UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarter ended May 18, 1996
Commission File Number 1-10958
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THE STOP & SHOP COMPANIES, INC.
-------------------------------
(Exact name of registrant as specified in its charter)
Delaware 06-1231252
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
P.O. Box 369
Boston, MA 02101
(Address of principal executive offices)
(Zip Code)
(617) 380-8000
(Registrant's telephone number, including area code)
None
----
(Former name, former address and former
fiscal year, if changed since last report)
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 and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
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Number of shares of the issuer's common stock, outstanding as of June 14, 1996:
50,353,686 shares.
PAGE 2
THE STOP & SHOP COMPANIES, INC.
AND SUBSIDIARIES
INDEPENDENT ACCOUNTANTS' REPORT
- -------------------------------
To the Stockholders and Board of Directors of
The Stop & Shop Companies, Inc.:
We have reviewed the accompanying condensed consolidated balance sheets of The
Stop & Shop Companies, Inc. and subsidiaries as of May 18, 1996 and May 20,
1995, and the related condensed consolidated statements of operations and cash
flows for the sixteen-week periods then ended. These condensed consolidated
financial statements are the responsibility of the Company's management.
We conducted our review in accordance with standards established by the American
Institute of Certified Public Accountants. A review of interim financial
information consists principally of applying analytical procedures to financial
data and of making inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit conducted in
accordance with generally accepted auditing standards, the objective of which is
the expression of an opinion regarding the condensed consolidated financial
statements taken as a whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to such condensed consolidated financial statements for them to be in
conformity with generally accepted accounting principles.
We have previously audited, in accordance with generally accepted auditing
standards, the consolidated balance sheet of The Stop & Shop Companies, Inc. and
subsidiaries as of January 27, 1996, and the related consolidated statements of
operations, stockholders' equity, and cash flows for the year then ended (not
presented herein); and in our report dated March 4, 1996 (March 27, 1996, as to
Note 17), we expressed an unqualified opinion on those consolidated financial
statements. In our opinion, the information set forth in the accompanying
condensed consolidated balance sheet as of January 27, 1996 is fairly stated, in
all material respects, in relation to the consolidated balance sheet from which
it has been derived.
DELOITTE & TOUCHE LLP
Boston, Massachusetts
June 10, 1996
PAGE 3
THE STOP & SHOP COMPANIES, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(Dollars in thousands except per share amounts)
16 Wks Ended 16 Wks Ended
May 18, 1996 May 20, 1995
------------ ------------
Retail sales $1,513,849 $1,192,540
--------- ---------
Costs and expenses:
Cost of goods sold, buying and warehousing costs 1,089,777 856,871
Selling, store operating and administrative expenses 304,876 234,994
Depreciation and amortization 30,971 25,402
Amortization of goodwill and lease interests 6,225 3,466
--------- ----------
Total costs and expenses 1,431,849 1,120,733
--------- ----------
Operating profit 82,000 71,807
Interest on obligations under capital leases 7,927 5,634
Interest and amortization of debt expense, net 23,191 17,579
--------- ----------
Earnings before income tax provision 50,882 48,594
Income tax provision 23,382 22,594
--------- ----------
Net earnings $ 27,500 $ 26,000
======== =========
Net earnings per common share and
share equivalents $ 0.53 $ 0.50
========= =========
Weighted average number of common share and
share equivalents outstanding (in thousands) 52,346 52,117
========= ==========
See accompanying notes to condensed consolidated financial statements.
PAGE 4
THE STOP & SHOP COMPANIES, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(Dollars in thousands)
May 18, 1996 Jan. 27, 1996 May 20, 1995
------------ ------------- ------------
ASSETS
Current assets:
Cash and cash equivalents $ 12,462 $ 16,423 $ 17,064
Restricted investments 14,595 4,507 17,625
Accounts receivable 73,838 76,104 53,573
Construction advances receivable 13,682 9,094 18,686
Inventories 262,497 271,988 215,266
Prepaid expenses 19,516 18,340 18,603
Deferred tax assets, net 140,474 140,474 49,371
Net assets held for disposal 95,215 93,223 -
--------- --------- ---------
Total current assets 632,279 630,153 390,188
--------- --------- ---------
Property, plant and equipment, net:
Property excluding capital leases, net 961,302 960,670 906,176
Property under capital leases, net 123,130 128,124 108,015
--------- --------- ---------
Property, plant and equipment, net 1,084,432 1,088,794 1,014,191
--------- --------- ---------
Other assets:
Goodwill, net 405,146 402,873 164,038
Lease interests at market value, net 196,653 199,265 156,801
Deferred financing costs, net 4,919 5,584 6,551
Notes receivable 32,883 32,800 29,377
Other 122,612 107,274 45,681
--------- --------- ---------
Total other assets 762,213 747,796 402,448
--------- --------- ---------
Total assets $2,478,924 $2,466,743 $1,806,827
========= ========= =========
See accompanying notes to condensed consolidated financial statements.
(Continued)
PAGE 5
THE STOP & SHOP COMPANIES, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED) (Cont.)
(Dollars in thousands)
May 18, 1996 Jan. 27, 1996 May 20, 1995
------------ ------------- ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 338,672 $ 377,741 $ 242,921
Other accrued expenses 124,047 120,600 80,241
Accrued employee compensation and benefits 86,043 84,188 68,715
Accrued workers' compensation and general
liability 74,884 75,834 54,743
Accrued acquisition costs 67,201 67,121 -
Accrued income taxes 46,890 34,676 30,247
Short-term debt 364 17,865 247
Current portion of long-term debt 211,027 212,770 13,434
------- ------- -------
Total current liabilities 949,128 990,795 490,548
------- ------- -------
Long-term debt:
Mortgage notes,
S&S Finance International, Inc. - - 200,000
Other mortgage notes 13,972 14,385 12,104
Credit agreement 235,000 205,000 288,000
Term loan facility 200,000 200,000 -
Subordinated debt 195,190 195,190 195,190
Senior secured notes 118,013 118,013 -
Obligations under capital leases 163,018 166,574 129,649
------- ------- -------
Total long-term debt 925,193 899,162 824,943
------- ------- -------
Deferred tax liabilities, net 234,924 234,924 194,343
Commitments and contingencies - - -
Stockholders' equity:
Preferred stock: none outstanding - - -
Common stock: 50,353,486 shares outstanding
(50,204,920 at Jan. 27, 1996 and
49,937,631 at May 20, 1995) 505 503 501
Additional paid-in capital 318,327 317,193 315,608
Retained earnings (deficit) 54,222 26,722 (15,222)
Treasury stock, at cost (3,375) (2,556) (3,894)
-------- -------- --------
Total stockholders' equity 369,679 341,862 296,993
-------- --------- --------
Total liabilities and
stockholders' equity $2,478,924 $2,466,743 $1,806,827
========= ========== =========
See accompanying notes to condensed consolidated financial statements.
PAGE 6
THE STOP & SHOP COMPANIES, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(Dollars in thousands)
16 Wks Ended 16 Wks Ended
May 18, 1996 May 20, 1995
------------ ------------
Cash flows from operating activities:
Net earnings $ 27,500 $ 26,000
Adjustments to reconcile net earnings
to net cash provided by operating activities:
Depreciation and amortization 30,971 25,402
Amortization of goodwill and lease interests 6,225 3,466
Amortization of deferred financing costs 665 644
Changes in working capital (36,597) (42,707)
-------- --------
Net cash provided by operating activities 28,764 12,805
--------- ---------
Cash flows from investing activities:
Capital expenditures (30,543) (46,216)
Disposals of property, plant and equipment 1,564 776
Long-term notes receivable (83) (2,574)
-------- -------
Net cash used in investing activities (29,062) (48,014)
-------- --------
Cash flows from financing activities:
Proceeds from issuance of debt - 3,013
Principal payments on short-term debt (501) (326)
Principal payments on long-term debt (1,639) (405)
Net borrowings under credit agreement 13,000 46,042
Deferred financing costs - (54)
Principal payments under capital lease obligations (4,622) (4,036)
Common stock issued under stock option plans 1,136 192
Treasury stock activity, net (819) (100)
Other (10,218) (3,669)
-------- --------
Net cash provided by (used in) financing
activities (3,663) 40,657
-------- ------
Net increase (decrease) in cash and cash
equivalents (3,961) 5,448
Cash and cash equivalents:
Beginning of period 16,423 11,616
------- -------
End of period $12,462 $17,064
====== ======
See accompanying notes to condensed consolidated financial statements.
(Continued)
PAGE 7
THE STOP & SHOP COMPANIES, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (Cont.)
(Dollars in thousands)
16 Wks Ended 16 Wks Ended
May 18, 1996 May 20, 1995
------------ ------------
Supplemental disclosures of
cash flow information:
Cash paid for interest $ 32,770 $ 23,929
======= =======
Cash paid for income taxes $ 10,655 $ 24,093
======= =======
Supplemental schedule of non-cash investing
and financing activities:
Capital lease obligations incurred $ - $ 1,971
======= =======
See accompanying notes to condensed consolidated financial statements.
PAGE 8
THE STOP & SHOP COMPANIES, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. Opinion of Management
---------------------
With respect to the unaudited financial information for the interim periods,
it is the opinion of management of The Stop & Shop Companies, Inc. and its
subsidiaries (hereinafter referred to as the "Company") that all adjustments,
which consist of normal and recurring adjustments and adjustments relating to
the acquisitions of Purity Supreme, Inc. and MelMarkets, Inc., necessary to
present a fair statement of the results for such interim periods, have been
included. The report should be read in conjunction with the Company's
Consolidated Financial Statements for the year ended January 27, 1996 ("fiscal
1995").
Operating results for the 16 week period ended May 18, 1996 are not
necessarily indicative of results that may be expected for the full fiscal year
ending February 1, 1997 ("fiscal 1996").
2. Income Tax Provision (Benefit)
------------------------------
The Company has provided for income taxes on an interim basis using the
estimated annual effective tax rate method.
3. Net Earnings Per Share and Share Equivalents
--------------------------------------------
Primary earnings per share and share equivalents are computed based on the
weighted average number of shares outstanding plus the common stock equivalents
related to stock options, once the latter causes dilution in earnings per share
in excess of 3%. For each of the periods presented, fully diluted earnings per
share are not presented since the results do not cause dilution in earnings per
share in excess of 3%.
4. New Accounting Standards
------------------------
In March 1995, the Financial Accounting Standard Board issued SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and For Long-Lived Assets to
Be Disposed Of", which is effective for fiscal years beginning after December
15, 1995. The initial adoption of SFAS No. 121 did not have a material effect
on the consolidated financial statements.
In October 1995, the Financial Accounting Standards Board issued SFAS No.
123, "Accounting for Stock-Based Compensation", which is effective for fiscal
years beginning after December 15, 1995. SFAS No. 123 requires expanded
disclosures of stock-based compensation arrangements with employees. The
Company will continue to apply APB Opinion No. 25 to its stock-based
compensation arrangements and will disclose the required pro forma effect on net
income and earnings per share in its fiscal 1996 financial statements.
5. Commitments and Contingencies
-----------------------------
On June 23, 1995, Bradlees, Inc. ("Bradlees") filed for bankruptcy
protection under Chapter 11 of the United States Bankruptcy Code. The Company
has assigned certain leases to Bradlees and, under certain circumstances, may
have liability in the event of nonperformance by Bradlees. To date, Bradlees
has rejected two of the assigned leases and, on February 21, 1996, announced
that it would close 12 of its stores. In fiscal 1995, the Company provided for
the estimated costs associated with the leases for the announced closed stores.
On June 14, 1996, Bradlees filed a motion seeking court approval to reject the
leases for 5 of the 12 announced stores to be closed.
PAGE 9
THE STOP & SHOP COMPANIES, INC.
AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Results of Operations
- ---------------------
Results of operations for the 16 weeks ended May 18, 1996 are referred to
herein as "Quarter 1996" and the 16 weeks ended May 20, 1995 are referred to as
"Quarter 1995".
Total retail sales for the Company were $1,513.8 million in Quarter 1996, an
increase of 26.9% over Quarter 1995. Comparable store sales increased 2.7% over
the prior year. Total retail sales increased at a greater rate than comparable
store sales due to the acquisitions of Purity Supreme, Inc. ("Purity") and
MelMarkets, Inc. ("Mel's") in fiscal 1995 and growth from new stores. At the
end of Quarter 1996, the Company operated 159 Stop & Shop supermarkets,
including 116 superstores, and 17 Mel's Foodtown supermarkets. The Company also
operated 28 Purity supermarkets and 64 Li'l Peach convenience stores at the end
of Quarter 1996.
Operating profit for the Company, defined as earnings from operations before
interest and income taxes, was $82.0 million for Quarter 1996, compared with
$71.8 million for Quarter 1995. As a percentage of sales, operating profit was
5.4% for Quarter 1996 and 6.0% for Quarter 1995. The decrease in operating
profit, as a percentage of sales, can be attributed to a continued competitive
environment. Selling, store operating, and administrative expenses, as a
percentage of sales, were 20.1% in Quarter 1996, compared to 19.7% in Quarter
1995. The increase in Quarter 1996 resulted primarily from higher snow
plowing/removal costs along with the addition of Mel's. Depreciation and
amortization expense (including amortization of goodwill and lease interests)
was $37.2 million in Quarter 1996 compared to $28.9 million in Quarter 1995.
The increase resulted from the Company's acquisitions of Purity and Mel's and
its continuing superstore development program.
Net interest expense was $31.1 million or 2.1% of sales for Quarter 1996,
compared with $23.2 million or 1.9% of sales for Quarter 1995. The increase in
net interest expense was due to expenses associated with the new $200 million
term loan facility that the Company entered into to expand its financial
liquidity and the Senior Secured Notes, due 1999, that the Company assumed in
the Purity acquisition.
The effective income tax rate on earnings from continuing operations was
approximately 46% in Quarter 1996 and Quarter 1995.
Net earnings for Quarter 1996 were $27.5 million or $0.53 per share. Net
earnings for Quarter 1995 were $26.0 million or $0.50 per share. The weighted
average number of common share and share equivalents used in this calculation
was 52.3 million in Quarter 1996, compared with 52.1 million in Quarter 1995.
PAGE 10
THE STOP & SHOP COMPANIES, INC.
AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION (Cont.)
Liquidity and Capital Resources
- -------------------------------
Net cash provided by operating activities was $28.8 million in Quarter 1996
and $12.8 million in Quarter 1995 (see "Condensed Consolidated Statements of
Cash Flows"). Working capital deficiency amounted to $316.8 million and $100.4
million at May 18, 1996 and May 20, 1995, respectively. This resulted in ratios
of current assets to current liabilities of 0.7 and 0.8, respectively. The
increase in the working capital deficiency was primarily the result of the $200
million S & S Finance International, Inc. note which is due on December 16,
1996. The Company's high sales productivity results in a rapid inventory
turnover. That turnover, coupled with a program for extended payment terms from
vendors, results in a high ratio of trade accounts payable to inventory. This
resulted in an increase in the working capital deficiency that merely reflects
efficient operations by the Company. The increase in the working capital
deficiency was lessened somewhat as a result of the Purity acquisition.
Included in current assets are Net Assets Held For Disposal, which represent the
net assets of the Purity stores that must be divested and certain additional
Purity stores and the Li'l Peach convenience stores that will be divested if
adequate proceeds can be obtained. In view of the Company's $364.0 million
available under its bank Credit Agreement, the Company does not believe the
working capital deficiency creates a liquidity problem.
The Company expects that working capital requirements and capital additions,
including the funds necessary for the Company's planned Stop & Shop stores, will
continue to be funded through a combination of funds available from operations,
the Credit Agreement and real estate financing arrangements, including a master
lease financing program. The Company expects that debt service requirements
will be funded through operations, currently available capacity, and new
borrowings.
The retained earnings at May 18, 1996 were $54.2 million compared to an
accumulated deficit at May 20, 1995 of $15.2 million. The elimination of the
accumulated deficit was the result of the Company generating net earnings.
Capital Asset Additions
- -----------------------
The Company continued its program of square footage growth in 1996. The
Company opened three new stores in Quarter 1996 and refurbished two former
Purity stores. In Quarter 1996, cash capital expenditures were $30.5 million.
Cash capital expenditures are expected to approximate $100.0 million in fiscal
1996 and will be financed substantially through cash from operations and
utilization of the revolving loan facility. At the close of Quarter 1996, the
Company operated 159 Stop & Shop supermarkets, including 116 superstores, and 17
Mel's Foodtown supermarkets. The Company also operated 28 Purity supermarkets
and 64 Li'l Peach convenience stores at the end of Quarter 1996.
PAGE 11
THE STOP & SHOP COMPANIES, INC.
AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION (Cont.)
Purity Acquisition
- ------------------
During Quarter 1996, the Company refurbished two former Purity supermarkets,
completing the planned conversions. The sale of non-converted Purity stores
continued in Quarter 1996. Twenty of the 31 Purity stores to be divested or
sold, have either been sold or are under agreement to be sold. Sixteen of the
31 stores were required to be sold under the terms of an agreement with the
Massachusetts Attorney General and the Federal Trade Commission.
During Quarter 1996, the Company entered into a definitive agreement to sell
the Li'l Peach business. This sale is expected to close in mid-July.
Royal Ahold Acquisition
- -----------------------
During Quarter 1996, the Company entered into an agreement to be acquired by
Royal Ahold, a leading international food retailer with annual sales of $18
billion.
PAGE 12
THE STOP & SHOP COMPANIES, INC.
AND SUBSIDIARIES
PART II OTHER INFORMATION
-------------------------
Item 1. Legal Proceedings
On February 10, 1992, the Company received a complaint filed in the U.S.
Bankruptcy Court in the Northern District of California by the Trustee in
bankruptcy of Hamilton-Taft & Company ("HTC"), a tax payment service firm,
alleging that approximately $12.55 million in tax payments made by HTC on the
Company's behalf in January and March 1991, utilizing withholding funds
previously deposited by the Company with HTC for this purpose, constituted
avoidable preferences under Section 547 of the Bankruptcy Code. On May 2, 1995,
the U.S. Court of Appeals for the Ninth Circuit, reversing rulings of the lower
courts, granted partial summary judgment to the Trustee. The Company filed a
motion for reconsideration and for an en banc hearing by the Ninth Circuit. On
September 18, 1995, the Trustee and the Company settled this claim upon a Stop &
Shop payment of approximately $4.5 million. Subsequently, the Company received
distributions of $1.62 million from the estate of the bankrupt, reducing its
loss to $2.88 million. Further distributions are possible. The Company has
filed a declaratory judgment action against its insurance carrier, Federal
Insurance Company, seeking a determination of coverage for this loss. That
claim is pending in U.S. District Court in Massachusetts.
PAGE 13
THE STOP & SHOP COMPANIES, INC.
AND SUBSIDIARIES
PART II OTHER INFORMATION (Cont.)
---------------------------------
Item 6. Exhibits and Reports on Form 8-K
A. Exhibits
No.
--------
*15. Letter re: Unaudited interim financial information
B. Reports on Form 8-K
-------------------
For the 16 weeks ended May 18, 1996, the Company filed a Form 8-K,
dated March 29, 1996.
* As filed herewith
PAGE 14
THE STOP & SHOP COMPANIES, INC.
AND SUBSIDIARIES
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.
THE STOP & SHOP COMPANIES, INC.
Date: June 21, 1996 By /s/ Robert G. Tobin
-------------------------------
Robert G. Tobin
Chairman, President and
Chief Executive Officer
EXHIBIT INDEX
EXHIBIT DESCRIPTION
- ------- -----------
15. Letter re: Unaudited interim financial information