Item 1. Business - ----------------
SFW Holding Corp. (the "Company") was incorporated in Delaware in January 1997, and is a wholly-owned subsidiary of Dart Group Corporation ("Dart").
On May 18, 1998, a wholly-owned subsidiary of Richfood Holdings, Inc. ("Richfood") acquired all of the outstanding shares of Dart. In connection with that acquisition, Richfood caused the subsidiary to merge with and into Dart in a transaction in which Dart became a wholly-owned subsidiary of Richfood. As a result of the merger, Richfood indirectly owned 100% of the outstanding common stock of the Company.
On August 31, 1999, Richfood was acquired in a merger by a wholly-owned subsidiary of SUPERVALU INC., a Delaware corporation ("SUPERVALU"), and the Company became an indirect, wholly-owned subsidiary of SUPERVALU.
The Company's sole asset is its ownership of 100% of the outstanding common stock of Shoppers Food Warehouse Corp. ("Shoppers"). The Company's business is substantially the same as that of Shoppers and is subject to all of the risks associated therewith. Therefore, substantially all of the information set forth herein which pertains to the operations of the Company's business and its financial condition references the business and financial condition of Shoppers. Shoppers' principal executive offices are located at 4600 Forbes Blvd., Lanham, Maryland 20706. The telephone number of Shoppers is 301-306-8600.
Operations - ----------
Shoppers is a leading supermarket operator in Greater Washington, D.C. (as defined below), operating 36 stores under the "Shoppers Food Warehouse" and "Shoppers Club" names. Shoppers operates warehouse-style, price impact superstores that focus on providing value to Shoppers' customers while offering a convenient one stop shopping opportunity.
Most of Shoppers' price superstores offer traditional dry grocery departments, along with strong basic perishables. In addition to national brands, Shoppers' stores carry a variety of grocery and general merchandise under private label names, including "Richfood" and "Shoppers Food Warehouse." Private label products are of a quality generally comparable to that of national brands, at significantly lower prices. Shoppers' stores carry over 30,000 items, and generally range in size from 20,000 to 77,000 square feet with an average size of approximately 47,000 square feet.
Store Expansion and Remodeling - ------------------------------
Shoppers has plans to open several new stores and upgrade existing stores. Shoppers has opened 4 new stores since July, 1997 and is currently considering expanding or remodeling at least 3 stores during fiscal 2001. Of its existing 36 stores, 27 are larger than 40,000 square feet, and all but one of Shoppers' stores were opened, remodeled or expanded during the last ten years. The Company believes that Shoppers' existing supermarkets generally have well-established locations with favorable lease terms (including multiple options), are in good condition and require only routine maintenance.
The following chart sets forth certain information concerning Shoppers' stores during the past five fiscal years:
Fiscal Year --------------------------------------- 1996 1997 1998 1999 2000 ---- ---- ---- ---- ---- Number of Stores at Beginning of Period 33 34 34 37 38 New Stores Opened 1 0 3 1 0 Stores Closed 0 0 0 0 2 --- --- --- --- --- Stores at End of Period 34 34 37 38 36 Remodeled/Expanded 0 2 0 2 2
Purchasing, Warehousing and Distribution - ----------------------------------------
Shoppers purchases approximately 75% of its inventory from Richfood. Because Shoppers' stores receive most of their deliveries from Richfood almost daily, Shoppers maintains no warehouse storage space. Shoppers also purchases merchandise sold in its supermarkets, in particular, beverages and snack products, from sources other than Richfood and SUPERVALU.
Competition - -----------
The supermarket industry is highly competitive and characterized by narrow profit margins. Shoppers' competitors include national, regional and local supermarket chains, independent grocery stores, specialty food stores, warehouse club stores, drug stores and convenience stores. Supermarket chains generally compete on the basis of location, quality of products, service, price, product variety and store condition. Shoppers competes by providing its customers with exceptional value by offering quality produce and fresh foods, higher-end specialty departments with self-service and discount price features, and a selection of national brand groceries and private label goods, all at competitive prices. Shoppers is the largest supermarket chain targeting the price-conscious segment in Greater Washington, D.C. While similar in most respects to conventional supermarket operators, Shoppers' stores offer a greater selection of "club size" products, along with popular-sized brands. Through this approach, Shoppers has established a unique niche among supermarket operators in Greater Washington, D.C.
The two primary competitors of Shoppers are Giant Food, Inc. ("Giant") and Safeway Inc. ("Safeway"), conventional supermarket chains, both of which operate in the higher-service, higher-price segment. Giant and Safeway have market shares in Greater Washington, D.C. of approximately 44% and 26%, respectively. The Company believes that Shoppers' market share is approximately 13%, the third largest market share in Greater Washington, D.C. "Greater Washington, D.C." includes Washington, D.C.; Calvert, Charles, Frederick, Montgomery and Prince Georges counties in Maryland; Arlington, Fairfax, Loudoun, Prince William and Stafford counties in Virginia; and the independent cities of Alexandria, Fairfax and Falls Church in Virginia. Shoppers does not, however, operate any stores in the city of Washington, D.C.
Shoppers' ability to remain competitive in its markets depends in part on its ability to remodel and update its stores in response to remodelings and new store openings by its competitors. The Company believes that Shoppers will face increased competition in the future from other supermarket chains and Shoppers intends to compete aggressively against existing and new competition.
Employees - ---------
As of January 29, 2000, Shoppers employed approximately 5,200 people, of whom approximately 1,500 were full-time. Approximately 5,000 employees were covered by collective bargaining agreements with various locals of two unions. Shoppers has an agreement with United Food and Commercial Workers, Local 400, which will expire July 1, 2000 and covers approximately 4,700 retail clerks and meat cutters, and an agreement with United Food and Commercial Workers, Local 27, which will expire September 30, 2001 and covers approximately 300 retail clerks and meat cutters.
Trade Names, Service Marks and Trademarks - -----------------------------------------
Shoppers uses a variety of trade names, service marks and trademarks. Except for "Shoppers," "SFW," "Shoppers Food Warehouse" and "Shoppers Club," the Company does not believe any of such trade names, service marks or trademarks are material to Shoppers' business. Shoppers presently has federal registrations of the "Shoppers Food Warehouse" and "Colossal Donuts" trademarks. It has federal registration of "Shoppers Club" as a service mark and is seeking federal registration of it as a trademark. Shoppers also has federally registered "Shoppers," "Shoppers Food Warehouse" and "SFW" as service marks and has also registered the "Shoppers Food Warehouse" and "SFW" designs.
Government Regulation - ---------------------
Shoppers is subject to regulation by a variety of governmental agencies, including, but not limited to, the U.S. Food and Drug Administration, the U.S. Department of Agriculture and state and local health departments and other agencies, including those regulating the sale of beer and wine.
Environmental Matters - ---------------------
Shoppers is subject to federal, state and local laws, regulations and ordinances that (i) govern activities or operations that may have adverse environmental effects, such as discharges to air and water, as well as handling and disposal practices for solid and hazardous wastes, and (ii) impose liability for the costs of cleaning up, and certain damages resulting from, sites of past spills, disposals or other releases of hazardous materials. The Company believes that Shoppers conducts its operations in compliance with applicable environmental laws. Shoppers has not incurred material capital expenditures for environmental controls during the previous three years.
Item 2.
Item 2. Properties - ------------------
Shoppers has 18 supermarkets in Virginia and 18 in Maryland, all of which are leased. Most are operated under long-term leases that the Company believes have favorable terms. Shoppers' stores range in size from approximately 20,000 to 77,000 total square feet and average approximately 47,000 square feet. Shoppers' stores can be categorized by size as follows: (i) 9 stores smaller than 40,000 square feet; (ii) 11 stores ranging from 40,000 to 50,000 square feet; and (iii) 16 stores between 50,000 and 77,000 square feet.
Shoppers leases an 86,000 square foot office building located in Lanham, MD that serves as its corporate offices. The lease commenced in 1990 and expires in 2010. Shoppers subleases approximately 2,000 square feet of this office building to unrelated third parties.
Item 3.
Item 3. Legal Proceedings - -------------------------
There are no material pending legal proceedings other than ordinary routine litigation incidental to the business of Shoppers or the Company.
Item 4.
Item 4. Submission of Matters to a Vote of Security Holders - -----------------------------------------------------------
Information omitted in accordance with General Instruction I (2)(c).
Part II -------
Item 5.
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters - -----------------------------------------------------------------------------
The Company's common stock is not publicly traded.
Item 6.
Item 6. Selected Financial Data - -------------------------------
Information omitted in accordance with General Instruction I(2)(a).
Item 7.
Item 7. Management's Discussion and Analysis of Financial Condition and Results - ------------------------------------------------------------------------------- of Operations -------------
Outlook - -------
Except for historical information, statements in the Management's Discussion and Analysis of Financial Condition and Results of Operations are "forward-looking" within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Actual results may differ materially due to a variety of factors, including Shoppers' ability to open new stores and the effect of regional economic conditions. The Company undertakes no obligation and does not intend to update, revise or otherwise publicly release any revisions to these forward-looking statements that may be made to reflect future events or circumstances, other than through its regular quarterly and annual reports filed with the Securities and Exchange Commission.
Results of Operations - ---------------------
Reference to "fiscal 2000" means the 52 weeks ended January 29, 2000, "fiscal 1999" means the 52 weeks ended January 30, 1999 and "fiscal 1998" means the 52 weeks ended January 31, 1998.
The results of operations in the financial statements present split periods due to the acquisition of Richfood and Shoppers by SUPERVALU that occurred August 30, 1999. During fiscal 2000, SUPERVALU operated Shoppers as a distinct unit within its retail division. Management's Discussion and Analysis of Financial Condition and Results of Operations is based on results for the full year.
Fiscal 2000 Compared with Fiscal 1999
Sales remained relatively flat, at $885.4 in 2000 compared to $885.6 million in fiscal 1999. The sales decrease was primarily due to the closing of two stores during fiscal 2000. Comparable store sales were flat during fiscal 2000.
Gross profit increased by approximately $5.3 million, or 2.5%, at $218.9 million in fiscal 2000 compared to $213.6 million in fiscal 1999. Gross profit, as a percentage of sales, increased to 24.7% during fiscal 2000 compared to 24.1% during fiscal 1999. The increase in gross profit was primarily due to merchandising initiatives.
Selling and administrative expenses increased by approximately $5.6 million, or 3.3%, to $175.9 million in fiscal 2000 from $170.3 million in fiscal 1999. Selling and administrative expenses, as a percentage of sales, increased to 19.9% during fiscal 2000 from 19.2% during fiscal 1999. The increase was primarily attributable to an increase in payroll and benefits costs as well as higher advertising expenses.
Operating income was $27.7 million for fiscal 2000 compared to $29.8 million for fiscal 1999. The decrease was primarily due to the increased selling and administrative expenses and increased amortization of goodwill and depreciation of fixed assets.
Interest income decreased approximately $0.5 million during fiscal 2000 compared to fiscal 1999 due to the fact that fewer investments were made as a result of a lower cash balance held during fiscal 2000.
Interest expense decreased approximately $3.0 million from $18.5 million during fiscal 1999 to $15.5 million during fiscal 2000. The reduction in interest expense was primarily driven by lower debt levels due to the purchase of $24.6 million of the Senior Notes in October 1999.
The effective income tax rate for fiscal 2000 was 56.4% compared to 54.3% for fiscal 1999. The increase was attributable to a full year's worth of depreciation of acquisition-related goodwill as a result of the Dart Acquisition by Richfood in May 1998.
Net income was $6.9 million during fiscal 2000 compared to $7.1 million in fiscal 1999, a decrease of 2.4%.
Fiscal 1999 Compared with Fiscal 1998
Sales increased by $29.8 million, from $855.8 million during fiscal 1998 to $885.6 million during fiscal 1999. The sales increase was primarily due to additional sales associated with four new stores opened since July 1997. Comparable store sales decreased 6.0% during fiscal 1999, compared to the prior fiscal year. The decrease in comparable store sales was primarily due to cannibalization of existing Shoppers' stores and competitive market conditions.
Gross profit increased by $14.4 million (7.2%), from $199.2 million during fiscal 1998 to $213.6 million during fiscal 1999. Gross profit, as a percentage of sales, increased to 24.1% during fiscal 1999 from 23.3% during fiscal 1998. The increase in gross profit was primarily due to promotional pricing as well as better buying.
Selling and administrative expenses increased by $9.6 million (6.0%), from $160.7 million during fiscal 1998 to $170.3 million during fiscal 1999. Selling and administrative expenses, as a percentage of sales, increased from 18.8% during fiscal 1998 to 19.2% during fiscal 1999. The increases were primarily attributable to higher advertising expenses and one time promotional expenses at certain locations.
Operating income was $29.8 million for fiscal 1999 compared to $27.4 million during the prior fiscal year. The increase was primarily due to the increase in gross profit, partially offset by the increased selling and administrative expenses and amortization of goodwill.
Interest expense decreased approximately $2.6 million from $21.1 million during fiscal 1998 to $18.5 million during fiscal 1999. The decrease was primarily the result of a reduction in interest expense due to accretion of the adjustment to market value of the Senior Notes made in conjunction with the Dart acquisition.
The effective income tax rate for fiscal 1999 was 54.3% compared to 48.5% for fiscal 1998. The increase was attributable to nondeductible amortization of acquisition related goodwill.
Net income increased by $3.4 million, from $3.7 million during fiscal 1998 to $7.1 million during fiscal 1999. The increase was primarily attributable to the increase in operating income during fiscal 1999 and an extraordinary item of $3.1 million on the loss on early extinguishment of debt during fiscal 1998.
Effects of Inflation - --------------------
During the last three fiscal years, the rate of general inflation has been relatively low and has not had a significant impact on Shoppers' net sales or income.
Liquidity and Capital Resources - -------------------------------
Shoppers' principal source of liquidity is expected to be its cash flows from operations. It is anticipated that Shoppers' principal uses of liquidity will be to provide working capital, finance capital expenditures and meet debt service requirements.
During fiscal 2000, operating activities generated net cash of $21.1 million compared to using $12.4 million during the prior fiscal year. The increase was primarily due to changes in working capital.
Investing activities used $17.7 million of Shoppers' cash during fiscal 2000 compared to $5.9 million during fiscal 1999. The increase was primarily due to an increase of $11.3 million in capital expenditures due to the major remodeling of two of Shoppers' stores during fiscal 2000. The Company estimates that Shoppers will make total capital expenditures of approximately $20.0 million during the 52 weeks ending February 3, 2001. The Company expects that these capital expenditures will be financed primarily through cash flows from Shoppers' operations.
Financing activities used $6.6 million during fiscal 2000 compared to generating $20.9 in the prior year. The change was primarily due to the $26.7 million bond purchase by SUPERVALU.
The Company believes that cash flows from Shoppers' operations will be adequate to meet its anticipated requirements for working capital, debt service and capital expenditures.
New Accounting Standards - ------------------------
Revenue Recognition In December 1999, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 101 - Revenue Recognition ("SAB No.101"). SAB No. 101 provides guidance on recognition, presentation, and disclosure of revenue in financial statements.
Accounting for Derivative Instruments and Hedging Activities Statement of Financial Accounting Standard No. 133, "Accounting for Derivative Instruments and Hedging Activities" was issued in June 1998. This statement establishes comprehensive accounting and reporting standards for derivative instruments and hedging activities.
The provisions for SAB No. 101 are effective for fiscal 2001, and for SFAS No. 133 they are effective for fiscal 2002. The Company has not yet determined the impact, if any, these new standards may have on Shoppers' consolidated financial position or results of operations.
Item 7A.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk - -------------------------------------------------------------------
The registrant's market risk exposure is not material. Interest on both Shoppers' notes receivable and Senior Notes are at fixed rates. The market value of the fixed rate notes is subject to change due to fluctuations in market interest rates. Neither the Company or Shoppers has any other financial instruments that result in material exposure to interest rate risk.
Cautionary Statements for Purposes of the Safe Harbor Provisions of the Private - ------------------------------------------------------------------------------- Securities Litigation Reform Act of 1995 - ----------------------------------------
Any statements in this report regarding the Company's outlook for its businesses and their respective markets, such as projections of future performance, statements of management's plans and objectives, forecasts of market trends and other matters, are forward-looking statements based on the assumptions and beliefs of the Company's management. Such statements may be identified by such words or phrases as "will likely result," "are expected to," "will continue," "outlook," "is anticipated," "estimate," "project," "management believes" or similar expressions. Such forward-looking statements are subject to certain risks and uncertainties that could cause actual results to differ materially from those discussed in such forward-looking statements and no assurance can be given that the results in any forward-looking statement will be achieved. For these statements, the Company claims the protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995.
The following is a summary of certain factors, the results of which could cause the Company's future results to differ materially from those expressed in any forward-looking statements contained in this report:
(1) the nature and extent of the consolidation of the retail food and food distribution industry; (2) the competitive practices in the retail and food distribution industries; (3) the ability of Shoppers to continue to recruit, train and retain quality franchise and corporate retail store operators; and (4) the ability of the Shoppers to attract and retain customers.
Since the Company does not operate any businesses and its sole asset is the common stock of Shoppers, the Company is subject to the same risks and uncertainties as Shoppers. Please refer to Exhibit 99(i) of this report, and subsequent quarterly reports on Form 10-Q, as filed with the Securities and Exchange Commission, for a more detailed discussion of these and other factors that could cause the Company's actual results in future periods to differ materially from those projected in such forward-looking statements.
Item 8.
Item 8. Financial Statements and Supplementary Data - ---------------------------------------------------
Financial Statements Page - -------------------- ----
Independent Auditors' Report 10
Report of Independent Auditors 11
Report of Independent Public Accountants 12
Consolidated Balance Sheets 13
Consolidated Statements of Earnings 14
Consolidated Statements of Stockholders' Equity 15
Consolidated Statements of Cash Flows 16
Notes to Consolidated Financial Statements 17
INDEPENDENT AUDITORS' REPORT ----------------------------
THE BOARD OF DIRECTORS SFW HOLDING CORP.
We have audited the accompanying consolidated balance sheet of SFW Holding Corp. and subsidiaries ("the Company") as of January 29, 2000, and the related consolidated statements of operations, stockholders' equity and cash flows for the 22-week period ended January 29, 2000 and the 30-week period ended August 30, 1999. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit.
We conducted our audit 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 audit provides 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 SFW Holding Corp. and subsidiaries as of January 29, 2000, and the results of their operations and their cash flows for the 22-week period ended January 29, 2000 and the 30-week period ended August 30, 1999, in conformity with generally accepted accounting principles.
/s/ KPMG LLP
Norfolk, Virginia March 31, 2000
THE BOARD OF DIRECTORS SFW HOLDING CORP.:
We have audited the accompanying consolidated balance sheet of SFW Holding Corp. (a Delaware corporation and wholly owned indirect subsidiary of Dart Group Corporation) and subsidiaries (the "Company"), as of January 30, 1999, and the related consolidated statements of operations, stockholders' equity and cash flows for the thirty-seven week period ended January 30, 1999 and the fifteen week period ended May 18, 1998. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit. The consolidated balance sheet of SFW Holding Corp. and subsidiaries as of January 31, 1998 and the related consolidated statements of operations, stockholder's equity and cash flows for the 52 weeks ended January 31, 1998, the 31 weeks ended February 1, 1997 and the 52 weeks ended June 29, 1996 were audited by other auditors whose report, dated April 28, 1998, expressed an unqualified opinion on those statements.
We conducted our audit 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 audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of SFW Holding Corp. and subsidiaries as of January 30, 1999, and the results of their operations and their cash flows for the thirty-seven week period ended January 30, 1999 and the fifteen week period ended May 18, 1998, in conformity with generally accepted accounting principles.
/s/ Ernst & Young LLP
Richmond, Virginia April 26, 1999
Report of Independent Public Accountants
To the Board of Directors of SFW Holding Corp.:
We have audited the accompanying consolidated statements of operations, stockholders' equity, and cash flows of SFW Holding Corp. (a Delaware corporation and wholly owned subsidiary of SUPERVALU INC.) and subsidiaries (the "Company") for the fifty-two week period ended January 31, 1998. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the results of the operations and the cash flows of SFW Holding Corp. and subsidiaries for the fifty-two week period ended January 31, 1998, in conformity with accounting principles generally accepted in the United States.
Effective February 6, 1997, the Company changed its method of depreciating property and equipment.
/s/ ARTHUR ANDERSEN LLP
Vienna, Virginia April 28, 1998
SFW HOLDING CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (In thousands, except share and per share data)
SFW HOLDING CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF EARNINGS (In thousands)
SFW HOLDING CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (In thousands)
SFW HOLDING CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CASH FLOWS (In thousands)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
General - -------
The accompanying consolidated financial statements include the accounts of SFW Holding Corp. (a Delaware corporation) and its subsidiaries, (the "Company") for the 30 weeks ended August 30, 1999 ("30 weeks of fiscal 2000"), the 22 weeks ended January 29, 2000 ("22 weeks of fiscal 2000"), the 37 weeks ended January 30, 1999 ("37 weeks of fiscal 1999"), the 15 weeks ended May 19, 1998 ("15 weeks of fiscal 1998") and the 52 weeks ended January 31, 1998 ("fiscal 1998"). All significant intercompany accounts and transactions have been eliminated. The Company operates in one business segment. On May 18, 1998, a wholly-owned subsidiary of Richfood Holdings, Inc. ("Richfood") acquired all the outstanding shares of Dart (the "Dart Acquisition") and as a result, Richfood indirectly owned 100% of the outstanding common stock of the Company (see Note 2). On August 31, 1999, Richfood was acquired in a merger by a wholly-owned subsidiary of SUPERVALU INC., a Delaware corporation ("SUPERVALU"), and the Company became an indirect, wholly-owned subsidiary of SUPERVALU at that time (the "SUPERVALU Acquisition"). In both the Dart Acquisition and the SUPERVALU Acquisition, the assets and liabilities of the Company were recorded at fair value, with the excess purchase price allocated to goodwill.
The Company owns 100% of the outstanding common stock of Shoppers Food Warehouse Corp. ("Shoppers") and exists solely as a holding company for Shoppers. The Company's business is substantially the same as that of Shoppers. Therefore, substantially all of the information set forth in these Notes which pertains to the operations of Shoppers' business and its financial condition reflects the business and financial condition of the Company.
Fiscal Year - -----------
The Company's fiscal year ends on the Saturday closest to January 31.
Cash and Cash Equivalents - -------------------------
The Company considers all highly liquid temporary cash investments with initial maturities of three months or less to be cash equivalents. At January 29, 2000, there were no short term investments. At January 31, 1999, short-term investments of approximately $2.1 million were invested in money market funds.
Use of Estimates in Financial Statements - ----------------------------------------
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates.
Inventories - -----------
Shoppers' inventories are priced at the lower of cost or market. For substantially all inventories, cost is determined using the last-in, first-out ("LIFO") method. At both January 29, 2000 and January 30, 1999, the LIFO value of inventories approximated their replacement cost. Net income would have been higher by approximately $197,000, $200,000 and $368,000 for the 30 weeks ended August 30, 1999, the 15 weeks ended May 18, 1998 and fiscal 1998, respectively, if inventory had been priced on a FIFO basis.
Property and Equipment - ----------------------
Property and equipment are stated at cost. Estimated useful lives are generally ten years for buildings and major improvements, ten years for equipment and the shorter of the term of the lease or expected life for leasehold improvements. Property and equipment are stated at cost and depreciated using the straight-line method over the estimated useful lives of their respective assets.
Goodwill - --------
Amounts paid in excess of the fair value of acquired net assets are amortized on a straight-line basis. The recoverability of goodwill is assessed by determining whether the goodwill balance can be recovered through projected cash flows and operating results over its remaining life. Impairment of the asset would be recognized when it is probable that such future undiscounted cash flows will be less than the carrying value of the asset. Goodwill is being amortized over 40 years.
Leasehold Rights - ----------------
Favorable leasehold rights are amortized over the term of the lease using the straight-line method.
Other Assets - ------------
Other assets consist of long-term deposits and a non-compete agreement. The cost of the non-compete agreement is amortized straight line over the term of the non-compete agreement, which is 20 years.
Fair Value of Financial Instruments - -----------------------------------
At January 29, 2000 and January 30, 1999, the carrying amount of financial instruments included in current assets and current liabilities approximates fair value due to the short maturity of those instruments.
The fair value of the due to affiliates balance is not practical to estimate due to the nature of this obligation.
The fair value for Shoppers' fixed rate Senior Notes (see Note 4) is based on quoted market prices. The fair value of Shoppers' outstanding Senior Notes on January 29, 2000 was approximately $181.7 million compared to $211.8 million at January 30, 1999. The fair value of the Note Receivable from Dart (see Note 8) approximates the carrying value.
Reclassifications - -----------------
Certain reclassifications have been made to prior years' financial statements to conform to the 2000 presentation. These reclassifications did not affect results of operations as previously reported.
NOTE 2 - ACQUISITIONS
SUPERVALU Acquisition - ---------------------
On August 31, 1999, Richfood was acquired in a merger by a wholly-owned subsidiary of SUPERVALU INC., a Delaware corporation ("SUPERVALU"), and the Company became an indirect, wholly-owned subsidiary of SUPERVALU at that time. SUPERVALU has accounted for the Dart Acquisition using the purchase method of accounting and, accordingly, a new accounting basis was established as of August 30, 1999 and was used for the remaining twenty-two weeks of fiscal 2000. The assets and liabilities of Shoppers were restated to reflect their estimated fair market values as of that date. The excess of the purchase price paid for Shoppers over its net assets acquired (goodwill) of $310,076 has been pushed down to the Company. The goodwill is being amortized on a straight-line basis over 40 years. Certain financial statement and related footnote amounts for periods prior to the SUPERVALU acquisition may not be comparable to corresponding amounts subsequent to the acquisition. Pro forma amounts have not been disclosed for the year ended January 29, 2000 in this report due to the immaterial difference between such amounts and the amounts in the consolidated financial statements presented.
Dart Acquisition - ----------------
On May 18, 1998, a wholly-owned subsidiary of Richfood acquired all of the outstanding shares of Dart, which owns 100% of the outstanding common stock of the Company for $160 per share, net to the seller in cash, or approximately $201 million. The Company owns 100% of the outstanding common stock of Shoppers. In connection with the Dart
Acquisition, Richfood caused its subsidiary to merge with and into Dart in a transaction in which Dart became a wholly-owned subsidiary of Richfood. As a result of the Dart Acquisition, Richfood indirectly owned 100% of the outstanding common stock of the Company and Shoppers.
Richfood accounted for the Dart Acquisition using the purchase method of accounting, and accordingly, a new accounting basis was established as of May 18, 1998 and the assets and liabilities of Shoppers were restated to reflect their estimated fair market values as of that date. Fiscal 1999 includes the results of operations for 37 weeks under this new basis of accounting. The excess of the Dart Acquisition purchase price allocated to Shoppers over net assets of Shoppers acquired (goodwill) has been pushed-down to the Company. This goodwill is being amortized on a straight line basis over 40 years.
Pro forma operating results for the 52 week periods ended January 30, 1999 and January 31, 1998 reflect the Dart Acquisition as if it had occurred on February 2, 1997. The following unaudited pro forma results of the Company reflect the push down of acquisition entries, including, but not limited to, additional amortization of goodwill, amortization of the fair market adjustment of the Senior Notes, (see Note 4 - Long-Term Debt) and reversal of amortization of the acquisition costs associated with the acquisition of the Company (in thousands).
Pro Forma Pro Forma 52 Weeks Ended 52 Weeks Ended January 30, 1999 January 31, 1998 ---------------- ---------------- Sales $885,559 $855,769 Gross profit 213,555 199,197 Income before extraordinary item and cumulative effect of accounting change 6,504 5,300
Net income $ 6,504 $ 3,903
NOTE 3 - PROPERTY AND EQUIPMENT
At January 29, 2000 and January 30, 1999, property and equipment consisted of the following:
2000 1999 ------- ------- Land $ 800 $ 800 Buildings and leasehold improvements 12,302 10,589 Equipment and fixtures 49,544 45,276 Construction in progress 4,164 - Less: Accumulated depreciation (2,793) (3,764) ------- ------- Net property and equipment $64,017 $52,901 ======= =======
Property and equipment includes $7.1 million of assets under a capital lease, less the related accumulated amortization of $0.3 million at January 29, 2000. Depreciation and amortization expense related to property and equipment, including assets under capital lease, was approximately $3.5 million, $4.1 million, $3.7 million, $2.1 million and $5.0 million during the 22 weeks of fiscal 2000, the 30 weeks of fiscal 2000, the 37 weeks of fiscal 1999, the 15 weeks of fiscal 1999 and fiscal 1998, respectively.
NOTE 4 - LONG-TERM DEBT
Senior Notes - ------------
In June 1997, Shoppers issued $200.0 million aggregate principal amount of 9 3/4% Senior Notes due 2004 (the "Senior Notes"). The net proceeds from the Senior Notes were $193.5 million (after fees and expenses of approximately $6.5 million), of which $143.5 million was used to repay debt and $50.0 million (the "Restricted Proceeds") was paid to Dart in the form of a $40.0 million dividend and a $10.0 million loan for settlements with certain Dart shareholders.
Interest on the Senior Notes is accrued from the date of issuance and is payable semi-annually in arrears on each June 15 and December 15. The Senior Notes are effectively subordinated in right of payment to all secured indebtedness of Shoppers and contain certain restrictive covenants including, (i) limitation on restricted payments, (ii) limitation on indebtedness, (iii) limitation on investments, loans and advances, (iv) limitation on liens, (v) limitation on transactions with affiliates, (vi) restriction on mergers, consolidations and transfers of assets, (vii) limitation on lines of business, (viii) limitations on asset sales and (ix) limitation on issuance and sale of capital stock of subsidiaries.
On May 18, 1998, in connection with the Dart Acquisition, the Senior Notes were adjusted on the Company's Balance Sheet to their fair value of $221.5 million. The $21.5 million of fair value in excess of face value of the Senior Notes is being amortized on a straight-line basis over the stated maturity period. In June 1998, Richfood purchased $6.5 million in face amount of the outstanding Senior Notes in an open market transaction for a total cash payment of approximately $7.2 million, including accrued interest.
In October 1999, SUPERVALU repurchased $24.6 million in face amount of the outstanding Senior Notes in open market transactions with total cash payments of approximately $26.7 million, including accrued interest. There was no gain or loss on this repurchase because the purchase price approximated the carrying value.
The Senior Notes are fully and unconditionally guaranteed by the Company. The guarantee is secured by a first priority security interest in the capital stock of Shoppers owned by the Company.
During fiscal 1998, the early extinguishment of debt resulted in the write-off of unamortized deferred financing costs of $5.3 million, which has been presented in the consolidated statement of operations as an extraordinary loss, net of the related tax benefit of $2.2 million.
NOTE 5 - INCOME TAXES
The provision for income taxes before extraordinary items and cumulative effect of accounting change is comprised of the following (in thousands):
This effective income tax rate is reconciled to the Federal statutory rate as follows:
As a result of the Dart Acquisition and the SUPERVALU acquisition, certain differences have arisen between the book and tax basis of various assets and liabilities of Shoppers and are reflected in the table that follows. Temporary differences that give rise to the deferred tax assets and liabilities on a consolidated basis are as follows (in thousands):
Post- Pre- SUPERVALU SUPERVALU Acquisition Acquisition January 29, 2000 January 30, 1999 (52 weeks) (52 weeks) Deferred tax assets: Accrued expenses $ 182 $ 492 Deferred rent 566 272 Capital lease 4,845 2,442 Employee benefits 3,078 4,240 Deferred income 307 854 Other 1,421 744 ------- ------ $10,399 $9,044
Deferred tax liabilities:
Post- Pre- SUPERVALU SUPERVALU Acquisition Acquisition January 29, 2000 January 30, 1999 (52 weeks) (52 weeks)
Depreciation $ 1,959 $ 2,492 Lease rights 5,262 5,691 Inventory 1,003 934 Purchase accounting asset basis adjustments 9,328 9,327 Other 2,881 - -------- ------- $ 20,433 $18,444 -------- -------
Net deferred tax liability $(10,034) $(9,400) ======== =======
A valuation allowance is provided when it is more likely than not that some portion or all of the deferred tax assets will not be realized. Shoppers believes that no valuation allowance is necessary due to its history of profitable operations.
NOTE 6 - LEASE COMMITMENTS
Shoppers leases retail store space under noncancelable lease agreements ranging from 1 to 20 years. Renewal options are available on the majority of the leases for one or more periods of five years each. Most leases require the payment of taxes and maintenance costs, and some leases provide for additional rentals based on sales in excess of specified minimums. All store leases have stated periodic rental increases. The increases are amortized over the lives of the leases. Rent expense includes approximately $334,000, $502,000, $712,000, $294,000 and $991,000 of amortized rental increases for the 22 weeks of fiscal 2000, the 30 weeks of fiscal 2000, the 37 weeks of fiscal 1999, the 15 weeks of fiscal 1999 and fiscal 1998, respectively.
The following is a schedule of annual future minimum payments under the capital lease for office space and noncancelable operating leases, which have initial or remaining terms in excess of one year at January 30, 2000 (in thousands):
Fiscal Year Capital Lease Operating Lease ----------------------------- ------------- ---------------
2001 $ 1,443 $ 17,995 2002 1,486 19,088 2003 1,531 18,630 2004 1,576 18,609 2005 & after 12,135 182,780 ------- --------- Total $18,171 $ 257,102 =========
Imputed interest 5,519 ------- Present value of net minimum lease payments 12,652 Current maturities 618 ------- Long-term capital lease obligation $12,034 =======
Minimum capital lease and operating lease obligations have not been reduced by future minimum sublease rentals of approximately $3.8 million under noncancelable sublease agreements.
Rent expense for operating leases charged to operations is as follows (in thousands):
Post- Pre- SUPERVALU SUPERVALU Post-Dart Pre-Dart Acquisition Acquisition Acquisition Acquisition January 29, August 30, January 30, May 18, January 31, 2000 1999 1999 1998 1998 ----------- ----------- ------------ ----------- ----------- (22 weeks) (30 weeks) (37 weeks) (15 weeks) (52 weeks)
Minimum rentals $7,018 $ 9,570 $11,605 $4,513 $14,088 Contingent rentals 2,209 2,653 3,860 1,390 5,110 ------ ------- ------- ------ -------- Total $9,227 $12,223 $15,465 $5,903 $19,198 ====== ======= ======= ====== ========
Related-Party Leases - --------------------
For the period prior to February 1, 1998, Shoppers leased its office space from a formerly related party. The lease was accounted for as a capital lease and Shoppers made rental payments for fiscal 1998 of approximately $1.3 million.
Subleasing Agreements - ---------------------
Shoppers subleases space within one store for the sale of beer and wine to an entity affiliated with its officers. Shoppers received rental income of approximately $68,000, $93,000, $207,000, $40,000, and $209,000 during the 22 weeks ended January 29, 2000, the 30 weeks ended August 30, 1999, the 37 weeks of fiscal 1999, the 15 weeks of fiscal 1999 and fiscal 1998, respectively, from this entity, which is included in selling and administrative expenses.
NOTE 7 - EMPLOYEE BENEFIT PLANS
401(k) Plan - -----------
Shoppers has a defined contribution 401(k) plan (the "401K Plan"), which is available to substantially all employees over the age of 21 who have completed one year of continuous service. Discretionary contributions are made by Shoppers, in trust, for the exclusive benefit of employees who participate in the 401K Plan. The Board of Directors authorized contributions of $284,615, $115,384, $400,000 and $233,000 to the 401K Plan during 37 weeks of fiscal 1999, 15 weeks of fiscal 1999, fiscal 1998 and fiscal 1997, respectively. Shoppers has accrued $607,000 as of January 29, 2000 for fiscal 2000 contributions to be made to the 401K Plan. Amounts accrued for the contributions to be made to the 401K Plan are included in accrued salaries and benefits in the accompanying financial statements.
Multiemployer Plans - -------------------
Shoppers made contributions to multi-employer plans for its union employees for pension, health and other benefits of $5.5 million, $7.5 million, $8.5 million, $3.5 million and $12.1 million during the 22 weeks of fiscal 2000, the 30 weeks of fiscal 2000, the 37 weeks of fiscal 1999, the 15 weeks of fiscal 1999 and 1998, respectively.
NOTE 8 - TRANSACTIONS WITH AFFILIATES
Transactions with Richfood / SUPERVALU - --------------------------------------
The January 29, 2000 Consolidated Balance Sheet includes $52.0 million due to affiliates compared to $26.0 million at January 30, 1999. The $52.0 million consists primarily of amounts due to SUPERVALU for the purchase of bonds and amounts due for incomes taxes, inventory purchases and general and administrative expenses. Inventory purchases from Richfood during the 22 week post-acquisition period ended January 29, 2000 totaled $248.4 million. During the
30 week pre-acquisition period ended August 30, 1999, inventory purchases from Richfood were approximately $301.0 million. Inventory purchases from Richfood during the 37 weeks of fiscal 1999 were approximately $361.3 million.
Transactions with Dart - ----------------------
In fiscal 1999, Dart charged Shoppers, on a monthly basis, for actual expenses which related directly to Shoppers' operations (primarily insurance and legal expenses). Substantially all such charges were supported by invoices from unrelated parties designating Shoppers as recipient of the related goods or services. Such charges were approximately $0.1 million and $0.4 million during the 37 weeks of fiscal 1999 and the 15 weeks of fiscal 1999, respectively.
Dart Notes Receivable - ---------------------
In connection with the 1992 sale of the assets of Total Beverage Corp. by Shoppers to Dart, Shoppers received a note receivable from Dart of approximately $1.5 million. In May 1998, Shoppers realized $1.2 million representing full settlement of this note. As a result, Shoppers received approximately $0.7 million in excess of the recorded estimated realizable value of the note, which was recognized in the Company's consolidated statement of operations during the 15 week period ended May 18, 1998.
On September 26, 1997, Shoppers loaned Dart $10.0 million from the Restricted Proceeds that Dart used to fund a portion of a settlement with certain members of the Haft family who were stockholders of Dart. The loan is in the form of a promissory note that bears interest at 9 3/4% per annum, compounded annually. Interest and principal are payable on June 15, 2004, however, Dart may make interest payments prior to that time. On January 28, 1998, Shoppers loaned Dart an additional $25.0 million that Dart used to fund a portion of a settlement with Herbert H. Haft, who was a stockholder of Dart. The loan is in the form of a promissory note that bears interest at 9 3/4% per annum, compounded annually. Interest and principal are payable on June 15, 2004, however, Dart may make interest payments prior to that time.
NOTE 9 - COMMITMENTS AND CONTINGENCIES
Shoppers is party to various legal proceedings arising from the normal course of business activities, none of which, in management's opinion, is expected to have a material adverse impact on the Company's consolidated results of operations or consolidated financial position.
As of January 29, 2000, approximately 4,700 employees of Shoppers were covered by a collective bargaining agreement with United Food and Commercial Workers, Local 400 that will expire on July 1, 2000. The Company anticipates that the agreement will be renewed by the expiration date.
NOTE 10 - INTERIM FINANCIAL DATA (UNAUDITED)
Selected interim financial data for the fiscal years ended January 29, 2000 and January 30, 1999 are as follows: (in thousands)
Thirteen Week Period Ended:
January 29, October 30 July 31, May 1, 2000 1999 (1) 1999 1999 ----------- ---------- -------- ---------
Sales $229,705 $215,815 $219,784 $220,069 Gross profit 54,512 53,797 55,501 55,084 Net income 1,694 1,601 1,916 1,700
Thirteen Week Period Ended:
January 30, November 1, August 1, May 2, 1999 1998 1998 (2) 1998 ----------- ---------- -------- ---------
Sales $226,603 $220,431 $224,527 $213,998 Gross profit 55,165 55,153 53,747 49,490 Net income 2,599 3,153 122 1,207
(1) Includes four weeks' results of operations prior to the SUPERVALU Acquisition and nine weeks under the new basis of accounting established in connection with the SUPERVALU Acquisition (Note 2).
(2) Includes two weeks' results of operations prior to the Dart Acquisition and eleven weeks under the new basis of accounting established in connection with the Dart Acquisition (Note 2).
Item 9.
Item 9. Changes in and Disagreements with Accountants on Accounting and - ----------------------------------------------------------------------- Financial Disclosure --------------------
Not required to be included in this Form 10-K in accordance with the instructions to Item 304 of Regulation S-K.
PART III
Item 10.
Item 10. Directors, Executive Officers, Promoters and Control Persons of the - ---------------------------------------------------------------------------- Registrant. -----------
Information omitted in accordance with General Instruction I(2)(c).
Item 11.
Item 11. Executive Compensation. - --------------------------------
Information omitted in accordance with General Instruction I(2)(c).
Item 12.
Item 12. Security Ownership of Certain Beneficial Owners and Management. - ------------------------------------------------------------------------
Information omitted in accordance with General Instruction I(2)(c).
Item 13.
Item 13. Certain Relationships and Related Transactions. - --------------------------------------------------------
Information omitted in accordance with General Instruction I(2)(c).
Part IV
Item 14.
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K - -------------------------------------------------------------------------
(a)(1) Financial Statements
See Item 8.
(a)(2) Schedules
All schedules are omitted because the required information is not applicable or it is presented in the consolidated financial statements or related notes or the required information is not material.
(a)(3) Exhibits
4.1 Indenture, dated June 26, 1997, by and among Shoppers Food Warehouse Corp., SFW Holding Corp. and Norwest Bank Minnesota, National Association (incorporated by reference to Exhibit 4.1 to Shoppers Food Warehouse Corp. Form S-4, Registration No. 333-32825, filed with the SEC August 5, 1997).
4.2 Form of Shoppers Food Warehouse Corp. Global Security, dated June 26, 1997 (incorporated by reference to Exhibit 4.1 to Shoppers Food Warehouse Corp. Form S-4, Registration No. 333-32825, filed with the SEC on August 5, 1997).
10.1 Employment Agreement, dated August 18, 1997, between William White and Shoppers Food Warehouse Corp. (incorporated by reference to Exhibit 10.2 to the Dart Group Corporation (No. 0-1946) Quarterly Report on Form 10-Q filed with the SEC on September 15, 1997).
10.2 Promissory Notes, dated September 26, 1997 and January 28, 1998, from Dart Group Corporation to Shoppers Food Warehouse Corp. (incorporated by reference to Exhibit 10.3 to Shoppers Food Warehouse Corp. Annual Report on Form 10-K filed with the SEC on May 1, 1998).
27 Financial Data Schedule.
Exhibit 10.1 is a management contract required to be filed as an exhibit hereto.
99.1 Cautionary Statements Pursuant to the Securities Litigation Reform Act
(b) Reports on Form 8-K
SFW Holding Corp. filed a Current Report on Form 8-K on February 21, 2000 reporting a change in accountants under Item 4 - Changes in Registrant's Certifying Accountant.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
SFW HOLDING CORP.
Date: April 26, 2000 By: /s/ William J. Bolton ----------------------- -------------------------------------- William J. Bolton
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Date: April 26, 2000 /s/ William J. Bolton ----------------------- -------------------------------------- William J. Bolton Director and Chief Executive Officer
Date: April 26, 2000 /s/ Pamela K. Knous ----------------------- -------------------------------------- Pamela K. Knous Vice President and Chief Financial Officer (Principal Accounting Officer)
Date: April 26, 2000 /s/ David L. Boehnen ----------------------- -------------------------------------- David L. Boehnen Director
Date: April 26, 2000 /s/ Jeffrey Noddle ----------------------- -------------------------------------- Jeffrey Noddle Director
SFW HOLDING CORP.
Exhibit Index -------------
Exhibit - -------
27 Financial Data Schedule
99.1 Cautionary Statements Pursuant to the Securities Litigation Reform Act