Document/Exhibit Description Pages Size
1: 10-K Annual Report 50± 234K
2: EX-2.1 Plan of Acquisition, Reorganization, Arrangement, 68± 305K
Liquidation or Succession
3: EX-10.11 Material Contract 8± 36K
4: EX-12.1 Statement re: Computation of Ratios 1 5K
5: EX-23.1 Consent of Experts or Counsel 1 5K
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For the fiscal year ended December 30, 1995 (fifty-two weeks)
Commission File Number: 001-10252
SMITH'S FOOD & DRUG CENTERS, INC.
(Exact name of registrant as specified in its charter)
Delaware 87-0258768
(State of incorporation) (I.R.S. Employer Identification No.)
1550 South Redwood Road, Salt Lake City, UT 84104
(Address of principal executive offices) (Zip Code)
(801) 974-1400
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act
Class B Common Stock, $.01 par value New York Stock Exchange
(Title of each class) (Name of each exchange on which registered)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
The aggregate market value of the voting stock held by non-affiliates of the
registrant, computed by reference to the last sale price of the Class B Common
Stock on March 25, 1996: $381,675,455
Number of shares outstanding of each class of common stock as of March 25,
1996:
Class A 11,366,532 Class B 13,705,191
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Company's Proxy Statement for its 1996 Annual Meeting of
Stockholders are incorporated by reference into Part III of this Form 10-K.
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Annual Report on Form 10-K or any
amendment to this Annual Report on Form 10-K. [ ]
TABLE OF CONTENTS
PART I 1
Item 1. Business 1
Item 2. Properties 11
Item 3. Legal Proceedings 12
Item 4. Submission of Matters to a Vote of
Security Holders 12
PART II 13
Item 5. Market for the Registrant's Common
Equity and Related Stockholder Matters 13
Item 6. Selected Financial Data 13
Item 7. Management's Discussion and Analysis of
Financial Condition and Results of
Operations 14
Item 8. Financial Statements and Supplementary Data 21
Item 9. Changes in and Disagreements With
Accountants on Accounting and Financial
Disclosure 21
PART III 21
Item 10. Directors and Executive Officers of the
Registrant 21
Item 11. Executive Compensation 22
Item 12. Security Ownership of Certain Beneficial
Owners and Management 22
Item 13. Certain Relationships and Related
Transactions 22
PART IV 22
Item 14. Exhibits, Financial Statement Schedules,
and Reports on Form 8-K 22
INDEX TO FINANCIAL STATEMENTS F-1
SIGNATURES S-1
INDEX TO EXHIBITS E-1
PART I
Item 1. Business
Smith's Food & Drug Centers, Inc. (the "Company") is a leading supermarket
company in the Intermountain and Southwestern regions of the United States,
operating 120 stores located in Utah (35), Arizona (30), Nevada (22), New
Mexico (19) and Idaho, Texas and Wyoming (collectively, 14). Substantially all
of the Company's stores offer one-stop shopping convenience through a food and
drug combination format which features a full-line supermarket with drug and
pharmacy departments and some or all of the following specialty departments:
delicatessens, hot prepared food sections, in-store bakeries, video rental
shops, floral shops, one-hour photo processing labs, full-service banking and
frozen yogurt shops. The Company's 114 food and drug combination stores
averaged approximately 63,000 square feet and $420,000 per week in sales volume
in fiscal 1995. The Company has recently opened four price impact warehouse
stores and also operates two conventional supermarkets.
The Company has substantially completed the sale, lease or closure of its
Southern California regional operations. The Company entered into agreements
to sell or lease 16 stores and related equipment and three non-operating
properties to various supermarket companies and others and has closed its
remaining 18 stores (the "California Divestiture"). Management determined that
because of the attractive growth prospects in the Company's other principal
markets and the competitive environment in Southern California, it would
redeploy Company resources from California into such other markets. See "_
California Divestiture." Except as otherwise stated, references to the number
of stores operated by the Company give effect to the California Divestiture.
The Company was founded in 1948 and reincorporated under Delaware law in
1989. The Company's Class B Common Stock is traded on the New York Stock
Exchange under the symbol "SFD".
Recent Developments
The Company and Cactus Acquisition, Inc., a Delaware corporation and
wholly owned subsidiary of the Company ("Acquisition"), entered into a
Recapitalization Agreement and Plan of Merger, dated as of January 29, 1996
(the "Recapitalization Agreement"), with Smitty's Supermarkets, Inc.
("Smitty's"), a regional supermarket operator with 28 supermarkets in the
Phoenix and Tucson areas, and The Yucaipa Companies ("Yucaipa"), a private
investment group specializing in the supermarket industry.
In the Recapitalization Agreement, the Company has agreed, subject to the
terms and conditions described therein to: (i) commence a tender offer (the
"Offer") to purchase 50% of the Company's outstanding Class A Common Stock, par
value $.01 per share ("Class A Common Stock"), and Class B Common Stock, par
value $.01 per share ("Class B Common Stock"; and, together with the Class A
Common Stock, the "Common Stock") (excluding shares issuable in the Merger
referred to below), for $36.00 in cash per share; and (ii) consummate the
merger of Smitty's with Acquisition, pursuant to which Smitty's will become a
wholly owned subsidiary of the Company and the stockholders of Smitty's will
receive 3,038,888 shares of Class B Common Stock of the Company (the "Merger").
The Merger will significantly enhance the Company's market position in Arizona.
Following the Merger, the Company will consolidate its Arizona operations with
those of Smitty's. See "_ Operating Strategy Following the Consummation of the
Transactions." It is anticipated that the Offer and the Merger will close
simultaneously, except in certain limited circumstances.
As part of the Recapitalization (as defined below) and Merger
(collectively, the "Transactions"), the Company intends to: (i) purchase 50%
of its outstanding Common Stock for approximately $451.4 million; (ii) repay
approximately $667.9 million of indebtedness of the Company and approximately
$101.9 million of indebtedness of Smitty's; (iii) purchase up to half of the
outstanding management stock options of the Company for approximately $13.7
million; and (iv) purchase approximately $1 million of its Series I Preferred
Stock, par value $.01 per share (the "Series I Preferred Stock"). In addition,
the Company will pay related debt refinancing premiums, accrued interest and
fees and expenses in connection with the Transactions.
As part of the Recapitalization, the Company will enter into a management
services agreement (the "Management Services Agreement") with Yucaipa and will
issue warrants to Yucaipa pursuant to a warrant agreement (the "Warrant
Agreement") to purchase shares of a new non-voting Class C Common Stock, par
value $.01 per share ("Class C Common Stock"), of the Company, representing 10%
of the aggregate common shares on a fully diluted basis, for an initial
exercise price of $50 per share, subject to certain conditions and exceptions.
Under the Management Services Agreement, Yucaipa will provide certain
management consulting services and Ronald W. Burkle, the managing general
partner of Yucaipa, will become Chief Executive Officer of the Company.
Mr. Burkle, along with another designee of Yucaipa, will be nominated to become
a member of the Company's Board of Directors.
To consummate the Transactions, the Company will require approximately
$1,432.7 million of financing to repay certain outstanding indebtedness of the
Company and Smitty's, purchase Common Stock in the Offer, purchase shares of
Series I Preferred Stock, purchase management stock options, and pay related
fees and expenses. The Company plans to obtain the necessary funds by (a)
borrowings of approximately $707.7 million aggregate principal amount under a
new senior credit facility (the "New Credit Facility"); (b) the issuance of up
to $250 million of new senior notes (the "New Senior Notes"); (c) the issuance
of up to $400 million of new senior subordinated notes (the "New Senior
Subordinated Notes"); and (d) the issuance of new cumulative redeemable
exchangeable preferred stock (the "New Preferred Stock") by the Company for
gross proceeds of $75 million. In addition, the Company will assume
approximately $43.2 million of existing indebtedness of Smitty's upon
consummation of the Merger.
The "Recapitalization" as defined in the Recapitalization Agreement refers
collectively to: (i) the execution, delivery and receipt of the proceeds under
the financing agreements to be entered into by the Company; (ii) the making and
consummation of the Offer; (iii) the execution and delivery of the Management
Services Agreement; (iv) the execution and delivery of, and the issuance of the
warrants provided for under, the Warrant Agreement; (v) the completion of
certain transactions contemplated by the Recapitalization Agreement regarding
the composition of the Company's Board of Directors, the election of Ronald
Burkle as Chief Executive Officer, the cash payment for a portion of, and the
reduction of the exercise price for a portion of, the Company's management
stock options and the amendment of the Company's deferred compensation
agreements; and (vi) the filing of the Amended and Restated Certificate of
Incorporation for the Company.
Principal Markets
The Company's stores are located predominantly in Utah, Arizona, Nevada
and New Mexico, which are among the fastest growing states in terms of
population and employment. According to the U.S. Bureau of the Census, the
population of those four states has increased at a compound annual growth rate
of 3.0% since 1990, compared to the national average of 1.1% over the same
period. According to the U.S. Bureau of Labor Statistics, employment in the
same four states has increased at a compound annual growth rate of 4.0% since
1990, compared to the national average of 1.3% over the same period. In
addition, management believes that operating in distinct markets in several
states provides advantages due to the differences in economic cycles,
demographics and competitive conditions among such markets.
The Company has achieved strong competitive positions in each of its
principal markets. The Company currently has leading market shares in Salt
Lake City (31%), Las Vegas (24%) and Albuquerque (23%) and, after giving effect
to the Merger, the Company will also have a leading market share in Phoenix
(24%). The Company believes its reputation for offering a broad product
selection and low pricing combined with quality customer service has created a
valuable franchise with strong name recognition and customer loyalty.
Store Formats
The Company operates three types of retail stores: (i) 114 food and drug
combination stores; (ii) four warehouse stores; and (iii) two conventional
supermarkets. The food and drug combination stores range in size from 30,000
to 88,000 square feet (with an average size of 63,000 square feet) and offer an
extensive line of supermarket, non-food and drug products. The Company's
typical food and drug combination store offers approximately 50,000 SKUs, in
comparison to approximately 20,000 SKUs offered at the average conventional
supermarket nationwide. All stores carry a full line of supermarket products,
including groceries, meat, poultry, produce, dairy products, bakery goods,
frozen foods and health and beauty aids. In addition, combination stores carry
a wide variety of general merchandise, including drugs, toys, hardware,
giftware and small appliances. Within each category of merchandise, the stores
offer multiple selections of nationally advertised brand name items. In
addition, the stores carry an extensive selection of private label merchandise,
which provides comparable quality products priced lower than national brands.
The Company also carries a variety of bulk merchandise and generic brand
products which enhance the Company's low price image. These stores feature
modern layouts with wide aisles and well-lighted spaces to facilitate
convenient shopping, a variety of specialty departments along the periphery and
centralized checkout facilities. The Company's four price impact warehouse
stores operating under the PriceRite Grocery Warehouse name, average 55,000
square feet in size, and are targeted to price-conscious consumers rather than
conventional supermarket consumers. The PriceRite stores offer lower prices,
fewer SKUs and fewer service departments than the Company's food and drug
combination stores and conventional stores. The Company's conventional stores
average 26,000 square feet in size and have the appearance of traditional
supermarkets.
Store Development and Expansion
The following table sets forth information concerning changes in the store
base of the Company over the last five years.
1991 1992 1993 1994 1995
Stores Opened (Net):
Intermountain and Southwest 5 1 2 2 15
California 9 9 8 6 2
Total Number of Stores (end of period):
Intermountain and Southwest 100 101 103 105 120
California 9 18 26 32 34
Not including California operations, approximately 80% of the Company's
stores have been opened or remodeled within the last seven years. Over the
past five fiscal years, the Company's capital expenditures for the construction
of new and remodeled stores (not including California operations) totaled
approximately $414.0 million. In addition, during the same period the Company
invested approximately $163.0 million in distribution, processing and other
support facilities (not including California operations).
The Company's real estate department locates, acquires and develops sites
for future stores. The Company's 48 years of operation have allowed it to
choose its store locations selectively as new residential areas have been
developed. The Company believes that many of its stores are in developed areas
where land values and the difficulties in locating suitable parcels would make
it difficult to replicate the Company's existing store base. The Company has
historically sought to purchase the best potential new store locations
available in any target market. If the Company cannot purchase the best
potential locations, however, it will consider leasing a location from its
owner or a local developer. As a result of this strategy, giving effect to the
California Divestiture, the Company owned 95 of its 120 stores, including the
underlying land with respect to 86 of such owned stores, as of December 30,
1995. See "Item 2. Properties." In order to maximize its future capital
expenditure resources, the Company intends to place a greater emphasis on
leasing new stores following the consummation of the Transactions.
Merchandising
The Company's merchandising strategy is to offer customers the ability to
fulfill a significant portion of their daily and weekly shopping needs at one
convenient location and to establish and promote its reputation as a low price
leader in the trade area of each of its stores. The cornerstones of this
strategy include:
Everyday Low Pricing. The Company offers its products on an everyday low
pricing ("EDLP") basis in all markets other than Phoenix and Tucson, where the
Company offers a combination of EDLP and promotional pricing. The Company
offers an EDLP program in most markets because the Company believes that it
generally allows for higher overall profitability than a promotional pricing
program. An EDLP program allows for more consistent prices over time than a
promotional program, which entails variable pricing and higher levels of demand
for sale products. As a result, EDLP simplifies inventory management and
lowers operating costs.
Quality Customer Service. The Company believes a key to its success is
its emphasis on quality customer service. The Company provides courteous and
efficient customer service by placing a high degree of emphasis on employee
training. Most stores have a customer service counter located near the store
entrance to answer questions and to assist customers in locating merchandise.
The Company also provides rapid in-store checkout services, aided by the use of
computerized scanning devices and the bagging of groceries at checkout. In
most locations, stores are open 24 hours each day.
Advertising and Promotion. The Company reinforces its low price image
through extensive television advertising and through print advertising in
newspapers and circulars. The Company divides its advertising budgets in a
similar manner across its markets, with approximately 80% committed to print
advertising and approximately 20% committed to radio and television
advertising. The Company also takes an active interest in the communities in
which its stores are located and maintains programs designed to contribute
funds, products and manpower to local charities and civic groups.
Specialty Departments. Each combination store provides certain specialty
departments designed to provide one-stop shopping convenience to customers and
to increase the frequency with which customers return to the store. The
specialty departments, which vary depending upon store size and location,
include delicatessens with prepared foods, full-service fresh fish and meat
departments, bakeries, dry cleaning drop-off facilities, U.S. Post Office
branches, pharmacies, video rental departments, take-out food counters, camera
and photo departments with on-site film processing, floral departments and
in-store banking provided by a regional or local bank.
Private Label Program. Through its private label program, the Company
offers in excess of one thousand items under the "Smith's," "Mountain Dairy,"
"Creek View" and other brand names. These products provide customers
with quality comparable to that of national brands but at lower prices.
Management believes that the Company's private label program is one of the most
successful programs in the industry. The Company's owned manufacturing and
processing facilities, including its milk and beverage plants, cultured dairy
products plant, ice cream processing plant and frozen dough plant, supply the
Company's stores with private label milk, milk products, fruit punches, sour
cream, yogurt, cottage cheese, chip dip products, ice cream and novelty items,
baked goods and other products and allow the Company to generate gross margins
on such private label items that are generally higher than on national brands.
Operations
The Company is divided into two major operating regions, the Intermountain
Region and the Southwest Region, which are segmented into eight geographic
districts. The Intermountain Region consists of stores in Utah, Idaho, Nevada
and Wyoming. The Southwest Region consists of stores in Arizona, New Mexico
and Texas. The districts are staffed with operational managers who are given
as much autonomy as possible while retaining the advantages of central control
over accounting, real estate, legal, data processing and other functions at the
Company's headquarters. This operational autonomy enables management to react
quickly to changes in local markets.
District and store managers are responsible for store operations, local
advertising formats, employee relations and development, customer relations,
community affairs and other functions relating to local operations. The
regional staff includes supervisors responsible for the meat, produce, bakery,
non-food, pharmacy, one-hour photo, deli and prepared foods departments, who
help each regional manager.
Purchasing, Distribution and Processing
The Company's purchasing activities are regionally centralized, with most
food products and all general merchandise being purchased in volume through
regional buyers supervised by headquarter's management. Certain specialized or
perishable products are purchased at regional warehouse levels.
The Company owns and operates one of the most modern and efficient
backstage operations in the industry. The Company's warehousing, distribution
and processing facilities, which comprise approximately 3,000,000 square feet,
have all been built, expanded or remodeled in the last five years. Central
distribution facilities in Salt Lake City and Layton, Utah supply products to
all stores in the Intermountain Region and distribute the majority of non-food
merchandise, pharmaceutical products and certain bulk products to stores in the
Southwest Region. An integrated distribution and processing center in
Tolleson, Arizona includes complete warehousing operations and a dairy
processing plant. The facility supplies products to all stores in the
Southwest Region and Las Vegas. The Company also operates two produce
warehouses, one in Ontario, California and the other in Albuquerque, New
Mexico. See "Item 2. Properties." Approximately 80% of products sold in 1995
were shipped through the Company's distribution network.
The Company transports food and merchandise from its distribution centers
primarily through a Company-owned fleet of tractors and trailers which
primarily serve nearby stores and through common carriers for stores located at
greater distances. As of December 30, 1995, the Company's owned fleet included
158 tractors and 406 trailers. The Company seeks to lower costs on shipments
by taking advantage of backhauling opportunities where available.
The Company's processing facilities located in Tolleson, Arizona and
Layton, Utah produce a variety of products under the Company's private label
for distribution to Company stores. The Company's dairy plants process a
variety of milk, milk products and fruit punches. The Company's automated
frozen dough plant produces frozen bakery goods for final baking at in-store
bakeries. The Company's cultured dairy products plant produces sour cream,
yogurt, cottage cheese and chip dip products. The Company's ice cream
processing plant supplies all stores with the Company's private label ice cream
and novelty items.
The Company believes that its central distribution facilities provide
several advantages. Management is able to control inventory levels throughout
its system in order to maximize the Company's in-stock position, while at the
same time optimizing the use of store shelf space. Costs of products are
reduced through centralized volume purchases and effective management of per-
item transportation costs. Stores are also served more efficiently through
central control of delivery schedules. By managing overall inventory levels,
the Company seeks to maximize inventory turns and minimize investments in
inventory. Management believes the Company's backstage operations will be able
to accommodate the increased volume resulting from the integration of the
Smitty's operations in Arizona following the Merger and to support anticipated
future growth.
Information Systems and Technology
The Company is currently supported by a full range of advanced management
systems. The Company has implemented store-level inventory and item management
systems developed on UNIX in-store processors using the Informix relational
database. This application includes direct store delivery store receiving,
which allows goods to be scanned electronically upon arrival at each store
receiving dock. This system also includes price verification and order entry
using hand-held personal computers. Store checkout is supported by NCR point-
of-sale scanning. The Company's stores are supported by pharmacy, video
rental, labor scheduling and time and attendance systems which help the Company
facilitate customer service while managing labor costs.
The Company's buying operations are supported by the AS/400-based E3
forecasting and purchasing system which uses statistical models of seasonality,
promotions and buying behavior to optimize inventory levels. The Company's
distribution centers operate utilizing leading software of the Dallas Systems
Company. The key components are the Distribution Center Management Control
System, which is used for all inventory processing, and the Distribution Center
Assignment Monitoring System (DCAMS), which is used for labor standards
management. To increase operating efficiency and decrease labor costs, the
DCAMS system transmits work assignments to lift drivers and order selectors
through a radio-frequency terminal. The Company is currently installing the
OMI purchasing and forecasting system which will be used for distribution
center replenishment. The installation is expected to be completed during
1996.
The Company's computer operations and applications development activities
were outsourced to Electronic Data Systems in 1992 under a ten-year outsourcing
agreement.
Competition
The supermarket industry is highly competitive and characterized by narrow
profit margins. The Company's competitors include national and regional
supermarket chains, independent and specialty grocers, drug and convenience
stores and the newer "alternative format" food stores, including warehouse club
stores, deep discount drug stores and "supercenters." The Company's
competitors continue to open new stores in the Company's existing markets. In
addition, new competitors have entered the Company's markets in the past and
could do so in the future. Supermarket chains generally compete on the basis
of price, location, quality of products, service, product variety and store
condition. The Company regularly monitors its competitors' prices and adjusts
its prices and marketing strategy as management deems appropriate in light of
existing conditions. Some of the Company's competitors have greater financial
resources than the Company and could use those resources to take steps which
could adversely affect the Company's competitive position. The Company's
ability to respond to competitive pressures following the consummation of the
Transactions could be adversely affected by its highly leveraged financial
condition.
The Company's principal supermarket competitors in the Salt Lake City
market are Albertson's, Ream's Food Stores, Harmons, Fred Meyer, and Dan's
Foods. In the Phoenix market, the Company's principal competitors include
Fry's, Bashas Markets, Safeway, ABCO, Smitty's, Albertson's, Mega Foods and,
prior to the Merger, Smitty's. In Albuquerque, the Company's principal
competitors are Furr's, Jewel Osco and Albertson's, and in Las Vegas, the
Company's main competitors are Lucky, Vons and Albertson's. The Company also
competes with various drug chains and other non-food operators in each of its
markets.
Employees and Labor Relations
The Company's policy is to train and develop its employees and promote
from within. The Company generally prefers to promote its own employees to
store manager positions. Management-level employees, including store
department managers, participate in incentive compensation programs tied to
profitability, and such compensation programs can represent a significant
percentage of such managers' total compensation. The Company believes that its
employee retention rate is high within the industry, especially at the
store-manager level and above.
Excluding California operations, as of December 30, 1995, the Company
employed approximately 16,000 persons, approximately 53% of whom were full-time
and 47% of whom were part-time. Approximately 50% of the Company's employees
are unionized. The Company's unionized employees work under 15 collective
bargaining agreements with local labor unions, primarily in Arizona, Nevada and
New Mexico, which typically have three-year terms. Management of the Company
believes that it will be able to renew existing agreements on terms
satisfactory to the Company. If it is unable to do so, however, there could be
a material adverse effect on the Company's operations. The wages and benefits
provided in the Company's collective bargaining agreements are substantially
similar to those of its supermarket competitors. The Company has not
experienced a work stoppage in the past ten years and considers its relations
with its employees and labor unions to be satisfactory.
Environmental Matters
The Company is subject to a variety of environmental laws, rules,
regulations and investigative or enforcement activities, as are other companies
in the same or similar business. The Company believes it is in substantial
compliance with such laws, rules and regulations. These laws, rules,
regulations and agency activities change from time to time, and such changes
may affect the ongoing business and operations of the Company. The Company,
from time to time, has or may in the future receive requests from environmental
regulatory authorities to provide information or to conduct investigation or
remediation activities. None of these requests is expected by management to
have a material adverse effect on the Company's business.
Governmental Regulation
The Company is subject to regulation by a variety of governmental
authorities, including federal, state and local agencies which regulate the
distribution and sale of alcoholic beverages, pharmaceuticals, milk and other
agricultural products, as well as various other food and drug items and also
regulate trade practices, advertising, building standards, labor, health,
safety and environmental matters. The Company from time to time receives
inquiries from state and federal regulatory authorities with respect to its
comparative advertising practices, pricing policies, employment practices and
other trade practices. None of these inquiries, individually or in the
aggregate, has resulted, or is expected by management to result, in any order,
judgment, fine or other action that has, or would have, a material adverse
effect on the business or financial position of the Company.
Trade Names, Service Marks and Trademarks
The Company uses a variety of trade names, service marks and trademarks in
its business including "Smith's," "Smith's Food & Drug Centers," "Mountain
Dairy," "Creek View," "PriceRite," and numerous others. While the Company
believes its trademarks are important to its business, except for "Smith's,"
"Smith's Food & Drug Centers" and "PriceRite," the Company does not believe any
of such trademarks are critical to its business.
California Divestiture
In late 1995, management determined that because of the attractive growth
prospects of the Company's principal markets and the competitive environment in
California, the Company would attempt to sell its California operations and
redeploy its resources into its non-California markets.
In December 1995, the Company entered into an agreement to sublease its
Riverside, California distribution center to Ralphs Grocery Company ("Ralphs"),
an affiliate of Yucaipa. On January 29, 1996, Ralphs commenced the sublease of
the Riverside distribution center and dairy plant for an initial term of 23
years. Ralphs also purchased certain equipment and inventory for an aggregate
purchase price (net of certain offsetting payments) of approximately $8.7
million. The sublease provides for a subrental of approximately $8.8 million
per annum, which is substantially the same amount as is payable by the Company
under the master lease, and requires Ralphs to fulfill substantially all of the
other monetary obligations of the Company under the master lease.
In January 1996, the Company entered into agreements to sell or lease 16
of its California stores and three non-operating properties. The Company has
substantially completed the sale of these stores, including related equipment
and inventory. Of the 16 sold stores, the Company has leased or subleased
eight operating stores and one non-operating store to Ralphs. The non-
operating store, located in Beaumont, California, is partially completed, and
has been subleased by Ralphs in "as is" condition. The subleases to Ralphs are
for terms, and at subrentals, that are substantially equivalent to the terms
of, and the rentals payable under, the master store leases (except that Ralphs
is not responsible for rent escalations in the master store lease of one of the
subleased stores). The remaining eight stores were sold to other supermarket
companies, four pursuant to outright sales, two pursuant to assignments of
underlying leases and two pursuant to subleases. The two subleases are subject
to early termination if the Company has not satisfied certain conditions within
18 months.
The Company has substantially completed the California Divestiture
transactions described above and, since December 30, 1995, has received net
cash proceeds of approximately $67.2 million (excluding store inventory). The
Company expects to receive approximately $10.6 million of additional cash
proceeds shortly following the consummation of the Transactions. As of March
16, 1996, all of the unsold California stores have been closed. In connection
with its decision to cease operations in California, the Company recorded pre-
tax restructuring charges of $140 million for the year ended December 30, 1995
to reflect the anticipated cost to the Company of the California Divestiture.
In connection with the California Divestiture, the Company entered into a
settlement agreement with the California Attorney General (the "CAG") relating
to the stores that were sold, leased, or closed. Under the settlement
agreement, the Company agreed that, for a period of five years, it would not
operate any of the closed stores as supermarkets without the permission of the
CAG. In addition, for the same five-year period, the Company agreed not to (i)
transfer the closed stores to third parties for supermarket use without the
CAG's approval, (ii) transfer such stores for non-supermarket use without prior
notice to the CAG, and (iii) sell any of such stores subject to restrictions as
to future supermarket use.
Description of Smitty's Business
Smitty's is a leading regional supermarket operator based in Phoenix,
Arizona which through its wholly owned subsidiary, Smitty's Super Valu,
operates 25 stores in the Phoenix area and three stores in the Tucson area.
Smitty's stores provide high quality fresh and prepared foods, groceries,
general merchandise, restaurants and ancillary services in a shopping
environment which emphasizes service, convenience, quality, selection and
customer satisfaction. Smitty's Super Valu's 35-year presence in the Phoenix
community has enabled it to locate its stores in strategic and convenient
sites. These locations, together with Smitty's unique super combination store
format, have provided it with high name recognition and customer loyalty.
Store Formats. Smitty's, which will become a subsidiary of the Company
upon consummation of the Merger, currently operates (i) 21 food and general
merchandise "super combination" stores which average 105,000 square feet in
size, (ii) six food and drug combination stores, which average 63,000 square
feet in size, and (iii) one conventional supermarket. Smitty's "super
combination" stores offer a full line of supermarket items, a broad range of
drug store and pharmaceutical items and an expanded selection of general
merchandise. These stores offer numerous services and specialty departments,
including fresh produce, full-service fresh meat, delicatessen, seafood,
bakery, prepared foods, fresh-cut flowers and video and photo departments,
pharmacies, food courts, restaurants and full-service bank branches, family
style hair salons and airline ticket counters. The food and drug combination
stores offer a full selection of products and services, including full-service
fresh meat, delicatessen, seafood and bakery departments, an expanded line of
health care and beauty aids, a restaurant, snack bar or food court and full-
service banking.
Purchasing and Distribution. Smitty's currently makes approximately 60%
of its annual purchases from the Arizona division of Fleming Foods West, Inc.
("Fleming"). Smitty's has reached an agreement in principle with Fleming to
amend the supply agreements to make Fleming a back-up supplier to Smitty's
through the end of 1997.
Employees and Labor Relations. As of January 14, 1996, Smitty's employed
4,600 people, of whom approximately 36% were full-time and approximately 64%
were part-time. Approximately 4,100 employees working in the stores,
constituting approximately 89% of Smitty's employees, are covered by a
collective bargaining agreement that expires in October 1997. Smitty's has not
experienced a work stoppage in the past ten years and considers its relations
with its employees and the unions to be satisfactory.
Frequent Shopper Program. Smitty's has developed a proprietary
information system that updates and maintains a comprehensive customer database
used for its unique frequent shopper program, Shopper's Passport. Customers
obtain a Shopper's Passport bar-coded scan readable card which entitles them to
receive a number of benefits, including discounts on certain purchases, check
cashing authorization and participation in special promotions held throughout
the calendar year. Management believes that as a result of this program,
Shopper's Passport has established one of the most comprehensive supermarket
customer data bases in the country. The Company is evaluating plans to utilize
the Shopper's Passport program in the Company's stores throughout the Phoenix
and Tucson markets following the Merger.
Trade Names, Service Marks and Trademarks. Smitty's uses a variety of
trade names, service marks and trademarks. Except for "Smitty's" and
"Shopper's Passport," the Company does not believe any of such tradenames,
service marks or trademarks is material to Smitty's business.
Operating Strategy Following Consummation of the Transactions
Management, in conjunction with Yucaipa, has developed a strategic plan
designed to: (i) expand operations in existing and adjacent markets,
(ii) realize operating synergies and cost savings resulting from the Merger,
(iii) improve working capital management, (iv) grow its recently introduced
price impact warehouse stores and (v) dispose of remaining California real
estate following consummation of the Transactions.
Expand Operations in Existing and Adjacent Markets. Management believes
that there are significant opportunities to increase the Company's sales and
gain efficiencies in its existing markets through new store openings and store
remodels. From 1991 through 1994, management primarily focused on the Southern
California market, opening a net of 32 new stores in Southern California compa-
red to a net of 10 new stores in its other markets. In 1995, the Company opened
19 new stores, only two of which were located in California. In an effort to
more fully realize its market potential in its non-California markets, in 1995
the Company began opening smaller combination stores (54,000 to 60,000 square
feet) in existing markets as part of a "fill-in" strategy. By pursuing a growth
strategy which emphasizes opening new stores within its existing and adjacent
markets, the Company believes it can increase its market share and improve its
distribution and other efficiencies, while taking advantage of such markets'
favorable growth prospects.
Realize Operating Synergies and Cost Savings Resulting from the Merger.
Management believes that approximately $25 million of net annual cost savings
are achievable over a three-year period following the Merger. The majority of
such cost savings opportunities relate to its Arizona operations and are
believed to be achievable (on an annualized basis) by the end of the first full
year of operations following the Merger. It is anticipated that approximately
$17 million of capital expenditures and approximately $10 million of other
expenses will be required to integrate the Arizona operations and realize
such cost savings. The estimates of potential cost savings resulting from
the Merger contained in this report are forward looking statements that
involve risks and inherent uncertainties that could cause actual net annual
cost savings to differ materially from those projected. See "_Ability to
Achieve Anticipated Cost Savings" below. In connection with the Transactions,
the Company and Smitty's are evaluating the format mix of the combined
Arizona store base and are assessing the possibility of modifying the
formats of certain stores.
Improve Working Capital Management. Management believes that the Company
can improve its working capital management. Under Yucaipa's management, other
companies have achieved working capital improvements; however, there can be no
assurance that similar improvements can be achieved by the Company.
Grow Recently Introduced Price Impact Warehouse Format. The Company
recently developed a price impact warehouse store format and during 1995 opened
four of these stores in the Las Vegas area operating under the name "PriceRite
Grocery Warehouse." Management believes that a number of the Company's markets
are underserved by price impact warehouse stores and that there are substantial
opportunities for expansion of the Company's PriceRite format through the
conversion of existing stores and the opening of new stores. Yucaipa, through
its management of other supermarket companies, has extensive experience in
expanding and profitably operating price impact warehouse formats.
Dispose of Remaining California Real Estate. Following the consummation
of the Transactions, management, in conjunction with Yucaipa, anticipates that
it will pursue a strategy to dispose of certain real estate assets in
California, including leased and owned stores, non-operating, and excess land.
The Company would use the net cash proceeds from the sale of these assets to
either reinvest in the Company's business or reduce indebtedness incurred in
connection with the Transactions. At December 30, 1995, the aggregate book
value of such assets was approximately $260 million. If this strategy is
adopted, as anticipated, the Company would record a charge to earnings, which
could be substantial, to reflect the difference between the anticipated cash
proceeds from the accelerated dispositions and the Company's existing book
values and carrying costs for such assets.
Ability to Achieve Anticipated Cost Savings
Management of the Company has estimated that approximately $25 million of
annualized net cost savings (as compared to such costs for the pro forma
combined fiscal year ended December 30, 1995) can be achieved over a three-year
period as a result of integrating the Arizona operations of the Company and
Smitty's. These estimates of potential cost savings are forward looking
statements that are inherently uncertain. Actual cost savings, if any, could
differ materially from those projected. All of these forward looking
statements are based on estimates and assumptions made by management of the
Company, which although believed to be reasonable, are inherently uncertain and
difficult to predict; therefore, undue reliance should not be placed upon such
estimates. There can be no assurance that the savings anticipated in these
forward looking statements will be achieved. The following important factors,
among others, could cause the Company not to achieve the cost savings
contemplated herein or otherwise cause the Company's results of operations to
be adversely affected in future periods: (i) continued or increased
competitive pressures from existing and new competitors and new entrants,
including price-cutting strategies; (ii) unanticipated costs related to the
Recapitalization and Merger and the operations of the Company and Smitty's;
(iii) loss or retirement of key members of management or the termination of the
Management Services Agreement with Yucaipa; (iv) inability to negotiate more
favorable terms with suppliers or to improve working capital management; (v)
increases in interest rates or the Company's cost of borrowing or a default
under any material debt agreements; (vi) inability to develop new stores in
advantageous locations or to successfully convert existing stores; (vii)
prolonged labor disruption; (viii) deterioration in general or regional
economic conditions; (ix) adverse state or federal legislation or regulation
that increases the costs of compliance, or adverse findings by a regulator with
respect to existing operations; (x) loss of customers as a result of the
conversion of store formats; (xi) adverse determinations in connection with
pending or future litigations or other material claims against the Company;
(xii) inability to achieve future sales levels and other operating results that
support the cost savings, and (xiii) the unavailability of funds for capital
expenditures. Many of such factors are beyond the control of the Company. In
addition, there can be no assurance that unforeseen costs and expenses or other
factors will not offset the projected cost savings in whole or in part.
Item 2. Properties
As of December 30, 1995, giving effect to the California Divestiture, the
Company would have owned 95 of its 120 operating stores, including the
underlying land with respect to 86 of such owned stores. The Company's stores
are located throughout a seven-state area as follows:
State Stores Owned Stores Leased Total
Arizona 27 3 30
Utah 30 5 35
Nevada 12 10 22
New Mexico 15 4 19
Idaho 4 1 5
Wyoming 3 2 5
Texas 4 0 4
-- -- ---
Total 95 25 120
== == ===
The Company leases or subleases 25 of its operating stores from third
parties under leases expiring between 1997 and 2023. Nine of the Company-owned
stores are located on property which is ground-leased from third parties under
leases expiring between 2007 and 2045. In most cases, such building and ground
leases are subject to customary renewal options.
The Company owns a 1,180,000 square-foot distribution and dairy processing
center in Tolleson, Arizona, 573,000 square feet of grocery warehousing
facilities and 348,000 square feet of processing plants in Layton, Utah and a
226,000 square foot non-food warehouse in Salt Lake City, Utah. The Company
also leases a 40,000 square-foot produce and forward-purchasing warehouse in
Albuquerque, New Mexico, a 408,000 square-foot non foods warehouse in Salt Lake
City, Utah and a 205,000 square-foot produce warehouse in Ontario, California,
under leases expiring in 1997, 1997 and 1999, respectively.
The Company's corporate offices, data processing and records storage
facilities are located in over 100,000 square feet of office and warehouse
space owned by the Company in Salt Lake City, Utah.
Item 3. Legal Proceedings
The Company, in the ordinary course of its business, is party to various
legal actions. Management believes these are routine in nature and incidental
to the operations of the Company. Management believes that the outcome of any
proceedings to which the Company is currently a party will not, individually or
in the aggregate, have a material adverse effect on the operations or financial
condition of the Company.
Item 4. Submission of Matters to a Vote of Security Holders
There were no matters submitted to a vote of security holders during the
fourth quarter of fiscal 1995.
PART II
Item 5. Market for the Registrant's Common Equity and Related Stockholder
Matters
The Company's Class B Common Stock is listed on the New York Stock
Exchange under the symbol "SFD". The following table shows the high and low
sales prices per share for all quarters of fiscal 1994 and 1995:
High Low
------- -------
Fiscal 1994
First Quarter $24 1/8 $20 1/8
Second Quarter 22 18 1/8
Third Quarter 24 3/4 18 1/2
Fourth Quarter 26 3/4 22 5/8
Fiscal 1995
First Quarter $27 5/8 $23
Second Quarter 24 19 1/4
Third Quarter 20 1/4 18 1/8
Fourth Quarter 27 3/4 19 3/8
As of March 25, 1996, there were 236 Class A Common Stockholders and 1,129
Class B Common Stockholders of record. There are numerous stockholders who
hold their Class B Common Stock in the "street name" of their various stock
brokerage houses.
Cash dividends of $.15 per share of Class A Common Stock and Class B
Common Stock were paid in each of the four quarters of fiscal 1995, totaling
$.60 per common share for fiscal 1995. Cash dividends of $.13 per share of
Class A Common Stock and Class B Common Stock were paid in each of the previous
quarters of fiscal 1994, totaling $.52 per common share for fiscal 1994. The
Company paid a quarterly cash dividend of $.15 per common share for the first
quarter of fiscal 1996. However, as described under "Item 7. Management's
Discussion and Analysis of Financial Condition and Results of
Operation_Liquidity and Capital Resources," the Company intends to discontinue
the payment of cash dividends on the Common Stock following the consummation of
the Transactions and the payment of future dividends will be severely
restricted by the terms of the financing agreements entered into by the Company
in connection with the Transactions.
Item 6. Selected Financial Data
The following table sets forth selected consolidated historical financial
and other data of the Company for the five fiscal years ended December 30,
1995, which have been derived from the financial statements of the Company
audited by Ernst & Young LLP, independent auditors. The following information
should be read in conjunction with the historical consolidated financial
statements of the Company and related notes thereto included elsewhere herein.
[Enlarge/Download Table]
52 Weeks 53 Weeks 52 Weeks 52 Weeks 52 Weeks
Ended Ended Ended Ended Ended
December 28, January 2, January 1, December 31, December 30,
1991 1993 1994 1994 1995
------------ ---------- ----------- ------------ ------------
(dollars in millions, except per share data)
Operating Data:
Net sales $ 2,217.4 $ 2,649.9 $ 2,807.2 $ 2,981.4 $ 3,083.7
Gross profit 498.6 611.6 637.2 669.1 697.0
Operating, selling and
administrative expenses 344.4 419.7 430.3 440.8 461.4
Depreciation and
amortization 50.5 67.8 82.2 94.5 105.0
Interest expense 30.3 36.1 44.6 53.7 60.5
Restructuring charges(a) - - - - 140.0
Net income (loss) 45.1 53.7 45.8 48.8 (40.5)
Net income (loss) per
common share $ 1.65 $ 1.79 $ 1.52 $ 1.73 $ (1.62)
Weighted average common
shares outstanding 27,397,973 29,962,011 30,238,811 28,176,907 25,030,882
Balance Sheet Data
(end of period):
Working capital $ 30.7 $ 91.2 $ 160.4 $ 62.3 $ 162.7
Total assets 1,196.7 1,486.1 1,654.3 1,653.5 1,686.2
Total debt(b) 395.4 612.7 725.5 718.9 746.2
Redeemable preferred stock 8.5 7.5 6.5 5.4 4.3
Total stockholders'equity $ 474.4 $ 515.4 $ 542.2 $ 475.3 $ 416.7
Other Data:
Stores open at end of 109 119 129 137 154
period(c)
Capital expenditures $ 281.6 $ 208.0 $ 322.3 $ 146.7 $ 149.0
Ratio of earnings to
fixed charges(d) 3.02x 3.06x 2.55x 2.18x 1.92x
_____________________
(a) Reflects charges in connection with the California
Divestiture. See Note K to Notes to Consolidated Financial
Statements of the Company included elsewhere herein.
(b) Total debt includes long-term debt and current maturities of
long-term debt.
(c) After giving effect to the California Divestiture, the
Company will operate 120 stores. See "Item 1. Business."
(d) For purposes of computing the ratio of earnings to fixed
charges, "earnings" consist of earnings before income taxes,
restructuring charges and fixed charges. "Fixed charges"
consist of interest expense, amortization of deferred debt
issuance costs and one-third of rental expense (the portion
deemed representative of the interest factor). For the five-
year period ended December 30, 1995, the Company has not paid
any preferred stock dividends.
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Overview
Due to the Transactions and the California Divestiture, the Company
believes that its future operating results may not be directly comparable to
its historical operating results. Certain factors which are expected to affect
the future operating results of the Company (or their comparability to prior
periods) are discussed below.
California Divestiture. The Company has historically focused on expansion
into high growth markets, which led to its entrance into Southern California in
1991. During the period from 1991 through 1995, the Company opened 34 stores
in Southern California and a 1,100,000 square foot distribution center and
dairy plant in Riverside, California. Management determined that because of
the attractive growth prospects in the Company's other principal markets and
the competitive environment in Southern California, it would redeploy Company
resources from California into such other markets. In December 1995 the
Company executed a sublease with Ralphs pursuant to which Ralphs agreed to
sublease the Riverside distribution center and dairy plant for the remaining 23-
year term of the Company's lease. Ralphs also agreed to purchase certain
related equipment and inventory. The sublease term commenced and the related
purchases were consummated on January 29, 1996. In January 1996, the Company
entered into agreements to sell or lease 16 of its California stores and
related equipment and three non-operating properties to various supermarket
companies (including Ralphs) and others and indicated that the remaining 18
stores would be closed as soon as practicable. Of the stores being sold or
leased, four stores owned by the Company are being sold outright, two store
leases are being assigned, three stores owned by the Company are being leased
and seven leased stores are being subleased. Since December 30, 1995, the
Company has received net cash proceeds of approximately $67.2 million from the
store, equipment and property sales and expects to receive an additional
approximately $10.6 million shortly after the consummation of the Transactions.
As of March 16, 1996, all of the California stores have been closed. In
connection with its decision to cease operations in California, the Company
recorded pre-tax restructuring charges of $140 million for the year ended
December 30, 1995 to reflect the anticipated cost to the Company of the
California Divestiture. See Note K of the Notes to Consolidated Financial
Statements of the Company.
Certain information pertaining to the Company's California operations is
summarized below:
[Enlarge/Download Table]
52 Weeks 53 Weeks 52 Weeks 52 Weeks 52 Weeks
Ended Ended Ended Ended Ended
December 28, January 2, January 1, December 31, December 30,
1991 1993 1994 1994 1995
------------ ---------- ---------- ----------- ------------
(dollars in millions)
California stores at
end of period 9 18 26 32 34
Net sales $ 35.9 $320.4 $472.8 $652.9 $674.6
Capital expenditures:
Stores 118.4 160.0 136.1 53.0 23.4
Backstage facilities 1.1 33.8 80.6 2.7 1.3
------ ------ ------ ------ ------
Total capital
expenditures $119.5 $193.8 $216.7 $ 55.7 $ 24.7
====== ====== ====== ====== ======
Remaining California Real Estate. After completion of the California
Divestiture, the Company will continue to own real estate assets in California
having an aggregate book value at December 30, 1995 of approximately $260
million. These assets include the stores leased or subleased as part of the
California Divestiture (having an aggregate book value at December 30, 1995 of
$42.5 million), the closed stores (aggregate book value_$115.3 million) and
certain non-operating stores and other excess real estate (aggregate book
value_$102.2 million). These properties have annual carrying costs of
approximately $7 million (excluding depreciation and amortization).
Management's present policy is to own and manage its real estate assets,
including those in California, in order to maximize their long-term values,
and, as a result, the Company maintains a fully staffed real estate,
construction and property management capability. The Company believes that
there are several viable strategies for maximizing the value of its California
real estate assets over the next five years and that the implementation of
these policies would not have any material negative impact on future earnings.
Following the consummation of the Transactions, management, in conjunction with
Yucaipa, anticipates that it will pursue a strategy to dispose of certain real
estate assets in California on an accelerated basis, including leased stores,
closed stores and excess land. The Company would use the net cash proceeds
from the sales of these assets to either reinvest in the Company's business or
reduce indebtedness incurred in connection with the Transactions. If this
strategy is adopted, as anticipated, the Company would record a charge to
earnings, which could be substantial, to reflect the difference between the
anticipated cash proceeds from the accelerated dispositions and the Company's
existing book values and carrying costs for such assets. This charge will
cause a substantial decrease in the Company's earnings for such period and net
worth, but is not otherwise anticipated to adversely affect the Company's
liquidity or ongoing results of operations.
Debt Refinancing and Recapitalization Charges. In connection with the
anticipated consummation of the Transactions at May 1, 1996, the Company will
refinance approximately $628.2 million of its existing mortgage notes and
unsecured indebtedness as well as approximately $39.7 million of its revolving
credit borrowings. The Company will also refinance approximately $101.9
million of existing indebtedness of Smitty's (assuming a 100% tender of the
existing Senior Subordinated Notes due 2004 of Smitty's Super Valu, Inc. (the
"Smitty's Notes") and the Senior Discount Debentures due 2006 of Smitty's (the
"Smitty's Debentures")). In connection with such debt refinancings, the
Company will pay make-whole and other premiums estimated at approximately $97.2
million. These refinancing premiums, together with approximately $11.7 million
of debt issuance costs, will be written off upon the consummation of the
Transactions and reflected as an extraordinary charge for the quarter in which
the Transactions are consummated. It is estimated that this charge, net of
taxes, will be approximately $66.4 million. The Company will also record
approximately $12.5 million of pre-tax compensation expense in connection with
the purchase of certain management stock options as part of the
Recapitalization.
Integration of Arizona Operations. Following the Merger, management of
the Company has estimated that approximately $25 million of net annual cost
savings (as compared to costs for the pro forma combined fiscal year ended
December 30, 1995) are achievable by the end of the third year of combined
operations. Management believes that approximately $17 million in Merger-
related capital expenditures and approximately $10.0 million of other expenses
will be required to integrate Arizona operations and realize such cost savings.
Management anticipates that a charge related to such costs will be recorded in
the quarter in which the Transactions are consummated.
Purchase Accounting. The Merger will be accounted for as a purchase of
Smitty's by the Company. As a result, the assets and liabilities of Smitty's
will be recorded at their estimated fair value as of the date the Merger is
consummated. The purchase price for Smitty's will be determined by reference
to the trading price of the Company's Class B Common Stock following the
consummation of the Merger. The purchase price in excess of the fair value of
Smitty's assets will be recorded as goodwill and amortized over a 40-year
period. The actual purchase accounting adjustments will be determined
following the Merger.
Results of Operations
The Company's fiscal year ends on the Saturday closest to December 31.
The following table sets forth the selected historical operating results of the
Company for the three fiscal years ended December 30, 1995:
[Enlarge/Download Table]
As a Percentage of Sales
------------------------------------
52 Weeks 52 Weeks 52 Weeks 52 Weeks 52 Weeks 52 Weeks
Ended Ended Ended Ended Ended Ended
January 1, December 31, December 30, January 1, December 31, December 30,
1994 1994 1995 1994 1994 1995
---------- ------------ ------------ ---------- ------------ ------------
(dollars in millions)
Net sales $2,807.2 $2,981.4 $3,083.7 100.0% 100.0% 100.0%
Gross profit 637.2 669.1 697.0 22.7% 22.4% 22.6%
Operating, selling and
administrative expenses 430.3 440.8 461.4 15.3% 14.8% 15.0%
Depreciation and
amortization 82.2 94.5 105.0 2.9% 3.2% 3.4%
Operating income 124.7 133.8 130.7 4.4% 4.5% 4.2%
Interest expense 44.6 53.7 60.5 1.6% 1.8% 2.0%
Restructuring charges - - 140.0 -% -% 4.5%
Income taxes (benefit) 34.3 31.3 (29.3) 1.2% 1.1% (1.0)%
Net income (loss) 45.8 48.8 (40.5) 1.6% 1.6% (1.3)%
Comparison of Results of Operations for the 52 weeks ended December 30, 1995
with Results of Operations for the 52 weeks ended December 31, 1994
Net Sales. Net sales increased $102.3 million, or 3.4%, from $2,981.4
million in 1994 to $3,083.7 million in 1995. The sales increase in 1995 was
attributable to a net increase of 17 stores as of the end of 1995, offset in
part by a 3.4% decrease in same store sales. As adjusted to exclude the
Company's California stores, net sales increased $80.7 million, or 3.5%, from
$2,328.5 million in 1994 to $2,409.2 million in 1995. As adjusted to exclude
the Company's California stores, same store sales decreased 3.2% in 1995,
caused primarily by the Company's discontinuance of its "ad match" program in
the Phoenix and Tucson markets and new stores opened by competitors in the
Company's markets.
Gross Profit. Gross profit increased $27.9 million, or 4.2%, from $669.1
million in 1994 to $697.0 million in 1995. Gross margins during 1995 and 1994
were 22.6% and 22.4%, respectively. The increase in 1995 is due primarily to
less aggressive promotional activity in the Phoenix and Tucson markets
following the discontinuance of the Company's "ad match" program, reduced
charges for inventory shrinkage and improved competitive conditions in Utah,
which were partially offset by the increase in the LIFO charge and increased
new store openings. The pre-tax LIFO charge was $4.0 million in 1995 compared
to $2.5 million in 1994. Newly opened stores apply pressure on gross margins
until the stores become established in their respective markets. The Company
opened 19 new stores during 1995 (including two in California) compared to
eight stores in 1994 (including six in California).
Operating, Selling and Administrative Expenses. Operating, selling and
administrative expenses ("OS&A") increased $20.6 million, or 4.7%, from $440.8
million in 1994 to $461.4 million in 1995. As a percent of net sales, OS&A
increased from 14.8% in 1994 to 15.0% in 1995. The increase was caused
principally by the increase in new store opening costs compared to the prior
year. The decrease in same store sales also contributed to the increase of
OS&A as a percentage of net sales.
Depreciation and Amortization Expenses. Depreciation and amortization
expenses increased by $10.5 million, or 11.1%, from $94.5 million in 1994 to
$105.0 million in 1995, primarily due to the addition of new combination stores
and equipment replacements in remodeled stores.
Interest Expense. Interest expense increased $6.8 million from $53.7
million in 1994 to $60.5 million in 1995 primarily as a result of net increases
in the average debt amounts for each period.
Restructuring Charges. As a result of the California Divestiture, the
Company recorded $140 million of pre-tax restructuring charges to reflect the
estimated costs associated with the sale, lease or closure of its Southern
California stores and the Riverside distribution center. See Note K of the
Notes to Consolidated Financial Statements of the Company included elsewhere
herein.
Income Taxes. The Company recorded a tax benefit of $29.3 million in 1995
compared to an expense of $31.3 million in 1994. The benefit recorded in 1995
reflects an adjustment (benefit) of $53.4 million of the Company's deferred
taxes as a result of losses incurred in connection with the California
Divestiture.
Net Income (Loss). Income before restructuring charges decreased by $5.3
million, or 10.9%, from $48.8 million in 1994 to $43.5 million in 1995. Income
per common share before restructuring charges decreased 0.6% from $1.73 in 1994
to $1.72 in 1995. Primarily as a result of the restructuring charges, the
Company recorded a net loss of $40.5 million for 1995 ($1.62 per share)
compared to net income of $48.8 million in 1994 ($1.73 per share). The
weighted average number of common shares outstanding was 25,030,882 in 1995 and
28,176,907 in 1994.
Comparison of Results of Operations for the 52 weeks ended December 31, 1994
with Results of Operations for the 52 weeks ended January 1, 1994
Net Sales. Net sales increased $174.2 million, or 6.2%, from $2,807.2
million in 1993 to $2,981.4 million in 1994. The sales increase in 1994 was
attributable to a net increase of eight stores as of the end of 1994, offset in
part by a 2.3% decrease in same store sales. As adjusted to exclude the
Company's California stores, net sales decreased $5.9 million, or 0.3%, from
$2,334.4 million in 1993 to $2,328.5 million in 1994. As adjusted to exclude
the Company's California stores, same store sales decreased 1.3% in 1994. The
decrease in same store sales (excluding California) in 1994 was caused
primarily by competitive new store openings in the Company's principal market
areas and increased overall price competition in Utah.
Gross Profit. Gross profit increased $31.9 million, or 5.0%, from $637.2
million in 1993 to $669.1 million in 1994. Gross margins during 1994 and 1993
were 22.4% and 22.7%, respectively. The decrease in gross margin in 1994 was
caused primarily by the Company's aggressive Utah pricing program which
commenced in the second half of 1993 and continued through most of 1994. 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. The Company
opened eight new stores during 1994 (including six in California) compared to
ten new stores during 1993 (including eight in California).
Operating, Selling and Administrative Expenses. OS&A increased $10.5
million, or 2.4%, from $430.3 million in 1993 to $440.8 million in 1994. As a
percent of net sales, OS&A decreased from 15.3% in 1993 to 14.8% in 1994. The
decrease in 1994, resulting primarily from the Company's program to reduce
operating costs, was somewhat offset by the higher operating and labor costs
associated with the expansion into Southern California.
Depreciation and Amortization Expenses. Depreciation and amortization
expenses increased by $12.3 million, or 15.0%, from $82.2 million in 1993 to
$94.5 million in 1994, due to the addition of new food and drug combination
stores and distribution and processing facilities.
Interest Expense. Interest expense increased $9.1 million from $44.6
million in 1993 to $53.7 million in 1994 as a result of net increases in the
average debt amounts for each period.
Income Taxes. Income taxes as a percent of income before income taxes
were 39.1% in 1994 and 42.8% in 1993. 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
$0.09 per common share. This reduction consisted of $0.8 million, or $0.03 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 increased 6.6% from $45.8 million in 1993 to $48.8
million in 1994. 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 $0.11.
Liquidity and Capital Resources
The Company's cash flow from operating activities was $140.6 million for
fiscal 1995 and $203.6 million for fiscal 1994. The decrease in cash flow from
operating activities was due primarily to balance fluctuations in operating
assets and liabilities resulting from the execution of cash management policies
based upon cash availability. Trade accounts payable decreased cash provided
by operating activities by $21.7 million in 1995 and increased cash provided by
operating activities by $50.6 million in 1994. One of the Company's principal
uses of cash in its operating activities is inventory purchases. However,
supermarket operators typically require small amounts of working capital since
inventory is generally sold prior to the time that payments to suppliers are
due. This reduces the need for short-term borrowings and allows cash from
operations to be used for non-current purposes such as financing capital
expenditures and other investing activities.
The Company's cash used in investing activities was $146.3 million during
fiscal 1995 and $127.4 million during fiscal 1994. Investing activities
consisted primarily of additions to property and equipment for new stores,
remodels and equipment purchases.
The Company received approximately $7.5 million of cash from financing
activities for fiscal 1995 and used approximately $123.9 million of cash in
financing activities in fiscal 1994. The primary difference in financing
activities from 1994 to 1995 of $131.4 million was the repurchase of Common
Stock in 1994. In 1994, the Company purchased approximately $109.2 million of
its Common Stock under its stock buy-back program.
At December 30, 1995 and January 1, 1994, the Company had outstanding
$725.2 million and $699.9 million, respectively, of long-term debt, principally
borrowed from insurance companies and other institutional lenders. The Company
has not experienced difficulty to date in obtaining financing at satisfactory
terms. Assuming that the Transactions are not consummated, 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 expenditures and working
capital requirements for the forseeable future, including debt and lease
servicing requirements. Certain of the Company's existing debt agreements
require the Company to comply with various financial covenants, including
maintenance of certain levels of minimum net worth. The Company was in
compliance with all such covenants at December 30, 1995.
In order to consummate the Transactions, the Company expects to utilize
total new financing proceeds in the amount of approximately $1.4 billion. The
Company will enter into the New Credit Facility pursuant to which it will
borrow up to $655 million of term loans (the "New Term Loans") and will have
available a $190 million revolving credit facility (the "New Revolving
Facility"), of which approximately $52.7 million is anticipated to be
outstanding at the consummation of the Transactions. The Company will also
issue $250 million principal amount of New Senior Notes, $400 million principal
amount of New Senior Subordinated Notes and $75 million liquidation preference
of New Preferred Stock. The proceeds from the New Credit Facility and the
offerings of the Company's new securities will provide the sources of financing
required to consummate the Transactions and pay related fees and expenses
(including debt refinancing premiums). The Company will also assume certain
existing indebtedness of Smitty's.
The New Revolving Facility will be available, subject to the satisfaction
of customary borrowing conditions, for working capital requirements and general
corporate purposes. A portion of the New Revolving Facility may be used to
support letters of credit, approximately $28 million of which are anticipated
to be outstanding upon consummation of the Transactions. The New Revolving
Facility will be non-amortizing and will have a six and one-quarter year term.
The Company will be required to reduce loans outstanding under the New
Revolving Facility to $85 million for a period of not less than 30 consecutive
days during the first 12 months following the Merger and to $75 million for a
period of not less than 30 consecutive days during each consecutive 12-month
period thereafter. Assuming that the Merger closes on May 1, 1996, giving
effect to currently anticipated borrowings and letter of credit issuances, the
Company's remaining borrowing availability under the New Revolving Facility
would be approximately $109.3 million. Pursuant to the New Credit Facility, the
New Term Loans will be issued in four tranches: (i) Tranche A, in the amount of
$330 million, will have a six and one-quarter year term; (ii) Tranche B, in the
amount of $110 million, will have a seven and one-half year term; (iii) Tranche
C, in the amount of $110 million, will have an eight and one-half year term;
and (iv) Tranche D, in the amount of $105 million, will have a nine and one-
quarter year term. The New Term Loans will require quarterly amortization
payments. The New Credit Facility will be guaranteed by each of the Company's
subsidiaries and secured by liens on substantially all of the unencumbered
assets of the Company and its subsidiaries and by a pledge of the Company's
stock in such subsidiaries.
The Company will be subject to certain customary affirmative and negative
covenants contained in the New Credit Facility, including, without limitation,
covenants that restrict, subject to specified exceptions, (i) the incurrence of
additional indebtedness and other obligations, (ii) mergers and acquisitions,
(iii) asset sales, (iv) the granting of liens, (v) prepayment or repurchase of
other indebtedness, (vi) engaging in transactions with affiliates, (vii)
capital expenditures, (viii) the making of investments, (ix) dividends and
other payments with respect to equity interests, or (x) rental payments. In
addition, the New Credit Facility will require that the Company maintain
certain specified financial covenants, including a minimum fixed charge
coverage, a minimum operating cash flow, a maximum ratio of total debt to
operating cash flow and a minimum net worth.
The capital expenditures of the Company (excluding expenditures in
California) were $91.0 million for fiscal 1994 and $124.3 million for fiscal
1995. The Company currently anticipates that its aggregate capital
expenditures for fiscal 1996 will be approximately $100.0 million, excluding
the approximately $17 million of capital expenditures which are estimated to be
required in connection with the integration of Arizona operations. The Company
intends to finance these capital expenditures primarily with cash provided by
operations and other sources of liquidity including borrowings and leases. No
assurance can be given that sources of financing for capital expenditures will
be available or sufficient. However, the capital expenditure program has
substantial flexibility and is subject to revision based on various factors.
Management believes that if the Company were to substantially reduce or
postpone these programs, there would be no substantial impact on short-term
operating profitability. In the long term, however, if these programs were
substantially reduced, management believes its operating businesses, and
ultimately its cash flow, would be adversely affected.
The capital expenditures discussed above do not include potential
acquisitions which the Company could make to expand within its existing markets
or to enter other markets. Future acquisitions may require the Company to seek
additional debt or equity financing depending on the size of the transaction.
With the exception of the Transactions, the Company is not currently engaged in
discussions concerning any material acquisition which it considers probable.
Following the consummation of the Transactions, the Company will be highly
leveraged. Based upon current levels of operations and anticipated cost
savings and future growth, the Company believes that its cash flow from
operations, together with available borrowings under the New Revolving Facility
and its other sources of liquidity (including leases), will be adequate to meet
its anticipated requirements for working capital, capital expenditures, lease
payments, interest payments and scheduled principal payments. There can be no
assurance, however, that the Company's business will continue to generate cash
flow at or above current levels or that estimated cost savings or growth can be
achieved.
Accounting for the Impairment of Long-lived Assets and for Long-lived Assets to
be Disposed Of
The Financial Accounting Standards Board has issued Statement of Financial
Accounting Standards ("SFAS") No. 121 "Accounting for the Impairment of Long-
lived Assets and for Long-lived Assets to be Disposed Of." The Company will be
required to adopt this standard in the first quarter of 1996. The Company has
not performed the complex analysis required to determine the effect of
implementing this new standard. Management does not currently believe the
adoption of SFAS No. 121 would have a significant impact on the Company's
financial condition.
Effects of Inflation
The Company's primary costs, inventory and labor, are affected by a number
of factors that are beyond its control, including availability and price of
merchandise, the competitive climate and general and regional economic
conditions. As is typical of the supermarket industry, the Company has
generally been able to maintain gross profit margins by adjusting retail
prices, but competitive conditions may from time to time render the Company
unable to do so while maintaining its market share.
Item 8. Financial Statements and Supplementary Data
Audited Annual Financial Statements. The consolidated financial
statements of the Company, including an index thereto and the report of Ernst &
Young LLP, the Company's Independent Auditors, begin on page F-1 and are
incorporated herein by reference.
Quarterly Financial Data. (Dollar amounts in thousands, except per share
data (unaudited))
First Second Third Fourth Total
Fiscal 1995
Net sales $746,673 $770,405 $768,335 $798,324 $3,083,737
Gross profit 168,322 172,523 173,960 182,225 697,030
Net income (loss) 9,479 9,032 11,061 (70,084) (40,512)
Net income (loss)
per common share .37 .36 .44 (2.79) (1.62)
Fiscal 1994
Net sales $753,780 $748,328 $725,360 $753,891 $2,981,359
Gross profit 164,180 166,176 164,965 173,810 669,131
Net income 9,354 11,887 13,341 14,199 48,781
Net income per
common share .31 .41 .48 .53 1.73
Fiscal 1993
Net sales $688,239 $705,520 $686,747 $726,659 $2,807,165
Gross profit 161,552 163,770 152,445 159,411 637,178
Net income 14,007 13,999 7,911 9,903 45,820
Net income per
common share .46 .46 .26 .34 1.52
All quarters presented are for 13 weeks
Item 9. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure
None.
PART III
Iten 10. Directors and Executive Officers of the Registrant
Information concerning directors and executive officers of the Company is
included in the Company's Proxy Statement for its 1996 Annual Meeting of
Stockholders (the "Proxy Statement") under the captions "Management after
Recapitalization and Merger," "Proposal No. 3_Election of Directors" and
"Section 16(a) Reporting," which information is incorporated herein by
reference.
The Company's executive officers are appointed and serve, at the
discretion of the Board of Directors, until their successors are appointed.
Item 11. Executive Compensation
Information concerning Executive Compensation is included in the Company's
Proxy Statement under the caption "Executive Compensation," which information
is incorporated herein by reference (other than information under the
subcaptions "Compensation Committee Report on Executive Compensation" and
"_Performance Graph," which shall not be deemed to be incorporated by reference
herein).
Item 12. Security Ownership of Certain Beneficial Owners and Management
Information concerning Security Ownership of Certain Beneficial Owners and
Management is included in the Company's Proxy Statement under the caption
"Security Ownership of Certain Beneficial Owners and Management," which
information is incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions
Information concerning Certain Relationships and Related Transactions is
included in the Company's Proxy Statement under the captions "The
Recapitalization and Merger_Interest of Certain Persons in the Transactions"
and "Executive Compensation_Certain Transactions," which information is
incorporated herein by reference.
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a) Documents filed as part of this report:
1. Financial Statements:
The following consolidated financial statements of the Company and
its subsidiaries and the Report of Ernst & Young LLP, Independent
Auditors, included herein on pages F-2 through F-17 are incorporated
herein by reference:
Report of Ernst & Young LLP, Independent Auditors
Consolidated Balance Sheets--December 30, 1995 and December 31,
1994
Consolidated Statements of Income--fiscal years ended
December 30, 1995, December 31, 1994 and January 1, 1994
Consolidated Statements of Common Stockholders'
Equity--fiscal years ended December 30, 1995, December 31,
1994 and January 1, 1994
Consolidated Statements of Cash Flows--fiscal years ended
December 30, 1995, December 31, 1994 and January 1, 1994
Notes to Consolidated Financial Statements
2. Financial Statement Schedules:
None
3. Exhibits:
The exhibits listed in the accompanying index to exhibits
are filed or incorporated by reference as part of the
Form 10-K.
(b) Reports on Form 8-K:
There were no reports filed on Form 8-K during the fourth quarter of
fiscal 1995.
INDEX TO FINANCIAL STATEMENTS
Report of Independent Auditors (Ernst & Young LLP) F-2
Consolidated Balance Sheets at December 30, 1995 and
December 31, 1994 F-3
Consolidated Statements of Income for fiscal years ended
December 30, 1995, December 31, 1994 and January 1, 1994 F-4
Consolidated Statements of Common Stockholders' Equity for
fiscal years ended December 30, 1995, December 31, 1994
and January 1, 1994 F-5
Consolidated Statements of Cash Flows for fiscal years ended
December 30, 1995, December 31, 1994 and January 1, 1994 F-6
Notes to Consolidated Financial Statements F-7
REPORT OF INDEPENDENT AUDITORS
To the 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 30, 1995 and December
31, 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 30, 1995. 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 30, 1995 and December 31, 1994,
and the consolidated results of their operations and their cash flows for each
of the three fiscal years in the period ended December 30, 1995, in conformity
with generally accepted accounting principles.
ERNST & YOUNG LLP
Salt Lake City, Utah
January 29, 1996
SMITH'S FOOD & DRUG CENTERS, INC.
CONSOLIDATED BALANCE SHEETS
(dollar amounts in thousands)
1995 1994
-------- --------
ASSETS
Current Assets
Cash and cash equivalents $ 16,079 $ 14,188
Rebates and accounts receivable 23,802 25,596
Inventories 394,982 389,564
Prepaid expenses and deposits 21,255 15,858
Deferred tax assets 23,900 1,400
Assets held for sale 125,000
------- -------
Total Current Assets 605,018 446,606
Property and Equipment
Land 276,626 303,701
Buildings 610,049 619,056
Leasehold improvements 55,830 42,369
Fixtures and equipment 509,524 589,480
------- -------
1,452,029 1,554,606
Less allowances for depreciation
and amortization 390,933 364,741
--------- ---------
1,061,096 1,189,865
Other Assets 20,066 16,996
--------- ---------
$1,686,180 $1,653,467
========= =========
LIABILITIES AND COMMON STOCKHOLDERS' EQUITY
Current Liabilities
Trade accounts payable $ 214,152 $ 235,843
Accrued sales and other taxes 50,749 44,379
Accrued payroll and related benefits 97,455 84,083
Current maturities of long-term debt 20,932 19,011
Current maturities of Redeemable
Preferred Stock 1,008 1,017
Accrued restructuring costs 58,000
------- -------
Total Current Liabilities 442,296 384,333
Long-term debt, less current maturities 725,253 699,882
Accrued restructuring costs, less
current portion 40,000
Deferred income taxes 58,600 89,500
Redeemable Preferred Stock, less
current maturities 3,311 4,410
Common Stockholders' Equity
Convertible Class A Common Stock
(shares issued and outstanding,
11,613,043 in 1995 and 12,140,317
in 1994) 116 121
Class B Common Stock (shares issued,
18,348,968 in 1995 and 17,821,694
in 1994) 183 178
Additional paid-in capital 285,236 285,592
Retained earnings 238,027 293,456
------- -------
523,562 579,347
Less cost of Common Stock in the
treasury (4,890,302 shares in
1995 and 4,772,822 shares in
1994) 106,842 104,005
------- -------
416,720 475,342
--------- ---------
$1,686,180 $1,653,467
========= =========
See notes to consolidated financial statements.
SMITH'S FOOD & DRUG CENTERS, INC.
CONSOLIDATED STATEMENTS OF INCOME
(dollar amounts in thousands, except per share data)
1995 1994 1993
--------- --------- ---------
Net sales $3,083,737 $2,981,359 $2,807,165
Cost of goods sold 2,386,707 2,312,228 2,169,987
--------- --------- ---------
697,030 669,131 637,178
Expenses:
Operating, selling and
administrative 461,401 440,844 430,258
Depreciation and amortization 104,963 94,491 82,173
Interest 60,478 53,715 44,627
Restructuring charges 140,000
------- ------- -------
766,842 589,050 557,058
------- ------- -------
Income (loss) before income taxes (69,812) 80,081 80,120
Income taxes (29,300) 31,300 34,300
------ ------ ------
Net income (loss) $ (40,512) $ 48,781 $ 45,820
====== ====== ======
Net income (loss) per share of
Common Stock $(1.62) $1.73 $1.52
==== ==== ====
See notes to consolidated financial statements.
[Enlarge/Download Table]
SMITH'S FOOD & DRUG CENTERS, INC.
CONSOLIDATED STATEMENTS OF COMMON STOCKHOLDERS' EQUITY
(dollar amounts in thousands, except per share data)
Class A Common Stock Class B Common Stock
-------------------- -------------------- Additional
Number of Par Number of Par Paid-in Retained Treasury Total
Shares Value Shares Value Capital Earnings Stock
--------- ----- --------- ----- ------- -------- -------- --------
Balance at January 3, 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-$.52
per share (14,725) (14,725)
Other 635 635
---------- --- ---------- --- ------- ------- -------- -------
Balance at December 31, 1994 12,140,317 121 17,821,694 178 285,592 293,456 (104,005) 475,342
Net loss for 1995 (40,512) (40,512)
Conversion of shares
from Class A to
Class B (527,274) (5) 527,274 5
Purchase of Class B
Common Stock for the
treasury (9,039) (9,039)
Shares sold to the
Employee Stock Profit
Sharing Plan 2 108 110
Shares sold under the
Employee Stock
Purchase Plan (926) 6,094 5,168
Cash dividends-$.60
per share (14,917) (14,917)
Other 568 568
---------- --- ---------- --- ------- ------- -------- -------
Balance at December 30, 1995 11,613,043 $116 18,348,968 $183 $285,236 $238,027 $(106,842) $416,720
========== === ========== === ======= ======= ======== =======
See notes to consolidated financial statements.
SMITH'S FOOD & DRUG CENTERS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollar amounts in thousands)
1995 1994 1993
---- ---- ----
Operating Activities
Net income (loss) $(40,512) $ 48,781 $ 45,820
Adjustments to reconcile net
income (loss) to cash
provided by operating
activities:
Depreciation and amortization 104,963 94,491 82,173
Deferred income taxes (53,400) 10,500 15,400
Restructuring charges 140,000
Other 568 635 485
Changes in operating assets
and liabilities:
Rebates and accounts
receivable 1,794 (4,758) (4,038)
Inventories (5,418) (11,625) (36,523)
Prepaid expenses and
deposits (5,397) (1,324) (518)
Trade accounts payable (21,691) 50,618 1,119
Accrued sales and other
taxes 6,370 5,616 6,625
Accrued payroll and
related benefits 13,372 10,616 8,007
------- ------- -------
Cash provided by operating
activities 140,649 203,550 118,550
Investing Activities
Additions to property and
equipment (149,035) (146,676) (322,301)
Sale/leaseback arrangements
and other property and
equipment sales 5,841 20,949 159,137
Other (3,070) (1,649) (1,258)
------- ------- -------
Cash used in investing activities (146,264) (127,376) (164,422)
Financing Activities
Additions to long-term debt 45,978 27,000 262,000
Payments on long-term debt (18,686) (33,594) (149,197)
Redemptions of Redeemable
Preferred Stock (1,108) (1,042) (1,039)
Purchases of Treasury Stock (9,039) (109,239) (11,074)
Proceeds from sales of
Treasury Stock 5,278 7,693 7,107
Payment of dividends (14,917) (14,725) (15,530)
------ ------- ------
Cash provided by (used in)
financing activities 7,506 (123,907) 92,267
------ ------- ------
Net increase (decrease) in
cash and cash equivalents 1,891 (47,733) 46,395
Cash and cash equivalents at
beginning of year 14,188 61,921 15,526
------ ------ ------
Cash and cash equivalents at
end of year $ 16,079 $ 14,188 $ 61,921
====== ====== ======
See notes to consolidated financial statements.
SMITH'S FOOD & DRUG CENTERS, INC.
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 and Southwestern regions of the United
States.
Estimates and Assumptions
The preparation of financial statements in conformity with
generally accepted accounting principles requires management
to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results
could differ from those estimates.
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.
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, determined on
the last-in, first-out (LIFO) method, or market.
Approximately 95% of inventories in 1995 and 1994 were
valued using the LIFO method. Other inventories were valued
using the first-in, first-out (FIFO) method. The FIFO cost
exceeded the LIFO value of inventories by $8.1 million in
1995 and $4.1 million in 1994. The pretax LIFO charge was
$4.0 million in 1995, $2.5 million in 1994, and $1.6 million
in 1993.
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.
For leased stores that are closed and subleased to third
parties, a provision is made for the remaining lease
liability, net of expected sublease rental. For leased
stores that are closed but not yet subleased, a provision is
made based on discounted lease payments through the
estimated period until subleased.
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
$1.4 million in 1995, $5.8 million in 1994 and $14.5 million
in 1993) amounted to $60.7 million in 1995, $54.0 million in
1994 and $39.8 million in 1993.
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.
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 25,030,882 in 1995, 28,176,907
in 1994 and 30,238,811 in 1993. Common Stock equivalents in
the form of stock options are excluded from the weighted
average number of common shares in 1995 due to the net loss.
Adoption of Accounting Standard
In March 1995, the Financial Accounting Standards Board
issued Statement No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of", which requires impairment losses to be recorded on long-
lived assets used in operations when indicators of
impairment are present and the undiscounted cash flows
estimated to be generated by those assets are less than the
assets' carrying amount. Statement 121 also addresses the
accounting for long-lived assets that are expected to be
disposed of. Due to the nature of the Company's operations
and the number of estimates required to assess the impact of
Statement 121, the financial statement impact of adoption
has not yet been determined.
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.
Reclassifications
Certain reclassifications have been made to the 1993 and
1994 financial statements to conform with the 1995
presentation.
NOTE B - 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 (dollar amounts in thousands):
[Download Table]
Allowances for Current Year
Depreciation Net Book Depreciation
Cost and Amortization Value and Amortization
--------- ---------------- --------- ----------------
1995
Land $ 276,626 $ 276,626
Buildings 610,049 $108,985 501,064 $ 19,907
Leasehold improvements 55,830 12,556 43,274 2,970
Fixtures and Equipment 509,524 269,392 240,132 82,086
--------- -------- --------- -------
$1,452,029 $390,933 $1,061,096 $104,963
========= ======= ========= =======
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
========= ======= ========= =======
NOTE C - Long-Term Debt
Long-term debt consists of the following (dollar amounts in
thousands):
1995 1994
-------- --------
Mortgage notes, collateralized by property
and equipment with a cost of $420.7
million in 1995 and $413.0 million in
1994, due through 2011 with interest at
an average rate of 9.68% in 1995 and
9.73% in 1994 $254,385 $270,082
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 1995 and
1994 410,000 410,000
Revolving credit bank loans 68,000 27,000
Industrial revenue, bonds, collateralized
by property and equipment with a cost
of $11.7 million in 1995 and $11.6
million in 1994 due in 2000 through
2010 plus interest at an average rate
of 7.44% in 1995 and 7.47% in 1994 6,308 6,597
Other 7,492 5,214
------- -------
746,185 718,893
Less current maturities 20,932 19,011
------- -------
$725,253 $699,882
Interest rates on the revolving credit bank loans averaged
6.06% in 1995 and 5.89% in 1994. The agreements are
reviewed annually with the banks, at which time the date
each installment is due is generally extended one year. At
December 30, 1995, the Company had unused lines of credit
related to unsecured revolving credit bank loans of $60.0
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 30, 1995 are approximately
$20.9 million in 1996, $22.1 million in 1997, $23.7 million
in 1998, $45.4 million in 1999 and $28.9 million in 2000.
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 12,956,747 shares and 16,281,777 shares were
issued and outstanding in 1995 and 1994, respectively. The
redeemable Series I Preferred Stock has no dividend
requirement.
All shares of the Company's redeemable 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 Series
I 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. Series I Preferred Stock is
stated at redemption value in the balance sheet.
The amount included in the balance sheet for redeemable
Series I 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 30, 1995 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 (benefit) consists of the following
(dollar amounts in thousands):
1995 1994 1993
------- ------ ------
Current:
Federal $ 20,220 $17,211 $15,715
State 3,880 3,589 3,185
------ ------ ------
24,100 20,800 18,900
Deferred:
Federal (46,681) 9,247 13,012
State ( 6,719) 1,253 2,388
------ ------ ------
(53,400) 10,500 15,400
------ ------ ------
$(29,300) $31,300 $34,300
====== ====== ======
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 $19.2 million in 1995, $21.7 million in 1994 and $17.3
million in 1993.
The difference between income tax expense (benefit) and the
tax computed by applying the statutory income tax rate to
income before income taxes is as follows:
1995 1994 1993
------ ------ ------
Statutory federal income tax rate (35.0%) 35.0% 35.0%
State income tax rate, net of
federal income tax effect (4.3) 4.7 5.2
Effect of income tax rate changes
on deferred taxes (3.6) 2.4
Other .9 (.6) .2
---- ---- ----
(42.0%) 39.1% 42.8%
The effect of temporary differences that give rise to
deferred tax balances are as follows (dollar amounts in
thousands):
1995 1994
------ ------
Deferred tax liabilities:
Depreciation and amortization $81,008 $ 98,186
Other 13,572 11,935
------ -------
94,580 110,121
Deferred tax assets:
Accrued restructuring costs (33,305)
Accrued insurance claims (12,271) (10,126)
Rent (8,138) (6,006)
Other (6,166) (5,889)
------ ------
(59,880) (22,021)
------ ------
34,700 88,100
Net current deferred tax assets 23,900 1,400
------ ------
Net non-current deferred tax liabilities $58,600 $89,500
====== ======
NOTE G - Fair Value of Financial Instruments
The carrying amounts and related fair values of the
Company's financial instruments are as follows (dollar
amounts in thousands):
1995 1994
------------------ ------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
-------- -------- -------- --------
Cash and cash equivalents $ 16,079 $ 16,079 $ 14,188 $ 14,188
Long-term debt 746,185 803,613 718,893 680,460
Redeemable Preferred Stock 4,319 4,319 5,427 5,427
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 - Lease 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):
1995 1994 1993
------- ------- -------
Minimun rentals $46,460 $39,852 $19,539
Contingent rentals 235 293 281
------ ------ ------
46,695 40,145 19,820
Less sublease rental income 7,334 5,953 5,506
------ ------ ------
$39,361 $34,192 $14,314
====== ====== ======
At December 30, 1995, 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 (dollar amounts in thousands):
Minimum Less
Rental Sublease
Payments Rentals Total
-------- -------- --------
1996 $ 48,781 $ 16,419 $ 32,362
1997 40,223 16,932 23,291
1998 43,759 16,934 26,825
1999 46,205 16,600 29,605
2000 45,998 16,433 29,565
Thereafter 697,832 201,864 495,968
------- ------- -------
$922,798 $285,182 $637,616
======= ======= =======
At December 30, 1995 the Company had contract commitments of
approximately $3.6 million for future construction and a
contract for information technology services requiring
payments of approximately $19.6 million in 1996, $21.3
million in 1997, $24.1 million in 1998, $26.7 million in
1999 and $35.0 million in 2000.
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 profitability. The contribution expense was
$1.4 million in 1995, $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
282,485 shares, 309,553 shares and 180,950 shares from the
Treasury during 1995, 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 890,671 shares and
973,419 shares at the end of 1995 and 1994, 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 January 3, 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
Granted 19.00 317,000
Forfeited 19.00 (246,000)
----- ---------
Balance at December 30, 1995 $19.00 1,616,500
===== =========
The options are exercisable as follows:
Number of
Shares
---------
Options exercisable in the future
1997 25,000
1999 453,000
2000 130,000
2001 207,000
2002 64,500
2003 528,000
2004 11,000
2005 138,000
---------
1,556,500
Options currently exercisable 60,000
---------
1,616,500
=========
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 vesting
period of the options. The amount charged to operations in
1995, 1994 and 1993 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 $4.6 million in 1995, $4.2 million in 1994 and
$3.3 million in 1993. 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 up to the
maximum amount deductible for federal income tax purposes.
Net pension cost includes the following components (dollar
amounts in thousands):
1995 1994 1993
---- ---- ----
Service cost - present value of
benefits earned during the
period $2,119 $2,326 $1,869
Interest cost on projected
benefit obligation 1,966 1,725 1,350
Actual return on plan assets (9,692) 237 (1,053)
Net amortization and deferral 7,598 (1,615) (304)
----- ----- -----
$1,991 $2,673 $1,862
===== ===== =====
The following table presents the plan's funded status and
amounts recognized in the Company's consolidated balance
sheets (dollar amounts in thousands):
1995 1994
---- ----
Actuarial present value of accumulated
benefits based on service rendered
to date:
Vested $29,649 $16,965
Non-vested 3,482 3,438
------ ------
33,131 20,403
Fair value of plan assets (primarily
in equity and fixed income funds
and real estate) 37,934 20,993
------ ------
Fair value of plan assets in excess
of projected benefit obligation 4,803 590
Unrecognized net loss 7,473 5,737
Prior service cost 133 160
Unrecognized net asset (978) (1,141)
------ -----
Net prepaid pension cost $11,431 $5,346
====== =====
The weighted average discount rate used to determine the
actuarial present value of the projected benefit obligation
was 7.25% in 1995 and 8.5% in 1994. The expected long-term
rate of return on plan assets was 8.5% in 1995 and 1994, and
9.5% in 1993.
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.
NOTE K - Restructuring Charges
In December 1995, the Company recorded restructuring charges
amounting to $140 million related to its decision to sell,
lease or close all 34 stores and the distribution center
comprising its Southern California Region. The Southern
California Region contributed sales of approximately $675
million, $653 million and $473 million in 1995, 1994 and
1993, respectively, and recognized operating losses of $41.1
million, $49.5 million and $40.0 million in 1995, 1994 and
1993, respectively. These losses include corporate
allocations such as benefits of corporate buying,
distribution and manufacturing operations; interest expense
and corporate overhead. The restructuring charges include
the following components.
Total Adjustments Accrued Restructuring
Restructuring to Costs
Charges Carrying ---------------------
Value Current Long-term
------------- ----------- --------- -----------
Charges for lease
obligations $ 65,600 $25,600 $40,000
Asset valuation adjustments:
Closed stores 21,700 $21,700
Assets sold 20,300 20,300
Inventory 16,000 16,000
Termination payments 10,000 10,000
Other 6,400 6,400
------- ------ ------ ------
$140,000 $42,000 $58,000 $40,000
======= ====== ====== ======
The lease rental obligations primarily relate to closed
stores and consist of average annual lease expense over a
five-year period net of any sublease income, discounted at a
rate of 9%. Also included is a $15 million charge for
certain fees associated with the sublease of the
distribution center which is expected to be paid by March
1996. The distribution center and nine stores have been
leased or subleased to another supermarket company
controlled by the same group of investors that controls
Smitty's Supermarkets, Inc., with whom the Company has
entered into a definitive merger agreement (see Note L).
The charges for store and distribution center inventories
represent incremental losses for shrinkage, damage and
liquidation sales expected to be incurred during the closing
process.
The termination payments relate to substantially all of the
Company's 3,900 store and distribution center employees in
the Southern California Region. The termination payments
are expected to be made by the end of March 1996 and have
been estimated based on existing employment contracts and
involuntary termination statutes.
The other costs represent charges for taxes, fees,
contractual obligations, and other costs associated with
closing the region.
The restructuring charges include management's best
estimates of the amounts expected to be realized on the
disposal of the remaining stores and closure of the region.
At December 30, 1995, the Company's carrying value of closed
stores and excess land was approximately $260 million. The
Company's current management has not determined the ultimate
disposition or use of these real estate assets and believes
that their disposal in the ordinary course of business would
not result in a significant impact on carrying values.
However, should the Company complete the subsequent event
(see Note L), management may decide to pursue the sale of
these assets. The amounts the Company may realize on
disposal could differ significantly in the near term from
the carrying values.
NOTE L - Subsequent Event
On January 29, 1996, the Company announced it had entered
into a definitive merger agreement with Smitty's
Supermarkets, Inc. ("Smitty's") in which Smitty's will
become a wholly owned subsidiary of the Company. The merger
will be completed by issuing 3,038,888 shares of the
Company's Class B Common Stock for all of Smitty's
outstanding common stock, subject to adjustment under
certain circumstances. The Company will assume or refinance
approximately $148 million of Smitty's debt.
The Company also announced it will commence a self tender
offer to purchase 50% of its outstanding Class A and Class B
Common Stock for $36 per share, excluding shares to be
issued in connection with the Smitty's merger. Debt of
approximately $1.4 billion is expected to be issued at
various interest rates to finance the stock purchase, repay
certain existing indebtedness, and premiums related to early
repayment. In addition, the Company plans to offer
preferred stock to raise approximately $75 million.
Completion of the tender offer will be subject to the tender
of at least 50% of the Company's outstanding Common Stock,
the receipt of adequate financing and various other
conditions. Completion of the merger with Smitty's will be
conditioned on the Company's purchase of shares pursuant to
the self tender offer, receipt of adequate financing,
regulatory approvals, approval by the Company's stockholders
and various other conditions. The tender offer is expected
to commence in April 1996 and be consummated in May 1996.
The merger with Smitty's is expected to be consummated
concurrently with the closing of the tender offer.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
SMITH'S FOOD & DRUG CENTERS, INC.
/s/Jeffrey P. Smith
Jeffrey P. Smith
Chairman of the Board of Directors
Date: March 29, 1996 and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Signature Title Date
/s/Jeffrey P. Smith Chairman of the Board and March 29, 1996
Jeffrey P. Smith Chief Executive Officer
/s/Allen R. Rowland President and Chief March 29, 1996
Allen R. Rowland Operating Officer
/s/Matthew G. Tezak Senior Vice President and March 29, 1996
Matthew G. Tezak Chief Financial Officer
(Principal Financial
Officer)
/s/DeLonne Anderson Director March 29, 1996
DeLonne Anderson
/s/Robert D. Bolinder Director March 29, 1996
Robert D. Bolinder
/s/Allen P. Martindale Director March 29, 1996
Allen P. Martindale
/s/Nicole Miller Director March 29, 1996
Nicole Miller
/s/Duane Peters Director March 29, 1996
Duane Peters
Director March 29, 1996
Ray V. Rose
/s/Fred L. Smith Director March 29, 1996
Fred L. Smith
/s/Richard D. Smith Director March 29, 1996
Richard D. Smith
/s/Sean D. Smith Director March 29, 1996
Sean D. Smith
/s/Douglas John Tigert Director March 29, 1996
Douglas John Tigert
/s/Kenneth A. White Director March 29, 1996
Kenneth A. White
INDEX TO EXHIBITS
Exhibit
Number Document
2.1 Recapitalization Agreement and Plan of Merger dated as of
January 29, 1996 by and among Smith's Food & Drug Centers,
Inc., Cactus Acquisition, Inc., Smitty's Supermarkets, Inc.
and The Yucaipa Companies.
3.1 Restated Certificate of Incorporation of the Company
(incorporated by reference to Exhibit 3.1 in the Company's
Registration Statement on Form S-1 (Commission File No. 33-
28698) which became effective on June 21, 1989).
3.2 By-laws of the Company (incorporated by reference to Exhibit
3.2 in the Company's Registration Statement on Form S-1
(Commission File No. 33-28698) which became effective on June
21, 1989).
4.1 Article IV of Restated Certificate of Incorporation of the
Company (see Exhibit 3.1).
4.2 Certain instruments which define the rights of holders of
long-term debt of the Company and its subsidiaries are not
being filed because the total amount of securities authorized
under each such instrument does not exceed 10% of the total
consolidated assets of the Company and its subsidiaries. The
Company hereby agrees to furnish a copy of each such
instrument to the Commission upon request.
4.3 Form of Pass Through Trust Agreement between the Company and
the Pass Through Trustee Company (incorporated by reference to
Exhibit 4.1 in the Company's Registration Statement on Form S-
3 (Commission File No. 33-51097) which became effective on
January 26, 1994).
4.4 Form of Pass Through Certificate (included in Exhibit 4.3).
*10.1 Amended and Restated 1989 Stock Option Plan (incorporated by
reference to Exhibit 10.1 of the Company's Annual Report on
Form 10-K for the fiscal year ended December 28, 1991).
*10.2 First Amendment to the Amended and Restated 1989 Stock Option
Plan (Exhibit 10.1) dated as of February 7, 1995 (incorporated
by reference to Exhibit 10.2 of the Company's Annual Report on
Form 10-K for the fiscal year ended December 31, 1994).
*10.3 1993 Employee Stock Purchase Plan (incorporated by reference
to Exhibit 10.2 of the Company's Annual Report on Form 10-K
for the fiscal year ended January 2, 1993).
*10.4 First Amendment to the 1993 Employee Stock Purchase Plan
(Exhibit 10.3) dated as of August 2, 1993 (incorporated by
reference to Exhibit 10.3 of the Company's Annual Report on
Form 10-K for the fiscal year ended January 1, 1994).
*10.5 Employees' Profit Sharing Plan and Trust, as amended and
restated as of July 27, 1982 (incorporated by reference to
Exhibit 10.4 of the Company's Registration Statement on Form
S-1 (Commission File No. 33-28698) which became effective June
21, 1989).
*10.6 Pension Plan of Employees, as amended and restated as of July
27, 1982 (incorporated by reference to Exhibit 10.5 of the
Company's Registration Statement on Form S-1 (Commission File
No. 33-28698) which became effective on June 21, 1989).
10.7 Employee Profit Sharing Plan dated as of January 3, 1993,
First Amendment dated as of August 2, 1993 and Second
Amendment dated as of January 27, 1994 (incorporated by
reference to Exhibit 10.6 of the Company's Annual Report on
Form 10-K for the fiscal year ended January 1, 1994).
10.8 Third Amendment to the Employee Profit Sharing Plan (Exhibit
10.7) dated as of November 1, 1994 (incorporated by reference
to Exhibit 10.8 of the Company's Annual Report on Form 10-K
for the fiscal year ended December 31, 1994).
*10.9 Forms of Supplemental Compensation Agreements dated as of
January 2, 1985, and amended as of March 14, 1985, between the
Company and certain executive officers (incorporated by
reference to Exhibit 10.6 of the Company's Registration
Statement on Form S-1 (Commission File No. 33-28698) which
became effective on June 21, 1989).
10.10 Revolving Credit Agreement, dated as of January 31, 1995,
between the Company and Banco di Roma (incorporated by
reference to Exhibit 10.10 of the Company's Annual Report on
Form 10-K for the fiscal year ended December 31, 1994).
10.11 Revolving Credit Agreement, dated as of November 28, 1995,
between the Company and Credit Suisse.
10.12 Loan Agreement Between the Company and a consortium of lenders
dated May 1, 1992 (incorporated by reference to Exhibit 10.11
of the Company's Annual Report on Form 10-K for the fiscal
year ended January 2, 1993).
10.13 Loan Agreement between the Company and a consortium of lenders
dated December 15, 1992 (incorporated by reference to Exhibit
10.12 of the Company's Annual Report on Form 10-K for the
fiscal year ended January 2, 1993).
*10.14 Form of Additional Retirement Benefit Agreement between the
Company and certain of its executive officers (incorporated by
reference to Exhibit 10.13 of the Company's Annual Report on
Form 10-K for the fiscal year ended January 2, 1993).
*10.15 Form of Indemnification Agreement between the Company and its
directors and officers (incorporated by reference to Exhibit
10.14 of the Company's Annual Report on Form 10-K for the
fiscal year ended January 2, 1993).
10.16 Revolving Credit Agreement, dated as of June 28, 1993, between
the Company and Bank of America (incorporated by reference to
Exhibit 10.15 of the Company's Form 10-Q for the second
quarter ended July 3, 1993).
10.17 Amendment 1, dated as of September 16, 1994, to Revolving
Credit Agreement, dated as of June 28, 1993, between the
Company and Bank of America (incorporated by reference to
Exhibit 10.19 of the Company's Form 10-Q for the third quarter
ended October 1, 1994).
10.18 Loan Agreement between the Company and a consortium of lenders
dated November 1, 1993 (incorporated by reference to Exhibit
10.17 of the Company's Annual Report on Form 10-K for the
fiscal year ended January 1, 1994).
10.19 Committed Credit Line Agreement, dated as of March 31, 1995,
between the Company and Wachovia Bank of Georgia, N.A.
(incorporated by reference to Exhibit 10.20 of the Company's
Form 10-Q for the first quarter ended April 1, 1995).
10.20 Committed Credit Line Agreement, dated as of May 31, 1995,
between the Company and Banque National de Paris (incorporated
by reference to Exhibit 10.21 of the Company's Form 10-Q for
the second quater ended July 1, 1995).
10.21 Amendment 2, dated as of May 9, 1995, to Revolving Credit
Agreement, dated as of June 28, 1993, between the Company and
Bank of America (incorporated by reference to Exhibit 10.22 of
the Company's Form 10-Q for the second quater ended July 1,
1995).
12.1 Statement regarding computation of ratio of earnings to fixed
charges.
21.1 Subsidiaries of the Company (incorporated by reference to
Exhibit 22.1 of the Company's Annual Report on Form 10-K for
the fiscal year ended January 1, 1994).
23.1 Consent of Ernst & Young LLP, Independent Auditors.
* Indicates management contract or compensatory plan or arrangement.
Dates Referenced Herein and Documents Incorporated by Reference
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