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 (13 weeks) ended October 27, 2001.
[_] 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
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.)
11840 Valley View Road, Eden Prairie, Minnesota 55344
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(Address of principal executive office) (Zip Code)
(952) 828-4000
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(Registrant's telephone number, including area code)
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
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At December 3, 2001 the registrant had 1,000 shares of Common Stock voting,
$0.01 par value per share,. The common stock of SFW Holding Corp. is not
publicly traded.
The registrant meets the conditions set forth in General Instruction H(1)(a) and
(b) of Form 10-Q and is therefore filing this form with the reduced disclosure
format.
PART I
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Item 1. Financial Statements
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The consolidated financial statements of SFW Holding Corp. (the "Company") and
its wholly-owned subsidiary, Shoppers Food Warehouse Corp. ("Shoppers") included
herein have been prepared by the Company without audit (except for the
consolidated balance sheet as of January 27, 2001, 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 accounting principles generally accepted in the United States of
America have been condensed or omitted because they are not applicable or not
required.
It is suggested that these consolidated financial statements are read in
conjunction with the consolidated financial statements and notes thereto
included in the Company's Annual Report on Form 10-K for the fiscal year ended
January 27, 2001.
SFW HOLDING CORP. AND SUBSIDIARY
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share data)
October 27, January 27,
2001 2001
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Assets
Current assets:
Cash and cash equivalents $ 2,089 $ 2,966
Accounts receivable, net 6,100 20,120
Merchandise inventories 38,902 38,065
Other current assets 4,574 5,286
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Total current assets 51,665 66,437
Property and equipment, net 93,498 88,400
Goodwill, net 293,754 297,725
Lease rights, net 25,752 26,706
Note receivable, related party 50,433 46,897
Other assets 318 825
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Total assets $515,420 $526,990
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Liabilities and Stockholder's Equity
Current liabilities:
Accounts payable $ 11,164 $ 8,861
Accrued expenses 26,473 23,388
Due to affiliates 30,105 63,677
Accrued income taxes 19,960 16,122
Current maturities of capital lease obligations 829 658
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Total current liabilities 88,531 112,706
Senior notes due 2004 175,410 178,370
Capital lease obligations 32,781 26,619
Other liabilities 8,679 8,633
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Total liabilities 305,401 326,328
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Stockholder's equity:
Class A common stock, voting, par value $0.01 per share, 1,000
shares authorized, issued and outstanding -- --
Additional paid-in capital 189,408 189,408
Retained earnings 20,611 11,254
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Total stockholder's equity 210,019 200,662
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Total liabilities and stockholder's equity $515,420 $526,990
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The accompanying notes are an integral part of these
consolidated financial statements.
SFW HOLDING CORP. AND SUBSIDIARY
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
(in thousands)
Third quarter (13 weeks) Year to date (39 weeks)
ended ended
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October 27, October 28, October 27, October 28,
2001 2000 2001 2000
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Sales $240,444 $219,063 $719,305 $658,654
Cost of sales 177,830 162,376 534,704 492,300
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Gross profit 62,614 56,687 184,601 166,354
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Selling and administrative expenses 53,919 48,207 158,017 143,137
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Operating income 8,695 8,480 26,584 23,217
Interest income 1,180 1,196 3,819 3,407
Interest expense 4,005 3,544 11,712 10,805
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Net interest expense 2,825 2,348 7,893 7,398
Earnings before income taxes 5,870 6,132 18,691 15,819
Provision for income taxes 2,909 3,085 9,334 8,101
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Net earnings $ 2,961 $ 3,047 $ 9,357 $ 7,718
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The accompanying notes are an integral part of these
consolidated financial statements.
SFW HOLDING CORP. AND SUBSIDIARY
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Year to date (39 weeks)
ended
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October 27, October 28,
2001 2000
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Net cash provided by operating activities $ 39,033 $ 14,919
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Cash flows from investing activities:
Capital expenditures (5,769) (18,269)
Reimbursement of renovation costs from landlord -- 4,371
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Net cash used in investing activities (5,769) (13,898)
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Cash flows from financing activities:
Cash provided to affiliated companies (33,572) (551)
Principal payments under capital lease obligations (569) (377)
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Net cash used in financing activities (34,141) (928)
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Net (decrease) increase in cash and cash equivalents (877) 93
Cash and cash equivalents, beginning of period 2,966 3,390
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Cash and cash equivalents, end of period $ 2,089 $ 3,483
======== ========
Supplemental Cash Flow Data:
Cash paid during the period for:
Income taxes, net $ 5,504 $ 3,525
Interest 15,748 14,830
Disclosure of noncash investing activity-
Assets acquired under capital lease $ 6,902 $ 5,782
The accompanying notes are an integral part of these
consolidated financial statements.
NOTE 1 - GENERAL
General
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The accompanying consolidated financial statements include the accounts of SFW
Holding Corp., a Delaware corporation, and its subsidiaries, (collectively "SFW"
or the "Company") for the 13 weeks ended October 27, 2001 ("third quarter
2002"), the 39 weeks ended October 27, 2001 ("year to date 2002"), the 13 weeks
ended October 28, 2000 ("third quarter 2001"), and the 39 weeks ended October
28, 2000 ("year to date 2001"). All significant intercompany accounts and
transactions have been eliminated. Shoppers, the Company's operating subsidiary,
operates in one business segment. The Company is an indirect wholly-owned
subsidiary of SUPERVALU INC. ("SUPERVALU").
The accompanying consolidated financial statements of the Company as of October
27, 2001, and for the 13 weeks and 39 weeks ended October 27, 2001, and October
28, 2000, have not been audited. Certain information and footnote disclosures
normally included in the financial statements prepared in accordance with
accounting principles generally accepted in the United States of America have
been condensed or 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 October
27, 2001, and the results of its operations for the 13-week and 39-week periods
ended October 27, 2001, and October 28, 2000, respectively.
Use of Estimates in Financial Statements
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The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America 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.
Reclassifications
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Certain previous year amounts have been reclassified to conform to the current
year presentation. These reclassifications had no impact on net earnings or
total stockholder's equity.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
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OF OPERATIONS
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Forward Looking Statements
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Statements in this report that are not historical in nature, including
references to beliefs, anticipations or expectations, 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. Such statements
are subject to a wide variety of risks and uncertainties that could cause actual
results to differ materially from those projected including, without limitation,
the ability of the Company (as defined above) to open new stores, the effect of
regional economic conditions, the effect of increased competition in the markets
in which the Company operates and other risks described from time to time in the
Company's filings with the Securities and Exchange Commission. The Company
undertakes no obligation and does not intend to update, revise or otherwise
publicly release any revisions to these forward-looking statements, which
revisions may be made to reflect any future events or circumstances, other than
through its regular quarterly and annual reports filed with the Securities and
Exchange Commission (the "SEC").
Results of Operations
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RESULTS FOR THE QUARTER:
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Sales were $240.4 million for third quarter 2002, compared to $219.1 million for
third quarter 2001, an increase of 9.8%. The sales increase was primarily due to
the opening of two new stores in fourth quarter 2001, as well as an increase of
3.3% in comparable store sales.
Gross profit, as a percentage of sales, remained relatively consistent at 26.0%
in third quarter 2002, compared to 25.9% in third quarter 2001.
Selling and administrative expenses, as a percentage of sales, increased
slightly to 22.4% for third quarter 2002, compared to 22.0% for third quarter
2001. The increase is primarily due to higher union health insurance expense.
Operating income was $8.7 million for third quarter 2002, compared to $8.5
million for third quarter 2001. The increase was primarily due to the increases
in sales and gross profit, substantially offset by higher selling and
administrative expenses.
Interest expense increased approximately $0.5 million from $3.5 million during
third quarter 2001, to $4.0 million during third quarter 2002. The increase in
interest expense was due to an increase in capital lease obligations relating to
the new stores.
The effective income tax rate for third quarter 2002 was 49.6%, compared to
50.3% for third quarter 2001.
Net income was $2.9 million during third quarter 2002, compared to $3.0 million
during third quarter 2001, a decrease of 3.9%.
YEAR TO DATE RESULTS:
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Sales were $719.3 million year to date 2002, compared to $658.7 million year to
date 2001, an increase of 9.2%. The sales increase was primarily due to the
opening of two new stores in fourth quarter 2001, as well as an increase of 1.7%
in comparable store sales.
Gross profit, as a percentage of sales, increased to 25.7% year to date 2002,
compared to 25.3% year to date 2001. The increase is primarily due to improved
merchandising activities.
Selling and administrative expenses, as a percentage of sales, increased
slightly to 22.0% year to date 2002, compared to 21.7% year to date 2001. The
increase is primarily due to higher union health insurance expense.
Operating income was $26.6 million year to date 2002, compared to $23.2 million
year to date 2001. The increase was primarily due to the increases in sales and
gross profit, partially offset by higher selling and administrative expenses.
Interest income increased by approximately $0.4 million year to date 2002 from
$3.4 million year to date 2001 to $3.8 million year to date 2002 due to an
increase in the outstanding balance of the note receivable.
Interest expense increased approximately $0.9 million from $10.8 million year to
date 2001, to $11.7 million year to date 2002. The increase in interest expense
was due to an increase in capital lease obligations relating to the new stores.
The effective income tax rate for year to date 2002 was 49.9%, compared to 51.2%
for year to date 2001. The decrease is primarily attributable to increased
taxable earnings in relation to the fixed amount of non-deductible goodwill
associated with the SUPERVALU acquisition.
Net income was $9.3 million year to date 2002, compared to $7.7 million year to
date 2001, an increase of 20.8%.
Liquidity and Capital Resources
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Year-to date 2002, operating activities generated net cash of $39.0 million,
compared to generating $14.9 million year to date 2001. The increase was
primarily due to a reduction in working capital of $21.8 million year to date
2002, compared to year to date 2001.
Investing activities used $5.8 million year to date 2002, compared to using
$13.9 million year to date 2001. The change reflects lower capital expenditures
of $3.0 million, compared to year to date 2001.
Financing activities primarily reflect the payment to affiliated companies of
$33.6 million year to date 2002, compared to $0.6 million year to date 2001.
The Company believes that cash flows from its operations as well as cash
provided by affiliated companies will be adequate to meet its anticipated
requirements for working capital, debt service and capital expenditures.
New accounting standards
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In June 2001 the Financial Accounting Standards Board approved Statement of
Financial Accounting Standard No. 142, "Goodwill and Other Intangible Assets."
SFAS No. 142 requires companies to cease amortizing goodwill that existed at
June 30, 2001. For the Company, this amortization of existing goodwill will
cease on January 26, 2002. Any goodwill resulting from an acquisition completed
after June 30, 2001 will not be amortized. SFAS No. 142 also establishes a new
method of testing goodwill for impairment on an annual basis or on an interim
basis if an event occurs or circumstances change that would reduce the fair
value of a reporting unit below its carrying value. The adoption of SFAS No. 142
will result in the discontinuation of amortization of goodwill and goodwill will
be tested for impairment under the new standard beginning in the first quarter
of fiscal 2003.
In June 2001, the Financial Accounting Standards Board issued Statement No. 143,
"Accounting for Asset Retirement Obligations," which addresses financial
accounting and reporting for obligations associated with the retirement of
tangible long-lived assets and the associated asset retirement costs. The
standard applies to legal obligations associated with the retirement of long-
lived assets that result from the acquisition, construction, development and/or
normal use of the asset. Statement No. 143 requires that the fair value of a
liability for an asset retirement obligation be recognized in the period in
which it is incurred if a reasonable estimate of fair value can be made. The
Company is required and plans to adopt the provisions of Statement No. 143 in
the first quarter of fiscal 2004.
In August 2001, the Financial Accounting Standards Board approved Statement of
Financial Accounting Standard No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets." SFAS No. 144 addresses the financial accounting
and reporting for the impairment or disposal of long-lived assets and supersedes
Statement of Financial Accounting Standard No. 121 "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of".
However, this statement retains the fundamental provisions of SFAS No. 121 for
(a) recognition and measurement of the impairment of long-lived assets to be
held and used and (b) measurement of long-lived assets to be disposed of by
sale.
SFAS No. 144 also supersedes the accounting and reporting provisions of APB
Opinion No. 30 "Reporting the Results of Operations-Reporting the Effects of
Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently
Occurring Events and Transactions" for the disposal of a segment of a business.
However, this Statement retains the requirement of APB No. 30 to report
discontinued operations separately from continuing operations and extends that
reporting to a component of an entity that either has been disposed of or is
classified as held for sale. This statement also amends ARB No. 51,
"Consolidated Financial Statements" to eliminate the exception to consolidation
for a temporarily controlled subsidiary. The Company is required and plans to
adopt the provisions of SFAS No. 144 in the first quarter of fiscal 2003.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
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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 market value
of the fixed rate notes is subject to change due to fluctuations in market
interest rates. The Company does not have any other financial instruments that
result in material exposure to interest rate risk.
PART II - Other Information
Item 1. Legal Proceedings
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None
Item 2. Changes in Securities and Use of Proceeds
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Not Applicable
Item 3. Defaults Upon Senior Securities
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Not Applicable
Item 4. Submission of Matters to a Vote of Security Holders
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Not Applicable
Item 5. Other Information
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None
Item 6. Exhibits and Reports on Form 8-K
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(A) Exhibits
None
(B) Reports on Form 8-K
None
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.
SFW HOLDING CORP.
Date: December 10, 2001 By: /s/ Pamela K. Knous
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Pamela K. Knous
Executive Vice President, Chief
Financial Officer (authorized
officer of the registrant and
principal financial officer)