Annual Report — Form 10-K
Filing Table of Contents
Document/Exhibit Description Pages Size
1: 10-K From 10-K for Year Ended December 31, 1994 19± 89K
4: EX-10.10 Material Contract 10± 38K
2: EX-10.2 Material Contract 1 7K
3: EX-10.8 Material Contract 4± 18K
5: EX-13.1 Annual or Quarterly Report to Security Holders 18± 77K
6: EX-23.1 Consent of Experts or Counsel 1 6K
7: EX-27 Financial Data Schedule (Pre-XBRL) 1 6K
EX-13.1 — Annual or Quarterly Report to Security Holders
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EXHIBIT 13.1
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Net Sales
Net sales increased 6.2% in 1994, 5.9% in 1993, and
19.5% in 1992 compared with the respective prior years.
Since 1992 included 53 weeks compared to 52 weeks in 1993
and 1991, the increase in net sales would have been 8% in
1993 and 18% in 1992 after adjusting for the extra week.
New stores increased net sales by 8.5% in 1994, 6.6% in
1993, and 18.8% in 1992. The fluctuation in sales
increases from new stores resulted primarily from the
timing of store openings within the respective years.
Same store sales decreased 2.3% in 1994, 0.7% in 1993, and
increased 0.7% in 1992 compared with the respective prior
years. The decreases in same store sales in 1994 and 1993
were caused primarily by the continuing recession in
Southern California and new stores opened by competitors
in this and other markets. Same store sales in 1993 also
were negatively affected by heavy price competition in
Utah resulting from the Company's aggressive pricing
program. To the extent these conditions persist, the
decreases in same store sales may continue.
The Company opened 8 stores during 1994, 11 stores
during 1993, and 12 stores during 1992. Retail square
footage increased to 9,101,000 square feet at the end of
1994 (137 stores) from 8,501,000 square feet at the end of
1993 (129 stores) and 7,668,000 square feet at the end of
1992 (119 stores). An additional four stores were
completed during 1994. However, to avoid problems
associated with opening stores during the Christmas
season, the grand openings for these completed stores were
held in January. During 1995, the Company slowed its
expansion into Southern California in order to focus on
the operations of the 32 stores opened in that region
during the past three years. The Company plans to open
new stores in other states to offset the fewer California
openings. In 1995, the Company anticipates opening 14 to
16 stores including the four stores completed during 1994
and 10 to 12 stores in 1996. Future stores primarily will
range from 54,000 to 66,000 square feet, although a few
larger stores will be opened where appropriate.
Gross Margins
Gross margins during 1994, 1993, and 1992 were 22.2%,
22.5%, and 22.9%, respectively. The decreases in 1994 and
1993 were caused primarily by the Company's aggressive
Utah pricing program, which commenced in July 1993. To
reinforce the Company's everyday low price program, prices
in Utah stores were lowered on more than 10,000 grocery,
meat and produce items.
Gross margins also are affected by the Company's
expansion program. The stores in Southern California tend
to operate at higher gross margins to offset higher real
estate, operating and labor costs. The Company
anticipates that new stores recently opened and the
planned new stores will apply pressure on the Company's
gross margins until the stores become established in their
respective markets. Additionally, the new 1,000,000 square
foot distribution center in Riverside, California ,
including a dairy processing plant, is expected to lower
gross margins in the Southern California region until
backstage efficiencies and reduced shipping expenses can
be realized.
In 1992 the Company adopted the last-in, first-out
(LIFO) cost method for valuing inventories. The pretax
LIFO charge was $2.5 million in 1994 and $1.6 million in
1993. There were no LIFO charges or credits in 1992.
Operating, Selling and Administrative Expenses
Operating, selling and administrative expenses as a
percent of net sales were 14.8% in 1994, 15.3% in 1993,
and 15.8% in 1992. The decrease in 1994 and 1993,
resulting primarily from the Company's aggressive program
to reduce operating costs, was somewhat offset by the
higher operating costs associated with the expansion into
Southern California. The Company anticipates that the new
and planned stores will increase operating, selling and
administrative expenses as a percent of net sales until
anticipated economies of scale are realized.
Depreciation and Amortization Expenses
Depreciation and amortization expenses increased
14.9% in 1994, 22.0% in 1993, and 38.9% in 1992 over the
respective prior years due to the addition of new
combination centers and distribution and processing
facilities.
Interest Expense
Interest expense increased 20.4% in 1994, 23.5% in
1993, and 19.2% in 1992 compared with the respective prior
years as a result of net increases in the average long-
term debt amounts for each period.
Income Taxes
Income taxes as a percent of income before income
taxes were 39.1% in 1994, 42.8% in 1993, and 39.1% in
1992. The Omnibus Budget Reconciliation Act of 1993
increased the Company's Federal Tax rate from 34% to 35%.
As a result of the increased tax rate, net income for 1993
was reduced by $2.75 million or $.09 per common share.
This reduction consisted of $.80 million or $.03 per
common share for the rate increase on income earned in
1993 and $1.95 million or $.06 per common share for the
increase in recorded deferred taxes.
Net Income
Net income was $48.8 million for 1994 compared to
$45.8 million for 1993, an increase of 6%. However, as a
result of a reduction in the number of shares outstanding
through the Company's buy-back programs, net income per
common share increased 14% from $1.52 to $1.73. During
1994, the Company repurchased 4.9 million shares of common
stock in the open market. The weighted average number of
shares of Common Stock outstanding in 1994 was reduced by
approximately 1.9 million shares, which increased net
income per common share by $.11.
Liquidity and Capital Resources
Cash and cash equivalents decreased $47.7 million
during 1994 and increased $46.4 million during 1993. The
increase during 1993 primarily resulted from the receipt
of $152.7 million from a sale/leaseback transaction
completed at the end of 1993. The proceeds from the
sale/leaseback transaction were used to finance 1994 store
expansion, cash management efforts, and normal cash
activities. Working capital decreased to $62.3 million at
December 31, 1994 from $160.4 million at January 1, 1994,
a decrease of $98.1 million. The Company's current ratio
at the end of 1994 was 1.2:1 compared to 1.5:1 in 1993.
The working capital is supplemented by unused revolving
credit lines which aggregated $53 million at December 31,
1994.
Cash provided by operating activities amounted to
$203.6 million and $118.6 million for 1994 and 1993,
respectively. Cash provided by operating activities in
each of such years was partially offset by increases in
inventory balances. The Company maintains levels of
inventory necessary to support its high-volume, everyday
low price merchandising strategy. Inventories increased
$11.6 million and $36.5 million to $389.6 million and
$377.9 million at the end of 1994 and 1993, respectively.
These increases in inventories were caused mainly by
warehouse and store expansion. The increase in trade
accounts payable of $50.6 million in 1994 resulted
primarily from better year end cash management.
Cash used in investing activities totaled $127.4
million for 1994 and $164.4 million for 1993. Additions
to property and equipment totaled $146.7 million in 1994
and $322.3 million in 1993 reflecting the Company's
ongoing expansion program. In 1993 the Company completed
the sale and leaseback of several recently constructed
stores and its new Riverside distribution center totaling
$152.7 million. The Company anticipates investing
approximately $125 million during 1995 for the development
and construction of new food and drug centers, remodeling
of existing stores and replacing equipment. However, the
actual timing and amount of capital expenditures may vary
depending upon a number of factors. Cash used in financing
activities totaled $123.9 million for 1994.
Cash provided by financing activities totaled $92.3
million for 1993. During 1994, the Company repurchased
4.9 million shares totaling $109.2 million under its stock
repurchase plans. The treasury stock activities reduced
common stockholders' equity by $101.0 million. During
1993, the Company obtained $262.0 million in additional
unsecured long-term borrowings to finance additions to
property and equipment. Quarterly cash dividends have
been paid on the Company's Class A and Class B Common
Stock since 1989. In January 1995, the Board of Directors
increased the annual dividend rate from $.52 to $.60 per
common share.
At December 31, 1994 and January 1, 1994, the Company
had outstanding $669.9 million and $704.0 million,
respectively, of long-term debt, principally borrowed from
insurance companies and other institutional lenders. Of
these amounts, $257.7 million and $289.1 million were
secured by real estate assets at the end of each
respective year. The Company has not experienced
difficulty to date in obtaining financing at satisfactory
terms.
Management believes that the financial resources
available to it, including proceeds from sale/leaseback
transactions, amounts available under existing and future
bank lines of credit, additional long-term financings and
internally generated funds, will be sufficient to meet
planned capital expansion and working capital requirements
for the foreseeable future, including debt and lease
servicing requirements. The Company may, however, use
additional sources of funds for such purposes, including
the issuance of debt or equity securities and leasing
rather than owning real estate and equipment.
Inflation
In recent years, the impact of inflation on the
Company's operating results has been moderate, reflecting
generally lower rates of inflation in the economy.
Management does not believe that the Company will be
adversely affected by any significant future inflation
because of the large number of Company-owned stores which
do not have contingent or volume-related rental
obligations. While inflation has not had, and the Company
does not expect it to have, a material impact upon
operating results, there is no assurance that the
Company's business will not be affected by inflation in
the future.
CONSOLIDATED STATEMENTS OF INCOME
Dollar amounts in thousands,
except per share data
1994 1993 1992
Net sales $2,981,359 $2,807,165 $2,649,860
Cost of goods sold 2,318,127 2,175,061 2,042,800
----------- ----------- -----------
663,232 632,104 607,060
Expenses:
Operating selling and
administrative 440,844 430,258 419,664
Depreciation and
amortization 88,592 77,099 63,216
Interest 53,715 44,627 36,130
----------- ----------- -----------
583,151 551,984 519,010
Income before income
taxes 80,081 80,120 88,050
Income taxes 31,300 34,300 34,400
----------- ----------- -----------
Net income $48,781 $45,820 $53,650
=========== =========== ===========
Net income per share
of Common Stock $1.73 $1.52 $1.79
See Notes to consolidated financial statements
CONSOLIDATED BALANCE SHEETS
Dollar amounts in thousands 1994 1993
ASSETS
Current Assets
Cash and cash equivalents $14,188 $61,921
Rebates and accounts receivable 25,596 20,838
Inventories 389,564 377,939
Prepaid expenses and deposits 17,258 19,634
Property and Equipment
Land 303,701 282,469
Buildings 619,056 582,775
Leasehold improvements 42,369 38,866
Fixtures and equipment 589,480 538,882
---------- ----------
1,554,606 1,442,992
Less allowances for
depreciation and amortization 364,741 284,363
---------- ----------
1,189,865 1,158,629
Other Assets 16,996 15,347
---------- ----------
$1,653,467 $1,654,308
========== ==========
LIABILITIES AND COMMON STOCKHOLDERS' EQUITY
Current Liabilities
Trade accounts payable $235,843 $185,225
Accrued sales and other taxes 44,379 38,763
Accrued payroll and related
benefits 84,083 73,467
Current maturities of long-term
debt 19,011 21,473
Current maturities of
Redeemable Preferred Stock 1,017 1,046
---------- ----------
Total Current Liabilities 384,333 319,974
Long-Term Debt, less current
maturities 699,882 704,014
Deferred Income Taxes 89,500 82,700
Redeemable Preferred Stock, less
current maturities 4,410 5,423
Common Stockholders' Equity
Convertible Class A Common Stock
(shares issued and outstanding,
12,140,317 in 1994 and 12,617,445
in 1993) 121 126
Class B Common Stock (shares Issued,
17,821,694 in 1994 and 17,344,566 in
1993) 178 173
Additional paid-in capital 285,592 285,482
Retained earnings 293,456 259,400
---------- ----------
579,347 545,181
Less cost of Common Stock in
the treasury (4,772,822 shares in
1994 and 95,718 shares in 1993) 104,005 2,984
---------- ----------
475,342 542,197
---------- ----------
$1,653,467 $1,654,308
========== ==========
See notes to consolidated financial statements
[Enlarge/Download Table]
CONSOLIDATED STATEMENTS OF COMMON STOCKHOLDERS' EQUITY
Class A Common Class B Common
Stock Stock Additional
Dollar amounts in thousands Number of Par Number of Par Paid-in Retained Treasury Total
except per share data Shares Value Shares Value Capital Earnings Stock
Balance at December 29,1991 14,160,430 $141 15,801,581 $158 $285,444 $188,643 $474,386
Net income for 1992 53,650 53,650
Conversion of shares from
Class A to Class B (757,298) (7) 757,298 7
Cash dividends $.44 per share (13,183) (13,183)
Other 536 536
---------- ---- ---------- ---- -------- -------- -------- --------
Balance at January 2, 1993 13,403,132 134 16,558,879 165 285,980 229,110 515,389
Net income for 1993 45,820 45,820
Conversion of shares from
Class A to Class B (785,687) (8) 785,687 8
Purchase of Class B Common
Stock for the treasury $(11,074) (11,074)
Shares sold to the Employee
Stock Profit Sharing Plan (212) 3,237 3,025
Shares sold under the
Employee Stock Purchase Plan (771) 4,853 4,082
Cash dividends $.52 per share (15,530) (15,530)
Other 485 485
---------- ---- ---------- ---- -------- -------- -------- --------
Balance at January 1, 1994 12,617,445 126 17,344,566 173 285,482 259,400 (2,984) 542,197
Net income for 1994 48,781 48,781
Conversion of shares from
Class A to Class B (477,128) (5) 477,128 5
Purchase of Class B Common
Stock for the treasury (109,239) (109,239)
Shares sold to the Employee
Stock Profit Sharing Plan 143 1,505 1,648
Shares sold under the
Employee Stock Purchase Plan (668) 6,713 6,045
Cash dividends $.52 per share (14,725) (14,725)
Other 635 635
---------- ---- ---------- ---- -------- -------- -------- --------
Balance at December 31, 1994 12,140,317 $121 17,821,694 $178 $285,592 $293,456 $(104,005) $475,342
========== ==== ========== ==== ======== ======== ========= ========
See notes to consolidated financial statements
CONSOLIDATED STATEMENTS OF CASH FLOWS
Dollar amounts in thousands 1994 1993 1992
Operating Activities
Net income $48,781 $45,820 $53,650
Adjustments to reconcile net income to
cash provided by operating activities:
Depreciation and amortization (including
amounts charged to cost of goods sold) 94,491 82,173 67,781
Deferred income taxes 10,500 15,400 16,000
Other 635 485 536
Changes in operating assets and liabilities:
Rebates and accounts receivable (4,758) (4,038) (1,726)
Inventories (11,625) (36,523) (50,989)
Prepaid expenses and deposits (1,324) (518) (10,161)
Trade accounts payable 50,618 1,119 3,723
Accrued sales and other taxes 5,616 6,625 1,296
Accrued payroll and related benefits 10,616 8,007 4,478
-------- -------- --------
Cash provided by operating activities 203,550 118,550 84,588
Investing Activities
Additions to property and equipment (146,676) (322,301) (287,989)
Sale/leaseback arrangements and other
property and equipment sales 20,949 159,137 3,920
Other (1,649) (1,258) (2,500)
-------- -------- --------
Cash used in investing activities (127,376) (164,422) (286,569)
Financing Activities
Additions to long-term debt 27,000 262,000 252,748
Payments on long-term debt (33,594) (149,197) (35,513)
Redemptions of Redeemable
Preferred Stock (1,042) (1,039) (939)
Purchases of Treasury Stock (109,239) (11,074)
Proceeds from sales of Treasury Stock 7,693 7,107
Payment of dividends (14,725) (15,530) (13,183)
-------- -------- --------
Cash provided by (used in)
financing activities (123,907) 92,267 203,113
Net increase (decrease) in cash and cash
equivalents (47,733) 46,395 1,132
Cash and cash equivalents at
beginning of year 61,921 15,526 14,394
-------- -------- --------
Cash and cash equivalents at end of year $14,188 $61,921 $15,526
======== ======== =======
See notes to consolidated financial statements
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A - Significant Accounting Policies
Principles of Consolidation
The consolidated financial statements include the accounts of Smith's Food &
Drug Centers, Inc. and its wholly-owned subsidiaries (The Company), after
the elimination of significant intercompany transactions and accounts. The
Company operates a regional supermarket and drug store chain in the
Intermountain, Southwestern, and Southern California regions of the United
States.
Definition of Accounting Period
The Company's fiscal year ends on the Saturday nearest to December 31.
Fiscal year operating results include 52 weeks for each year except 1992
which includes 53 weeks.
Cash and Cash Equivalents
Cash and cash equivalents consist of cash and short-term investments with
maturities less than three months. The amount reported in the balance sheet
for cash and cash equivalents approximates its fair value.
Inventories
Inventories are valued at the lower of cost or market. Approximately 95% of
inventories in 1994 and 1993 were valued using LIFO. Other inventories were
valued using the first-in, first-out method.
Property and Equipment
Property and equipment are stated at cost. Depreciation and amortization
are provided by the straight-line method based upon estimated useful lives.
Improvements to leased property are amortized over their estimated useful
lives or the remaining terms of the leases, whichever is shorter.
Pre-Operating and Closing Costs
Costs incurred in connection with the opening of new stores and distribution
facilities are expensed as incurred. The remaining net investment in stores
closed, less salvage value, is charged against earnings in the period of
closing and, for leased stores, a provision is made for the remaining lease
liability, net of expected sublease rental.
Interest Costs
Interest costs are expensed as incurred, except for interest costs which
have been capitalized as part of the cost of properties under development.
The Company's cash payments for interest (net of capitalized interest of
approximately $5.8 million in 1994, $14.5 million in 1993, and $8.8 million
in 1992) amounted to $54.0 million in 1994, $39.8 million in 1993, and $33.6
million in 1992.
Income Taxes
The Company determines its deferred tax assets and liabilities based on
differences between the financial reporting and tax basis of its assets and
liabilities using the tax rates that will be in effect when the differences
are expected to reverse. Deferred income taxes result primarily from
temporary differences arising from accrued insurance claims and using
different depreciation and amortization methods for book and tax purposes.
Net Income Per Share of Common Stock
Net income per share of Common Stock is computed by dividing the net income
by the weighted average number of shares of Common Stock outstanding of
28,176,907 in 1994, 30,238,811 in 1993, and 29,962,011 in 1992. In 1994 and
1993, the weighted average number of common shares includes common stock
equivalents in the form of stock options. In 1992, stock options were
excluded from the calculation. Stock options did not have a material
dilutive effect on the net income per share calculation in any period
reported.
Litigation
The Company is a party to certain legal actions arising out of the ordinary
course of its business. Management believes that none of these actions,
individually or in the aggregate, will have a material adverse effect on the
Company's results of operations or financial position.
Property and Equipment
The Company depreciates its buildings over 25 to 30 years and its fixtures
and equipment over a period of 2 to 9 years and amortizes its leasehold
improvements over their estimated useful lives or the life of the lease,
whichever is shorter. Property and equipment consists of the following:
Allowances for
Depreciation Net Current Year
Dollar amounts in and Book Depreciation
thousands Cost Amortization Value Amortization
1994
Land $303,701 $303,701
Buildings 619,056 $ 92,542 526,514 $18,334
Leasehold improvements 42,369 10,122 32,247 1,842
Fixtures and equipment 589,480 262,077 327,403 74,315
--------- --------- --------- ---------
$1,554,606 $364,741 $1,189,865 $94,491
========== ========= ========== ==========
1993
Land $282,469 $282,469
Buildings 582,775 $75,663 507,112 $17,902
Leasehold improvements 38,866 8,333 30,533 1,884
Fixtures and equipment 538,882 200,367 338,515 62,387
--------- -------- --------- ---------
$1,442,992 $284,363 $1,158,629 $82,173
========== ========= ========== ==========
NOTE C - Long-Term Debt
Long-term debt consists of the following:
Dollar amounts in thousands 1994 1993
Mortgage notes,collateralized by property and
equipment with a cost of $413.0 million in 1994
and $451.4 million in 1993,due through 2011 with
interest at an average rate of 9.73% in 1994 and
9.77% in 1993 $270,082 $301,740
Unsecured notes,due in 2002 through 2015 with
varying annual installments starting in 2000
which accrue interest at an average rate of
7.68% in 1994 and 1993 410,000 410,000
Revolving credit bank loans 27,000
Industrial revenue bonds,collateralized by property
and equipment with a cost of $11.6 million in 1994
and $21.0 million in 1993 due in 2000 through 2010
plus interest at an average rate of 7.47% in 1994
and 6.68% in 1993 6,597 8,847
Other 5,214 4,900
-------- --------
718,893 725,487
Less current maturities 19,011 21,473
-------- --------
$699,882 $704,014
======== ========
Interest rates on the revolving credit bank loans are generally lower than
the prime rate. The agreements are reviewed annually with the banks, at
which time the date each installment is due is generally extended one year.
At December 31, 1994, the Company had unused lines of credit related to
unsecured revolving credit bank loans of $53.0 million.
The Company's loan agreements contain provisions which require the Company
to maintain a specified level of consolidated net worth, fixed charge
coverage and ratio of debt to net worth.
Maturities of the Company's long-term debt for the five fiscal years
succeeding December 31, 1994 are approximately $19.0 million in 1995, $20.9
million in 1996, $22.1 million in 1997, $23.7 million in 1998 and $45.4
million in 1999.
The amounts classified as revolving credit bank loans approximate their fair
value. The fair value of the Company's long-term debt was estimated using
discounted cash flow analysis, based on the Company's current incremental
borrowing rates for similar types of debt arrangements.
NOTE D - Redeemable Preferred Stock
The Company has 85,000,000 shares of $.01 per share par value Preferred
Stock authorized. The Company has designated 34,524,579 of these shares as
Series I Preferred Stock, of which 16,281,777 shares and 19,406,694 shares
were issued and outstanding in 1994 and 1993, respectively. The Preferred
Stock has no dividend requirement.
All shares of the Company's Series I Preferred Stock are subject to
redemption at any time at the option of the Board of Directors, in such
numbers as the Board may determine, and at a redemption price of $.33 1/3
per share. The scheduled redemptions of the Company's Redeemable Preferred
Stock are approximately $1.0 million each year until all outstanding shares
are redeemed. Upon liquidation of the Company, each share of Series I
Preferred Stock is entitled to a liquidation preference of $.33 1/3, on a
pro rata basis with any other series of Preferred Stock, before any
distribution to the holders of Class A Common Stock or Class B Common Stock.
Each share of Series I Preferred Stock is entitled to ten votes. Redeemable
Series I Preferred Stock is stated at redemption value in the balance sheet.
The amount included in the balance sheet for Redeemable Preferred Stock
approximates its fair value.
NOTE E - Common Stockholders' Equity
The voting powers, preferences and relative rights of Class A Common Stock
and Class B Common Stock are identical in all respects, except that the
holders of Class A Common Stock have ten votes per share and the holders of
Class B Common Stock have one vote per share. Each share of Class A Common
Stock is convertible at any time at the option of the holder into one share
of Class B Common Stock. The Company's Certificate of Incorporation also
provides that each share of Class A Common Stock will be converted
automatically into one share of Class B Common Stock if at any time the
number of shares of Class A Common Stock issued and outstanding shall be
less than 2,910,885. Future sales or transfers of the Company's Class A
Common Stock are restricted to the Company or immediate family members of
the original Class A Common Stockholders unless first presented to the
Company for conversion into an equal number of Class B Common Stock shares.
The Class B Common Stock has no conversion rights. At December 31, 1994
there were 20,000,000 shares of $.01 per share par value Class A Common
Stock and 100,000,000 shares of $.01 per share par value Class B Common
Stock authorized.
NOTE F - Income Taxes
Income tax expense consists of the following:
Dollar amounts in thousands 1994 1993 1992
Current:
Federal $17,211 $15,715 $15,493
State 3,589 3,185 2,907
-------- -------- --------
20,800 18,900 18,400
Deferred:
Federal 9,247 13,012 13,819
State 1,253 2,388 2,181
-------- -------- --------
10,500 15,400 16,000
-------- -------- --------
$31,300 $34,300 $34,400
======== ======== ========
Income tax expense included a charge of $1.95 million in 1993 resulting from
applying the increased federal tax rate to deferred tax items. Cash
disbursements for income taxes were $21.7 million in 1994, $17.3 million in
1993, and $17.6 million in 1992.
The difference between income tax expense and the tax computed by applying
the statutory income tax rate to income before income taxes is as follows:
1994 1993 1992
Statutory federal income tax rate 35.0% 35.0% 34.0%
State income tax rate, net of
federal income tax effect 4.7 5.2 5.0
Effect of income tax rate
increase on deferred taxes 2.4
Other (.6) .2 .1
-------- -------- --------
39.1% 42.8% 39.1%
======== ======== ========
Deferred income taxes arise because of differences in the treatment of
income and expense items for financial reporting and income tax purposes.
The effect of temporary differences that give rise to deferred tax balances
are as follows:
Dollar amounts in thousands 1994 1993
Deferred tax liabilities:
Depreciation and amortization $98,186 $85,078
Other 11,935 7,203
-------- --------
110,121 92,281
Deferred tax assets:
Reserves (12,088) (11,243)
Rent (6,006)
Other (3,927) (3,495)
-------- --------
(22,021) (14,738)
-------- --------
88,100 77,543
Net current deferred tax assets 1,400 5,157
Net non-current deferred tax
liabilities $89,500 $82,700
======== ========
NOTE G - Fair Value of Financial Instruments
he carrying amounts and related fair values of the Company's financial
nstruments are as follows:
1994 1993
Dollar amounts in thousands Carrying Fair Carrying Fair
Amount Value Amount Value
Cash and cash equivalents $14,188 $14,188 $61,921 $61,921
Long-term debt 718,893 680,460 725,487 784,627
Redeemable Preferred Stock 5,427 5,427 6,469 6,469
The methods of determining the fair value of the Company's financial
instruments are disclosed in the respective notes to the consolidated
financial statements.
NOTE H - Leases and Commitments
The Company leases property and equipment under terms which include, in some
cases, renewal options, escalation clauses or contingent rentals which are
based on sales. Total rental expense for such leases amounted to the
following:
Dollar amounts in thousands 1994 1993 1992
Minimum rentals $39,852 $19,539 $18,956
Contingent rentals 293 281 161
-------- -------- --------
40,145 19,820 19,117
Less sublease rental income 5,953 5,506 4,906
-------- -------- --------
$34,192 $14,314 $14,211
======== ======== ========
At December 31, 1994, future minimum rental payments and sublease rentals
for all noncancellable leases with initial or remaining terms of one year or
more consisted of the following:
Minimum Less
Rental Sublease
Dollar amounts in thousands Payments Rentals Total
1995 $32,389 $7,334 $25,055
1996 46,948 6,825 40,123
1997 38,737 6,375 32,362
1998 42,273 6,247 36,026
1999 44,052 5,681 38,371
Thereafter 712,673 26,946 685,727
-------- -------- --------
$917,072 $59,408 $857,664
======== ======== ========
At December 31, 1994 the Company had contract commitments of approximately
$11.6 million for future construction.
NOTE I - Employee Stock Plans
In 1993 the Company established a stock profit sharing plan under which year
end employees who are compensated for more than 1,000 hours during the year
are participants. Eligible employees are allocated shares of the Company's
Class B Common Stock based on hours of service up to 2,080 hours.
Contributions are made at the sole discretion of the Company based on its
profitablility. The contribution expense was $1.6 million in 1994 and $3.0
million in 1993.
In 1993 the Company established a stock purchase plan which permits
employees to purchase shares of the Company's Class B Common Stock through
payroll deductions at 85% of fair market value at the time of purchase.
Employees purchased 309,553 shares and 180,950 shares from the Treasury
during 1994 and 1993, respectively.
The Company has a Stock Option Plan which authorizes the Compensation
Committee of the Board of Directors to grant options to key employees for
the purchase of Class B Common Stock. The aggregate number of shares
available for grant under the plan is equal to 10% of the number of shares
of Class B Common Stock authorized. However, the number of outstanding and
unexercised options shall not exceed 10% of the number of shares of Class A
and Class B Common Stock outstanding. The number of unoptioned shares of
Class B Common Stock available for grant was 973,419 shares and 1,489,129
shares at the end of 1994 and 1993, respectively. The options may be either
incentive stock options or non-qualified stock options. Stock options
granted to key employees and options outstanding are as follows:
Option Price Number of
per Share Shares
Balance at December 28, 1991 $19.00 938,000
Granted 19.00 198,500
Forfeited 19.00 (29,000)
-------- ---------
Balance at January 2, 1993 19.00 1,107,500
Granted 19.00 622,000
Forfeited 19.00 (232,000)
-------- ---------
Balance at January 1, 1994 19.00 1,497,500
Granted 19.00 81,000
Forfeited 19.00 (33,000)
-------- ---------
Balance at December 31, 1994 $19.00 1,545,500
======== =========
The options are exercisable as follows:
Number of Shares
Options exercisable in the future
1997 25,000
1999 507,000
2000 100,000
2001 212,000
2002 69,500
2003 561,000
2004 11,000
---------
1,485,500
Options currently exercisable 60,000
---------
1,545,500
=========
Compensation expense for the difference between the market value of the
options on the grant date and the grant price is recognized on a
straight-line basis over the life of the options. The amount charged to
operations in 1994, 1993 and 1992 was immaterial.
NOTE J - Pension Plans
Employees whose terms of employment are determined by negotiations with
recognized collective bargaining units are covered by their respective
multi-employer defined benefit pension plans to which the Company
contributes. The costs charged to operations for these plans amounted to
approximately $4.2 million in 1994, $3.3 million in 1993, and $2.3 million
in 1992. Other information for these multi-employer plans is not available
to the Company.
The Company maintains a defined benefit pension plan for all other permanent
employees which provides for normal retirement at age 65. Employees are
eligible to join when they complete at least one year of service and have
reached age 21. The benefits are based on years of service and stated
amounts associated with those years of service. The Company's funding
policy is to contribute annually the maximum amount deductible for federal
income tax purposes. Net pension cost includes the following components:
Dollar amounts in thousands 1994 1993 1992
Service cost - present value of
benefits earned during the period $2,326 $1,869 $1,619
Interest cost on projected
benefit obligation 1,725 1,350 1,079
Actual return on plan assets 237 (1,053) (339)
Net amortization and deferral (1,615) (304) (628)
--------- --------- ---------
$2,673 $1,862 $1,731
========= ========= =========
The following table presents the plan's funded status and amounts recognized
in the Company's consolidated balance sheets:
Dollar amounts in thousands 1994 1993
Actuarial present value of accumulated benefits
based on service rendered to date:
Vested $16,965 $14,623
Non-vested 3,438 3,750
------- -------
20,403 18,373
Plan assets at fair value (primarily in equity
and fixed income funds and real estate) 20,993 17,188
Projected benefit obligation less than (in
excess of) fair value of plan assets 590 (1,185)
Unrecognized net loss from past experience
different from that assumed and effects of
changes in assumptions 5,737 5,616
Prior service cost not yet recognized in net
periodic pension cost 160 188
Unrecognized net asset (1,141) (1,304)
------- -------
Net prepaid pension cost $5,346 $3,315
======= =======
The weighted average discount rate used to determine the actuarial present
value of the projected benefit obligation was 8.5% in 1994 and 7.75% in
1993. The expected long-term rate of return on plan assets was 8.5% in
1994, and 9.5% in 1993 and 1992.
The Company provides a 401(k) plan for virtually all employees. The plan is
entirely funded by employee contributions which are based on employee
compensation not to exceed certain limits.
Report of Ernst & Young LLP, Independent Auditors
Board of Directors and Stockholders
of Smith's Food & Drug Centers, Inc.
We have audited the accompanying consolidated balance sheets of
Smith's Food & Drug Centers, Inc. and subsidiaries as of December
31, 1994 and January 1, 1994, and the related consolidated
statements of income, common stockholders' equity, and cash flows
for each of the three fiscal years in the period ended December
31, 1994. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above
present fairly, in all material respects, the consolidated
financial position of Smith's Food & Drug Centers, Inc. and
subsidiaries at December 31, 1994 and January 1, 1994, and the
consolidated results of their operations and their cash flows for
each of the three fiscal years in the period ended December 31,
1994, in conformity with generally accepted accounting
principles.
ERNST & YOUNG LLP
Salt Lake City, Utah
January 24, 1995
Quarterly Financial Data
----------------------------------------------------------------------
Dollar amounts in thousands,
except per share data (unaudited)
----------------------------------------------------------------------
Fiscal 1994 First Second Third Fourth Year
Net sales $753,780 $748,328 $725,360 $753,891 $2,981,359
Gross profit 162,717 164,700 163,545 172,270 663,232
Net income 9,354 11,887 13,341 14,199 48,781
Net income per
common share .31 .41 .48 .53 1.73
NYSE price range
High 24 1/8 22 24 3/4 26 3/4
Low 20 1/8 18 1/8 18 1/2 22 5/8
Fiscal 1993
Net sales $688,239 $705,520 $686,747 $726,659 $2,807,165
Gross profit 160,350 162,538 151,226 157,990 632,104
Net income 14,007 13,999 7,911 9,903 45,820
Net income per
common share .46 .46 .26 .34 1.52
NYSE price range
High 37 1/4 33 1/4 26 1/2 22 1/2
Low 31 23 5/8 20 19
Fiscal 1992
Net sales $669,511 $640,096 $653,385 $686,868 $2,649,860
Gross profit 151,229 147,297 150,989 157,545 607,060
Net income 13,148 13,544 13,844 13,114 53,650
Net income per
common share 44 .45 .46 .44 1.79
NYSE price range
High 43 1/4 38 34 3/4 37 3/4
Low 33 3/8 27 7/8 25 3/4 32 3/4
The first quarter results of fiscal 1992 are for 14 weeks of operations
while all other quarters presented are for 13 weeks.
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FIVE YEAR SUMMARY OF SELECTED FINANCIAL AND OPERATING DATA
Dollar amounts in thousands, 1994 1993 1992 1991 1990
except per share data 52 Weeks 52 Weeks 53 Weeks 52 Weeks 52 Weeks
Income Statement Data
Net sales $2,981,359 $2,807,165 $2,649,860 $2,217,437 $2,031,373
Gross profit 663,232 632,104 607,060 493,589 442,318
Operating,, selling and
administrative expense 440,844 430,258 419,664 344,363 323,792
Depreciation and amortization
expense 88,592 77,099 63,216 45,510 38,217
Interest expense 53,715 44,627 36,130 30,319 25,595
Income before income taxes 80,081 80,120 88,050 73,397 54,714
Net income 48,781 45,820 53,650 45,097 34,314
Common Stock Data
Average number of common shares
outstanding 28,176,907 30,238,811 29,962,011 27,397,973 25,272,011
Net income per common share $ 1.73 $ 1.52 $ 1.79 $ 1.65 $ 1.36
Dividends per common share .52 .52 .44 .36 .28
Book value per common share 18.87 18.15 17.20 15.83 10.61
Balance Sheet Data
Net property and equipment $1,189,865 $1,158,629 $1,077,638 $ 861,350 $637,312
Total assets 1,653,467 1,654,308 1,486,085 1,196,689 891,716
Long-term debt, less current
maturities 699,882 704,014 592,311 375,632 326,190
Redeemable Preferred Stock, less
current maturities 4,410 5,423 6,462 7,401 8,448
Common stockholders' equity 475,342 542,197 515,389 474,386 268,158
Select Operating Data
Number of stores 137 129 119 109 95
Total store square footage 9,101,000 8,501,000 7,668,000 6,773,000 5,580,000
Number of employees 19,859 18,759 19,310 18,303 15,208
Dates Referenced Herein and Documents Incorporated by Reference
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