-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, KbA9BMG+rM3BQgoNNyBUC9Uhu5IY32CBQKlVDd1t4ILLR1w1hdplXvr3JIMAGj5F 4SyCrWZQrnmUcP/BYvk+Ug== 0000871891-98-000001.txt : 19980330 0000871891-98-000001.hdr.sgml : 19980330 ACCESSION NUMBER: 0000871891-98-000001 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19971228 FILED AS OF DATE: 19980327 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: CARR GOTTSTEIN FOODS CO CENTRAL INDEX KEY: 0000871891 STANDARD INDUSTRIAL CLASSIFICATION: RETAIL-GROCERY STORES [5411] IRS NUMBER: 920135158 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 001-12116 FILM NUMBER: 98575315 BUSINESS ADDRESS: STREET 1: 6411 A ST CITY: ANCHORAGE STATE: AK ZIP: 99518 BUSINESS PHONE: 9075611944 MAIL ADDRESS: STREET 1: 6411 A ST CITY: ANCHORAGE STATE: AK ZIP: 99518 10-K 1 FORM 10-K UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K (Mark One) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED] For the fiscal year ended: December 28, 1997 or [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED] For the transition period from __________ to ____________. Commission file number: 1-12116 CARR-GOTTSTEIN FOODS CO. (Exact name of registrant as specified in its charter) Delaware 920135158 (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 6411 A Street Anchorage, Alaska 99518 (Address of principal executive offices) Registrant's telephone number, including area code: (907) 561-1944 Securities registered pursuant to Section 12(b) of the Act: Title of each class: Common stock - par value $.01 Name of each exchange on which registered: New York Stock Exchange Securities registered pursuant to section 12(g) of the Act: None. Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 5(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 [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (ss.229.405 of this chapter) 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 Form 10-K or any amendment to this form 10-K. [X] Aggregate market value of the voting stock held by non-affiliates of the registrant as of March 10, 1998: $26,956,550 Number of Shares of Common Stock outstanding as of March 10, 1998: 8,190,796. DOCUMENTS INCORPORATED BY REFERENCE (To the Extent Indicated Herein) - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- CARR-GOTTSTEIN FOODS CO. INDEX TO ANNUAL REPORT ON FORM 10-K For the Fiscal Year Ended December 28, 1997 PART I Page Item 1. Business 1 ................................................................. Item 2. Properties 7 ................................................................. Item 3. Legal Proceedings 7 ................................................................. Item 4. Submission of Matters to a Vote of Security Holders 8 ..................................................... PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matte 9 ................................................................ Item 6. Selected Financial Information and Other Data 10 .......................................................... Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 11 ............................................. Item 8. Financial Statements and Supplementary Data 14 ............................................................ Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 14 ........................................................ PART III Item 10. Directors and Officers of the Registrant 15 ................................................................. Item 11. Executive Compensation 16 ................................................................. Item 12. Security Ownership of Certain Beneficial Owners and Management 16 ................................................................. Item 13. Certain Relationships and Related Transactions 16 ............................................................ PART IV Item 14. Exhibits, Financial Statement Schedules, Reports on Form 8-K 17 ................................... Item 1. Business As used in this Annual Report on Form 10-K ("Form 10-K"), unless the context indicates otherwise, the terms "Company" and "CGF" refer to Carr-Gottstein Foods Co., a Delaware corporation. Unless otherwise indicated, as used in this Form 10-K (i) all references to square feet are to gross square feet, rather than net selling space; and (ii) all references to a year shall mean the fiscal year of the Company which commences in such year (for example, the fiscal year commencing December 30, 1996 and ending December 28, 1997 is referred herein as "1997"). The Company The Company is the leading food and drug retailer in Alaska, with 45 stores primarily located in Anchorage, as well as in Fairbanks, Juneau, Kenai and other Alaska communities. The Company operates a chain of 15 super-combination food, drug and general merchandise stores under the name Carrs Quality Centers (the "Carrs Stores"). The Company also operates nine smaller stores, four under the name Eagle Quality Centers and two under other trade names (collectively, the "Eagle Stores"), as well as three neighborhood food stores in smaller Alaska communities. The Company is also Alaska's highest-volume alcoholic beverage retailer through its chain of 16 wine and liquor stores operated under the name Oaken Keg Spirit Shops (the "Oaken Keg Stores"). The Company also operates five small tobacco stores which operate under the name The Great Alaska Tobacco Company (the "Tobacco Stores"). In addition, the Company's vertically integrated organization, which includes freight transportation operations and Alaska's only full-line food warehouse and distribution center, provides the Company's retail and wholesale operations important merchandising benefits, cost advantages and operating efficiencies generally not available to its competitors. History The Company's predecessor (the "Predecessor") was formed in 1986 as the result of a merger of J.B. Gottstein & Co., a retail grocery and wholesale grocery distributor founded in 1915, and Carrs Quality Centers, an Alaska grocery store company that commenced operations in 1950. The Company was formed in 1990 by Leonard Green & Partners, L.P. ("LGA"), for the purpose of acquiring, through Green Equity Investors, L.P. ("GEI") and with certain members of the Company's senior management, assets of the Predecessor used in its retail, wholesale and freight operations. On October 12, 1990, the Company acquired certain assets of the Predecessor, including real property, and certain subsidiaries used or held for use in the business and operation of retail food and liquor stores, food wholesaling and freight operations, and assumed certain liabilities, pursuant to an acquisition agreement among the Company, the Predecessor, Laurence J. Carr and Barnard J. Gottstein. Business Strategy The Company's business strategy is to enhance its leading market position in Alaska and to increase revenue and profitability by providing competitively priced, high-quality grocery and perishable merchandise at superior levels of customer convenience and satisfaction. The Company believes it is at the forefront of supermarket industry innovations in customer offerings and expects to capitalize on its competitive advantages within Alaska. The Company has devoted significant resources to expand and remodel its well-established stores to take full advantage of their prime locations. The Company expects to vigorously pursue opportunities to improve its profitability through increased efficiencies at both the store and distribution levels, enhanced systems and cost controls and recently implemented state-of-the-art electronic marketing programs. Management believes that these efforts to improve revenue and reduce costs, combined with opportunistic acquisition or construction of new stores, primarily Eagle Stores in smaller Alaska communities and, selectively, Carrs Stores, will address the Company's goal of maximizing profitable growth. The Company's strategy capitalizes on the following competitive advantages: Superior Merchandising Capabilities. The primary objectives of the Company's merchandising strategy are customer convenience and satisfaction. Hallmarks of the Company's stores are their variety, quality and presentation of fresh produce and other perishables offered together with a wide range of specialty departments and services not found in conventional supermarkets. The Company believes that freshness and quality of produce is generally the single most important determinant for a customer in choosing a supermarket, and that the freshness, quality, variety and presentation of its perishables are among the finest in the United States supermarket industry. Quality Store Base. Over the past 30 years the Company has strategically located its stores in prime residential shopping areas intended to provide maximum accessibility and convenience to customers. Since 1991 the Company has invested in excess of $100 million to remodel and expand its existing store base and acquire or construct new stores. Due to the excellent condition of the current store base, the Company does not expect that significant capital improvements will be necessary in the foreseeable future. Vertically Integrated Freight Distribution and Warehouse Facilities. The Company's freight distribution and warehouse facilities provide it with distinct competitive advantages in its procurement costs, quality of perishables and inventory management. The Company is able to supply merchandise to its Anchorage area stores generally within 12 hours, six days per week, allowing it to offer fresher perishables, minimize stock-outs and devote a greater percentage of store square footage to selling rather than on-site storage space. Because the Company's competitors rely on distribution facilities located more than 2,200 miles away, the Company believes that its competitors experience a five-day or more delay in receiving merchandise, must use more store square footage for inventory storage and are not able to match the Company's shipping volume efficiencies. Furthermore, the economies of scale provided by the Company's third-party wholesale and freight distribution businesses reduce the Company's own delivered cost of goods. State-of-the-Art Electronic Direct Marketing Program. Through its "Carrs Plus" electronic marketing program, the Company tracks consumer buying patterns, enabling the Company to optimize its marketing expenditures. By using a "Carrs Plus" card with their purchases, customers automatically obtain discounts on various store items while the Company collects detailed information about consumer preferences. The Company uses the information generated through its "Carrs Plus" program to develop targeted direct mail marketing campaigns, which are typically more cost-effective and successful than mass mailings or newspaper advertisements. Merchandising Strategy The Company's retail merchandising strategy emphasizes shopping convenience, superlative customer service and high-quality produce, meat and other perishables. The integration of the Company's retail and distribution operations is important to the success of its merchandising strategy, as it allows the Company to offer fresher perishables and experience fewer stock-outs than its competitors. Key elements of the Company's merchandising strategy include: Quality Produce, Meat and Other Perishables. Carrs Stores and Eagle Stores emphasize superior quality produce, meat, seafood and other perishables in addition to a wide selection of food, drugstore items and general merchandise. The Company believes that the freshness, quality, variety and presentation of its perishables are among the finest in the United States supermarket industry. Innovative Specialty Departments. A hallmark of the Company's stores is the variety of innovative specialty departments. A number of Carrs Stores offer a combination of specialty service meat departments, 59-minute photo developing, "Orient Express" Chinese and other specialty food take-out counters, service seafood departments, sushi counters, candy departments, fresh fruit and juice bars, bagel bars, fresh pasta departments, espresso and ice cream stands, and full-service Bank of America branches. All Carrs Stores also include full-service pharmacies, floral departments and service delicatessens. All Carrs Stores and most Eagle Stores include natural food departments, soup and salad bars, in-store bakeries and video rental departments. In the Anchorage area, the Company also offers catering services for large and small events. In addition, the Company is the exclusive ticketing agent for most major Alaska cultural and sporting events, selling tickets through its Carrs TixTM outlets in all but two Carrs Stores and at certain event locations. Competitive Prices. The Company maintains a reputation as the provider of the best overall supermarket values in Alaska by supplementing its competitive pricing with targeted temporary price reductions on selected food and non-food merchandise. The Company's sophisticated information systems and distribution network give management the flexibility to respond to market conditions by rapidly adjusting its prices. Customer Service. The Company distinguishes itself from its competitors by offering excellent customer service. The Company has adopted operating policies designed to maximize customer convenience and satisfaction. Checkout services include price scanning in all stores, acceptance of credit cards and debit cards, use of the Company's proprietary "Carrs Plus" card, "candy-free" checkout aisles for customers with young children, and carryout for all customers with more than one bag. Many Carrs Stores and Eagle Stores feature special services to assist customers, including baby changing rooms with complimentary diapers and a service center from which customers can send and receive faxes, send overnight packages and purchase hunting and fishing licenses and money orders. Store Base Over the past 30 years the Company has strategically located its stores in prime residential shopping areas to provide maximum accessibility and convenience to customers. The Carrs Stores and Eagle Stores are destination stores that offer customers one-stop shopping convenience in modern, easy-to-shop formats. Due to the Company's Anchorage distribution center, the Company's stores are not required to maintain a significant amount of space for inventory storage and are therefore able to maximize selling area. Carrs Stores. Carrs Stores are super-combination food, drug and general merchandise stores. Specialty departments and merchandise mix in each Carrs Stores are based upon management's review of the location of a store, demographics of the area surrounding each store and a store's proximity to other Carrs Stores. The 15 Carrs Stores range from approximately 28,500 total square feet to approximately 73,000 total square feet, and average approximately 52,000 total square feet. Eagle Stores and Other Stores. Eagle Stores are designed to serve the smaller and more rural communities in which they operate by offering a full range of food items, a variety of non-food and drugstore items and general merchandise products with a selection of the Company's higher margin specialty departments. The Eagle Stores range from approximately 16,300 total square feet to approximately 43,900 total square feet and average approximately 25,600 total square feet. The Company operates Eagle Stores in Homer, Seward, Valdez, Unalaska/Dutch Harbor, Nome and Kotzebue. In addition, the Company operates three smaller neighborhood stores in Big Lake, Seldovia and Girdwood which average approximately 10,000 square feet. Oaken Keg Stores. The Company is the state's highest-volume alcoholic beverage retailer. Alaska law does not permit alcoholic beverages to be sold in grocery stores. Accordingly, a wholly-owned subsidiary of the Company operates a chain of 16 Oaken Keg Stores. The Company has positioned 14 of the 16 Oaken Keg Stores adjacent to Carrs Stores to provide convenient access to customers and generate walk-in traffic. Oaken Keg Stores range in size from 900 total square feet to 5,300 total square feet. Tobacco Stores. Tobacco Stores were designed to offer the consumer a customer friendly environment, in a tightly controlled area, in which to purchase a full range of tobacco items including a broad selection of cigars and miscellaneous accessories. The five Tobacco Stores range in size from 525 total square feet to approximately 1,000 total square feet. Store Expansions, Remodels and Additions. From 1990 through 1995 and continuing in 1997, the Company pursued a program of store expansions and remodels, as well as store additions through either construction or acquisition. Remodels involve the addition of specialty departments and cosmetic renovations. Expansions involve the same type of work as remodels, but include the addition of square footage. Management believes that the addition or expansion of specialty departments and services into the Company's stores, combined with the upgrading and enlargement of core product departments, has led to increased customer traffic and sales volume and improved store operating performance. In addition, management believes that providing a broad range of products and services strengthens the competitive position of its Carrs Stores and Eagle Stores as destination stores in each of their markets. In mid 1997, the Company acquired a store in Girdwood, Alaska from an independent operator and converted this store into its Eagle format. In 1995, the Company opened a new 70,000 square foot Carrs Store in Juneau. The Company completed one major remodel at its Carrs locations during fiscal 1997 and substantially completed two other major remodels which were finalized in early 1998. During the first quarter 1998, the Company entered into an agreement to purchase certain real estate and personal property in Fairbanks and the North Pole contingent upon certain conditions. As part of the agreement, the Company will lease a 58,000 square foot store in North Pole. The Company will continue to search for opportunities to grow its Eagle Stores either through acquisition or new construction. Warehouse Facilities and Freight Distribution Warehouse Operations. The Company's full-line food warehouse and distribution center in Anchorage is the only facility of its kind in Alaska. The warehouse and distribution center consists of a 233,000 square foot facility in Anchorage which supplies approximately 80% of the merchandise sold in the Company's stores. This facility also contains refrigeration and freezer space and six state-of-the-industry banana ripening rooms. The Company's computerized store ordering system allows each individual store to place its own merchandise orders directly with the warehouse. Special computerized storage and picking systems track merchandise from point of receiving through point of sale to ensure precise inventory control and minimize handling costs. The warehouse and distribution center operates above a 95% fill rate. This efficiency, plus the proximity of the facility to a significant number of the Company's stores, enables the Company to respond quickly to store orders and to minimize stock-outs at its stores. Freight Operations. The Company operates its own 105,000 square foot warehouse and cross-dock facility in Tacoma, Washington, which serves as a collection point for substantially all of the inventory purchased by the Company in the lower 48 states. At the Tacoma facility, inventory is received, sorted and logged into the Company's computerized inventory management system. The Company operates 18 tractors and 537 trailers. This fleet, in addition to trailers leased as needed on a short-term basis, handles all transportation from the Company's Tacoma facility to ocean ports, from the Anchorage port to the Company's warehouse, and most of the transportation from the Company's warehouse to the Company's retail stores and third-party customers. Third-Party Wholesale and Freight Services. In addition to supplying its own stores, the Company utilizes its warehouse and distribution capabilities to sell grocery and household products on a wholesale basis to customers throughout Alaska, including other retailers and military commissaries. The Company believes that this expanded customer base allows it to take advantage of purchasing and other operating synergies which might otherwise be unavailable to it. In addition to its warehouse sales, the Company utilizes its existing shipping and freight handling systems to offer freight services to third parties. The economies of scale resulting from these third-party sales and services reduce the Company's own delivered cost of goods. Competitive Advantages. The Company's freight and warehouse operations give the Company several logistical and cost advantages relative to its competition. The Company has developed logistical expertise in long-range distribution which enables it to service efficiently stores and customers throughout Alaska, up to approximately 900 miles from its Anchorage warehouse. The Company manages the inventory for its retail operations and its wholesale distribution operations on a combined basis. It is able to consolidate van loads at its Tacoma facility for maximum space efficiency, reducing the number of vans that must be shipped and the landed cost of the Company's inventory in Anchorage. In contrast, the Company's competitors do not have centralized warehousing and distribution facilities in Alaska and must supply individual retail sites in Alaska from warehouses in the lower 48 states, more than 2,200 miles from Anchorage. This requires a longer lead time for store orders and makes it difficult for competitors to match the consistent freshness of the Company's perishables or its responsiveness to market conditions. Without a consolidation and distribution center in Alaska, the Company's competitors must ship vans from the lower 48 states directly to their Alaskan stores, and the Company believes that the competitors generally have a five-day or more period from placement of order to receipt of merchandise. Since the Company ships to an Alaska warehouse where loads can be redistributed for shipment to individual stores, management believes the Company is able to load vans more efficiently, reducing the cost of shipment. In order to reduce stock-outs, the Company's competitors must maintain larger in-store inventories, thereby reducing selling square footage that could otherwise be devoted to a broader selection of merchandise. Marketing and Promotion The Company's retail advertising strategy is directed primarily at emphasizing its variety of high-quality perishables, customer service and a broad selection of nationally advertised brand name products, available at competitively low prices. The Company markets its retail operations through newspaper, radio and television advertising and also uses direct mail advertising, including periodic advertisements, and special season catalogues. The Company's proprietary "Carrs Plus" card is used by customers for quick check cashing and video rental, special discounts and bonuses without using coupons. Through its "Carrs Plus" electronic marketing program the Company tracks consumer buying patterns, enabling the Company to optimize its marketing expenditures. The Company uses the information generated through its "Carrs Plus" program to develop targeted direct mail marketing campaigns which are typically more cost-effective and successful than mass mailings or newspaper advertisements. The Company markets its wholesale operations primarily through a wholesale sales force. The Company also participates actively in local community affairs through the donation of funds and products to local sporting events and charities, and it encourages employees to participate in civic groups. Management Information Systems The Company employs sophisticated information technology systems in all of its stores and distribution operations to improve operating efficiency and achieve lower costs, particularly in the areas of buying, distribution, scanning and in-store computing, merchandising and expense management. Management believes that its commitment to management information systems provides labor cost savings, better control of prices and increased checkout speed and accuracy due to improved product procurement, store delivery schedules, inventory management and pricing accuracy. The Company's information system also handles real time electronic mail and authorizations for check, debit and credit payments, and processing for third-party pharmacy authorization. In addition, the Company uses scanner-generated information by store of individual product sales for better merchandising of stores, tighter inventory control and better space allocation. All Company stores and a majority of the Company's independent wholesale customers place orders via hand-held TelxonTM terminals. Such orders can be processed by the warehouse within the hour. The Company developed and maintains a warehouse inventory tracking and productivity improvement system to manage all of the Company's warehouse inventory levels. This system includes inventory control and labor management components that help reduce product cost and maximize the Company's ability to service customers. This system also tracks inventory that is "on the water" during ocean transport from Washington to Alaska. Sophisticated logistics systems anticipate inventory needs and recommend product moves between the Tacoma and Anchorage sites. Central purchasing and a proprietary forward-buying system provide the Company with purchasing power that helps minimize product acquisition costs. During the first quarter of 1996, the Company completed the process of replacing its 4381 IBM mainframe computer with the installation of its new purchasing and financial system ("Project Fusion") that was designed to improve operating efficiencies and help streamline the Company's administrative operations. Project Fusion has allowed the Company to support modern database tools and client/server technology. The Company believes that this new flexible systems environment has enabled it to respond more rapidly to business opportunities and competitive situations as a result of better utilization of management information data. Trademarks and Licenses The Company employs various trademarks, trade names and service marks. Certain governmental licenses and permits, including alcoholic beverage licenses, health permits and various business licenses, are necessary to operations. Management believes that the Company holds and is in material compliance with all necessary licenses and permits. Competition The food, drug and general merchandise retail businesses are highly competitive. The principal competitive factors in the Alaska market include quality of products, customer service, product assortment, price, store location and convenience. The Company believes that its competitive strengths include its high-quality perishables, customer service, specialty departments, low prices, variety of product offering, convenient store locations and long history of community involvement. The Company believes that its freight network and Anchorage warehouse and distribution center also provide significant competitive advantages. Given the wide assortment of products its stores offer, the Company competes with various types of retailers, including independent and national supermarket operators, retail drug chains, national general merchandisers and discount retailers and membership wholesale clubs. The Company's principal competitors in the supermarket business include Safeway, Fred Meyer, Alaska Commercial, a number of independent supermarket operators, and four military commissaries. The Company's primary competitors for general merchandise are Fred Meyer, Kmart and Wal-Mart, and Costco and Sam's Club membership warehouse stores. The pace of new store openings and store expansions has slowed considerably since April 1994 and, to the Company's knowledge, other than a few competitive remodels in progress during early 1998, no other new competitive openings are scheduled or have been announced. There can be no assurance that other competitors will not either expand or begin operations in Alaska. Year 2000 Issue The year 2000 issues stems from the fact that many computer programs were written using two, rather than four, digits to identify the applicable year. As a result, computer programs with time-sensitive software may recognize a two-digit code for any year in the next century as related to this century. For example, "00" entered in a date-filed for the year 2000, may be interpreted as the year 1900, resulting in system failures or miscalculations and disruptions of operations, including, among other things, a temporary inability to process transactions or engage in other normal business activities. In order to improve operating efficiencies and to help streamline the Company's administrative operations, the Company installed its new purchasing and financial system, Project Fusion, in 1996. An ancillary benefit of Project Fusion is that the majority of the resulting systems are Year 2000 compliant. Based upon a recent assessment, the Company has determined that the incremental cost of ensuring that its remaining computer systems are Year 2000 compliant is not expected to have a material adverse effect on the Company. The Company has completed a preliminary assessment of each of its operations and their Year 2000 readiness, believes that appropriate actions are being taken, and expects to complete its overall Year 2000 remediation prior to any anticipated impact on its operations. The Company believes that, with modifications to existing software and conversions to new systems, the Year 2000 issue will not pose significant operational problems for its computer systems and that costs associated with Year 2000 remediation will not be material. However, if such modifications and conversions are not made, or are not completed timely, the Year 2000 issue could have a material impact on the operations of this Company. The potential impact of the Year 2000 issue on significant customers, vendors and suppliers has not yet been assessed and cannot be reasonably estimated at this time. Further, while the Company has initiated formal communications with a number of its significant suppliers to determine the extent to which the Company's interface systems are vulnerable to those third parties' failure to remediate their own Year 2000 issues, and will initiate similar communication with the balance of its major suppliers in 1998, there is no guarantee that the systems of other companies on which the Company's systems rely will be timely converted and would not have an adverse effect on the Company's systems. Alaska Economy Historically, Alaska had been one of the more rapidly growing states in the United States in terms of both population and employment, although employment growth has slowed recently. The Alaska Department of Labor had projected growth in Alaska's population from approximately 553,000 in 1990 to approximately 671,000 in 2000, a compound annual growth rate of approximately 2.0% compared to the estimated national population growth rate of approximately 1.0% for that period. Employment in Alaska, which grew 0.4% in 1997, is projected to remain fairly flat over the next few years. Alaska's residents are not subject to any state sales or income taxes and receive annual distributions from the state of Alaska Permanent Fund, a fund of approximately $20 billion that is supported by royalties from oil production. The distribution totaled $643 million ($1,296 per eligible resident) in Alaska's fiscal year ended June 30, 1997. The traditional strengths of the Alaska economy have been petroleum, fishing, forest products and mining industries. Military and government spending, as well as tourism, have also been major contributors to the state's economy. Military and government spending provide a stimulus to the state's economy through payroll and benefit payments and capital spending on transportation and other infrastructure. In recent years, tourism has become an increasingly important contributor to the Alaska economy. Employees As of March 1, 1997, the Company employed a total of approximately 3,000 people, approximately 2,300 of whom are covered by collective bargaining agreements. Certain employees engaged in the Company's warehouse operations are represented by the Teamsters Union, grocery store and administrative employees are represented by the United Food and Commercial Workers Union ("UFCW"), and pharmacists are represented by the Alaska State District Council of Laborers. The Company has not experienced a labor strike since 1971 and believes its relations with its employees to be satisfactory. On July 24, 1996, the Company entered into a three-year labor agreement covering approximately 2,000 grocery store employees represented by the UFCW. On December 1, 1996, the Company entered into a three-year contract with the UFCW covering its administrative employees and on February 28, 1997, the Company entered into a three-year agreement with the Teamsters Union covering its Anchorage warehouse and distribution employees. The two latter contracts provide for pay increases over their terms. Item 2. Properties The Company owns eight neighborhood shopping centers. Five centers are located within the Anchorage area, and each is anchored by a Carrs Store. The other centers are located in Homer, Valdez and Unalaska/Dutch Harbor and are anchored by Eagle Stores. These eight centers include an aggregate of approximately 491,000 square feet of retail space, approximately 347,000 square feet of which is occupied by the Company's grocery and liquor stores and approximately 144,000 square feet of which is leased to retail tenants. In addition to its shopping centers, the Company owns six stand-alone supermarkets, one each in Anchorage, Fairbanks, Juneau, Seward, Nome and Girdwood. The Anchorage, Fairbanks and Juneau facilities include adjacent Oaken Keg Stores. The Company owns a supermarket in Ketchikan, Alaska, which is part of a shopping center owned by an unaffiliated party. The Company owns its warehouse and distribution center in Anchorage (approximately 233,000 square feet), its cross-dock and warehouse facility in Tacoma, Washington (approximately 105,000 square feet with associated truck yard), an office building in Anchorage (approximately 9,300 square feet), and one stand-alone Oaken Keg Store in Fairbanks. The Company owns a small village store located in Seldovia, Alaska. During the first quarter 1998, the Company entered into a definitive sales agreement whereby it will sell approximately 18 acres of property in Tacoma, Washington, the location of its current cross-dock and warehouse facility. As part of the agreement, a new and improved replacement cross-dock and warehouse facility will be constructed and leased back to the Company. The lease term will be for 15 years and will include three successive renewal options at the end of the initial term. The Company leases five Carrs Stores, six Oaken Keg Stores and its two headquarters buildings from general partnerships controlled by the former owners of the Predecessor. The Company leases one Carrs Store, two Oaken Keg Stores and two neighborhood stores from unaffiliated landlords. The remaining terms for all leased Carrs Stores locations, except one, exceed 20 years, including renewal options. The lease term of one Carrs location in Anchorage expired in 1996, and negotiations are underway to extend that term. The lease term of one Oaken Keg location exceeds twenty years, and one expires in 2015. The lease term of one Oaken Keg expires in each of 2001, 2000, 1999 and 1998. Two Oaken Keg Stores are currently on month-to-month lease terms while new long-term leases are being negotiated. The lease for the Kotzebue Eagle Store expires in 1999, and the Company has four two-year options to extend the lease terms. The Company's lease for its neighborhood store in Big Lake expires in 1998. Most of the properties owned in fee by the Company are collateral for approximately $41.9 million principal amount of first mortgage financing that matures in June 2001. Certain of the Company's leased properties are collateral for the Company's $116.8 million bank facility. The Company is subject to federal, state and local laws and regulations that impose liability for cleaning up past or present releases of pollutants to the environment. In this regard, the Company has performed remedial investigations and cleanup activities with respect to contamination from underground storage tanks at certain of its properties. One such situation remains pending at the present time. Management believes that any liability relating to that situation will not have a material adverse impact on the financial condition, results of operations or business of the Company. Item 3. Legal Proceedings The Company is a party to a number of legal proceedings in the ordinary course of business. Management believes that these proceedings will not, in the aggregate, have a material adverse impact on the financial condition, results of operations or business of the Company. A subsidiary of the Company, AOL Express ("AOL"), operates a warehouse and cross-dock facility near the Port of Tacoma, Washington. In 1981, the United States Environmental Protection Agency ("EPA") designated the bottom of Commencement (Tacoma) Bay (the "Bay") as a site to be cleaned up under the Comprehensive Environmental Response, Compensation and Liability Act ("CERCLA"). In 1989, the EPA named as potentially responsible parties ("PRPs") over 130 parties, including AOL, that own property located along the Bay or on storm sewer systems that discharge into the Bay. The agency divided the Bay into several areas and intends to negotiate cleanup responsibilities separately with those PRPs in each area. The cleanup costs for the area to which AOL has been assigned have been estimated preliminarily to range from $18.0 million to $30.0 million. The EPA announced that it has named too many PRPs to discuss dismissal or settlement with any single party. The Company therefore joined with approximately 40 other PRPs who claim to have contributed little or nothing toward the contamination of the Bay (the "Minor PRPs Group"). The Minor PRP Group is currently working with a group of large, industrial PRPs to create a privately mediated allocation of liability. No assurance can be given that a private allocation of liability will be agreed upon or, if agreed upon, that it will be acceptable to the Company. The Company has commissioned environmental investigations of its Tacoma facility site and operations, and, based on these investigations, management believes that the Company is not responsible for the contamination that is the subject of these proceedings. Accordingly, the Company has made no accrual for liability in connection with this action. It will continue to seek its dismissal from the action, directly, through the Minor PRP Group, and through the allocation mediation. While there can be no assurance that the Company will be dismissed from these proceedings and an estimate of the portion (if any) of the cost allocable to the Company is uncertain, based on the Company's findings to date, the Company believes that any costs or liability resulting from this action will not have a material adverse impact on the financial condition, results of operations or business of the Company. Item 4. Submissions of Matters to a Vote of Security Holders No matters were submitted to a vote of security holders during the fourth quarter of the fiscal year ended December 28, 1997. PART II Item 5. Market for the Registrant's Common Equity and Related Stockholders Matters. The Company's Common Stock is traded on the New York Stock Exchange under the symbol CGF. The quarterly high and low closing sale prices for the Common Stock as reported on the New York Stock Exchange during 1995, 1996 and 1997 are as follows:
1995 High Low First quarter......................... $ 6.75 $ 5.88 Second quarter........................ $ 5.88 $ 5.75 Third quarter......................... $ 6.88 $ 6.00 Fourth quarter........................ $ 8.50 $ 5.13 1996 First quarter......................... $ 5.63 $ 4.50 Second quarter........................ $ 5.13 $ 4.13 Third quarter......................... $ 4.38 $ 3.63 Fourth quarter........................ $ 4.13 $ 3.38 1997 First quarter......................... $ 5.88 $ 3.63 Second quarter........................ $ 5.38 $ 4.75 Third quarter......................... $ 5.44 $ 4.75 Fourth quarter........................ $ 5.31 $ 4.75 1998 First quarter (through March 10, 1998) $ 5.75 $ 4.81
As of March 10, 1998, the number of stockholders of record of the Company's Common Stock was 221. The Company has not declared or paid cash dividends to its stockholders. The Company anticipates that all of its earnings in the near future will be used for debt repayments or be retained for the development and expansion of its business and, therefore, does not anticipate paying dividends on its Common Stock in the foreseeable future. Declaration of dividends on the Common Stock will depend, among other things, upon the level of indebtedness, future earnings, the operating and financial conditions of the Company, its capital requirements and general business conditions. The agreements governing the Company's indebtedness contain provisions which prohibit the Company from paying dividends on its Common Stock. See "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations-Liquidity and Capital Resources."
Item 6. Selected Financial Information and Other Data. (Amounts in Thousands, except for per share Fiscal year Fiscal year Fiscal year Fiscal year Fiscal year and store information) 1997 1996 1995 1994 1993 - ---------------------------------------------- ---------------- -------------- ---------------- -------------- --------------- Operating Results: Sales $ 589,274 $ 612,576 $ 601,322 $ 577,063 $ 555,266 Cost of merchandise sold, including warehousing and transportation expenses (1) 418,639 442,996 431,230 417,183 396,080 Gross profit 170,635 169,580 170,092 159,880 159,186 Operating and administrative expenses (1,4,6) 151,105 144,525 141,884 130,255 131,313 Operating income (4,6) 19,530 25,055 28,208 29,625 27,873 Interest expense, net 26,711 27,923 16,079 12,210 19,327 Income (loss) before extraordinary item and cumulative effect of change in accounting for income taxes (5,605) (2,810) (3) 4,650 9,211 (2) 4,244 Net income (loss) (5,605) (2,810) 3,744 9,211 (14,581) =============== ============== =============== ============== =============== Other Data: Depreciation and amortization $ 16,536 $ 17,702 $ 17,626 $ 15,690 $ 18,294 Compensation expense stock options (4) - - 1,518 - - Non-recurring charge (6) 8,949 - - - - Cash interest 25,366 26,484 15,558 12,143 18,680 Basic Income (Loss) Per Share: Before extraordinary items $ (0.71) $ (0.36) $ 0.32 $ 0.55 $ 0.30 Net income (loss) (0.71) (0.36) 0.26 0.55 (1.03) Weighted average shares outstanding 7,921 7,814 (5) 14,457 16,763 14,139 Diluted Income (Loss) Per Share: (7) Before extraordinary items $ (0.71) $ (0.36) $ 0.31 $ 0.53 $ 0.29 Net income (loss) (0.71) (0.36) 0.25 0.53 (1.01) Weighted average shares outstanding 7,921 7,814 15,112 17,233 14,435 Financial Position: Total assets $ 315,466 $ 330,844 $ 336,620 $ 326,369 $ 308,912 Long-term debt, excluding current maturities 215,421 227,640 234,740 136,339 137,456 Stockholders' equity 24,314 29,598 32,302 112,636 113,366 Capital expenditures 7,010 4,390 16,660 26,473 27,949 Other Year End Statistics: Number of stores 45 42 39 36 33 Number of employees 3,040 3,243 3,568 3,597 3,525
(1) Reclassifications have been made to fiscal years 1993 through 1995. During these years, warehousing, transportation and the related occupancy costs were originally reported as operating and administrative expenses. For the current presentation, these expenses have been classified as cost of sales. (2) In fiscal year 1993 extraordinary item consisted of a $21,100 ($1.49 per share) charge resulting from early retirement of debt. (3) In fiscal year 1995, extraordinary item consisted of a $906 ($0.06 per share) charge resulting from early retirement of debt. (4) In 1995, the Company recognized a one time pre-tax charge of $1.5 million for non-cash expenses associated with the restructuring of a management stock option incentive plan. (5) On November 15, 1995 the Company repurchased and retired 7,500 shares of common stock. This repurchase reduced the weighted average shares for fiscal year 1995 by approximately 800 shares. (6) In 1997, the Company recognized a non-recurring charge of $8.9 million for expenses principally associated with its decision to close its YES foods institutional food service business and discontinue wholesaling services to a Russian export business. (7) Diluted earnings per share data for fiscal years 1993 through 1996 have been restated to conform with Statement of Financial Accounting Standard No. 128, Earnings Per Share. Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations. In recent years, Alaska, primarily the greater Anchorage area, has attracted an increased presence of existing and new competitors, including supermarkets, general merchandisers, discount retailers and warehouse membership club stores. The Company has addressed the competition by remerchandising certain general merchandise categories and by continuing its aggressive capital expenditure program to remodel existing stores and establish additional stores in new regions of Alaska. From 1992 through 1997, 11 of the 15 Carrs Stores have been remodeled or expanded, and two new Carrs Stores and four new Eagle Stores have been added. The table below sets forth certain income statement components as a percentage of sales.
Fiscal Year ------------------------------------------ 1997 1996 1995 ---- - ---- - ---- Sales.............................................. 100.0% 100.0% 100.0% Cost of merchandise sold, including warehousing and transportation expenses............................... 71.0 71.7 72.3 Gross profit.................................................... 29.0 27.7 28.3 Operating and administrative expenses........................... 25.7 23.6 23.6 ---- ---- ---- Operating income................................................ 3.3 4.1 4.7 === === ===
Results of Operations Fiscal 1997 Compared to Fiscal 1996 Sales. Sales for fiscal 1997 were $589.3 million compared to $612.6 million for fiscal 1996. The 3.8% decrease was due primarily to the Company's decision to close its YES Foods institutional food service business and discontinue its wholesaling services to a Russian export business as well as generally softer comparable store sales at the retail division during the first half of 1997. The decrease in sales for 1997 reflects a 1.4% decrease in total retail comparable store sales. Sales at the retail division were impacted by increased competitive activity and less promotional spending by the Company. Gross Profit. Gross profit for fiscal 1997 was $170.6 million compared to $169.6 million for fiscal 1996. The increase in gross margin dollars is primarily attributable to improved buying practices, reductions in promotional spending as well as improved gross margins achieved at the wholesale and freight divisions. As a percentage of sales, gross profit was 29.0% for fiscal 1997 as compared to 27.7% for fiscal 1996. Gross profit as a percentage of sales for fiscal 1997 increased as a result of improved buying practices, reductions in promotional spending during 1997 and the closure of YES Foods which operated at lower gross margin rates. Operating and Administrative Expenses. Operating expenses for fiscal 1997, before a one time pre-tax non-recurring charge of $8.9 million for expenses principally associated with the Company's decision to close its YES Foods institutional food service business and discontinue its wholesaling services to a Russian export business, were $142.2 million compared to $144.5 million for fiscal 1996. Excluding the non-recurring charge, operating expenses as a percentage of sales were 24.1% for fiscal 1997 and 23.6% for fiscal 1996. Including the non-recurring charge, operating expenses were 151.1 million, or 25.7% of sales. Operating Income. Operating income for fiscal 1997, before the non-recurring pre-tax charge of $8.9 million recognized in June 1997, increased $3.4 million from $25.1 million, or 4.1% of sales, in 1996 to $28.5 million, or 4.8% of sales, in 1997. The increase was due primarily to the improved gross margin rate and dollars during 1997. Other Income and Expense. Net interest expense was $26.7 million for fiscal 1997 compared to $27.9 million for fiscal 1996. The decrease in interest expense reflects the lower average debt balances during 1997. See "Liquidity and Capital Resources." Income Taxes. The Company recognized an income tax benefit for fiscal 1997 of $1.9 million compared to an expense of $30,000 for fiscal 1996. Net Loss. Net loss was $5.6 million, or $0.71 per share, for fiscal 1997 compared to a net loss of $2.8 million, or $0.36 per share, for fiscal 1996. The net loss for fiscal 1997 reflects a $8.9 million pre-tax non-recurring charge ($5.3 million, or $0.67 per share on an after-tax basis) for expenses principally associated with the Company's decision to close its YES Foods institutional food service business and discontinue its wholesaling services to a Russian export business. Fiscal 1996 Compared to Fiscal 1995 Sales. Sales for fiscal 1996 were $612.6 million compared to $601.3 million for fiscal 1995. The 1.9% increase was due primarily to increases in Eagle Stores sales as well as sales improvements from the wholesale and freight divisions. The increase in sales for 1996 reflects a 0.5% increase in total retail comparable store sales. Gross Profit. Gross profit for fiscal 1996 was $169.6 million compared to $170.1 million for fiscal 1995. The decrease in gross margin dollars is primarily attributable to the increased promotional spending associated with the kick-off of the Carrs Plus "Swipe the Gold, Save the Green" electronic marketing campaign which impacted the first three quarters of 1996. As a percentage of sales, gross profit was 27.7% for fiscal 1996 as compared to 28.3% for fiscal 1995. Gross profit as a percentage of sales for fiscal 1996 decreased as a result of the increased promotional spending during the first three quarters of 1996 and an overall increase in third party wholesale and freight business sales mix, generating a lower gross profit margin. Operating and Administrative Expenses. Operating expenses for fiscal 1996 were $144.5 million compared to $141.9 million for fiscal 1995. Operating expenses as a percentage of sales were 23.6% for each of fiscal 1996 and fiscal 1995. The increase in operating expenses reflects expenses associated with the new Carrs Store opened in March 1995, as well as increased expenses associated with the Company's "Fusion" corporate reengineering project which was designed to bring operating efficiencies and improvements to the backstage side of the business. Operating Income. Operating income for fiscal 1996 was $25.1 million compared to $28.2 million for fiscal 1995. The decrease was due primarily to the increased promotional expenses associated with the Carrs Plus electronic marketing campaign, increased expenses associated with the Company's "Fusion" project and increases in depreciation and amortization. Other Income and Expense. Net interest expense was $27.9 million for fiscal 1996 compared to $16.1 million for fiscal 1995. The increase in interest expense reflects increased borrowings associated with the financing of the Company's tender offer for approximately 50% of its outstanding stock in November 1995. See "Liquidity and Capital Resources." Income Taxes. Income tax expense for fiscal 1996 was $30,000 compared to $5.2 million (a 52.8% effective tax rate) for fiscal 1995. The high effective tax rate in 1995 resulted from the amortization of intangible assets for which no tax benefit was available. Net Income (Loss). Net loss was $2.8 million, or $0.36 per share, for fiscal 1996, compared to net income before extraordinary items of $4.7 million, or $0.32 per share, for fiscal 1995. An extraordinary charge of $1.5 million ($0.9 million, or $0.06 per share, on an after-tax basis) was recorded during 1995 as a result of the early retirement of debt. After giving effect to the extraordinary charge, net income for 1995 was $3.7 million, or $0.26 per share. The net income for fiscal 1995 reflects a $2.2 million pre-tax non-recurring charge (or $0.09 per share on an after-tax basis) for expenses associated with a sale/leaseback transaction that the Company elected not to pursue. Liquidity and Capital Resources The Company's primary sources of liquidity are cash flows from operations and its working capital revolving credit facility, which are considered to be adequate for anticipated cash needs. Primary uses are capital expenditures, debt service, and lease payments. Net cash provided by operating activities was $22.2 million for fiscal 1997 compared to $22.2 million for fiscal 1996 and $17.1 million for fiscal 1995. The fiscal 1996 increase compared to fiscal 1995 was due primarily to the one-time charge in 1995 for expenses associated with a sale/leaseback transaction that the Company elected not to pursue. The balance of the changes is due to higher inventory balances offset by increases in accrued payables and expenses. The Company spent an aggregate of $7.0 million, $4.4 million and $16.7 million on capital expenditures during fiscal 1997, 1996 and 1995, respectively. During fiscal 1997 the Company completed one major remodel and substantially completed the remodels at two additional Carrs locations and added two Great Alaska Tobacco Company stores. Management anticipates that capital expenditures for fiscal 1998 will be approximately $7.0 to $12.0 million. The table below summarizes year-end historical remodels, expansions and new store information, as well as added selling square footage resulting from expansions and new stores, for the period from 1990 through December 1997. Due to the Company's substantial investment in the store base since 1990, the Company does not expect that significant capital improvements will be necessary in the foreseeable future.
Number of stores Total selling Remodels Expansions New stores square feet added Total selling square feet ------------- -------------- ---------- ------------------ ------------------------- Year Carrs Eagle Carrs Eagle Carrs Eagle Carrs Eagle Carrs Eagle 1990 3 1 -- -- -- -- -- -- 407,446 62,572 1991 7 -- -- 1 -- -- -- 5,240 407,446 62,572 1992 -- -- 2 -- -- -- 38,581 -- 446,027 62,572 1993 5 2 2 -- 1 -- 50,450 -- 496,477 62,572 1994 3 -- 2 -- -- 3 5,320 67,184 501,797 129,756 1995 -- -- 1 -- 1 -- 43,976 -- 543,725 129,756 1996 -- -- -- -- -- -- -- -- 543,725 129,756 1997 3 -- -- -- -- 1 520 2,255 544,245 132,011
Net cash used by financing activities was $14.0 million for fiscal 1997. The cash used was principally for scheduled debt amortization payments and payments against the Company's working capital revolver. The level of borrowings under the Company's revolving debt is dependent primarily upon cash flows from operations, the timing of disbursements, long-term borrowing activity and capital expenditure requirements. On November 15, 1995 the Company completed a cash tender offer in which it purchased 7.5 million shares of previously outstanding common stock at $11.0 per share. In conjunction with the tender offer, the Company completed the issuance of $100 million principal amount of unsecured senior subordinated notes. In addition to financing the tender offer, the net proceeds from the sale of the notes were used to repay a portion of the debt outstanding under the Company's existing credit facility and to pay fees and expenses associated with the offering of the notes, the tender offer and the amendment and restatement of the Company's existing credit facility. Concurrently with the consummation of the tender offer, the Company amended and restated its credit facility (the "New Credit Facility"). The New Credit Facility provides for (i) two term loan facilities, a $35.0 million facility maturing on June 30, 2001 and a $60.0 million facility maturing on December 31, 2002, and (ii) a revolving credit facility of $35.0 million expiring on June 30, 2001. The revolving credit facility and the $35.0 million term loan bears interest at an annual rate equal to the lender's base rate plus 1.5% or the reserve-adjusted Eurodollar rate plus 2.5%, at the Company's option, and the $60.0 million term loan bears interest at an annual rate equal to the lender's base rate plus 2% or the reserve-adjusted Eurodollar rate plus 3%, at the Company's option. Interest rates on the revolving credit facility and the $35.0 million term loan are subject to reduction by up to .75% in the event the Company meets certain financial tests. The principal amount of the $35.0 million term loan and $60.0 million term loan is required to be amortized commencing on June 30, 1996. Scheduled amortization payments under the $35.0 million term loan is $5.0 million in 1996, $7.0 million in each of 1997, 1998 and 1999, $5.0 million in 2000 and $4.0 million in 2001. Scheduled amortization payments under the $60.0 million term loan are $600,000 in 1996, 1997, 1998, 1999 and 2000, $15.0 million in 2001 and $42.0 million in 2002. Availability under the revolver will be reduced by $5.0 million on each of December 31, 1999 and 2000. At December 28, 1997 there were no borrowings on the Company's revolving credit facility. The Company had available unused credit of $35.0 million. Funds borrowed under the revolving credit portion of the New Credit Facility are restricted to working capital and general corporate purposes. Inflation. As is typical of the supermarket industry, the Company has adjusted its retail prices in response to inflationary trends. Competitive conditions may from time to time limit the Company's ability to increase its prices as a result of inflation. New Accounting Pronouncements. In February 1997, the Financial Accounting Standards Board (FASB) issued SFAS No. 128, "Earnings Per Share." This new standard simplifies the earnings per share (EPS) calculation and makes the U.S. standard for computing EPS more consistent with international accounting standards. The Company adopted SFAS 128 at year-end 1997. EPS for prior years has been restated where necessary to comply with SFAS 128. Under SFAS 128, primary EPS was replaced with a simpler calculation called basic EPS. Basic EPS is calculated by dividing income available to common shareholders by the weighted average common shares outstanding. Previously, primary EPS was based on the weighted average of both outstanding and issuable shares assuming all dilutive options had been exercised. Under SFAS 128, fully diluted EPS has not changed significantly, but has been renamed diluted EPS. Diluted EPS includes the effect of all potentially dilutive securities, such as options. The Company's basic and diluted EPS are materially the same. In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income." SFAS 130 establishes standards for the reporting and display of comprehensive income and its components. Comprehensive income includes all changes in equity during a period except those due to owner investments and distributions. It includes items such as foreign currency translation adjustments, and unrealized gains and losses on available-for-sale securities. This standard does not changes the display or components of present-day net income. The Company will present the required disclosures in its financial statements beginning in the 1998 first quarter. This statement is not expected to have a material impact on the Company. Also in June 1997, the FASB issued SFAS No. 131, "Disclosure about Segments of an Enterprise and Related Information." This new standard requires companies to disclose segment data based on how management makes decisions about allocating resources to segments and how it measures segment performance. SFAS 131 requires companies to disclose a measure of segment profit or loss (operating income, for example), segment assets, and reconciliations to consolidated totals. It also requires entity-wide disclosures about a company's products and services, its major customers and the material countries in which it holds assets and reports revenues. The Company will adopt SFAS 131 in its 1998 year-end financial statements. This statement is not expected to have a significant effect on the Company's financial statements. In February 1998, the FASB issued SFAS No 132, "Employers' Disclosures about Pensions and Other Postretirement Benefits." SFAS 132 standardizes the disclosure requirements for pensions and postretirement benefits where practical. It also eliminates certain disclosures and requires additional information on changes in benefit obligations and fair values of plan assets. The Company will adopt SFAS 132 in its 1998 year-end financial statements. This statement is not expected to have a significant effect on the Company's pension plan disclosures. Item 8. ........Financial Statements and Supplementary Data. ........See the Index to Consolidated Financial Statements at page F-1. Item 9. .........Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. .........None. PART III Certain information required by Part III is omitted from this Report as CGF will file a definitive proxy statement pursuant to Regulation 14A (the "Proxy Statement") not later than 120 days after the end of the fiscal year covered by this Report, and certain information included therein is incorporated herein by reference. Only those sections of the Proxy Statement which specifically address the items set forth herein are incorporated by reference. Such incorporation does not include the Compensation Committee Report or the Performance Graph included in the Proxy Statement. Item 10. .........Directors and Executive Officers of the Registrant John J. Cairns, 70, is the current Chairman of the Board of CGF. He joined Carr-Gottstein Inc., CGF's predecessor, in 1981 and served as General Manager, Executive Vice President, Chief Operating Officer, Secretary, and a director until the sale of its operating assets to CGF in 1990. From 1990 until 1993, Mr. Cairns served as President of CGF and served as Chairman of the Board of Directors of CGF. In 1993, he was made Chief Executive Officer upon the creation of that position. In September 1994, Mr. Cairns retired from his position as Chief Executive Officer. Mr. Cairns continues to serve as Chairman and is employed by the Company on a part-time basis to assist the Chief Executive Officer on special projects and matters of strategic planning. Prior to joining CGF's predecessor, Mr. Cairns held various operating, administrative, and executive positions with the Great Atlantic and Pacific Tea Company from 1943 to 1978 and served as Vice President-Corporate Development and a director of Smith Management Corporation, a regional retail food operator in Salt Lake City, from 1978 to 1981. Lawrence H. Hayward, 43, is President and Chief Executive Officer of CGF. He joined the Company in March 1995 as its Senior Vice President and Chief Operating Officer and was promoted to President and Chief Executive Officer in August 1996. From 1981 until 1990, Mr. Hayward served in various corporate positions at American Stores Company headquartered in Salt Lake City, Utah. From 1990 to 1995, Mr. Hayward was employed by Buttrey Food and Drug Co. as Vice President for Distribution/Transportation, Vice President for Support Services and then Vice President of Store Operations. Mr. Hayward currently serves on the Board of Directors of Western Association of Food Chains, Inc. Donald J. Anderson, 37, is Senior Vice President, Chief Financial Officer and Secretary of CGF. He joined the Company in his present position in April 1995. Mr. Anderson has 20 years of experience in the grocery industry. From 1977 to 1994, he served in various positions with Buttrey Food and Drug Co., including Director of Financial Reporting, Corporate Controller, and Vice President. In 1994, Mr. Anderson returned to American Stores Corporate where he was Program Manager for the financial portion of a multi-million dollar re-engineering program. Jeff L. Philipps, 42, is Senior Vice President Retail Division of CGF. He joined the Company in his present position in February 1997. Mr. Philipps has more than 20 years of experience in the retail food business. Prior to joining CGF Mr. Philipps served as the Director of Business Development for the National Procurement Organization at American Stores Company headquartered in Salt Lake City, Utah. Leonard I. Green, 64, has served as a director of the Company since 1990. Since 1989, he has been, individually or through a corporation, a partner of LGA, a merchant banking firm that is the general partner of GEI. Since 1994, Mr. Green has also been an executive officer and equity owner of Leonard Green & Partners, L.P. ("LGP"), a second merchant banking firm that manages another investment fund. Before forming LGA in 1989, Mr. Green had been a partner of the merchant banking firm of Gibbons, Green, van Amerongen for more than five years. Mr. Green is also a director of Rite-Aid Corporation, Communications & Power Industries, Inc., and Hechinger Company. Jonathan D. Sokoloff, 40, has been a director of the Company since 1990. He joined LGA as a partner in 1990. Mr. Sokoloff has also been an executive officer and equity owner of LGP since its formation in 1994. Mr. Sokoloff was previously a managing director in corporate finance at Drexel Burnham Lambert Incorporated. Mr. Sokoloff is also a director of TwinLab Corporation, Gart Sports Company and Hechinger Company. Gregory J. Annick, 34, has been a director of the Company since 1990. He joined LGA as an associate in 1989, became a principal in 1993, and through a corporation became a partner in 1994. Since 1994, Mr. Annick has also been an executive officer and equity owner of LGP. From 1988 to 1989, he was an associate with the merchant banking firm of Gibbons, Green, van Amerongen. Before that time, Mr. Annick was a financial analyst in mergers and acquisitions with Goldman, Sachs & Co. Mr. Annick is also a director of Communications & Power Industries, Incs., Leslie's Poolmart, Inc., Hechinger Company and Liberty Group Publishing, Inc. E. Dean Werries, 68, became a director of CGF in 1994. From 1989 to 1994, Mr. Werries served as Chairman of the Board of Fleming Companies, Inc. He joined Fleming in 1955 and held various positions within that company through 1988, when he was appointed President and Chief Executive Officer. In 1994, Mr. Werries retired as Chairman. He currently serves as Chairman of the Board of Sonic Corp. Donald E. Gallegos, 63, became a director of CGF in 1994. He is the retired President of King Soopers, a retail grocery chain owned by Kroger, Inc. On April 1, 1997, after serving seven years as President, Mr. Gallegos retired from that position and became Chairman of the Executive Committee. Mr. Gallegos held various positions with King Soopers prior to being appointed Senior Vice President of King Soopers in 1982 and then President in 1990. To the best of CGF's knowledge, based solely upon review of the copies of such reports furnished to CGF and written representations that no other reports were required, all Section 16(a) filing requirements applicable to its officers, directors, and greater than ten-percent shareholders were complied with during the fiscal year ended December 28, 1997. Item 11. .........Executive Compensation The information required by this Item is included under the captions "Executive Compensation" in the Proxy Statement. Item 12. ........Security Ownership of Certain Beneficial Owners and Management The information required by this Item is included under the caption "Ownership of Voting Securities By Certain Beneficial Owners and Management" in the Proxy Statement. Item 13. .....Certain Relationships and Related Transactions The information required by this Item is included under the caption "Certain Transactions" in the Proxy Statement. Item 14. .....Exhibits, Financial Statement Schedules, and Reports on Form 8-K (a) 1 Financial Statements - See Index to Consolidated Financial Statements at page F-.1 (a) 2 Financial Statement Schedule - none (a) 3 Exhibits - See Index to Exhibits immediately following page F-27. (b) No reports on Form 8-K were filed during the fourth quarter of the fiscal year ended December 28, 1997. 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, on the 16th day of March, 1998. CARR-GOTTSTEIN FOODS CO. By: /S/ Lawrence H. Hayward -------------------------- Lawrence H. Hayward, President 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 indicated on the 16th day of March, 1997. PRINCIPAL EXECUTIVE OFFICERS DIRECTORS /S/ Leonard I. Green /S/ Lawrence H. Hayward ----------------------- - -------------------------- Leonard I. Green Lawrence H. Hayward, President and Chief Executive Officer; Director /S/ Jonathan Sokoloff ------------------------ Jonathan Sokoloff PRINCIPAL FINANCIAL OFFICER and ACCOUNTING OFFICER /S/ Gregory Annick ------------------------ /S/ Donald J. Anderson Gregory Annick - -------------------------- Donald J. Anderson, Chief Financial Officer and Accounting Officer /S/ John J. Cairns ------------------------ John J. Cairns /S/ Lawrence H. Hayward -------------------------- Lawrence H. Hayward /S/ E. Dean Werries -------------------------- E. Dean Werries /S/ Donald Gallegos -------------------------- Donald Gallegos - ------------------------------------------------------------------------------- CARR-GOTTSTEIN FOODS CO. AND SUBSIDIARIES - ------------------------------------------------------------------------------- Index to Consolidated Financial Statements - ------------------------------------------------------------------------------- Page Independent Auditors' Report F-2 ............................................................................... Consolidated Statements of Operations for the years ended December 28, 1997, December 29, 1996 and December 31, 1995 F-3 ............................................................................... Consolidated Balance Sheets as of December 28, 1997 and December 29, 1996 F-4 ............................................................................... Consolidated Statements of Stockholders' Equity for the years ended December 28, 1997, December 29, 1996, December 31, 1995............. F-5 Consolidated Statements of Cash Flows for the years ended December 28, 1997, December 29, 1996, and December 31, 1995 F-6 ............................................................................... Notes to Consolidated Financial Statements F-7 .............................................................................. - ------------------------------------------------------------------------------- Independent Auditors' Report - ------------------------------------------------------------------------------- The Board of Directors and Stockholders Carr-Gottstein Foods Co. We have audited the consolidated financial statements of Carr-Gottstein Foods Co. and subsidiaries as listed in the accompanying index. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated 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 consolidated financial statements referred to above present fairly, in all material respects, the financial position of Carr-Gottstein Foods Co. and subsidiaries as of December 28, 1997 and December 29, 1996 and the results of their operations and their cash flows for each of the years in the three-year period ended December 28, 1997 in conformity with generally accepted accounting principles. KPMG Peat Marwick LLP Anchorage, Alaska February 12, 1998 CARR-GOTTSTEIN FOODS CO. AND SUBSIDIARIES Consolidated Statements of Operations
Years ended - ----------------------------------------------------------------------------------------------------------------------- December 28, 1997 December 29, December 31, Amounts In Thousands (except per share data) 1996 1995 - ----------------------------------------------------------------- ------------------ ----------------- ----------------- Sales $ 589,274 $ 612,576 $ 601,322 Cost of merchandise sold, including warehousing and transportation expenses 418,639 442,996 431,230 - ----------------------------------------------------------------- ----------------- ------------------ ----------------- Gross profit 170,635 169,580 170,092 Operating and administrative expenses 142,156 144,525 140,366 Compensation expense for stock options - - 1,518 Non-recurring charge 8,949 - - - ----------------------------------------------------------------- ----------------- ------------------ ------------------- Operating income 19,530 25,055 28,208 Other income (expense): Interest expense, net (26,711) (27,923) (16,079) Other income (expense) (373) 88 (23) Non-recurring costs related to sale-leaseback - - (2,249) - ----------------------------------------------------------------- ----------------- ------------------ ------------------- Income (loss) before income tax expense, and extraordinary item (7,554) (2,780) 9,857 Income tax benefit (expense) 1,949 (30) (5,207) - ----------------------------------------------------------------- ----------------- ------------------ ------------------- Income (loss) before extraordinary item (5,605) (2,810) 4,650 Extraordinary item - loss on early retirement of debt, net of income tax benefit - - (906) - ----------------------------------------------------------------- ----------------- ------------------ ------------------- Net income (loss) $ (5,605) $ (2,810) $ 3,744 ================================================================= ================= ================== =================== Basic income (loss) per common share: Income (loss) before extraordinary item $ (0.71) $ (0.36) $ 0.32 Extraordinary item - - (0.06) - ----------------------------------------------------------------- ----------------- ------------------ ------------------- Net income (loss) per share $ (0.71) $ (0.36) $ 0.26 ================================================================= ================= ================== =================== Diluted income (loss) per common share: Income (loss) before extraordinary item $ (0.71) $ (0.36) $ 0.31 Extraordinary item - - (0.06) - ----------------------------------------------------------------- ----------------- ------------------ ------------------- Net income (loss) per share $ (0.71) $ (0.36) $ 0.25 ================================================================= ================= ================== =================== Weighted average common shares outstanding - basic 7,921 7,814 14,457 Weighted average common shares outstanding - diluted 7,921 7,814 15,112 ================================================================= ================= ================== ===================
See accompanying notes to consolidated financial statements. Consolidated Balance Sheets
December 28, December 29, Amounts in Thousands 1997 1996 - ----------------------------------------------------------------------------------------------------------------------- Assets Current assets: Cash and cash equivalents $ 11,081 $ 8,655 Accounts receivable, net 11,513 16,650 Income taxes receivable 949 - Inventories 51,471 54,232 Deferred taxes 2,690 1,918 Prepaid expenses and other current assets 2,380 2,809 - ----------------------------------------------------------------------------------- ----------------- ------------------ Total current assets 80,084 84,264 Property, plant and equipment, at cost, net of accumulated depreciation 134,090 142,179 Intangible assets, net of accumulated amortization 88,973 91,731 Deferred taxes 783 334 Other assets 11,535 12,336 - ----------------------------------------------------------------------------------- ----------------- ------------------ $ 315,465 $ 330,844 =================================================================================== ================= ================== Liabilities and Stockholders' Equity Current liabilities: Accounts payable $ 37,187 $ 38,467 Accrued expenses 20,621 15,145 Income taxes payable - 298 Current maturities of long-term debt 12,220 7,281 Revolving line of credit - 7,000 Estimated obligation for self-insurance 2,176 1,958 - ----------------------------------------------------------------------------------- ----------------- ------------------ Total current liabilities 72,204 70,149 Long-term debt, excluding current maturities 215,420 227,640 Estimated obligation for self-insurance 1,536 1,536 Other liabilities 1,991 1,921 - ----------------------------------------------------------------------------------- ----------------- ------------------ Total liabilities 291,151 301,246 - ----------------------------------------------------------------------------------- ----------------- ------------------ Stockholders' equity: Common stock, $.01 par value, authorized 25,000 shares, issued 9,680 shares at 1997 and 1996, respectively 97 97 Additional paid in capital 52,088 52,513 Deficit (16,149) (10,544) - ----------------------------------------------------------------------------------- ----------------- ------------------ 36,036 42,066 Less treasury stock, 1,741 shares and 1,853 shares, respectively, at cost 11,722 12,468 - ----------------------------------------------------------------------------------- ----------------- ------------------ Total stockholders' equity 24,314 29,598 - ----------------------------------------------------------------------------------- ----------------- ------------------ Commitments and contingencies =================================================================================== ================= ================== $ 315,465 $ 330,844 =================================================================================== ================= ==================
See accompanying notes to consolidated financial statements. Consolidated Statements of Stockholders' Equity Years ended December 28, 1997 December 29, 1996, and December 31, 1995
Total Additional Stock Stock-holders' Common Paid-In Subscriptions Treasury Equity Amounts in Thousands Stock capital Deficit Receivable Stock - --------------------------------------- ------------ ------------- ---------- ----------------- ------------ ----------- Balance at January 1, 1995 $ 172 $ 134,258 $ (11,478) $ (40) $ (10,276) $ 112,636 Issuance of treasury stock - (6) - - 162 156 Purchase of treasury stock - - - - (2,498) (2,498) Purchase and retirement of common stock (75) (83,175) - - - (83,250) Issuance of stock options - 1,518 - - - 1,518 Net income - - 3,744 - - 3,744 Change under stock purchase plan - - - (4) - (4) - ---------------------------------------- ---------- ------------ ------------- ------------ -------------- ------------- Balance at December 31, 1995 97 52,595 (7,734) (44) (12,612) 32,302 Issuance of treasury stock - (82) - - 144 62 Net loss - - (2,810) - - (2,810) Payments under stock purchase plan - - - 44 - 44 - ---------------------------------------- ---------- ------------ ------------- ------------ -------------- ------------- Balance at December 29, 1996 97 52,513 (10,544) - (12,468) 29,598 Issuance of treasury stock - (425) - - 746 321 Net loss - - (5,605) - - (5,605) - ---------------------------------------- ---------- ------------ ------------- ------------ -------------- ------------- Balance at December 29, 1997 $ 97 $ 52,088 $ (16,149) $ - $ (11,722) $ 24,314 ======================================== ========== ============ ============= ============ ============== =============
See accompanying notes to consolidated financial statements. Consolidated Statements of Cash Flows
Years ended - ----------------------------------------------------------------------------------------------------------------------- December 28, December 29, December 31, Amounts in Thousands 1997 1996 1995 - ----------------------------------------------------------------------------------------------------------------------- Operating activities: Net income (loss) $ (5,605) $ (2,810) $ 3,744 Adjustments to reconcile net income (loss) to net cash provided by operating activities: Extraordinary loss before income tax benefit - - 1,539 Depreciation 13,678 14,844 14,141 Amortization of intangibles 2,858 2,858 3,485 Amortization of loan fees 1,345 1,439 696 Loss (gain) on disposal of property and equipment 115 (84) 23 Compensation recognized for stock options - - 1,518 Changes in assets and liabilities: Decrease (increase) in receivables 5,137 1,203 (2,244) Decrease (increase) in inventories 2,761 (3,727) (1,111) Decrease in prepaid expenses and other current assets 429 72 564 Increase in other assets (544) (556) (1,284) Increase (decrease) in income taxes payable (298) 298 - Decrease (increase) in deferred taxes (1,221) (984) 390 Increase (decrease) in accounts payable (1,280) 2,481 (4,368) Increase in accrued expenses 5,476 7,793 1,024 Decrease (increase) in income tax receivable (949) 164 93 Increase (decrease) in obligation for self-insurance 218 (836) (422) Increase (decrease) in other liabilities 70 50 (650) - ----------------------------------------------------------------------------------------------------------------------- Net cash provided by operating activities 22,190 22,205 17,138 - ----------------------------------------------------------------------------------------------------------------------- Investing activities: Additions to property and equipment (6,910) (4,390) (16,660) Additions to intangible assets (100) - (26) Proceeds from sale of property and equipment 1,206 287 66 Proceeds from sale of subsidiary - - 983 - ----------------------------------------------------------------------------------------------------------------------- Net cash used in investing activities (5,804) (4,103) (15,637) - ----------------------------------------------------------------------------------------------------------------------- Financing activities: Proceeds from issuance of long-term debt - - 95,000 Proceeds from issuance of senior subordinated notes - - 91,750 (Payments) borrowings under revolving line of credit, net (7,000) (9,000) 4,044 Payments on long-term debt, including prepayment penalties (7,281) (3,370) (104,202) Change in stock subscriptions receivable - 44 (4) Purchase and retirement of common stock - - (83,250) Purchase of treasury stock - - (2,498) Issuance of treasury stock, net 321 62 156 - ----------------------------------------------------------------------------------------------------------------------- Net cash provided by (used in) financing activities (13,960) (12,264) 996 - ----------------------------------------------------------------------------------------------------------------------- Net increase in cash and cash equivalents 2,426 5,838 2,497 Cash and cash equivalents at beginning of year 8,655 2,817 320 - ----------------------------------------------------------------------------------------------------------------------- Cash and cash equivalents at end of year $ 11,081 $ 8,655 $ 2,817 ======================================================================================================================= Supplemental information: Interest paid $ 25,064 $ 25,198 $ 14,387 Income taxes paid $ 956 $ 552 $ 4,091 =======================================================================================================================
See accompanying notes to consolidated financial statements. CARR-GOTTSTEIN FOODS CO. AND SUBSIDIARIES - ------------------------------------------------------------------------------- Notes to Consolidated Financial Statements Amounts in Thousands (except for per share data) - ------------------------------------------------------------------------------- (1) BUSINESS Carr-Gottstein Foods Co. and subsidiaries (Company) is the leading food and drug retailer in Alaska with 45 stores primarily located in Anchorage, as well as in Fairbanks, Juneau, Kenai and other Alaska communities. The Company operates a chain of 15 super-combination food, drug and general merchandise stores under the name Carrs Quality Centers. The Company also operates nine smaller stores under the name of Eagle Quality Centers or other names in smaller Alaska communities. The Company is also Alaska's highest-volume alcoholic beverage retailer through its chain of 16 wine and liquor stores operated under the name of Oaken Keg stores. The Company operates five small tobacco stores which operate under the name of The Great Alaska Tobacco Company. In addition, the Company operates a freight transportation business under the names of AOL Express and APR Forwarders, a full-line food warehouse and distribution center under the name of J.B. Gottstein. The Company, through CGF Properties, Inc., owns many of the buildings and shopping centers from which its Carrs and Eagle Quality Centers operate. (2) ACQUISITION AND BASIS OF PRESENTATION As of October 12, 1990, CG Acquisition Co. acquired certain assets and liabilities of Carr-Gottstein Inc. and other related entities (Predecessor) and changed the corporate name to Carr-Gottstein Foods Co. The transactions described above are referred to herein as the Acquisition. The cost of the Acquisition approximated $280,000 and was financed through bank borrowings, issuance of senior notes, subordinated notes and common stock. The Acquisition was accounted for using purchase accounting in which the purchase price was allocated to the acquired assets and liabilities based on their relative estimated fair values. The excess of the purchase price over the fair value of assets and liabilities acquired resulted in identified intangibles of $25,100 and goodwill of $105,700. (3) CAPITALIZATION On May 6, 1993, the Company reclassified its common stock into a single class and authorized 25,000 shares of $.01 par value common stock and 10,000 shares of $.01 par value preferred stock and a two for one split for the reclassified common stock. As a result of the split, 5,678 shares were issued and additional paid-in capital was reduced by $57. During 1993 the Company undertook an initial public offering of its common stock. The shares were issued at an initial price of $14.50 per share. The Company issued 5,824 new shares of common stock and received net proceeds of $77,632. Common stock and additional paid-in capital were increased by $58 and $77,574, respectively. (4) TENDER OFFER On October 13, 1995, the Company announced a tender offer for 7,500 shares of common stock at $11.00 per share. The Company completed the tender offer on November 15, 1995 and repurchased and retired 7,500 shares of common stock at a cost of $82,500 plus $750 of fees and expenses. The Company financed the tender offer through the issuance of $100,000 of 12% unsecured senior subordinated notes. Concurrent with the tender offer, the Company renegotiated and amended its bank debt and revolving line of credit. The Company paid $8,250 of fees and expenses to issue the senior subordinated notes and to amend its bank debt and revolving line of credit. The debt amendment is accounted for as an early extinguishment of debt. Notes to Consolidated Financial Statements Amounts in Thousands (except for per share data) - ------------------------------------------------ (5) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Accounting Estimates and Assumptions In preparing the consolidated financial statements in accordance with generally accepted accounting principles, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the financial statements and revenue and expenses for the reporting period. Actual results could differ from those estimates and assumptions. The more significant estimates and assumptions applied in the preparation of the consolidated financial statements are discussed below. Fiscal Year The Company's fiscal year is a 52 or 53 week year, ending on the Sunday closest to the calendar year-end. All years presented in the consolidated financial statements consist of 52 weeks. References to fiscal years 1997, 1996 and 1995 represent the 52 week years ending December 28, 1997, December 29, 1996 and December 31, 1995, respectively. Consolidation The consolidated financial statements of the Company include the accounts of Carr-Gottstein Foods Co. and its divisions, J.B. Gottstein, Carrs Quality Centers and Eagle Quality Centers and its wholly-owned subsidiaries, AOL Express, Inc., APR Forwarders, Inc., Oaken Keg Spirit Shops, Inc., Alaska Advertisers, Inc. and CGF Properties, Inc. The Company sold its wholly-owned computer services subsidiary in the first quarter of 1995. Significant intercompany transactions and accounts have been eliminated from the consolidated financial statements. Cash Equivalents For purposes of the statement of cash flows, short-term investments with a maturity of three months or less are considered to be cash equivalents. Cash and cash equivalents include cash on hand, checking accounts and savings accounts. Inventories Inventories are stated at the lower of cost or market. Retail food company and liquor company store inventory cost is determined by reducing inventories taken at retail prices by estimated gross margin percentages. Wholesale inventories are valued at weighted average cost. Inventories include direct transportation, warehouse and allocated administrative costs. Property, Plant and Equipment Property, plant and equipment are recorded at cost. Maintenance, repairs and minor replacements are charged to expense as incurred. When assets are sold, retired or fully depreciated, their cost and related accumulated depreciation are removed from the property, plant and equipment accounts, and any gain or loss is recorded. Depreciation The costs of buildings, equipment and fixtures are depreciated over their estimated useful lives on a straight-line basis. The components of buildings are depreciated over lives ranging from ten to 31.5 years or over the respective lease terms, if such periods are shorter. Fixtures and equipment are depreciated over estimated lives of three to 15 years. Intangible Assets and Amortization Intangible assets represent the excess of purchase price over fair value of net assets acquired. Goodwill is generally amortized on a straight-line basis over 40 years. Costs allocated to specifically identified assets are amortized on a straight-line basis over three to five years. On an annual basis the Company assesses the recoverability of goodwill and other intangible assets by determining whether the amortization of the balances over the remaining lives can be recovered through the undiscounted future operating cash flows of the acquired operations. Loan Fees Loan fees are amortized over the term of the related debt. Notes to Consolidated Financial Statements Amounts in Thousands (except for per share data) - ------------------------------------------------- Buying and Promotional Allowances Allowances and credits received from vendors in connection with the Company's buying and merchandising activities are recognized as earned. Investment in Affiliate The equity method of accounting is used to account for the Company's ownership of 33-1/3% of the stock of Denali Commercial Management, Inc. (DCM). The financial position and results of operations of DCM are not material. Income Taxes The Company files consolidated federal and state income tax returns. Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carry-forwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Commitments and Contingencies Liabilities for loss contingencies arising from claims, assessments, litigation, fines and penalties, and other sources are recorded when it is probable that a liability has been incurred and the amount of the assessment or cost can be reasonably estimated. Earnings Per Common Share Statement of Financial Accounting Standard No. 128, Earnings Per Share, which simplifies the earnings per share calculation and makes the U.S. standard more consistent with international accounting standards, was adopted at year-end by the Company. Earnings per share data for 1996 and 1995 has been restated to conform with the provisions of SFAS No. 128. Basic earnings per common share are determined by dividing net income (loss) by the weighted average number of common shares outstanding. Diluted earnings per common share are determined by dividing net income (loss) by the weighted average number of common shares outstanding, including common stock options which are dilutive. For purposes of calculating diluted earnings per share for the year ended December 31, 1995, weighted average shares outstanding have been increased by 655 to reflect common stock options which were dilutive. At December 28, 1997 and December 29, 1996, options to purchase 1,072 and 1,157 shares of common stock, respectively, were not included in the computation of diluted earnings per share because they were not dilutive. Impairment of Long-Lived Assets Statement of Financial Accounting Standard No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of, sets forth new standards for determining when long-lived assets are impaired and requires impaired assets to be carried at the lower of cost or fair value. The Company adopted the new standard as of January 1, 1996 which has had no effect on the Company's financial statements. Stock Option Plan Statement of Financial Accounting Standard No. 123, Accounting for Stock-Based Compensation, was adopted by the Company as of January 1, 1996. This statement establishes accounting and reporting standards for stock-based employee compensation plans. As permitted by this statement, the Company has elected to continue to account for stock options using, APB Opinion No. 25, Accounting for Stock Issued to Employees, to determine the amount of any compensation expense related to stock options. Consequently, the Company will disclose the amount of compensation expense and the impact on net earnings and earnings per share had the fair value method set forth in the new statement been used to calculate compensation. Reclassifications Certain reclassifications have been made to the fiscal year 1995 consolidated financial statements to conform to the current period presentation. During 1995, warehousing, transportation and the related occupancy costs were originally reported as operating and administrative expenses. For the current year's presentation, these expenses have been classified as cost of sales. Notes to Consolidated Financial Statements Amounts in Thosuands (except for per share data) - -------------------------------------------------- (6) ACCOUNTS RECEIVABLE Accounts receivable consist of the following:
December 28, December 29, 1997 1996 - ----------------------------------------------------------------------------------------------------------------------- Wholesale and retail trade $ 10,593 $ 15,267 Tenant 127 248 Other 1,492 1,378 - ----------------------------------------------------------------------------------------------------------------------- 12,212 16,893 Less allowance for doubtful accounts 699 243 - ----------------------------------------------------------------------------------------------------------------------- Accounts receivable, net $ 11,513 $ 16,650 =======================================================================================================================
(7) PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment consist of the following: December 28, December 29, 1997 1996 - ----------------------------------------------------------------------------------------------------------------------- Land $ 24,932 $ 25,393 Buildings 95,624 95,458 Fixtures and equipment 98,087 93,326 - ----------------------------------------------------------------------------------------------------------------------- 218,643 214,177 Less accumulated depreciation 84,553 71,998 - ----------------------------------------------------------------------------------------------------------------------- Property, plant and equipment, net $ 134,090 $ 142,179 =======================================================================================================================
(8) INTANGIBLE ASSETS Intangible assets consist of the following: December 28, December 29, 1997 1996 - ----------------------------------------------------------------------------------------------------------------------- Goodwill $ 107,605 $ 107,505 Other intangibles 18,485 18,485 - ----------------------------------------------------------------------------------------------------------------------- 126,090 125,990 Less accumulated amortization 37,117 34,259 - ----------------------------------------------------------------------------------------------------------------------- Intangible assets, net $ 88,973 $ 91,731 =======================================================================================================================
(9) REVOLVING LINE OF CREDIT The Company has a $35,000 revolving line of credit (revolver) available for working capital purposes. The revolver, along with the bank term debt, are secured by substantially all of the Company's assets, except for certain real estate assets. The revolver and term debt agreements contain restrictive covenants. Interest is payable quarterly on the revolver at the lower of prime plus 1.5% or LIBOR plus 2.5%. Availability under the revolver is reduced by $5,000 on each December 31, 1999 and 2000. The Company is required to pay an annual commitment fee of 0.5% per annum on the average unused portion of the revolver. There was no outstanding balance on the revolver at December 28, 1997. The interest rate on the revolver at revolver at December 31, 1996, was approximately 8.0%. Notes to Consolidated Financial Statements Amounts in Thousands (except for per share data) - ------------------------------------------------ (10) LONG-TERM DEBT Long-term debt consist of the following:
December 28, December 29, 1997 1996 - ---------------------------------------------------------------------------------------------------------------------- Firstmortgage notes payable in monthly payments of $426; including interest at 10.55%; unpaid balance due at maturity of June 1, 2001; prepayments prohibited through 1996; prepayment penalties apply; secured by real estate $ 41,871 $ 42,532 Senior subordinated notes with interest payable semiannually at 12%; entire balance due at maturity of November 15, 2005; prepayment penalties apply; unsecured 100,000 100,000 Bank term note payable with varying semiannual principal payments; interest payable quarterly at the lower of prime plus 1.5% or LIBOR plus 2.5%, approximately 8.4% at December 28, 1997; maturity of June 30, 2001 26,500 32,500 Bank term note payable with varying semiannual principal payments; interest payable quarterly at the lower of prime plus 2.0% or LIBOR plus 3.0%, approximately 8.9% at December 28, 1997; maturity December 31, 2002 59,100 59,700 Other notes payable 169 189 - ----------------------------------------------------------------------------------------------------------------------- 227,640 234,921 Less current maturities of long-term debt 12,220 7,281 - ----------------------------------------------------------------------------------------------------------------------- Total long-term debt $ 215,420 $ 227,640 =======================================================================================================================
The Company's debt agreements contain various restrictive covenants pertaining to net worth levels and dividends, limitations on additional indebtedness and capital expenditures, financial ratios and monthly, quarterly and annual reporting requirements. In addition, the agreements require certain mandatory pre-payment of amounts resulting from real estate or fixed asset sales, increases in outstanding cash balances, issuance of stock, or the issuance of additional debt. Substantially all of the assets of the Company are pledged as security for long-term debt. During 1997, the Company amended its bank agreement whereby its restrictive covenants excluded the impact of the non-recurring charge taken for expenses principally associated with its decision to close YES Foods and discontinue it wholesaling services to a Russian export business. The Company is currently in the process of further amending its existing agreement to modify some of the existing covenant levels. This amendment will be completed during the second quarter 1998. The Company is in compliance with all debt agreements. The aggregate maturities of long-term debt for periods subsequent to December 28, 1997 are as follows: Fiscal year Amount - ------------------------------------------------------------------------------- 1998 $ 12,220 1999 8,570 2000 3,634 2001 46,216 2002 36,000 Thereafter 121,000 - ------------------------------------------------------------------------------- $ 227,640 =============================================================================== Notes to Consolidated Financial Statements Amounts in Thousands (except for per share data) - ------------------------------------------------ Interest expense consists of the following:
Fiscal year - ----------------------------------------------------------------------------------------------------------------------- 1997 1996 1995 - ----------------------------------------------------------------------------------------------------------------------- Interest on debt $ 25,306 $ 26,484 $ 15,558 Amortization of loan fees 1,345 1,439 696 - ----------------------------------------------------------------------------------------------------------------------- 26,711 27,923 16,254 Less capitalized interest - - 175 - ----------------------------------------------------------------------------------------------------------------------- Interest expense, net $ 26,711 $ 27,923 $ 16,079 =======================================================================================================================
Loan fees are classified as other assets and total $6,513 and $7,856, net of amortization, at December 28, 1997 and December 29, 1996, respectively. In fiscal year 1995 the Company incurred $8,250 of loan fees to issue the senior subordinated notes and to amend its bank debt and revolver. The amendment and renegotiation of the Company's bank debt and revolver in fiscal year 1995 is considered an early extinguishment of debt. This transaction resulted in an extraordinary loss of $906 from the write-off of unamortized loan fees of $1,539, net of income tax benefit of $633. (11) OTHER LIABILITIES Other long-term obligations consist primarily of installment obligations payable to former or current employees arising from deferred compensation agreements of the Predecessor which were assumed in the Acquisition. These obligations are payable over a ten-year period, without interest, commencing on the employee's termination from the Company. Each employee's principal balance, which accrues interest at 8% to the date of termination, is discounted from the date the employee attains the age of 65 for current employees or the remaining payoff period for terminated employees. (12) INCOME TAXES Income tax expense (benefit) for continuing operations before extraordinary item consist of the following:
Fiscal year - ----------------------------------------------------------------------------------------------------------------------- 1997 1996 1995 - ----------------------------------------------------------------------------------------------------------------------- Current: Federal $ (562) $ 782 $ 3,546 State (166) 232 638 - ----------------------------------------------------------------------------------------------------------------------- (728) 1,014 4,184 - ----------------------------------------------------------------------------------------------------------------------- Deferred: Federal (942) (759) 871 State (279) (225) 152 - ----------------------------------------------------------------------------------------------------------------------- (1,221) (984) 1,023 - ----------------------------------------------------------------------------------------------------------------------- Income tax expense $ (1,949) $ 30 $ 5,207 =======================================================================================================================
A reconciliation of income tax expense (benefit) at the statutory rate of 35% applied to earnings before income taxes and extraordinary item to the Company's effective rate is as follows: Notes to Consolidated Financial Statements Amounts in Thousands (except for per share data) - ------------------------------------------------
Fiscal year - ----------------------------------------------------------------------------------------------------------------------- 1997 1996 1995 - ----------------------------------------------------------------------------------------------------------------------- Computed "expected" tax expense (benefit) $ (2,644) $ (973) $ 3,450 State income taxes, net of federal benefit (290) 4 764 Nondeductible goodwill amortization 925 925 925 Other 60 74 68 - ---------------------------------------------------------------------------------------------------------------------- $ (1,949) $ 30 $ 5,207 =======================================================================================================================
Total tax benefit for fiscal year 1997 is $1,949. Total tax expense for fiscal year 1996 is $30. In July 1997, an examination by the Internal Revenue Service ("IRS") of the Company's federal tax returns for fiscal years 1994 and 1995 was finalized, resulting in no material effect on the results of operations or financial condition of the Company. The examination had no effect on previously recorded expense or net income. The components of the net deferred tax asset are as follows:
December 28, December 29, 1997 1996 - ----------------------------------------------------------------------------------------------------------------------- Deferred tax assets: Alternative minimum tax credit carryforward $ 4,535 $ 4,949 Intangible assets, due to differences in amortization 69 460 Financial statement accrual of self- insurance costs 1,427 1,436 Financial statement accrual for compensated absences 671 826 Revenues received in advance, amortized for financial reporting 638 452 Financial statement expense for stock options 496 612 Inventory capitalized for taxes 638 497 Other 287 100 - ----------------------------------------------------------------------------------------------------------------------- Total gross deferred tax assets 8,761 9,332 - ----------------------------------------------------------------------------------------------------------------------- Deferred tax liabilities: Property, plant, and equipment, due to differences in depreciation (5,798) (7,055) Other 510 (25) - ----------------------------------------------------------------------------------------------------------------------- Total gross deferred tax liabilities (5,288) (7,080) - ----------------------------------------------------------------------------------------------------------------------- Net deferred tax asset $ 3,473 $ 2,252 =======================================================================================================================
At December 28, 1997 the Company had alternative minimum tax credit carry forwards of approximately $3,843 and $692 for federal and state income taxes, respectively, which carry forward indefinitely. Notes to Consolidated Financial Statements Amounts in Thousands (except for per share data) - ------------------------------------------------ A valuation allowance is provided when it is more likely than not that some portion of the deferred tax asset will not be realized. Based on the Company's historical taxable income, adjusted for significant items such as the loss from early retirement of debt and utilization of net operating losses, and expected future taxable income, management believes it is more likely than not that the Company will realize the benefit of deferred tax assets existing at December 28, 1997. Further, management believes the existing net deductible temporary differences will reverse during periods in which the Company generates net taxable income. Therefore, the Company has not provided a valuation allowance. However, the amount of the deferred tax asset considered realizable could be reduced in the near term if estimates of future taxable income are reduced. (13) LEASE COMMITMENTS The Company leases (as lessee) land, buildings, fixtures and equipment primarily for retail stores and its headquarters under operating leases expiring at various dates through 2019. Generally, these leases include options to renew at the end of the initial lease period. Commitments for future minimum payments under non-cancelable operating leases for periods subsequent to December 28, 1997 are as follows: Fiscal Year Amount - ------------------------------------------------------------------------------- 1998 $ 6,518 1999 6,463 2000 6,355 2001 6,316 2002 6,252 Thereafter 41,747 - ------------------------------------------------------------------------------- $ 73,651 =============================================================================== Rental expense under operating lease agreements include contingency rentals which are based on a certain percentage of sales that are achieved over a set amount of sales determined on an individual store basis. Rental expense is as follows: Fiscal year Minimum payments Percentage rents Total - ------------------------------------------------------------------------------- 1995 $ 9,426 $ 1,024 $ 10,450 1996 9,338 355 9,693 1997 9,549 71 9,620 =============================================================================== In May 1995, the Company entered into letters of intent regarding a sale-leaseback transaction which would have encompassed substantially all of the real estate owned by the Company. In August 1995, the Company elected not to pursue the sale-leaseback transaction and expensed $2,249 of non-recurring costs related to this transaction. The Company leases five Carrs Stores, six Oaken Keg Stores and its two headquarters buildings from general partnerships controlled by the former owners of the Predecessor. The Company leases one Carrs Store, two Oaken Keg Stores and two neighborhood stores from unaffiliated landlords. During the first quarter 1998, the Company entered into a definitive sales agreement whereby it will sell approximately 18 acres of property in Tacoma, Washington. A new cross-dock and warehouse facility will be constructed and leased back to the Company. The lease term will be 15 years and will included three successive renewal options. During the first quarter 1998, the Company entered into an agreement to purchase certain real estate and personal property in Fairbanks and the North Pole contingent upon certain conditions. As part of the agreement, the Company will lease a 58,000 square foot store in North Pole for an initial lease term of 15 years followed by four successive renewal options. Notes to Consolidated Financial Statements Amounts in Thousands (except for per share data) - ------------------------------------------------ (14) LESSOR The Company is the lessor of commercial and office facilities. Generally, these operating leases include options to renew at the end of the initial lease period. Substantially all of the leases for commercial facilities provide for minimum rentals and contingent rentals while leases for office facilities are generally for fixed rentals. Minimum annual rentals under non-cancelable operating leases for periods subsequent to December 28, 1997 are as follows: Fiscal year Amount - ------------------------------------------------------------------------------- 1998 $ 1,141 1999 958 2000 691 2001 360 2002 331 Thereafter 616 - ------------------------------------------------------------------------------- $ 4,097 ===============================================================================
Net rental income related to these operating leases is as follows: Fiscal year Minimum rents Percentage rents Related expenses Net rental income - ----------------------------------------------------------------------------------------------------------------------- 1995 $ 1,266 $ 48 $ 582 $ 732 1996 1,582 19 661 940 1997 1,454 72 996 530 =======================================================================================================================
(15) RETIREMENT AND UNION PENSION PLANS The Company contributes to a 401(k) retirement savings plan covering substantially all employees qualified by age and length of service, except employees covered by union contracts. The Company employs approximately 3.0 people of which 2.3 or 77% are covered by union contracts. The retirement savings plan allows participant contributions in an amount equal to 15% of the participant's compensation, not to exceed federal statutory maximum contributions. The amount of discretionary Company contributions is determined by the Board of Directors, subject to Internal Revenue Code limitations. Participants are 100% vested in Company contributions. In addition, the Company contributes to union sponsored multi-employer pension plans on behalf of union employees. Contributions to retirement savings and pension plans are as follows: Fiscal year 401(k) plan Pension plans - ------------------------------------------------------------------------------- 1995 $ 636 $ 3,367 1996 611 3,445 1997 589 3,505 =============================================================================== (16) INCENTIVE BONUS PLAN The Company has an incentive bonus plan for key employees. The amount of bonuses distributed to eligible employees and individual bonus awards are based on the Company's financial performance and other criteria set by a committee appointed by the Board of Directors. The cost of this plan approximated $1,455, $0, and $0 for fiscal years 1997, 1996 and 1995, respectively. Notes to Consolidated Financial Statements Amounts in Thousands (except for per share data) - ------------------------------------------------ (17) STOCK OPTIONS Outside Director Plan The Company has an outside director stock option plan for directors who are not for three years prior to appointment to the Board of Directors an employee of the Company or a partner or employee of Leonard Green & Associates, L.P., (LGA), Green Equity Investors, L.P. (GEI) or any partnership controlled by such partnerships. Each outside director is automatically granted the option to purchase 20 shares of common stock at the then fair market value on the date of such appointment or election to the Board of Directors. The options are fully vested upon grant. The plan permits awards with respect to a maximum of 100 shares. As of December 28, 1997, two directors each had been granted an option to purchase 20 shares of common stock at $5.25 per share. Employee Performance Plan The Company has a non-qualified performance stock option plan, under which a committee of the Board of Directors may award key employees options to purchase common stock in the Company. The plan permits awards with respect to a maximum of 1,312 shares. As of December 28, 1997, options for 1,072 shares were outstanding, of which options with respect to 1,049 shares were fully vested. The committee determines the exercise price of the options and the period over which the options will vest. Options are generally awarded at fair market value of the Company's stock as of the date of the award. On December 20, 1995, the Board of Directors canceled options for 749 common shares with exercise prices of $5.00 to $10.63 per share and immediately reissued options for 749 common shares with exercise prices of $2.88 or $5.25 per share. The Board of Directors undertook this action to compensate key employees who held unvested options and were unable to participate in the Company's tender offer for 7,500 shares of common stock in November 1995. See note 4. The Company recognized $1,518 of compensation expense for certain options that were reissued at an exercise price of $2.88 per share, as this price was below the fair market value of Company's common stock of $5.25 on the reissuance date. At December 28, 1997, there were 77 additional shares available for grant under the plan. The per share weighted-average fair value of stock options granted during 1997, 1996 and 1995 was $1.84, $1.34 and $2.86 respectively, on the date of grant using a qualified option-pricing model with the following weighted-average assumptions: 1997 - expected dividend yield 0.0%, risk-free interest rate of 6.0%, volatility of 39.2% and an expected life of 7 years; 1996 - - expected dividend yield 0.0%, risk-free interest rate of 7.1%, volatility of 38.6% and an expected life of 9 years; 1995 - expected dividend yield 0.0%, risk-free interest rate of 6.8% volatility of 28.9% and an expected life of 10 years. The Company applies APB Opinion No. 25 in accounting for its Plan and, accordingly, compensation expense is only recognized for stock options which the exercise price is less than fair value on the date of grant. Had the Company determined compensation cost based on the fair value at the grant date for its options under SFAS No. 123, the Company's net income (loss) would have been reduced to the pro forma amounts indicated below:
1997 1996 1995 - ----------------------------------------------------------------------------------------------------------------------- Net income (loss) As reported $ ( 5,605) $ (2,810) $ 3,744 Pro forma (5,727) (3,066) 3,613 Basic net income (loss) per share As reported $ (0.71) $ (0.36) $ 0.26 Pro forma (0.72) (0.39) 0.25 Diluted net income (loss) per share As reported $ (0.71) $ (0.36) $ 0.25 Pro forma (0.72) (0.39) 0.24 =======================================================================================================================
Pro forma net income reflects only options granted in 1997, 1996 and 1995. Therefore, the full impact of calculating compensation cost for stock options under SFAS No. 123 is not reflected in the pro forma net income (loss) amounts presented above because compensation cost is reflected over the options' vesting period of 3 years and compensation cost for options granted prior to January 1, 1995 is not considered. Notes to Consolidated Financial Statements Amounts in Thousands (except for per share data) - ------------------------------------------------ Stock option activity during the periods indicated is as follows:
Number of Weighted-Average Shares Exercise Price - ----------------------------------------------------------------------------------------------------------------------- Balance at January 1, 1995 739 $ 6.13 Granted 1,075 3.89 Exercised (27) 5.69 Forfeited (39) 6.30 Canceled (749) 6.11 Expired (9) 6.07 - ----------------------------------------------------------------------------------------------------------------------- Balance at December 31, 1995 990 $ 3.72 Granted 235 3.62 Exercised (21) 2.88 Forfeited (7) 5.12 Canceled (35) 5.88 Expired (5) 4.30 - ----------------------------------------------------------------------------------------------------------------------- Balance at December 29, 1996 1,157 $ 3.66 Granted 110 4.20 Exercised (111) 2.89 Forfeited (19) 5.25 Canceled (35) 5.25 Expired (30) 5.09 - ----------------------------------------------------------------------------------------------------------------------- Balance at December 28, 1997 1,072 $ 3.67 =======================================================================================================================
At December 28, 1997, the range of exercise prices and weighted-average remaining contractual life of outstanding options was $2.88 - $5.25 and 9 years, respectively. The number of shares subject to exercisable options was 1,049, 1,078 and 813 at fiscal year-end 1997, 1996 and 1995, respectively, and the weighted-average exercise price of those options was $3.64, $3.54 and $3.38, respectively. (18) RELATED PARTY TRANSACTIONS GEI owns approximately 37% of the Company's common stock. LGA is the general partner of GEI. The Company paid LGA fees of $450, $450 and $577 for fiscal years 1997, 1996 and 1995, respectively for management consulting and advisory services. The Company also engaged LGA to provide financial advisory services with respect to the 1995 tender offer and negotiating the terms of the Company's senior subordinated notes, revolver and bank term debt. LGA was paid $1,500 for such financial advisory services. (19) COMMITMENTS AND CONTINGENCIES Shared Appreciation Agreement The Company is party to a shared appreciation agreement with the Predecessor which requires the Company to pay the Predecessor 50% of certain proceeds in excess of $65,500 from the financing, refinancing, condemnation, sale or other disposition or realization of value of certain real properties. The cumulative maximum amount payable under the agreement was $7,300 through fiscal year 1994. Beginning in fiscal year 1995, the maximum amount payable is increased by 10% per annum of any remaining unpaid portion of the maximum. As of December 28, 1997 the maximum amount payable is $9,490, of which no amount is currently due as the conditions of the agreement have not been met. Notes to Consolidated Financial Statements Amounts in Thousands (except for per share data) - ------------------------------------------------ Self-Insurance The Company is self-insured for basic automobile, workers' compensation, general liability and employee health benefits, and purchases insurance coverage for amounts in excess of the basic self-insurance program. Reserves are established to cover estimated reported losses, estimated unreported losses based on past experience modified for current trends, and estimated expenses for investigating and settling claims. Actual losses will vary from the established reserves. While management uses what it believes is pertinent information and factors in determining the amount of reserves, future additions to the reserves may be necessary due to changes in the information and factors used. Environmental Remediation The Company, along with other parties, has been identified by the Environmental Protection Agency (EPA) as a potentially responsible party (PRP) for the cleanup of a site in Tacoma, Washington. The EPA has estimated primarily the cost of the required remediation to range from $18,000 to $30,800. Based on a Company-commissioned environmental investigation, management believes that the Company is not responsible for the subject contamination. Accordingly, the Company has made no accrual for liability in connection with this site and is seeking dismissal from the proceedings both directly and indirectly through a group of PRPs who are responsible for a minimal amount, if any, of the contamination. While there can be no assurance that the Company will be dismissed from these proceedings and an estimate of the portion, if any, of the cost allocable to the Company is uncertain, based on the Company's findings to date, management believes that any liability the Company may incur in connection with these proceedings will not have a material adverse impact on the financial condition, results of operations or business of the Company. Legal Proceedings The Company is subject to legal proceedings and claims which have arisen in the ordinary course of its business that are not fully adjudicated. Management believes, after consultation with legal counsel, these actions when finally concluded and determined will not have a material adverse effect on the Company's financial position. (20) GEOGRAPHIC CONCENTRATION All of the Company's retail outlets are in Alaska, with nine of its 15 Carrs Quality Centers and nine of its 16 Oaken Keg Stores located in Anchorage, Alaska. In addition, the Company's wholesale distribution business is conducted in Alaska. As a result of this geographic concentration, the Company's growth and operations depend upon economic conditions in Alaska. Because the economy of Alaska is dependent on the natural resources industry, particularly oil, as well as on tourism, commercial fishing, government and U.S. military spending, any deterioration or improvements in these markets could affect the Company. (21) FAIR VALUE OF FINANCIAL INSTRUMENTS Cash and Accounts Receivable The carrying amount approximates fair value due to the short maturity of these instruments. Short and Long-Term Debt The carrying amount of the Company's borrowings under the revolver approximate fair value. The fair value of long-term debt is based on the current rates offered to the Company for debt with similar terms and average maturities. The carrying amount of long-term debt of $227,641 and $234,921 has approximate fair values of $230,437 and $239,020, at December 28, 1997 and December 29, 1996, respectively. Notes to Consolidated Financial Statements Amounts in Thousands (except for per share data) - ------------------------------------------------ (22) QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
Following is a presentation of selected financial data for each of the four quarters of fiscal year 1997 and 1996: First Second Third Fourth quarter quarter quarter quarter - ----------------------------------------------------------------------------------------------------------------------- 1997: Sales $ 141,467 $ 152,029 $ 152,007 $ 143,771 Gross profit 40,992 43,700 43,431 42,512 Operating income 5,478 (1,422) 7,964 7,510 Net income (loss) (1,019) (5,075) 339 150 Basic net income (loss) per share (0.13) (0.64) .04 .02 Diluted net income (loss) per share (0.13) (0.64) .04 .02 Average shares outstanding 7,883 7,932 7,934 7,937 Average shares outstanding-diluted 7,883 7,932 8,653 8,482 1996: Sales $ 142,809 $ 160,953 $ 158,506 $ 150,308 Gross profit 40,103 43,836 44,273 41,368 Operating income 4,668 6,827 7,172 6,388 Net loss (1,633) (415) (64) (698) Basic loss per share (0.21) (0.05) (0.01) (0.09) Diluted loss per share (0.21) (0.05) (0.01) (0.09) Average shares outstanding 7,805 7,808 7,815 7,825 Average shares outstanding-diluted 7,805 7,808 7,815 7,825 =======================================================================================================================
Notes to Consolidated Financial Statements Amounts in Thousands (except for per share data) - ------------------------------------------------ (23) CONDENSED CONSOLIDATING FINANCIAL INFORMATION The Company issued $100,000 of senior subordinated unsecured notes on November 15, 1995. CGF Properties, Inc. has not guaranteed the unsecured notes and financial information for this wholly-owned subsidiary is presented separately. All of the Company's other direct and indirect subsidiaries, AOL Express, Inc., APR Forwarders, Inc., Oaken Keg Spirit Shops, Inc. and Alaska Advertisers, Inc., are wholly-owned and have fully and unconditionally guaranteed the unsecured notes on a joint and several basis and, accordingly, are presented on a combined basis. Parent company only information is presented for Carr-Gottstein Foods Co., which reflects only its business activity and its wholly-owned subsidiaries accounted for using the equity method. Separate financial statements and other disclosures for the guarantor subsidiaries are not presented because in the opinion of management such information is not material. The following are condensed consolidating balance sheets:
Balance Sheet Non-Guarantor Guarantor Parent Subsidiary Subsidiaries Company December 28, 1997 CGF Properties (Combined) Only Elimination Consolidated - ----------------------------------------------------------------------------------------------------------------------- Assets Inventories $ - $ 3,837 $ 47,634$ - $ 51,471 Other current assets 8,323 74,760 5,230 (59,700) 28,613 - ----------------------------------------------------------------------------------------------------------------------- Total current assets 8,323 78,597 52,864 (59,700) 80,084 Property, plant and equipment, net 62,671 4,951 66,468 - 134,090 Intangible, net - - 88,973 - 88,973 Investments in subsidiaries - - 108,207 (108,207) - Other assets 32 573 11,713 - 12,318 - ----------------------------------------------------------------------------------------------------------------------- $ 71,026 $ 84,121 $ 328,225 $ (167,907) $ 315,465 ======================================================================================================================= Liabilities and Stockholders' Equity Current liabilities $ 1,591 $ 4,276 $ 126,037 $ (59,700) $ 72,204 Long-term debt, excluding current maturities 41,073 - 174,347 - 215,420 Other liabilities - - 3,527 - 3,527 - ----------------------------------------------------------------------------------------------------------------------- Total liabilities 42,664 4,276 303,911 (59,700) 291,151 - ----------------------------------------------------------------------------------------------------------------------- Common stock 10 44 97 (54) 97 Additional paid-in capital 28,966 39,381 52,088 (68,347) 52,088 Retained earnings (deficit) (614) 40,420 (16,149) (39,806) (16,149) - ----------------------------------------------------------------------------------------------------------------------- 28,362 79,845 36,036 (108,207) 36,036 Less treasury stock - - 11,722 - 11,722 - ----------------------------------------------------------------------------------------------------------------------- Total stockholders' equity 28,362 79,845 24,314 (108,207) 24,314 - ----------------------------------------------------------------------------------------------------------------------- $ 71,026 $ 84,121 $ 328,225 $ (167,907) $ 315,465 =======================================================================================================================
Notes to Consolidated financial Statements Amounts in Thousands (except for per share data) - ------------------------------------------------
Balance Sheet Non-Guarantor Guarantor Parent Subsidiary Subsidiaries Company December 29, 1996 CGF Properties (Combined) Only Elimination Consolidated - ----------------------------------------------------------------------------------------------------------------------- Assets Inventories $ - $ 4,690 $ 49,542$ - $ 54,232 Other current assets 5,526 63,389 6,117 (45,000) 30,032 - ----------------------------------------------------------------------------------------------------------------------- Total current assets 5,526 68,079 55,659 (45,000) 84,264 Property, plant and equipment, net 65,191 5,725 71,263 - 142,179 Intangible, net - - 91,731 - 91,731 Investments in subsidiaries - - 101,920 (101,920) - Other assets 32 483 12,155 - 12,670 - ----------------------------------------------------------------------------------------------------------------------- $ 70,749 $ 74,287 $ 332,728 $ (146,920) $ 330,844 ======================================================================================================================= Liabilities and Stockholders' Equity Current liabilities $ 966 $ 279 $ 113,904 $ (45,000) $ 70,149 Long-term debt, excluding current maturities 41,871 - 185,769 - 227,640 Other liabilities - - 3,457 - 3,457 - ----------------------------------------------------------------------------------------------------------------------- Total liabilities 42,837 279 303,130 (45,000) 301,246 - ----------------------------------------------------------------------------------------------------------------------- Common stock 10 44 97 (54) 97 Additional paid-in capital 28,966 39,381 52,513 (68,347) 52,513 Stock subscription receivable - - - - - Retained earnings (deficit) (1,064) 34,583 (10,544) (33,519) (10,544) - ----------------------------------------------------------------------------------------------------------------------- 27,912 74,008 42,066 (101,920) 42,066 Less treasury stock - - 12,468 - 12,468 - ----------------------------------------------------------------------------------------------------------------------- Total stockholders' equity 27,912 74,008 29,598 (101,920) 29,598 - ----------------------------------------------------------------------------------------------------------------------- ======================================================================================================================= $ 70,749 $ 74,287 $ 332,728 $ (146,920) $ 330,844 =======================================================================================================================
Notes to Consolidated Financial Statements Amounts in Thousands (except for per share data) - ------------------------------------------------
The following are condensed consolidating statements of operations: Statement of Operations Non-Guarantor Guarantor Parent Subsidiary Subsidiaries Company Fiscal year 1997 CGF Properties (Combined) Only Elimination Consolidated - ----------------------------------------------------------------------------------------------------------------------- Sales $ - $ 78,176 $ 551,205 $ (40,107) $ 589,274 Cost of merchandise sold, including warehousing and transportation - 57,142 401,604 (40,107) 418,639 - ----------------------------------------------------------------------------------------------------------------------- Gross profit - 21,034 149,601 - 170,635 Operating and administrative (income) expenses (5,218) 11,141 145,182 - 151,105 - ----------------------------------------------------------------------------------------------------------------------- Operating income 5,218 9,893 4,419 - 19,530 Interest expense, net (4,456) - (22,255) - (26,711) Other income (expense) - - (373) - (373) Equity in subsidiary earnings - - 6,287 (6,287) - - ----------------------------------------------------------------------------------------------------------------------- Income before income tax 762 9,893 (11,922) (6,287) (7,554) Income tax (expense) benefit (312) (4,056) 6,317 - 1,949 - ----------------------------------------------------------------------------------------------------------------------- ======================================================================================================================= Net income (loss) $ 450 $ 5,837 $ (5,605) $ (6,287) $ (5,605) =======================================================================================================================
Notes to Consolidated Financial Statements Amounts in Thousands (except for per share data) - ------------------------------------------------
Statement of Operations Non-Guarantor Guarantor Parent Subsidiary Subsidiaries Company Fiscal year 1996 CGF Properties (Combined) Only Elimination Consolidated - ----------------------------------------------------------------------------------------------------------------------- Sales $ - $ 75,159 $ 574,182 $ (36,765) $ 612,576 Cost of merchandise sold, including warehousing and transportation - 54,261 425,500 (36,765) 442,996 - ----------------------------------------------------------------------------------------------------------------------- Gross profit - 28,898 148,682 - 169,580 Operating and administrative (income) expenses (5,155) 11,884 137,796 - 144,525 - ----------------------------------------------------------------------------------------------------------------------- Operating income 5,155 9,014 10,886 - 25,055 Interest expense, net (4,522) - (23,401) - (27,923) Other income (expense) - - 88 - 88 Equity in subsidiary earnings - - 5,691 (5,691) - - ----------------------------------------------------------------------------------------------------------------------- Income before income tax 633 9,014 (6,736) (5,691) (2,780) Income tax (expense) benefit (260) (3,696) 3,926 - (30) - ----------------------------------------------------------------------------------------------------------------------- Net income (loss) $ 373 $ 5,318 $ (2,810) $ (5,691) $ (2,810) =======================================================================================================================
Notes to Consolidated Financial Statements Amounts in Thousands (except for per share data) - ------------------------------------------------
Statement of Operations Non-Guarantor Guarantor Parent Subsidiary Subsidiaries Company Fiscal year 1995 CGF Properties (Combined) Only Elimination Consolidated - ----------------------------------------------------------------------------------------------------------------------- Sales $ - $ 78,302 $ 562,830 $ (39,810) $ 601,322 Cost of merchandise sold, including warehousing and transportation - 56,359 414,777 (39,810) 431,230 - ----------------------------------------------------------------------------------------------------------------------- Gross profit - 21,943 148,053 - 170,092 Operating and administrative (income) expenses (4,981) 10,439 136,330 - 141,884 - ----------------------------------------------------------------------------------------------------------------------- Operating income 4,981 11,504 11,723 - 28,208 Interest expense, net (4,589) - (11,490) - (16,079) Gain (loss) on disposal of fixed assets 2 12 (37) - (23) Equity in subsidiary earnings - - 7,015 (7,015) - Non-recurring costs related to sale-leaseback - - (2,249) - (2,249) - ----------------------------------------------------------------------------------------------------------------------- Income before income tax and extraordinary item 394 11,516 4,962 (7,015) 9,857 Income tax expense (162) (4,733) (312) - (5,207) - ----------------------------------------------------------------------------------------------------------------------- Income before extraordinary item 232 6,783 4,650 (7,015) 4,650 Extraordinary item - loss on early retirement of debt, net of tax benefit - - (906) - (906) - ----------------------------------------------------------------------------------------------------------------------- Net income $ 232 $ 6,783 $ 3,744 $ (7,015) $ 3,744 =======================================================================================================================
Notes to Consolidated Financial Statements Amounts in Thousands (except for per share data) - ------------------------------------------------ The following is condensed consolidating cash flow information. The consolidated Company's cash and cash equivalents is positive at each balance sheet date so negative balances for individual subsidiaries are not classified as liabilities. The net cash provided by operating activities fluctuates due to changes in intercompany receivables and payables from the transfer of cash to and from the parent company.
Statement of Cash Flows Non-Guarantor Guarantor Parent Subsidiary Subsidiaries Company Fiscal year 1997 CGF Properties (Combined) Only Consolidated - ----------------------------------------------------------------------------------------------------------------------- Net cash provided by operating activities $ 661 $ 43 $ 21,486 $ 22,190 - ----------------------------------------------------------------------------------------------------------------------- Investing activities Addition to property and equipment - (43) (6,967) (7,010) Proceeds from sale of property and equipment - - 1,206 1,206 - ----------------------------------------------------------------------------------------------------------------------- Net cash used in investing activities - (43) (5,761) (5,804) - ----------------------------------------------------------------------------------------------------------------------- Financing activities Net payments under line of credit - - (7,000) (7,000) Payments on long-term debt (661) - (6,620) (7,281) Purchase of treasury stock - - 321 321 - ------------------------------------------------------------------------------------------------------------------------- Net cash used by financing activities (661) - (13,299) (13,960) - ----------------------------------------------------------------------------------------------------------------------- Net increase in cash and cash equivalents - - 2,426 2,426 Cash and cash equivalents at beginning of year 53 106 8,496 8,655 - --------------------------------------------------------------------------------------------------------------------- Cash and cash equivalents at end of year $ 53 $ 106 $ 10,922 $ 11,081 =======================================================================================================================
Notes to Consolidated Financial Statements Amounts in Thousands (except for per share data) - ------------------------------------------------
Statement of Cash Flows Non-Guarantor Guarantor Parent Subsidiary Subsidiaries Company Fiscal year 1996 CGF Properties (Combined) Only Consolidated - ----------------------------------------------------------------------------------------------------------------------- Net cash provided by operating activities $ 548 $ 417 $ 21,240 $ 22,205 - ---------------------------------------------------------------------------------------------------------------------- Investing activities Addition to property and equipment - (368) (4,022) (4,390) Proceeds from sale of property and equipment - - 287 287 - ----------------------------------------------------------------------------------------------------------------------- Net cash used in investing activities - (368) (3,735) (4,103) - ----------------------------------------------------------------------------------------------------------------------- Financing activities Net payments under line of credit - - (9,000) (9,000) Payments on long-term debt (548) - (2,822) (3,370) Purchase of treasury stock - - 62 62 Change in stock subscriptions receivable - - 44 44 - ----------------------------------------------------------------------------------------------------------------------- Net cash used by financing activities (548) - (11,716) (12,264) - ----------------------------------------------------------------------------------------------------------------------- Net increase in cash and cash equivalents - 49 5,789 5,838 Cash and cash equivalents at beginning of year 53 57 2,707 2,817 - ----------------------------------------------------------------------------------------------------------------------- Cash and cash equivalents at end of year $ 53 $ 106 $ 8,496 $ 8,655 =======================================================================================================================
Notes to Consolidated Financial Statements Amounts in Thousands (except for per share data) - ------------------------------------------------
Statement of Cash Flows Non-Guarantor Guarantor Parent Subsidiary Subsidiaries Company Fiscal year 1995 CGF Properties (Combined) Only Consolidated - ----------------------------------------------------------------------------------------------------------------------- Net cash provided by (used in) operating activities $ (1,336) $ 605 $ 17,869 $ 17,138 - ----------------------------------------------------------------------------------------------------------------------- Investing activities Addition to property and equipment (139) (637) (15,884) (16,660) Addition to intangible assets - - (26) (26) Proceeds from sale of subsidiary - - 983 983 Other 2 12 52 66 - ----------------------------------------------------------------------------------------------------------------------- Net cash used in investing activities (137) (625) (14,875) (15,637) - ----------------------------------------------------------------------------------------------------------------------- Financing activities Proceeds from issuance of debt - - 186,750 186,750 Net borrowings under line of credit - - 4,044 4,044 Payments on long-term debt (540) - (103,662) (104,202) Purchase and retirement of common stock - - - (83,250) (83,250) Purchase of treasury stock - - (2,498) (2,498) Other - - 152 152 - ----------------------------------------------------------------------------------------------------------------------- Net cash used by financing activities (540) - 1,536 996 - ----------------------------------------------------------------------------------------------------------------------- Net increase (decrease) in cash and cash equivalents (2,013) (20) 4,530 2,497 Cash and cash equivalents at beginning of year 2,066 77 (1,823) 320 - ----------------------------------------------------------------------------------------------------------------------- Cash and cash equivalents at end of year $ 53 $ 57 $ 2,707 $ 2,817 =======================================================================================================================
CARR-GOTTSTEIN FOODS CO. AND SUBSIDIARIES Index to Exhibits Sequentially Exhibit No. Description Numbered 3.1(1) Restated Certificate of Incorporation 3.3(2) Restated Bylaws 4.1(3) Indenture dated as of November 15, 1995 among Registrant, the certain subsidiaries of Registrant and U.S. Trust company of California, N.A., as Trustee 4.2(3) Registration Rights Agreement dated as of November 15, 1995 among Registrant, certain subsidiaries of Registrant, and Donaldson, Lufkin, & Jenrette Securities Corporation, BT Securities Corporation and Goldman, Sachs & Co. 4.3 Form of Note Certificate (included in Exhibit 4.1) 4.4 First Supplemental Indenture dated as of March 14, 1996 among Carr-Gottstein Foods Co., the guarantors named therein and U.S. Trust Company of California, N.A., as Trustee 10.1(4) Deed of Trust, Assignment of Rents, Security Agreement and Fixture filing dated October 11, 1991 by and between CGF Properties, Inc., Stewart Title Company of Alaska, Inc., and Teachers Insurance and Annuity Association of America 10.2(4) Assignment of Lessor's Interest in lease dated October 11, 1991 by Registrant in favor of Teachers Insurance and Annuity Association of America 10.3(4) Environmental Indemnity dated October 11, 1991 by Registrant payable to Teachers Insurance and Annuity Association of America 10.8(4) Carr-Gottstein Foods Co. 1991 Stock Option Plan 10.14(4) Shared Appreciation Agreement dated October 12, 1990 between Carr-Gottstein Foods Co. and Registrant 10.22(4) Amended and Restated Retail Lease (Huffman Shopping Center) dated October 12, 1990 between Labar Co. and Registrant 10.65(5) Carr-Gottstein Foods Co. Retirement Savings & Investment Plan and Trust as Amended and Restated July 1, 1991 10.66(5) Oaken Keg Spirit Shops Retirement Savings & Investment Plan and Trust as Amended and Restated July 1, 1991 10.67(5) Amendment to the Carr-Gottstein 1991 Stock Option Plan 10.71(6) Form of Assignment and Assumption Agreement 10.72(6) Form of Assignment of Leases and Rents 10.73(6) Form of Environmental Indemnity Agreement 10.74(6) Form of Fee Mortgage 10.75(6) Form of Leasehold Mortgage 10.79(6) Swing Line Loan Promissory Note ($5,000,000) between Registrant and Bankers Trust Company 10.80(6) Guaranty Agreement 10.81(6) Security Agreement 10.82(6) Pledge Agreement 10.83(6) Collateral Account Agreement 10.97(7) 1991 Outside Directors Stock Option Plan 10.99(8) Employment Agreement - Lawrence Hayward 10.101(9) Employment Agreement - Donald Anderson 10.102(10)Amended and Restated Credit Agreement, dated as of November 15, 1995 among Registrant, certain lenders and Bankers Trust Company, as agent 10.103(11)Management Service Agreement between Registrant and Leonard Green & Associates, L.P. 21(11) Subsidiaries of Registrant Footnotes to Exhibits - --------------------- (1) Incorporated by reference to the exhibit filed with the Registrant's Quarterly Report on Form 10-Q for the quarter ended July 4, 1993. (2) Incorporated by reference to the exhibit filed with the Registrant's Quarterly Report on Form 10-Q for the quarter ended October 3, 1993 (3) Incorporated by reference to the exhibit filed with the Registrant's Amendment Number 2 to Schedule 13E-4 first published on October 13, 1995 (4) Incorporated by reference to the exhibit filed with the Registrant's Form S-1 Registration Statement filed on May 21, 1993. (5) Incorporated by reference to the exhibit filed with the Registrant's Quarterly Report on Form 10-Q for the quarter ended July 4, 1993. (6) Incorporated by reference to the exhibit filed with the Registrant's Quarterly Report on Form 10-Q for the quarter ended October 3, 1993. (7) Incorporated by reference to the exhibit filed with the Registrant's Quarterly Report on Form 10-Q for the quarter ended July 3, 1994. (8) Incorporated by reference to the exhibit filed with the Registrant's Quarterly Report on Form 10-Q for the quarter ended October 2, 1994. (9) Incorporated by reference to the exhibit filed with the Registrant's Annual Report on Form 10-K for the fiscal year ended January 1, 1995. (10) Incorporated by reference to the exhibit filed with the Registrant's Quarterly Report on Form 10-Q for the quarter ended July 2, 1995. (11) Incorporated by reference to the exhibit filed with the Registrant's Registration Statement on Form S-4 on December 19, 1995. EX-27 2 FINANCIAL DATA SCHEDULE
5 This schedule contains summary financial information extracted from the consolidated balance sheet as of December 28, 1997, and the related statements of income and cash flows for the 12-month period then ended and is qualified in its entirety by reference to such financial statements. 1000 YEAR DEC-28-1997 DEC-28-1996 DEC-28-1997 11081 0 12212 699 51471 80084 218643 84553 315465 72204 0 0 0 97 24217 315465 589274 589274 418639 418639 151478 0 26711 (7554) (1949) (5605) 0 0 0 (5605) (0.71) (0.71)
EX-27.1 3 RESTATED FINANCIAL DATA SCHEDULE
5 This schedule contains summary financial information extracted from the consolidated balance sheet as of December 29, 1996, and the related statements of income and cash flows for the 12-month period then ended and is qualified in its entirety by reference to such financial statements. 1000 YEAR DEC-29-1996 JAN-01-1996 DEC-29-1996 8655 0 16893 243 54232 84264 214177 71998 330844 70149 0 0 0 97 29501 330844 612576 612576 442996 442996 144525 0 27923 (2780) 30 0 0 0 0 (2810) (0.36) (0.36) Restated to be consistent with 1997 presentation. Restated to reflect adoption in fourth quarter 1997 of FAS 128 which is a new standard of computing and presenting both basic and diluted net income per share.
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