the first quarter of 1997 increased 1.1% reflecting the favorable consumer
response to the Company's initiatives for improving sales and customer service.
Gross profit increased $39.2 million, or 26.7%, from $146.6 million in the
first quarter of 1996 to $185.8 million in the first quarter of 1997. Gross
margins during the first quarter of 1997 were 22.3% compared to 21.1% a year
ago. Excluding the Company's California operations, gross profit increased
$46.4 million, or 33.3%, in the first quarter of 1997 compared to the
comparable period last year.
Operating, selling and administrative expense ("OS&A") increased $4.6 million,
or 4.1%, from $111.4 million in first quarter of 1996 to $116.0 million in the
first quarter of 1997. As a percent of net sales, OS&A decreased in the first
quarter from 16.1% last year to 14.0% this year. The decrease in OS&A as a
percent of net sales in the first quarter was primarily caused by synergies
resulting from the merger with Smitty's and the lack in 1997 of expenses
related to the closure of the Company's California stores.
Depreciation and amortization expense increased $.3 million, or 1.2%, from
$22.6 million in the first quarter last year to $22.9 million in the first
quarter this year. The decrease in depreciation and amortization expense
resulting from the closure of the California Region was offset by the addition
of Smitty's stores and new food and drug combination stores opened since the
first quarter of 1996.
Interest expense increased $18.3 million, or 126.7%, from $14.4 million in the
first quarter last year to $32.7 million for the first quarter of 1997. The
increase in interest expense was primarily due to the increased debt incurred
in conjunction with the Merger and Recapitalization. On March 27, 1997, the
Company completed the refinancing of its secured credit facilities financing
which effectively reduced the Company's interest rate on the bank term loans by
approximately 170 basis points.
The extraordinary charge of $25.0 million recorded in the first quarter of 1997
consists of the write-off of debt issuance costs related to the old credit
facilities which were refinanced.
Net loss for the first quarter of 1997 totaled $18.2 million or $1.12 per
common share compared to last year's net loss of $1.2 million or $.05 per
common share. The net loss in 1997 was primarily as a result of the
extraordinary charge noted above.
Liquidity and Capital Resources
During the first fourteen weeks of 1997, cash provided by operating activities
was $104.8 million compared to $6.4 million last year. This increase was
caused primarily by balance fluctuations in operating assets and liabilities
resulting from the closure of the California region, receipt of $49.8 million
from an income tax refund, and normal operations.
Cash used in investing activities was $2.6 million for the first fourteen weeks
of 1997 as a result of the Company's ongoing expansion program which was 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 eight closed stores and excess land.
Cash used in financing activities totaled $147.0 million for the first fourteen
weeks of 1997 as a result of prepayments of the Credit Facility.
On March 27, 1997, the Company entered into an amended and restated senior
credit facility (the "New Credit Facility") that provided $600 million
aggregate principal amount of term loans (the "New Term Loans") and a $150
million revolving credit facility (the "New Revolving Facility") which is
available for working capital requirements and general corporate purposes. At
April 5, 1997, other than $13.7 million of letters of credit, $12.0 million was
outstanding under the New Revolving Facility. 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 two
tranches: Tranche A, in the amount of $400 million, has a six and
three-quarter year term and Tranche B, in the amount of $200 million, has an
eight 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 $21.0 million for the first
fourteen weeks of 1997. The Company currently anticipates that its aggregate
capital expenditures for fiscal 1997 will be approximately $100 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. 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.
The Company has discontinued the payment of cash dividends and payment of
future dividends is severely restricted by the terms of the New Credit Facility
and the Indenture governing the Notes.
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.
In February 1997, the Financial Accounting Standards Board issued Statement No.
128, "Earnings per Share", which is required to be adopted for periods ending
after December 15, 1997. At that time, the Company will be required to change
the method currently used to compute earnings per share and to restate all
prior periods. Under the new requirements, basic earnings per share excludes
the effect of stock options and diluted earnings per share includes the effect
of stock options. For the quarter ended April 5, 1997, basic income per share
before extraordinary charge would be $.01 higher than reported and basic loss
per share would be $.03 higher than reported. Diluted earnings per share would
be the same as reported which included the effect of stock options. For the
quarter ended March 30, 1996, basic loss per share and diluted loss per share
would be the same as reported because of the immateriality of the effect of
stock options.
Cautionary Statement for Purposes of "Safe Harbor Provisions" of the Private
Securities Litigation Reform Act of 1995
When used in this report, the words "estimate," "believe," "expect," "project"
and similar expressions, together with other discussion of future trends or
results, are intended to identify forward-looking statements within the meaning
of Section 27A of the Securities Act of 1933, as amended (the "Securities Act")
and Section 21E of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"). Such statements are subject to certain risks and
uncertainties, including those discussed below, 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 assurance that the savings or other benefits anticipated in
these forward-looking statements will be achieved. The following important
factors, among others, could cause the Company not to achieve the cost savings
or other benefits contemplated herein or otherwise cause the Company's results
of operations to be adversely affected in future periods: (i) continued or
increased competitive pressures from existing competitors and new entrants,
including price-cutting strategies; (ii) unanticipated costs related to the
Company's growth and operating strategies; (iii) loss or retirement of key
members of management; (iv) inability to negotiate more favorable terms with
suppliers or to improve working capital management; (v) increase in interest
rates of the Company's cost of borrowing or a default under any material debt
agreements; (vi) inability to develop new stores in advantageous locations or
to successfully convert existing stores; (vii) prolonged labor disruption;
(viii) deterioration in general of regional economic conditions; (ix) adverse
state or federal legislation or regulation that increases the cost of
compliance, or adverse finds by a regulator with respect to existing
operations; (x) loss of customers as result of the conversion of store formats;
(xi) adverse determinations in connection with pending or future litigation or
other material claims and judgments against the Company; (xii) inability to
achieve future sales; and (xiii) the unavailability of funds for capital
expenditures. Many of such factors are beyond the control of the Company.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
On May 22, 1996, Larry F. Klang ("Plaintiff") filed a purported class action
complaint against the Company in the Court of Chancery of the State of
Delaware, New Castle County. Plaintiff filed an amended complaint on May 30,
1996 (the "Klang Complaint") which named as defendants the Company, the
directors of the Company prior to the consummation of the Merger, The Yucaipa
Companies, a California general partnership ("Yucaipa"), Ronald Burkle, and
Smitty's. The Klang Complaint alleged, 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 and
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 and on May 13,
1997, the Court denied the Plaintiff's motion to rescind the recapitalization
transactions and dismissed each of the Plaintiff's claims. On May 13, 1997,
Plaintiff filed a notice of appeal and on May 16, 1997, Plaintiff filed a
motion to expedite the appeal.
Item 5. Other Information
On May 11, 1997, the Company and Fred Meyer, Inc., a Delaware corporation
("Fred Meyer"), entered into an Agreement and Plan of Reorganization and Merger
(the "Merger Agreement"). Pursuant to the terms of the Merger Agreement, the
Company and Fred Meyer will form a Delaware holding company ("Holdings"),
Holdings will form two subsidiaries ("Smith's Sub" and "Fred Sub") and, subject
to certain conditions being satisfied or waived, Smith's Sub would merge with
and into the Company and Fred Sub would merge with and into Fred Meyer (the
"Smith's Merger" and the "Fred Merger," and collectively, the "1997 Mergers").
Pursuant to the 1997 Mergers, (i) each outstanding share of the Company's Class
A Common Stock and each outstanding share of the Company's Class B Common Stock
would be converted into the right to receive 1.05 shares of Holdings Common
Stock, $.01 par value ("Holdings Common Stock"), (ii) each outstanding share of
the Company's Series I Preferred Stock, $.01 par value, would be converted into
the right to receive $.33 1/3, and (iii) each outstanding share of Fred Meyer
Common Stock would be converted into the right to receive one share of Holdings
Common Stock. It is anticipated that the Holdings Common Stock would trade on
the New York Stock Exchange. Conditions to the consummation of the 1997
Mergers include the receipt of regulatory approvals and approval by the
shareholders of Fred Meyer and the Company.
In connection with the Merger Agreement, the Company and Fred Meyer have
entered into a stock option agreement (the "Option Agreement") pursuant to
which Fred Meyer has granted the Company an option to acquire under certain
circumstances related to the termination of the Merger Agreement, up to 19.9%
of Fred Meyer's outstanding Common Stock at a price per share equal to $45.00.
The option is exercisable only under certain circumstances and is subject to a
limitation on the total profit that may be realized thereunder. In the event
the Merger Agreement is terminated under certain circumstances, Fred Meyer has
agreed to reimburse the Company for its out-of-pocket expenses and to pay the
Company certain termination fees. Certain shareholders holding over 65% of the
voting power of the Company's outstanding capital stock have entered into
agreements to vote their shares in favor of the Smith's Merger.
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 first quarter.
INDEX TO EXHIBITS
Exhibit
Number Document
10.4 Credit Agreement dated as of March 27, 1997 by and among the
Company, the lenders named therein, The Chase Manhattan Bank,
as Administrative Agent, and Bankers Trust Company, as
Syndication Agent.
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: 5/20/97 /s/ Matthew G. Tezak
-------------------------------
Matthew G. Tezak, Senior Vice
President and Chief Financial
Officer (Principal Accounting
Officer)