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 October 30, 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
SFW HOLDING CORP.
(Exact name of registrant as specified in its charter)
Delaware 52-2014682
-------- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
3300 75/th/ Ave. Landover, Maryland, 20785
------------------------------------------
(Address of principal executive office) (Zip Code)
(301) 226-1200
-----------------
(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 ___
---
At December 14, 1999, the registrant had 1,000 shares of common stock. 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.
1
Part 1 - Financial Information
Item 1. Financial Statements
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 Holding's Annual Report on Form 10-K for the fiscal year ended
January 30, 1999.
2
SFW HOLDING CORP. AND SUBISIDIARY
CONSOLIDATED STATEMENTS OF EARNINGS (UNAUDITED)
(In thousands, except per share data)
Thirteen Weeks Ended Thirty-nine Weeks Ended
-------------------------------- --------------------------------
October 30, October 31, October 30, October 31,
1999 1998 1999 1998
-------------- -------------- -------------- --------------
Sales $215,815 $220,431 $655,668 $658,956
Cost of sales 162,018 165,278 491,287 500,566
-------- -------- -------- --------
Gross profit 53,797 55,153 164,381 158,390
Selling and administrative expenses 43,605 42,711 131,504 127,627
Depreciation and amortization 3,618 3,200 11,341 9,900
-------- -------- -------- --------
Operating income 6,574 9,242 21,536 20,863
Interest
Interest income 1,186 949 2,912 3,235
Interest expense 3,944 4,113 12,602 14,279
-------- -------- -------- --------
Net interest expense 2,758 3,164 9,690 11,044
Earnings before income taxes 3,816 6,078 11,846 9,819
Provision for income taxes 2,215 2,925 6,630 5,337
-------- -------- -------- --------
Net earnings $ 1,601 $ 3,153 $ 5,216 $ 4,482
======== ======== ======== ========
The accompanying notes are an integral part of these statements.
3
SFW HOLDING CORP. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share data)
October 31, January 30,
1999 1999
--------------- ---------------
Assets (Unaudited)
Current assets:
Cash and cash equivalents $ 4,184 $ 6,602
Accounts receivable, net 7,721 13,263
Merchandise inventories 36,256 31,477
Other current assets 8,033 5,044
--------------- ---------------
Total current assets 56,194 56,386
Property, plant and equipment, net 59,508 52,901
Goodwill, net 308,030 311,371
Lease rights 28,231 29,031
Note receivable and other assets 42,419 40,100
--------------- ---------------
Total assets $494,382 $489,789
=============== ===============
Liabilities and stockholders' equity
Current liabilities:
Accounts payable $ 15,599 $ 12,283
Accrued payroll and benefits 4,865 5,401
Due to affiliates 45,433 26,038
Accrued interest 7,175 2,378
Other accrued expenses 13,063 14,577
--------------- ---------------
Total current liabilities 86,135 60,677
Senior notes due 2004 182,592 211,764
Capital lease obligations 12,182 12,709
Deferred income taxes 16,824 12,832
Other liabilities 6,453 6,827
Stockholders' equity:
Common stock, voting, par value $0.01 per share, 1,000
shares authorized, issued and outstanding.
Additional paid-in capital 179,091 179,091
Retained earnings 11,105 5,889
--------------- ---------------
Total stockholders' equity 190,196 184,980
--------------- ---------------
Total liabilities and stockholders' equity $494,382 $489,789
=============== ===============
The accompanying notes are an integral part of these balance sheets.
4
SFW HOLDING CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED)
(In thousands)
Thirty-nine weeks ended
---------------------------------------
October 30, October 31,
1999 1998
----------------- -----------------
Cash Flows from Operating Activities:
Net earnings $ 5,216 $ 4,482
Adjustments to reconcile net earnings to net cash provided by
operating activities:
Depreciation and amortization 11,341 9,900
Amortization of deferred financing costs - 763
Amortization of bond premium (2,515) (1,608)
Increase in deferred rent liability - 706
Changes in assets and liabilities:
Accounts receivable 5,542 (4,203)
Merchandise inventories (4,779) 3,608
Other assets (5,251) 1,158
Accounts payable 3,316 (11,599)
Due to affiliates 19,395 (3,626)
Accrued expenses (104) 7,655
Deferred income and income taxes 4,758 (654)
------------- ------------
Net cash provided by operating activities 36,919 6,582
------------- ------------
Cash Flows from Investing Activities:
Capital expenditures (12,219) (5,604)
Purchase of short-term investments - (3,604)
Sales/maturities of short-term investments - 4,121
Purchase of bonds and bond premium (26,657) -
------------- ------------
Net cash used in investing activities (38,876) (5,087)
Cash Flows from Financing Activities:
Payments for acquisition and deferred financing costs - (294)
Principal payments under capital lease obligations (461) (261)
------------- ------------
Net cash used in financing activities (461) (555)
Net increase (decrease) in cash and cash equivalents (2,418) 940
Cash and cash equivalents at beginning of period 6,602 4,027
------------- ------------
Cash and cash equivalents at end of period $ 4,184 $ 4,967
============= ============
The accompanying notes are an integral part of these statements.
5
SFW HOLDING CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (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 October
30, 1999, and for the 13 and 39 weeks ended October 30, 1999, and October 31,
1998, have not been audited. Certain information and footnote disclosures
normally included in the financial statements prepared in accordance with
generally accepted accounting principles ("GAAP") 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
30, 1999, and the results of its operations for the 13 and 39 week periods ended
October 30, 1999, and October 31, 1998. As a result of the Dart Acquisition on
May 18, 1998, in which Richfood Holdings, Inc. ("Richfood") acquired all of the
outstanding stock of Dart Group Corporation, the Company's parent, the results
of operations for the 13 and 39 week periods ended October 30, 1999 are not
necessarily indicative of the results that may be achieved for the fiscal year
ending January 29, 2000.
NOTE 2 - ACQUISITION/MERGER
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.
Certain financial statement and related footnote amounts for periods prior to
the Richfood acquisition may not be comparable to corresponding amounts
subsequent to the acquisition. In addition, the results of operations for the
13 and 39 week periods ended October 30, 1999 are not necessarily indicative of
the results that may be achieved for the fiscal year ended January 29, 2000.
NOTE 3 - INCOME TAXES
The Company's effective income tax rate increased to 58.0% and 56.0% for the 13
and 39 weeks ended October 30, 1999, respectively, from 48.1% and 54.4% for the
13 and 39 weeks ended October 31, 1998, respectively. The increase is primarily
attributable to decreased taxable earnings in relation to the fixed amount of
acquisition non-deductible goodwill associated with the Dart Acquisition.
6
NOTE 4 - TRANSACTIONS WITH AFFILIATES
The October 30, 1999 Consolidated Balance Sheet includes $45.3 million due to
affiliates. This amount consists primarily of amounts due to affiliates for the
purchase of bonds and amounts due for income taxes, inventory purchases and
general and administrative expenses.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATION
Outlook
Except for historical information, statements in this Management's Discussion
and Analysis of Results of Operations and Financial Condition 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. 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.
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.
Results of Operations
The Company's operations are conducted primarily through its wholly-owned
subsidiary, Shoppers Food Warehouse Corp. ("Shoppers").
Sales decreased by $4.6 million, or 2.1%, from $220.4 million during the 13
weeks ended October 31, 1998 to $215.8 million during the 13 weeks ended October
30, 1999. This decrease was due primarily to the closing of one store during
the first quarter ($3.4 million) and competitive new store openings. Sales
decreased by $3.3 million, or 0.5%, from $659.0 million during the 39 weeks
ended October 31, 1998, to $655.7 million during the 39 weeks ended October 30,
1999. The sales decrease for the 39 weeks ended October 30, 1999 was due
primarily to the closure of one store in the 39 week period ended October 30,
1999, offset, in part, by the opening of one new store during the 1998 period,
and competitive new store openings recently in the area. Comparable store sales
decreased 0.5% and 1.4% for the 13 weeks and 39 weeks ended October 30, 1999,
respectively, compared to the corresponding periods in the prior year. The
decreases in comparable store sales were due primarily to the opening of a new
Shoppers store cannibalizing existing stores, as well as increased competition.
Gross profit decreased by $1.4 million, or 2.5%, from $55.2 million during the
13 weeks ended October 31, 1998, to $53.8 million during the 13 weeks ended
October 30, 1999. Gross profit increased by approximately $6.0 million, or
3.8%, from $158.4 million during the 39 weeks ended October 31, 1998, to $164.4
million during the 39 weeks ended October 30, 1999. Gross profit, as a
percentage of sales, remained essentially unchanged at 24.9% during the 13 weeks
ended October 30, 1999, compared to 25.0% during the 13 weeks ended October 31,
1998. Gross profit, as a percentage of sales, increased to 25.1% during the 39
weeks ended
7
October 30, 1999, compared to 24.0% during the 39 weeks ended October 31, 1998.
The increase in the gross profit percentage during the 39 week period of the
current year over the comparable period of the prior year was primarily
attributed to a reduction of the number of items offered on special
discount, better buying and the reduction of product shrinkage losses.
Selling and administrative expenses increased by $0.9 million, from $42.7
million during the 13 weeks ended October 31, 1998, to $43.6 million during the
13 weeks ended October 30, 1999. Selling and administrative expenses increased
by approximately $3.9 million, from $127.6 million during the 39 weeks ended
October 31, 1998, to $131.5 million during the 39 weeks ended October 30, 1999.
The increases in these periods are primarily attributable to higher labor and
benefits costs, as well as increased advertising cost during the current period.
Selling and administrative expenses, as a percentage of sales, increased from
19.4% for both the 13 weeks and 39 weeks ended October 31, 1998, to 20.2% and
20.1% during the 13 weeks and 39 weeks ended October 30, 1999, respectively.
Depreciation and amortization increased by $1.4 million from $9.9 million during
the 39 weeks ended October 31, 1998, to $11.3 million during the 39 weeks ended
October 30, 1999. The increase was primarily due to additional amortization of
goodwill as a result of the Dart Acquisition.
Interest income increased approximately $0.3 million, from $0.9 million for the
13 weeks ended October 31, 1998, to $1.2 million for the 13 weeks ended October
30, 1999. For the 39 weeks ended October 30, 1999, interest income decreased
approximately $0.3 million, from $3.2 million for the 39 weeks ended October 31,
1998, to $2.9 million for the current period.
The Company's effective income tax rate increased to 58.0% and 56.0% for the 13
and 39 weeks ended October 30, 1999, respectively, from 48.1% and 54.4% for the
13 and 39 weeks ended October 31, 1998, respectively. The increase is primarily
attributable to decreased taxable earnings in relation to the fixed amount of
acquisition non-deductible goodwill associated with the Dart Acquisition.
Liquidity and Capital Resources
The Company's principal source of liquidity is expected to be 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 the 39 weeks ended October 30, 1999, operating activities generated net
cash of $36.9 million, compared to generating net cash of $6.6 million during
the 39 weeks ended October 31, 1998. The increase was primarily due to the
increase in the balance due to affiliates. The balance due to affiliates was
$45.4 million at October 30, 1999 compared to $26.0 million at January 31, 1999.
During the 39 weeks ended October 30, 1999, investing activities used
approximately $12.2 million of capital expenditures primarily for store remodels
and $26.7 million for the purchase of bonds. For the 39 weeks ended October 31,
1998, investing activities used approximately $5.6 million for capital
expenditures.
8
Financing activities used $0.5 million of the Company's funds during the 39 week
period ended October 30, 1999, compared to $0.6 million during the 39 weeks
ended October 31, 1998.
The Company believes that cash flows from Shoppers' operations will be adequate
to meet its anticipated requirements for working capital and debt service.
Year 2000 Compliance
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 two digits rather than four to define a year. As a result, computer
systems that have date-sensitive software and embedded systems 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.
As a result of the Dart Acquisition, the Company's computer systems and software
programs were incorporated into Richfood's systems and programs. Richfood has
developed and implemented a strategic, long-term information technology plan
(the "Strategic Plan") to upgrade its core application systems. Concurrently,
Richfood has developed and implemented 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:
[] Information technology systems ("IT"),
[] Embedded technology and other systems ("Non-IT"), and
[] 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 will be significantly mitigated.
Richfood's Y2K Plan, as it pertains to the Company, involves the following three
phases:
[] 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.
9
[] 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.
[] 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, have also been validated; however, the
Company believes that non-compliance of the Non-IT systems would not pose a
significant risk to the Company's financial condition or results of operations.
With respect to IT systems, the remediation/testing phase and the implementation
phase have been substantially completed. Certain point of sale software systems
and all time and attendance systems have been upgraded or replaced during 1999.
Additionally, human resources, payroll and general ledger system software
upgrades were completed in August 1999.
The majority of the Company's Non-IT systems are currently Year 2000 compliant;
however, certain systems, which include telephones, had to be upgraded or
replaced. The Non-IT systems remediation/testing phase was completed in November
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
approximately $5.5 million to date. Of this amount, approximately $3.9 million
has been capitalized in accordance with GAAP. Of the remaining costs, all but
$0.1 million have been expensed to date, with the remainder planned to be used
for monitoring and supporting contingency and transition plans. All expenditures
by the Company related to the Y2K Plan will be funded by cash flows 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.
10
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 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
December 1999 and expect that such plans may include provisions relating to,
among other things, manual workarounds and adjusting staffing strategies as well
as 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.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Omitted
11
PART II - Other Information
Item 1. Legal Proceedings
None
Item 2. Changes in Securities and Use of Proceeds
Omitted
Item 3. Default Upon Senior Securities
Omitted
Item 4. Submission of Matters to a Vote of Security Holders
Omitted
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
(A) Exhibits
3(ii) Bylaws, as adopted August 31, 1999.
27.1 Financial Data Schedule
(B) Reports on Form 8-K
None
12
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 14, 1999 By: /s/ Pamela K. Knous
-------------------------------
Pamela K. Knous
Executive Vice President, Chief
Financial Officer (authorized
officer of the registrant and
principal financial officer)
13