================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
____________________________
FORM 10-Q
(Mark One)
[ X ] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the Quarterly Period Ended August 2, 1997
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 0-19802
BUTTREY FOOD AND DRUG STORES COMPANY
(Exact name of registrant as specified in its charter)
Delaware 81-0466189
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
601 6th Street, S.W.
Great Falls, Montana 59404
(Address of principal executive offices)
Registrants telephone number, including area code: (406) 761-3401
Indicate by check mark whether the registrant (1) has filed all documents and
reports required to be filed by Sections 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for 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 [ ]
The number of shares of the registrant's Common Stock outstanding at
September 15, 1997 was 8,642,131 shares
EXHIBIT INDEX APPEARS AT PAGE 12
============================
Page 1 of 16
BUTTREY FOOD AND DRUG STORES COMPANY
AND SUBSIDIARY
FORM 10-Q
For the Quarterly Period Ended August 2, 1997
INDEX
Part I. Financial Information Page
Item 1. Financial Statements
a) Consolidated Balance Sheets as of August 2, 1997 (unaudited)
and February 1, 1997 3
b) Consolidated Statements of Operations for the 13 weeks and the
26 weeks ended August 2, 1997 (unaudited) and August 3, 1996
(unaudited) 4
c) Consolidated Statement of Stockholders' Equity as of February
1, 1997 and August 2, 1997 (unaudited) 4
d) Consolidated Statements of Cash Flows for the 13 weeks and the
26 weeks ended August 2, 1997 (unaudited) and August 3, 1996
(unaudited) 5
e) Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 7
Part II. Other Information
Item 1. Legal Proceedings 12
Item 6. Exhibits and Reports on Form 8-K 12
Signatures 13
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Buttrey Food and Drug Stores Company and Subsidiary
Consolidated Balance Sheets
=====================================================================================================================
(Dollar Amounts in Thousands)
- ---------------------------------------------------------------------------------------------------------------------
ASSETS
August 2, February 1,
1997 1997
- ---------------------------------------------------------------------------------------------------------------------
(unaudited)
Current assets:
Cash and cash equivalents $ 10,148 $ 5,075
Accounts receivable 4,616 4,905
Inventories 43,098 42,741
Prepaid expenses 1,197 1,514
Deferred tax asset 444 544
- ---------------------------------------------------------------------------------------------------------------------
Total current assets 59,503 54,779
Property and equipment, at cost 155,699 152,900
Less accumulated depreciation 59,042 54,417
- ---------------------------------------------------------------------------------------------------------------------
Net property and equipment 96,657 98,483
Intangible assets, net 6,987 4,145
Other assets 693 591
- ---------------------------------------------------------------------------------------------------------------------
Total assets $163,840 $157,998
=====================================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current installments of long-term debt $ 5,054 $ 6,128
Current obligations under capital leases 455 428
Accounts payable 21,680 18,561
Accrued payroll and benefits 8,418 7,552
Accrued expenses and reserves 3,985 4,869
Accrued interest payable 1,419 131
Income taxes 1,630 -
- ---------------------------------------------------------------------------------------------------------------------
Total current liabilities 42,641 37,669
Long-term debt 18,163 18,569
Obligations under capital leases 8,723 8,957
Deferred taxes payable 805 905
- ---------------------------------------------------------------------------------------------------------------------
Total liabilities 70,332 66,100
Stockholders' equity:
Preferred stock $.01 par value, authorized 1,000,000 shares - -
Common stock $.01 par value, authorized 15,000,000 shares;
issued and outstanding 8,640,556 shares as of August 2, 1997
and 8,639,056 shares as of February 1, 1997 86 86
Paid-in capital 79,144 79,133
Retained earnings 14,803 13,079
- ---------------------------------------------------------------------------------------------------------------------
94,033 92,298
Less stock subscriptions receivable 525 400
- ---------------------------------------------------------------------------------------------------------------------
Net stockholders' equity 93,508 91,898
- ---------------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $163,840 $157,998
=====================================================================================================================
See accompanying notes to consolidated financial statements
Buttrey Food and Drug Stores Company and Subsidiary
Consolidated Statements of Operations
========================================================================================================
(Dollar Amounts in Thousands, Except Per Share Data)
- --------------------------------------------------------------------------------------------------------
13 Weeks Ended 26 Weeks Ended
------------------------ ----------------------
August 2, August 3, August 2, August 3,
1997 1996 1997 1996
- --------------------------------------------------------------------------------------------------------
(unaudited) (unaudited)
Sales $ 101,125 $ 94,082 $ 196,059 $ 182,217
Cost of sales and related occupancy expenses 75,965 72,117 147,055 139,129
- --------------------------------------------------------------------------------------------------------
Gross Profit 25,160 21,965 49,004 43,088
Marketing, general, and administrative expenses 22,095 19,633 43,318 38,925
- --------------------------------------------------------------------------------------------------------
Operating income 3,065 2,332 5,686 4,163
Other income / (expense):
Gain / (loss) on disposal of owned property - 11 (1) 11
Interest income 41 29 54 57
Interest expense (785) (669) (1,592) (1,309)
Interest expense - tax settlement (1,274) - (1,274) -
- --------------------------------------------------------------------------------------------------------
(2,018) (629) (2,813) (1,241)
- --------------------------------------------------------------------------------------------------------
Earnings before income taxes 1,047 1,703 2,873 2,922
Income tax provision 419 680 1,149 1,168
- --------------------------------------------------------------------------------------------------------
Net earnings $ 628 $ 1,023 $ 1,724 $ 1,754
========================================================================================================
Net earnings per share $ 0.07 $ 0.12 $ 0.20 $ 0.20
========================================================================================================
Weighted average common and common
equivalent shares outstanding 8,738,681 8,640,057 $8,731,813 $8,626,291
========================================================================================================
Consolidated Statements of Stockholders' Equity
========================================================================================================
(Dollar Amounts in Thousands)
- --------------------------------------------------------------------------------------------------------
Net
Common Paid-in Retained Stock stockholders'
stock capital earnings subscriptions equity
- --------------------------------------------------------------------------------------------------------
Balance at February 1, 1997 $ 86 $79,133 $13,079 $(400) $91,898
Net additions on stock subscriptions - 11 - (125) (114)
Net earnings - - 1,724 - 1,724
- --------------------------------------------------------------------------------------------------------
Balance at August 2, 1997 (unaudited) $ 86 $79,144 $14,803 $(525) $93,508
========================================================================================================
See accompanying notes to consolidated financial statements
Buttrey Food and Drug Stores Company and Subsidiary
Consolidated Statements of Cash Flows
=========================================================================================================
(Dollar Amounts in Thousands)
- -----------------------------------------------------------------------------------------------------------
13 Weeks Ended 26 Weeks Ended
------------------------- -----------------------
August 2, August 3, August 2, August 3,
1997 1996 1997 1996
- -----------------------------------------------------------------------------------------------------------
(unaudited) (unaudited)
OPERATING ACTIVITIES:
Net income $ 628 $1,023 $ 1,724 $ 1,754
Adjustments to reconcile income to net cash
provided by operating activities:
Depreciation 2,560 2,138 5,040 4,164
Amortization 155 37 266 82
Loss (gain) on disposal of owned property - (11) 1 (11)
Changes in operating assets and liabilities:
Decrease in accounts receivable 132 277 288 217
Decrease (increase) in inventories 655 353 (357) 732
Decrease (increase) in prepaid expenses 345 (18) 317 (22)
Increase in accounts payable 2,912 3,107 3,119 6,024
Increase (decrease) in accrued payroll and benefits 1,209 734 866 (387)
Decrease in accrued expenses and reserves (599) (701) (1,405) (1,051)
Increase in accrued interest payable 1,327 70 1,289 15
Increase (decrease) in accrued income taxes 1,413 (505) 2,143 (17)
- -----------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 10,737 6,504 13,291 11,500
- -----------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES:
Purchase of property and equipment (888) (7,643) (3,214) (10,889)
Increase in other assets (2,215) (383) (3,203) (447)
- -----------------------------------------------------------------------------------------------------------
Net cash used by investing activities (3,103) (8,026) (6,417) (11,336)
- -----------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES:
Payments on long-term debt (4,829) (534) (3,939) (1,101)
Proceeds from equipment financing 2,386 3,960 2,386 3,960
Increase in management notes - - (125) -
Issuance of common stock - - 12 -
Payments on capital lease obligations (105) (93) (208) (184)
Increase (decrease) in notes payable, net (2) (5) 73 (20)
- -----------------------------------------------------------------------------------------------------------
Net cash provided (used) by financing activities (2,550) 3,328 (1,801) 2,655
- -----------------------------------------------------------------------------------------------------------
Increase in cash and cash equivalents 5,084 1,806 5,073 2,819
Cash and cash equivalents at beginning of period 5,064 7,153 5,075 6,140
- -----------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $10,148 $8,959 $10,148 $ 8,959
=========================================================================================================
See accompanying notes to consolidated financial statements
BUTTREY FOOD AND DRUG STORES COMPANY AND SUBSIDIARY
________________________________________________________________________________
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
The unaudited interim consolidated financial statements and related notes
have been prepared pursuant to the rules and regulations of the Securities and
Exchange Commission. Accordingly, certain information and footnote disclosures
normally included in financial statements prepared in accordance with generally
accepted accounting principles have not been presented. The accompanying
unaudited interim consolidated financial statements and related notes should be
read in conjunction with the financial statements and related notes included in
the Buttrey Food and Drug Stores Company ("Buttrey" or the "Company") Annual
Report on Form 10-K for the year ended February 1, 1997.
The information furnished reflects, in the opinion of the management of the
Company, all material adjustments consisting only of normal recurring accruals
necessary to present fairly the Company's financial condition and its results of
operations.
SFAS No. 128, Earnings per Share, was issued in February 1997 and will replace
the presentation of primary earnings per share ("EPS") with a presentation of
basic and diluted EPS on the face of the income statement for all entities with
complex capital structures. SFAS No. 128 also requires a reconciliation of the
numerator and denominator of the diluted EPS computation.
Basic EPS excludes dilution and is computed by dividing income available to
common stockholders by the weighted-average number of common shares outstanding
for the period. Diluted EPS reflects the potential dilution that could occur if
securities or other contracts to issue common stock were exercised or converted
into common stock or resulted in the issuance of common stock that then shared
in the earnings of the equity.
This statement will be effective for the Company commencing February 1, 1998
and earlier application is not permitted. Once effective, this statement
requires restatement of all prior-period EPS data. Pro forma basic and diluted
net income per share as determined under this statement does not differ from the
amounts as currently reported herein.
The Company has reached a proposed settlement with the Internal Revenue
Service ("IRS") with regard to adjustments associated with the Company's initial
acquisition of assets. As previously disclosed, the Company had received notice
from the IRS on December 1, 1995 of proposed adjustments for the Company's
fiscal periods 1991 to 1994. These proposed adjustments would have resulted in
additional federal taxes of $5,600,000, plus interest from the date when such
additional taxes are asserted to have been due to the date of payment.
Under the terms of the proposed settlement, pending final approval by the IRS,
the Company will pay approximately $1,706,000 in federal taxes plus
approximately $1,086,000 in interest. Additionally, the Company will also have
corresponding state tax liabilities of approximately $483,000 plus approximately
$188,000 in interest. The aggregate $2,189,000 in tax liability has been
recorded on the Company's balance sheet by adjusting deferred tax assets and
liabilities to reflect the revised tax basis of its assets, by adjusting the
current tax liability to reflect the prior year taxes due, and by applying the
effect of those adjustments to increase goodwill associated with the Company's
initial acquisition of assets. These balance sheet adjustments had no effect on
current income. The aggregate interest of $1,274,000 ($764,000 after-tax, or
$0.09 per share), however, has been recorded as an expense in the fiscal quarter
ended August 2, 1997. See Part II Other Information -- Item 1. Legal
Proceedings.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
The following discussion should be read in conjunction with the financial
statements and related notes included elsewhere in this Form 10-Q.
GENERAL
Buttrey is a food and drug retailer in Montana and in the market areas it
serves in Wyoming and western North Dakota. Founded in Montana in 1896, the
Company currently operates 43 stores, and a mail order pharmacy business. The
Company is the successor to the Buttrey Food and Drug division (the "Predecessor
Division") of Skaggs Alpha Beta, Inc. ("Skaggs"), an indirect, wholly-owned
subsidiary of American Stores Company ("ASC"). The Company acquired certain
assets and liabilities of the Predecessor Division in October 1990 in a
transaction (the "Acquisition") organized by Freeman Spogli & Co. Incorporated
("FS&Co."), a private investment firm.
RISK FACTORS
The following risk factors should be carefully considered, in addition to
other information contained in this Form 10-Q.
Certain Restrictions Imposed by Lenders
The Company's credit agreement contains significant financial and operating
covenants including, among other things, limitations on the amount of the
Company's capital expenditures, restrictions on the ability of the Company to
incur indebtedness, to pay dividends and to take certain other corporate
actions, and requirements that the Company maintain certain financial ratios and
satisfy certain financial tests. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Liquidity and Capital
Resources."
Competition
The food and drug retailing business is highly competitive. The Company's
competitors include, among others, multi-regional supermarket chains, smaller,
independent supermarket chains, drug stores, convenience stores, discount
hardware stores and large chain discount retailers. Some of these competitors
have substantially greater resources than the Company. The Company expects
competition from large chain discount retailers to further increase as stores
are opened in market areas served by the Company.
Expansion Plans
During the first quarter of 1997, the Company opened its fifth Buttrey Big
Fresh store in Bozeman, Montana (replacing a smaller, outmoded Buttrey Food &
Drug store previously located there), which occurred in February 1997, and
acquired a store in Cody, Wyoming, which occurred in April 1997. The Company
also plans to remodel approximately three stores during 1997. In addition, the
Company continues to seek sites for new store construction and intends to
continue the acquisition of existing stores. These plans are subject to site
availability and financing, competition, zoning and other governmental
regulations and general economic conditions, and no assurances can be given that
such plans will not be revised as a result of such factors. In addition, the
Company historically has experienced temporary disruptions and lost sales during
store remodelings, and believes that this will continue in connection with
future remodelings.
Control of the Company
A majority of the members of the Board of Directors of the Company are
affiliated with FS&Co., which controls FS Equity Partners II, L.P., the
Company's principal stockholder ("FSEP"). FSEP
currently holds 50.8% of the outstanding Common Stock of the Company. As a
result, FS&Co. controls and will continue to control the Company's management
policy and financing decisions.
RESULTS OF OPERATIONS
13 Weeks Ended August 2, 1997 Compared to 13 Weeks Ended August 3, 1996
Sales for the 13 weeks ended August 2, 1997 increased $7.0 million, or 7.5%,
from $94.1 million in the second quarter of 1996 to $101.1 million in the second
quarter of 1997. The increase in sales reflects additional sales from the
stores in Cheyenne, Laramie and Cody, Wyoming that the Company acquired during
the past year; the replacement of the Company's Bozeman, Montana store as a
Buttrey Big Fresh; and an increase in comparable store sales. Comparable store
sales increased 1.1% despite a more aggressive competitive environment, poor
summer tourism, and limited inflation.
Gross profit for the 13 weeks ended August 2, 1997 increased $3.2 million from
$22.0 million in the second quarter of 1996 to $25.2 million in the second
quarter of 1997. Gross profit as a percentage of sales increased 1.6% from
23.3% in the second quarter of 1996 to 24.9% in the second quarter of 1997 as a
result primarily of lower product procurement costs.
Marketing, general and administrative ("MG&A") expenses for the 13 weeks ended
August 2, 1997 increased $2.5 million from $19.6 million in the second quarter
of 1996 to $22.1 million in the second quarter of 1997. The increase in MG&A is
principally attributable to the operating expenses of the new stores described
above, an increase in depreciation expense, and an increase in administration
expense. MG&A expenses as a percentage of sales increased 0.9% from 20.9% in
the second quarter of 1996 to 21.8% in the second quarter of 1997.
Operating income for the 13 weeks ended August 2, 1997 increased $0.8 million
from $2.3 million, or 2.5% of sales, in the second quarter of 1996 to $3.1
million, or 3.0% of sales, in the second quarter of 1997. The increase in
operating income primarily reflects the improvement in gross profit offset by
the increase in MG&A expenses described above.
Interest expense, net of interest income, for the 13 weeks ended August 2,
1997 increased $0.2 million from $0.6 million, or 0.7% of sales, in the second
quarter of 1996 to $2.0 million, or 2.0% of sales, in the second quarter of
1997. Interest expense for the second quarter of 1997 includes a one-time
interest charge of $1.3 million associated with the proposed IRS tax settlement
(See Part II Other Information -- Item 1. Legal Proceedings). Excluding
this one-time charge, interest expense, net of interest income, for the 13 weeks
ended August 2, 1997 increased $0.1 million from $0.6 million, or 0.7% of sales,
in the second quarter of 1996 to $0.7 million, or 0.7% of sales, in the second
quarter of 1997. The increase in net interest expense, excluding the one-time
charge, is attributable to an increase in outstanding long-term debt. See
"--Liquidity and Capital Resources."
Net income for the 13 weeks ended August 2, 1997 decreased $0.4 million from
$1.0 million, or $0.12 per share, in the second quarter of 1996 to $0.6 million,
or $0.07 per share, in the second quarter of 1997. Excluding the one-time
interest charge described above of $1.3 million ($0.8 million after-tax, or
$0.09 per share), net income for the 13 weeks ended August 2, 1997 increased
$0.4 million from $1.0 million, or $0.12 per share, in the second quarter of
1996 to $1.4 million, or $0.16 per share, in the second quarter of 1997.
26 Weeks Ended August 2, 1997 Compared to 26 Weeks Ended August 3, 1996
Sales for the 26 weeks ended August 2, 1997 increased $13.9 million, or 7.6%,
from $182.2 million in 1996 to $196.1 million in 1997. The increase in sales
reflects additional sales from the stores in
Cheyenne, Laramie and Cody, Wyoming that the Company acquired during the past
year; the replacement of the Company's Bozeman, Montana store as a Buttrey Big
Fresh; and an increase in comparable store sales. Comparable store sales
increased 0.9% despite a more aggressive competitive environment, the severity
of this year's winter, promotions run in 1996 which were not duplicated in 1997,
poor summer tourism and limited inflation.
Gross profit for the 26 weeks ended August 2, 1997 increased $5.9 million from
$43.1 million in 1996 to $49.0 million in 1997. Gross profit as a percentage of
sales increased 1.4% from 23.6% in 1996 to 25.0% in 1997 as a result of lower
product procurement costs.
MG&A expenses for the 26 weeks ended August 2, 1997 increased $4.4 million
from $38.9 million in 1996 to $43.3 million in 1997. The increase in MG&A is
principally attributable to the operating expenses of the new stores described
above, an increase in depreciation expense, an increase in administration
expense, and pre-opening expenses during the first quarter for both the Bozeman,
Montana and the Cody, Wyoming stores. MG&A expenses as a percentage of sales
increased 0.7% from 21.4% in 1996 to 22.1% in 1997.
Operating income for the 26 weeks ended August 2, 1997 increased $1.5 million
from $4.2 million, or 2.3% of sales, in 1996 to $5.7 million, or 2.9% of sales,
in 1997. The increase in operating income primarily reflects the improvement in
gross profit offset by the increase in MG&A expenses described above.
Interest expense, net of interest income, for the 26 weeks ended August 2,
1997 increased $1.5 million from $1.3 million, or 0.7% of sales, in 1996 to $2.8
million, or 1.4% of sales, in 1997. Interest expense for the second quarter of
1997 includes a one-time interest charge of $1.3 million associated with the
proposed IRS tax settlement (See Part II Other Information -- Item 1. Legal
Proceedings). Excluding this one-time charge, interest expense, net of interest
income, for the 26 weeks ended August 2, 1997 increased $0.2 million from $1.3
million, or 0.7% of sales, in 1996 to $1.5 million, or 0.8% of sales, in 1997.
The increase in net interest expense, excluding the one-time charge, is
attributable to an increase in outstanding long-term debt. See "--Liquidity and
Capital Resources."
Net income for the 26 weeks ended August 2, 1997 decreased $31,000 from
$1,754,000, or $0.20 per share, in 1996 to $1,724,000, or $0.20 per share, in
1997. Excluding the one-time interest charge described above of $1,274,000
($764,000 after-tax, or $0.09 per share), net income for the 26 weeks ended
August 2, 1997 increased $733,000 from $1,754,000, or $0.20 per share, in 1996
to $2,488,000, or $0.29 per share, in 1997.
LIQUIDITY AND CAPITAL RESOURCES
The Company's liquidity needs arise primarily from debt service on its
indebtedness and the funding of the Company's capital expenditure and working
capital requirements. The Company has financed its liquidity needs primarily
using cash flow from operations, lease and debt financing of capital
expenditures, cash provided by certain asset sales, temporary borrowings under
the Company's working capital facility and the public sale of equity securities
in an initial public offering of Common Stock in February 1992.
On September 7, 1995, the Company entered into a new credit facility with The
CIT Group/Business Credit, Inc. ("CITBC") and The CIT Group/Equipment Financing,
Inc. ("CEF") providing available credit of up to $42.8 million (the "Financing
Agreement"). The new facility includes a $30.0 million revolving credit
facility (with a $10.0 million sublimit for letters of credit) and includes
variable rate term loans totaling $12.8 million, which the Company used to
refinance existing equipment financing loans resulting in lower interest rates
and extended maturities. The borrowing base under which the revolving credit
facility can be utilized is equal to 65% of Eligible Inventory (essentially non-
perishable inventory). The estimated borrowing base as of August 2, 1997 was
$24.1 million. During the third quarter of 1996,
the Financing Agreement was amended to provide for a third term loan in an
amount of up to $5.0 million (which the Company used to finance a substantial
portion of the purchase price related to its June 1996 acquisition of the
Cheyenne, Wyoming store), to increase the flexibility of the covenants relating
to capital expenditures contained therein, and to make other technical changes.
Under the Financing Agreement, interest is determined, at the Company's option,
at a defined prime rate or at the London Interbank Offered Rate ("LIBOR") for
each applicable loan as follows:
$30.0 Working Capital Facility prime rate plus 0.50% or LIBOR plus 2.00%
$8.1 Term Loan I prime rate plus 1.00% or LIBOR plus 2.25%
$4.7 Term Loan II prime rate plus 1.50% or LIBOR plus 2.65%
$5.0 Term Loan III prime rate plus 1.50% or LIBOR plus 2.25%
The Financing Agreement matures five years from inception, however, the
principal portion of Term Loans I and II are amortized on a straight-line basis
over 84 months and the principal portion of Term Loan III is amortized on a
straight-line basis over 60 months. In the event that the Financing Agreement
is not extended at the end of five years, the term loans will become due and
payable. Additionally, the Financing Agreement also provides that the maturity
date of all balances shall become accelerated upon a specified change in control
or ownership in the Company.
Borrowings under the Financing Agreement are secured by the Great Falls
Distribution Center, a retail store location in Butte, Montana and substantially
all of the personal property of the Company. The Financing Agreement contains
certain financial and operating covenants, including limitations on the amount
of the Company's capital expenditures, its ability to pay dividends, and its
ability to incur additional debt. The Financing Agreement also requires the
maintenance of certain financial ratios and the satisfaction of certain tests
which require escalating levels of performance over time. The Company is
currently in compliance with all such financial ratios and tests. The principal
financial covenants defined in the Financing Agreement compared to the Company's
actual results for the 26 weeks ended August 2, 1997 are as follows:
Actual Test
Minimum Net Worth $93.5 Million $75.0 Million
Maximum Capital Expenditures $ 3.2 Million $19.0 Million
Maximum Net Capital Expenditures $ 0.8 Million $13.0 Million
Minimum Interest Charge Coverage Ratio 6.49 4.70
As of August 2, 1997, the Company had no borrowings outstanding under the
revolving credit facility except for letter of credit commitments of $2.6
million. The outstanding balance under Term Loan I was $5.9 million (of which
$1.2 million is classified as current), under Term Loan II was $3.4 million (of
which $0.7 million is classified as current), and under Term Loan III was $4.0
million (of which $1.0 million is classified as current). The Company's
borrowing requirements for working capital are somewhat seasonal, reflecting
increases in inventory in the fourth calendar quarter due to holiday purchases
and, historically, the Company's funding of employee benefit program
contributions in the first calendar quarter of each year.
The Company has utilized equipment financing from time to time in order to
finance the purchases of store equipment and vehicles. The proceeds from each
of Term Loan I and Term Loan II were used by the Company to repay the remaining
outstanding obligations of all prior equipment financing loans. In
addition to these loans, on September 1, 1995, the Company completed a $1.2
million financing of new store equipment for the Company's new store in Butte,
Montana. The loan bears interest at LIBOR plus 2.65% and is payable in equal
monthly installments over four years. On July 26, 1996, the Company completed a
$4.0 million loan transaction with NationsBanc Leasing Corporation
("NationsBanc") to finance the purchase of new equipment for the recently
completed Great Falls, Montana remodels and to upgrade the Company's
transportation fleet. Approximately $3.5 million of this loan bears interest at
an 8.03% fixed rate while the remaining $0.5 million bears interest at LIBOR
plus 2.35%. The loan is payable in monthly installments over 48 months. On
November 4, 1996, the Company completed an additional loan transaction with
NationsBanc in an amount of approximately $1.6 million, which proceeds were used
by the Company to finance the Lewistown, Montana remodel and to further upgrade
the Company's transportation fleet. The new loan is payable in monthly
installments over 48 months and bears interest at LIBOR plus 2.35%. As of August
2, 1997, the outstanding obligation under these equipment loans aggregated $5.1
million (of which $1.7 million is classified as current).
The Company has also entered into commitments to finance a portion of its 1997
capital expenditures. The first commitment is with MetLife Capital Corporation
to finance up to $2.0 million of new store equipment and the second commitment
is with General Electric Capital Corporation ("GE Capital")to finance up to
$10.0 million of new store equipment. During the second quarter, the Company
completed a $2.4 million dollar loan transaction with GE Capital for the
financing of the fixtures and equipment at the Company's new Bozeman, Montana
store. The new loan is payable in monthly installments over 60 months and bears
interest at the 30-day commercial paper rate plus 2.18%. As of August 2, 1997,
the outstanding obligation under this equipment loan was $2.3 million (of which
$0.5 million is classified as current).
The Company has entered into a number of capital lease obligations for store
facilities. The Company's total outstanding capital lease obligation as of
August 2, 1997 was $9.2 million (of which $0.5 million is classified as
current).
Net cash provided by operating activities was $13.3 million for the 26 weeks
ended August 2, 1997, as compared with $11.5 million for the 26 weeks ended
August 3, 1996. The increase in net cash provided by operating activities was
primarily attributable to a $1.0 million increase in net income before
depreciation, amortization and disposal of owned property and $0.8 million for
net changes in operating assets and liabilities.
The Company spent an aggregate of $22.9 million, $10.0 million and $8.8
million on capital expenditures (primarily for acquisitions, store remodelings
and ongoing maintenance of its existing store base and support functions),
during fiscal years 1996, 1995 and 1994, respectively. Of these amounts, the
Company has funded approximately $10.6 million, $1.2 million and $9.2 million
through equipment and real estate financings in fiscal years 1996, 1995 and
1994, respectively. The Company plans to continue its store remodeling and
development program. During the first quarter of 1997, the Company completed
the acquisition of one store in Cody, Wyoming and also opened its fifth Buttrey
Big Fresh store in Bozeman, Montana (replacing a smaller, outmoded Buttrey Food
& Drug store previously located there). The purchase price for the Cody store
was $2.4 million for fixtures and equipment and a non-compete agreement, plus
$0.3 million for inventory. The Company also entered into a lease with the
seller of the business for the real property on which the grocery store was
previously located. The Company plans to remodel approximately three stores
during 1997. For 1997, capital expenditures by the Company, including the
foregoing, are estimated to be approximately $19.0 million, including
approximately $7.2 million for the remodels and for the ongoing maintenance of
its existing store base and support functions. Additionally, the Company also
may expand the number of stores it operates through additional selective
acquisitions of existing food or drug stores that will complement the Company's
operations. Except for the Cody acquisition, the projected capital expenditure
amount for 1997 does not include any additional amounts for potential
acquisitions.
Based upon the foregoing, and considering current and projected operating
results as well as the current budgeted capital expenditures of approximately
$19.0 million, the Company believes that it will have
sufficient cash available, including amounts available under the Financing
Agreement and cash generated from operations, and amounts available from lease
and mortgage financings, to meet its liquidity needs for debt service, its
capital expenditure program, working capital and general corporate purposes for
the foreseeable future.
BUTTREY FOOD AND DRUG STORES COMPANY
AND SUBSIDIARY
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Internal Revenue Service ("IRS") has completed its examination of the
Company's income tax returns for the periods ended February 1, 1992 and February
2, 1991, the period of the Company's initial acquisition of assets. On December
1, 1995, the Company received notice from the IRS of proposed adjustments for
the company's fiscal periods 1991 to 1994 which would eliminate the Company's
net operating loss and alternative minimum tax credit carryover and would result
in additional federal taxes of $5.6 million plus interest from the date when
such additional taxes are asserted to have been due to the date of payment.
These adjustments generally relate to the Company's allocation of purchase price
among the assets initially acquired by the Company and the treatment of certain
of these assets for tax depreciation and amortization purposes.
During August 1997, the Company reached a proposed settlement with the IRS
with regard to adjustments associated with the Company's initial acquisition of
assets. Under the terms of the proposed settlement, pending final approval by
the IRS, the Company will pay approximately $1,706,000 in federal taxes plus
approximately $1,086,000 in interest. Additionally, the Company will also have
corresponding state tax liabilities of approximately $483,000 plus approximately
$188,000 in interest. The aggregate $2,189,000 in tax liability has been
recorded on the Company's balance sheet by adjusting deferred tax assets and
liabilities to reflect the revised tax basis of its assets, by adjusting the
current tax liability to reflect the prior year taxes due, and by applying the
effect of those adjustments to increase goodwill associated with the Company's
initial acquisition of assets. The aggregate interest of $1,274,000 ($764,000
after-tax, or $0.09 per share), however, has been recorded as an expense in the
fiscal quarter ended August 2, 1997.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibit Number
10.1 Letter Amendment dated August 1, 1997 to Financing Agreement dated
September 7, 1995 by and among the Company, CITBC and CEF.
27.1 Financial Data Schedule
(b) Reports on Form 8-K
During the quarter ended August 2, 1997, the Company did not file any reports
on Form 8-k
SIGNATURE
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.
Dated: September 15, 1997 BUTTREY FOOD AND DRUG STORES COMPANY
(Registrant)
/s/ Wayne S. Peterson
-----------------------------------
Wayne S. Peterson
Senior Vice President, Chief Financial
Officer and Secretary
(Duly Authorized Officer and Principal
Financial and Accounting Officer)