UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED July 31, 1999
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 for the transition period from _________________ to
___________________
Commission file number 333-32825
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SFW HOLDING CORP.
(Exact name of registrant as specified in its charter)
Delaware 52-2014682
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
3300 75TH Ave. Landover, Maryland, 20785
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(Address of principal executive office)
(Zip Code)
(301) 226-1200
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(Registrant's telephone number, including area code)
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(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (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
-- --
At September 14, 1999, the registrant had 1,000 shares of common stock. The
common stock of SFW Holding Corp. is not publicly traded.
1
Item 1. Financial Statements
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The consolidated financial statements included herein have been prepared by SFW
Holding Corp.("SFW Holding" or the "Company") without audit (except for the
consolidated balance sheet as of January 30, 1999, which has been derived from
the audited consolidated balance sheet as of that date) pursuant to the rules
and regulations of the Securities and Exchange Commission. Certain information
and footnote disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been condensed or
omitted, although Shoppers believes that the disclosures are adequate to make
the information presented not misleading.
It is suggested that these consolidated financial statements be read in
conjunction with the consolidated financial statements and notes thereto
included in SFW Holdings' Annual Report on Form 10-K for the fiscal year ended
January 30, 1999.
2
SFW HOLDING CORP. AND SUBSIDIARY
--------------------------------
CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
---------------------------------------------
(dollars and shares in thousands, except per share data)
Thirteen Weeks Ended Twenty-six Weeks Ended
-------------------- ----------------------
July 31, August 1, July 31, August 1,
1999 1998 1999 1998
----------- ------------ ---------- ------------
Sales $219,784 $224,527 $439,853 $438,525
Cost of sales 164,283 170,780 329,268 335,288
----------- ------------ ---------- ------------
Gross Profit 55,501 53,747 110,585 103,237
Selling and
administrative expenses 44,036 44,724 87,900 84,916
Depreciation
and amortization 3,820 3,836 7,723 6,700
----------- ------------ ---------- ------------
Operating income 7,645 5,187 14,962 11,621
Interest income 853 972 1,727 2,286
Interest expense 4,329 4,696 8,658 10,166
----------- ------------ ---------- ------------
Income before income taxes 4,169 1,463 8,031 3,741
Provision for
income taxes 2,253 1,341 4,415 2,412
----------- ------------ ---------- ------------
Net Income $1,916 $ 122 $3,616 $1,329
=========== ============ ========== ============
The accompanying notes are an integral part of these statements.
3
SFW HOLDING CORP. AND SUBSIDIARY
--------------------------------
CONSOLIDATED BALANCE SHEETS
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(dollars in thousands)
(Unaudited)
July 31, January 30,
ASSETS 1999 1999
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Current Assets:
Cash and cash equivalents $ 2,013 $ 6,602
Marketable debt securities 45 -
Accounts receivable, net of
allowance of $910 and $500 7,465 13,263
Merchandise inventories 30,051 31,477
Deferred income taxes 2,665 3,432
Prepaid expenses 2,573 1,612
----- ------
Total current assets 44,812 56,386
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Property and Equipment, at cost:
Land and buildings 9,000 9,000
Furniture, fixtures and equipment 48,392 45,276
Leasehold improvements 3,320 2,388
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60,712 56,664
Accumulated depreciation and amortization 6,705 3,763
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Net property and equipment 54,007 52,901
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Goodwill, net of accumulated amortization of
$9,689 and $5,809 309,364 311,371
Lease Rights 28,476 29,031
Note Receivable from Dart Group 40,451 38,860
Other Assets 724 1,240
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Total assets $477,834 $489,789
======== ========
The accompanying notes are an integral part of these balance sheets.
4
SFW HOLDING CORP. AND SUBSIDIARY
--------------------------------
CONSOLIDATED BALANCE SHEETS
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(dollars in thousands)
(Unaudited)
July 31, January 30,
LIABILITIES AND STOCKHOLDER'S EQUITY 1999 1999
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Current Liabilities:
Accounts payable $ 6,460 $ 12,283
Accrued expenses
Salaries and benefits 4,408 5,401
Taxes other than income 3,093 2,525
Interest 1,734 2,378
Insurance 2,297 4,881
Other 4,947 5,840
Current portion of capital lease obligations 597 531
Income taxes payable 609 800
Due to affiliates 18,181 26,038
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Total current liabilities 42,326 60,677
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Senior Notes Due 2004 210,177 211,764
Capital Lease Obligations 12,342 12,709
Deferred Income Taxes 16,824 12,832
Other Liabilities 7,569 6,827
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Total Liabilities 289,238 304,809
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Commitments and Contingencies
Stockholder's Equity:
Common Stock, voting, par value
$0.01 per share, 1,000 shares authorized,
issued and outstanding
Paid-in-capital 179,091 179,091
Retained earnings 9,505 5,889
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Total stockholder's equity 188,596 184,980
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Total liabilities and stockholder's equity $477,834 $489,789
======= =======
The accompanying notes are an integral part of these balance sheets.
5
SFW HOLDING CORP. AND SUBSIDIARY
--------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
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(dollars in thousands)
Twenty-Six Weeks Ended
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July 31, August 1,
1999 1998
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Cash Flows from Operating Activities:
Net income $ 3,616 $ 1,329
Adjustments to reconcile net income to net
cash(used in)provided by operating activities
Depreciation and amortization 7,723 6,700
Amortization of deferred financing costs - 518
Amortization of bond premium (1,587) (748)
Increase in deferred rent liability - 488
Change in assets and liabilities:
Accounts receivable 5,798 (3,079)
Merchandise inventories 1,426 3,875
Due to affiliates (7,857) (1,883)
Prepaid expenses (961) (549)
Other assets (1,461) 721
Prepaid income taxes - 1,217
Accounts payable (5,823) (6,293)
Accrued expenses (3,902) 532
Accrued interest (644) (1,758)
Income tax payable (191) 4,836
Deferred income taxes 4,759 (4,281)
Deferred income - (192)
Other (1,132) -
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Net cash (used in) provided by
operating activities $ (236) $ 1,433
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Cash Flows from Investing Activities:
Capital expenditures $(4,053) $ (4,305)
Purchase of short-term investments - (3,604)
Sale/maturity of short-term investments - 4,121
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Net cash used in investing activities $(4,053) $ (3,788)
-------- --------
Cash Flows from Financing Activities:
Payments for acquisition and deferred financing
costs $ - $ (294)
Principal payments under capital lease
obligations (300) (83)
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Net cash used in financing activities $ (300) $ (377)
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Net decrease in cash and equivalents (4,589) (2,732)
Cash and equivalents, beginning of period 6,602 4,027
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Cash and equivalents, end of period $ 2,013 $ 1,295
========= =========
Supplemental Disclosure of Cash Flow Information:
Cash paid for
Interest $ 9,749 $ 10,386
Income taxes 100 1,242
The accompanying notes are an integral part of these statements.
6
SFW HOLDING CORP. AND SUBSIDIARY
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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July 31, 1999 and August 1, 1998
--------------------------------
(Unaudited)
NOTE 1 - GENERAL
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 as of the date of the
financial statements, and the reported amounts of revenues and expenses during
the reporting period. Accordingly, actual results could differ from those
estimates.
The accompanying consolidated financial statements of the Company as of July 31,
1999 and for the 26 and 13 week periods ended July 31, 1999 and August 1, 1998
have been prepared without an audit. Certain information and footnote
disclosures normally included in the financial statements prepared in accordance
with generally accepted accounting principles ("GAAP") have been omitted from
the accompanying consolidated financial statements.
In the opinion of the Company, the accompanying consolidated financial
statements reflect all adjustments (which include normal recurring adjustments)
necessary to present fairly the financial position of the Company as of July 31,
1999, and the results of its operations for the 26 and 13 weeks ended July 31,
1999, and August 1, 1998. On May 18, 1998, Richfood Holding, Inc. (Richfood)
acquired all of the outstanding stock of Dart Group Corporation, which
indirectly owns 100% of the outstanding common stock of the Company (the "Dart
Acquisition"). As a result of the Dart Acquisition, certain financial statement
and related footnote amounts for periods prior to the Dart Acquisition are not
comparable to corresponding amounts subsequent to the Dart Acquisition. In
addition, the results of operations for the 26 and 13 week periods ended July
31, 1999, are not necessarily indicative of the results that may be achieved for
the fiscal year ending January 29, 2000.
SFW Holding's sole purpose is to own 100% of the stock of its sole subsidiary,
Shoppers Food Warehouse Corp. ("Shoppers").
NOTE 2 - ACQUISITION/MERGER
On June 9, 1999, Richfood announced that it had entered into an Agreement and
Plan of Merger (the "Agreement"), dated as of June 9, 1999, among SUPERVALU
INC., a Delaware corporation ("SUPERVALU"), Winter Acquisition, Inc., a Delaware
corporation and wholly-owned subsidiary of SUPERVALU ("Acquisition"), and
Richfood. On August 31, 1999, Richfood's Shareholders approved the merger of
Richfood into Acquisition (the "Merger") with Acquisition being the surviving
corporation. As a result, the Company is an indirect, wholly-owned subsidiary of
SUPERVALU.
NOTE 3 - INCOME TAXES
The Company's effective income tax rate decreased to 55.0% and 54.0% for the 26
and 13 week periods ended July 31, 1999, respectively, from 64.5% and 91.7% for
the 26 and 13 week periods ended August 1, 1998, respectively. The decrease is
primarily attributable to increased taxable income in relation to the fixed
amount of acquisition non-deductible goodwill expense.
7
NOTE 4 - TRANSACTIONS WITH AFFILIATES
Transactions with Richfood
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The July 31, 1999, Consolidated Balance Sheet includes $18.2 million due to
affiliates. This amount consists primarily of amounts due to Richfood for income
taxes, inventory purchases and general and administrative expenses.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Outlook
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Except for historical information, statements in this 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 the
Company's ability to open new stores and the effect of regional economic
conditions. Shoppers 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 SEC.
On June 9, 1999, Richfood announced that it had entered into an Agreement and
Plan of Merger (the "Agreement"), dated as of June 9, 1999, among SUPERVALU
INC., a Delaware corporation ("SUPERVALU"), Winter Acquisition, Inc., a Delaware
corporation and wholly-owned subsidiary of SUPERVALU ("Acquisition"), and
Richfood. On August 31, 1999 Richfood's shareholders approved the merger of
Richfood into Acquisition (the "Merger") with Acquisition being the surviving
corporation. As a result, the Company is an indirect, wholly-owned subsidiary of
SUPERVALU.
Results of Operations
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26 and 13 Weeks Ended July 31, 1999 Compared with the 26 and 13 Weeks Ended
August 1, 1998
Sales increased by $1.4 million, or .30%, from $438.5 million during the 26
weeks ended August 1, 1998, to $439.9 million during the 26 weeks ended July 31,
1999. The sales increase for the 26 weeks ended July 31, 1999, was primarily due
to the opening of one new store in July 1998, offset, in part, by the closure of
one store during the 26 week period ended July 31, 1999. Sales decreased by $4.7
million, or 2.11%, from $224.5 million during the 13 weeks ended August 1, 1998
to $219.8 million during the 13 weeks ended July 31, 1999. This decrease was due
primarily to competitive new store openings and promotional strategies employed
by competitors. Comparable store sales decreased 1.8% and 3.5% for the 26 weeks
and 13 weeks ended July 31,1999, respectively, compared to the corresponding
periods in the prior year. The decreases in comparable store sales were due
primarily to the opening of new Shoppers stores and the effects of
cannibalization on existing stores, as well as increased competition.
8
Gross profit increased by approximately $7.4 million (7.2%), from $103.2 million
during the 26 weeks ended August 1,1998, to $110.6 million during the 26 weeks
ended July 31, 1999. Gross profit increased by $1.8 million (3.4%), from $53.7
million during the 13 weeks ended August 1, 1998, to $55.5 million during the 13
weeks ended July 31, 1999. Gross profit, as a percentage of sales, increased to
25.1% during the 26 weeks ended July 31, 1999, compared to 23.5% during the 26
weeks ended August 1, 1998. Gross profit, as a percentage of sales, increased to
25.3% during the 13 weeks ended July 31, 1999, from 23.9% during the 13 weeks
ended August 1, 1998. The increases in gross profit percentages during the 26
and 13 week periods of the current year over the comparable periods of the prior
year were primarily attributed to a reduction of the number of items offered on
special discount, higher allowance income achieved through vendor participation
and reduction in product shrinkage losses.
Selling and administrative expenses increased by approximately $3.0 million,
from $84.9 million during the 26 weeks ended August 1, 1998, to $87.9 million
during the 26 weeks ended July 31, 1999. Selling and administrative expenses
decreased by $0.7 million, from $44.7 million during the 13 weeks ended August
1, 1998, to $ 44.0 million during the 13 weeks ended July 31, 1999. The increase
in the 26 week period is primarily attributable to increased payroll costs
associated with negotiated union rates. The effect of these increased payroll
costs in the 13 week period on selling and administrative expenses is offset by
a reduction in variable operating expenses associated with lower volume. Selling
and administrative expenses, as a percentage of sales, increased from 19.36% and
19.92% during the 26 weeks and 13 weeks ended August 1, 1998, respectively, to
19.98% and 20.04% during the 26 weeks and 13 weeks ended July 31, 1999,
respectively.
Depreciation and amortization increased by $1.0 million from $6.7 million during
the 26 weeks ended August 1, 1998, to $7.7 million during the 26 weeks ended
July 31, 1999. The increase was primarily due to additional amortization
goodwill as a result of the Dart Acquisition.
Interest income decreased $0.6 million, from $2.3 million for the 26 weeks ended
August 1,1998, to $1.7 million for the 26 weeks ended July 31, 1999. Interest
income decreased $0.1, from $1.0 million for the 13 weeks ended August 1, 1998,
to $0.9 million for the 13 weeks ended July 31, 1999. The decreases are
primarily attributable to the reduction in the amount of cash available for
investment purposes.
The Company's effective income tax rate decreased to 55.0% and 54.0% for the 26
and 13 week periods ended July 31, 1999, respectively, from 64.5% and 91.7% for
the 26 and 13 week periods ended August 1, 1998, respectively. The decrease is
primarily attributable to increased taxable income in relation to the fixed
amount of acquisition non-deductible goodwill associated with the Dart
Acquisition.
9
Liquidity and Capital Resources
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The Company's principal source of liquidity is expected to be cash flow 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 the 26 weeks ended July 31, 1999, operating activities used net of cash
of $0.2 million, compared to generating net cash of $1.4 million during the 26
weeks ended August 1, 1998. The decrease was primarily due to cash generated
from operating activities for the 26 weeks ended July 31, 1999 that was used to
fund amounts due to an affiliate. The balance due to affiliate was $18.2 million
at July 31, 1999, compared to $26.0 million at January 31, 1999.
During the 26 weeks ended July 31, 1999, investing activities used approximately
$4.0 million of capital expenditures primarily for store remodels. For the 26
weeks ended August 1, 1998, investing activities used approximately $4.3 million
for capital expenditures.
Financing activities used $0.3 million of the Company's funds during the 26 week
period ended July 31, 1999, compared to $0.4 million during the 26 weeks ended
August 1, 1998.
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.
Year 2000 Compliance
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References herein to Richfood are based on information provided by Richfood to
the Company.
The "Year 2000" issue is the result of computer systems and software programs
using only two digits rather than four to define a year. As a result, computer
systems that have date--sensitive software may recognize a date using "00" as
the year 1900 rather than the year 2000. Unless remedied, the Year 2000 issue
could result in system failures, miscalculations, and the inability to process
necessary transactions or engage in similar normal business activities. In
addition to computer systems and software, any equipment using embedded chips,
such as switch gear, controllers and telephone exchanges, could also be at risk.
As a result of the Dart Acquisition, the Company's computer systems and software
programs are being incorporated into Richfood's. Richfood has developed, and is
implementing, a strategic, long--term information technology plan (the
"Strategic Plan") to upgrade its core application systems. Concurrently,
Richfood has developed and is implementing a plan (the "Y2K Plan") to ensure
that its information systems are Year 2000 compliant. The Y2K Plan focuses on
the following three major areas:
10
o Information technology systems ("IT").
o Embedded technology and other systems ("Non-IT").
o Key third party relationships.
Based on the Strategic Plan and assessments conducted as part of the Y2K Plan,
Richfood determined that it would be necessary to modify or replace portions of
its software and certain hardware systems so that such systems will properly
recognize dates beyond December 31, 1999. Richfood presently believes that with
the modification or replacement of existing software and certain hardware
systems, the Year 2000 issue can be significantly mitigated. However, if such
modifications and replacements are not made, or are not completed in a timely
manner, the Year 2000 issue could have a material adverse effect on the
financial condition or results of operations of the Company.
Richfood's Y2K Plan, as it pertains to the Company, involves the following three
phases:
o Assessment -- locating, listing and prioritizing the specific
technology that is potentially subject to Year 2000 issues,
assessing the actual exposure of such technology to the Year
2000 issue, and planning/scheduling the allocation of internal
and third party resources for the remediation effort.
o Remediation/Testing of non-compliant systems - selecting and
executing the method necessary to resolve the Year 2000 issues
that were identified, including replacement, upgrade, repair
or abandonment, and testing the remediated or converted
technology to determine the efficacy of the resolutions.
o Implementation- placing remediated technology into operation.
The assessment phase has been completed with respect to IT and Non--IT systems
that Richfood believes could be adversely affected by the Year 2000 issue. The
assessment indicated that many of the Company's significant information systems
could be adversely affected, particularly the general ledger, human resources,
payroll, and point of sale systems. Non-IT systems, including telephones,
loss-prevention and food production systems, are also being validated; however,
the Company believes that non-compliance of the Non-IT systems does not pose a
significant risk to the Company's financial condition or results of operations.
With respect to IT systems, the project is 90% complete. Human resources,
payroll and general ledger system software upgrades were completed in August
1999. In-store systems, including point of sale, and the time and attendance
will be completed by the end of September 1999. All other remaining upgrades
will be completed in October 1999.
11
The majority of the Company's Non--IT systems are currently Year 2000 compliant;
however, certain systems, which include telephones, will need to be upgraded or
replaced. The Non--IT systems remediation/testing phase is approximately 95%
complete and full implementation is expected by the end of September 1999.
Richfood's evaluation of the Year 2000 readiness of the Company's material
suppliers(Richfood is the Company's primary supplier), customers and other third
parties, has not identified any class of third party providers that could
materially impact the Company's results of operations in the event of their
failure to become Year 2000 compliant. However, there can be no assurance that
the failure of any unrelated third parties to become Year 2000 compliant in a
timely manner would not result in a material adverse effect on the Company's
results of operations or financial condition.
Total costs associated with the Company's Year 2000 remediation are expected to
be approximately $3.4 million. Of this amount, approximately $3.0 million has
been, or is expected to be, capitalized in accordance with GAAP, with
approximately $2.6 million capitalized to date. The Company expects to pay the
majority of the remaining costs over the next few months. All expenditures by
the Company related to the Y2K Plan will be funded by cash flow from operations
and are not expected to impact other operating or investment plans. No material
information technology projects have been deferred as a result of the
implementation of the Y2K Plan.
The aforementioned costs of the Y2K Plan and the completion dates are based on
management's best estimates, which were derived from assumptions of future
events, including the availability of resources, key third party modification
plans and other factors. There can be no assurance that these estimates will
prove to be accurate, and actual results could vary due to uncertainties.
Although the Y2K Plan is expected to be adequate to address the Company's Year
2000 concerns, the Company could experience a material adverse effect on its
results of operations or financial condition if its Year 2000 compliance
schedule is not met, if the costs to remediate the Company's Year 2000 issues
significantly exceed current estimates or if material suppliers, customers and
other businesses encounter serious problems in their Year 2000 remediation
efforts. Therefore, Richfood and the Company are in the process of developing
plans to address such contingencies, with a focus on mission critical systems.
The Company and Richfood expect to complete contingency plans by the end of
September 1999 and expect that such plans may include provisions relating to,
among other things, manual workarounds and adjusting staffing strategies, and
will describe the communications, operations and IT activities that will be
utilized if the contingency plans must be executed.
Richfood's Year 2000 efforts are ongoing and the Y2K Plan will continue to
evolve as new information becomes available. The failure to correct a material
Year 2000 issue could result in an interruption in certain normal business
activities and operations. Due to the general uncertainty inherent in the Year
2000 issue, resulting in part from the uncertainty of the Year 2000 readiness of
third parties upon whom Richfood and the Company rely, the Company is unable to
determine at this time whether the consequences of Year 2000 failures will have
a material adverse effect on the Company's financial condition or results of
operations. However, the Company believes that, with the implementation of the
Y2K Plan as scheduled, the possibility of significant interruptions of normal
operations should be reduced. Moreover, the Company believes that the
acquisition of Richfood by SUPERVALU will not affect its year 2000 readiness
plan.
12
Item 2A. Quantitative and Qualitative Disclosures about Market Risk
- -------- ----------------------------------------------------------
The registrant's market risk exposure is not material. Interest on both the
Company's notes receivable and Senior Notes are at fixed rates. The Company does
not have any other financial instruments that result in material exposure to
interest rate risk.
13
PART II
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Item 6. Exhibits and Reports on Form 8-K
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(A) Exhibit
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27.1 Financial Data Schedule
(B) Reports on Form 8-K
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None
14
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SHOPPERS FOOD WAREHOUSE CORP.
Date: September 14, 1999 By: /s/ Pamela K. Knous
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Pamela K. Knous
Executive Vice President, Chief Financial
Officer
15