<PAGE> 1
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 November 1, 1997
----------------
( ) 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
---------
SHOPPERS FOOD WAREHOUSE CORPORATION
------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 53-0231809
- ----------------------------------------------- ---------------------
(State or other jurisdiction of incorporation (I.R.S. Employer
or organization) Identification No.)
4600 Forbes Blvd., Lanham, Maryland, 20706
------------------------------------------
(Address of principal executive office)
(Zip Code)
(301) 306-9600
----------------------------------------------------
(Registrant's telephone number, including area code)
----------------------------------------------------
(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 No X
--- ---
At December 15, 1997, Shoppers Food Warehouse Corp. had 23,333 1/3 shares of
Class A Common Stock, nonvoting, $5.00 par value per share, outstanding and
10,000 shares of Class B Common Stock, voting, $5.00 par value per share,
outstanding. The common stock of Shoppers Food Warehouse Corp. is not
publicly traded.
1
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Item 1. Financial Statements
Certain consolidated financial statements included herein have been prepared by
Shoppers Food Warehouse Corp. ("Shoppers" or the "Company"), without audit,
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 pursuant to such rules and regulations, 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 Shoppers' Form S-4 Registration Statement File No. 333-32825.
2
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SHOPPERS FOOD WAREHOUSE CORP.
CONSOLIDATED STATEMENTS OF OPERATIONS
(dollars and shares in thousands, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
Thirteen Weeks Ended Thirty-Nine Weeks Ended
------------------------ ------------------------
November 1, November 2, November 1, November 2,
1997 1996 1997 1996
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Sales $214,076 $205,470 $633,600 $625,123
Cost of sales 165,707 160,518 486,071 483,992
-------- -------- -------- --------
Gross profit 48,369 44,952 147,529 141,131
-------- -------- -------- --------
Selling and administrative
expenses 41,627 39,217 118,304 113,596
Depreciation and
amortization 3,155 2,090 8,234 6,934
-------- -------- -------- --------
Operating income 3,587 3,645 20,991 20,601
Interest income 960 1,691 2,757 4,804
Interest expense 5,514 383 15,906 1,445
-------- -------- -------- --------
Income(loss)before income,
taxes, extraordinary item
and cumulative effect of
accounting change (967) 4,953 7,842 23,960
Income taxes (benefit) (121) 1,655 3,730 8,234
-------- -------- -------- --------
Income (loss) before
extraordinary item and
cumulative effect of
accounting change (846) 3,298 4,112 15,726
Extraordinary item:
Loss on early
extinguishment of debt,
net of income taxes of
$2,150 - - (3,126) -
Cumulative effect of
accounting change, net
of income taxes of
$1,344 - - 1,729 -
-------- -------- -------- --------
Net income (loss) $ (846) $ 3,298 $ 2,715 $ 15,726
======== ======== ======== ========
Earnings per common
share data:
Income (loss) before
extraordinary item and
cumulative effect of
accounting change $ (25.38) $ 98.94 $ 123.36 $ 471.78
Extraordinary item:
Loss on early
extinguishment of
debt - - (93.78) -
Cumulative effect of
accounting change, net - - 51.87 -
-------- -------- -------- --------
Net income (loss) $ (25.38) $ 98.94 $ 81.45 $ 471.78
======== ======== ======== ========
</TABLE>
(Continued on next page)
3
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SHOPPERS FOOD WAREHOUSE CORP.
CONSOLIDATED STATEMENTS OF OPERATIONS (Continued)
(dollars and shares in thousands, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
Thirteen Weeks Ended Thirty-Nine Weeks Ended
------------------------ ------------------------
November 1, November 2, November 1, November 2,
1997 1996 1997 1996
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Weighted average common
shares outstanding 33 33 33 33
======== ======== ======== ========
Pro forma amounts assuming
change is applied
retroactively:
Income before
extraordinary item $ (846) $ 3,202 $ 4,112 $ 15,437
Earnings per common
share $ (25.38) $ 96.06 $ 123.37 $ 463.11
Net income $ (846) $ 3,202 $ 2,715 $ 15,437
Earnings per common
share $ (25.38) $ 96.06 $ 81.46 $ 463.11
</TABLE>
The accompanying notes are an integral part of these statements.
4
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SHOPPERS FOOD WAREHOUSE CORP.
CONSOLIDATED BALANCE SHEETS
(dollars in thousands)
<TABLE>
<CAPTION>
(Unaudited) (Audited)
November 1, February 1,
ASSETS 1997 1997
----------- -----------
<S> <C> <C>
Current Assets:
Cash and short-term instruments $ 11,544 $ 13,739
Marketable debt securities 23,029 94,999
Accounts receivable 6,890 9,244
Merchandise inventories 30,929 29,699
Prepaid income taxes 951 -
Deferred income tax benefit 4,660 -
Prepaid expenses 1,725 2,056
Due from affiliate 522 522
-------- --------
80,250 150,259
-------- --------
Property and Equipment, at cost:
Land and buildings 7,503 9,120
Store and warehouse equipment 63,918 78,737
Office and automotive equipment 2,082 3,767
Leasehold improvements 3,842 4,412
-------- --------
77,345 96,036
Accumulated depreciation and amortization 37,363 73,944
-------- --------
Net property and equipment 39,982 22,092
-------- --------
Deferred Income Taxes - 5,853
Deferred Financing Costs 6,556 -
Goodwill 146,049 -
Lease Rights 11,842 -
Note Receivable from parent 10,000 -
Other Assets 866 804
-------- --------
Total assets $295,545 $179,008
======== ========
</TABLE>
The accompanying notes are an integral part of these balance sheets.
5
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SHOPPERS FOOD WAREHOUSE CORP.
CONSOLIDATED BALANCE SHEETS
(dollars in thousands)
<TABLE>
<CAPTION>
(Unaudited) (Audited)
November 1, February 1,
LIABILITIES AND STOCKHOLDERS' EQUITY 1997 1997
----------- -----------
<S> <C> <C>
Current Liabilities:
Accounts payable $ 40,064 $ 41,830
Accrued interest 6,933 -
Accrued expenses
Salaries and benefits 5,877 4,886
Taxes other than income 2,484 2,903
Other 11,572 6,469
Income taxes payable - 1,391
-------- --------
66,930 57,479
-------- --------
Senior Notes due 2004 200,000 -
Capital Lease Obligations 11,604 10,035
Deferred Income Taxes 9,337 -
Other Liabilities 2,681 7,006
-------- --------
Total liabilities 290,552 74,520
-------- --------
Commitments and Contingencies
Stockholders' Equity:
Class A common stock, nonvoting, par value
$5.00 per share, 25,000 shares authorized;
23,333 1/3 shares issued 117 117
Class B common stock, voting, par value
$5.00 per share, 25,000 shares authorized;
10,000 shares issued 50 50
Unrealized gain on short-term investments 34 -
Retained earnings 4,792 104,321
-------- --------
Total stockholders' equity 4,993 104,488
-------- --------
Total liabilities and stockholders'
equity $295,545 $179,008
======== ========
</TABLE>
The accompanying notes are an integral part of these balance sheets.
6
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SHOPPERS FOOD WAREHOUSE CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands)
(Unaudited)
<TABLE>
<CAPTION>
Thirty-Nine Weeks Ended
-----------------------
November 1, November 2,
1997 1996
----------- -----------
<S> <C> <C>
Cash Flows from Operating Activities:
Net income $ 2,715 $ 15,726
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 8,234 6,934
Cumulative effect of accounting change (1,729) -
Amortization of deferred financing costs 1,201 -
Interest in excess of capital lease payments 209 193
Provision for closed stores - 294
Write-off of Increasing Rate Notes
financing costs 5,276 -
Increase in deferred rent liability 704 408
Change in assets and liabilities:
Accounts receivable 2,354 2,469
Merchandise inventories (1,230) 480
Prepaid income taxes (951) -
Prepaid expenses 331 (11)
Other assets (62) 216
Accounts payable (1,766) (1,877)
Accrued interest on Senior Notes 6,589 -
Accrued expenses 2,187 367
Income taxes payable (1,391) (2,470)
Closed store reserve (276) (362)
Deferred income taxes (190) 274
Deferred income (1,308) 737
-------- --------
Net cash provided by operating activities $ 20,897 $ 23,378
-------- --------
Cash Flows from Investing Activities:
Capital expenditures $ (8,819) $ (7,127)
Purchase of United States Treasury Notes (32,693) (68,270)
Maturities of Unites States Treasury Notes 14,723 58,812
Sale of United States Treasury Notes 90,558 -
-------- --------
Net cash provided by(used in)investing
activities $ 63,769 $(16,585)
-------- --------
Cash Flows from Financing Activities:
Payments for acquisition and deferred financing
costs $(13,843) $ -
Proceeds from Senior Notes 200,000 -
Repayment of Increasing Rate Notes (140,000) -
Restricted Proceeds (50,218) -
Release of Restricted Proceeds 50,000 -
Note receivable from parent (10,000) -
Dividends to shareholder (50,000) (10,000)
Payment for acquisition debt (72,800) -
-------- --------
Net cash used in financing activities $(86,861) $(10,000)
-------- --------
</TABLE>
7
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SHOPPERS FOOD WAREHOUSE CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
(dollars in thousands)
(Unaudited)
<TABLE>
<CAPTION>
Thirty-Nine Weeks Ended
-----------------------
November 1, November 2,
1997 1996
----------- -----------
<S> <C> <C>
Net decrease in cash and equivalents $ (2,195) $ (3,207)
Cash and equivalents, beginning of period 13,739 12,478
-------- --------
Cash and equivalents, end of period $ 11,544 $ 9,271
======== ========
Supplemental Disclosure of Cash Flow Information:
Cash paid for
Interest $ 4,497 $ 510
Income taxes 4,191 3,448
Supplemental disclosure of noncash activities:
</TABLE>
In conjunction with the acquisition of a 50% interest in the Company, $210
million of debt was pushed down into the Company's financial statements, (see
Note 5).
The accompanying notes are an integral part of these statements.
8
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SHOPPERS FOOD WAREHOUSE CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
November 1, 1997 and November 2, 1996
(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 condensed interim financial statements as of November 1, 1997
and for the 39 weeks ended November 1, 1997 and November 2, 1996 of the Company
have been prepared by Shoppers Food Warehouse Corp. (the "Company") without an
audit. Certain information and footnote disclosures normally included in the
financial statements in accordance with generally accepted accounting principles
have been omitted from the accompanying interim financial statements.
In the opinion of the Company, the accompanying unaudited interim consolidated
financial statements reflect all adjustments (which include normal recurring
adjustments) necessary to present fairly the financial position of the Company
as of November 1, 1997, and the results of its operations for the 39 weeks ended
November 1, 1997 and November 2, 1996. The results of operations for the quarter
ended November 1, 1997 are not necessarily indicative of the results to be
achieved for the full fiscal year.
NOTE 2 - EARNINGS PER SHARE
Earnings per share is computed using the weighted average number of shares of
common stock outstanding during the periods.
In March 1997 the Financial Accounting Standards Board adopted Statement of
Financial Accounting Standards ("SFAS") No. 128, Earnings Per Share. The Company
does not expect the implementation of SFAS No. 128 to have a material effect on
the primary earnings per share reflected in the accompanying financial
statements.
NOTE 3 - INTERIM INVENTORY ESTIMATES
The Company's inventories are priced at the lower of last-in, first-out ("LIFO")
cost or market. At November 1, 1997 and February 1, 1997 inventories determined
on a first-in, first-out basis would have been greater by approximately
$5,053,000 and $4,375,000, respectively. Net income would have been higher by
approximately $675,000 in both 39 week periods ended November 1, 1997 and
November 2, 1996.
The Company takes a physical inventory on a store by store basis of its grocery,
frozen food, dairy and health and beauty care departments
9
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SHOPPERS FOOD WAREHOUSE CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
November 1, 1997 and November 2, 1996
(Unaudited)
semiannually and the Company uses a gross profit method to determine inventories
for those departments for quarters when complete physical counts are not taken.
The Company took a physical inventory in 12 of the 37 stores for these
departments for the quarter ended November 1, 1997. All perishable departments
are inventoried monthly.
NOTE 4 - SHORT-TERM INSTRUMENTS AND MARKETABLE DEBT SECURITIES
The Company's short-term instruments included United States Treasury Bills, with
a maturity of three months or less, and money market funds. Marketable debt
securities included United States Treasury Notes and United States Agency
Securities.
Effective February 1, 1997, the Company classifies its marketable debt
securities as available-for-sale. At November 1, 1997, market value was
approximately $34,000 greater than cost, net of income taxes, and the Company
had no investments that qualified as trading or held-to-maturity.
The amortized cost of debt securities classified as available-for-sale is
adjusted for amortization premiums and accretion of discounts to maturity. Such
amortization and interest are included in interest income. Realized gains and
losses are included in interest income. The cost of securities sold is based on
the specific identification method.
NOTE 5 - ACQUISITION
On February 6, 1997, Dart Group Corporation ("Dart") acquired the 50% interest
in Shoppers that it did not already own for $210 million (the "Acquisition") and
Shoppers became a wholly owned subsidiary of Dart. Dart financed the Acquisition
through the application of $137.2 million in net proceeds raised from an
offering of Increasing Rate Senior Notes due 2000 (the "Increasing Rate Notes")
of SFW Acquisition Corp., a newly created wholly-owned indirect subsidiary of
Dart, and $72.8 million of bridge financing (the "Bridge Loan") provided by a
bank. Immediately after the Acquisition, SFW Acquisition Corp. merged into
Shoppers (with Shoppers becoming obligor on the Increasing Rate Notes) and
Shoppers repaid the Bridge Loan from its existing cash and the liquidation of
certain short-term investments.
The Acquisition was recorded using the purchase method of accounting and Dart's
interest in Shoppers has been pushed down into the accompanying financial
statements. The purchase price has been allocated to the assets and liabilities
of Shoppers and the remaining excess purchase price over the net assets acquired
of $148.8 million represents goodwill which will be amortized over 40 years. In
connection with the Acquisition, the Company adopted Dart's method of
depreciating property and equipment on a straight line basis. Prior to the
Acquisition, the Company used accelerated depreciation methods.
10
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SHOPPERS FOOD WAREHOUSE CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
November 1, 1997 and November 2, 1996
(Unaudited)
The following pro forma analysis gives effect to the change in depreciation
method assuming the depreciation method was applied retroactively.
<TABLE>
<CAPTION>
July 2, July 1, June 29, February 1,
1994 1995 1996 1997
(52 weeks) (52 weeks) (52 weeks) (31 weeks)
---------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
Pro forma amounts:
Net income $13,961 $19,170 $18,413 $10,186
Earnings per common
share $418.83 $575.10 $552.39 $305.58
Historical amounts:
Net income $12,929 $19,526 $18,703 $10,455
Earnings per common
share $387.87 $585.78 $561.09 $313.65
</TABLE>
Pro forma operating results for the 52 weeks ended February 1, 1997 and the 39
weeks ended November 2, 1996 reflect the Acquisition as if it had occurred on
February 4, 1996. The pro forma results reflect the push down of all acquisition
entries, including additional amortization of intangibles, interest on the
acquisition related debt, amortization of deferred financing costs as well as
deprecation adjustments for the new basis of assets as of the Acquisition.
<TABLE>
<CAPTION>
Pro Forma
------------------------------------
52 Weeks Ended 39 Weeks Ended
February 1, 1997 November 2, 1996
---------------- ----------------
<S> <C> <C>
Sales $ 850,875 $ 625,123
Income before taxes 7,793 5,682
Income before
extraordinary item
and cumulative effect
of accounting change 3,660 2,387
</TABLE>
NOTE 6 - LONG-TERM DEBT
In June 1997, Shoppers refinanced the Increasing Rate Notes with $200.0 million
aggregate principal amount of 9 3/4% Senior Notes due 2004 (the "Senior Notes").
The net proceeds from the Senior Notes was $193.5 million (after fees and
expenses of approximately $6.5 million) of which $143.5 million was used to
repay the Increasing Rate Notes (including interest) and $50.0 million (the
"Restricted Proceeds") was paid to Dart in the form of a $40 million dividend
and a $10 million loan for settlements with certain Dart shareholders (Haft
family members). Interest on the Senior Notes accrued from the date of issuance
and is payable semi-annually in arrears on each June 15 and December 15,
commencing December 15, 1997. The Senior Notes have certain covenants including
limitations on additional indebtedness and are guaranteed by the capital stock
of Shoppers. The
11
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SHOPPERS FOOD WAREHOUSE CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
November 1, 1997 and November 2, 1996
(Unaudited)
Company is currently in compliance with all covenants.
The Senior Notes are fully and unconditionally guaranteed by SFW Holding Corp.
("Holdings"), the immediate parent of the Company. The guarantee is secured by a
first priority security interest in the capital stock of the Company owned by
Holdings.
Prior to the Acquisition, Holdings had no material assets, liabilities or
operations independent of the Company. As of the Acquisition date, Dart
contributed its initial 50% interest in the Company to Holdings for 100% of the
stock of Holdings. This interest was recorded at Dart's carryover basis.
Subsequent to the merger of SFW Acquisition Corp. into the Company, Holdings
became the immediate parent of the Company. Holdings' sole purpose is to own the
Company's stock.
Since Holdings' sole asset is its investment in the Company and the accounting
for the Acquisition was pushed down into the Company's financial statements, the
post acquisition consolidated financial statements of Holdings are substantially
the same as the Company's consolidated financial statements. Accordingly, no
separate financial statements of Holdings are presented because this information
would not be material to investors.
NOTE 7 - SETTLEMENT OF LITIGATION
Settlement with Robert, Gloria and Linda Haft
On September 26, 1997, the Company and Dart, which owns all of the Company's
outstanding common stock, closed the transactions contemplated in an agreement,
dated August 16, 1997, to settle certain litigation and enter other related
transactions (the "RGL Settlement") with Robert M. Haft, Gloria G. Haft, Linda
G. Haft and certain related parties (collectively "RGL").
The transactions completed by the closing of the RGL Settlement between Dart and
RGL include: the purchase by Dart from RGL of 104,976 shares of Dart Class B
Common Stock and 77,244 shares of Dart Class A Common Stock; the termination of
options held or claimed by RGL to purchase shares of Dart Class A Common Stock;
the termination of putative options to purchase 15 shares of Dart/SFW Corp., and
the termination of a small number of options to purchase shares of common stock
of Trak Auto Corporation ("Trak Auto") and Crown Books Corporation ("Crown
Books"), affiliates of Dart. Dart paid RGL a total of approximately $41.0
million in connection with these transactions.
In addition, Dart acquired all of Robert M. Haft and Linda G. Haft's respective
interests in partnerships owning Dart's headquarters building in Landover,
Maryland and a warehouse leased by Trak Auto in Bridgeview, Illinois for $4.4
million. Dart paid for the RGL Settlement with the
12
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SHOPPERS FOOD WAREHOUSE CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
November 1, 1997 and November 2, 1996
(Unaudited)
Restricted Proceeds and the Company paid the Restricted Proceeds to Dart in the
form of a $40 million dividend and a $10 million loan.
The closing of the RGL Settlement resulted in the termination of the pending
claim by RGL to control of Dart and the settlement of all litigation between
them and Dart and its subsidiaries.
Settlements with Herbert H. Haft and Ronald S. Haft
On October 16, 1997, Dart announced settlements (the "Settlements") with Herbert
H. Haft and Ronald S. Haft pursuant to a settlement agreement with Herbert H.
Haft (the "HHH Settlement Agreement"), a First Supplemental Settlement Agreement
with Ronald S. Haft (the "First Supplemental Agreement") and a Second
Supplemental Settlement Agreement with Ronald S. Haft (the "Second Supplemental
Agreement"). The Settlements were subsequently approved by the Delaware Court of
Chancery on November 24, 1997.
The transactions contemplated in the HHH Settlement Agreement include: the
purchase by Dart from Herbert H. Haft of all his shares of, and options to
purchase, Dart Class A Common Stock; that Herbert H. Haft will resign from all
of his positions with Dart and its subsidiary corporations; that Herbert H. Haft
will relinquish his claim to voting control of Dart and that Herbert H. Haft
will terminate his employment contract with Dart. In addition, all outstanding
litigation and disputes between Dart and Herbert H. Haft will be resolved. As
consideration for the Settlements, Dart will pay Herbert H. Haft approximately
$28 million upon closing, including $9.25 million which may be deferred until
June 1, 1998 if the closing occurs before then. Dart will also make a $10
million loan to a partnership owned by Herbert H. Haft and Ronald S. Haft, which
loan will be personally guaranteed by Ronald S. Haft and will be secured by the
partnership's interest in three shopping centers located in suburban Washington,
D.C. and by a one-half indirect interest in the Company's headquarters building
in Lanham, Maryland leased from a partnership in which the Haft's own one-half
of the partnership interest. The Company will loan Dart an additional $25
million for the Settlements as permitted by the covenants under the Senior
Notes.
The transactions contemplated in the First Supplemental Agreement include:
completion of bankruptcy plans of reorganization for partnerships owning Dart's
headquarters in Landover, Maryland and a warehouse leased to Trak Auto in
Bridgeview, Illinois; payment by Dart of $7 million to reduce outstanding
mortgage loans on these properties, which will thereafter be wholly-owned by
Dart and/or its affiliates; and Ronald S. Haft will pay $2.2 million to Dart
from escrowed funds previously earmarked for Ronald S. Haft.
13
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SHOPPERS FOOD WAREHOUSE CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
November 1, 1997 and November 2, 1996
(Unaudited)
On November 19, 1997, the transactions contemplated in the First Supplemental
Agreement were closed.
The closing of the settlement transactions with Herbert H. Haft are expected
to occur in early 1998. There can be no assurance that the closing will occur.
Under the Second Supplemental Agreement, after the closing of the transactions
contemplated in the HHH Settlement Agreement, Dart will be entiled to require
that the shares now held in a Voting Trust for the benefit of Ronald S. Haft to
be transferred to Dart.
NOTE 8 - LEGAL PROCEEDINGS
In the ordinary course of business, Shoppers is party to various legal actions
that the Company believes are routine in nature and incidental to the operation
of its business. The Company believes that the outcome of the proceedings to
which Shoppers currently is party will not have a material adverse effect upon
the business, financial condition and results of operations. Dart however, is a
party to certain legal proceedings that could have an adverse effect on the
Company's business, financial conditions and results of operations.
NOTE 9 - STOCKHOLDERS' EQUITY
The following represents the changes in retained earnings for the 39 weeks ended
November 1, 1997:
<TABLE>
<S> <C>
Balance, February 1, 1997 $ 104,321
Merger of SFW Acquisition Corp. (52,244)
Dividends paid (50,000)
Net income 2,715
---------
Balance, November 1, 1997 $ 4,792
=========
</TABLE>
14
<PAGE> 15
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
Outlook
Except for historical information, statements in this Management's Discussion
and Analysis of Financial Condition and Results of Operations are
forward-looking. Actual results may differ materially due to a variety of
factors, including the Company's ability to open new stores, the effect of
regional economic conditions and the Company's ability to compete in the highly
competitive supermarket industry in the greater Washington, D.C. metropolitan
area. Shoppers believes that it will face increased competition in the future
from other supermarket chains and intends to compete aggressively against
existing and new competition.
Litigation involving the control of Dart could adversely affect the Company's
business, financial condition and results of operations. On December 6, 1995,
the Delaware Court of Chancery entered the Standstill Order, which restricts
certain actions by Dart. Without further order of the court, Dart may not (i)
change its certificate of incorporation or bylaws; (ii) change the current
composition of Dart's board of directors or any of its subsidiaries; (iii)
change the current Haft family officers of Dart or any of its subsidiaries; or
(iv) issue any additional securities of Dart or any of its subsidiaries (except
employee stock options issued in the ordinary course of business). In addition,
without first giving Herbert H. Haft and certain other litigants not less than
seven days' written notice, Dart may not take any extraordinary actions,
including but not limited to actions that would result in (a) the liquidation of
Dart or any of its subsidiaries, (b) the sale of any major subsidiary of Dart or
(c) a disadvantage to any Class B stockholder of Dart through any debt
transactions. For purposes of the Standstill Order, the phrase "extraordinary
actions" means any transaction, contract or agreement, the value of which
exceeds $3.0 million.
Liquidity and Capital Resources
The Company's principal sources of liquidity are expected to be cash flow from
operations and borrowings under a credit facility (the "New Credit Facility")
that the Company is seeking to enter into with a bank or other third party to
borrow (under a line of credit and letters of credit) up to an aggregate of $25
million. It is anticipated that the Company's principal uses of liquidity will
be to provide working capital, finance capital expenditures, meet debt service
requirements and loan up to $25 million to Dart for the Haft Settlements.
Letters of credit have been issued by NationsBank N.A. in connection with the
Company's workers' compensation insurance in the amount of approximately $6.7
million as of November 1, 1997. These letters of credit will mature at various
dates through December 1998.
During the 39 weeks ended November 1, 1997, operating activities generated $20.9
million of cash. One of the principal uses of cash in the Company's operating
activities is inventory purchases. However, Shoppers' relatively high inventory
turnover enables the Company to finance a substantial portion of its inventory
through trade payables, thereby allowing the Company to use cash from operations
for non-current purposes such as
15
<PAGE> 16
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations (Continued)
financing capital expenditures and other investing activities.
For the 39 weeks ended November 1, 1997, investing activities provided $63.8
million to Shoppers from the net disposition of $72.6 million of marketable debt
securities, which amount was partially offset by $8.8 million of capital
expenditures.
Shoppers estimates that it will make capital expenditures of approximately $10.9
million during the 52 weeks ended January 31, 1998. Such expenditures relate to
three new store openings as well as routine expenditures for equipment and
maintenance. Management expects that these capital expenditures will be financed
primarily through cash flow from operations and the New Credit Facility. Capital
expenditures for two stores scheduled to open in the following two fiscal years
are estimated to be approximately $7.0 million.
In February 1997, $137.2 million of the net proceeds from the sale of the
Increasing Rate Notes and $72.8 million of Shoppers' cash, cash equivalents and
short-term investments were used to fund the Acquisition. In addition, Shoppers
paid approximately $6.9 million in fees and expenses incurred by Dart in
connection with the Acquisition. On February 6, 1997, the Company also declared
a dividend of $10.0 million that was paid on May 30, 1997.
In June 1997, Shoppers sold $200.0 million aggregate principal amount of its
Senior Notes due 2004 (the "Senior Notes"). The net proceeds of the offering was
approximately $193.5 million. Shoppers used approximately $143.5 million of the
net proceeds to repay its Increasing Rate Notes due 2000 (including accrued and
unpaid interest through the date of redemption). The remaining net proceeds were
paid to Dart for a settlement with Robert M., Gloria G. and Linda G. Haft on
September 26, 1997 in the form of a $40 million dividend and a $10 million loan.
Shoppers' current interest expense consists primarily of interest on the Senior
Notes and capital lease obligations. Interest expense increased $14.5 million
from $1.4 million during the 39 weeks ended November 2, 1996 to $15.9 million
during the 39 weeks ended November 1, 1997 due to interest paid on the
Increasing Rate Notes and interest accrued on the Senior Notes.
The Company believes that cash flows from Shoppers' operations and borrowings
under the New Credit Facility will be adequate to meet its anticipated
requirements for working capital, debt service and capital expenditures over the
next few years. However, there can be no assurances that Shoppers will generate
sufficient cash flow from operations or that it will be able to borrow under the
New Credit Facility.
Results of Operations
The Company opened three new stores since July 1997 for a store count of 37 at
November 1, 1997.
16
<PAGE> 17
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations (Continued)
Sales increased by $8.5 million, from $625.1 million during the 39 weeks ended
November 2, 1996 to $633.6 million during the 39 weeks ended November 1, 1997.
Sales increased by $8.6 million, from $205.5 million during the 13 weeks ended
November 2, 1996 to $214.1 million during the 13 weeks ended November 1, 1997.
The sales increases were due to the three new stores opened since July 1997.
Comparable store sales decreased 1.7% and 4.0% during the 39 weeks and 13 weeks
ended November 1, 1997, respectively. The decreases in comparable store sales
were primarily due to the new stores drawing customers from existing stores and
competitive market conditions.
Gross profit increased by $6.4 million (4.5%), from $141.1 million during the 39
weeks ended November 2, 1996 to $147.5 million during the 39 weeks ended
November 1, 1997 and increased by $3.4 million (7.6%), from $45.0 million during
the 13 weeks ended November 2, 1996 to $48.4 million during the 13 weeks ended
November 1, 1997. Gross profit, as a percentage of sales, increased to 23.3% and
22.6% during the 39 weeks and 13 weeks ended November 1, 1997, respectively from
22.6% and 21.9% during the 39 weeks and 13 weeks ended November 2, 1996. The
increases were primarily due to a more proactive pricing strategy on selected
items, to a reduction in the number of items which are offered at special
discounts on a weekly basis in stores, and to a higher allowance income achieved
through increased vendor participation.
Selling and administrative expenses increased by $4.7 million (4.1%), from
$113.6 million during the 39 weeks ended November 2, 1996 to $118.3 million
during the 39 weeks ended November 1, 1997 and increased by $2.4 million (6.1%),
from $39.2 million during the 13 weeks ended November 2, 1996 to $41.6 million
during the 13 weeks ended November 1, 1997. Selling and administrative expenses,
as a percentage of sales, increased from 18.2% and 19.1% during the 39 weeks and
13 weeks ended November 2, 1996 to 18.7% and 19.4% during the 39 weeks and 13
weeks ended November 1, 1997. The increases were primarily attributable to
increased payroll costs associated with negotiated union rates and store
remodeling and to expenses associated with the new stores opened since July
1997.
Depreciation and amortization increased $1.3 million from $6.9 million during
the 39 weeks ended November 2, 1996 to $8.2 million during the 39 weeks ended
November 1, 1997 and increased $1.1 million from $2.1 million during the 13
weeks ended November 2, 1996 to $3.2 million during the 13 weeks ended November
1, 1997. The increases were primarily due to additional depreciation and
amortization associated with goodwill and lease rights, as well as with fixed
assets purchased for the new stores opened since July 1997 offset by a reduction
of assets becoming fully depreciated in 1997 and 1996. In connection with the
Acquisition, the Company commenced using Dart's method of depreciating property
and equipment on a straight-line basis. Prior to the Acquisition, the Company
used accelerated methods. The cumulative effect of this change in accounting
principle has been recorded in the interim financial statements for the nine
months ended November 1, 1997. Depreciation expense for the 39 weeks ended
November 2, 1996 would have been $0.2 million more using the straight-line
basis.
Operating income was $21.0 million and $3.6 million for the 39 weeks and 13
17
<PAGE> 18
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations (Continued)
weeks ended November 1, 1997 compared to $20.6 million and $3.6 million during
the same periods in the prior year. The increases were primarily as a result of
higher gross profit, partially offset by selling and administrative expenses and
increased depreciation and amortization.
Interest income decreased $2.0 million and $0.7 million during the 39 weeks and
13 weeks ended November 1, 1997 compared to the 39 weeks and 13 weeks ended
November 2, 1996 due to a reduction of funds available for short-term investing
as a result of the repayment of the bridge financing associated with
Acquisition.
Interest expense increased $14.5 million from $1.4 million during the 39 weeks
ended November 2, 1996 to $15.9 million during the 39 weeks ended November 1,
1997 as a result of interest paid on the Increasing Rate Notes, interest accrued
on the Senior Notes and the amortization of financing costs.
The effective income tax rate for the 39 weeks ended November 1, 1997 was 47.6%
compared to 34.4% for the 39 weeks ended November 2, 1996. The increase was
primarily attributable to nondeductible amortization of acquisition related
goodwill.
On June 26, 1997 the Company sold $200 million aggregate principal amount of its
9.75% senior notes due 2004. Net proceeds were used on July 25, 1997 to repay
$143.3 million (including approximately $3.3 million of accrued and unpaid
interest) of the existing Increasing Rate Notes and to pay $50.0 million into an
escrow account to be used by Dart if and when it consummates a settlement with
certain of its shareholders. As a result of this transaction, $5.3 million,
representing an unamortized portion of the financing costs incurred to secure
initial senior indebtedness, were expensed as an extraordinary item, net of
taxes of approximately $1.9 million.
Net income decreased by $13.0 million, from $15.7 million during the 39 weeks
ended November 2, 1996 to $2.7 million during the 39 weeks ended November 1,
1997 and by $4.1 million, from $3.3 million during the 13 weeks ended November
2, 1996 to a net loss of $0.8 million during the 13 weeks ended November 1,
1997. These decreases were primarily attributable to increased interest expense
associated with the Company's indebtedness and the extraordinary item discussed
above offset by the cumulative effect of the change in accounting principle.
Effect of New Accounting Standard
In February 1997, the Financial Accounting Standards Board issued a Statement of
Financial Accounting Standards ("SFAS") No. 128 Earnings Per Share. SFAS No. 128
replaces the presentation of primary earnings per share, previously presented by
the Company, with basic earnings per share and requires a reconciliation of the
numerator and denominator of basic earnings per share to fully diluted earnings
per share. Fully diluted earnings per share is computed similarly to the
previous requirements. The Company will be required to adopt SFAS No. 128 in the
fourth quarter of fiscal 1998 and to restate all previously presented earnings
per share data.
18
<PAGE> 19
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations (Continued)
The presentation of the Company's basic earnings per share under SFAS No. 128 is
greater than the amounts presented herein as primary earnings per share.
In June 1997, the Financial Accounting Standards Board issued SFAS No. 130
Reporting Comprehensive Income. SFAS No. 130 requires that an enterprise (a)
classify items of other comprehensive income by their nature in a financial
statement and (b) display the accumulated balance of other comprehensive income
separately from retained earnings and additional paid-in capital in the equity
section of a statement of financial position. The Company will adopt SFAS No.
130 in the first quarter of fiscal 1999 and will provide the necessary
disclosures.
19
<PAGE> 20
PART II
Item 1. Legal Proceedings
Haft Litigation involving Dart Group Corporation and its Subsidiaries
Over the past three years, there has been significant litigation
involving the control of Dart Group Corporation ("Dart"), the Company's parent.
On September 7, 1994, the Board of Directors of Dart established an Executive
Committee comprised of Dart's outside directors to conduct the affairs of Dart
with respect to matters that were the subject of dispute between the then
Chairman of the Board and Chief Executive Officer of Dart, Herbert H. Haft, and
the then President and Chief Operating Officer of Dart, Ronald S. Haft.
Beginning in the fall of 1994, the Executive Committee assumed day-to-day
involvement in Dart's management. In April 1996, the Board of Directors of Dart
authorized the Executive Committee to conduct the affairs of Dart with respect
to matters that are the subject of dispute between Dart and its present
Co-Chairman, or in connection with which Dart and its present Co-Chairman have
adverse interests, and to continue to oversee the day-to-day management of Dart.
Dart has filed three lawsuits against Herbert H. Haft alleging various improper
actions by him.
On October 6, 1995, Dart and Ronald S. Haft entered into a settlement
of litigation initiated by Ronald S. Haft to obtain control of Dart through the
exercise of certain disputed stock options, and other related transactions (the
"RSH Settlement"). The RSH Settlement transactions are subject to legal
challenge and, through such litigation, Herbert H. Haft seeks control of Dart.
If he succeeds in litigation to obtain control of Dart (in excess of 35% of the
voting stock of Dart), it would constitute a Change in Control under the
Indenture permitting the Holders, subject to certain conditions, to require the
Company to repurchase any or all of the Senior Notes at a price equal to 101% of
the principal amount thereof, plus any accrued and unpaid interest to the date
of repurchase. There can be no assurance that the Company will have sufficient
funds available to purchase all of the outstanding Senior Notes were they to be
tendered in response to a Change in Control. A Change in Control resulting from
the Haft litigation would make it more difficult for the Company to obtain funds
through a refinancing for such purpose.
In connection with the legal challenges to the RSH Settlement, on
December 6, 1995, the Delaware Court of Chancery entered a Standstill Order (the
"Standstill Order"), which restricts certain actions by Dart. Without further
order of the court, Dart may not, among other things, (i) change the current
composition of the Board of Directors of Dart or any of its subsidiaries or (ii)
issue any additional securities of Dart or any of its subsidiaries. In addition,
without first giving certain litigants not less than seven days' written notice,
Dart may not take any extraordinary actions, including but not limited to
actions that would result in (a) the liquidation of Dart or any of its
subsidiaries or (b) the sale of any major subsidiary of Dart. For purposes of
the Standstill Order, the Company is a "subsidiary" of Dart and the phrase
"extraordinary actions" means any transaction, contract or agreement, the value
of which exceeds $3 million.
20
<PAGE> 21
Item 1. Legal Proceedings (continued)
Settlements with the Hafts
On September 26, 1997, Dart consummated the RGL Settlement pursuant to
which Dart resolved certain disputes with Robert M. Haft, Gloria G. Haft and
Linda G. Haft concerning control of Dart.
On October 17, 1997, Dart entered into settlements with Herbert H. Haft
and Ronald S. Haft pursuant to a settlement agreement with Herbert H. Haft (the
"HHH Settlement Agreement"), a First Supplemental Settlement Agreement with
Ronald S. Haft (the "First Supplemental Agreement") and a Second Supplemental
Settlement Agreement with Ronald S. Haft (the "Second Supplemental Agreement").
The transactions contemplated in the First Supplemental Agreement were closed on
or about November 20, 1997. On November 24, 1997, after a fairness hearing, the
Delaware Chancery Court approved the settlements as fair and reasonable and
authorized the dismissal of derivative litigation in which Herbert H. Haft,
Ronald S. Haft and certain Dart directors were defendants. It is expected that
the transactions contemplated in the HHH Settlement Agreement and the Second
Supplemental Settlement Agreement will close in January 1998, although no
assurances can be made that the closing will not be delayed beyond January,
1998.
Upon the closing of those settlements, Herbert H. Haft will (a) sell to
Dart all of his shares of Dart Class A Common Stock, and shares of and options
to purchase stock of Trak Auto Corporation and Crown Books Corporation, Dart
subsidiaries, (b) retire from all of his positions with Dart and its subsidiary
corporations, (c) relinquish his claim to voting control of Dart, (d) terminate
his employment agreement with Dart, and (e) sell to Dart various real estate
interests. In addition, all outstanding litigation and disputes between Dart and
Herbert H. Haft will be dismissed. As consideration for the settlements, Dart
will pay Herbert H. Haft approximately $28 million upon closing, of which amount
$9.25 million may be deferred until June 1, 1998 if the closing occurs before
then. Dart also will make a secured $10 million loan to a partnership owned by
Herbert H. Haft and Ronald S. Haft and Dart and Herbert H. Haft will exchange
mutual general releases.
Reference is made to the public filings made by Dart with the
Commission for further information about the above described matters.
Other
In the normal course of business, the Company is involved in various
claims and litigation. In the opinion of management, liabilities, if any, will
not have a material adverse effect upon the consolidated financial condition and
results of operations of the Company.
21
<PAGE> 22
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Number Document
27 Financial Data Schedule
(b) Reports on Form 8-K
None
22
<PAGE> 23
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 CORPORATION
Date: December 15, 1997 By: William White
-------------------- -----------------------
WILLIAM WHITE
President
Date: December 15, 1997 JACK BINDER
-------------------- -----------------------
Jack Binder
Chief Financial Officer
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